<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 13, 1998
REGISTRATION NO. 333-41413
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
----------------
SCHEIN PHARMACEUTICAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
Delaware 2834 11-2726505
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
100 Campus Drive
Florham Park, New Jersey 07932
(973) 593-5500
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
Corporation Service Corporation
1013 Centre Road
Wilmington, Delaware 19805
(302) 636-5454
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
----------------
Copies of Communications to:
<TABLE>
<S> <C>
Edward W. Kerson, Esq. Alan L. Jakimo, Esq.
Proskauer Rose LLP Brown & Wood LLP
1585 Broadway One World Trade Center, 58th Floor
New York, New York 10036-8299 New York, New York 10048
(212) 969-3000 (212) 839-5300
</TABLE>
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effectiveness of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the
same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS (SUBJECT TO COMPLETION)
DATED MARCH 13, 1998
3,000,000 SHARES
LOGO SCHEIN
PHARMACEUTICAL
COMMON STOCK
------------
ALL OF THE 3,000,000 SHARES OF COMMON STOCK, $.01 PAR VALUE PER SHARE (THE
"COMMON STOCK"), OFFERED HEREBY (THE "OFFERING") ARE BEING SOLD BY SCHEIN
PHARMACEUTICAL, INC. ("SCHEIN PHARMACEUTICAL," "SCHEIN" OR THE "COMPANY").
PRIOR TO THE OFFERING, THERE HAS BEEN NO PUBLIC MARKET FOR THE COMMON STOCK
OF THE COMPANY. IT IS CURRENTLY ANTICIPATED THAT THE INITIAL PUBLIC OFFERING
PRICE WILL BE BETWEEN $14.00 AND $16.00 PER SHARE. SEE "UNDERWRITING" FOR A
DISCUSSION OF THE FACTORS CONSIDERED IN DETERMINING THE INITIAL PUBLIC OFFERING
PRICE. APPLICATION HAS BEEN MADE TO LIST THE COMMON STOCK ON THE NEW YORK STOCK
EXCHANGE UNDER THE SYMBOL "SHP."
------------
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON
PAGE 6 OF THIS PROSPECTUS.
------------
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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
PER SHARE.................................. $ $ $
TOTAL(3)................................... $ $ $
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
(1) THE COMPANY HAS AGREED TO INDEMNIFY THE UNDERWRITERS AGAINST CERTAIN
LIABILITIES, INCLUDING LIABILITIES UNDER THE SECURITIES ACT OF 1933, AS
AMENDED. SEE "UNDERWRITING."
(2) BEFORE DEDUCTING EXPENSES PAYABLE BY THE COMPANY, ESTIMATED TO BE
$1,500,000.
(3) THE COMPANY HAS GRANTED THE UNDERWRITERS AN OPTION, EXERCISABLE WITHIN 30
DAYS OF THE DATE HEREOF, TO PURCHASE AN AGGREGATE OF UP TO 450,000 SHARES
OF COMMON STOCK AT THE PRICE TO PUBLIC, LESS UNDERWRITING DISCOUNTS AND
COMMISSIONS, TO COVER OVER-ALLOTMENTS, IF ANY. IF ALL SUCH ADDITIONAL
SHARES ARE PURCHASED, THE TOTAL PRICE TO PUBLIC, UNDERWRITING DISCOUNTS AND
COMMISSIONS AND PROCEEDS TO COMPANY WILL BE $ , $ AND $ ,
RESPECTIVELY. SEE "UNDERWRITING."
------------
THE COMMON STOCK IS OFFERED BY THE SEVERAL UNDERWRITERS NAMED HEREIN WHEN, AS
AND IF RECEIVED AND ACCEPTED BY THEM, AND SUBJECT TO THEIR RIGHT TO REJECT
ORDERS IN WHOLE OR IN PART AND SUBJECT TO CERTAIN OTHER CONDITIONS. IT IS
EXPECTED THAT DELIVERY OF CERTIFICATES FOR THE SHARES WILL BE MADE AT THE
OFFICES OF COWEN & COMPANY, NEW YORK, NEW YORK, ON OR ABOUT , 1998.
------------
COWEN & COMPANY BEAR, STEARNS & CO. INC.
SALOMON SMITH BARNEY
, 1998
<PAGE>
A BROAD SPECTRUM OF PHARMACEUTICAL EXPERIENCE
BRANDED
PRODUCTS
INFeD(R)
PHOTO Specialty product for
iron management
treatment of severe
anemia
STERILE DOSAGE
MANUFACTURING
CAPABILITIES
PHOTO .Injectables.Ophthalmics
.Otics.Penicillins
.Cephalosporins
.Over 75 million vials and ampules made annually
SOLID DOSAGE
MANUFACTURING
CAPABILITIES
PHOTO .Immediate and
extended-release products
.Over 4 billion tablets and capsules made annually
RESEARCH & DEVELOPMENT
PHOTO .24 ANDAs approved during past three years
.$85 million in R&D expenditures over the last 3 years
SALES, MARKETING
.Approximately 60,000 customers
PHOTO .130-person generic sales and marketing force
.20-person branded sales force
[PHOTO]
MANUFACTURED PRODUCTS
.160 chemical entities.325 dosage strengths
.200 approved ANDAs
LOGO SCHEIN
PHARMACEUTICAL
MARSAM STERIS
PHARMACEUTICALS INC. LABORATORIES
The information in the captions above is presented as of December 1997 and
is subject to change. No assurance can be given that any of the Company's
products covered by pending Abbreviated New Drug Applications or other
products under development will be successfully developed or approved by the
United States Food and Drug Administration or achieve significant revenue or
profitability.
----------------
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.
----------------
Certain persons participating in the Offering may engage in transactions
that stabilize, maintain or otherwise affect the price of the Common Stock,
including stabilizing, the purchase of Common Stock to cover syndicate short
positions and the imposition of penalty bids. For a description of these
activities, see "Underwriting."
<PAGE>
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". Except as otherwise noted, all information in this
Prospectus assumes no exercise of the Underwriters' over-allotment option and
reflects (i) a 105-for-one stock split that will occur immediately prior to the
effective date of the Offering and (ii) the conversion of each outstanding
share of Class A Common Stock and Class B Common Stock into a single class of
Common Stock upon the completion of the Offering. 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
3
<PAGE>
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 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.
THE OFFERING
Common Stock offered hereby........ 3,000,000 shares
Common Stock to be outstanding after
the Offering........................... 31,692,720 shares(1)
To reduce existing indebtedness,
Use of proceeds.................... which may include a term loan,
senior floating rate notes and a
revolving credit loan. See "Use
of Proceeds."
Proposed NYSE symbol.................... SHP
- ------------
(1) Excludes 3,745,770 shares of Common Stock reserved for issuance upon the
exercise of outstanding options granted pursuant to the Company's 1993
Stock Option Plan, 1997 Stock Option Plan and the 1995 Non-Employee
Director Plan as of February 28, 1998 at a weighted average exercise price
of $16.84 per share. Upon closing of the Offering, the Company intends to
grant up to an additional 936,915 options at an exercise price equal to the
initial public offering price of the Common Stock offered hereby. See
"Management--Stock Options."
4
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
---------------------------
1995(1) 1996 1997
-------- -------- --------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues...................................... $391,846 $476,295 $490,170
-------- -------- --------
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(1).................................. 30,000 -- --
Operating income(1)............................... 4,342 31,066 39,017
Interest expense, net............................. 10,005 23,285 26,578
Other expense (income), net(2).................... (1,245) 1,193 (9,318)
Income (loss) before taxes on income.............. (4,418) 6,588 21,757
Net income (loss)................................. $(14,900) $ 1,397 $ 11,102
======== ======== ========
Basic and diluted earnings (loss) per share(3).... $ (0.52) $ 0.05 $ 0.39
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 1997
-----------------------
ACTUAL AS ADJUSTED(4)
-------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital....................................... $ 73,249 $ 88,599
Total assets.......................................... 534,126 534,126
Short-term debt, including current portion of long-
term debt............................................ 56,440 41,090
Long-term debt, less current maturities............... 198,705 173,705
Stockholders' equity.................................. 139,715 180,065
</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) 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 and gain on sales of
marketable securities of $12.7 million in 1997.
(3) See Note 1 to the Consolidated Financial Statements of the Company for
information concerning the computation of earnings per share.
(4) Gives effect to the sale of shares of common stock to be sold by the
Company in the Offering at an estimated public offering price of $15.00 per
share, and the application of the estimated net proceeds therefrom to repay
debt, as if the transactions had occurred as of December 1997. See "Use of
Proceeds."
5
<PAGE>
RISK FACTORS
An investment in shares of Common Stock involves a high degree of risk. In
addition to the other information in this Prospectus, prospective investors
should carefully consider the following factors in evaluating the Company and
its business before purchasing any shares of Common Stock.
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."
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
6
<PAGE>
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 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.
7
<PAGE>
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."
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."
8
<PAGE>
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 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
9
<PAGE>
to be outstanding immediately following the 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
Offering.
Bayer Corporation, which owns 28.3% of the outstanding shares of Common
Stock immediately prior to the Offering, may purchase shares of the Company 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 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, 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 an
employee benefit plan or current stockholder) and if 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.
As long as Bayer Corporation owns 10% or more 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 those
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.
10
<PAGE>
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."
RESTRICTIONS IMPOSED BY TERMS OF INDEBTEDNESS
The Senior Credit Agreement (as defined herein) requires the Company to
maintain specified financial ratios and satisfy certain financial tests. The
Company's ability to meet such financial tests may be affected by events
beyond its control, and there can be no assurance that the Company will meet
such tests. A breach of any of these financial tests could result in an event
of default under the Senior Credit Agreement, in which case the lenders could
elect to declare all liabilities and obligations thereunder to be immediately
due and payable and to terminate all commitments under the Senior Credit
Agreement. If the Company were unable to repay or refinance all amounts
declared due and payable, such lenders could proceed against the collateral
that secures the liabilities and obligations under the Senior Credit
Agreement. Substantially all the assets of the Company secure the liabilities
and obligations under the Senior Credit Agreement. If the Senior Credit
Agreement were to be accelerated, there can be no assurance that the Company
would be able to repay in full such indebtedness and other indebtedness of the
Company, and in such event the equity holders could lose their entire
investment. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources."
SHARES ELIGIBLE FOR FUTURE SALE
The 3,000,000 shares of Common Stock sold by the Company in the Offering
will be immediately freely tradeable without restriction under the Securities
Act, except for any shares purchased by an "affiliate" of the Company (as that
term is defined under the rules and regulations of the Securities Act), which
will be subject to the resale limitations of Rule 144 under the Securities
Act. In addition, upon completion of the Offering, 28,692,720 outstanding
shares of Common Stock will be "restricted securities" (as that term is
defined in Rule 144 under the Securities Act of 1933 (the "Securities Act"))
and, under certain circumstances, will be eligible, together with
approximately 1,800,000 shares that may be issued on the exercise of
outstanding options during the 180-day period after the effective date of the
Registration Statement (defined below), for sale in the public market without
registration, subject to the limitations and conditions established pursuant
to Rules 144 and 701 under the Securities Act. The Company is unable to
predict the effect that sales made under Rule 144, or otherwise, may have on
the then prevailing market price of the Common Stock. Certain holders of
shares of Common Stock and outstanding options to purchase shares of Common
Stock have entered into lock-up agreements in which such holders have agreed
not to offer or sell publicly or otherwise dispose of such shares without the
consent of Cowen & Company for 180 days after the effective date of the
Registration Statement. Under the terms of the Restructuring Agreements,
certain principal stockholders of the Company are subject to restrictions on
the transfer of their shares. In addition, the holders of 28,475,265 shares of
Common Stock are entitled to certain piggyback and demand registration rights
with respect to such shares. By exercising their registration rights, subject
to certain limitations, such holders could cause a large number of shares to
be registered and sold in the public market. Such sales may have an adverse
effect on the market price for the Common Stock and could impair the Company's
ability to raise capital through an offering of its equity securities. See
"Principal Stockholders," "Shares Eligible for Future Sale" and
"Underwriting."
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
11
<PAGE>
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."
DILUTION
The public offering price is substantially higher than the tangible book
value per share of Common Stock. Investors purchasing shares of Common Stock
in the Offering will therefore incur immediate, substantial dilution estimated
to be $15.36 per share (based on an estimated offering price of $15.00 per
share, the midpoint of the estimated range, and after deducting underwriting
discounts and offering expenses). See "Dilution."
ANTI-TAKEOVER PROVISIONS
Certain provisions of the Company's certificate of incorporation and by-laws
in effect as of the effective date of the Offering, as well as the Delaware
General Corporation Law (the "Delaware GCL"), could discourage a third party
from attempting to acquire, or make it more difficult for a third party to
acquire, control of the Company without approval of the Company's Board of
Directors. Such provisions could also limit the price that certain investors
might be willing to pay in the future for shares of the Common Stock. Such
provisions allow the Board of Directors to authorize the issuance of preferred
stock with rights superior to those of the Common Stock.
Moreover, the provisions of Delaware law and the certificate of
incorporation and by-laws of the Company relating to the removal of directors
and the filling of vacancies on the Board of Directors preclude a third party
from removing incumbent directors without cause and simultaneously gaining
control of the Board of Directors by filling, with its own nominees, the
vacancies created by removal. These provisions also reduce the power of
stockholders generally, even those with a majority of the voting power in the
Company, to remove incumbent directors and to fill vacancies on the Board of
Directors without the support of the incumbent directors.
In addition, the certificate of incorporation and by-laws of the Company
provide that stockholder action may not be effected without a duly called
meeting. The certificate of incorporation and by-laws of the Company also do
not permit stockholders of the Company to call special meetings of
stockholders. This effectively limits the ability of the Company's
stockholders to conduct any form of consent solicitation. See "Description of
Capital Stock" and "Principal Stockholders."
ABSENCE OF DIVIDENDS
The Company intends to retain earnings, if any, for use in its business and
does not anticipate paying any cash dividends in the foreseeable future. See
"Dividend Policy."
NO PRIOR PUBLIC MARKET; POSSIBLE SHARE PRICE VOLATILITY
Prior to the Offering, there has been no public market for the Common Stock,
and there can be no assurance that an active trading market will develop or be
sustained after the Offering. The public offering price of the Common Stock
will be determined by negotiations between the Company and the representatives
of the Underwriters. The stock market, including the New York Stock Exchange,
on which the Company is applying to list the Common Stock, has from time to
time experienced significant price and volume fluctuations that are unrelated
to the operating performance of particular companies. In addition, the market
price of the Common Stock, like the stock prices of many publicly traded
pharmaceutical companies, may be highly volatile. Announcements of new
products by the Company or its competitors, approvals of products or other
actions by FDA, developments or disputes concerning patent or proprietary
rights or regulations, publicity regarding actual or potential clinical
results relating to products under development by the Company or its
competitors, public concern as to the safety of pharmaceutical products and
economic and other external factors, as well as period-to-period fluctuations
in financial results, among other factors, may have a significant impact on
the market price of the Common Stock. See "Underwriting."
12
<PAGE>
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
The net proceeds to the Company from the sale of the Common Stock offered
hereby, after deducting underwriting discounts and commissions and estimated
offering expenses, will be approximately $40.4 million, assuming a public
offering price of $15.00 per share (the midpoint of the estimated range),
($46.7 million, if the Underwriters' over-allotment option is exercised in
full). The Company intends to use all of the proceeds to repay a portion of
the revolving and/or term loan facility under the Senior Credit Agreement,
which had an outstanding balance of $170.0 million as of February 28, 1998,
which matures on December 31, 2001 and bears interest at a rate of 7.83% at
February 28, 1998, and/or to repurchase and retire a portion of the Senior
Floating Rate Notes Due 2004 (as defined herein), which had an outstanding
balance of $100.0 million as of February 28, 1998, bear interest at a rate of
8.69% at February 28, 1998 and were issued in exchange for the Company's
Senior Subordinated Loan. Reductions to the revolving loan facility may be
reborrowed. All repayments or repurchases to the term loan facility and Senior
Floating Rate Notes Due 2004 will be permanent. See "Capitalization" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
DIVIDEND POLICY
The Company does not anticipate paying cash dividends in the foreseeable
future. The Company currently intends to retain any future earnings for use in
the Company's business. Currently, the Company's Senior Credit Agreement and
its Senior Floating Rate Notes Due 2004 contain restrictions on the payment of
dividends. In addition, until the earlier of the Governance Termination Date,
the Qualified Public Offering Date and a sale of shares by Bayer Corporation
other than to a permitted transferee, the Company may not declare dividends on
the Common Stock without the consent of Bayer Corporation. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources," "Certain Transactions," "Principal
Stockholders" and Note 9 to the Consolidated Financial Statements of the
Company.
13
<PAGE>
CAPITALIZATION
The following table sets forth the short-term debt and capitalization of the
Company as of December 1997 (i) on a historical basis and (ii) as adjusted to
give effect to the receipt and application of the estimated net proceeds of
the sale of 3,000,000 shares of Common Stock offered by the Company in the
Offering, assuming a public offering price of $15.00 per share (the midpoint
of the estimated range). 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
--------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Short-term debt:
Revolving credit facility(1)........................ $ 44,000 $28,650
Current portion of term loan facility............... 11,579 11,579
Current portion of capitalized lease obligations and
other.............................................. 861 861
-------- --------
Total short-term debt............................. $ 56,440 $ 41,090
======== ========
Long-term debt:
Term loan facility.................................. $ 98,421 $ 98,421
Senior Floating Rate Notes Due 2004(2).............. 100,000 75,000
Capitalized lease obligations....................... 284 284
-------- --------
Total long-term debt.............................. 198,705 173,705
-------- --------
Stockholders' equity:
Common stock, par value $.01 per share; 100,000
authorized shares: 28,693 issued and outstanding,
actual; 31,693 issued and outstanding as
adjusted(3)........................................ 287 317
Additional paid-in capital.......................... 38,494 78,814
Retained earnings................................... 99,483 99,483
Other............................................... 1,451 1,451
-------- --------
Total stockholders' equity........................ 139,715 180,065
-------- --------
Total capitalization............................ $338,420 $353,770
======== ========
</TABLE>
- --------
(1) For a description of the amount that may be borrowed under the Senior
Credit Agreement, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
(2) For a description of the terms and conditions of the Senior Floating Rate
Notes Due 2004, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Note 9 to the Consolidated
Financial Statements of the Company.
(3) Excludes 3,745,770 shares of Common Stock reserved for issuance upon the
exercise of outstanding options granted pursuant to the Company's 1993
Stock Option Plan, 1997 Stock Option Plan and 1995 Non-Employee Director
Plan as of February 28, 1998 at a weighted average exercise price of
$16.84 per share. Upon closing of the Offering, the Company intends to
grant options to purchase up to an additional 936,915 shares at an
exercise price equal to the initial public offering price of the Common
Stock offered hereby. See "Management--Stock Options."
14
<PAGE>
DILUTION
The consolidated negative net tangible book value of the Company as of
December 1997 was $(51.8) million, or $(1.81) per share. Consolidated negative
net tangible book value per share represents the amount of the Company's
stockholders' equity, less intangible assets, divided by 28,692,720, the
number of shares of Common Stock outstanding, in each case as of December
1997.
Dilution per share represents the difference between the amount per share
paid by purchasers of shares of Common Stock offered by the Company in the
Offering and the pro forma consolidated negative net tangible book value per
share of Common Stock immediately after completion of the Offering. After
giving effect to the sale of 3,000,000 shares of Common Stock offered by the
Company in the Offering at an assumed initial public offering price of $15.00
(the midpoint of the estimated range) per share and after deducting
underwriting discounts and commissions and estimated offering expenses payable
by the Company, the pro forma consolidated negative net tangible book value of
the Company as of December 1997 would have been $(11.4) million, or $(0.36)
per share. This represents an immediate increase in net tangible book value of
$1.45 per share to existing stockholders and an immediate dilution in net
tangible book value of $15.36 per share to purchasers of Common Stock in the
Offering, as illustrated in the following table:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............... $15.00
Consolidated negative net tangible book value per share before
the Offering................................................. $(1.81)
Increase per share attributable to new investors.............. 1.45
------
Pro forma consolidated negative net tangible book value per
share after the Offering..................................... (0.36)
------
Dilution per share to new investors........................... $15.36
======
</TABLE>
During the past five years the following persons have acquired shares of the
Common Stock for the following prices: Martin Sperber--an aggregate of 619,290
shares at an average price of $19.05 per share; and other members and former
members of the Company's and Henry Schein, Inc.'s management--an aggregate of
549,570 shares at an average price of $19.05 per share. See "Certain
Transactions" and "Principal Stockholders."
15
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
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
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <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
======== ======== ======== ======== ========
Basic and diluted
earnings (loss) per
share(4)............... $ 1.62 $ 0.23 $ (0.52) $ 0.05 $ 0.39
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER
--------------------------------------------
1993 1994 1995(1) 1996 1997
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <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.
(4) See Note 1 to the Consolidated Financial Statements of the Company for
information concerning the computation of earnings per share.
16
<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.
17
<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.
18
<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 from 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 percent 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 as a result of increased research and
development activities generally.
19
<PAGE>
Amortization of goodwill and other intangibles was unchanged from the
comparable period in 1996.
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.
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 and was 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 the
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.
20
<PAGE>
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.
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 Senior Floating Rate Notes.
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 increase in accounts payable and
accrued expenses and decline in inventories of $27.6 million, offset by an
increase of 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 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 ended.
21
<PAGE>
In December 1997, the Company issued $100.0 million of Senior Floating Rate
Notes Due 2004 (the "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 in 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 Offering does not constitute a "change of control" under the
Notes. The Notes, which are unsecured obligations of the Company, rank pari
passu with or senior to all existing and future 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 dividends may be paid if the EBITDA-to-
interest expense ratio is greater than 2.5 times for the years 1998 and 1999
and 3.0 times thereafter. Cumulative dividends cannot exceed 50% of the
cumulative net income and the net proceeds of any equity offering to the most
recent quarter then ended.
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 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
Senior Floating Rate Notes Due 2004 (as defined herein), 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 to the term loan facility and
Senior Floating Rate Notes Due 2004 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.
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
22
<PAGE>
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, EXCEPT PER SHARE DATA)
<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
======== ======== ======== ======== ======== ======== ======== ========
Basic and diluted
earnings (loss) per
share.................. $ 0.14 $ 0.00 $ (0.06) $ (0.03) $ 0.14 $ 0.01 $ (0.02) $ 0.26
======== ======== ======== ======== ======== ======== ======== ========
</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 asserting performance.
23
<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.
24
<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
25
<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
maintenance organizations, managed care organizations, pharmacy benefit
managers, group purchasing
26
<PAGE>
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
27
<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>
28
<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.
29
<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
30
<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
31
<PAGE>
Company's Steris facility and are not expected to be approved until FDA has
confirmed that Steris has 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.
32
<PAGE>
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.
33
<PAGE>
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.
34
<PAGE>
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.
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
35
<PAGE>
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.
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
36
<PAGE>
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
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
37
<PAGE>
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 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.
38
<PAGE>
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.
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.
39
<PAGE>
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 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,
40
<PAGE>
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.
41
<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,
42
<PAGE>
Pharmaceutical Division North America. Between 1983 and 1993, Dr. Ebsworth
held various management and 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 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 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.
43
<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 57,750 $ 75,000 22,709 (4)
Executive Vice 1996 341,000 59,700 143,725 21,000 75,000 24,321 (4)
President, Chief
Financial Officer and
Director
Javier Cayado............ 1997 220,000 37,000 398 10,500 100,000 29,343 (5)
Senior Vice President 1996 220,000 40,500 969 10,500 125,000 16,910 (5)
Technical Operations
Paul Feuerman............ 1997 225,000 61,000 8,596 15,750 100,000 17,625 (6)
Senior Vice President, 1996 185,000 32,400 7,738 21,000 100,000 13,799 (6)
General Counsel and
Director
Paul Kleutghen........... 1997 211,000 37,300 9,362 8,925 100,000 36,531 (7)
Senior Vice President 1996 211,000 38,800 24,415 21,000 100,000 47,115 (7)
Strategic Development
Marvin Samson............ 1997 400,000 -- 2,659 183,750 -- 24,754 (8)
Former Executive Vice 1996 400,000 70,000 -- 21,000 -- 21,126 (8)
President
</TABLE>
44
<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 89,250 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 21,000 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 21,000 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.
45
<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
------------------------------------------------------- ---------------------
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......... 57,750 6.5% $14.29 2007 $ 586,030 $1,421,829
Paul Feuerman........... 15,750 1.8 14.29 2007 159,826 387,772
Jay Cayado.............. 10,500 1.2 14.29 2007 106,551 285,514
Paul Kleutghen.......... 8,925 1.0 14.29 2007 90,568 219,737
Marvin Samson........... 183,750 20.7 14.29 2007 1,864,641 4,524,003
Michael Casey........... 89,250 10.1 14.29 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
SHARES ACQUIRED ------------------------- -------------------------
NAME ON EXERCISE VALUE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- --------------- -------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Martin Sperber.......... -- -- 503,475 -- -- --
Dariush Ashrafi......... -- -- 36,435 115,815 -- $41,033
Paul Feuerman........... -- -- 25,410 34,440 -- 11,183
Jay Cayado.............. -- -- 24,465 22,785 -- 7,455
Paul Kleutghen.......... -- -- 30,450 28,875 -- 6,337
Marvin Samson........... -- -- 7,035 197,715 -- 130,463
Michael Casey........... -- -- 36,435 -- -- --
James McGee............. -- -- 480,585 -- $863,100 --
</TABLE>
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
46
<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 503,475 shares of Common Stock at a price of $19.05 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
47
<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.
48
<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 2,877,000 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 2,877,000
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 105,000 shares of Common Stock, subject
to adjustment under certain circumstances. Although options granted under the
1993 Plan to purchase 2,654,190 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 1,068,165 shares under the 1997 Plan
at the then fair market value and plans to grant 936,915 additional options to
purchase shares of Common Stock under the 1997 Plan prior to or at the
completion of the 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 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 1,941,450 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 22,575 shares of Common
Stock under the Non-Employee Director Plan and plans to grant 9,450 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 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).
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
49
<PAGE>
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 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.
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
50
<PAGE>
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 500,000 shares.
51
<PAGE>
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.
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. See "Validity of Shares."
52
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to
beneficial ownership of the Company's Common Stock as of March 31, 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 BENEFICIAL OWNERSHIP
NUMBER OF SHARES PRIOR TO THE OFFERING AFTER THE OFFERING
BENEFICIALLY OWNED (2) (3) (2)(4)
------------------ --------------------- --------------------
BENEFICIAL OWNER(1)
- -------------------
<S> <C> <C> <C>
Martin Sperber (5)...... 20,504,715 66.6% 64.7%
Marvin H. Schein (6)
(8).................... 9,452,100 30.7% 29.8%
135 Duryea Road
Melville, NY 11747
Bayer Corporation....... 8,141,910 26.4% 25.7%
100 Bayer Road
Pittsburgh, PA 15205
Trusts established by
Pamela Schein (6) (8).. 7,144,410 23.2% 22.5%
Pamela Joseph (7) (8)... 2,785,440 9.0% 8.8%
Dariush Ashrafi......... 36,330 * *
Javier Cayado........... 24,465 * *
Paul Feuerman........... 25,410 * *
Paul Kleutghen.......... 30,450 * *
David R. Ebsworth....... 1,995 * *
Richard L. Goldberg..... 1,995 * *
Directors and Executive
Officers as
Group (7 persons) (5).. 20,625,360 67.0% 61.0%
</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.
Percentages shown assume that Bayer does not exercise its preemptive rights
in connection with the Offering. See "--Restructuring Agreements" and
"Description of Capital Stock."
(3) The 30,792,195 shares of Common Stock deemed outstanding prior to the
Offering includes:
(a) 28,692,720 shares of Common Stock outstanding; and
(b) 2,099,475 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 this Prospectus.
(4) The 33,792,195 shares of Common Stock deemed outstanding after the
Offering includes:
(a) 28,692,720 shares of Common Stock outstanding prior to the Offering
and 3,000,000 shares offered herein; and
(b) 2,099,475 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 this Prospectus.
53
<PAGE>
(5) Includes:
(a) 619,290 shares for which Mr. Sperber either is the direct beneficial
owner or holds in trusts for his family members' benefit; and
(b) 503,475 shares issuable pursuant to the exercise of stock options that
are held by Mr. Sperber and are currently exercisable; and
(c) 19,381,950 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.
(6) Includes all shares for which such stockholder is either the direct
beneficial owner or holds in trust for his or her family members and/or
charities for which such stockholder is trustee.
(7) Includes 182,385 shares held in trust, of which Ms. Joseph is a principal
beneficiary.
(8) All shares are held by Mr. Sperber as voting trustee under the Voting
Trust Agreement. See "--Restructuring Agreements."
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., 61.2% of
the outstanding shares of Common Stock immediately after the completion of the
Offering, assuming the Underwriters' over-allotment option is not exercised).
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
54
<PAGE>
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 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, 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 employee
benefit plan or current stockholder) 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
55
<PAGE>
(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 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. See "Shares Eligible For Future Sale."
In addition to the above restrictions, the Restructuring Agreements
generally provide that Bayer Corporation may not transfer any of its 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.
56
<PAGE>
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.
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.
57
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have outstanding
31,692,720 shares of Common Stock and 2,861,355 shares of Common Stock
reserved for issuance upon the exercise of outstanding stock options pursuant
to the Stock Option Plan and certain other options granted by the Company. The
3,000,000 shares of Common Stock sold by the Company in the Offering will be
immediately freely tradeable without restriction under the Securities Act,
except for any shares purchased by an "affiliate" of the Company (as that term
is defined under the rules and regulations of the Securities Act), which will
be subject to the resale limitations of Rule 144 under the Securities Act. The
remaining 28,692,720 outstanding shares of Common Stock, which were issued by
the Company in private transactions not involving a public offering (and any
shares issued upon exercise of employee stock options granted pursuant to the
Stock Option Plan), are "Restricted Securities" for purposes of Rule 144 and
may not be resold in a public distribution, except in compliance with the
registration requirements of the Securities Act or pursuant to Rule 144. The
share numbers in this section assume the Underwriters' over-allotment options
are not exercised.
Prior to the Offering, there has been no public market for the Common Stock.
The Company cannot predict the effect, if any, sales of shares of Common Stock
or the availability of shares for sale will have on the market price from time
to time. Nevertheless, sales of substantial amounts of Common Stock in the
public market could adversely affect the market price of the Common Stock and
could impair the Company's future ability to raise capital through an offering
of its equity securities.
The Company, the Company's officers and directors and certain other
shareholders and option holders of the Company have agreed, subject to certain
limited exceptions, not, directly or indirectly, to offer, sell, assign,
transfer, encumber, contract to sell or otherwise dispose of any outstanding
shares of Common Stock or any securities of the Company substantially similar
to Common Stock (other than in the Offering and, in the case of the Company,
pursuant to the Stock Option Plan) held by them for a period of 180 days after
the date of this Prospectus without the prior written consent (which consent
may be given without notice to the Company's shareholders or other public
announcement) of Cowen & Company. Cowen & Company has advised the Company that
it has no present intention of releasing any of the Company's shareholders or
option holders from such lock-up agreements until the expiration of such 180-
day period.
In addition, Bayer Corporation and the Continuing Stockholders are subject
to certain restrictions under the Restructuring Agreements governing the
transfer of shares. See "Principal Stockholders."
Pursuant to the Stock Option Plan, 2,541,525 shares of Common Stock are
available for future option grants, of which the Company plans to grant
options to purchase 936,915 shares of Common Stock upon or immediately prior
to the completion of the Offering. See "Management--Stock Options."
Rule 701 under the Securities Act provides that the shares of Common Stock
acquired upon the exercise of outstanding options may be resold by persons
other than affiliates beginning 90 days after the date of this Prospectus,
subject only to the manner of sale provisions of Rule 144, and by affiliates
under Rule 144 without compliance with its one-year minimum holding period,
subject to certain limitations. The Company intends to file one or more
registration statements on Form S-8 under the Securities Act to register all
shares of Common Stock subject to outstanding stock options, Common Stock
issuable pursuant to the Stock Option Plan, shares purchased under the
Employee Stock Purchase Plan and the account balances of participants under
the Company Retirement Plan as of the Offering that do not qualify for an
exemption under Rule 701 from the registration requirements of the Securities
Act. The Company expects to file these registration statements promptly after
the date of this Prospectus, and such registration statements are expected to
become effective upon filing. Shares of Common Stock covered by these
registration statements will thereupon be eligible for sale in the public
markets, subject to the Lock-up Agreements, if applicable.
Certain persons and entities (the "General Rightholders") are entitled to
certain rights with respect to the registration under the Securities Act of a
total of 28,475,265 shares of Common Stock (the "General Registrable
58
<PAGE>
Shares"), including a total of 19,381,950 shares of Common Stock subject to
the Continuing Stockholders Agreement (as hereinafter defined) under the terms
of an agreement among the Company and the General Rightholders (the "General
Stockholders Agreement"). The General Stockholders Agreement provides that in
the event the Company proposes to register any of its securities under the
Securities Act pursuant to a demand registration request, subject to certain
exceptions, the General Rightholders shall be entitled to include General
Registrable Shares in such registration, subject to the right of the managing
underwriter of any such offering to exclude for marketing reasons some of such
General Registrable Shares from such registration. The General Rightholders
have the additional right to require the Company to prepare and file, subject
to certain conditions and limitations, three registration statements under the
Securities Act with respect to their General Registrable Shares at any time
before the earlier of September 30, 2004 and the first date on which Bayer
Corporation owns less than 10% of the outstanding Common Stock of the Company.
Certain persons and entities (the "Continuing Rightholders") are entitled to
certain rights with respect to the registration under the Securities Act of a
total of 19,381,950 shares of Common Stock (the "Continuing Registrable
Shares") under the terms of an agreement among the Company and the Continuing
Rightholders (the "Continuing Stockholders Agreement"). The Continuing
Stockholders Agreement provides that in the event the Company proposes to
register any of its securities under the Securities Act pursuant to a demand
registration request, subject to certain exceptions, the Continuing
Rightholders shall be entitled to include Continuing Registrable Shares in
such registration, subject to the right of the managing underwriter of any
such offering to exclude for marketing reasons some of such Continuing
Registrable Shares from such registration. The Continuing Rightholders have
the additional right under the Continuing Stockholders Agreement to require
the Company to prepare and file, subject to certain conditions and
limitations, four registration statements under the Securities Act with
respect to their Continuing Registrable Shares at any time before the tenth
anniversary of the date of the Offering. See "Principal Stockholders."
No prediction can be made as to the effect, if any, that market sales of
Restricted Securities or the availability of such Restricted Securities for
sale will have on the market price of the Common Stock. Nevertheless, sales of
substantial amounts of Common Stock in the public market will have an adverse
impact on the market price of the Common Stock.
59
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 100,000,000 shares
of Common Stock, par value $.01 per share and 2,000,000 shares of Preferred
Stock, par value $.01 per share (the "Preferred Stock"). Immediately prior to
the Offering, there were 28,692,720 shares of Common Stock outstanding held of
record by 13 stockholders.
Prior to the Offering, the authorized capital stock of the Company consisted
of Class A Common Stock and Class B Common Stock. Each share of Class A and
Class B Common Stock was identical in every respect, except that holders of
shares of Class A Common Stock were entitled to one vote in respect of each
share held on all matters voted upon by the Company's stockholders and holders
of shares of Class B Common Stock were not entitled to vote on any matter.
Concurrent with the Offering, each share of Class B Common Stock was
automatically reclassified as and changed into one new share of the Company's
Class A Common Stock, which has been re-designated "Common Stock."
The holders of shares of Common Stock are (i) entitled to one vote per share
on all matters to be voted on by stockholders; (ii) not entitled to cumulate
their votes in elections for directors, which means holders of more than half
the outstanding shares of Common Stock can elect all the directors of the
Company; and (iii) entitled to receive such dividends as may be declared from
time to time by the Board of Directors in its discretion from any assets
legally available for that purpose, after payment of dividends (subject to
restrictions imposed by terms of indebtedness and under the General
Stockholders Agreement) required to be paid on outstanding shares of Preferred
Stock, if any. In the event of the dissolution of the Company, whether
voluntary or involuntary, if any, after distribution to the holders of
Preferred Stock, if any, of amounts to which they may be preferentially
entitled, the holders of Common Stock are entitled to share ratably in the
assets of the Company legally available for distribution to its stockholders.
Subject to the rights of Bayer Corporation under the Restructuring Agreements
to maintain its ownership percentage of the outstanding shares of Common Stock
of the Company, the holders of Common Stock have no preemptive, subscription,
conversion or redemption rights, and are not subject to further calls or
assessments, or rights of redemption, by the Company. The Common Stock
currently outstanding, and the Common Stock issued in the Offering, is and
will be validly issued, fully paid and non-assessable. See "Dividend Policy,
"Principal Stockholders--Restructuring Agreements."
PREFERRED STOCK
The Board of Directors of the Company is authorized, without further
stockholder action, to divide any or all shares of the authorized Preferred
Stock into one or more series and to fix and determine the designations,
preferences and relative, participating, optional or other special rights and
qualifications, limitations or restrictions thereon, of any series so
established, including voting powers, dividend rights, liquidation
preferences, redemption rights and conversion privileges. Although the Company
has no present intention to issue shares of Preferred Stock, the issuance of
shares of Preferred Stock or the issuance of rights to purchase such shares
may have the effect of delaying, deferring or preventing a change in control
of the Company or an unsolicited acquisition proposal. For instance, the
issuance of a series of Preferred Stock might impede a business combination by
including class voting rights that would enable the holder to block such a
transaction. In addition, under certain circumstances, the issuance of
Preferred Stock could adversely affect the voting power of the holders of the
Common Stock. Although the Board of Directors is required to make any
determination to issue such stock based on its judgment as to the best
interests of the stockholders of the Company, the Board of Directors could act
in a manner that would discourage an acquisition attempt or other transaction
that some, or a majority, of the stockholders might believe to be in their
best interests or in which stockholders might receive a premium for their
stock over the then market price of the stock. The Board of Directors does not
intend to seek stockholder approval prior to any issuance of currently
authorized Preferred Stock, unless otherwise required by law.
THE DELAWARE BUSINESS COMBINATION ACT
The Company is incorporated under the Delaware GCL. Section 203 of the
Delaware GCL (the "Delaware Business Combination Act") imposes a three-year
moratorium on business combinations between a Delaware
60
<PAGE>
corporation and an "interested stockholder" (in general, a stockholder owning
15% or more of a corporation's outstanding voting stock) or an affiliate or
associate of an interested stockholder, unless (i) prior to an interested
stockholder becoming an interested stockholder, the board of directors of the
corporation approved either the business combination or the transaction
resulting in the interested stockholder becoming an interested stockholder;
(ii) upon consummation of the transaction resulting in an interested
stockholder becoming an interested stockholder, the interested stockholder
owned 85% or more of the voting stock outstanding at the time the transaction
commenced (excluding, from the calculation of outstanding shares, shares
beneficially owned by directors who are also officers and certain employee
stock plans); or (iii) on or after an interested stockholder became an
interested stockholder, the business combination is approved by (A) the board
of directors and (B) holders of at least 66 2/3% of the outstanding shares
(other than those shares beneficially owned by the interested stockholder) at
a meeting of stockholders.
The Delaware Business Combination Act applies to certain corporations
incorporated in Delaware, unless, among other things, the corporation
expressly elects not to be governed by the legislation and sets forth that
election in an amendment to the corporation's certificate of incorporation or
by-laws as approved by (in addition to any other vote required by law) a
majority of the shares entitled to vote (however, the amendment would not be
effective until 12 months after the date of its adoption and would not apply
to any business combination between the corporation and any person who became
an interested stockholder on or prior to the adoption of the amendment). The
Company has not made such an election and, upon completion of the Offering,
will be subject to the Delaware Business Combination Act.
The Delaware Business Combination Act may discourage other persons from
making a tender offer for or acquisitions of substantial amounts of the Common
Stock. This could have the incidental effect of inhibiting changes in
management and may also prevent temporary fluctuations in the market price of
the Common Stock that often result from actual or rumored takeover attempts.
In addition, the limited liability provisions in the Company's certificate of
incorporation with respect to directors and the indemnification provisions in
the Company's certificate of incorporation may discourage stockholders from
bringing a lawsuit against directors for breach of their fiduciary duty and
may also have the effect of reducing the likelihood of derivative litigation
against directors and officers, even though such an action, if successful,
might otherwise have benefitted the Company and its stockholders. Furthermore,
a stockholder's investment in the Company may be adversely affected to the
extent the Company pays the costs of settlement and damage awards against the
Company's directors and officers pursuant to the indemnification provisions in
the Company's certificate of incorporation.
ANTI-TAKEOVER EFFECT OF PROVISIONS OF THE CERTIFICATE OF INCORPORATION AND BY-
LAWS
Certain provisions of the certificate of incorporation and by-laws in effect
as of the effective date of the Offering could discourage potential
acquisition proposals and could delay or prevent a change in control of the
Company. These provisions are intended to enhance the likelihood of continuity
and stability in the composition of the Board of Directors and in the policies
formulated by the Board of Directors and to discourage certain types of
transactions that may involve an actual or threatened change of control of the
Company, such as an unsolicited acquisition proposal. Because these provisions
could have the effect of discouraging potential acquisition proposals, they
may inhibit fluctuations in the market price of shares of Common Stock that
could otherwise result from actual or rumored takeover attempts. These
provisions also may have the effect of preventing changes in the management of
the Company.
The certificate of incorporation of the Company provides that the Board of
Directors will be divided into three classes of directors with each class
holding office for staggered three-year terms. The classification of directors
will have the effect of making it more difficult to change the composition of
the Board of Directors, because at least two annual meetings of stockholders,
instead of one, generally will be required to effect a change in the majority
of the Board of Directors. Under Delaware law, unless the certificate of
incorporation otherwise provides, a director on a classified board may be
removed by the stockholders only with cause. See "Management--Board of
Directors."
61
<PAGE>
The provisions of Delaware law and the certificate of incorporation and by-
laws of the Company relating to the removal of directors and the filling of
vacancies on the Board of Directors preclude a third party from removing
incumbent directors without cause and simultaneously gaining control of the
Board of Directors by filling, with its own nominees, the vacancies created by
removal. These provisions also reduce the power of stockholders generally,
even those with a majority of the voting power in the Company, to remove
incumbent directors and to fill vacancies on the Board of Directors without
the support of the incumbent directors.
In addition, the certificate of incorporation and by-laws of the Company
provide that stockholder action may not be effected without a duly called
meeting. The certificate of incorporation and by laws of the Company also do
not permit stockholders of the Company to call special meetings of
stockholders. This effectively limits the ability of the Company's
stockholders to conduct any form of consent solicitation. See "Principal
Stockholders."
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is ChaseMellon
Shareholder Services, L.L.C.
62
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Company has agreed to sell to each of the Underwriters named below, and each
of such Underwriters, for whom Cowen & Company, Bear, Stearns & Co. Inc. and
Smith Barney Inc. are acting as representatives (the "Representatives"), has
severally agreed to purchase from the Company, the number of shares of Common
Stock set forth opposite the name of such Underwriter below:
<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERWRITER OF COMMON STOCK
----------- -----------------
<S> <C>
Cowen & Company...............................................
Bear, Stearns & Co. Inc. .....................................
Smith Barney Inc. ............................................
---------
Total....................................................... 3,000,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent and that the Underwriters are
committed to purchase all shares of Common Stock offered hereby (other than
those covered by the over-allotment option described below) if any of such
shares are purchased.
The Underwriters propose to offer the shares of Common Stock directly to the
public at the initial public offering price set forth on the cover page of
this Prospectus and to certain dealers at such price less a concession not in
excess of $ per share. The Underwriters may allow, and such dealers may re-
allow, a concession not in excess of $ per share to certain other brokers
and dealers. After the shares of Common Stock are released for sale to the
public, the offering price and other selling terms may from time to time be
varied by the Representatives.
The Company has granted to the Underwriters an option, exercisable for up to
30 days after the date of this Prospectus, to purchase up to an aggregate of
450,000 additional shares of Common Stock to cover over-allotments, if any. If
the Underwriters exercise their over-allotment option, the Underwriters have
severally agreed, subject to certain conditions, to purchase approximately the
same percentage thereof that the number of shares of Common Stock to be
purchased by each of them shown in the foregoing table bears to the total
number of shares of Common Stock offered hereby. The Underwriters may exercise
such option only to cover over-allotments made in connection with the sale of
shares of Common Stock offered hereby.
At the request of the Company, the Underwriters have reserved for sale, at
the initial public offering price, up to 7% of the shares of Common Stock to
be offered and sold hereby by the Company to the Company's Retirement Plan at
the direction of employees, directors and employees of the Company and other
persons. The number of shares of Common Stock available for sale to the
general public will be reduced to the extent such persons purchase such
reserved shares. Any reserved shares which are not orally confirmed for
purchase within one day of the pricing of the Offering will be offered by the
Underwriters to the general public on the same terms as the other shares
offered hereby. Certain individuals purchasing reserved shares may be required
to agree not to sell, offer or otherwise dispose of any shares of Common Stock
for a period of three months after the date of this Prospectus.
The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act, and to contribute
to payments the Underwriters may be required to make in respect thereof.
63
<PAGE>
The Company, the Company's executive officers and directors and certain
other stockholders and optionholders of the Company have agreed, subject to
certain limited exceptions, not, directly or indirectly, to sell, offer,
pledge, contract to sell or grant any option to purchase or otherwise dispose
of or transfer any shares of Common Stock or any securities convertible into
or exercisable or exchangeable for shares of Common Stock for a period of 180
days after the date of this Prospectus without the prior written consent
(which consent may be given without notice to the Company's stockholders or
other public announcement) of Cowen & Company. Cowen & Company has advised the
Company that it has no present intention of releasing any of the Company's
stockholders or optionholders from such lock-up agreements until the
expiration of such 180-day period.
The Representatives have advised the Company that the Underwriters do not
intend to confirm sales in excess of 5% of the shares of Common Stock offered
hereby to any account over which they exercise discretionary authority.
Until the distribution of the Common Stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the Underwriters
and certain selling group members to bid for and purchase the Common Stock. As
an exception to these rules, the Representatives are permitted to engage in
certain transactions that stabilize the price of the Common Stock. Such
transactions consist of bids or purchases for the purpose of pegging, fixing
or maintaining the price of the Common Stock.
If the Underwriters create a short position in the Common Stock in
connection with the Offering, i.e., if they sell more shares of Common Stock
than are set forth on the cover page of this Prospectus, the Representatives
may reduce that short position by purchasing Common Stock in the open market.
The Representatives may also elect to reduce any short position by exercising
all or part of the over-allotment option described above.
The Representatives may also impose a penalty bid on certain Underwriters
and selling group members. This means that if the Representatives purchase
Common Stock in the open market to reduce the Underwriters' short position or
to stabilize the price of the Common Stock, they may reclaim the amount of the
selling concession from the Underwriters and selling group members who sold
those shares of Common Stock as part of the Offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher
than it might be in the absence of such purchases. The imposition of a penalty
bid might also have an effect on the price of a security to the extent that it
were to discourage resales of the security.
Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the
transactions described above may have on the price of the Common Stock. In
addition, neither the Company nor any of the Underwriters makes any
representation that the Representatives will engage in such transactions or
that such transactions, once commenced, will not be discontinued without
notice.
Prior to the Offering, there has been no public market for the Common Stock.
Consequently, the initial public offering price will be determined by
negotiation between the Company and the Representatives. Among the factors to
be considered in such negotiations will be prevailing market conditions, the
results of operations of the Company in recent periods, the market
capitalizations and stages of development of other companies that the Company
and the Representatives believe to be comparable to the Company, estimates of
the business potential of the Company, the present state of the Company's
development and other factors deemed relevant.
64
<PAGE>
VALIDITY OF SHARES
The validity of the shares of Common Stock being sold in the Offering 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. Certain legal matters in connection with the
Offering will be passed upon for the Underwriters by Brown & Wood LLP, New
York, New York.
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.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"SEC") a Registration Statement on Form S-1 (together with all amendments and
exhibits, the "Registration Statement") under the Securities Act. This
Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules to the Registration
Statement, certain parts of which are omitted in accordance with the rules and
regulations of the SEC. For further information with respect to the Company
and the Common Stock offered hereby, reference is made to the Registration
Statement and to its exhibits and schedules. The Registration Statement,
including exhibits, may be inspected and copied without charge at the SEC's
principal office located at 450 Fifth Street, N.W., Judiciary Plaza,
Washington, D.C. 20549 and at the regional offices of the SEC located at Seven
World Trade Center, Suite 1300, New York, New York 10048 and the Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies
of such material may be obtained by mail from the Public Reference Section of
the Commission at 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C.
20549, upon the payment of prescribed fees. The Commission also maintains a
web site at http://www.sec.gov that contains reports, proxy and information
statements, as well as other information regarding registrants that file
electronically with the SEC.
The Company intends to furnish its stockholders with annual reports
containing audited financial statements and to make available quarterly
reports for the first three quarters of each fiscal year containing interim
unaudited financial information.
65
<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>
[This is the form of report we will be in a position to furnish upon
completion of the stock split discussed in Note 1.]
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, except for Note 1
which is as of , 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; 100,000 authorized
shares;
issued and outstanding 28,693 shares at December
28, 1996
and December 27, 1997............................. 287 287
Additional paid-in capital......................... 38,592 38,494
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, EXCEPT PER SHARE DATA
<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
======== ======== ========
Basic Earnings (Loss) Per Share......... $ (0.52) $ 0.05 $ 0.39
======== ======== ========
Weighted Average Number of Shares
Outstanding............................ 28,743 28,718 28,693
======== ======== ========
</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........ 28,743 $287 $39,548 $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........ 28,743 287 39,548 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......................... (50) -- (956) -- --
Foreign currency translation
adjustments.................... -- -- -- -- (835)
------ ---- ------- -------- -------
Balance, December 28, 1996........ 28,693 287 38,592 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 ....... 28,693 $287 $38,494 $ 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
connection with the proposed offering, the Company, on , 1998, effected
a 105-for-one stock split, and increased its authorized common stock to
100,000,000 shares. All applicable share and per share amounts in the
accompanying consolidated financial statements have been retroactively
adjusted to reflect the stock split.
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)
COMPUTATION OF EARNINGS PER COMMON SHARE
In 1997, the Financial Accounting Standards Board issued Standard No. 128
("SFAS No. 128"), Earnings per Share. SFAS No. 128 replaced the calculation of
primary and fully diluted earnings per share with basic and diluted earnings
per share. Unlike primary earnings per share, basic earnings per share
excludes the dilutive effects of options. Diluted earnings per share is very
similar to the fully diluted earnings per share. Earnings per share has been
computed using the weighted average number of shares of common (both Class A
and Class B). See Note 11. Diluted earnings per share is the same as the basic
amounts for all periods presented and thus has not been presented. The assumed
exercise of stock options could potentially dilute basic earnings per share
amounts in the future.
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.
F-9
<PAGE>
SCHEIN PHARMACEUTICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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 19,240,620 Class
A and 9,452,100 Class B issued and outstanding.
During 1996, the Company agreed to repurchase 50,190 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 5,859,000 shares under the plans. However, 222,810 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 and earnings (loss) per share would have been reduced by
$0.03, $0.08 and $0.13, 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
$9.52........ 186,375 5.8 $9.52 180,600 $9.52
$14.29....... 734,370 9.2 14.29 15,330 14.29
$19.05....... 2,202,690 7.4 19.05 1,721,475 19.05
--------- ---------
3,123,435 8.1 17.36 1,917,405 18.11
========= =========
</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......... 1,717,380 $17.89
Granted (at $19.05 per share).................. 378,105 19.05
Exercised...................................... -- --
Canceled (at $19.05 per share)................. (8,085) 19.05
--------- ------
Shares under option at December 30, 1995......... 2,087,400 18.10
Granted (at $19.05 per share).................. 513,135 19.05
Exercised...................................... -- --
Canceled (at $14.29 to $19.05 per share)....... 78,960 17.45
--------- ------
Shares under option at December 28, 1996......... 2,521,575 18.31
Granted (at $14.29 per share).................. 887,145 14.29
Exercised...................................... -- --
Canceled (at $9.52 to $19.05 per share)........ (285,285) 16.67
--------- ------
Shares under option at December 27, 1997 (at
$9.52 to $19.05 per share)...................... 3,123,435 $17.36
========= ======
Options exercisable at December
1995........................................... 1,131,900 $18.34
1996........................................... 1,601,880 $17.96
1997........................................... 1,917,405 $18.11
Options available for grant:
1995........................................... 894,600
1996........................................... 460,425
1997........................................... 1,917,405
Weighted average fair value of options granted
during:
1995........................................... $ 8.72
1996........................................... $ 8.54
1997........................................... $ 6.26
</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 50,190 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 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 DEALER, SALESPERSON, OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS OR BY
ANY OTHER PERSON. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SHARES OF COMMON
STOCK OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY
PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION TO SUCH PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT
THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE
DATE HEREOF.
-----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary......................................................... 3
Risk Factors............................................................... 6
The Company................................................................ 13
Use of Proceeds............................................................ 13
Dividend Policy............................................................ 13
Capitalization............................................................. 14
Dilution................................................................... 15
Selected Consolidated Financial Data....................................... 16
Management's Discussion and
Analysis of Financial Condition
and Results of Operations................................................. 17
Business................................................................... 25
Management................................................................. 42
Certain Transactions....................................................... 52
Principal Stockholders..................................................... 53
Shares Eligible For Future Sale............................................ 58
Description of Capital Stock............................................... 60
Underwriting............................................................... 63
Validity of Shares......................................................... 65
Experts.................................................................... 65
Available Information...................................................... 65
Index to Consolidated Financial Statements................................. F-1
</TABLE>
-----------------
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK OFFERED HEREBY, WHETHER OR
NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS 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.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
3,000,000 SHARES
LOGO SCHEIN
PHARMACEUTICAL
COMMON STOCK
------------------
PROSPECTUS
------------------
COWEN & COMPANY
BEAR, STEARNS & CO. INC.
SALOMON SMITH BARNEY
, 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the estimated expenses and costs (other than
underwriting discounts and commissions) expected to be incurred by the Company
in connection with the issuance and distribution of the securities being
registered under this registration statement. Except for the SEC and NASD
filing fees, all expenses have been estimated and are subject to future
contingencies.
<TABLE>
<S> <C>
SEC registration fee.......................................... $ 18,319
NYSE fee...................................................... 170,000
NASD fee...................................................... 6,710
Legal fees and expenses....................................... 550,000
Printing and engraving expenses............................... 350,000
Accounting fees and expenses.................................. 200,000
Transfer agent and registrar fees and expenses................ 15,000
Miscellaneous................................................. 189,971
----------
Total....................................................... $1,500,000
==========
</TABLE>
ITEM 14. 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
II-1
<PAGE>
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 15. RECENT SALES OF UNREGISTERED SECURITIES
None.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<C> <S>
1.1 Form of Underwriting Agreement.
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.
3.4 Amended and Restated By-Laws of the Company adopted by the Company on
March 6, 1998.
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.
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 Offering Memorandum, dated December 19, 1997, with respect to the
Company's $100,000,000 Senior Floating Rate Notes Due 2004.
5.1 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.
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.
10.2 Agreement, dated June 10, 1994, between Steris Laboratories, Inc.,
Akzo Pharma International B.V., and Organon Inc.
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., dated
September 30, 1996.
10.5 Agreement, dated August 16, 1994, between the Company and Elan Pharma
Ltd. (currently Elan Corporation plc).
10.6 Custom Manufacturing Agreement, dated July 1, 1995, between the
Company and Johnson Matthey, Inc.
10.7 (Intentionally Omitted)
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.
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <S>
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.
10.14 Schein Pharmaceutical, Inc. 1997 Stock Option Plan.
10.15 Schein Pharmaceutical, Inc. 1995 Non-Employee Director Stock Option
Plan (amended and restated as of August 8, 1996).
10.16 Employment Agreement, dated November 29, 1993 between the Company and
Paul Feuerman.
10.17 Deferred Compensation Agreement, dated August 8, 1996, between the
Company and Paul Feuerman.
10.18 Employment Agreement, dated May 1, 1995, between the Company and
Dariush Ashrafi.
10.19 Employment offer letter, dated April 17, 1995, from the Company to
Dariush Ashrafi.
10.20 Employment Agreement, dated September 30, 1994, between the Company
and Martin Sperber, including Amendment No. 1 dated as of March 6,
1998.
10.21 Option Agreement Pursuant to 1993 Stock Option Plan dated September
30, 1994 between Schein Holdings, Inc. and Martin Sperber.
10.22 Employment Agreement, dated as of July 28, 1995, between the Company
and Marvin Samson.
10.23 Compensation Continuation Agreement, dated October 19, 1991, between
the Company and Marvin Samson.
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.
10.25 Retirement Plan of Schein Pharmaceutical, Inc. and Affiliates,
including Amendment No. 4.
10.26 Amendment No. 1 to the Retirement Plan of Schein Pharmaceutical, Inc.
and Affiliates.
10.27 1993 Book Equity Appreciation Rights Program.
10.28 Form of Book Equity Appreciation Rights Award.
10.29 Form of Split Dollar Life Insurance Agreement.
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.
10.31 Continuing Shareholders Agreement, dated September 30, 1994, by and
among the Company and each of the shareholders listed on schedule A
thereto.
10.32 Heads of Agreement, dated September 30, 1994, by and among the
Company, Bayer Corporation (formerly Miles Inc.) and Bayer A.G.
10.33 Second Consolidated Agreement, dated December 15, 1992, between the
Company, its affiliates, and Alfred B. Engelberg.
10.34 License and Development Agreement, dated November 30, 1993, between
the Company and Ethical Holdings PLC.
10.35 License and Development Agreement, dated January 15, 1993, between the
Company and Ethical Holdings Limited, including Amendment, dated
November 4, 1994.
10.36 Letter Agreement, dated June 23, 1995, between the Company and Ethical
Holdings, Inc., including Revised Schedule 5, effective July 21, 1995.
10.37 (Intentionally Omitted.)
10.38 Multiproduct Technology Transfer, Development and License Agreement,
dated August 30, 1994, between the Company and Ethical Holdings PLC.
10.39 License and Development Agreement, dated March 31, 1994, between the
Company and Ethical Holdings PLC.
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.
</TABLE>
II-3
<PAGE>
<TABLE>
<C> <S>
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 No. 3 dated as of January 28, 1998.
10.45 Schein Pharmaceutical, Inc. 1998 Employee Stock Purchase Plan, dated
January 28, 1998.
10.46 Stock Purchase Agreement, dated February 6, 1998, between the Company
and Cheminor Drugs Limited.
10.47 Shareholders Agreement, dated February 6, 1998, between the Company,
Cheminor Drugs Limited and the principal shareholders of Cheminor
Drugs Limited listed on Schedule A.
10.48 Strategic Alliance Agreement, dated February 6, 1998, among the
Company, Cheminor Drugs Limited, Dr. Reddy's Laboratories Limited and
Reddy-Cheminor, Inc.
21.1 List of Subsidiaries.
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).
27.1 Financial Data Schedule.
</TABLE>
(b) Financial Statement Schedules
The following financial statement schedule of the Company included herein
should be read in conjunction with the Consolidated Financial Statements and
the Notes thereto included elsewhere in this Registration Statement.
Report of Independent Public Accountants on Supplemental Schedule to the
Consolidated Financial Statements.
Schedule II--Valuation Allowances
All other schedules for the Company are omitted because either they are not
applicable or the required information is shown in the financial statements or
notes thereto.
ITEM 17. UNDERTAKINGS
The Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
The Registrant hereby undertakes to provide to the Underwriters at the
closing specified in the Underwriting Agreement (filed herewith as Exhibit
1.1) certificates in such denominations and registered in such names as
required by the Underwriters to permit prompt delivery to each purchaser.
II-4
<PAGE>
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described in Item 14, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question 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.
II-5
<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 13th 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-1, and any registration statement relating to
the same offering as this Registration Statement that is to be effective upon
filing pursuant to Rule 462(b) and the Securities Act of 1933, 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 13, 1998
MARTIN SPERBER Executive Officer,
President and
Director (principal
executive officer)
/s/ Dariush Ashrafi Chief Financial
- ------------------------------------- Officer, Executive March 13, 1998
DARIUSH ASHRAFI Vice President and
Director (principal
financial and
accounting officer)
/s/ Paul Feuerman Senior Vice
- ------------------------------------- President, General March 13, 1998
PAUL FEUERMAN Counsel and Director
Director
/s/ David R. Ebsworth March 13, 1998
- -------------------------------------
DAVID R. EBSWORTH
/s/ Richard L. Goldberg Director
- ------------------------------------- March 13, 1998
RICHARD L. GOLDBERG
II-6
<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, except for Note 1 which is as of ,
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-7
<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-8
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. PAGE
------- ----
<C> <S> <C>
1.1 Form of Underwriting Agreement.
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.
3.4 Amended and Restated By-Laws of the Company adopted by the
Company on March 6, 1998.
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.
4.2 First, Second, Third and Fourth Amendment 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 Offering Memorandum, dated December 19, 1997, with respect to
the Company's $100,000,000 Senior Floating Rate Notes Due 2004.
5.1 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.
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.
10.2 Agreement, dated June 10, 1994, between Steris Laboratories,
Inc., Akzo Pharma International B.V., and Organon Inc.
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., dated September 30, 1996.
10.5 Agreement, dated August 16, 1994, between the Company and Elan
Pharma Ltd. (currently Elan Corporation plc), including
Supplemental Agreement, dated September 22, 1994.
10.6 Custom Manufacturing Agreement, dated July 1, 1995, between the
Company and Johnson Matthey, Inc.
10.7 (Intentionally Omitted.)
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.
10.14 Schein Pharmaceutical, Inc. 1997 Stock Option Plan.
10.15 Schein Pharmaceutical, Inc. 1995 Non-Employee Director Stock
Option Plan (amended and restated as of August 8, 1996).
10.16 Employment Agreement, dated November 29, 1993 between the
Company and Paul Feuerman.
10.17 Deferred Compensation Agreement, dated August 8, 1996, between
the Company and Paul Feuerman.
10.18 Employment Agreement, dated May 1, 1995, between the Company
and Dariush Ashrafi.
10.19 Employment offer letter, dated April 17, 1995, from the Company
to Dariush Ashrafi.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. PAGE
------- ----
<C> <S> <C>
10.20 Employment Agreement, dated September 30, 1994, between the
Company and Martin Sperber, including Amendment No. 1 dated as
of March 6, 1998.
10.21 Option Agreement Pursuant to 1993 Stock Option Plan dated
September 30, 1994 between Schein Holdings, Inc. and Martin
Sperber.
10.22 Employment Agreement, dated as of July 28, 1995, between the
Company and Marvin Samson.
10.23 Compensation Continuation Agreement, dated October 19, 1991,
between the Company and Marvin Samson.
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.
10.25 Retirement Plan of Schein Pharmaceutical, Inc. and Affiliates,
including Amendment No. 4.
10.26 Amendment No. 1 and Amendment No. 3 to the Retirement Plan of
Schein Pharmaceutical, Inc. and Affiliates.
10.27 1993 Book Equity Appreciation Rights Program.
10.28 Form of Book Equity Appreciation Rights Award.
10.29 Form of Split Dollar Life Insurance Agreement.
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.
10.31 Continuing Shareholders Agreement, dated September 30, 1994, by
and among the Company and each of the shareholders listed on
schedule A thereto.
10.32 Heads of Agreement, dated September 30, 1994, by and among the
Company, Bayer Corporation (formerly Miles Inc.) and Bayer A.G.
10.33 Second Consolidated Agreement, dated December 15, 1992, between
the Company, its affiliates, and Alfred B. Engelberg.
10.34 License and Development Agreement, dated November 30, 1993,
between the Company and Ethical Holdings PLC.
10.35 License and Development Agreement, dated January 15, 1993,
between the Company and Ethical Holdings Limited, including
Amendment, dated November 4, 1994.
10.36 Letter Agreement, dated June 23, 1995, between the Company and
Ethical Holdings, Inc., including Revised Schedule 5, effective
July 21, 1995.
10.37 (Intentionally Omitted.)
10.38 Multiproduct Technology Transfer, Development and License
Agreement, dated August 30, 1994, between the Company and
Ethical Holdings PLC.
10.39 License and Development Agreement, dated March 31, 1994,
between the Company and Ethical Holdings PLC.
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 No. 3 dated as of January
28, 1998.
10.45 Schein Pharmaceutical, Inc. 1998 Employee Stock Purchase Plan,
dated January 23, 1998.
10.46 Stock Purchase Agreement, dated February 6, 1998, between the
Company and Cheminor Drugs Limited.
10.47 Shareholders Agreement, dated February 6, 1998, between the
Company, Cheminor Drugs Limited and the principal shareholders
of Cheminor Drugs Limited listed on Schedule A.
10.48 Strategic Alliance Agreement, dated February 6, 1998, among the
Company, Cheminor Drugs Limited, Dr. Reddy's Laboratories
Limited and Reddy-Cheminor, Inc.
21.1 List of Subsidiaries.
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).
27.1 Financial Data Schedule.
</TABLE>
<PAGE>
EXHIBIT 1.1
3,000,000 Shares
SCHEIN PHARMACEUTICAL, INC.
Common Stock
UNDERWRITING AGREEMENT
----------------------
March __, 1998
COWEN & COMPANY
BEAR, STEARNS & CO. INC.
SMITH BARNEY INC.
As Representatives of the several Underwriters
c/o Cowen & Company
One Financial Square
New York, New York 10005
Dear Sirs:
1. Introductory. Schein Pharmaceutical, Inc., a Delaware corporation (the
------------
"Company") proposes to sell, pursuant to the terms of this Agreement, to
the several underwriters named in Schedule A hereto (the "Underwriters,"
or, each, an "Underwriter"), an aggregate of 3,000,000 shares of common
stock, par value $.01 per share (the "Common Stock") of the Company. The
aggregate of 3,000,000 shares so proposed to be sold is hereinafter
referred to as the "Firm Stock". The Company also proposes to sell to the
Underwriters, upon the terms and conditions set forth in Section 3 hereof,
up to an additional 450,000 shares of Common Stock (the "Optional Stock").
The Firm Stock and the Optional Stock are hereinafter collectively referred
to as the "Stock". Cowen & Company ("Cowen"), Bear, Stearns & Co. Inc. and
Smith Barney Inc. are acting as representatives of the several Underwriters
and in such capacity are hereinafter referred to as the "Representatives".
2. Representations and Warranties of the Company. The Company represents and
---------------------------------------------
warrants to, and agrees with, the several Underwriters that:
(i) A registration statement on Form S-1 (File No. 33-41413) in the
form in which it became or becomes effective and also in such form as
it may be when any post-effective amendment thereto shall become
effective with respect to the Stock, including any pre-effective
prospectuses included as part of the registration statement as
originally filed or as part of any amendment or supplement thereto, or
filed pursuant to Rule 424 under the Securities Act of
<PAGE>
1933, as amended (the "Securities Act"), and the rules and regulations
(the "Rules and Regulations") of the Securities and Exchange
Commission (the "Commission") thereunder, copies of which have
heretofore been delivered to you, has been carefully prepared by the
Company in conformity with the requirements of the Securities Act and
has been filed with the Commission under the Securities Act. If it is
contemplated, at the time this Agreement is executed, that a post-
effective amendment to the registration statement will be filed and
must be declared effective before the offering of the Stock may
commence, the term "Registration Statement" as used in this Agreement
means the registration statement as amended by said post-effective
amendment. The term "Registration Statement" as used in this
Agreement shall also include any registration statement relating to
the Stock that is filed and declared effective pursuant to Rule 462(b)
under the Securities Act. The term "Prospectus" as used in this
Agreement means the prospectus in the form included in the
Registration Statement, or, (A) if the prospectus included in the
Registration Statement omits information in reliance on Rule 430A
under the Securities Act and such information is included in a
prospectus filed with the Commission pursuant to Rule 424(b) under the
Securities Act, the term "Prospectus" as used in this Agreement means
the prospectus in the form included in the Registration Statement as
supplemented by the addition of the Rule 430A information contained in
the prospectus filed with the Commission pursuant to Rule 424(b) and
(B) if prospectuses that meet the requirements of Section 10(a) of the
Securities Act are delivered pursuant to Rule 434 under the Securities
Act, then (i) the term "Prospectus" as used in this Agreement means
the "prospectus effective upon completion" (as such term is defined in
Rule 434(g) under the Securities Act) as supplemented by (a) the
addition of Rule 430A information or other information contained in
the form of prospectus delivered pursuant to Rule 434(b)(2) under the
Securities Act or (b) the information contained in the term sheets
described in Rule 434(b)(3) under the Securities Act, and (ii) the
date of such prospectuses shall be deemed to be the date of the term
sheets. The term "Pre-effective Prospectus" as used in this Agreement
means the prospectus subject to completion in the form included in the
Registration Statement at the time of the initial filing of the
Registration Statement with the Commission, and as such prospectus
shall have been amended from time to time prior to the date of the
Prospectus.
(ii) The Commission has not issued or threatened to issue any order
preventing or suspending the use of any Pre-effective Prospectus, and,
at its date of issue, each Pre-effective Prospectus conformed in all
material respects with the requirements of the Securities Act and did
not include any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they
were made, not misleading; and, when the Registration Statement
becomes effective and at all times subsequent thereto up
2
<PAGE>
to and including each of the Closing Dates (as hereinafter defined),
the Registration Statement and the Prospectus and any amendment or
supplement thereto contained and will contain all material statements
and information required to be included therein by the Securities Act
and conformed and will conform in all material respects to the
requirements of the Securities Act and neither the Registration
Statement nor the Prospectus, nor any amendment or supplement thereto,
included or will include any untrue statement of a material fact or
omit to state any material fact required to be stated therein or
necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading; provided,
however, that the foregoing representations, warranties and agreements
shall not apply to information contained in or omitted from any Pre-
effective Prospectus or the Registration Statement or the Prospectus
or any such amendment or supplement thereto in reliance upon, and in
conformity with, written information furnished to the Company by or on
behalf of any Underwriter, directly or through you, specifically for
use in the preparation thereof; there is no franchise, lease,
contract, agreement or document or legal or governmental proceeding
required to be described in the Registration Statement or Prospectus
or to be filed as an exhibit to the Registration Statement which is
not described or filed therein as required; and all descriptions of
any such franchises, leases, contracts, agreements or documents, of
the Company's Certificate of Incorporation and By-laws, and of laws,
rules, regulations, orders, judgments and decrees contained in the
Registration Statement are accurate and complete descriptions of such
documents in all material respects and fairly present the information
required to be shown.
(iii) Subsequent to the respective dates as of which information is
given in the Registration Statement and Prospectus, and except as set
forth or contemplated in the Prospectus, neither the Company nor any
of its subsidiaries has incurred any material liabilities or
obligations, direct or contingent, nor entered into any material
transactions not in the ordinary course of business, and there has not
been any material adverse change, or any development involving a
prospective material adverse change, in or affecting the condition
(financial or otherwise), properties, business, management, prospects,
net worth or results of operations of the Company and its subsidiaries
considered as a whole, or any change in the capital stock or short-
term or long-term debt of the Company and its subsidiaries considered
as a whole.
(iv) The consolidated financial statements, together with the related
notes and schedules, set forth in the Prospectus and elsewhere in the
Registration Statement fairly present, on the basis stated in the
Registration Statement, the consolidated financial condition, results
of operations and changes in financial condition of the Company and
its consolidated subsidiaries at the respective
3
<PAGE>
dates or for the respective periods therein specified. Such
statements of the Company and related notes and schedules have been
prepared in accordance with generally accepted accounting principles
applied on a consistent basis except as may be set forth in the
Prospectus. The selected financial and statistical data set forth in
the Prospectus under the captions "Prospectus Summary - Summary
Consolidated Financial Data," "Capitalization," "Dilution," "Selected
Consolidated Financial Data," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Management -
Executive Compensation," "Certain Transactions," "Principal
Stockholders" and "Shares Eligible for Future Sale" fairly present, on
the basis stated in the Registration Statement, the information set
forth therein.
(v) BDO Seidman LLP, who have expressed their opinions on the audited
financial statements of the Company included in the Registration
Statement and the Prospectus are independent public accountants as
required by the Securities Act and the Rules and Regulations.
(vi) The Company and each of its subsidiaries have been duly organized
and are validly existing and in good standing as corporations under
the laws of their respective jurisdictions of organization, with power
and authority (corporate and other) to own or lease their properties
and to conduct their businesses as described in the Prospectus; each
of the Company and its subsidiaries is in possession of and operating
in compliance with all franchises, grants, authorizations, licenses,
permits, easements, consents, certificates and orders required for the
conduct of its business, all of which are valid and in full force and
effect, except where noncompliance would not materially and adversely
affect the Company and its subsidiaries taken as a whole or,
individually, the Company or any of its Subsidiaries (as hereinafter
defined) (a "Material Adverse Effect"); and the Company and each
of such subsidiaries are duly qualified to do business and in good
standing as foreign corporations in all other jurisdictions where
their ownership or leasing of properties or the conduct of their
businesses requires such qualification, except where the failure to be
qualified and in good standing would not have a Material Adverse
Effect. The Company and each of its subsidiaries have all requisite
power and authority, and all necessary consents, approvals,
authorizations, orders, registrations, qualifications, licenses and
permits of and from all public regulatory or governmental agencies and
bodies to own, lease and operate their properties and conduct their
businesses as now being conducted and as described in the Registration
Statement and the Prospectus, except where the absence thereof would
not have a Material Adverse Effect, and such consents, approvals,
authorizations, orders, registrations, qualifications, licenses and
permits do not contain materially burdensome restrictions not
adequately disclosed in the Registration Statement and the Prospectus.
The Company owns, directly or indirectly, the corporations,
associations or other entities listed in Schedule C hereto (each, a
4
<PAGE>
"Subsidiary"), each of which is owned by the Company or a subsidiary
of the Company to the extent set forth in Schedule C.
(vii) The Company's authorized and outstanding capital stock is on
the date hereof, and will be on the Closing Date, as set forth under
the heading "Capitalization" in the Prospectus and, assuming that the
105-for-1 stock split and the conversion of each outstanding share of
Class A Common Stock and Class B Common Stock into a single class of
Common Stock has been consummated, the outstanding shares of Common
Stock of the Company conform to the description thereof in the
Prospectus and have been duly authorized and validly issued and are
fully paid and nonassessable and have been issued in compliance with
all federal and state securities laws and were not issued in violation
of or, except as disclosed in the Prospectus, subject to any
preemptive rights or similar rights to subscribe for or purchase
securities and conform to the description thereof contained in the
Prospectus. Except as disclosed in or contemplated by the Prospectus
and the financial statements of the Company and related notes thereto
included in the Prospectus, the Company does not have outstanding any
options or warrants to purchase, or any preemptive rights or other
rights to subscribe for or to purchase any securities or obligations
convertible into, or any contracts or commitments to issue or sell,
shares of its capital stock or any such options, rights, convertible
securities or obligations, except for options granted subsequent to
the date of information provided in the Prospectus pursuant to the
Company's employee and stock option plans as disclosed in the
Prospectus. The description of the Company's stock option and other
stock plans or arrangements, and the options or other rights granted
or exercised thereunder, as set forth in the Prospectus, accurately
and fairly presents the information required to be shown with respect
to such plans, arrangements, options and rights. Except as disclosed
in the Prospectus, all outstanding shares of capital stock of each
subsidiary have been duly authorized and validly issued, and are fully
paid and nonassessable and, except for directors' qualifying shares,
to the extent owned by the Company or a subsidiary of the Company, are
owned free and clear of any liens, encumbrances, equities or claims or
other rights to purchase, agreements or other obligations to issue or
other rights to convert any obligations into shares of capital stock
or ownership interests in any of the Company's subsidiaries are
outstanding.
(viii) The Stock to be issued and sold by the Company to the
Underwriters hereunder has been duly and validly authorized and, when
issued and delivered against payment therefor as provided herein, will
be duly and validly issued, fully paid and nonassessable and free of
any preemptive or similar rights. The Stock conforms to the
description thereof contained in the Prospectus, and such description
conforms to the rights set forth in the instruments defining the same.
5
<PAGE>
(ix) Except as set forth in the Prospectus, (A) there are no legal or
governmental actions, suits, proceedings or claims pending to which
the Company or any of its subsidiaries or affiliates is a party or of
which any property of the Company or any subsidiary or affiliate is
subject, which might individually or in the aggregate (i) prevent or
adversely affect the transactions contemplated by this Agreement, (ii)
suspend the effectiveness of the Registration Statement, (iii) prevent
or suspend the use of the Pre-effective Prospectus in any jurisdiction
or (iv) result in a material adverse change in the condition
(financial or otherwise), properties, business, management, prospects,
net worth or results of operations of the Company and its subsidiaries
considered as a whole, (B) there is no valid basis for any such legal
or governmental proceeding and (C) to the Company's knowledge no such
proceedings are threatened or contemplated against the Company or any
subsidiary or controlled affiliate by governmental authorities or
others. The Company is not a party nor subject to the provisions of
any material injunction, judgment, decree or order of any court,
regulatory body or other governmental agency or body. The description
of the Company's litigation under the heading "Legal Proceedings" and
regulatory proceedings under the heading "Risk Factors--Pending
Regulatory Matters" in the Prospectus is true and correct and complies
with the Rules and Regulations.
(x) The statements set forth in the Prospectus under the caption
"Description of Capital Stock," insofar as they purport to constitute
a summary of the terms of the capital stock, or under the captions
"Management," "Certain Transactions," "Principal Stockholders" and
"Shares Eligible for Future Sale," insofar as they purport to describe
the provisions of the documents referred to therein, are accurate and
complete in all material respects.
(xi) The execution, delivery and performance of this Agreement and the
consummation of the transactions herein contemplated will not conflict
with or result in a breach or violation of any of the terms or
provisions of or constitute a default under any indenture, mortgage,
note, deed of trust, loan agreement, lease or other agreement or
instrument to which the Company or any of its subsidiaries is a party
or by which it or any of its properties is or may be bound, the
Certificate of Incorporation, By-laws or other organizational
documents of the Company or any of its subsidiaries, or any law,
order, rule or regulation of any court or governmental agency or body
having jurisdiction over the Company or any of its subsidiaries or any
of their properties and do not and will not result in the creation of
any lien or the like against such properties.
(xii) Neither the Company nor any of its subsidiaries is, or with
notice or lapse of time or both will be, in violation of or in default
under its Certificate
6
<PAGE>
of Incorporation or By-laws or other organizational documents or in
default in the performance or observance of any obligation, agreement,
covenant or condition contained in any indenture, mortgage, note, deed
of trust, loan agreement, lease or other agreement or instrument to
which it is a party or by which it or any of its properties may be
bound, except where such default would not have a Material Adverse
Effect.
(xiii) No consent, approval, authorization or order of any court or
governmental agency or body is required for the execution, delivery
and performance of this Agreement by the Company and the consummation
of the transactions contemplated hereby, except such as may be
required by the National Association of Securities Dealers, Inc. (the
"NASD") or under the Securities Act or the Securities Exchange Act of
1934, as amended (the "Exchange Act") or the securities or "Blue Sky"
laws of any jurisdiction in connection with the purchase and
distribution of the Stock by the Underwriters.
(xiv) The Company has the full corporate power and authority to enter
into this Agreement and to perform its obligations hereunder
(including to issue, sell and deliver the Stock), and this Agreement
has been duly and validly authorized, executed and delivered by the
Company and is a valid and binding obligation of the Company,
enforceable against the Company in accordance with its terms, except
to the extent that rights to indemnity and contribution hereunder may
be limited by federal or state securities laws or the public policy
underlying such laws.
(xv) Except as set forth in the Prospectus, the Company and its
Subsidiaries are in compliance with, and conduct their businesses in
conformity with all applicable federal, state, local and foreign laws,
rules and regulations or any court or governmental agency or body,
except where noncompliance would not have a Material Adverse Effect;
to the knowledge of the Company, otherwise than as set forth in the
Registration Statement and the Prospectus, no prospective change in
any of such federal or state laws, rules or regulations has been
adopted which, when made effective, would have a Material Adverse
Effect. In the ordinary course of business, employees of the Company
conduct periodic reviews of the effect of Environmental Laws (as
defined below) on the business operations and properties of the
Company and its Subsidiaries, in the ordinary course of which they
seek to identify liabilities. Except as disclosed in the Registration
Statement, the Company and its Subsidiaries are in compliance with all
applicable existing federal, state, local and, where applicable,
foreign laws and regulations relating to the protection of human
health or the environment or imposing liability or requiring standards
of conduct concerning any Hazardous Materials ("Environmental Laws"),
except for such instances of noncompliance which, either singly or in
the aggregate,
7
<PAGE>
would not have a Material Adverse Effect. The term "Hazardous
Material" means (i) any "hazardous substance" as defined by the
Comprehensive Environmental Response, Compensation and Liability Act
of 1980, as amended, (ii) any "hazardous waste" as defined by the
Resource Conservation and Recovery Act, as amended, and (iii) any
pollutant or contaminant or hazardous, dangerous or toxic chemical,
material, waste or substance regulated under or within the meaning of
any other Environment Law.
(xvi) The Company and its subsidiaries have filed all necessary
federal, state, local and foreign income, payroll, franchise and other
tax returns and have paid all taxes shown as due thereon or with
respect to any of their properties, and there is no tax deficiency
that has been, or to the knowledge of the Company is likely to be,
asserted against the Company or any of its subsidiaries or any of
their respective properties or assets that would materially and
adversely affect the financial position, business or operations of the
Company and its subsidiaries.
(xvii) Except as disclosed in the Registration Statement and
Prospectus no person or entity has the right to require registration
of shares of Common Stock or other securities of the Company because
of the filing or effectiveness of the Registration Statement or
otherwise, except for persons and entities who have expressly waived
such right or who have been given proper notice and have failed to
exercise such right within the time or times required under the terms
and conditions of such right.
(xviii) Neither the Company nor any of its officers, directors or
controlled affiliates has taken or will take, directly or indirectly,
any action designed or intended to stabilize or manipulate the price
of any security of the Company, or which caused or resulted in, or
which might in the future reasonably be expected to cause or result
in, stabilization or manipulation of the price of any security of the
Company.
(xix) The Company has provided you with all monthly consolidated
financial statements since December 27, 1997 to the date hereof, that
are available to the officers of the Company.
(xx) The Company and its subsidiaries own or possess the right to use
all patents, trademarks (including "INFeD", "Ferrlecit" and "Unipine
XL"), trademark registrations, service marks, service mark
registrations, trade names, copyrights, licenses, inventions, trade
secrets, know-how and rights described in the Prospectus as being
owned or used by them or any of them, and, except as disclosed in the
Prospectus, the Company is not aware of any claim to the contrary or
any challenge by any other person to the rights of the Company and its
subsidiaries with respect to the foregoing, except where such
8
<PAGE>
claims and challenges would not, singly or in the aggregate, have a
Material Adverse Effect. The Company's business as now conducted and
as proposed to be conducted does not and will not infringe or conflict
with, in any material respect, patents, trademarks, service marks,
trade names, copyrights, trade secrets, licenses or other intellectual
property or franchise right of any person (except for patent challenge
proceedings). Except as described in the Prospectus, no claim has
been made against the Company alleging the infringement by the Company
of any patent, trademark, service mark, trade name, copyright, trade
secret, license or other intellectual property right or franchise
right of any person.
(xxi) The Company and its subsidiaries have performed all material
obligations required to be performed by them under all contracts
required by Item 601(b)(10) of Regulation S-K under the Securities Act
to be filed as exhibits to the Registration Statement, and neither the
Company nor any of its subsidiaries nor any other party to such
contract is in default under or in breach of any such obligations.
Neither the Company nor any of its subsidiaries has received any
notice of such default or breach.
(xxii) Neither the Company nor any of its subsidiaries is involved in
any material labor dispute nor is any such dispute threatened. The
Company is not aware that (A) except as disclosed in the Prospectus,
any executive, key employee or significant group of employees of the
Company or any subsidiary plans to terminate employment with the
Company or any such subsidiary or (B) any such executive or key
employee is subject to any noncompete, nondisclosure, confidentiality,
employment, consulting or similar agreement that would be violated by
the present or proposed business activities of the Company and its
subsidiaries. Neither the Company nor any subsidiary has or expects
to have any liability for any prohibited transaction or funding
deficiency or any complete or partial withdrawal liability with
respect to any pension, profit sharing or other plan which is subject
to the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), to which the Company or any subsidiary makes or ever has
made a contribution and in which any employee of the Company or any
subsidiary is or has ever been a participant. With respect to such
plans, the Company and each subsidiary are in compliance, in all
material respects, with all applicable provisions of ERISA.
(xxiii) The Company has obtained the written agreements described in
Section 8(k) of this Agreement from each of its officers, directors
and holders of Common Stock listed on Schedule B hereto.
(xxiv) The Company and its subsidiaries have, and the Company and its
subsidiaries as of the Closing Date will have, good and marketable
title in fee
9
<PAGE>
simple to all real property and good and marketable title to all
personal property owned or proposed to be owned by them which is
material to the business of the Company or of its subsidiaries, in
each case free and clear of all liens, encumbrances and defects except
such as are described the Prospectus or such as would not have a
Material Adverse Effect; and any real property and buildings held
under lease by the Company and its subsidiaries or proposed to be held
after giving effect to the transactions described in the Prospectus
are, or will be as of each of the Closing Dates, held by them under
valid, subsisting and enforceable leases with such exceptions as would
not have a Material Adverse Effect, except as described in or
contemplated by the Prospectus.
(xxv) The Company and its subsidiaries are insured by insurers of
recognized financial responsibility against such losses and risks and
in such amounts as are customary in the businesses in which they are
engaged or propose to engage after giving effect to the transactions
described in the Prospectus; and neither the Company nor any
subsidiary of the Company has any reason to believe that it will not
be able to renew its existing insurance coverage as and when such
coverage expires or to obtain similar coverage from similar insurers
as may be necessary to continue its business at a cost that would not
materially and adversely affect the condition, financial or otherwise,
or the earnings, business or operations of the Company and its
subsidiaries considered as a whole, except as described in or
contemplated by the Prospectus.
(xxvi) Other than as contemplated by this Agreement, there is no
broker, finder or other party that is entitled to receive from the
Company any brokerage or finder's fee or other similar fee or
commission as a result of any of the transactions contemplated by this
Agreement.
(xxvii) The Company and each of its subsidiaries maintain a system of
internal accounting controls sufficient to provide reasonable
assurances that (i) transactions are executed in accordance with
management's general or specific authorization; (ii) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles and to
maintain accountability for assets; (iii) access to assets is
permitted only in accordance with management's general or specific
authorization; and (iv) the recorded accountability for assets is
compared with existing assets at reasonable intervals and appropriate
action is taken with respect to any differences.
(xxviii) To the Company's knowledge, neither the Company nor any of
its subsidiaries nor any employee or agent of the Company or any of
its subsidiaries has made any payment of funds of the Company or any
of its subsidiaries or received or retained any funds in violation of
any law, rule or
10
<PAGE>
regulation, which payment, receipt or retention of funds is of a
character required to be disclosed in the Prospectus.
(xxix) Neither the Company nor any of its subsidiaries is or, after
application of the net proceeds of this offering as described under
the caption "Use of Proceeds" in the Prospectus, will become an
"investment company" or an entity "controlled" by an "investment
company" as such terms are defined in the Investment Company Act of
1940, as amended. The Company intends to conduct its affairs in a
manner such that it will not become an entity required to register as
an "investment company" subject to regulation under the Investment
Company Act.
(xxx) The Common Stock has been approved for quotation and trading on
the New York Stock Exchange, subject to official notice of issuance.
(xxxi) Each certificate signed by any officer of the Company and
delivered to the Underwriters or counsel for the Underwriters shall be
deemed to be a representation and warranty by the Company as to the
matters covered thereby.
3. Purchase by, and Sale and Delivery to, Underwriters--Closing Dates. The
------------------------------------------------------------------
Company agrees to sell to the Underwriters the Firm Stock; and on the basis
of the representations, warranties, covenants and agreements herein
contained, but subject to the terms and conditions herein set forth, the
Underwriters agree, severally and not jointly, to purchase the Firm Stock
from the Company, the number of shares of Firm Stock to be purchased by
each Underwriter being set opposite its name in Schedule A, subject to
adjustment in accordance with Section 12 hereof.
The purchase price per share to be paid by the Underwriters to the Company
will be the price per share set forth in the table on the cover page of the
Prospectus under the heading "Proceeds to the Company" (the "Purchase
Price").
The Company will deliver the Firm Stock to the Representatives for the
respective accounts of the several Underwriters (in the form of definitive
certificates, issued in such names and in such denominations as the
Representatives may direct by notice in writing to the Company given at or
prior to 12:00 Noon, New York Time, on the second full business day
preceding the First Closing Date (as defined below) or, if no such
direction is received, in the names of the respective Underwriters or in
such other names as Cowen may designate (solely for the purpose of
administrative convenience) and in such denominations as Cowen may
determine, against payment of the aggregate Purchase Price therefor by
certified or official bank check or checks in immediately available funds
(same day funds), payable to the order of the Company, at the offices of
Brown & Wood llp, One World Trade Center, New York, New York 10048. The
time and date of the delivery and closing shall be at _____ A.M.,
11
<PAGE>
New York Time, on _______________, 1998, in accordance with Rule 15c6-1 of
the Exchange Act. The time and date of such payment and delivery are
herein referred to as the "First Closing Date". The First Closing Date and
the location of delivery of, and the form of payment for, the Firm Stock
may be varied by agreement between the Company and Cowen. The First
Closing Date may be postponed pursuant to the provisions of Section 12.
The Company shall make the certificates for the Stock available to the
Representatives for examination on behalf of the Underwriters not later
than 10:00 A.M., New York Time, on the business day preceding the First
Closing Date at the offices of Cowen & Company, Financial Square, New York,
New York 10005.
It is understood that Cowen or Bear, Stearns & Co., Inc. or Smith Barney
Inc., individually and not as Representatives of the several Underwriters,
may (but shall not be obligated to) make payment to the Company on behalf
of any Underwriter or Underwriters, for the Stock to be purchased by such
Underwriter or Underwriters. Any such payment by Cowen or Bear, Stearns &
Co., Inc. or Smith Barney Inc. shall not relieve such Underwriter or
Underwriters from any of its or their other obligations hereunder.
The several Underwriters agree to make an initial public offering of the
Firm Stock at the initial public offering price as soon after the
effectiveness of the Registration Statement as in their judgment is
advisable. The Representatives shall promptly advise the Company of the
making of the initial public offering.
For the purpose of covering any over-allotments in connection with the
distribution and sale of the Firm Stock as contemplated by the Prospectus,
the Company hereby grants to the Underwriters an option to purchase up to
an aggregate of 450,000 shares of Optional Stock. The price per share to
be paid for the Optional Stock shall be the Purchase Price. The option
granted hereby may be exercised as to all or any part of the Optional Stock
at any time, and from time to time, not more than thirty (30) days
subsequent to the effective date of this Agreement. No Optional Stock
shall be sold and delivered unless the Firm Stock previously has been, or
simultaneously is, sold and delivered. The right to purchase the Optional
Stock or any portion thereof may be surrendered and terminated at any time
upon notice by the Underwriters to the Company.
The option granted hereby may be exercised by the Underwriters by giving
written notice from Cowen to the Company setting forth the number of shares
of the Optional Stock to be purchased by them and the date and time for
delivery of and payment for the Optional Stock. Each date and time for
delivery of and payment for the Optional Stock (which may be the First
Closing Date, but not earlier) is herein called the "Option Closing Date"
and shall in no event be earlier than two (2) business days nor later than
ten (10) business days after written notice is given. (The Option Closing
12
<PAGE>
Date and the First Closing Date are herein called the "Closing Dates".)
Optional Stock shall be purchased for the account of each Underwriter in
the same proportion as the number of shares of Firm Stock set forth
opposite such Underwriter's name in Schedule A hereto bears to the total
number of shares of Firm Stock (subject to adjustment by the Underwriters
to eliminate odd lots). Upon exercise of the option by the Underwriters,
the Company agrees to sell to the Underwriters the number of shares of
Optional Stock set forth in the written notice of exercise and the
Underwriters agree, severally and not jointly and subject to the terms and
conditions herein set forth, to purchase the number of such shares
determined as aforesaid.
The Company will deliver the Optional Stock to the Underwriters (in the
form of definitive certificates, issued in such names and in such
denominations as the Representatives may direct by notice in writing to the
Company given at or prior to 12:00 Noon, New York Time, on the second full
business day preceding the Option Closing Date or, if no such direction is
received, in the names of the respective Underwriters or in such other
names as Cowen may designate (solely for the purpose of administrative
convenience) and in such denominations as Cowen may determine, against
payment of the aggregate Purchase Price therefor by certified or official
bank check or checks in Clearing House funds (next day funds), payable to
the order of the Company, at the offices of Brown & Wood llp, One World
Trade Center, New York, New York 10048. The Company shall make the
certificates for the Optional Stock available to the Underwriters for
examination not later than 10:00 A.M., New York Time, on the business day
preceding the Option Closing Date at the offices of Cowen & Company, One
Financial Square, New York, New York 10005. The Option Closing Date and
the location of delivery of, and the form of payment for, the Option Stock
may be varied by agreement between the Company and Cowen. The Option
Closing Date may be postponed pursuant to the provisions of Section 12.
4. Covenants and Agreements of the Company. The Company covenants and agrees
---------------------------------------
with the several Underwriters that:
(a) The Company will (i) if the Company and the Representatives have
determined not to proceed pursuant to Rule 430A of the of the Rules and
Regulations, use its best efforts to cause the Registration Statement to
become effective as soon as practicable after the execution of this
Agreement, (ii) if the Company and the Representatives have determined to
proceed pursuant to Rule 430A of the Rules and Regulations, use its best
efforts to comply with the provisions of and make all requisite filings
with the Commission pursuant to Rule 430A and Rule 424 of the Rules and
Regulations and (iii) if the Company and the Representatives have
determined to deliver Prospectuses pursuant to Rule 434 of the Rules and
Regulations, to use its best efforts to comply with all the applicable
provisions thereof. The Company will advise the Representatives promptly
as to the time at which the Registration Statement becomes effective, will
advise the Representatives promptly of the issuance by the Commission of
any stop order suspending the effectiveness of the Registration Statement
or of the
13
<PAGE>
institution of any proceedings for that purpose, and will use its best
efforts to prevent the issuance of any such stop order and to obtain as
soon as possible the lifting thereof, if issued. The Company will advise
the Representatives promptly of the receipt of any comments from the
Commission or any request by the Commission for any amendment of or
supplement to the Registration Statement or the Prospectus or for
additional information and will not at any time file any amendment to the
Registration Statement or supplement to the Prospectus which shall not
previously have been submitted to the Representatives a reasonable time
prior to the proposed filing thereof or to which the Representatives shall
reasonably object in writing or which is not in compliance with the
Securities Act and the Rules and Regulations.
(b) The Company will prepare and file with the Commission, promptly upon
the request of the Representatives, any amendments or supplements to the
Registration Statement or the Prospectus which in the reasonable opinion of
the Representatives may be necessary to enable the several Underwriters to
continue the distribution of the Stock and will use its best efforts to
cause the same to become effective as promptly as possible.
(c) If at any time after the effective date of the Registration Statement
when a prospectus relating to the Stock is required to be delivered under
the Securities Act any event relating to or affecting the Company or any of
its subsidiaries occurs as a result of which the Prospectus or any other
prospectus as then in effect would include an untrue statement of a
material fact, or omit to state any material fact necessary to make the
statements therein, in light of the circumstances under which they were
made, not misleading, or if it is necessary at any time to amend the
Prospectus to comply with the Securities Act, the Company will promptly
notify the Representatives thereof and will prepare an amended or
supplemented prospectus which will correct such statement or omission; and
in case any Underwriter is required to deliver a prospectus relating to the
Stock nine (9) months or more after the effective date of the Registration
Statement, the Company, upon the request of the Representatives and at the
expense of such Underwriter, will prepare promptly such prospectus or
prospectuses as may be necessary to permit compliance with the requirements
of Section 10(a)(3) of the Securities Act; provided, however, that the
requirements of this Section 4(c), except the notification provision
hereof, shall be suspended in the event that, and for only so long as,
there exist pending material corporate developments or similar material
events that have not yet been publicly disclosed and as to which the
Company believes that public disclosure will have a material adverse effect
on such developments or events.
(d) The Company will deliver to the Representatives, at or before the
Closing Date, signed copies of the Registration Statement, as originally
filed with the Commission, and all amendments thereto including all
financial statements and exhibits thereto, and will deliver to the
Representatives such number of copies of the Registration Statement,
including such financial statements but without exhibits, and
14
<PAGE>
all amendments thereto, as the Representatives may reasonably request. The
Company will deliver or mail to or upon the order of the Representatives,
from time to time until the effective date of the Registration Statement,
as many copies of the Pre-effective Prospectus as the Representatives may
reasonably request. The Company will deliver or mail to or upon the order
of the Representatives on the date of the initial public offering, and
thereafter from time to time during the period when delivery of a
prospectus relating to the Stock is required under the Securities Act, as
many copies of the Prospectus, in final form or as thereafter amended or
supplemented as the Representatives may reasonably request; provided,
however, that the expense of the preparation and delivery of any prospectus
required for use nine (9) months or more after the effective date of the
Registration Statement shall be borne by the Underwriters required to
deliver such prospectus.
(e) The Company will make generally available to its stockholders as soon
as practicable, but not later than fifteen (15) months after the effective
date of the Registration Statement, an earnings statement which will be in
reasonable detail (but which need not be audited) and which will comply
with Section 11(a) of the Securities Act, covering a period of at least
twelve (12) months beginning after the "effective date" (as defined in Rule
158 under the Securities Act) of the Registration Statement.
(f) The Company will cooperate with the Representatives to enable the Stock
to be registered or qualified for offering and sale by the Underwriters and
by dealers under the securities laws of such jurisdictions as the
Representatives may designate and at the request of the Representatives
will make such applications and furnish such consents to service of process
or other documents as may be required of it as the issuer of the Stock for
that purpose; provided, however, that the Company shall not be required to
qualify to do business or to file a general consent (other than that
arising out of the offering or sale of the Stock) to service of process in
any such jurisdiction where it is not now so subject. The Company will,
from time to time, prepare and file such statements and reports as are or
may be required of it as the issuer of the Stock to continue such
qualifications in effect for so long a period as the Representatives may
reasonably request for the distribution of the Stock. The Company will
advise the Representatives promptly after the Company becomes aware of the
suspension of the qualifications or registration of (or any such exception
relating to) the Common Stock of the Company for offering, sale or trading
in any jurisdiction or of any initiation or threat of any proceeding for
any such purpose, and in the event of the issuance of any orders suspending
such qualifications, registration or exception, the Company will, with the
cooperation of the Representatives use its best efforts to obtain the
withdrawal thereof.
(g) The Company will furnish to its stockholders annual reports containing
financial statements certified by independent public accountants and will
make available to its stockholders quarterly summary financial information
in reasonable detail which may be unaudited. During the period of five (5)
years from the date
15
<PAGE>
hereof, so long as the Company remains a reporting company under the
Exchange Act, the Company will deliver to the Representatives and, upon
request, to each of the Underwriters: (i) as soon as practicable after the
end of each fiscal year (the first such fiscal year being 1998), copies of
each annual report of the Company containing the balance sheet of the
Company as of the close of such fiscal year and statements of income,
stockholders' equity and cash flows for the year then ended and the opinion
thereon of the Company's independent public accountants, and each other
report furnished by the Company to its stockholders; (ii) copies of any
other reports (financial or other) which the Company shall publish or
otherwise make available to any of its stockholders as such; (iii) as soon
as practicable after the filing thereof, each proxy statement, Annual
Report on Form 10-K, Quarterly Report on Form 10-Q, Current Report on Form
8-K or other report or financial statement filed by the Company with the
Commission, or the NASD or any securities exchange; and (iv) press releases
and such other information as the Company publicly disseminates. So long
as the Company has active subsidiaries, such financial statements will be
on a consolidated basis to the extent the accounts of the Company and its
subsidiaries are consolidated in reports furnished to its stockholders
generally. Separate financial statements shall be furnished for all
subsidiaries whose accounts are not consolidated but which at the time are
significant subsidiaries as defined in the Rules and Regulations and for
which separate financial statements are required under the Rules and
Regulations.
(h) The Company will use its best efforts to maintain the listing of the
Stock on the New York Stock Exchange.
(i) The Company will maintain a transfer agent and registrar for its Common
Stock.
(j) For so long as a prospectus relating to the Stock is required to be
delivered under the Securities Act, prior to filing its quarterly
statements on Form 10-Q, the Company will have its independent auditors
perform a limited quarterly review of its quarterly numbers.
(k) The Company will not offer, sell, assign, transfer, encumber, contract
to sell, grant an option to purchase or otherwise dispose of any shares of
Common Stock or securities convertible into or exercisable or exchangeable
for Common Stock (including, without limitation, Common Stock of the
Company which may be deemed to be beneficially owned by the Company in
accordance with the Rules and Regulations) during the 180 days following
the date on which the price of the Common Stock to be purchased by the
Underwriters is set, other than the Company's sale of Common Stock
hereunder, the Company's issuance of Common Stock upon the exercise of
warrants and stock options which are presently outstanding and the grant of
options under the Company's stock option plan described in the Prospectus;
provided, however, that the Company may issue and deliver shares of Common
Stock
16
<PAGE>
or securities convertible into or exercisable or exchangeable for Common
Stock in connection with any acquisition of, or joint venture or other
collaborative arrangement with, another company if the terms of issuance
provide that such Common Stock or securities convertible into or
exercisable or exchangeable for Common Stock shall not be sold prior to the
expiration of the 180-day period hereinabove referenced.
(l) Prior to filing with the Commission any reports on Form SR pursuant to
Rule 463 of the Rules and Regulations, the Company will furnish a copy
thereof to counsel for the Underwriters and receive and consider its
comments thereon, and will deliver promptly to the Representatives a signed
copy of each report on Form SR filed by it with the Commission.
(m) The Company will apply the net proceeds from the sale of the Stock as
set forth in the description under "Use of Proceeds" in the Prospectus,
which description complies in all respects with the requirements of Item
504 of Regulation S-K.
(n) The Company will supply you with copies of all correspondence to and
from, and all documents issued to and by, the Commission in connection with
the registration of the Stock under the Securities Act.
(o) Prior to each of the Closing Dates the Company will furnish to you, as
soon as they have been prepared, copies of any unaudited interim
consolidated financial statements of the Company and its subsidiaries for
any periods subsequent to the periods covered by the financial statements
appearing in the Registration Statement and the Prospectus.
(p) Except as required by applicable law, prior to each of the Closing
Dates the Company will issue no press release or other communications
directly or indirectly and hold no press conference with respect to the
Company or any of its subsidiaries, the financial condition, results of
operations, business, prospects, assets or liabilities of any of them, or
the offering of the Stock, without your prior written consent. For so long
as a prospectus relating to the Stock is required to be delivered under the
Securities Act, the Company will use its reasonable efforts to provide to
you copies of each press release or other public communications with
respect to the financial condition, results of operations, business,
prospects, assets or liabilities of the Company at least twenty-four (24)
hours prior to the public issuance thereof or such longer advance period as
may reasonably be practicable.
5. Payment of Expenses. (a) The Company will pay (directly or by
-------------------
reimbursement) all costs, fees and expenses incurred in connection with
expenses incident to the performance of the obligations of the Company
under this Agreement and in connection with the transactions contemplated
hereby, including but not limited to (i) all expenses and taxes incident to
the issuance and delivery of the Stock to the Representatives; (ii) all
expenses incident to the registration of the Stock under the
17
<PAGE>
Securities Act; (iii) the costs of preparing stock certificates (including
printing and engraving costs); (iv) all fees and expenses of the registrar
and transfer agent of the Stock; (v) all necessary issue, transfer and
other stamp taxes in connection with the issuance and sale of the Stock to
the Underwriters; (vi) fees and expenses of the Company's counsel and the
Company's independent accountants; (vii) all costs and expenses incurred in
connection with the printing, filing, shipping and distribution of the
Registration Statement, each Pre-effective Prospectus and the Prospectus
(including all exhibits and financial statements) and all amendments and
supplements provided for herein, the Master Agreement Among Underwriters
between the Representatives and the Underwriters, the Master Selected
Dealers' Agreement, the Underwriters' Questionnaire and the Blue Sky
memoranda (including related fees and expenses of counsel to the
Underwriters) and this Agreement; (viii) all filing fees, attorneys' fees
and expenses incurred by the Company or the Underwriters in connection with
exemptions from the qualifying or registering (or obtaining qualification
or registration of) all or any part of the Stock for offer and sale and
determination of its eligibility for investment under the Blue Sky or other
securities laws of such jurisdictions as the Representatives may designate;
and (ix) fees and expenses, including those of counsel to the Underwriters,
paid or incurred in connection with filings made with the NASD.
(b) In addition to the other obligations of the Company under Section 6(a)
hereof, the Company agrees that, as an interim measure during the pendency
of any claim, action, investigation, inquiry or other proceeding arising
out of or based upon (i) any statement or omission or any alleged statement
or omission, (ii) any act or failure to act or any alleged act or failure
to act or (iii) any breach or inaccuracy in their representations and
warranties, it will reimburse each Underwriter on a quarterly basis for all
reasonable legal or other expenses incurred in connection with
investigating or defending any such claim, action, investigation, inquiry
or other proceeding, notwithstanding the absence of a judicial
determination as to the propriety and enforceability of the Company's
obligation to reimburse each Underwriter for such expenses and the
possibility that such payments might later be held to have been improper by
a court of competent jurisdiction. To the extent that any such interim
reimbursement payment is so held to have been improper, each Underwriter
shall promptly return it to the Company, together with interest, compounded
daily, determined on the basis of the prime rate (or other commercial
lending rate for borrowers of the highest credit standing) announced from
time to time by _______, New York, New York (the "Prime Rate"). Any such
interim reimbursement payments which are not made to an Underwriter in a
timely manner as provided below shall bear interest at the Prime Rate from
the due date for such reimbursement. This expense reimbursement agreement
will be in addition to any other liability which the Company may otherwise
have. The request for reimbursement will be sent to the Company.
18
<PAGE>
(c) In addition to its other obligations under Section 6(b) hereof, each
Underwriter severally agrees that, as an interim measure during the
pendency of any claim, action, investigation, inquiry or other proceeding
arising out of or based upon any statement or omission, or any alleged
statement or omission, described in Section 6(b) hereof which relates to
information furnished to the Company pursuant to Section 6(b) hereof, it
will reimburse the Company (and, to the extent applicable, each officer,
director or controlling person) on a quarterly basis for all reasonable
legal or other expenses incurred in connection with investigating or
defending any such claim, action, investigation, inquiry or other
proceeding, notwithstanding the absence of a judicial determination as to
the propriety and enforceability of the Underwriters' obligation to
reimburse the Company (and, to the extent applicable, each officer,
director or controlling person) for such expenses and the possibility that
such payments might later be held to have been improper by a court of
competent jurisdiction. To the extent that any such interim reimbursement
payment is so held to have been improper, the Company (and, to the extent
applicable, each officer, director or controlling person) shall promptly
return it to the Underwriters together with interest, compounded daily,
determined on the basis of the Prime Rate. Any such interim reimbursement
payments which are not made to the Company within thirty (30) days of a
request for reimbursement shall bear interest at the Prime Rate from the
date of such request. This indemnity agreement will be in addition to any
liability which such Underwriter may otherwise have.
6. Indemnification and Contribution. (a) The Company agrees to indemnify and
--------------------------------
hold harmless each Underwriter and each person, if any, who controls such
Underwriter within the meaning of the Securities Act and the respective
officers, directors, partners, employees, representatives and agents of
each of such Underwriter (collectively, the "Underwriter Indemnified
Parties" and, each, an "Underwriter Indemnified Party"), against any
losses, claims, damages, liabilities or expenses (including the reasonable
cost of investigating and defending against any claims therefor and counsel
fees incurred in connection therewith), joint or several, which may be
based upon the Securities Act, or any other statute or at common law, (i)
on the ground or alleged ground that any Pre-effective Prospectus, the
Registration Statement or the Prospectus (or any Pre-effective Prospectus,
the Registration Statement or the Prospectus as from time to time amended
or supplemented) includes or allegedly includes an untrue statement of a
material fact or omits to state a material fact required to be stated
therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading, unless such
statement or omission was made in reliance upon, and in conformity with,
written information furnished to the Company by any Underwriter, directly
or through the Representatives, specifically for use in the preparation
thereof or was subsequently corrected in an amendment or supplement, but
such amendment or supplement was not appropriately distributed by the
Underwriters or (ii) for any act or failure to act or any alleged act or
failure to act by any Underwriter in connection with, or relating in any
manner to, the Stock or the offering contemplated hereby, and which is
included
19
<PAGE>
as part of or referred to in any loss, claim, damage, liability or expense
arising out of or based upon matters covered by clause (i) above (provided
that the Company shall not be liable under this clause (ii) to the extent
that it is determined in a final judgment by a court of competent
jurisdiction that such loss, claim, damage, or liability or expense
resulted directly from any such acts or failures to act undertaken or
omitted to be taken by such Underwriter through its gross negligence or
willful misconduct). The Company will be entitled to participate at its
own expense in the defense or, if it so elects, to assume the defense of
any suit brought to enforce any such liability, but if the Company elects
to assume the defense, such defense shall be conducted by counsel chosen by
it and reasonably acceptable to the Underwriters. In the event the Company
elects to assume the defense of any such suit and retain such counsel, any
Underwriter Indemnified Parties, defendant or defendants in the suit, may
retain additional counsel but shall bear the fees and expenses of such
counsel unless (i) the Company shall have specifically authorized the
retaining of such counsel or (ii) the parties to such suit include any such
Underwriter Indemnified Parties, and the Company and such Underwriter
Indemnified Parties at law or in equity have been advised by counsel to the
Underwriters that one or more legal defenses may be available to it or them
which may not be available to the Company, in which case the Company shall
not be entitled to assume the defense of such suit notwithstanding its
obligation to bear the fees and expenses of such counsel. This indemnity
agreement is not exclusive and will be in addition to any liability which
the Company might otherwise have and shall not limit any rights or remedies
which may otherwise be available at law or in equity to each Underwriter
Indemnified Party.
(b) Each Underwriter severally and not jointly agrees to indemnify and hold
harmless the Company, each of its directors, each of its officers who have
signed the Registration Statement and each person, if any, who controls the
Company within the meaning of the Securities Act (collectively, the
"Company Indemnified Parties"), against any losses, claims, damages,
liabilities or expenses (including, unless the Underwriter or Underwriters
elect to assume the defense, the reasonable cost of investigating and
defending against any claims therefor and counsel fees incurred in
connection therewith), joint or several, which arise out of or are based in
whole or in part upon the Securities Act, the Exchange Act or any other
federal, state, local or foreign statute or regulation, or at common law,
on the ground or alleged ground that any Pre-effective Prospectus, the
Registration Statement or the Prospectus (or any Pre-effective Prospectus,
the Registration Statement or the Prospectus, as from time to time amended
and supplemented) includes an untrue statement of a material fact or omits
to state a material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances in
which they were made, not misleading, but only insofar as any such
statement or omission was made in reliance upon, and in conformity with,
written information furnished to the Company by such Underwriter, directly
or through the Representatives, specifically for use in the preparation
thereof; provided, however, that in no case is such Underwriter to be
liable with respect to any claims made against any Company Indemnified
Party
20
<PAGE>
against whom the action is brought unless such Company Indemnified Party
shall have notified such Underwriter in writing within a reasonable time
after the summons or other first legal process giving information of the
nature of the claim shall have been served upon the Company Indemnified
Party, but failure to notify such Underwriter of such claim shall not
relieve it from any liability which it may have to any Company Indemnified
Party otherwise than on account of its indemnity agreement contained in
this paragraph. Such Underwriter shall be entitled to participate at its
own expense in the defense, or, if it so elects, to assume the defense of
any suit brought to enforce any such liability, but, if such Underwriter
elects to assume the defense, such defense shall be conducted by counsel
chosen by it. In the event that any Underwriter elects to assume the
defense of any such suit and retain such counsel, the Company Indemnified
Parties and any other Underwriter or Underwriters or controlling person or
persons, defendant or defendants in the suit, shall bear the fees and
expenses of any additional counsel retained by them, respectively. The
Underwriter against whom indemnity may be sought shall not be liable to
indemnify any person for any settlement of any such claim effected without
such Underwriter's consent. This indemnity agreement is not exclusive and
will be in addition to any liability which such Underwriter might otherwise
have and shall not limit any rights or remedies which may otherwise be
available at law or in equity to any Company Indemnified Party.
(c) If the indemnification provided for in this Section 6 is unavailable or
insufficient to hold harmless an indemnified party under subsection (a) or
(b) above in respect of any losses, claims, damages, liabilities or
expenses (or actions in respect thereof) referred to herein, then each
indemnifying party shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages, liabilities
or expenses (or actions in respect thereof) in such proportion as is
appropriate to reflect the relative benefits received by the Company and
the Underwriters from the offering of the Stock. If, however, the
allocation provided by the immediately preceding sentence is not permitted
by applicable law, then each indemnifying party shall contribute to such
amount paid or payable by such indemnified party in such proportion as is
appropriate to reflect not only such relative benefits but also the
relative fault of the Company and the Underwriters in connection with the
statements or omissions which resulted in such losses, claims, damages,
liabilities or expenses (or actions in respect thereof), as well as any
other relevant equitable considerations. The relative benefits received by
the Company and the Underwriters shall be deemed to be in the same
proportion as the total net proceeds from the offering (before deducting
expenses) received by the Company bear to the total underwriting discounts
and commissions received by the Underwriters, in each case as set forth in
the table on the cover page of the Prospectus. The relative fault shall be
determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by the
Company or the Underwriters and the parties' relative intent, knowledge,
access to information and opportunity to
21
<PAGE>
correct or prevent such statement or omission. The Company and the
Underwriters agree that it would not be just and equitable if contribution
were determined by pro rata allocation (even if the Underwriters were
treated as one entity for such purpose) or by any other method of
allocation which does not take account of the equitable considerations
referred to above. The amount paid or payable by an indemnified party as a
result of the losses, claims, damages, liabilities or expenses (or actions
in respect thereof) referred to above shall be deemed to include any legal
or other expenses reasonably incurred by such indemnified party in
connection with investigating, defending, settling or compromising any such
claim. Notwithstanding the provisions of this subsection (c), no
Underwriter shall be required to contribute any amount in excess of the
amount by which the total price at which the shares of the Stock
underwritten by it and distributed to the public were offered to the public
exceeds the amount of any damages which such Underwriter has otherwise been
required to pay by reason of such untrue or alleged untrue statement or
omission or alleged omission. The Underwriters' obligations to contribute
are several in proportion to their respective underwriting obligations and
not joint. No person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation.
7. Survival of Indemnities, Representations, Warranties, etc. The respective
---------------------------------------------------------
indemnities, covenants, agreements, representations, warranties and other
statements of the Company and the several Underwriters, as set forth in
this Agreement or made by them respectively, pursuant to this Agreement,
shall remain in full force and effect, regardless of any investigation made
by or on behalf of any Underwriter or the Company or any of its officers or
directors or any controlling person, and shall survive delivery of and
payment for the Stock.
8. Conditions of Underwriters' Obligations. The respective obligations of the
---------------------------------------
several Underwriters hereunder shall be subject to the accuracy, at and
(except as otherwise stated herein) as of the date hereof and at and as of
each of the Closing Dates, of the representations and warranties made
herein by the Company, to compliance at and as of each of the Closing Dates
by the Company with its covenants and agreements herein contained and other
provisions hereof to be satisfied at or prior to each of the Closing Dates,
and to the following additional conditions:
(a) The Registration Statement shall have become effective and no stop
order suspending the effectiveness thereof shall have been issued and no
proceedings for that purpose shall have been initiated or, to the knowledge
of the Company or the Representatives, shall be threatened by the
Commission, and any request for additional information on the part of the
Commission (to be included in the Registration Statement or the Prospectus
or otherwise) shall have been complied with to the reasonable satisfaction
of the Representatives. Any filings of the Prospectus, or any supplement
thereto, required pursuant to Rule 424(b) or Rule 434 of the Rules
22
<PAGE>
and Regulations, shall have been made in the manner and within the time
period required by Rule 424(b) and Rule 434 of the Rules and Regulations,
as the case may be.
(b) The Representatives shall have been satisfied that there shall not have
occurred any change, on a consolidated basis, prior to each of the Closing
Dates in the condition (financial or otherwise), properties, business,
management, prospects, net worth or results of operations of the Company
and its subsidiaries considered as a whole, or any change in the capital
stock or short-term or long-term debt of the Company and its subsidiaries
considered as a whole, such that (i) the Registration Statement or the
Prospectus, or any amendment or supplement thereto, contains an untrue
statement of fact which, in the opinion of the Representatives, is
material, or omits to state a fact which, in the opinion of the
Representatives, is required to be stated therein or is necessary to make
the statements therein not misleading, or (ii) it is unpracticable in the
reasonable judgment of the Representatives to proceed with the public
offering or purchase the Stock as contemplated hereby.
(c) The Representatives shall be satisfied that no legal or governmental
action, suit or proceeding affecting the Company which is material and
adverse to the Company or which affects or may affect the Company's ability
to perform its obligations under this Agreement shall have been instituted
or threatened and there shall have occurred no material adverse development
in any existing such action, suit or proceeding.
(d) At the time of execution of this Agreement, the Representatives shall
have received from BDO Seidman LLP, independent certified public
accountants, a comfort letter, dated the date hereof, in form and substance
satisfactory to the Underwriters.
(e) The Representatives shall have received from BDO Seidman LLP,
independent certified public accountants, letters, dated each of the
Closing Dates, to the effect that such accountants reaffirm, as of each of
the Closing Dates, and as though made on each of the Closing Dates, the
statements made in the letter furnished by such accountants pursuant to
paragraph (d) of this Section 8.
(f) The Representatives shall have received from Proskauer Rose LLP,
counsel for the Company, opinions, dated each of the Closing Dates, to the
effect set forth in Exhibit I hereto.
(g) The Representatives shall have received from _________, regulatory
counsel for the Company, opinions, dated each of the Closing Dates, to the
effect set forth in Exhibit II hereto.
(h) The Representatives shall have received from Brown & Wood llp, counsel
for the Underwriters, their opinions dated each of the Closing Dates with
respect to the
23
<PAGE>
incorporation of the Company, the validity of the Stock, the Registration
Statement and the Prospectus and such other related matters as it may
reasonably request, and the Company shall have furnished to such counsel
such documents as they may request for the purpose of enabling them to pass
upon such matters.
(i) The Representatives shall have received certificates, dated each of the
Closing Dates, of the chief executive officer or the President and the
chief financial or accounting officer of the Company to the effect that:
(i) No stop order suspending the effectiveness of the Registration
Statement has been issued, and, to the best of the knowledge of the
signers, no proceedings for that purpose have been instituted or are
pending or contemplated under the Securities Act;
(ii) Neither any Pre-effective Prospectus, as of its date, nor the
Registration Statement nor the Prospectus, nor any amendment or
supplement thereto, as of the time when the Registration Statement
became effective and at all times subsequent thereto up to the
delivery of such certificate, included any untrue statement of a
material fact or omitted to state any material fact required to be
stated therein or necessary to make the statements therein, in light
of the circumstances under which they were made, not misleading;
(iii) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus, and except as
set forth or contemplated in the Prospectus, neither the Company nor
any of its subsidiaries has incurred any material liabilities or
obligations, direct or contingent, nor entered into any material
transactions not in the ordinary course of business and there has not
been any material adverse change in the condition (financial or
otherwise), properties, business, management, prospects, net worth or
results of operations of the Company and its subsidiaries considered
as a whole, or, except for changes in the amount outstanding under the
Company's revolving credit facility described in the Prospectus that
are not material, any change in the capital stock or short-term or
long-term debt of the Company and its subsidiaries considered as a
whole;
(iv) The representations and warranties of the Company in this
Agreement are true and correct at and as of each of the Closing Dates,
and the Company has complied with all the agreements and performed or
satisfied all the conditions on its part to be performed or satisfied
at or prior to the Closing Dates; and
(v) Since the respective dates as of which information is given in the
Registration Statement and the Prospectus, and except as disclosed in
or contemplated by the Prospectus, (i) there has not been any material
adverse
24
<PAGE>
change or a development involving a material adverse change in the
condition (financial or otherwise), properties, business, management,
prospects, net worth or results of operations of the Company and its
subsidiaries considered as a whole; (ii) the business and operations
conducted by the Company and its subsidiaries have not sustained a
loss by strike, fire, flood, accident or other calamity (whether or
not insured) of such a character as to interfere materially with the
conduct of the business and operations of the Company and its
subsidiaries considered as a whole; (iii) no legal or governmental
action, suit or proceeding is pending or threatened against the
Company which is material to the Company, whether or not arising from
transactions in the ordinary course of business, or which may
materially and adversely affect the transactions contemplated by this
Agreement; (iv) since such dates and except as so disclosed, the
Company has not incurred any material liability or obligation, direct,
contingent or indirect, made any change in its capital stock (except
pursuant to its stock plans), made any material change in its short-
term or funded debt or repurchased or otherwise acquired any of the
Company's capital stock; and (v) the Company has not declared or paid
any dividend, or made any other distribution, upon its outstanding
capital stock payable to stockholders of record on a date prior to the
Closing Date.
(j) The Company shall have furnished to the Representatives such additional
certificates as the Representatives may have reasonably requested as to the
accuracy, at and as of each of the Closing Dates, of the representations
and warranties made herein and as to compliance at and as of each of the
Closing Dates with the covenants and agreements herein contained and other
provisions hereof to be satisfied at or prior to each of the Closing Dates,
and as to satisfaction of the other conditions to the obligations of the
Underwriters hereunder.
(k) Cowen shall have received the written agreements, substantially in the
form of Exhibit III hereto, of the officers, directors and holders of
Common Stock listed in Schedule B that each will not offer, sell, assign,
transfer, encumber, contract to sell, grant an option to purchase or
otherwise dispose of any shares of Common Stock (including, without
limitation, Common Stock which may be deemed to be beneficially owned by
such officer, director or holder in accordance with the Rules and
Regulations) during the 180 days following the date of the final
Prospectus.
(l) The New York Stock Exchange shall have approved the stock for listing,
subject only to official notice of issuance.
All opinions, certificates, letters and other documents will be in
compliance with the provisions hereunder only if they are satisfactory in
form and substance to the Representatives. The Company will furnish to the
Representatives conformed copies of such opinions, certificates, letters
and other documents as the Representatives shall reasonably request. If
any of the conditions hereinabove provided for in this Section
25
<PAGE>
shall not have been satisfied when and as required by this Agreement, this
Agreement may be terminated by the Representatives by notifying the Company
of such termination in writing or by telegram at or prior to each of the
Closing Dates, but Cowen, on behalf of the Representatives, shall be
entitled to waive any of such conditions.
9. Effective Date. This Agreement shall become effective immediately as to
--------------
Sections 5, 6, 7, 9, 10, 11, 13, 14, 15, 16 and 17 and, as to all other
provisions, at 11:00 a.m. New York City time on the first full business day
following the effectiveness of the Registration Statement or at such
earlier time after the Registration Statement becomes effective as the
Representatives may determine on and by notice to the Company or by release
of any of the Stock for sale to the public. For the purposes of this
Section 9, the Stock shall be deemed to have been so released upon the
release for publication of any newspaper advertisement relating to the
Stock or upon the release by you of telegrams (i) advising Underwriters
that the shares of Stock are released for public offering or (ii) offering
the Stock for sale to securities dealers, whichever may occur first.
10. Termination. This Agreement (except for the provisions of Section 5) may
-----------
be terminated by the Company at any time before it becomes effective in
accordance with Section 9 by notice to the Representatives and may be
terminated by the Representatives at any time before it becomes effective
in accordance with Section 9 by notice to the Company. In the event of any
termination of this Agreement under this or any other provision of this
Agreement, there shall be no liability of any party to this Agreement to
any other party, other than as provided in Sections 5, 6 and 11 and other
than as provided in Section 12 as to the liability of defaulting
Underwriters.
This Agreement may be terminated after it becomes effective by the
Representatives by notice to the Company (i) if at or prior to the First
Closing Date trading in securities on any of the New York Stock Exchange,
American Stock Exchange, Nasdaq National Market, Chicago Board of Options
Exchange, Chicago Mercantile Exchange or Chicago Board of Trade shall have
been suspended or minimum or maximum prices shall have been established on
any such exchange or market, or a banking moratorium shall have been
declared by New York or United States authorities; (ii) trading of any
securities of the Company shall have been suspended on any exchange or in
any over-the-counter market; (iii) if at or prior to the First Closing Date
there shall have been (A) an outbreak or escalation of hostilities between
the United States and any foreign power or of any other insurrection or
armed conflict involving the United States or (B) any change in financial
markets or any calamity or crisis which, in the judgment of the
Representatives, makes it impractical or inadvisable to offer or sell the
Stock on the terms contemplated by the Prospectus; (iv) if there shall have
been any development or prospective development involving particularly the
business or properties or securities of the Company or any of its
subsidiaries or the transactions contemplated by this Agreement, which, in
the
26
<PAGE>
judgment of the Representatives, makes it impracticable or inadvisable to
offer or deliver the Stock on the terms contemplated by the Prospectus; (v)
if there shall be any litigation or proceeding, pending or threatened,
which, in the judgment of the Representatives, makes it impracticable or
inadvisable to offer or deliver the Stock on the terms contemplated by the
Prospectus; or (vi) if there shall have occurred any of the events
specified in the immediately preceding clauses (i) - (v) together with any
other such event that makes it, in the judgment of the Representatives,
impractical or inadvisable to offer or deliver the Stock on the terms
contemplated by the Prospectus.
11. Reimbursement of Underwriters. Notwithstanding any other provisions
-----------------------------
hereof, if this Agreement shall not become effective by reason of any
election of the Company pursuant to the first paragraph of Section 10 or
shall be terminated by the Representatives under Section 8 or Section 10,
the Company will bear and pay the expenses specified in Section 5 hereof
and, in addition to their obligations pursuant to Section 6 hereof, the
Company will reimburse the reasonable out-of-pocket expenses of the several
Underwriters (including reasonable fees and disbursements of counsel for
the Underwriters) incurred in connection with this Agreement and the
proposed purchase of the Stock, and promptly upon demand the Company will
pay such amounts to you as Representatives.
12. Substitution of Underwriters. If any Underwriter or Underwriters shall
----------------------------
default in its or their obligations to purchase shares of Stock hereunder
and the aggregate number of shares which such defaulting Underwriter or
Underwriters agreed but failed to purchase does not exceed ten percent
(10%) of the total number of shares underwritten, the other Underwriters
shall be obligated severally, in proportion to their respective commitments
hereunder, to purchase the shares which such defaulting Underwriter or
Underwriters agreed but failed to purchase. If any Underwriter or
Underwriters shall so default and the aggregate number of shares with
respect to which such default or defaults occur is more than ten percent
(10%) of the total number of shares underwritten and arrangements
satisfactory to the Representatives and the Company for the purchase of
such shares by other persons are not made within forty-eight (48) hours
after such default, this Agreement shall terminate.
If the remaining Underwriters or substituted Underwriters are required
hereby or agree to take up all or part of the shares of Stock of a
defaulting Underwriter or Underwriters as provided in this Section 12, (i)
the Company shall have the right to postpone the Closing Dates for a period
of not more than five (5) full business days in order that the Company may
effect whatever changes may thereby be made necessary in the Registration
Statement or the Prospectus, or in any other documents or arrangements, and
the Company agrees promptly to file any amendments to the Registration
Statement or supplements to the Prospectus which may thereby be made
necessary, and (ii) the respective numbers of shares to be purchased by the
remaining Underwriters or substituted Underwriters shall be taken as the
basis of their underwriting obligation for all purposes of this Agreement.
Nothing herein contained
27
<PAGE>
shall relieve any defaulting Underwriter of its liability to the Company or
the other Underwriters for damages occasioned by its default hereunder.
Any termination of this Agreement pursuant to this Section 12 shall be
without liability on the part of any non-defaulting Underwriter or the
Company, except for expenses to be paid or reimbursed pursuant to Section 5
and except for the provisions of Section 6.
13. Notices. All communications hereunder shall be in writing and, if sent to
-------
the Underwriters shall be mailed, delivered or telegraphed and confirmed to
you, as their Representatives c/o Cowen & Company at One Financial Square,
New York, New York 10005, attention: John P. Dunphy, with a copy to the
office of Counsel to Investment Banking, except that notices given to an
Underwriter pursuant to Section 6 hereof shall be sent to such Underwriter
at the address furnished by the Representatives or, if sent to the Company,
shall be mailed, delivered or telegraphed and confirmed to Schein
Pharmaceutical, Inc., 100 Campus Drive, Florham Park, New Jersey 07932,
attention: Chief Financial Officer, with a copy to Proskauer Rose LLP, 1585
Broadway, New York, New York 10036-8299, attention: Edward K. Kerson, Esq.
14. Successors. This Agreement shall inure to the benefit of and be binding
----------
upon the several Underwriters and the Company and their respective
successors and legal representatives. Nothing expressed or mentioned in
this Agreement is intended or shall be construed to give any person other
than the persons mentioned in the preceding sentence any legal or equitable
right, remedy or claim under or in respect of this Agreement, or any
provisions herein contained, this Agreement and all conditions and
provisions hereof being intended to be and being for the sole and exclusive
benefit of such persons and for the benefit of no other person; except that
the representations, warranties, covenants, agreements and indemnities of
the Company contained in this Agreement shall also be for the benefit of
the person or persons, if any, who control any Underwriter or Underwriters
within the meaning of Section 15 of the Securities Act or Section 20 of the
Exchange Act, and the indemnities of the several Underwriters shall also be
for the benefit of each director of the Company, each of its officers who
has signed the Registration Statement and the person or persons, if any,
who control the Company within the meaning of Section 15 of the Securities
Act or Section 20 of the Exchange Act.
15. Applicable Law. This Agreement shall be governed by and construed in
--------------
accordance with the laws of the State of New York.
16. Authority of the Representatives. In connection with this Agreement, you
--------------------------------
will act for and on behalf of the several Underwriters, and any action
taken under this Agreement by Cowen, as Representative, will be binding on
all the Underwriters.
17. Partial Unenforceability. The invalidity or unenforceability of any
------------------------
Section, paragraph or provision of this Agreement shall not affect the
validity or enforceability of any
28
<PAGE>
other Section, paragraph or provision hereof. If any Section, paragraph or
provision of this Agreement is for any reason determined to be invalid or
unenforceable, there shall be deemed to be made such minor changes (and
only such minor changes) as are necessary to make it valid and enforceable.
18. General. This Agreement constitutes the entire agreement of the parties to
-------
this Agreement and supersedes all prior written or oral and all
contemporaneous oral agreements, understandings and negotiations with
respect to the subject matter hereof. In this Agreement, the masculine,
feminine and neuter genders and the singular and the plural include one
another. The section headings in this Agreement are for the convenience of
the parties only and will not affect the construction or interpretation of
this Agreement. This Agreement may be amended or modified, and the
observance of any term of this Agreement may be waived, only by a writing
signed by the Company and the Representatives.
19. Counterparts. This Agreement may be signed in two (2) or more
------------
counterparts, each of which shall be an original, with the same effect as
if the signatures thereto and hereto were upon the same instrument.
29
<PAGE>
If the foregoing correctly sets forth our understanding, please indicate
your acceptance thereof in the space provided below for that purpose,
whereupon this letter and your acceptance shall constitute a binding
agreement between us.
Very truly yours,
SCHEIN PHARMACEUTICAL, INC.
By:____________________________
Martin Sperber
Chairman, CEO and President
30
<PAGE>
Accepted and delivered in
New York, New York as of
the date first above written.
COWEN & COMPANY
BEAR, STEARNS & CO., INC.
SMITH BARNEY INC.
Acting on their own behalf
and as Representatives of the several
Underwriters referred to in the
foregoing Agreement.
By: COWEN & COMPANY
By: Cowen Incorporated,
its general partner
By: ______________________________
John P. Dunphy
Managing Director - Syndicate
31
<PAGE>
SCHEDULE A
Number of Shares Number of Shares
of Firm Stock to of Optional Stock
Name be Purchased to be Purchased
---- ------------------ -----------------
Cowen & Company
Bear, Stearns & Co. Inc.
Smith Barney Inc.
----------- ---------
3,000,000 450,000
=========== =========
A-1
<PAGE>
SCHEDULE B
Persons Providing Lock-Up Agreements Pursuant to Section 8(k)
[TO COME]
B-1
<PAGE>
SCHEDULE C
List of Company Subsidiaries Pursuant to Section 2(vi)
Marsam Pharmaceuticals, Inc.
Steris Laboratories, Inc.
Danbury Pharmacal, Inc.
Danbury Pharmacal Puerto Rico, Inc.
Schein Pharmaceutical International, Inc.
C-1
<PAGE>
Exhibit I
Form of Opinion of Issuer's Counsel
[Date]
COWEN & COMPANY
BEAR, STEARNS & CO. INC.
SMITH BARNEY, INC.
As representatives of the several
Underwriters named in Schedule A
c/o Cowen & Company
Financial Square
New York, New York 10005
Re: Schein Pharmaceutical, Inc.
3,000,000 Shares of Common Stock
Dear Ladies and Gentlemen:
We have acted as counsel for Schein Pharmaceutical, Inc., a Delaware
corporation (the "Company"), in connection with the sale by the Company and
purchase of 3,000,000 shares of Common Stock, par value $.01 per share, of the
Company (the "Shares") by the several Underwriters listed in Schedule A to the
Underwriting Agreement, dated ____, 1998, among the Company, Cowen & Company,
Bear, Stearns & Co. Inc. and Smith Barney Inc., as representatives of the
several Underwriters named therein (the "Underwriting Agreement"). This opinion
is being furnished pursuant to Section 8(f) of the Underwriting Agreement. All
defined terms not defined herein shall have the meanings ascribed to them in the
Underwriting Agreement.
We are of the opinion that:
1. The Company and each of its subsidiaries have been duly incorporated and
are validly existing as corporations in good standing under the laws of their
respective jurisdictions of incorporation, are duly qualified to do business and
are in good standing as foreign corporations in each jurisdiction in which their
respective ownership or lease of property or the conduct of their respective
businesses requires such qualification, except where the failure to be so
qualified and in good standing would not have a Material Adverse Effect, and
have all power and authority necessary to own or hold their respective
properties and conduct the businesses in which they are engaged;
I-1
<PAGE>
2. The Company has an authorized capitalization as set forth in the
Prospectus, and all of the issued shares of capital stock of the Company have
been duly and validly authorized and issued, are fully paid and non-assessable
and all of the Shares to be issued and sold by the Company to the Underwriters
pursuant to the Underwriting Agreement have been duly and validly authorized
and, when issued and delivered against payment therefor as provided for in the
Underwriting Agreement, shall be duly and validly issued, fully paid and non-
assessable; except as otherwise disclosed in the Prospectus, all of the issued
shares of capital stock of each subsidiary of the Company have been duly and
validly authorized and issued and are fully paid, non-assessable and, to the
extent owned by the Company or a subsidiary of the Company, are owned directly
or indirectly by the Company, free and clear of all liens, encumbrances,
equities or claims; and all of the issued shares of capital stock of the
Company, including the Shares, conforms to the description thereof in the
Prospectus;
3. There are no preemptive or other rights to subscribe for or to purchase,
nor any restriction upon the voting or transfer of, any of the Shares pursuant
to the Company's Certificate of Incorporation or By-Laws or any agreement or
other instrument;
4. Except as set forth in the Prospectus, there are no legal or governmental
proceedings pending to which the Company or any of its subsidiaries is a party
or of which any property or assets of the Company or any of its Subsidiaries is
the subject which, if determined adversely to the Company or any of its
subsidiaries, could have a Material Adverse Effect on the Company and its
subsidiaries; and, to the best of our knowledge, no such proceedings are
threatened or contemplated by governmental authorities or other third parties;
5. The Company and each of its subsidiaries own or possess the right to use
all patents, trademarks, trademark registrations, service marks, service mark
registrations, trade names, copyrights, licenses, inventions, trade secrets and
rights described in the Prospectus as being owned by them or any of them or
necessary for the conduct of their respective businesses, and the Company is not
aware of any claim to the contrary or any challenge by any other person to the
rights of the Company or any of its subsidiaries with respect to the foregoing,
except where such claims and challenges would not, singly or in the aggregate,
have a Material Adverse Effect. The Company's business as now conducted and as
proposed to be conducted does not and will not infringe or conflict with any
patents, trademarks, service marks, trade names, copyrights, trade secrets,
licenses or other intellectual property or franchise right of any person (except
for patent challenge proceedings);
6. The Company and each of its subsidiaries have, and the Company and each of
its subsidiaries as of the Closing Dates will have, good and marketable title in
fee simple to all real property and good and marketable title to all personal
property owned or proposed to be owned by them which is material to the business
of the Company or any of its subsidiaries, in each case free and clear of all
liens, encumbrances and defects, except such as are described in the Prospectus
or such as would not have a Material Adverse Effect; and any real property and
buildings held under lease by the Company and its subsidiaries or proposed to be
held after giving effect to the transactions described in the Prospectus are, or
will be as
I-2
<PAGE>
of the Closing Dates, held by them under valid, subsisting and enforceable
leases with such exceptions as would not have a Material Adverse Effect;
7. The Company has full corporate power and authority to enter into the
Underwriting Agreement and to perform its obligations thereunder (including to
issue, sell and deliver the Shares), and the Underwriting Agreement has been
duly and validly authorized, executed and delivered by the Company and is a
valid and binding obligation of the Company, enforceable against the Company in
accordance with its terms, except to the extent that rights to indemnification
and contribution thereunder may be limited by federal or state securities laws
or the public policy underlying such laws;
8. The execution, delivery and performance of the Underwriting Agreement and
the consummation of the transactions therein contemplated will not result in a
breach or violation of any of the terms or provisions of or constitute a default
under any indenture, mortgage, deed of trust, note agreement or other agreement
or instrument to which the Company or any of its subsidiaries is a party or by
which any of them or any of their properties is or may be bound, the Certificate
of Incorporation, By-laws or other organizational documents of the Company or
any of its subsidiaries, or any law, order, rule or regulation of any court or
governmental agency or body having jurisdiction over the Company or any of its
subsidiaries or any of their properties or result in the creation of a lien;
9. No consent, approval, authorization or order of any court or governmental
agency or body is required for the consummation by the Company of the
transactions contemplated by the Underwriting Agreement, except such as may be
required by the National Association of Securities Dealers, Inc. (the "NASD") or
under the Securities Act, the Securities Exchange Act of 1934, as amended, or
the securities or "Blue Sky" laws of any jurisdiction in connection with the
purchase and distribution of the Shares by the Underwriters;
10. Except as set forth in the Prospectus, the Company and each of its
subsidiaries are in compliance with, and conduct their businesses in conformity
with, all applicable federal, state, local and foreign laws, rules and
regulations, including, but not limited to, those of any governmental agency,
court or tribunal; to the best of our knowledge, no prospective change in any of
such federal, state, local or foreign laws, rules or regulations has been
adopted which, when made effective, would have a Material Adverse Effect.
Except as disclosed in the Registration Statement, the Company and its
subsidiaries are in compliance with all applicable federal, state, local and,
where applicable, foreign laws and regulations relating to the protection of
human health or the environment or imposing liability or requiring standards of
conduct concerning any Hazardous Materials, except for such instances of
noncompliance which, either singly or in the aggregate, would not have a
Material Adverse Effect;
11. The Registration Statement was declared effective under the Securities
Act as of __________, 1998, the Prospectus was filed with the Commission
pursuant to Rule 424(b) of the Rules and Regulations on __________, 1998 and no
stop order suspending the
I-3
<PAGE>
effectiveness of the Registration Statement has been issued and no proceeding
for that purpose is pending or, to the best of our knowledge, threatened by the
Commission;
12. The Registration Statement and the Prospectus and any amendments or
supplements thereto (except for the financial statements and other financial
data included therein, as to which we express no opinion) comply as to form in
all respects with the requirements of the Securities Act and the Rules and
Regulations and the documents incorporated by reference in the Prospectus, when
they became effective or were filed with the Commission, as the case may be,
complied as to form in all respects with the requirements of the Securities Act
or the Exchange Act, as applicable, and the Rules and Regulations; and any
amendment or supplement to any such incorporated document, when they became
effective or were filed with the Commission, as the case may be, complied as to
form in all respects with the requirements of the Securities Act or the Exchange
Act, as applicable, and the Rules and Regulations;
13. To the best of our knowledge, there are no contracts or other documents
which are required by the Securities Act or by the Rules and Regulations to be
described in the Prospectus or filed as exhibits to the Registration Statement
which have not been described in the Prospectus or filed as exhibits to the
Registration Statement or incorporated therein by reference as permitted by the
Rules and Regulations;
14. Other than as described in the Prospectus, there are no contracts,
agreements or understandings between the Company and any person granting such
person the right (other than rights which have been waived or satisfied) to
require the Company to file a registration statement under the Securities Act
with respect to any securities of the Company owned or to be owned by such
person or to require the Company to include such securities in the securities
registered pursuant to this Registration Statement or in any securities being
registered pursuant to any other registration statement filed by the Company
under the Securities Act;
15. The descriptions in the Registration Statement and Prospectus of
statutes, rules, regulations, legal or governmental proceedings, contracts and
other documents are accurate and such descriptions fairly present the
information required to be disclosed; and to the best of our knowledge, there
are no legal or governmental proceedings, statutes, rules or regulations, or any
contracts or documents of a character required to be described in the
Registration Statement or Prospectus or to be filed as exhibits to the
Registration Statement which are not described and filed as required;
16. The statements in the Prospectus under the caption "Description of
Capital Stock", insofar as they purport to constitute a summary of the terms of
capital stock, and under the captions "Certain Transactions" and "Shares
Eligible for Future Sale", insofar as they purport to describe the provisions of
the documents referred to therein, are accurate and complete in all material
respects;
I-4
<PAGE>
17. The Company and each of its subsidiaries are not, nor will they be
immediately after receiving the proceeds from the sale of the Shares, an
"investment company" or an entity "controlled" by an "investment company" as
such terms are defined in the Investment Company Act of 1940, as amended;
18. The Shares have been duly authorized and approved for quotation and
trading on the New York Stock Exchange, subject to official notice of issuance.
The foregoing opinion is limited to matters governed by the Federal laws of
the United States of America, the general corporate law of the State of Delaware
and the laws of the State of New York.
We have acted as counsel to the Company on a regular basis, have acted as
counsel to the Company in connection with previous financing transactions and
have acted as counsel to the Company in connection with the preparation and
filing of the Registration Statement and the Prospectus, and based on the
foregoing, no facts have come to our attention which lead us to believe that (i)
the Registration Statement or any amendment thereto, as of the Effective Date,
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary in order to make the statements
therein not misleading, or that the Prospectus contains any untrue statement of
a material fact or omits to state a material fact Required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading or (ii) any document
incorporated by reference in the Prospectus or any amendment or supplement to
any such incorporated document made by the Company, when they became effective
or were filed with the Commission, as the case may be, contained, in the case of
a registration statement which became effective under the Securities Act, any
untrue statement of a material fact or omitted to state a material fact required
to be stated therein or necessary in order to make the statements therein not
misleading, or, in the case of documents filed under the Exchange Act with the
Commission, contained any untrue statement of a material fact or omitted to
state a material fact necessary in order to make the statements therein, in
light of the circumstances under which they were made, not misleading.
Very truly yours,
I-5
<PAGE>
Exhibit II
Form of Opinion of Regulatory Counsel
Ladies and Gentlemen:
We have acted as United States Food and Drug regulatory counsel to Schein
Pharmaceutical, Inc. (the "Company") in connection with the sale by the Company
and purchase of 3,000,000 shares of Common Stock, par value $.01, of the Company
(the "Shares") by the several Underwriters listed in Schedule A to the
Underwriting Agreement, dated ____, 1998, among the Company, Cowen & Company,
Bear, Stearns & Co. Inc. and Smith Barney Inc., as representatives of the
several Underwriters named therein (the "Underwriting Agreement"). This opinion
is being furnished pursuant to Section 8(g) of the Underwriting Agreement. All
defined terms not defined herein shall have the meanings ascribed to them in the
Underwriting Agreement.
A Registration Statement on Form S-1 relating to the Offering was filed with
the Securities and Exchange Commission (the "Commission") by the Company under
the Securities Act of 1933, as amended, and, as amended, was declared effective
by the Commission on _____, 1998 (such registration statement, as amended and in
the form it became effective, the "Registration Statement"; the prospectus
included in the Registration Statement the "Prospectus"). For the purpose of
this opinion, we rely solely as to matters of fact on the representations in the
Registration Statement and we have not verified the factual statements or
conclusions set forth in the Registration Statement but have assumed their
validity. Subject to the above limitations, we are of the opinion that:
(i) The descriptions in the Registration Statement of the statutes,
regulations and legal or governmental proceedings or procedures
relating to the U.S. Food and Drug Administration (the "FDA")
and the regulatory process relating to the Company's products
including, without limitation, the statements in the
Registration Statement under the captions "Risk Factors--
Dependence on Regulatory Approval and Compliance", "Risk
Factors--Pending Regulatory Matters" and "Business--Government
Regulations", are accurate in all material respects and are a
fair summary of those statutes, regulations, proceedings or
procedures.
II-1
<PAGE>
(ii) Except as set forth in the Registration Statement and except
where noncompliance would not have a Material Adverse Effect,
the Company is in possession of and is operating its business
in compliance with all authorizations, licenses, permits,
consents, certificates and orders required from the FDA for
marketing its products in the United States, including, without
limitation, the specific products described in the Registration
Statement under the caption "Business--Products", all of which
are valid and in full force and effect.
(iii) Nothing has come to our attention that leads us to believe that
descriptions of federal laws, regulations or rules relating to
the manufacture or sale of the Company's products and the
approval process relating thereto contained in the Registration
Statement, including, without limitation, the statements in the
Registration Statement under the captions "Risk Factors--
Dependence on Regulatory Approval and Compliance", "Risk
Factors--Pending Regulatory Matters" and "Business--Government
Regulations", contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading.
We do not express any opinion as to any laws other than the Federal Food,
Drug, and Cosmetic Act or other related laws administered and enforced by the
FDA.
This opinion letter may not be relied upon or distributed to any person other
than you without our prior written consent.
Very truly yours,
II-2
<PAGE>
Form of Lock-Up Agreement Exhibit III
Cowen & Company
(as Representative of the Several Underwriters)
One Financial Square
New York, New York 10005
Ladies and Gentlemen:
The undersigned is an officer, director and/or owner of record or
beneficially of shares of common stock, $.01 par value per share (the "Shares"),
or options or convertible bonds that are convertible into Shares of Schein
Pharmaceutical, Inc., or of any successor or predecessor (the "Company"). The
Company proposes to issue and sell Shares in a public offering (the "Offering")
pursuant to a registration statement, and prospectus included therein (the
"Registration Statement" and the "Prospectus"), to be filed with the United
States Securities and Exchange Commission and to be underwritten by a syndicate
of underwriters for whom Cowen & Company is acting as representative (the
"Representative"). The undersigned recognizes that the Offering will benefit
the Company by, among other things, raising additional capital for its
operations and creating a public trading market for the Shares.
In consideration of the foregoing, the undersigned hereby agrees that,
without the prior written approval of Cowen & Company, the undersigned will not
directly or indirectly sell, offer, pledge, contract to sell or grant any option
to purchase or otherwise dispose of or transfer any Shares, or securities
convertible into or exchangeable or exercisable for Shares, which securities are
owned either of record or beneficially by the undersigned as of the date of this
letter or acquired on or prior to the date of effectiveness of the Registration
Statement, or are received upon the exercise of options or the conversion of
convertible bonds held by the undersigned on such dates (collectively, the
"Securities"), for a period of 180 days after the date of the final Prospectus;
provided, that such restrictions shall not apply to Shares sold in the Offering.
The foregoing agreement and representation shall terminate if the Offering has
not occurred on or before April 30, 1998.
The undersigned agrees and consents to the entry of stop transfer
instructions with the transfer agent for the Company's Shares against any
transfer of Securities by it in contravention of the restrictions set forth
herein. The undersigned acknowledges that the Representative and the Company
are relying on the foregoing agreement of the undersigned in carrying out the
Offering and in entering into underwriting arrangements with respect thereto.
III-1
<PAGE>
Notwithstanding the foregoing, if the undersigned is an individual, he
or she may transfer any Securities either during his or her lifetime or on death
by will or by intestacy to his or her immediate family or to a trust the
beneficiaries of which are exclusively the undersigned and/or a member or of his
or her immediate family or to a charitable organization; provided, however, that
in any case it shall be a condition to the transfer that the transferee execute
an agreement stating that the transferee is receiving and holding the Securities
transferred subject to the provisions of this Agreement, and there shall be no
further transfer of such Securities except in accordance with this Agreement.
For purposes of this Agreement, "immediate family" shall mean spouse, lineal
descendant, father, mother, brother or sister of the transferor and "charitable
organization" shall mean an organization described in Section 501(c)(3) of the
Internal Revenue Code of 1986, as amended.
Notwithstanding the foregoing, if the undersigned is a partnership, the
partnership may transfer any Securities to a partner of such partnership or a
retired partner of such partnership who retires after the date hereof, or to the
estate of any such partner or retired partner, and any partner who is an
individual may transfer such Securities by gift, will or intestate succession to
his or her spouse or lineal descendants or ancestors; and if the undersigned is
a corporation, the corporation may transfer such Securities to any shareholder
or subsidiary of such corporation and any shareholder who is an individual may
transfer Securities by gift, will, or intestate succession to his or her
immediate family or to a charitable organization; provided, however, that in any
such case, it shall be a condition to the transfer that the transferee execute
an agreement stating that the transferee is receiving and holding the
Securities subject to the provisions of this Agreement, and there shall be no
further transfer of such Securities except in accordance with this Agreement.
Very truly yours,
----------------------------------
(Signature)
----------------------------------
(Name)
----------------------------------
(Title)
----------------------------------
(Date)
III-2
<PAGE>
EXHIBIT 3.3
RESTATED
CERTIFICATE OF INCORPORATION
OF
SCHEIN PHARMACEUTICAL, INC.
(PURSUANT TO SECTION 242 OF THE
GENERAL CORPORATION LAW OF THE STATE OF DELAWARE)
It is hereby certified that:
1. The name of the corporation is Schein Pharmaceutical, Inc. (the
"Corporation"). The name under which the Corporation was originally incorporated
was Schein Pharmaceutical Corp., and the date of filing of the original
Certificate of Incorporation of the Corporation with the Secretary of State of
the State of Delaware was September 27, 1993.
2. The Board of Directors of the Corporation duly adopted a
resolution proposing and declaring it advisable that Certificate of
Incorporation of the Corporation be amended and restated in its entirety to read
as follows:
FIRST
The name of the corporation is Schein Pharmaceutical, Inc. (the
"Corporation").
<PAGE>
SECOND
The purpose for which the Corporation is formed is to engage in any
lawful act or activity for which corporations may be organized under the General
Corporation Law of the State of Delaware (the "Delaware General Corporation
Law").
THIRD
A.
The total number of shares of capital stock which the Corporation shall
have authority to issue is One Hundred Million (100,000,000) shares of common
stock, $.01 par value per share (the "Common Stock"), of which Seventy-Six
Million (76,000,000) shares shall be Class A Common Stock, $.01 par value per
share (the "Class A Common Shares"), and Twenty-Four Million (24,000,000) shares
shall be Class B Common Stock, $.01 par value per share (the "Class B Common
Shares") and Two Million (2,000,000) shares of preferred stock, $.01 par value
per share (the "Preferred Stock"). The Board of Directors may authorize, without
further stockholder approval, the issuance from time to time of the preferred
stock in one or more series with such designations and such powers, preferences
and rights, and such qualifications, limitations or restrictions (which may
differ with respect to each series) as the Board of Directors may fix by
resolution. Shares of capital stock of the Corporation may be issued for such
consideration, not less than the par value thereof, as shall be fixed from time
to time by the Board of Directors, and shares issued for such consideration
shall be fully paid and nonassessable.
B.
Each share of the Class B Common Shares issued and outstanding, or
issued and held in the treasury of the Corporation, shall be automatically
reclassified as and changed into one new share of the Corporation's Class A
Common Shares, without any action on the part of the holder thereof upon the
earliest to occur of (1) an initial public offering of shares of Common Stock,
(2) the Termination Date, as that term is defined in the Voting Trust Agreement
(the "Voting Agreement") dated September 30, 1994 among Schein Holdings, Inc.
("Holdings") and certain shareholders of Holdings, and Martin Sperber, as voting
trustee (the "Voting Trustee"), and (3) May 15, 1999. Upon the occurrence of a
transfer on the stock transfer records of the Corporation by a holder of any
share of Class B Common Shares, each such share of Class B Common Shares so
transferred shall be automatically reclassified as and changed into one new
share of the Corporation's Class A Common Shares, without any action on the part
of the holder thereof. Upon the occurrence of such a
2
<PAGE>
reclassification, each outstanding share of the Class A Common Shares shall
cease to be called "Class A Common Shares" and shall be called "Common Stock",
and shall otherwise be unchanged. In those cases where a reclassification
described in the preceding sentences would cause a shareholder to receive a
fractional share, the Corporation shall issue to the shareholder a stock
certificate representing such fractional share.
C.
The following is a statement of the powers, preferences and rights and
the qualifications, restrictions and limitations of the Common Stock of the
Corporation:
(1) Class A Common Shares and Class B Common Shares. Each Class A
-----------------------------------------------
Common Share shall be identical in every respect to each Class B Common Share,
except as provided in subparagraph (C)(4). Any Class B Common Share that is
converted into a Class A Common Share in accordance with paragraph B shall
thereafter be a Class A Common Share, with all the powers, preferences and
rights and the qualifications, restrictions and limitations, including, without
limitation, with respect to voting rights, as the Class A Common Share into
which it was converted. No amendment to this Certificate of Incorporation shall
in any manner amend, alter, change or repeal any provision (other than
provisions relating to voting in subparagraph (C)(4)) relating to the Class A
Common Shares without at the same time amending, altering, changing or repealing
in the same manner the corresponding provision relating to the Class B Common
Shares, without the consent of a majority of the outstanding Class B Common
Shares or until such time as there are no Class B Common Shares outstanding.
(2) Dividends. The holders of record of Common Stock shall be
---------
entitled to receive such dividends ratably as may from time to time be declared
by the Board of Directors out of funds legally available therefor.
(3) Liquidation. In the event of any liquidation, dissolution or
-----------
winding up of the affairs of the Corporation, voluntary or involuntary, the net
assets of the Corporation available to shareholders shall be distributed ratably
to the holders of Common Stock. Neither the merger or consolidation of the
Corporation with or into another corporation nor any sale, lease, conveyance or
other disposition of all or substantially all of the property, business or
assets of the Corporation shall be deemed to be a liquidation, dissolution or
winding up of the affairs of the Corporation within the meaning of this Article
THIRD.
(4) Voting Rights. Except as otherwise required by law, the holders
-------------
of Class A Common Shares shall be entitled to one vote in respect of each share
held on all matters voted upon
3
<PAGE>
by the shareholders of the Corporation. The holders of Class B Common Shares
shall not be entitled to vote on any matter, or to participate in a shareholders
meeting, or to receive notice of any meeting of shareholders; provided, however,
at any time the sum of (x) the number of Class A Common Shares subject to the
Voting Agreement plus (y) the number of Class A Common Shares owned by the
----
Voting Trustee (or his successor) or the Voting Trustee's (or his successor's)
affiliates (as defined in Rule 405 under the Securities Act of 1933) ((x) and
(y), together, the "Voting Number") constitutes less than a majority of the
outstanding voting shares of the Corporation and the Voting Trustee (or his
successor) under the Voting Agreement shall have given written notice to the
Corporation and to the known beneficial owner of such shares that he wishes to
vote the Required Number (as defined below) of Class B Common Shares at a
meeting of shareholders or by written consent for which a record date for notice
of and voting at the meeting or the consent shall have been established, the
Required Number of Class B Common Shares shall automatically be entitled to
participate in and vote at that meeting or in that written consent on the same
basis as Class A Common Shares (and shall remain Class B Common Shares until
reclassified and changed in accordance with this Certificate of Incorporation).
As used in this paragraph 4, the term "Required Number" of Class B Common
Shares, for purposes of any such meeting or written consent, means a number of
shares equal to (a) the sum of (i) one plus (ii) 50% of the number of shares
entitled to vote at the meeting or by consent, as the case may be (it being
understood that the Required Number of Class B Common Shares shall be counted as
though they were voting shares for purposes of this clause (ii)), reduced by (b)
the Voting Number on the record date for that meeting or consent (it being
understood that the only circumstance in which the Required Number shall exceed
zero is where the Corporation shall have issued a number of voting shares that
results in the Voting Number at a particular time being less than a majority of
the outstanding voting shares at that time).
(5) Other Rights. Except as set forth above, the Common Stock shall
------------
not bear any preferential, conversion or preemptive rights. Without limiting the
generality of the foregoing, no class of Common Stock may be split, consolidated
or reclassified in any manner other than as expressly provided herein, unless
the other class of Common Stock is split, consolidated or reclassified, as the
case may be, on an identical basis.
D.
Upon the filing in the office of the Secretary of State of the State of
Delaware of this Restated Certificate of Incorporation whereby this Article
THIRD is amended to read as set forth herein, each issued and outstanding share
of Class A
4
<PAGE>
Common Shares, par value $.01 per share, of the Corporation shall be
automatically reclassified and changed into 105 validly issued, fully paid and
nonassessable shares of Class A Common Shares, and each issued and outstanding
share of Class B Common Shares, par value $.01 per share, of the Corporation
shall be automatically reclassified and changed into 105 validly issued, fully
paid and nonassessable shares of Class B Common Shares. No scrip or fractional
shares will be issued by reason of this amendment.
E.
Action required or permitted to be taken at a meeting of the
stockholders of the Corporation may not be taken by consent or consents in
writing in lieu of a meeting.
FOURTH
The registered office of the Corporation in the State of Delaware is to
be located at 1013 Centre Road, Wilmington, County of New Castle, Delaware,
19805. The name of its registered agent at that address is Corporation Service
Company.
FIFTH
The duration of the Corporation is to be perpetual.
SIXTH
(1) The Board of Directors shall be divided into three classes, as
nearly equal in number as the then total number of directors (which shall not be
fewer than five or more than nine, unless otherwise determined by the Board of
Directors) constituting the whole board permits, with the term of office of one
class expiring each year. At the next election of directors, directors of the
first class (which shall initially be comprised of Martin Sperber and Richard
Goldberg) shall be elected to hold office for a term expiring at the next
succeeding annual meeting, directors of the second class (which shall initially
be comprised of Dariush Ashrafi) shall be elected to hold office for a term
expiring at the second succeeding annual meeting and directors of the third
class (which shall initially be comprised of David Ebsworth and Paul Feuerman)
shall be elected to hold office for a term expiring at the third succeeding
annual meeting. Subject to the foregoing, at each annual meeting of
stockholders, the successors to the class of directors whose term shall then
expire shall be elected to hold office for a term expiring at the third
5
<PAGE>
succeeding annual meeting and each director so elected shall hold office until
his successor is elected and qualified, or until his earlier resignation or
removal. If the number of directors is changed, any increase or decrease in the
number of directors shall be apportioned among the three classes to make all
classes as nearly equal in number as possible, and the Board of Directors shall
decide which class shall contain an unequal number of directors.
(2) Only persons who are nominated in accordance with the procedures
set forth in this paragraph, or in the general stockholders agreement dated
September 30, 1994 among Schein Holdings, Inc. (now Schein Pharmaceutical,
Inc.), Miles Inc. and certain stockholders of Schein Holdings, Inc. (the
"General Stockholders Agreement"), shall be eligible to serve as directors.
Nominations of persons for election to the Board of Directors of the Corporation
may be made at an annual meeting of stockholders (a) by or at the direction of
the Board of Directors or (b) by or on behalf of a stockholder of the
Corporation, or a duly authorized proxy for such stockholder, who is a
stockholder of record at the time of giving notice provided for in this
paragraph and who shall be entitled to vote for the election of directors at the
meeting. Any nominations not made by or at the direction of the Board of
Directors must be made pursuant to a notice in writing to the Secretary of the
Corporation delivered or mailed to, and received at, the principal executive
offices of the Corporation not fewer than 60 days or more than 90 days prior to
the anniversary date of the immediately preceding annual meeting; provided,
--------
however, that in the event the annual meeting with respect to which such notice
- -------
is to be tendered is not held within 30 days before or after such anniversary
date, notice by the stockholder to be timely must be received not earlier than
90 days prior to such annual meeting and not later than 60 days prior to such
annual meeting; and further provided, however, that, notwithstanding the
------- -------- -------
foregoing, with respect to the first annual meeting of stockholders after
January 2, 1998, such notice by the stockholder must be received at the
principal executive offices of the Corporation prior to the close of business on
the tenth day following the date on which notice of the meeting was first given
or made to stockholders generally. Such stockholder's notice shall set forth (a)
as to each person whom the stockholder proposes to nominate for election or
reelection as a director, all information relating to such person that is
required to be disclosed in solicitations of proxies for election of directors,
or is otherwise required, in each case pursuant to Regulation 14A under the
Securities Exchange Act of 1934 (including such person's written consent to
being named as a nominee and to serving as a director, if elected); and (b) as
to the stockholder giving the notice (i) the name and address, as they appear on
the Corporation's books, of such stockholder, (ii) the class and number of
shares of stock of the Corporation beneficially owned by such stockholder and
represented by proxy and (iii) a description of all arrangements or
understandings
6
<PAGE>
between such stockholder and any other person or persons (including their names)
in connection with such nomination and any material interest of such stockholder
in such nomination. At the request of the Board of Directors, any person
nominated by the Board of Directors for election as a director shall furnish to
the Secretary of the Corporation that information required to be set forth in a
stockholder's notice of nomination that pertains to the nominee. If the Board of
Directors shall determine, based on the facts, that a nomination was not made in
accordance with the above procedures, the Chairman of the meeting shall so
declare to the meeting and the defective nomination shall be disregarded.
(3) Unless a greater vote requirement in any matter is provided in
this Certificate of Incorporation or the By-laws, the affirmative vote of a
majority of the directors present and acting at a duly constituted meeting at
which a majority of the entire Board of Directors is present and acting, is
sufficient for all action of the Board of Directors.
(4) Any action required or permitted to be taken by the Board of
Directors may be taken without a meeting if all members of the Board consent in
writing to the adoption of resolutions authorizing the action.
(5) Elections of directors need not be by ballot unless the By-Laws
of the Corporation shall so provide.
SEVENTH
A.
No director shall be personally liable to the Corporation or its
stockholders for monetary damages for breach of fiduciary duty by such director
as a director, provided that this Article SEVENTH shall not eliminate or limit
the liability of a director (1) for any breach of such director's duty of
loyalty to the Corporation or its stockholders, (2) for acts or omissions of
such director not in good faith or which involve intentional misconduct or a
knowing violation of law, (3) under Section 174 of the Delaware General
Corporation Law, or (4) for any transaction from which such director derived an
improper personal benefit, in respect of which such breach of fiduciary duty
occurred. If the Delaware General Corporation Law is amended after approval by
the stockholders of this Article SEVENTH to authorize corporate action further
eliminating or limiting the personal liability of directors, then the liability
of a director of the Corporation shall be eliminated or limited to the fullest
extent permitted by the Delaware General Corporation Law, as so amended from
time to time.
7
<PAGE>
B.
(1) Right of Indemnification. Each person who was or is made a party
------------------------
or is threatened to be made a party to or is involved in any action, suit or
proceeding, whether civil, criminal, administrative or investigative
(hereinafter a "proceeding"), by reason of the fact that he or she, or a person
of whom he or she is the legal representative, (a) is or was a director or
officer of the Corporation or (b) is or was serving at the request of the
Corporation as a director, officer, employee or agent of another corporation or
of a partnership, joint venture, trust or other enterprise, including service
with respect to employee benefit plans (whether the basis of such proceeding is
alleged action in an official capacity as a director, officer, employee or agent
or in any other capacity while serving as a director, officer, employee or
agent), shall be indemnified and held harmless by the Corporation to the fullest
extent authorized by the Delaware General Corporation Law, as the same exists or
may hereafter be amended (but, in the case of any such amendment, only to the
extent that such amendment permits the Corporation to provide broader
indemnification rights than said law permitted the Corporation to provide prior
to such amendment), against all expense, liability and loss (including
attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts
paid or to be paid in settlement) actually and reasonably incurred or suffered
by such person in connection therewith and such indemnification shall continue
as to a person who has ceased to be a director, officer, employee or agent and
shall inure to the benefit of his or her heirs, executors and administrators;
provided, however, that, except as provided in paragraph (2) hereof the
Corporation shall indemnify any such person seeking indemnification in
connection with a proceeding (or part thereof) initiated by such person only if
such proceeding (or part thereof) was authorized by the Board of Directors of
the Corporation. The right to indemnification conferred in this Article SEVENTH
shall be a contract right and shall include the right to be paid by the
Corporation the expenses incurred in defending any such proceeding in advance of
its final disposition; provided, however, that, if the Delaware General
Corporation Law requires, the payment of such expenses incurred by a director or
officer in his or her capacity as such (and not in any other capacity in which
service was or is rendered by such person while a director or officer,
including, without limitation, service with respect to an employee benefit plan)
in advance of the final disposition of a proceeding, shall be made only upon
delivery to the Corporation of an undertaking, by or on behalf of such director
or officer, to repay all amounts so advanced if it shall ultimately be
determined that such director or officer is not entitled to be indemnified under
this Article SEVENTH or otherwise. The Corporation may, by action of its Board
of Directors, provide indemnification to employees and agents of the Corporation
with the same scope and effect as the foregoing indemnification of directors and
officers.
8
<PAGE>
(2) Right of Claimant to Bring Suit. If a claim under paragraph (1)
-------------------------------
of this Article SEVENTH is not paid in full by the Corporation within thirty
days after a written claim has been received by the Corporation, the claimant
may at any time thereafter bring suit against the Corporation to recover the
unpaid amount of the claim and, if successful in whole or in part, the claimant
shall be entitled to be paid also the expense of prosecuting such claim. It
shall be a defense to any such action (other than an action brought to enforce a
claim for expenses incurred in defending any proceeding in advance of its final
disposition where the required undertaking, if any is required, has been
tendered to the Corporation) that the claimant has not met the standards of
conduct which make it permissible under the Delaware General Corporation Law for
the Corporation to indemnify the claimant for the amount claimed, but the burden
of proving such defense shall be on the Corporation. Neither the failure of the
Corporation (including its Board of Directors, independent legal counsel, or its
stockholders) to have made a determination prior to the commencement of such
action that indemnification of the claimant is proper in the circumstances
because he or she has met the applicable standard of conduct set forth in the
Delaware General Corporation Law, nor an actual determination by the Corporation
(including its Board of Directors, independent legal counsel, or its
stockholders) that the claimant has not met such applicable standard of conduct,
shall be a defense to the action or create a presumption that the claimant has
not met the applicable standard of conduct.
(3) Non-Exclusivity of Rights. The right to indemnification and the
-------------------------
payment of expenses incurred in defending a proceeding in advance of its final
disposition conferred in this Article SEVENTH shall not be exclusive of any
other right which any person may have or hereafter acquire under any statute,
provision of the Certificate of Incorporation, by-law, agreement, vote of
stockholders or disinterested directors or otherwise.
(4) Insurance. The Corporation may maintain insurance, at its
---------
expense, to protect itself and any director, officer, employee or agent of the
Corporation or another corporation, partnership, joint venture, trust or other
enterprise, including service with respect to employee benefit plans, against
any such expense, liability or loss, whether or not the Corporation would have
the power to indemnify such person against such expense, liability or loss under
the Delaware General Corporation Law.
EIGHTH
Subject to the provisions of Article NINTH below, the directors of the
Corporation may, by a vote of a majority of directors present at a meeting in
which a quorum is present, adopt, amend or repeal any By-Law.
9
<PAGE>
NINTH
The Corporation shall not, and shall not permit any of its subsidiaries
to, and no officer, employee or other agent of the Corporation or any of its
subsidiaries shall have the authority, in the name or on behalf of the
Corporation or any of its subsidiaries to, directly or indirectly, without the
prior written consent of Bayer Corporation ("Bayer," formerly Miles Inc.) (which
consent shall be deemed given, if a majority of Bayer's nominees to the Board of
Directors of the Corporation consent in writing (it being understood that
consent given in this manner shall not be deemed the exclusive method of giving
consent)) amend or restate the Corporation's certificate of incorporation or By-
Laws in any respect, (a) as a result of which the ability to (i) elect a
majority of the members of the Board of Directors of the Corporation, (ii) adopt
an agreement of merger or consolidation, (iii) approve a sale of all or
substantially all the assets of the Corporation or (iv) adopt an amendment to
the Corporation's certificate of incorporation or by-laws would require the vote
of more than a majority of the outstanding shares of Common Stock entitled to
vote thereon, (b) that would adversely affect Bayer differently from other
holders of shares of Common Stock or (c) that, by its terms, would prohibit any
foreign national from holding shares of Common Stock or serving as a director.
This Article NINTH may be amended only with the prior written consent of
Bayer (as described above in this Article NINTH), and the provisions of this
Article NINTH shall terminate and be of no further force or effect upon the
termination of Bayer's rights under Section 2.5 of General Stockholders
Agreement.
TENTH
Whenever a compromise or arrangement is proposed between the Corporation
and its creditors or any class of them and/or between the Corporation and its
stockholders or any class of them, any court of equitable jurisdiction within
the State of Delaware may, on the application in a summary way of the
Corporation or of any creditor or stockholder thereof or on the application of
any receiver or receivers appointed for the Corporation under the provisions of
Section 291 of Title 8 of the Delaware Code or on the application of trustees in
dissolution or of any receiver or receivers appointed for the Corporation under
the provisions of Section 279 of Title 8 of the Delaware Code, order a meeting
of the creditors or class of creditors, and/or of the stockholders of the
Corporation, as the case may be, to be summoned in such manner as the said court
directs. If a majority in number representing three fourths in value of the
creditors or class of creditors, and/or of the stockholders or class of
10
<PAGE>
stockholders of the Corporation, as the case may be, agree to any compromise or
arrangement and to any reorganization of the Corporation as a consequence of
such compromise or arrangement, the said compromise or arrangement and the said
reorganization shall, if sanctioned by the court to which the said application
has been made, be binding on all the creditors or class of creditors, and/or on
all the stockholders, of the Corporation, as the case may be, and also on the
Corporation.
3. The foregoing amendment has been duly adopted by the
stockholders of the Corporation in accordance with the provisions of Section 242
of the General Corporation Law of the State of Delaware.
4. This amendment to the Certificate of Incorporation shall be
effective on and as of the date of filing this Certificate of Amendment with the
office of the Secretary of State of the State of Delaware.
11
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Amendment to be executed in its name by its President and attested to by its
Secretary this _____ day of March, 1998, and the statements contained herein
are affirmed as true under penalties of perjury.
SCHEIN PHARMACEUTICAL, INC.
By:___________________________
Martin Sperber
President
ATTEST:
By:___________________________
12
<PAGE>
EXHIBIT 4.1
- --------------------------------------------------------------------------------
CREDIT AGREEMENT
Among
SCHEIN PHARMACEUTICAL, INC.,
THE LENDERS,
as defined herein,
and
CHEMICAL BANK,
as Issuing Bank,
as Administrative Agent
and as Collateral Agent for the Lenders
[LOGO]SCHEIN
PHARMACEUTICAL
Dated as of September 5, 1995
- --------------------------------------------------------------------------------
<PAGE>
Schein Pharmaceutical, Inc.
$350M Credit Facilities
Chemical Bank, Agent
Amount: $350M
RC Facility $100M
Term Facility $250M
Tenor:
6.5 Years (Matures 12/31/01 )
Interest (price grid): LIBOR + 1.25% Range .75%[arrow] 1.50% 7.25%
Prime + .25% Range 0% [arrow] .50% 9.00%
Letter of Credit: Up to $30M available @ 1.625% (subject to grid)
Commitment Fee: 0.375% (unused portion) Range .25% [arrow] .50%
Arrangement Fee: 1.5% -- ($5,250,000)
Agent Fee: $100K annually
Mandatory Prepayments: 75% of Excess cash flow, 100% of new financing
above $10M, and % of proceeds from stock
offering:
50% if leverage is between 3.0x - 4.0x
25% if leverage is between 2.5x - 3.0x
0% if leverage is between 1.0x - 2.5x
Scheduled Prepayments: '95 - $0 '99 - $50M
'96 - $10M '00 - $60M
'97 - $30M '01 - $60M
'98 - $40M
Security: Mortgage all real property
Liens on receivables & inventory
Pledge of all domestic subsidiaries stock including
Marsam and 65% of wholly owned foreign
subsidiaries
Cross company guarantees by domestic subsidiaries
<PAGE>
FINANCIAL COVENANTS: Limitations on capital expenditures -
$25M/yr + 50% carryforward of unspent amount
commencing fiscal year '97
Maximum Total Leverage (debt) to EBITDA for '95
5x -- '98 3x
Minimum net worth - $145M
+$25M earnings in '96
+$55M earnings in '97
+$50M earnings in '98
+$75M earnings in '99
Minimum levels of working capital - 1.75x
Minimum fixed charge coverage - 1.5x - all years
(EBITDA-Cap Exp/Interest + Debt Payments)
Limitations on dividends -
Deemed dividends per the Shareholder
Agreement for registration expenses & fees
permitted + 25% of Net Income after leverage
drops below 2.5x (Est. '96 end of year)
Limitations on investments:
A) $10M annually for foreign investments (Bayer
JV's) (+ 50% of carryforward of unspent
amount)
B) $10M Aggregate of all other investments up
to '97 and $15M aggregate thereafter
Limitations on Debt to buy back stock and options
$5M
Transactions with Affiliates (Bayer and
Shareholders):
A) Limited to Shareholder agreement
B) Stock options permitted
C) Foreign JV's permitted up to $10M/yr
D) Loans to officers and employees up to $1.5M
aggregate
Limitations on Merger Agreement
A) Materially change terms other than to extend
Tender Offer period
B) To pay more than $250M for Marsam
<PAGE>
Schein Pharmaceutical, Inc.
$350M Credit Facilities
Chemical Bank, Agent
<TABLE>
<CAPTION>
Conditions to Closing: Status
---------------------- ------
<S> <C>
Bank required due diligence
---------------------------
Schein Pharmaceutical, Inc.
Financial review Done
Facilities visit Done
Collateral review Done
Environmental review Done
Solvency opinion 8/23/95
Marsam Pharmaceuticals, Inc.
Financial review Done
Facilities visit Done
Collateral review 8/21-22/95
Environmental review Done
Syndication:
Bank Meeting: Done
Information Memorandum Done
Management slides Done
Loan documents 4th Draft 8/22/95
Bank commitments due 8/24/95
Pre Closing 8/24/95
Closing 9/1/95
Funding 9/6/95
Merger Agreement: Done
Tender Offer Expires 9/1/95
Hart Scott Rodino Release Done
</TABLE>
<PAGE>
SCHEIN PHARMACEUTICAL, INC.
$350M CREDIT FACILITIES
CHEMICAL BANK, AGENT
BANK COMMITTED AMOUNT PROBABLE AMOUNT TOTAL
- ---- ---------------- ---------------------
Chemical Bank $350M $ 30M
LEAD MANAGERS:
- -------------
NatWest 35
Chase Manhattan 35
Mellon Bank 35
Credit Lyonnais 35
Citibank 35
Bank of Nova Scotia 35
Deutsche BAnk 35
Rabobank Nederland 35
---- ----
Subtotal 280 280
ABN Amro 25
Midlantic 25
Westdeutche Landesbank 25
Bank of Tokyo 25
Society Bank (Key Bank) 25
Bank of New York 15
Daiwa Bank 25
Society General 25
Yasuda Trust 25
Credit Suisse 25
Hypo 25
Bank of Montreal 25
Comerica 25
---- ----
Subtotal 190 125 315
Total* $470 $125 $595
*(Does not incl. Chemical's portion)
<PAGE>
Financial Schedules
$350M Credit Facilities
PRICING GRID:
<TABLE>
<CAPTION>
Frcst
Financial Ratio Price Grid Commitment
(Category) 0.75%- 1.50% Fee
---------- ------------ ----------
<S> <C> <C> <C>
YR 1995 4 1.25 .375
YR 1996 4-3 1.25 - 1.00 .375
YR 1997 2-1 .875 - .75 .3125-.25
YR 1998 1 .75 .25
YR 1999 1 .75 .25
</TABLE>
WORKING CAPITAL:
Working Capital (June 30, 1995) 3.0X
Projections (1996-1999) 2.5X (Average)
CAPITAL EXPENDITURE:
<TABLE>
<CAPTION>
Projected Limitation
--------- ----------
<S> <C> <C>
YR 1995 20 25
YR 1996 22 25
YR 1997 24 25
YR 1998 23 25
YR 1999 23 25
<CAPTION>
INTERNATIONAL JV'S
Projected Limitation
--------- ----------
<S> <C> <C>
YR 1995 7 10
YR 1996 10 10
YR 1997 5 10
YR 1998 0 10
YR 1999 0 10
<CAPTION>
INVESTMENTS (ALL OTHER)
Projected
---------
<S> <C> <C>
YR 1995 3 Limitation = $10M Aggregate (95,96,97
YR 1996 3 Limitation = $15M Aggregate (97,98,99
YR 1997 3
YR 1998 3
YR 1999 3
</TABLE>
<PAGE>
Financial Schedules
$350M Credit Facilities
<TABLE>
<CAPTION>
NET WORTH
Projected Test
--------- ----
<S> <C> <C>
YR 1995 154 145
YR 1996 196 170
YR 1997 262 225
YR 1998 345 275
YR 1999 435 350
</TABLE>
<TABLE>
<CAPTION>
LEVERAGE RATIO
{Total Debt/EBITDA}
Projected Test Senior Test
--------- ---- -----------
<S> <C> <C> <C>
YR 1995 4.4 5.0 5.0
YR 1996 2.5 4.0 4.0
YR 1997 1.6 3.5 3.0
YR 1998 1.0 3.0 2.5
YR 1999 0.6 3.0 2.5
</TABLE>
<TABLE>
<CAPTION>
MINIMUM FIXED CHARGE COVERAGE
Projected Test
--------- ----
<S> <C> <C>
YR 1995 3.6 1.5
YR 1996 3.0 1.5
YR 1997 2.5 1.5
YR 1998 2.6 1.5
YR 1999 2.8 1.5
</TABLE>
DIVIDEND LIMITATION
Dividend Limitation is in effect until Total Debt/EBITDA = 2.5X Estimated at
Year End 1996
<PAGE>
[EXECUTION COPY]
================================================================================
CREDIT AGREEMENT
Among
SCHEIN PHARMACEUTICAL, INC.,
THE LENDERS,
as defined herein,
and
CHEMICAL BANK,
as Issuing Batik,
as Administrative Agent
and as Collateral Agent for the Lenders
Dated as of September 5, 1995
================================================================================
[CS&M Ref. 6700-331/P95-0114]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
ARTICLE I
Definitions
<S> <C>
SECTION 1.01. Defined Terms .............................................. 3
SECTION 1.02. Terms Generally ............................................ 35
ARTICLE II
The Credits
SECTION 2.01. Commitments ................................................ 35
SECTION 2.02. Loans ...................................................... 36
SECTION 2.03. Borrowing Procedure ........................................ 39
SECTION 2.04. Evidence of Debt; Repayment of Loans ....................... 40
SECTION 2.05. Fees ....................................................... 41
SECTION 2.06. Interest on Loans .......................................... 43
SECTION 2.07. Default Interest ........................................... 44
SECTION 2.08. Alternate Rate of Interest ................................. 44
SECTION 2.09. Termination and Reduction of
Commitments .............................................. 45
SECTION 2.10. Conversion and Continuation of
Borrowings ............................................... 46
SECTION 2.11. Repayment of Term Facility
Borrowings ................................................ 48
SECTION 2.12. Optional Prepayment ........................................ 49
SECTION 2.13. Mandatory Prepayments ...................................... 50
SECTION 2.14. Reserve Requirements; Change in
Circumstances ............................................ 51
SECTION 2.15. Change in Legality ......................................... 54
SECTION 2.16. Indemnity .................................................. 55
SECTION 2.17. Pro Rata Treatment ......................................... 56
SECTION 2.18. Sharing of Setoffs ......................................... 56
SECTION 2.19. Payments ................................................... 57
SECTION 2.20. Taxes ...................................................... 58
SECTION 2.21. Assignment of Commitments under
Certain Circumstances; Duty To
Mitigate ................................................. 62
</TABLE>
<PAGE>
2
<TABLE>
<CAPTION>
Page
----
<S> <C>
SECTION 2.22. Letters of Credit ........................................... 63
ARTICLE III
Representations and Warranties
SECTION 3.01. Organization; Powers ........................................ 69
SECTION 3.02. Authorization ............................................... 69
SECTION 3.03. Enforceability .............................................. 70
SECTION 3.04. Governmental Approvals ...................................... 70
SECTION 3.05. Financial Statements ........................................ 71
SECTION 3.06. No Material Adverse Change .................................. 72
SECTION 3.07. Title to Properties; Possession
under Leases .............................................. 72
SECTION 3.08. Subsidiaries ................................................ 73
SECTION 3.09. Litigation; Compliance with Laws ............................ 73
SECTION 3.10. Agreements .................................................. 74
SECTION 3.11. Federal Reserve Regulations ................................. 74
SECTION 3.12. Investment Company Act; Public
Utility Holding Company Act ............................... 74
SECTION 3.13. Use of Proceeds ............................................. 75
SECTION 3.14. Tax Returns ................................................. 75
SECTION 3.15. No Material Misstatements ................................... 75
SECTION 3.16. Employee Benefit Plans ...................................... 75
SECTION 3.17. Environmental Matters ....................................... 76
SECTION 3.18. Insurance ................................................... 77
SECTION 3.19. Solvency .................................................... 77
SECTION 3.20. Location of Real Property and Leased
Premises .................................................. 78
SECTION 3.21. Labor Matters ............................................... 79
SECTION 3.22. Tender Offer; Merger ........................................ 79
SECTION 3.23. Capitalization of the Borrower .............................. 80
ARTICLE IV
Conditions of Lending
SECTION 4.01. All Credit Events ........................................... 81
SECTION 4.02. First Credit Event .......................................... 82
SECTION 4.03. Additional Conditions Precedent ............................. 88
</TABLE>
<PAGE>
3
<TABLE>
<CAPTION>
Page
----
ARTICLE V
Affirmative Covenants
<S> <C>
SECTION 5.01. Existence; Businesses and Properties ....................... 89
SECTION 5.02. Insurance .................................................. 89
SECTION S.03. Obligations and Taxes ...................................... 91
SECTION 5.04. Financial Statements, Reports, etc ......................... 91
SECTION 5.05. Litigation and Other Notices ............................... 93
SECTION 5.06. Employee Benefits .......................................... 93
SECTION 5.07. Maintaining Records; Access to
Properties and Inspections ............................... 93
SECTION 5.08. Use of Proceeds ............................................ 94
SECTION 5.09. Compliance with Environmental Laws ......................... 94
SECTION 5.10. Preparation of Environmental Reports ....................... 94
SECTION 5.11. Further Assurances ......................................... 95
SECTION 5.12. Rate Protection Agreements ................................. 96
SECTION 5.13. Merger ..................................................... 96
SECTION 5.14. Board of Directors of the Company .......................... 96
ARTICLE VI
Negative Covenants
SECTION 6.01. Indebtedness ............................................... 96
SECTION 6.02. Liens ...................................................... 98
SECTION 6.03. Sale and Lease-Back Transactions ........................... 100
SECTION 6.04. Investments, Loans and Advances ............................ 100
SECTION 6.05. Mergers, Consolidations and Sales of
Assets ................................................... 101
SECTION 6.06. Dividends and Distributions;
Restrictions on Ability of
Subsidiaries To Pay Dividends ........................... 102
SECTION 6.07. Transactions with Affiliates ............................... 103
SECTION 6.08. Business of Borrower and Subsidiaries ...................... 103
SECTION 6.09. Operating Leases ........................................... 104
SECTION 6.10. Amendments of Certain Agreements;
Conduct of Acquisition ................................... 104
SECTION 6.11. Fiscal Year ................................................ 104
SECTION 6.12. Payment on Other Indebtedness .............................. 104
SECTION 6.13. Capital Expenditures ....................................... 105
</TABLE>
<PAGE>
4
<TABLE>
<CAPTION>
Page
----
<S> <C>
SECTION 6.14. Leverage Ratio ............................................. 105
SECTION 6.15. Senior Debt Ratio .......................................... 106
SECTION 6.16. Net Worth .................................................. 107
SECTION 6.17. Working Capital ............................................ 107
SECTION 6.18. Fixed Charge Coverage Ratio ................................ 107
ARTICLE VII
Events of Default ........................................................ 107
ARTICLE VIII
The Administrative Agent and the Collateral Agent ........................ 112
ARTICLE IX
Miscellaneous
SECTION 9.01. Notices .................................................... 116
SECTION 9.02. Survival of Agreement ...................................... 117
SECTION 9.03. Binding Effect ............................................. 118
SECTION 9.04. Successors and Assigns ..................................... 118
SECTION 9.05. Expenses; Indemnity ........................................ 123
SECTION 9.06. Rights of Setoff ........................................... 124
SECTION 9.07. Applicable Law ............................................. 125
SECTION 9.08. Waivers; Amendment ......................................... 125
SECTION 9.09. Interest Rate Limitation ................................... 127
SECTION 9.10. Entire Agreement ........................................... 127
SECTION 9.11. WAIVER OF JURY TRIAL ....................................... 127
SECTION 9.12. Severability ............................................... 128
SECTION 9.13. Counterparts ............................................... 128
SECTION 9.14. Headings ................................................... 128
SECTION 9.15. Jurisdiction; Consent to Service of
Process ................................................. 128
SECTION 9.16. Mortgaged Property Casualty and
Condemnation ............................................ 129
SECTION 9.17. Confidentiality ............................................ 135
</TABLE>
<PAGE>
5
Schedule 1.01 Certain Permitted Holders
Schedule 2.01 Commitments
Schedule 3.08 Subsidiaries
Schedule 3.18 Insurance
Schedule 3.20(a) Owned Real Property
Schedule 3.20(b) Leased Real Property
Schedule 4.02(a) Local Counsel
Schedule 6.01 Existing Indebtedness
Schedule 6.02 Existing Liens
Schedule 6.04 Existing Investments
Exhibit A Form of Administrative
Questionnaire
Exhibit B Form of Assignment and Acceptance
Exhibit C Form of Borrowing Request
Exhibit D Form of Guarantee Agreement
Exhibit E Form of Indemnity, Subrogation and
Contribution Agreement
Exhibit F Form of Mortgage
Exhibit G Form of Pledge Agreement
Exhibit H Form of Security Agreement
Exhibit I-1 Form of Opinion of PRG&M
Exhibit I-2 Form of Opinion of Local Counsel
Exhibit J Form of Opinion of Counsel to the
Company
<PAGE>
CREDIT AGREEMENT dated as of September 1, 1995, among SCHEIN
PHARMACEUTICAL, INC., a Delaware corporation (the "Borrower"); the LENDERS (as
defined in Article I); and CHEMICAL BANK, a New York banking corporation as
issuing bank (in such capacity, the "Issuing Bank"), as administrative agent (in
such capacity, the "Administrative Agent") and as collateral agent (in suck
capacity, the "Collateral Agent") for the Lenders.
The Borrower has requested the Lenders to extend credit in order to enable
the Borrower, on the terms and subject to the conditions of this Agreement, to
borrow (a) on a term basis, on the Tender Offer Date (such term and each other
tern used but not otherwise defined in this preamble having the meaning assigned
to it in Article I), an aggregate principal amount not in excess of $250,000,000
(the "Tender Facility") and (b) on a revolving basis, at any time and from time
to time on or after the Tender Offer Date and prior to the Pre-Merger Facilities
Maturity Date, an aggregate principal amount at any time outstanding not in
excess of $100,000,000 (the "Pre-Merger Revolving Facility"). The proceeds of
borrowings under the Tender Facility and up to $50,000,000 of proceeds of
borrowings under the Pre-Merger Revolving Facility are to be used (a) by the
Borrower or Acquisition Co. (i) to purchase outstanding shares of common stock,
par value $.01 per share (the "Shares"), of Marsan Pharmaceuticals Inc., a
Delaware corporation (the "Company"), which Shares will be acquired by the
Borrower or Acquisition Co. pursuant to an all cash tender offer for all the
outstanding Shares (the "Tender Offer") to be made by Acquisition Co. pursuant
to the Merger Agreement, or (ii) to pay related fees and expenses not in excess
of $15,000,000, or (b) used by the Borrower to refinance up to $65,000,000
existing debt of the Borrower and the Subsidiaries (other than the Company and
its subsidiaries). The remaining proceeds of borrowings under the Pre-Merger
Revolving Facility are to be used to provide working capital for the Borrower
and the Subsidiaries and for general corporate purposes.
The Borrower has also requested the Lenders to extend credit in order to
enable the Borrower, on the terms and subject to the conditions of this
Agreement, to borrow (a) on a term basis, from time to time on or after the
<PAGE>
2
Merger Date and prior to the date 120 days after the Merger Date, an aggregate
principal amount not in excess of $250,000,000 (the "Term Facility"), and (b) on
a revolving basis, at any time and from time to time on or after the Merger Date
and prior to the Post-Merger Facilities Maturity Date, an aggregate principal
amount at any time outstanding not in excess of $100,000,000 (the "Post-Merger
Revolving Facility").
The Borrower has also requested the Issuing Bank to issue letters of credit
from time to time on or after the Merger Date and prior to the date that is five
Business Days prior to the Post-Merger Facilities Maturity Date, in an aggregate
face amount at any time outstanding not in excess of $30,000,000, to support
payment obligations incurred in the ordinary course of business by the Borrower
and its Subsidiaries.
The proceeds of the borrowings under the Term Facility and $50,000,000 of
the proceeds of borrowings under the Post-Merger Revolving Facility are to be
used solely (a) to pay any cash consideration due in the Merger to holders of
Shares, (b) to refinance borrowings under the Tender Facility and the Pre-Merger
Revolving Facility and (c) to pay fees and expenses related to the Acquisition
not in excess of $15,000,000 less the amount of such fees and expenses paid on
the Tender Offer Date. The remaining proceeds of borrowings under the
Post-Merger Revolving Facility are to be used to refinance borrowings under the
Pre-Merger Revolving Facility and to provide working capital for the Borrower
and the Subsidiaries.
The Lenders are willing to extend such credit to the Borrower and the
Issuing Bank is willing to issue letters of credit for the account of the
Borrower on the
<PAGE>
3
terms and subject to the conditions set forth herein. Accordingly, the parties
hereto agree as follows:
ARTICLE I
Definitions
SECTION 1.01. Defined Terms. As used in this Agreement, the following terms
shall have the meanings specified below:
"ABR Borrowing" shall mean a Borrowing comprised of ABR Loans.
"ABR Loan" shall mean any ABR Term Loan or ABR Revolving Loan.
"ABR Revolving Loan" shall mean any Revolving Loan bearing interest at a
rate determined by reference to the Alternate Base Rate in accordance with the
provisions of Article II.
"ABR Term Loan" shall mean any Term Loan bearing interest at a rate
determined by reference to the Alternate Base Rate in accordance with the
provisions of Article II.
"Acquisition" shall mean the Tender Offer, the Merger and the other
transactions contemplated by the Merger Agreement and the Tender Offer
Materials.
"Acquisition Co." shall mean SM Acquiring Co., Inc., a Delaware
corporation.
"Adjusted LIBO Rate" shall mean, with respect to any Eurodollar Borrowing
for any Interest Period, an interest rate per annum (rounded upwards, if
necessary, to the next 1/16 of 3%) equal to the product of (a) the LIBO Rate in
effect for such Interest Period and (b) Statutory Reserves.
"Administrative Agent Fees" shall have the meaning assigned to such term in
Section 2.05(b).
"Administrative Questionnaire" shall mean an Administrative Questionnaire
in the form of Exhibit A.
<PAGE>
4
"Affiliate" shall mean, when used with respect to a specified person,
---------
another person that directly, or indirectly through one or more intermediaries,
Controls or is Controlled by or is under common Control with the person
specified and, for the purposes of Section 6.07, shall include the officers,
directors and shareholders of the Borrower or any Subsidiary, their Affiliates,
the members of their immediate family and any trust for the benefit of any of
the foregoing.
"Aggregate Revolving Credit Exposure" shall mean the aggregate amount of
-----------------------------------
the Lenders' Revolving Credit Exposures.
"Alternate Base Rate" shall mean, for any day, a rate per annum (rounded
-------------------
upwards, if necessary, to the next 1/16 of 1%) equal to the greatest of (a) the
Prime Rate in effect on such day, (b) the Base CD Rate in effect on such day
plus 1% and (c) the Federal Funds Effective Rate in effect on such day plus 1/2
of 1%. If for any reason the Administrative Agent shall have determined (which
determination shall be conclusive absent manifest error) that it is unable to
ascertain the Base CD Rate or the Federal Funds Effective Rate or both for any
reason, including the inability or failure of the Administrative Agent to obtain
sufficient quotations in accordance with the terms thereof, the Alternate Base
Rate shall be determined as if the Base CD Rate or the Federal Funds Effective
Rate, or both, as appropriate, were unchanged from that existing on the last
date for which ascertainment thereof was made, until the circumstances giving
rise to such inability no longer exist. Any change in the Alternate Base Rate
due to a change in the Prime Rate, the Base CD Rate or the Federal Funds
Effective Rate shall be effective on the effective date of such change in the
Prime Rate, the Base CD Rate or the Federal Funds Effective Rate, respectively.
"Applicable Percentage" shall mean, for any day, with respect to any
---------------------
Eurodollar Loan or ABR Loan, or with respect to the Commitment Fees, as the case
may be, the applicable percentage set forth below under the caption "Eurodollar
Spread", "ABR Spread" or "Fee Percentage", as
<PAGE>
5
the case may be, based upon the Leverage Ratio and the Interest Expense Coverage
Ratio:
<TABLE>
<CAPTION>
Eurodollar ABR Fee
Spread Spread Percentage
------ ------ ----------
<S> <C> <C> <C>
Category 1
- ----------
Leverage Ratio less
than 3 to 1; and
Interest Expense
Coverage Ratio greater
than 5 to 1 0.7500 0.0000 0.2500
------ ------ ------
Category 2
- ----------
Leverage Ratio greater
than or equal to 3 to 1
but less than 3.5 to
1.0; Interest Expense
Coverage Ratio less
than or equal to 5 to 1
but greater than 4.5 to
1.0 0.8750 0.0000 0.3125
------ ------ ------
Category 3
- ----------
Leverage Ratio greater
than or equal to 3.5 to
1.0 but less than 4 to
1; Interest Expense
Coverage Ratio less
than or equal to 4.5 to
1.0 but greater than 4
to 1 1.0000 0.0000 0.3750
------ ------ ------
Category 4
- ----------
Leverage Ratio greater
than or equal to 4 to 1
but less than 4.5 to
1.0; Interest Expense
Coverage Ratio less
than or equal to 4 to 1
but greater than 3 to 1 1.2500 0.25000 0.3750
------ ------- ------
Category 5
- ----------
Leverage Ratio greater
than or equal to 4.5 to
1.0; or Interest
Expense Coverage Ratio
less than or equal to
3 to 1 1.5000 0.5000 0.5000
------ ------ ------
</TABLE>
In the event the Leverage Ratio and the Interest Expense Coverage Ratio
are in different categories, the spreads and fees will be based upon the
numerically higher category. Each change in the Applicable Percentage
resulting from a change in the Leverage Ratio or the
<PAGE>
6
Interest Expense Coverage Ratio shall be effective with respect to all Loans,
Commitments and Letters of Credit outstanding on and after the due date for
delivery to the Administrative Agent of the financial statements and
certificates required by Section 5.04(a) or 5.04(b) and Section 5.04(c)
indicating such change (even if such statements and certificates are delivered
prior to such due date) until the date immediately preceding the next due date
for delivery of such financial statements and certificates indicating another
such change (even if such statements and certificates are delivered prior to
such due date). Notwithstanding the foregoing, the Applicable Percentage shall
be determined by reference to (a) Category 5(i) for any period after the last
day of the second complete fiscal quarter to commence after the Merger Date
during which the Borrower has failed to deliver the financial statements and
certificates required by Section 5.04(a) or 5.04(b) and Section 5.04(c) if such
failure has continued unremedied for three Business Days following notice
thereof from the Administrative Agent or any Lender and (ii) at any time after
the last day of the second complete fiscal quarter to commence after the Merger
Date during the continuance of an Event of Default and (b) subject to clause (a)
above, Category 4 on or prior to the delivery of the financial statements and
certificates required by Section 5.04(a) or 5.04(b) and Section 5.04(c) for the
second complete fiscal quarter to commence after the Merger Date.
"Assessment Rate" shall mean for any date the annual rate (rounded upwards,
if necessary, to the next 1/100 of 1%) most recently estimated by the
Administrative Agent as the then current net annual assessment rate that will be
employed in determining amounts payable by the Administrative Agent to the
Federal Deposit Insurance Corporation (or any successor thereto) for insurance
by such Corporation (or such successor) of time deposits made in dollars at the
Administrative Agent's domestic offices.
"Asset Sale" shall mean (a) the sale, transfer or other disposition by the
Borrower or any Subsidiary to any person, other than the Borrower or a wholly
owned Subsidiary that is a Guarantor, of (i) any outstanding capital stock of
any Subsidiary or (ii) any other assets of the Borrower or any Subsidiary (other
than inventory, obsolete or worn out assets and Permitted Investments, in each
case disposed of in the ordinary course of business) and (b) the issuance or
sale by any Subsidiary of any shares of its capital stock or other equity
securities of such Subsidiary, or any
<PAGE>
7
obligations convertible into or exchangeable for, or giving any person a right,
option or warrant to acquire such securities or such convertible or exchangeable
obligations, other than an issuance or sale to the Borrower or a wholly owned
Subsidiary.
"Assignment and Acceptance" shall mean an assignment and acceptance entered
into by a Lender and an assignee, and accepted by the Administrative Agent and
the Borrower, respectively, in the form of Exhibit B or such other form as shall
be approved by the Administrative Agent and the Borrower, respectively.
"Base CD Rate" shall mean the sum of (a) the product of (i) the Three-Month
Secondary CD Rate and (ii) Statutory Reserves and (b) the Assessment Rate.
"Board" shall mean the Board of Governors of the Federal Reserve System of
the United States of America.
"Book-Entry Shares" shall mean the Shares tendered pursuant to the Tender
Offer in book-entry form through the Book-Entry Transfer Facilities.
"Book-Entry Transfer Facilities" shall mean the registered clearing
corporations designated by Acquisition Co. as "Book-Entry Facilities" for the
purpose of the Tender Offer.
"Borrowing" shall mean a group of Loans of a single Type made by the
Lenders on a single date and as to which a single Interest Period is in effect.
"Borrowing Request" shall mean a request by the Borrower in accordance with
the terms of Section 2.03 and substantially in the form of Exhibit C.
"Breakage Event" shall have the meaning assigned to such term in Section
2.16.
"Business Day" shall mean any day other than a Saturday, Sunday or day on
which banks in New York City are authorized or required by law to close;
provided, however, that, when used in connection with a Eurodollar Loan, the
term "Business Day" shall also exclude any day on which banks are not open for
dealings in dollar deposits in the London interbank market.
<PAGE>
8
"Capital Expenditures" for any period shall mean (a) the sum of (i) net
property, plant and equipment a property rights and deferred license costs of
the Borrower and the Subsidiaries as of the last May of such period, in each
case determined on a consolidated basis in accordance with GAAP, and (ii)
depreciation and amortization of property, plant and equipment and property
rights and deferred license costs of the Borrower and the Subsidiaries for such
period, determined on a consolidated basis in accordance with GAAP minus (b) the
sum of (i) the book value as of the last day prior to such period, for the
Borrower and the Subsidiaries determined on a consolidated basis in accordance
with GAAP, of those items of property, plant and equipment, and property rights,
and deferred license costs attributable to licenses, held by the Borrower or a
Subsidiary throughout such period, (ii) any additions to "net property, plant
and equipment" during such period, for the Borrower and the Subsidiaries,
determined on a consolidated basis in accordance with GAAP, resulting from
expenditures of proceeds of insurance settlements in respect of lost, destroyed
or damaged assets, equipment or other property to the extent such expenditures
are made to replace or repair all or any part of such lost, destroyed or damaged
assets, equipment or other property within 12 months of the receipt of such
proceeds and (iii) any additions, net of minority interests, if any, to "net
property, plant and equipment" and "net property rights and deferred license
costs" arising from the Acquisition.
"Capital Lease Obligations" of any person shall mean the obligations of
such person to pay rent or other amounts under any lease of or other arrangement
conveying the right to use) real or personal property, or a combination thereof,
which obligations are required to be classified and accounted for as capital
leases on a balance sheet of such person under GAAP, and the amount of such
obligations shall be the capitalized amount thereof determined in accordance
with GAAP.
"Casualty" shall have the meaning assigned to such term in Section 9.16.
A "Chance in Control" shall be deemed to have occurred if (a) any person or
group (within the meaning of Rule 13d-5 of the Securities Exchange Act of 1934
as in effect on the date hereof) other than a Permitted Holder or a group
consisting solely of Permitted Holders shall own directly or indirectly,
beneficially or of record, shares
<PAGE>
9
representing (i) both more than 30% of the aggregate ordinary voting power
represented by the issued and outstanding capital stock of the Borrower and a
higher percentage of such aggregate ordinary voting power than is then
represented by shares owned by the Permitted Holders or (ii) more than 50% of
such aggregate ordinary voting power; (b) a majority of the seats (other than
vacant seats) on the board of directors of the Borrower shall at any time have
been occupied by persons who were neither (i) nominated by a Permitted Holder,
nor (ii) on the board of directors of the Borrower on the date of this Agreement
(the "Incumbent Board"); (c) any person or group other than a Permitted Holder
or a group consisting solely of Permitted Holders shall otherwise Control the
Borrower; or (d) a "change in control", however defined, shall occur under any
instrument evidencing other Indebtedness in a principal amount in excess of
$5,000,000 of the Borrower or any Subsidiary. For purposes of clause (b)(ii)
hereof, any individual who becomes a member of the board of directors of the
Borrower subsequent to the date of this Agreement, and whose election, or
nomination for election by the Borrower's stockholders, was approved by the
members of the board who are also members of the Incumbent Board (or so deemed
to be pursuant hereto) shall be deemed a member of the Incumbent Board;
provided, however, that any such individual whose initial assumption of office
occurs as a result of either an actual or threatened election contest (as such
terms are used in Rule 14a-11 of Regulation 14A under the Securities Exchange
Act of 1934) or other actual or threatened solicitation of proxies or consents
by or on behalf of a person other than the then board of directors of the
Borrower shall be deemed not to be member of the Incumbent Board.
"Charges" shall have the meaning assigned to such term in Section 9.09.
"Chattel Mortgages" shall mean the chattel mortgages, chattel mortgage
notes and pledge agreements related to the Puerto Rico Subsidiary's machinery
and equipment and other security documents executed and delivered by the Puerto
Rico Subsidiary pursuant to Section 4.02(g)(ii) or 5.11, all in form and
substance acceptable to the Lenders.
"Closing Date" shall mean the date of the first Credit Event.
<PAGE>
10
"Code" shall mean the Internal Revenue Code of 1986, as the same may be
amended from time to time.
"Collateral" shall mean all the "Collateral" as defined in any Security
Document and shall also include the Mortgaged Properties.
"Commitment" shall mean, with respect to any Lender, such Lender's
Revolving Credit Commitment and Term Loan Commitment.
"Commitment Fee" shall have the meaning assigned to such term in Section
2.05(a).
"Commitments" shall mean the Tender Facility Commitments, the Pre-Merger
Revolving Credit Commitments, the Term Facility Commitments, the Post-Merger
Revolving Credit Commitments and the L/C Commitment.
"Company" shall have the meaning assigned to such term in the preamble.
"Condemnation" shall have the meaning assigned to such term in Section
9.16.
"Condemnation Proceeds" shall have the meaning assigned to such term in
Section 9.16.
"'Confidential Information Memorandum" shall mean the Confidential
Information Memorandum of the Borrower dated August 1995.
"Control" shall mean the possession, directly or indirectly, of the power
to direct or cause the direction of the management or policies of a person,
whether through the ownership of voting securities, by contract or otherwise,
and "Controlling" and "Controlled" shall have meanings correlative thereto.
"Credit Event" shall have the meaning assigned to such term in Section
4.01.
"Current Assets" as of any date shall mean the total assets that would
properly be classified as consolidated current assets, excluding cash and
Permitted Investments, of the Borrower and the Subsidiaries as of such date in
accordance with GAAP.
<PAGE>
11
"Current Liabilities" as of any date shall mean the total liabilities that
would properly be classified as consolidated current liabilities, excluding all
Loans, of the Borrower and the Subsidiaries as of such date in accordance with
GAAP.
"Default" shall mean any event or condition that upon notice, lapse of time
or both would constitute an Event of Default.
"Defaulted Advance" shall mean, with respect to any Lender at any time, the
amount of any Loan required to have been made by such Lender to the Borrower
pursuant to Section 2.01 at or prior to such time that has not been so made as
of such time by such Lender or by the Administrative Agent on its behalf;
provided, however, any such amount arising in connection with the failure by the
Required Lenders to make Loans that would have been part of a single Borrowing
shall be deemed not to be a Defaulted Advance. In the event that a portion of a
Defaulted Advance shall be deemed made pursuant to Section 2.02(g), the
remaining portion of such Defaulted Advance shall continue to be considered a
Defaulted Advance. To the extent any portion of a Loan made by the
Administrative Agent on a Lender's behalf is not fully repaid by such Lender by
the close of the Business Day following the making of such Loan and the
Administrative Agent thereafter exercises its right pursuant to Section 2.02(c)
to require repayment of such advance by the Borrower, then effective at the time
of such repayment by the Borrower, a Defaulted Advance shall arise equal to the
amount of such repayment.
"Defaulting Lender" shall mean, at any time, any Lender that, at such time,
owes a Defaulted Advance.
"dollars" or "$" shall mean lawful money of the United States of America.
"Domestic Subsidiary" shall mean any Subsidiary organized under the laws of
the United States of America, any State or territory thereof, the District of
Columbia or Puerto Rico.
"EBITDA" for any period shall mean Net Income for such period plus, to the
extent deducted in computing Net Income, the sum of (a) income tax expense, (b)
Interest Expense and (c) depreciation and amortization expense minus, to the
extent added in computing Net Income, (i) any non-
<PAGE>
12
cash, non-recurring gains and (ii) any interest income, all as determined on a
consolidated basis with respect to the Borrower and the Subsidiaries in
accordance with GAAP; provided, however, that, for the purpose of determining
the Leverage Ratio and compliance with Section 6.15 as of any date prior to the
last day of the third fiscal quarter of 1996, EBITDA for any four quarter period
shall equal EBITDA for the period from and including the first day of the fourth
fiscal quarter of 1995 to and including the last day of the most recently
completed fiscal quarter period multiplied by a fraction the numerator of which
is four and the denominator of which is the number of complete fiscal quarters
since September 30, 1995.
"environment" shall mean ambient air, surface water and groundwater
(including potable water, navigable water and wetlands), the land surface or
subsurface strata, the workplace or as otherwise defined in any Environmental
Law.
"Environmental Claim" shall mean any written accusation, allegation, notice
of violation, claim, demand, order, directive, cost recovery action or other
cause of action by, or on behalf of, any Governmental Authority or any person
for damages, injunctive or equitable relief, Remedial Action costs, property
damage, natural resource damages, nuisance, pollution or for fines, penalties or
restrictions, resulting from or based upon: (a) the existence, or the
continuation of the existence, of a Release (including sudden or non-sudden,
accidental or non-accidental Releases); (b) exposure to any Hazardous Material;
(c) the presence, ___; handling, transportation, storage, treatment or disposal
of any Hazardous Material; or (d) the violation or alleged violation of any
Environmental Law or Environmental Permit.
"Environmental Law" shall mean any and all applicable treaties, laws,
rules, regulations, codes, ordinances, orders, decrees, judgments, injunctions
or binding agreements issued, promulgated by or entered into with any
Governmental Authority, relating in any way to the environment, preservation or
reclamation of natural resources, the management, Release or threatened Release
of any Hazardous Material or to health and safety matters, including the
Comprehensive Environmental Response, Compensation and Liability Act of 1980, as
amended by the Superfund Amendments and Reauthorization Act of 1986, 42 U.S.C.
ss.ss. 9601 et seq. (collectively "CERCLA"), the Solid
<PAGE>
13
Waste Disposal Act, as amended by the Resource Conservation and Recovery Act of
1976 and Hazardous and Solid Amendments of 1984, 42 U.S.C. ss.ss. 6901 et seq.
the Federal Water Pollution Control Act, as amended by the Clean Water Act of
1977, 33 U.S.C. ss.ss. 1251 et seq. the Clean Air Act of 1970, as amended 42
U.S.C. ss.ss. 7401 et seq. the Toxic Substances Control Act of 1976, 15 U.S.C.
ss.ss. 2601 et seq., the Occupational Safety and Health Act of 1970, as amended,
29 U.S.C. ss.ss. 651 et seq., the Emergency Planning and Community Right-to-Know
Act of 1986, 42 U.S.C. ss.ss. 11001 et seq. the Safe Drinking Water Act of 1974,
as amended, 42 U.S.C. ss.ss. 300(f) et seq. the Hazardous Materials
Transportation Act, 49 U.S.C. ss.ss. 1801 et sea., and any similar or
implementing state or local law, and all amendments or regulations promulgated
thereunder.
"Environmental Permit" shall mean any permit, approval, authorization,
certificate, license, variance, filing or permission required by or from any
Governmental Authority pursuant to any Environmental Law.
"Equity Issuance" shall mean any issuance or sale by the Borrower of any
shares of its capital stock or other equity securities of the Borrower, or any
obligations convertible into or exchangeable for, or giving any person a right,
option or warrant to acquire such securities or such convertible or exchangeable
obligations; provided, however, that Equity Issuance shall not include any of
the foregoing to the extent arising from or in connection with the issuance of
any stock rights, options or warrants to a director, officer or employee of the
Borrower or any Subsidiary under a duly instituted stock option plan and any
exercise thereof, to the extent the aggregate Net Proceeds thereof in any fiscal
year do not exceed $3,000,000.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
the same may be amended from time to time.
"ERISA Affiliate" shall mean any trade or business (whether or not
incorporated) that, together with the Borrower or the Company, is treated as a
single employer under Section 414(b) or (c) of the Code, or solely for purposes
of Section 302 of ERISA and Section 412 of the Code, is treated as a single
employer under Section 414 of the Code.
<PAGE>
14
"ERISA Event" shall mean (a) any "reportable event", as defined in Section
4043 of ERISA or the regulations issued thereunder, with respect to a Plan; (b)
the adoption of any amendment to a Plan that would require the provision of
security pursuant to Section 401(a)(29) of the Code or Section 307 of ERISA; (c)
the existence with respect to any Plan of an "accumulated funding deficiency"
(as defined in Section 412 of the Code or Section 302 of ERISA), whether or not
waived; (d) the filing pursuant to Section 412(d) of the Code or Section 303(d)
of ERISA of an application for a waiver of the minimum funding standard with
respect to any Plan; (e) the incurrence of any liability under Title IV of ERISA
with respect to the termination of any Plan or the withdrawal or partial
withdrawal of the Borrower or any of its ERISA Affiliates from any Plan or
Multiemployer Plan; (f) the receipt by the Borrower or any ERISA Affiliate from
the PBGC or a plan administrator of any notice relating to the intention to
terminate any Plan or Plans or to appoint a trustee to administer any Plan; (g)
the receipt by the Borrower or any ERISA Affiliate of any notice concerning the
imposition of Withdrawal Liability or a determination that a Multiemployer Plan
is, or is expected to be, insolvent or in reorganization, within the meaning of
Title IV of ERISA; (h) the occurrence of a "prohibited transaction" with respect
to which the Borrower or any of its Subsidiaries is a "disqualified person"
(within the meaning of Section 4975 of the Code) or with respect to which the
Borrower or any such Subsidiary could otherwise be liable, other than a
transaction for which a statutory exemption is available or for which an
administrative exemption has been obtained; and (i) any other event or condition
with respect to a Plan or Multiemployer Plan that would reasonably be expected
to result in liability or the Borrower.
"Eurodollar Borrowing" shall mean a Borrowing comprised of Eurodollar
Loans.
"Eurodollar Loan" shall mean any Eurodollar Revolving Loan or Eurodollar
Term Loan.
"Eurodollar Revolving Loan" shall mean any Revolving Loan bearing interest
at a rate determined by reference to the Adjusted LIBO Rate in accordance with
the provisions of Article II.
"Eurodollar Term Loan" shall mean any Term Loan bearing interest at a rate
determined by reference to the
<PAGE>
15
Adjusted LIBO Rate in accordance with the provisions of Article II.
"Event of Default" shall have the meaning assigned to such term in Article
VII.
"Excess Cash Flow" for any period shall mean EBITDA for such period minus
(a) Interest Expense for such period, to the extent paid in cash during such
period, (b) any prepayments of Term Loans made during such period and any
scheduled repayments of principal of Indebtedness made by the Borrower or any
Subsidiary in cash during such period, (c) permitted Capital Expenditures and
investments pursuant to Section 6.04(i) or 6.04(1) during such period that are
paid in cash, (d) taxes paid in cash by the Borrower and the Subsidiaries on a
consolidated basis during such period, (e) an amount equal to any increase in
Net Working Capital during such period (to the extent not taken into account in
clauses (a), (d) and (f) of this definition), (f) extraordinary cash expenses of
the Borrower and the Subsidiaries paid on a consolidated basis during such
period but not included in determining EBITDA, (g) cash disbursements incurred
by the Borrower in transactions described in Section 6.07(d) to the extent that
GAAP does not permit such disbursements to be accounted for as expenses and
requires such disbursements to be accounted for as a distribution to
shareholders and (h) cash dividends paid by the Borrower in accordance with
Section 6.06(a)(iv) plus (i) an amount equal to any decrease in Net Working
Capital during such period (to the extent not taken into account in clauses (a),
(d) and (f) of this definition) and (ii) extraordinary cash income of the
Borrower and the Subsidiaries received on a consolidated basis during such
period but not included in determining EBITDA.
"Facility" shall mean the Tender Facility, the Pre-Merger Revolving Credit
Facility, the Term Loan Facility or the Post-Merger Revolving Credit Facility.
"Federal Funds Effective Rate" shall mean, for any day, the weighted
average of the rates on overnight Federal funds transactions with members of the
Federal Reserve System arranged by Federal funds brokers, as published on the
next succeeding Business Day by the Federal Reserve Bank of New York, or, if
such rate is not so published for any day that is a Business Day, the average of
the quotations for the day for such transactions received by the
<PAGE>
16
Administrative Agent from three Federal funds brokers of recognized standing
selected by it.
"Fee Letter" shall mean the Amended and Restated Fee Letter dated June 6,
1995, between the Borrower and the Administrative Agent.
"Fees" shall mean the Commitment Fees, the Administrative Agent Fees, the
L/C Participation Fees and the Issuing Bank Fees.
"Financial Officer" of any corporation shall mean the chief financial
officer, principal accounting officer, Treasurer or Controller of such
corporation.
"Fixed Charge Coverage Ratio" as of any date shall mean the ratio of (a)(i)
EBITDA plus (ii) if such date is on or after the last day of the third fiscal
quarter of 1997, the Permitted Carryforward Amount, minus (iii) Capital
Expenditures, in each case for the most recent complete four fiscal quarter
period ended on or prior to such date, to (b)(i) Interest Expense plus (ii) the
aggregate scheduled payments of principal in respect of Indebtedness of the
Borrower or any Subsidiary, in each case for the most recent complete four
fiscal quarter period ended on or prior to such date. The "Permitted
Carryforward Amount" for any four fiscal quarter period (the "subject period")
shall mean the lowest of (A) 50% of the excess, if any, of (I) $25,000,000 over
(II) Capital Expenditures for the four fiscal quarter period (the "prior
Period") ending immediately prior to the commencement of the subject period, (B)
50% of the amount of additional Capital Expenditures that could have been made
in the prior period without violating Section 6.18 and (C) actual Capital
Expenditures for the subject period.
"Foreign Subsidiary" shall mean any Subsidiary other than a Domestic
Subsidiary.
"GAAP" shall mean United States generally accepted accounting principles
applied on a consistent basis.
"Governmental Authority" shall mean any Federal, state, local or foreign
government, court or governmental agency, authority, instrumentality or
regulatory body.
"Guarantee" of or by any person shall mean any obligation, contingent or
otherwise, of such person guaranteeing any Indebtedness of any other person (the
<PAGE>
17
"primary obligor") in any manner, whether directly or indirectly, and including
any obligation of such person, direct or indirect, (a) to purchase or pay (or
advance or supply funds for the purchase or payment of) such Indebtedness or to
purchase (or to advance or supply funds for the purchase of) any security for
the payment of such Indebtedness, (b) to purchase or lease property, securities
or services for the purpose of assuring the owner of such Indebtedness of the
payment of such Indebtedness or (c) to maintain working capital, equity capital
or any other financial statement condition or liquidity of the primary obligor
so as to enable the primary obligor to pay such Indebtedness; provided, however,
that the term Guarantee shall not include endorsements for collection or deposit
in the ordinary course of business.
"Guarantee Agreements" shall mean the Guarantee Agreement, substantially in
the form of Exhibit D, made by the Guarantors in favor of the Collateral Agent
for the benefit of the Secured Parties.
"Guarantor" shall mean any person from time to time party to the Guarantee
Agreement as a guarantor.
"Hazardous Materials" shall mean all explosive or radioactive substances or
wastes, hazardous or toxic substances or wastes, pollutants, solid, liquid or
gaseous wastes, including petroleum or petroleum distillates, asbestos or
asbestos containing materials, polychlorinated biphenyls ("PCBs") or
PCB-containing materials or equipment, radon gas, infectious or medical wastes
and all other substances or wastes of any nature regulated pursuant to any
Environmental Law.
"Health Care Laws" shall mean any and all applicable current and future
treaties, laws, rules, regulations, codes, ordinances, orders, decrees,
judgments, injunctions, notices or binding agreements issued, promulgated or
entered into by the Food and Drug Administration, the Health Care Financing
Administration, the Department of Health and Human Services ("HHS"), the Office
of Inspector General of HHS, the Drug Enforcement Administration or any other
Governmental Authority (including any professional licensing laws, certificate
of need laws and state reimbursement laws), relating in any way to the
manufacture, distribution, marketing, sale, supply or other disposition of any
product or service of the Borrower or any Subsidiary, the conduct of the
business of the
<PAGE>
18
Borrower or any Subsidiary, the provision of health care services generally, or
to any relationship among the Borrower and the Subsidiaries, on the one hand,
and their suppliers and customers and patients and other end-users of their
products and services, on the other hand.
"Indebtedness" of any person shall mean, without duplication, (a) all
obligations of such person for borrowed money or with respect to deposits or
advances of any kind, (b) all obligations of such person evidenced by bonds,
debentures, notes or similar instruments, (c) all obligations of such person
upon which interest charges are customarily paid, (d) all obligations of such
person under conditional sale or other title retention agreements relating to
property or assets purchased by such person, (e) all obligations of such person
issued or assumed as the deferred purchase price of property or services
(excluding trade accounts payable and accrued obligations incurred in the
ordinary course of business), (f) all Indebtedness of others secured by (or for
which the holder of such Indebtedness has an existing right, contingent or
otherwise, to be secured by) any Lien on property owned or acquired by such
person, whether or not the obligations secured thereby have been assumed, (g)
all Guarantees by such person of Indebtedness of others, (h) all Capital Lease
Obligations of such person, (i) all obligations of such person in respect of
Rate Protection Agreements add (j) all obligations of such person as an account
party in respect of letters of credit and bankers' acceptances (and the amount
of such Indebtedness shall equal the net payments accrued by such person in
accordance with GAAP); provided, however, that Indebtedness described in clause
(i) above shall be excluded for purposes of determining the Leverage Ratio and
the amount of Senior Debt. The Indebtedness of any person shall include the
Indebtedness of any partnership in which such person is a general partner.
"Indemnitee" shall have the meaning assigned to such term in Section 9.05.
"Indemnity, Subrogation and Contribution Agreement" shall mean the
Indemnity, Subrogation and Contribution Agreement, substantially in the form of
Exhibit E, among the Borrower, the Guarantors and the Collateral Agent.
"Information" shall have the meaning assigned to such term in Section 9.17.
<PAGE>
19
"Insurance Proceeds" shall have the meaning assigned to such term in
Section 9.16.
"Interest Expense" for any period shall mean the gross interest expense of
the Borrower and the Subsidiaries for such period determined on a consolidated
basis in accordance with GAAP, including (a) the amortization of debt discounts,
(b) the amortization of all fees (including fees with respect to interest rate
protection agreements) payable in connection with the incurrence of Indebtedness
to the extent included in interest expense and (c) the portion of any payments
or accruals with respect to Capital Lease Obligations allocable to interest
expense. For purposes of the foregoing, gross interest expense shall be
determined after giving effect in accordance with GAAP to any net payments made,
received or accrued by such person with respect to Rate Protection Agreements
entered into as a hedge against interest rate exposure.
"Interest Expense Coverage Ratio" as of any date shall mean the ratio of
(a) EBITDA to (b) Interest Expense, in each case for the most recent complete
four fiscal quarter period ended on or prior to such date.
"Interest Payment Date" shall mean, with respect to any Loan, (a) the last
day of the Interest Period applicable to the Borrowing of which such Loan is a
part and, in the case of a Eurodollar Borrowing with an Interest Period of more
than three months' duration, each day that would have been an Interest Payment
Date had successive Interest Periods of three months' duration been applicable
to such Borrowing, (b) the date of any prepayment of such Loan (other than the
prepayment pursuant to Section 2.12(a) of an ABR Revolving Loan) or conversion
of such Loan (if a Eurodollar Loan) to a Borrowing of a different Type and (c)
the Pre-Merger Facilities Maturity Date and the Post-Merger Facilities Maturity
Date.
"Interest Period" shall mean (a) as to any Eurodollar Borrowing, the period
commencing on the date of such Borrowing and ending on the numerically
corresponding day (or, if there is no numerically corresponding day, on the last
day) in the calendar month that is 1, 2, 3 or 6 months (or, if Interest Periods
of such duration shall be available from each Lender, 9 or 12 months)
thereafter, as the Borrower may elect and (b) as to any ABR Borrowing, the
period commencing on the date of such Borrowing and ending on the next
succeeding March 31, June 30, September 30 or
<PAGE>
20
December 31; provided, however, that if any Interest Period would end on a day
other than a Business Day, such Interest Period shall be extended to the next
succeeding Business Day unless, in the case of a Eurodollar Borrowing only, such
next succeeding Business Day would fall in the next calendar month, in which
case such Interest Period shall end on the next preceding Business Day.
"Issuing Bank" shall mean Chemical Bank, in its capacity as issuer of
Letters of Credit hereunder, and any successor Issuing Bank pursuant to Section
2.22(i).
"Issuing Bank Fees" shall have the meaning assigned to such term in
Section 2.05(c).
"L/C Commitment" shall mean the commitment of the Issuing Bank to issue
Letters of Credit pursuant to Section 2.22.
"L/C Disbursement" shall mean a payment or disbursement made by the
Issuing Bank pursuant to a Letter of Credit.
"L/C Exposure" shall mean at any time the sum of (a) the aggregate
undrawn amount of all outstanding Letters of Credit at such time plus (b) the
aggregate principal amount of all L/C Disbursements that have not yet been
reimbursed at such time. The L/C Exposure of any Revolving Credit Lender at any
time shall mean its Pro Rata Percentage of the aggregate L/C Exposure at such
time.
"L/C Participation Fee" shall have the meaning assigned to such term in
Section 2.05(c).
"Lenders" shall mean (a) the financial institutions listed on Schedule
2.01 (other than any such financial institution that has ceased to be a party
hereto pursuant to an Assignment and Acceptance) and (b) any financial
institution that has become a party hereto pursuant to an Assignment and
Acceptance.
"Letter of Credit" shall mean any letter of credit issued pursuant to
Section 2.22.
"Leverage Ratio" as of any date shall mean the ratio of (a) Total Debt
as of such date to (b) EBITDA for the most recent complete four fiscal quarter
period ended on or prior to such date.
<PAGE>
21
"LIBO Rate" shall mean, with respect to any Eurodollar Borrowing, the rate
(rounded upwards, if necessary, to the next 1/16 of 1%) at which dollar deposits
approximately equal in principal amount to the Administrative Agent's portion of
such Eurodollar Borrowing and for a maturity comparable to such Interest Period
are offered to the principal London office of the Administrative Agent in
immediately available funds in the London interbank market at approximately
11:00 a.m., London time, two Business Days prior to the commencement of such
Interest Period.
"Lien" shall mean, with respect to any asset, (a) any mortgage, deed of
trust, lien, pledge, encumbrance, charge or security interest in or on such
asset, (b) the interest of a vendor or a lessor under any conditional sale
agreement, capital lease or title retention agreement relating to such asset
(excluding any leases that constitute operating leases under GAAP) and (c) in
the case of securities, shall also include any purchase option, call or similar
right of a third party with respect to such securities (excluding any option,
call or similar right in respect of securities that are not issued and
outstanding).
"Loan Documents" shall mean this Agreement, the Letters of Credit, the
Guarantee Agreement, the Security Documents and the Indemnity, Subrogation and
Contribution Agreement.
"Loan Parties" shall mean the Borrower and the Guarantors.
"Loans" shall mean the Revolving Loans and the Term Loans.
"Margin Stock" shall have the meaning assigned to such term in Regulation
U.
"Material Adverse Effect" shall mean (a) a materially adverse effect on the
business, assets, operations or condition, financial or otherwise, of the
Borrower and the Subsidiaries, taken as a whole, (b) impairment of the ability
of the Borrower and the Subsidiaries, taken as a whole, to perform their
obligations under the Loan Documents in any material respect or (c) material
impairment of the rights of or benefits available to the Lenders under any Loan
Document. In determining whether any Casualty or Condemnation has
<PAGE>
22
resulted in a Material Adverse Effect, appropriate regard shall be had for any
related Insurance Proceeds or Condemnation Proceeds and the Borrowers or any
Subsidiary's application thereof.
"Maturity Date" shall mean the Pre-Merger Facilities Maturity Date or the
Post-Merger Facilities Maturity Date, as applicable.
"Maximum Rate" shall have the meaning assigned to such term in Section
9.09.
"Merger" shall mean the merger of Acquisition Co. with and into the
Company, in which the Company shall be the surviving corporation, to be effected
pursuant to the Merger Agreement.
"Merger Agreement" shall mean the Agreement and Plan of Merger dated as of
July 28, 1995, among the Borrower, Acquisition Co. and the Company.
"Merger Date" shall mean the date of consummation of the Merger.
"Mortgaged Properties" shall mean the owned real properties of the Loan
Parties from time to time.
"Mortgages" shall mean the mortgages, deeds of trust, assignments of
leases and rents and other security documents executed and delivered by any Loan
Party pursuant to Section 4.02(j) or 5.11, each substantially in the form of
Exhibit F.
"Multiemployer Plan" shall mean a multiemployer plan as defined in Section
4001(a)(3) of ERISA.
"Net Income" for any period shall mean the consolidated net income or loss
of the Borrower and the Subsidiaries for such period determined in accordance
with GAAP, excluding (a) (to the extent included in such consolidated net income
or loss) the income (or loss) of any person (other than any Subsidiary) in which
any other person (other than the Borrower or any wholly owned Subsidiary) has an
equity interest, except to the extent of the amount of dividends or other
distributions actually paid to the Borrower or any Subsidiary by such person
during such period, (b) the income (or loss) of any person accrued prior to the
date it becomes a Subsidiary or is merged into or
<PAGE>
23
consolidated with the Borrower or any Subsidiary or the date such person's
assets are acquired by the Borrower or any Subsidiary, (c) any after tax gains
or losses attributable to sales of assets not in the ordinary course of business
and (d) (to the extent not included in clauses (a) through (c) above) any
extraordinary gains or non-cash extraordinary losses determined in accordance
with GAAP.
"Net Proceeds" shall mean: (a) with respect to any Asset Sale, the cash
proceeds thereof net of (i) costs of sale (including payment of the outstanding
principal amount of, premium or penalty, if any, and interest on any
Indebtedness (other than Loans) required to be repaid under the terms thereof as
a result of such Asset Sale), (ii) taxes paid or payable in the year such Asset
Sale occurs or in the following year as a result thereof and (iii) amounts
provided as a reserve, in accordance with GAAP, against any liabilities under
any indemnification obligations associated with such Asset Sale (provided that,
to the extent and at the time any such amounts are released from such reserve,
such amounts shall constitute Net Cash Proceeds); provided, however, that, with
respect to any Asset Sale described in clause (a)(ii) of the definition thereof,
the Net Proceeds thereof shall equal zero except to the extent that such Net
Proceeds (determined without regard to this proviso), together with the Net
Proceeds of all Asset Sales described in clause (a)(ii) of the definition
thereof (determined without regard to this proviso) previously received during
the then-current fiscal year, exceeds $1,000,000; and (b) with respect to any
Equity Issuance or any Specified Debt Issuance, the cash proceeds thereof net of
underwriting commissions or placement fees and expenses directly incurred in
connection therewith.
"Net Working Capital" as of any date shall mean the excess as of such date
of (a) Current Assets over (b) Current Liabilities.
"Net Worth" as of any date shall mean Stockholder's Equity as of such date.
"New Lending Office" shall have the meaning assigned to such term in
Section 2.20.
"Non-U.S. Lender" shall have the meaning assigned to such term in Section
2.20.
<PAGE>
24
"Obligations" shall mean, collectively, (a) the obligation to pay (i) the
principal of and premium, if any, and interest (including interest accruing
during the pendency of any bankruptcy, insolvency, receivership or other similar
proceeding, regardless of whether allowed or allowable in such proceeding) on
the Loans when and as due, whether at maturity, by acceleration, upon one or
more dates set for prepayment or otherwise, (ii) all other monetary obligations,
including reimbursement obligations, fees, costs, expenses and indemnities,
whether primary, secondary, direct, contingent, fixed or otherwise (including
monetary obligations incurred during the pendency of any bankruptcy, insolvency,
receivership or other similar proceeding, regardless of whether allowed or
allowable in such proceeding), of the Loan Parties to the Secured Parties under
this Agreement and the other Loan Documents and (iii) any amount in respect of
the foregoing that the Administrative Agent, the Collateral Agent or any Lender,
in its sole discretion, may elect to pay or advance under this Agreement or any
other Loan Document on behalf of any Loan Party after the occurrence and during
the continuation of a Default or an Event of Default, (b) the reimbursement
obligations of the Borrower described in Section 6.01(i) and (c) unless
otherwise agreed upon in writing by the applicable Lender, all net monetary
obligations of the Borrower under each Rate Protection Agreement entered into
with any Lender to hedge interest rate exposure with respect to this Agreement.
"Other Taxes" shall have the meaning assigned to such term in Section
2.20.
"PBGC" shall mean the Pension Benefit Guaranty Corporation referred to and
defined in ERISA.
"Perfection Certificate" shall mean the Perfection Certificate
substantially in the form of Annex 1 to the Security Agreement.
"Permitted Foreign Company" shall mean (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 a 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 Borrower and Bayer AG (provided that, if
applicable local law would not permit 50% of the equity
<PAGE>
25
interest in such an entity to be held by the Borrower and Bayer AG, such
percentage may be as low as 49% if the Borrower and Bayer AG 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" shall mean (a)(i) the persons listed on Schedule 1.01,
(ii) any individual forming part of the senior management of the Borrower on the
date of this Agreement, (iii) any trust for the benefit of any of the foregoing
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
Borrower and the Subsidiaries and (c) Bayer AG and any of its subsidiaries.
"Permitted Investments" shall mean:
(a) direct obligations of, or obligations the principal of and
interest on which are unconditionally guaranteed by, the United States of
America (or by any agency thereof to the extent such obligations are backed
by the full faith and credit of the United States of America), in each case
maturing within 90 days from the date of acquisition thereof;
(b) investments in commercial paper maturing within 90 days from the
date of acquisition thereof and having, at such date of acquisition, credit
ratings that are not lower than "A2" if rated by Standard & Poor's or "P2"
if rated by Moody's Investors Service, Inc.;
(c) investments in certificates of deposit, banker's acceptances and
time deposits maturing within 90 days from the date of acquisition thereof
issued or guaranteed by or placed with, and money market deposit accounts
issued or offered by, any domestic office of (i) any commercial bank
organized under the laws of the United States of America or any State
thereof that has a combined capital and surplus and undivided profits of
not less than $25O,000,000 or (ii) any Lender;
(d) in the case of any Foreign Subsidiary, investments not in excess
of $5,000,000 in the
<PAGE>
26
aggregate in dollar-denominated certificates of deposit, banker's
acceptances and time deposits maturing within 90 days from the date of
acquisition thereof issued or guaranteed by or placed with, and money
market deposit accounts issued or offered by, any local office of (i) any
commercial bank organized under the laws of the United States of America or
any State thereof that has a combined capital and surplus and undivided
profits of not less than $250,000,000, (ii) any Lender or (iii) any local
commercial bank that is an Affiliate of any Lender; and
(e) other investment instruments approved in writing by the Required
Lenders and offered by financial institutions which have a combined capital
and surplus and undivided profits of not less than $250,000,000.
"person" shall mean any natural person, corporation, business trust, joint
venture, association, company, limited liability company, partnership or
government, or any agency or political subdivision thereof.
"Plan" shall mean any employee pension benefit plan (other than a
Multiemployer Plan) subject to the provisions of Title IV of ERISA or Section
412 of the Code or Section 307 of ERISA, and in respect of which the Borrower or
any ERISA Affiliate is (or, if such plan were terminated, would under Section
4069 of ERISA be deemed to be) an "employer" as defined in Section 3(5) of
ERISA.
"Pledge Agreement" shall mean the Pledge Agreement, substantially in the
form of Exhibit G, among Borrower, the Subsidiaries from time to time party
thereto and the Collateral Agent for the benefit of the Secured Parties.
"Post-Merger Facilities Maturity Date" shall mean December 31, 2001.
"Post-Merger Revolving Credit Commitment" shall mean, with respect to any
Lender, the commitment of such Lender to make Post-Merger Revolving Loans
hereunder as set forth on Schedule 2.01, or in the Assignment and Acceptance
pursuant to which such Lender assumed its Post-Merger Revolving Credit
Commitment, as applicable, as the same may be (a) reduced from time to time
pursuant to Section 2.09
<PAGE>
27
and (b) reduced or increased from time to time pursuant to assignments by or to
such Lender pursuant to Section 9.04.
"Post-Merger Revolving Credit Exposure" shall mean, with respect to any
Lender at any time, the aggregate principal amount at such time of all
outstanding Post-Merger Revolving Loans of such Lender, plus the aggregate
amount at such time of such Lender's L/C Exposure.
"Post-Merger Revolving Facility" shall have the meaning assigned to such
term in the preamble.
"Post-Merger Revolving Facility Borrowing" shall mean a Borrowing comprised
of Post-Merger Revolving Loans.
"Post-Merger Revolving Loan" shall mean a Loan made pursuant to Section
2.01(d).
"Pre-Merger Facilities Maturity Date" shall mean the earlier of the Merger
Date and the date 270 days after the Tender Offer Date.
"Pre-Merger Revolving Credit Commitment" shall mean, with respect to any
Lender, the commitment of such Lender to make Pre-Merger Revolving Loans
hereunder as set forth on Schedule 2.01, or in the Assignment and Acceptance
pursuant to which such Lender assumed its Pre-Merger Revolving Credit
Commitment, as applicable, as the same may be (a) reduced from time to time
pursuant to Section 2.09 and (b) reduced or increased from time to time pursuant
to assignments by or to such Lender pursuant to Section 9.04.
"Pre-Merger Revolving Facility" shall have the meaning assigned to such
term in the preamble.
"Pre-Merger Revolving Facility Borrowing" shall mean a Borrowing comprised
of Pre-Merger Revolving Loans.
"Pre-Merger Revolving Loan" shall mean a Loan made pursuant to Section
2.01(b).
"Prime Rate" shall mean the rate of interest per annum publicly announced
from time to time by the Administrative Agent as its prime rate in effect at its
principal office in New York City; each change in the Prime Rate shall be
effective on the date such change is publicly announced as being effective.
<PAGE>
28
"Pro Rata Percentage" of any Revolving Credit Lender at any time shall mean
the percentage of the Total Revolving Credit Commitment at such time represented
by such Lender's Revolving Credit Commitment at such time. In the event the
Revolving Credit Commitments shall have expired or been terminated, the Pro Rata
Percentages shall be determined on the basis of the Revolving Credit Commitments
most recently in effect, but giving effect to any assignments pursuant to
Section 9.04.
"Properties" shall have the meaning assigned to such term in Section 3.17.
"Puerto Rico Subsidiary" shall mean Danbury Pharmacal Puerto Rico, Inc., a
Delaware corporation.
"Rate Protection Agreement" shall mean any interest rate swap agreement,
interest rate cap agreement, interest rate collar agreement, currency exchange
agreement or similar agreement entered into by the Borrower or any Subsidiary to
provide protection against fluctuations in interest rates or currency exchange
rates.
"Register" shall have the meaning assigned to such term in Section 9.04.
"Regulation G" shall mean Regulation G of the Board as from time to time in
effect and all official rulings and interpretations thereunder or thereof.
"Regulation U" shall mean Regulation U of the Board as from time to time in
effect and all official rulings and interpretations thereunder or thereof.
"Regulation X" shall mean Regulation X of the Board as from time to time in
effect and all official rulings and interpretations thereunder or thereof.
"Release" shall mean any spilling, leaking, pumping, pouring, emitting,
emptying, discharging, injecting, escaping, leaching, dumping, disposing,
depositing, dispersing, emanating or migrating of any Hazardous Material in,
into, onto or through the environment.
"Remedial Action" shall mean: (a) "remedial action" as such term is defined
in CERCLA, 42 U.S.C. Section 9601(24); and (b) any other action required by any
<PAGE>
29
Governmental Authority or voluntarily undertaken to (x) cleanup, remove, treat,
abate or in any other way address any Hazardous Material in the environment; (y)
prevent the Release or threat of Release, or minimize the further Release of any
Hazardous Material so it does not migrate or endanger or threaten to endanger
public health, welfare or the environment; or (z) perform studies and
investigations in connection with, or as a precondition to, clause (x) or (y)
above.
"Repayment Date" shall have the meaning assigned to such term in Section
2.11.
"Required Lenders" at any time shall mean Lenders having Loans, L/C
Exposures and unused Revolving Credit Commitments and Term Loan Commitments at
such time representing at least a majority of the sum of all Loans outstanding,
L/C Exposures and unused Revolving Credit Commitments and Term Loan Commitments
at such time; provided, however, if any Lender shall be a Defaulting Lender at
such time, there shall be excluded from the determination of Required Lenders at
such time (a) the aggregate principal amount of the Loans made by such Lender
and outstanding at such time and (b) the aggregate Commitments of such Lender at
such time.
"Responsible Officer" of any corporation shall mean any senior executive
officer or Financial Officer of such corporation and any other officer or
similar official thereof responsible for the administration of the obligations
of such corporation in respect of this Agreement.
"Revolving Credit Borrowing" shall mean a Borrowing comprised of Revolving
Loans.
"Revolving Credit Commitment" shall mean, with respect to any Lender, (a)
prior to the Merger Date, the Pre-Merger Revolving Credit Commitment of such
Lender and (b) on and after the Merger Date, the Post-Merger Revolving Credit
Commitment.
"Revolving Credit Exposure" shall mean, with respect to any Lender at any
time, the aggregate principal amount at such time of all outstanding Revolving
Loans of such Lender, plus the aggregate amount at such time of such Lender's
L/C Exposure.
<PAGE>
30
"Revolving Credit Lender" at any time shall mean a Lender with a Revolving
Credit Commitment at such time.
"Revolving Loans" shall mean the Pre-Merger Revolving Loans and Post-Merger
Revolving Loans. Each Revolving Loan shall be a Eurodollar Revolving Loan or an
ABR Revolving Loan.
"Sale and Lease-Back Transaction" shall mean any arrangement, directly or
indirectly, whereby the Borrower or any Subsidiary shall sell or transfer to any
person any property, real or personal, used or useful in its business, whether
now owned or hereafter acquired, and thereafter the Borrower or any Subsidiary
shall rent or lease (for a term in excess of one year) such property, or other
property that it intends to use for substantially the same purpose or purposes
as the property being sold or transferred, from such person or any of its
Affiliates.
"Secured Parties" shall mean each Lender, the Issuing Bank, the
Administrative Agent, the Collateral Agent, the beneficiary of each
indemnification obligation on the part of any Loan Party contained in any Loan
Document and the successors and assigns of the foregoing.
"Security Agreement" shall mean the Security Agreement, substantially in
the form of Exhibit H, between the Borrower, the Subsidiaries from time to time
party thereto and the Collateral Agent for the benefit of the Secured Parties.
"Security Documents" shall mean the Mortgages, the Security Agreement, the
Pledge Agreement, the Chattel Mortgages and each of the security agreements,
mortgages and other instruments and documents executed and delivered pursuant to
any of the foregoing or pursuant to Section 5.11.
"Senior Debt" shall mean (a) all Indebtedness of the Borrower and the
Guarantors, other than Subordinated Debt, and (b) all Indebtedness of the
Subsidiaries that are not Guarantors.
"Shares" shall have the meaning assigned to such term in the preamble.
<PAGE>
31
"Specified Debt Issuance" shall mean the issuance by the Borrower of any
Indebtedness permitted by Section 6.01(g).
"Specified Guarantor" shall mean any Guarantor that would be a "significant
subsidiary" of the Borrower, determined in accordance with Regulation 1.01 of
Regulation S-X of the Securities and Exchange Commission as if the references to
"10 percent" in the definition thereof were references to "5 percent".
"Statutory Reserves" shall mean a fraction (expressed as a decimal), the
numerator of which is the number one and the denominator of which is the number
one minus the aggregate of the maximum reserve percentages (including any
marginal, special, emergency or supplemental reserves) expressed as a decimal
established by the Board and any other banking authority, domestic or foreign,
to which the Administrative Agent or any Lender (including any branch,
Affiliate, or other fronting office making or holding a Loan) is subject (a)
with respect to the Base CD Rate, for new negotiable nonpersonal time deposits
in dollars of over $100,000 with maturities approximately equal to three months,
and (b) with respect to the Adjusted LIBO Rate, for Eurocurrency Liabilities (as
defined in Regulation D of the Board). Such reserve percentages shall include
those imposed pursuant to such Regulation D. Eurodollar Loans shall be deemed to
constitute Eurocurrency Liabilities and to be subject to such reserve
requirements without benefit of or credit for proration, exemptions or offsets
that may be available from time to time to any Lender under such Regulation D.
Statutory Reserves shall be adjusted automatically on and as of the effective
date of any change in any reserve percentage.
"Stockholder's Equity" as of any date shall mean, on a consolidated basis
for the Borrower and the Subsidiaries, (a) the sum of capital stock taken at par
value, capital surplus and retained earnings as of such date, minus (b) treasury
stock and any minority interest in Subsidiaries as of such date, all determined
in accordance with GAAP.
"Subordinated Debt" means unsecured Indebtedness of the Borrower that (a)
does not have any scheduled payments of principal prior to the 180th day
following the Post-Merger Facilities Maturity Date, (b) the principal of which
is subordinated to the prior payment in full in cash
<PAGE>
32
of all the Obligations in a manner reasonably satisfactory to the Administrative
Agent and (c) otherwise has terms and conditions reasonably satisfactory to the
Administrative Agent.
"subsidiary" shall mean, with respect to any person (herein referred to as
the "parent"), any corporation, partnership, limited liability company,
association or other business entity (a) of which securities or other ownership
interests representing more than 50% of the equity or more than 50% of the
ordinary voting power or more than 50% of the general partnership interests are,
at the time any determination is being made, owned, controlled or held by the
parent or one or more other subsidiaries of the parent, or (b) that is or would
otherwise be treated on a consolidated basis with the parent under, and in
accordance with, GAAP.
"Subsidiary" shall mean any subsidiary of the Borrower, including (on and
after the Tender Offer Date) the Company and its subsidiaries.
"Taxes" shall have the meaning assigned to such term in Section 2.20.
"Tender Facility" shall have the meaning assigned to such term in the
preamble.
"Tender Facility Borrowing" shall mean a Borrowing comprised of Tender
Facility Loans.
"Tender Facility Commitment" shall mean, with respect to any Lender, the
commitment of such Lender to make a Tender Facility Loan hereunder as set forth
on Schedule 2.01, or in the Assignment and Acceptance pursuant to which such
Lender assumed its Tender Facility Commitment, as applicable, as the same may be
(a) reduced from time to time pursuant to Section 2.09 and (b) reduced or
increased from time to time pursuant to assignments by or to such Lender
pursuant to Section 9.04.
"Tender Facility Loan" shall mean a Loan made pursuant to Section
2.01(a).
"Tender Offer" shall have the meaning assigned to such term in the
preamble.
<PAGE>
33
"Tender Offer Date" shall mean the first date on which the Borrower or
Acquisition Co. accepts Shares for payment pursuant to the Tender Offer.
"Tender Offer Materials" shall mean the tender offer statement on Schedule
14D-1 filed by the Borrower with the Securities and Exchange Commission with
respect to the Tender Offer, and all amendments and supplements thereto that are
similarly filed.
"Term Borrowing" shall mean a Borrowing comprised of Tender Facility Loans
or Term Facility Loans.
"Term Facility" shall have the meaning assigned to such term in the
preamble.
"Term Facility Availability Period" shall mean the period from and
including the Merger Date to and including the date 120 days thereafter.
"Term Facility Borrowing" shall mean a Borrowing comprised of Term Facility
Loans.
"Term Facility Commitment" shall mean' with respect to any Lender, the
commitment of such Lender to make Term Facility Loans hereunder as set forth on
Schedule 2.01, or in the Assignment and Acceptance pursuant to which such Lender
assumed its Term Facility Commitment, as applicable, as the same may be (a)
reduced from time to time pursuant to Section 2.09 and (b) reduced or increased
from time to time pursuant to assignments by or to such Lender pursuant to
Section 9.04.
"Term Facility Loan" shall mean a Loan made pursuant to Section 2.01(c).
"Term Loan Commitment" shall mean, with respect to any Lender, (a) prior to
the Merger Date, the Tender Facility Commitment of such Lender and (b) on and
after the Merger Date, the Term Facility Commitment of such Lender.
"Term Loans" shall mean the Tender Facility Loans and the Term Facility
Loans. Each Term Loan shall be a Eurodollar Term Loan or an ABR Term Loan.
"Three-Month Secondary CD Rate" shall mean, for any day, the secondary
market rate for three-month certificates of deposit reported as being in effect
on such
<PAGE>
34
day (or, if such day shall not be a Business Day, the next preceding Business
Day) by the Board through the public information telephone line of the Federal
Reserve Bank of New York (which rate will, under the current practices of the
Board, be published in Federal Reserve Statistical Release H.15(519) during the
week following such day), or, if such rate shall not be so reported on such day
or such next preceding Business Day, the average of the secondary market
quotations for three-month certificates of deposit of major money center banks
in New York City received at approximately 10:00 a.m., New York City time, on
such day (or, if such day shall not be a Business Day, on the next preceding
Business Day) by the Administrative Agent from three New York City negotiable
certificate of deposit dealers of recognized standing selected by it.
"Total Debt" as of any date shall mean the total Indebtedness of the
Borrower and the Subsidiaries as of such date determined on a consolidated basis
in accordance with GAP .
"Total Revolving Credit Commitment" at any time shall mean the aggregate
amount of the Revolving Credit Commitments, as in effect at such time.
"Transaction Party" shall mean the Borrower, the Company and each
subsidiary of the Borrower or the Company.
"Transactions" shall have the meaning assigned to such term in Section
3.02.
"Transferee" shall have the meaning assigned to such term in Section 2.20.
"Type", when used in respect of any Loan or Borrowing, shall refer to the
Rate by reference to which interest on such Loan or on the Loans comprising such
Borrowing is determined. For purposes hereof, the term "Rate" shall include the
Adjusted LIBO Rate and the Alternate Base Rate.
"wholly owned Subsidiary" shall mean a Subsidiary the securities (except
for directors' qualifying shares) or other ownership interests representing 100%
of the equity or 100% of the ordinary voting power or 100% of the general
partnership interests of which are, at the time any determination is being made,
owned by the Borrower or one of
<PAGE>
35
more wholly owned Subsidiaries or by the Borrower and one or more wholly owned
Subsidiaries.
"Withdrawal Liability" shall mean liability to a Multiemployer Plan as a
result of a complete or partial withdrawal from such Multiemployer Plan, as such
terms are defined in Part I of Subtitle E of Title IV of ERISA.
"Work" shall have the meaning assigned to such term in Section 9.16.
SECTION 1.02. Terms Generally. The definitions in Section 1.01 shall apply
equally to both the singular and plural forms of the terms defined. Whenever the
context may require, any pronoun shall include the corresponding masculine,
feminine and neuter forms. The words "include", "includes" and "including" shall
be deemed to be followed by the phrase "without limitation". All references
herein to Articles, Sections, Exhibits and Schedules shall be deemed references
to Articles and Sections of, and Exhibits and Schedules to, this Agreement
unless the context shall otherwise require. Except as otherwise expressly
provided herein, (a) any reference in this Agreement to any Loan Document shall
mean such document as amended, restated, supplemented or otherwise modified from
time to time and (b) all terms of an accounting or financial nature shall be
construed in accordance with GAAP, as in effect from time to time; provided,
however, that for purposes of determining compliance with the covenants
contained in Article VI and the definition of "Applicable Percentage", all
accounting terms herein shall be interpreted and all accounting determinations
hereunder shall be made in accordance with GAAP as in effect or the date of this
Agreement and applied on a basis consistent with the application used in the
financial statements referred to in Section 3.05(a).
ARTICLE II
The Credits
SECTION 2.01. Commitments. Subject to the terms and conditions and relying
upon the representations and warranties herein set forth, each Lender agrees,
severally and not jointly, (a) to make a term loan to the Borrower on the Tender
Offer Date in an aggregate principal amount not to exceed the Tender Facility
Commitment of such Lender, (b) to make revolving loans to the Borrower, at any
time and
<PAGE>
36
from time to time on or after the Tender Offer Date and until the earlier of the
Pre-Merger Facilities Maturity Date and the termination of the Pre-Merger
Revolving Credit Commitment of such Lender in accordance with the terms hereof,
in an aggregate principal amount at any time outstanding not to exceed the
Pre-Merger Revolving Credit Commitment of such Lender, (c) to make term loans to
the Borrower, at any time and from time to time during the Term Facility
Availability Period, in an aggregate principal amount not to exceed the Term
Facility Commitment of such Lender and (d) to make revolving loans to the
Borrower, at any time and from time to time on or after the Merger Date and
until the earlier of the Post-Merger Facilities Maturity Date and the
termination of the Post-Merger Revolving Credit Commitment of such Lender in
accordance with the terms hereof, in an aggregate principal amount at any time
outstanding that will not result in (i) the Post-Merger Revolving Credit
Exposure of such Lender exceeding (ii) the Post-Merger Revolving Credit
Commitment of such Lender. Within the limits set forth in clauses (b) and (d) of
the preceding sentence, the Borrower may borrow, pay or prepay and reborrow
Pre-Merger Revolving Loans and Post-Merger Revolving Loans subject to the terms,
conditions and limitations set forth herein. Amounts paid or prepaid in respect
of Tender Facility Loans and Term Facility Loans may not be reborrowed.
SECTION 2.02. Loans. (a) Each Loan shall be made as part of a Borrowing
consisting of Loans made by the Lenders ratably in accordance with their
applicable Tender Facility Commitments, Pre-Merger Revolving Credit Commitments,
Term Facility Commitments or Post-Merger Revolving Credit Commitments; provided,
however, that the failure of any Lender to make any Loan shall not in itself
relieve any other Lender of its obligation to lend hereunder (it being
understood, however, that no Lender shall be responsible for the failure of any
other Lender to make any Loan required to be made by such other Lender). Except
for Loans deemed made pursuant to Section 2.02(f) or 2.02(g), the Loans
comprising any Borrowing shall be in an aggregate principal amount that is (i)
an integral multiple of $1,000,000 and, in the case of a Eurodollar Borrowing,
not less than $5,000,000 or (ii) equal to the remaining available balance of the
applicable Commitments.
(b) Subject to Sections 2.08 and 2.15, each Borrowing shall be comprised
entirely of AIR Loans or Eurodollar Loans, as the Borrower may request pursuant
to
<PAGE>
37
Section 2.03. Each Lender may at its option make any Eurodollar Loan by causing
any domestic or foreign branch or Affiliate of such Lender to make such Loan;
provided, however, that (i) any exercise of such option shall not affect the
obligation of the Borrower to repay such Loan in accordance with the terms of
this Agreement and (ii) the exercise of such option shall not result in an
increase in Statutory Reserves above those applicable to members of the Federal
Reserve System. Borrowings of more than one Type may be outstanding at the same
time; Provided, however, that the Borrower shall not be entitled to request any
Borrowing that, if made, would result in more than 15 Eurodollar Borrowings
outstanding hereunder at any time. For purposes of the foregoing, Borrowings
having different Interest Periods, regardless of whether they commence on the
same date, shall be considered separate Borrowings.
(c) Each Lender shall make each Loan to be made by it hereunder on the
proposed date thereof by wire transfer of immediately available funds to such
account in New York City as the Administrative Agent may designate not later
than 1:00 p.m., New York City time, and the Administrative Agent shall by 2:00
p.m., New York City time, credit the amounts so received to an account with the
Administrative Agent designated by the Borrower in the applicable Borrowing
Request, which account must be in the name of the Borrower, or, if a Borrowing
shall not occur on such date because any condition precedent herein specified
shall not have been met, return the amounts so received to the respective
Lenders.
(d) Unless the Administrative Agent shall have received notice from a
Lender prior to 1:00 p.m. on the date of any Borrowing that such Lender shall
not make available to the Administrative Agent such Lender's portion of such
Borrowing, the Administrative Agent may assume that such Lender has made such
portion available to the Administrative Agent on the date of such Borrowing in
accordance with paragraph (c) above and the Administrative Agent may, in
reliance upon such assumption, make available to the Borrower on such date a
corresponding amount. If the Administrative Agent shall have so made funds
available then, to the extent that such Lender shall not have made such portion
available to the Administrative Agent, the Borrower and such Lender severally
agree to repay to the Administrative Agent, in the case of the Borrower, within
one Business Day of demand, and in the case of such Lender, forthwith on demand,
such corresponding amount together with
<PAGE>
38
interest thereon, for each day from and including the date such amount is made
available to the Borrower until the date such amount is repaid to the
Administrative Agent at (i) in the case of the Borrower, the interest rate
applicable at the time to the Loans comprising such Borrowing and (ii) in the
case of such Lender, a rate determined by the Administrative Agent to represent
its cost of overnight or short-term funds (which determination shall be
conclusive absent manifest error). If such Lender shall repay to the
Administrative Agent such corresponding amount, such amount shall constitute
such Lender's Loan as part of such Borrowing for purposes of this Agreement. The
Administrative Agent will promptly notify the Borrower of any Lender's failure
to make available such Lender's portion of any Borrowing if such failure
continues unremedied for one Business Day.
(e) Notwithstanding any other provision of this Agreement, the Borrower
shall not be entitled to request any Eurodollar Borrowing if the Interest Period
requested with respect thereto would end after the Pre-Merger Facilities
Maturity Date or the Post-Merger Facilities Maturity Date, as applicable.
(f) If the Issuing Bank shall not have received from the Borrower the
payment required to be made by Section 2.22(e) within the time specified in such
Section, the Issuing Bank shall promptly notify the Administrative Agent of the
L/C Disbursement and the Administrative Agent shall promptly notify each
Revolving Credit Lender of such L/C Disbursement and its Pro Rata Percentage
thereof. Each Revolving Credit Lender shall pay by wire transfer of immediately
available funds to the Administrative Agent not later than 2:00 p.m., New York
City time, on such date (or, if such Revolving Credit Lender shall have received
such notice later than 12:00 noon, New York City time, on any day, not later
than 10:00 a.m., New York City time, on the immediately following Business Day),
an amount equal to such Lender's Pro Rata Percentage of such L/C Disbursement
(it being understood that such amount shall be deemed to constitute an ABR
Revolving Loan of such Lender and such payment shall be deemed to have reduced
the L/C Exposure), and the Administrative Agent shall promptly pay to the
Issuing Bank amounts so received by it from the Revolving Credit Lenders. The
Administrative Agent shall promptly pay to the Issuing Bank any amounts received
by it from the Borrower pursuant to Section 2.22(e) prior to the time that any
Revolving Credit Lender makes any payment pursuant to
<PAGE>
39
this paragraph (f); any such amounts received by the Administrative Agent
thereafter shall be promptly remitted by the Administrative Agent to the
Revolving Credit Lenders that shall have made such payments and to the Issuing
Bank, as their interests may appear. If any Revolving Credit Lenders shall not
have made its Pro Rata Percentage of such L/C Disbursement available to the
Administrative Agent as provided above, the Borrower and such Lender severally
to pay interest on such amount, for each day from and including the date such
amount is required to be paid in accordance with this paragraph (f) to but
excluding the date such amount is paid, to the Administrative Agent at (i) in
the case of the Borrower, a rate per annum equal to the interest rate applicable
to ABR Revolving Loans and (ii) in the case of such Lender, for the first such
day, the Federal Funds Effective Rate, and for each day thereafter, the
Alternate Base Rate. The Administrative Agent will promptly notify the Borrower
or any Lender's failure to make available such Lender's Pro Rata Percentage of
any L/C Disbursement if such failure continues unremedied for one Business Day.
(g) If the Borrower shall exercise its right of set-off pursuant to Section
9.06(b), the amount so set off shall be deemed to be a Eurodollar Revolving Loan
with an Interest Period of one month made by the applicable Defaulting Lender on
the date, and to the extent, of such set-off.
SECTION 2.03. Borrowing Procedure. In order to request a Borrowing (other
than a deemed Borrowing pursuant to Section 2.02(f) or 2.02(g), as to which this
Section 2.03 shall not apply), the Borrower shall telecopy (with receipt
confirmed telephonically) to the Administrative Agent a duly completed Borrowing
Request (a) in the case of a Eurodollar Borrowing, not later than 12:00 noon,
New York City time, three Business Days before a proposed Borrowing, and (b) in
the case of an ABR Borrowing, not later than 11:00 a.m., New York City time, on
the same Business Day as the proposed Borrowing is to be made. Each Borrowing
Request shall be irrevocable, shall be signed by or on behalf of the Borrower
and shall specify the following information: (i) whether being requested is to
be a Tender Facility Borrowing, a Term Facility Borrowing, a Pre-Merger
Revolving Facility Borrowing or a Post-Merger Revolving Facility Borrowing, and
whether such Borrowing is to be a Eurodollar Borrowing or an ABR Borrowing; (ii)
the date of such Borrowing (which shall be a Business Day); (iii) the
<PAGE>
40
number and location of the account to which funds are to be disbursed (which
shall be an account that complies with the requirements of Section 2.02(c));
(iv) the amount of such Borrowing; and (v) if such Borrowing is to be a
Eurodollar Borrowing, the Interest Period with respect thereto; provided,
however, that, notwithstanding any contrary specification in any Borrowing
Request, each requested Borrowing shall comply with the requirements set forth
in Section 2.02. If no election as to the Type of Borrowing is specified in any
such notice, then the requested Borrowing shall be an ABR Borrowing. If no
Interest Period with respect to any Eurodollar Borrowing is specified in any
such notice, then the Borrower shall be deemed to have selected an Interest
Period of one month's duration. The Administrative Agent shall promptly (and in
any event on the same day that the Administrative Agent receives such notice, if
received by 1:00 p.m., New York City time, on such day) advise the applicable
Lenders of any notice given pursuant to this Section 2.03 (and the contents
thereof), and of each Lender's portion of the requested Borrowing.
SECTION 2.04. Evidence of Debt; Repayment of Loans. (a) Subject to Section
9.06(b), the Borrower hereby unconditionally promises to pay to the
Administrative Agent for the account of each Lender (i) the principal amount of
each Tender Facility Loan of such Lender on the Pre-Merger Facilities Maturity
Date, (ii) the principal amount of each Term Facility Loan of such Lender as
provided in Section 2.11 and (iii) the then unpaid principal amount of each
Revolving Loin of such Lender on the applicable Maturity Date.
(b) Each Lender shall maintain in accordance with its usual practice an
account or accounts evidencing the indebtedness of the Borrower to such Lender
resulting from each Loan made by such Lender from time to time, including the
amounts of principal and interest payable and paid such Lender from time to time
under this Agreement.
(c) The Administrative Agent shall maintain accounts in which it shall
record (i) the amount of each Loan made hereunder, the Type thereof and the
Interest Period applicable thereto, (ii) the amount of any principal or interest
due and payable from the Borrower to each Lender hereunder and (iii) the amount
of any sum received by the Administrative Agent hereunder from the Borrower and
each Lender's share thereof.
<PAGE>
41
(d) The entries made in the accounts maintained pursuant to paragraphs (b)
and (c) above shall be prima facie evidence of the existence and amounts of the
obligations therein recorded; provided, however, that the failure of any Lender
or the Administrative Agent to maintain such accounts or any error therein shall
not in any manner affect the obligations of the Borrower to repay the Loans in
accordance with their terms, except to the extent that the correction of such
error results in a reduction of the Borrower's obligations hereunder.
(e) Notwithstanding any other provision of this Agreement, in the event any
Lender shall request and receive a promissory note payable to such Lender and
its registered assigns to evidence the Loans made by it hereunder, the interests
represented by such note shall at all times (including after any assignment of
all or part of such interests pursuant to Section 9.04) be represented by one or
more promissory notes payable to the payee named therein or its registered
assigns.
SECTION 2.05. Fees. (a) The Borrower shall pay to each Lender, through the
Administrative Agent, on the date of this Agreement and on the last day of
March, June, September and December in each year and on each date on which the
Tender Facility Commitment or the Pre-Merger Revolving Credit Commitment of such
Lender shall expire or be terminated as provided herein, a commitment fee (a
"Commitment Fee") equal to 0.375% per annum on the average daily unused amount
of the Tender Facility Commitment and Pre-Merger Revolving Loan Commitment of
such Lender during the preceding quarter (or other period commencing with the
date, on or prior to the date of this Agreement, on which the Borrower shall
accept the Commitments of such Lender or ending with the Pre-Merger Facilities
Maturity Date or the date on which the Commitments of such Lender shall expire
or be terminated). In addition, the Borrower shall, after the Merger Date, pay
to each Lender, through the Administrative Agent, on the last day of March,
June, September and December in each year and on the date on which the Term
Facility Commitment and the Post-Merger Revolving Credit Commitment of such
Lender shall expire or be terminated as provided herein, a Commitment Fee equal
to the Applicable Percentage per annum in effect from time to time on the
average daily unused amount of the Term Facility Commitment and the Post-Merger
Revolving Credit Commitment (taking into account such Lender's L/C Exposure as a
used amount thereof) of such Lender during the preceding quarter (or other
period
<PAGE>
42
commencing with the Merger Date or ending with the Post-Merger Facilities
Maturity Date or the date on which the Term Facility Commitment and the
Post-Merger Revolving Credit Commitment of such Lender shall expire or be
terminated). All Commitment Fees shall be computed on the basis of the actual
number of days elapsed in a year of 360 days. The Commitment Fee due to each
Lender shall commence to accrue on the date of acceptance by the Borrower of the
Commitment of such Lender and shall cease to accrue on the date on which the
Commitment of such Lender shall be terminated as provided herein.
Notwithstanding this paragraph (a), no Commitment Fee shall be due or payable to
any Lender that is a Defaulting Lender on the due date for payment of such
Commitment Fee.
(b) The Borrower shall pay to the Administrative Agent, for its own
account, the administrative fees set forth in the Fee Letter at the times and in
the amounts specified therein (the "Administrative Agent Fees").
(c) The Borrower shall pay (i) to each Revolving Credit Lender with a
Post-Merger Revolving Credit Commitment, through the Administrative Agent, on
the last day of March, June, September and December of each year (commencing
with the first such day following the Merger Date) and on the date on which the
Post-Merger Revolving Credit Commitment of such Lender shall be terminated
pursuant to Section 2.09 and no Letter of Credit shall remain outstanding, a fee
(an "L/C Participation Fee") calculated on such Lender's Pro Rata Percentage of
the average daily aggregate L/C Exposure during the preceding quarter (or other
period commencing with the Merger Date or ending with the Post-Merger Revolving
Facilities Maturity Date or the date on which all Letters of Credit have been
canceled or have expired and the Post-Merger Revolving Credit Commitments of all
Lenders shall expire or be terminated pursuant to Section 2.09) at a rate equal
to the Applicable Percentage from time to time used pursuant to Section 2.06 to
determine the interest rate on Revolving Credit Borrowings comprised of
Eurodollar Loans, and (ii) to the Issuing Bank on the last day of March, June,
September and December of each year (commencing with the first such day
following the Merger Date), a fronting fee of 0.125% per annum on the average
daily aggregate L/C Exposure during the preceding quarter (or other period
commencing with the Merger Date or ending with the Post-Merger Facilities
Maturity Date or the date on which all Letters of Credit have been canceled or
have expired and the Post-Merger
<PAGE>
43
Revolving Credit Commitments of all Lenders shall expire or be terminated) and,
with respect to each Letter of Credit, any other fees agreed upon by the
Borrower and the Issuing Bank plus, in connection with the issuance, amendment
or transfer of any Letter of Credit or any L/C Disbursement, the Issuing Bank's
customary documentary and processing charges, as disclosed to the Borrower prior
to the issuance of such Letter of Credit (the "Issuing Bank Fees"). All L/C
Participation Fees and Issuing Bank Fees shall be computed on the basis of the
actual number of days elapsed in a year of 360 days. Notwithstanding this
paragraph (c), no L/C Participation Fee shall be due or payable to any Lender
that is a Defaulting Lender on the due date for payment of such L/C
Participation Fee.
(d) The payment of Fees shall be subject to Section 9.06(b). All Fees shall
be paid on the dates due, in immediately available funds, to the Administrative
Agent for distribution, if and as appropriate, among the Lenders, except that
the Issuing Bank Fees shall be paid directly to the Issuing Bank. Once paid,
none of the Fees shall be refundable under any circumstances, except to the
extent such payment shall have been made as a consequence of manifest error.
SECTION 2.06. Interest on Loans. (a) Subject to the provisions of Section
2.07, the Loans comprising each ABR Borrowing shall bear interest (computed on
the basis of the actual number of days elapsed over a year of 365 or 366 days,
as the case may be, when the Alternate Base Rate is determined by reference to
the Prime Rate and over a year of 360 days at all other times) at a rate per
annum equal to the Alternate Base Rate plus the Applicable Percentage in effect
from time to time.
(b) Subject to the provisions of Section 2.07, the Loans comprising each
Eurodollar Borrowing shall bear interest (computed on the basis of the actual
number of days elapsed over a year of 360 days) at a rate per annum equal to the
Adjusted LIBO Rate for the Interest Period in effect for such Borrowing plus the
Applicable Percentage in effect from time to time.
(c) The payment of interest shall be subject to Section 9.06(b). Interest
shall accrue from and including the first day of an Interest Period to but
excluding the last day of such Interest Period. Interest on each Loan shall
accrue daily for the account of the holder from time
<PAGE>
44
to time of such Loan and shall be payable on the Interest Payment Dates
applicable to such Loan except as otherwise provided in this Agreement. The
applicable Alternate Base Rate or Adjusted LIBO Rate for each Interest Period or
day within an Interest Period, as the case may be, shall be determined by the
Administrative Agent, and such determination shall be conclusive absent manifest
error.
SECTION 2.07. Default Interest. If the Borrower shall default in the
payment of the principal of or interest on any Loan or any other amount becoming
due hereunder, by acceleration or otherwise, or under any other Loan Document,
the Borrower shall on demand from time to time pay interest, to the extent
permitted by law, on such defaulted amount to but excluding the date of actual
payment (after as well as before judgment) (a) in the case of overdue principal,
at the rate otherwise applicable to such Loan pursuant to Section 2.06 plus
2.00% per annum and (b) in all other cases, at a rate per annum (computed on the
basis of the actual number of days elapsed over a year of 365 or 366 days, as
the case may be, when determined by reference to the Prime Rate and over a year
of 360 days at all other times) equal to the sum of the Alternate Base Rate plus
2.00%.
SECTION 2.08. Alternate Rate of Interest. In the event, and on each
occasion, that on the day two Business Days prior to the commencement of any
Interest Period for a Eurodollar Borrowing the Administrative Agent shall have
determined in good faith that dollar deposits in the principal amounts of the
Loans comprising such Borrowing are not generally available in the London
interbank market, or that the rates at which such dollar deposits are being
offered will not adequately and fairly reflect the cost any Lender of making or
maintaining its Eurodollar Loan during such Interest Period, or that reasonable
means do not exist for ascertaining the Adjusted LIBO Rate, the Administrative
Agent will, as soon as practicable thereafter, give written notice of such
determination to the Borrower and the Lenders. In the event of any such
determination, until the Administrative Agent shall have advised the Borrower
and the Lenders that the circumstances giving rise to such notice no longer
exist, any request by the Borrower for a Eurodollar Borrowing pursuant to
Section 2.03 or 2.10 shall be deemed to be a request for an ABR Borrowing. The
Administrative Agent will promptly advise the Borrower once the circumstances
giving rise to any such notice no longer exist. Each determination by the
<PAGE>
45
Administrative Agent hereunder shall be conclusive absent manifest error.
SECTION 2.09. Termination and Reduction of Commitments. (a) The Tender
Facility Commitments shall automatically terminate at 5:00 p.m., New York City
time, on the Tender Offer Date. The Term Facility Commitments shall
automatically terminate at 5:00 p.m., New York City time, on the last day of the
Term Facility Availability Period. The Pre-Merger Revolving Credit Commitments
shall automatically terminate at 5:00 p.m., New York City time, on the
Pre-Merger Facilities Maturity Date. The Post-Merger Revolving Credit
Commitments shall automatically terminate on the Post-Merger Facilities Maturity
Date. The L/C Commitment shall automatically terminate at the earlier-of (i)
5:00 p.m., New York City time, on the sixth Business Day prior to the
Post-Merger Facilities Maturity Date and (ii) the termination of the Post-Merger
Revolving Credit Commitments. Notwithstanding the foregoing, (i) all the
Commitments shall automatically terminate at 5:00 p.m., New York City time, on
December 1, 1995, if the initial Credit Event shall not have occurred by such
time and (ii) the Post-Merger Revolving Credit Commitments and the Term Facility
Commitments shall automatically terminate at 5:00, New York City time, on the
Pre-Merger Facilities Maturity Date unless the Merger shall previously have been
consummated.
(b) Upon at least three Business nays' prior irrevocable telephonic notice
to the Administrative Agent (confirmed in writing), the Borrower may at any time
in whole permanently terminate, or from time to time in part permanently reduce,
the Tender Facility Commitments, the Term Facility Commitments, the Pre-Merger
Revolving Loan Commitments or the Post-Merger Revolving Credit Commitments;
provided, however, that (i) each partial reduction of the Commitments with
respect to any Facility shall be in an integral multiple of $1,000,000 and in a
minimum amount of $5,000,000 and (ii) the Total Revolving Credit Commitment
shall not be reduced to an amount that is less than the Aggregate Revolving
Credit Exposure at the time. Any payment of Revolving Loans pursuant to Section
2.13(a) or 2.13(c) shall automatically reduce the applicable Revolving Credit
Commitments by the amount of such payment.
(c) Each reduction in the Tender Facility Loan Commitments, the Term
Facility Loan Commitments, the Pre-Merger Revolving Loan Commitments or the
Post-Merger
<PAGE>
46
Revolving Credit Commitments hereunder shall be made ratably among the Lenders
in accordance with their respective applicable Commitments. The Borrower shall
pay to the Administrative Agent for the account of the applicable Lenders, on
the date of each termination or reduction, the Commitment Fees on the amount of
the Commitments so terminated or reduced accrued to but excluding the date of
such termination or reduction.
SECTION 2.10. Conversion and Continuation of Borrowings. The Borrower shall
have the right at any time upon prior irrevocable telephonic notice to the
Administrative Agent (confirmed promptly in writing) (a) not later than 11:00
a.m., New York City time, on the Business Day of the proposed conversion, to
convert any Eurodollar Borrowing into an ABR Borrowing, (b) not later than 12:00
noon, New York City time, three Business Days prior to conversion or
continuation, to convert any ABR Borrowing, into a Eurodollar Borrowing or to
continue any Eurodollar Borrowing as a Eurodollar Borrowing for an additional
Interest Period, and (c) not later than 12:00 noon, New York City time, three
Business Days prior to conversion, to convert the Interest Period with respect
to any Eurodollar Borrowing to another permissible Interest Period, subject in
each case to the following:
(i) each conversion or continuation shall be made pro rata among the
Lenders in accordance with the respective principal amounts of the Loans
comprising the converted or continued Borrowing;
(ii) if less than all the outstanding principal amount of any
Borrowing shall be converted or continued, then each resulting Borrowing
shall satisfy the limitations specified in Sections 2.02(a) and 2.02(b)
regarding the principal amount and maximum number of Borrowings of the
relevant Type;
(iii) each conversion shall be effected by each Lender and the
Administrative Agent by recording for the account of such Lender the new
Loan of such Lender resulting from such conversion and reducing the Loan
(or portion thereof) of such Lender being converted by an equivalent
principal amount;
(iv) if any Eurodollar Borrowing is converted at a time other than the
end of the Interest Period applicable thereto, the Borrower shall pay, upon
<PAGE>
47
demand, any amounts due to the Lenders pursuant to Section 2.16;
(v) unless each Lender otherwise agrees, any portion of a Borrowing
maturing or required to be repaid in less than one month from the date of
any conversion or continuation may not be converted into or continued as a
Eurodollar Borrowing;
(vi) any portion of a Eurodollar Borrowing that cannot be converted
into or continued as a Eurodollar Borrowing by reason of the immediately
preceding clause shall be automatically converted at the end of the
Interest Period in effect for such Borrowing into an ABR Borrowing;
(vii) no Interest Period may be selected for any Eurodollar Term
Borrowing that would end later than a Repayment Date occurring on or after
the first day of such Interest Period if, after giving effect to such
selection, the aggregate outstanding amount of (A) the Eurodollar Term
Borrowings with Interest Periods ending on or prior to such Repayment Date
and (B) the ABR Term Borrowings would not be at least equal to the
principal amount of Term Borrowings to be paid on such Repayment Date;
(viii) no Borrowing may be converted into, or continued as, a
Eurodollar Borrowing when any Default has occurred and is continuing and
the Administrative Agent or the Required Lenders have determined that such
conversion or continuation is not appropriate (and, instead, any such
Borrowing will be converted into or remain as an ABR Borrowing on the last
day of the Interest Period applicable thereto); and
(ix) no Borrowing may be converted into, or continued as, a Eurodollar
Borrowing when any Event of Default has occurred and is continuing, unless
the Required Lenders have determined that such conversion or continuation
is appropriate (and, instead, any such Borrowing will be converted into or
remain as an ABR Borrowing on the last day of the Interest Period
applicable thereto).
Each notice pursuant to this Section 2.10 shall refer to this Agreement and
specify (i) the identity and amount of the Borrowing that the Borrower requests
be
<PAGE>
48
converted or continued, (ii) whether such Borrowing is to be converted to or
continued as a Eurodollar Borrowing or an ABR Borrowing, (iii) if such notice
requests a conversion, the date of such conversion (which shall be a Business
Day) and (iv) if such Borrowing is to be converted to or continued as a
Eurodollar Borrowing, the Interest Period with respect thereto. If no Interest
Period is specified in any such notice with respect to any conversion to or
continuation as a Eurodollar Borrowing, the Borrower shall be deemed to have
selected an Interest Period of one months duration. The Administrative Agent
shall advise the Lenders of any notice given pursuant to this Section 2.10 and
of each Lender's portion of any converted or continued Borrowing. If the
Borrower shall not have given notice in accordance with this Section 2.10 to
continue any Borrowing into a subsequent Interest Period (and shall not
otherwise have given notice in accordance with this Section 2.10 to convert such
Borrowing), such Borrowing shall, at the end of the Interest Period applicable
thereto (unless repaid pursuant to the terms hereof), automatically be continued
into a new Interest Period as an ABR Borrowing, unless such Borrowing is
comprised of Loans deemed made pursuant to Section 2.02(g), in which case such
Borrowing shall be continued as a Eurodollar Borrowing with an Interest Period
of one month.
SECTION 2.11. Repayment of Term Facility Borrowings. (a) The Term Facility
Borrowings shall be
<PAGE>
49
repaid in 22 consecutive installments payable on the dates (each a "Repayment
Date") and in the amounts set forth below:
<TABLE>
<CAPTION>
Repayment Date Amount
-------------- ------------
<S> <C>
9/30/96 $5,000,000
12/31/96 $5,000,000
3/31/97 $7,500,000
6/30/97 $7,500,000
9/30/97 $7,500,000
12/31/97 $7,500,000
3/31/98 $10,000,000
6/30/98 $10,000,000
9/30/98 $10,000,000
12/31/98 $10,000,000
3/31/99 $12,500,000
6/30/99 $12,500,000
9/30/99 $12,500,000
12/31/99 $12,500,000
3/31/00 $15,000,000
6/30/00 $15,000,000
9/30/00 $15,000,000
12/31/00 $15,000,000
3/31/01 $15,000,000
6/30/01 $15,000,000
9/30/01 $15,000,000
12/31/01 $15,000,000
</TABLE>
(b) Each prepayment of Term Loans pursuant to this Section 2.11 shall be
subject to Section 9.06(b). Each prepayment of principal of Term Facility
Borrowings pursuant to Section 2.12 or 2.13 shall be applied to reduce pro rata
the scheduled payments of principal due under this Section 2.11 after the date
of such prepayment. To the extent not previously paid, all Term Facility
Borrowings shall be due and payable on the Post-Merger Facilities Maturity Date.
Each payment of Term Facility Borrowings pursuant to this Section 2.11 shall be
accompanied by accrued interest on the principal amount paid to but excluding
the date of payment.
SECTION 2.12. Optional Prepayment. (a) The Borrower shall have the right at
any time and from time to time to prepay any Borrowing, in whole or in part,
upon at least three Business Days' prior irrevocable telephonic notice (promptly
confirmed in writing) to the Administrative Agent before 11:00 a.m., New York
City time; provided,
<PAGE>
50
however, that each partial prepayment of Borrowings under any Facility shall be
in an amount that is an integral multiple of $1,000,000.
(b) Each notice of prepayment shall specify the prepayment date and the
principal amount of each Borrowing (or portion thereof) to be prepaid and shall
commit the Borrower to prepay such Borrowing by the amount stated therein on the
date stated therein. All prepayments under this Section 2.12 shall be subject to
Section 2.16 but otherwise without premium or penalty and shall be subject to
Section 9.06(b). All prepayments under this Section 2.12 (other than prepayments
of ABR Revolving Loans) shall be accompanied by accrued interest on the
principal amount being prepaid to but excluding the date of payment.
SECTION 2.13. Mandatory Prepayments. (a) Not later than 100 days after the
end of each fiscal year of Borrower, commencing with the fiscal year ending
December 28, 1996, the Borrower shall (i) calculate Excess Cash Flow for such
fiscal year and apply 75% of such Excess Cash Flow to prepay Borrowings in
accordance with paragraph (d) below and (ii) deliver to the Administrative Agent
a certificate signed by any Financial Officer of the Borrower setting forth the
amount, if any, of Excess Cash Flow for such period and the calculation thereof,
in reasonable detail.
(b) In the event of any termination of all the Pre-Merger Revolving Credit
Commitments or Post-Merger Revolving Credit Commitments, the Borrower shall
repay or prepay all the outstanding Pre-Merger Revolving Facility Borrowings or
Post-Merger Revolving Facility Borrowings, respectively, on the date of such
termination. In the event of any partial reduction of the Revolving Credit
Commitments, then (i) at or prior to the effective date of such reduction, the
Administrative Agent shall notify the Borrower and the Revolving Credit Lenders
of the Aggregate Revolving Credit Exposure after giving effect thereto and (ii)
if the Aggregate Revolving Credit Exposure would exceed the Total Revolving
Credit Commitment after giving effect to such reduction or termination, then the
Borrower shall, on the date of such reduction or termination, repay or prepay
Revolving Credit Borrowings or cash-collateralize outstanding Letters of Credit
in an amount sufficient to eliminate such excess.
<PAGE>
51
(c) The Borrower shall apply 100% of Net Proceeds promptly upon its receipt
thereof (or, if applicable, promptly upon any amounts being deemed to constitute
Net Proceeds as provided in the definition of such term) to prepay Borrowings in
accordance with paragraph (d) below; provided, however, that, in the case of Net
Proceeds from an Equity Issuance, (x) the Borrower shall only be required to
apply 50% of such Net Proceeds to the prepayment of Loans if immediately prior
to receipt thereof the Leverage Ratio is greater than 3.00 to 1.00 but not
greater than 4.00 to 1.00 and 25% of such Net Proceeds to the prepayment of
Loans if at the time of receipt thereof the Leverage Ratio is greater than 2.50
to 1.00 but not greater than 3.00 to 1.00 and (y) the Borrower shall not be
required to apply any of such Net Proceeds to the prepayment of Loans if at the
time of receipt thereof the Leverage Ratio is not greater than 2.50 to 1.00. The
Borrower shall deliver to the Administrative Agent (i) at the time of each
prepayment required under this paragraph (c), a certificate signed by a
Financial Officer of the Borrower setting forth in reasonable detail the
calculation of the amount of such prepayment and (ii) not later than the later
of (A) the date on which a Responsible Officer of the Borrower becomes aware
that such prepayment will be made and (B) the date that is three Business Days
prior to the date of such prepayment, a notice of such prepayment. Such
certificate shall also describe in reasonable detail the facts and circumstances
giving rise to the applicable prepayment event and a reasonably detailed
calculation of the Net Proceeds therefrom.
(d) Prepayments under paragraphs (a) and (c) above shall be applied first
against outstanding Term Loans and second against outstanding Revolving Loans.
Prepayments required under this Section 2.13 in respect of any Facility shall be
applied first against ABR Loans outstanding under such Facility and then against
Eurodollar Loans outstanding under such Facility.
(e) All prepayments under this Section 2.13 shall be subject to Section
2.16 but otherwise without premium or penalty and shall be subject to Section
9.06(b). All prepayments under this Section 2.13 shall be accompanied by accrued
interest on the principal amount being prepaid to but excluding the date of
payment.
SECTION 2.14. Reserve Requirements; Change in Circumstances. (a)
Notwithstanding any other provision of this Agreement, if after the date of this
Agreement any
<PAGE>
52
change in applicable law or regulation or in the interpretation or
administration thereof by any Governmental Authority charged with the
interpretation or administration thereof (whether or not having the force of
law) shall change the basis of taxation of payments to any Lender or the Issuing
Bank of the principal of or interest on any Eurodollar Loan made by such Lender
or any Fees or other amounts payable hereunder (other than changes in respect of
taxes imposed on the overall net income of such Lender or the Issuing Bank by
the jurisdiction in which such Lender or the Issuing Bank has its principal
office or by any political subdivision or taxing authority therein), or shall
impose, modify or deem applicable any reserve, special deposit or similar
requirement against assets of, deposits with or for the account of or credit
extended by any Lender or the Issuing Bank (except any such reserve requirement
that is fully reflected in the Adjusted LIBO Rate) or shall impose on such
Lender or the Issuing Bank or the London interbank market any other condition
affecting this Agreement or Eurodollar Loans made by such Lender or any Letter
of Credit or participation therein, and the result of any of the foregoing shall
be to increase the cost to such Lender or the Issuing Bank of making or
maintaining any Eurodollar Loan or increase the cost to any Lender of issuing or
maintaining any Letter of Credit or purchasing or maintaining a participation
therein or to reduce the amount of any sum received or receivable by such Lender
or the Issuing Bank hereunder (whether of principal, interest or otherwise) by
an amount deemed by such Lender or the Issuing Bank to be material, then the
Borrower shall pay to such Lender or the Issuing Bank, as the case may be, upon
demand such additional amount or amounts as shall compensate such Lender or the
Issuing Bank, as the case may be, for such additional costs incurred or
reduction suffered.
(b) If any Lender or the Issuing Bank shall determine that the adoption
after the date of this Agreement of any law, rule, regulation, agreement or
guideline regarding capital adequacy, or any change after the date hereof in any
such law, rule, regulation, agreement or guideline (whether such law, rule,
regulation, agreement or guideline has been adopted) or in the interpretation or
administration thereof by any Governmental Authority charged with the
interpretation or administration thereof, or compliance by any Lender (or any
lending office of such Lender) or the Issuing Bank or any Lender's or the
Issuing Bank's holding company with any request or directive regarding capital
adequacy (whether or not having the force
<PAGE>
53
of law) of any Governmental Authority has or would have the effect of reducing
the rate of return on such Lender's or the Issuing Bank's capital or on the
capital of such Lender's or the Issuing Bank's holding company, if any, as a
consequence of this Agreement or the Loans made or participation's in Letters of
Credit purchased by such Lender pursuant hereto or the Letters of Credit issued
by the Issuing Bank pursuant hereto to a level below that which such Lender or
the Issuing Bank or such Lender's or the Issuing Bank's holding company could
have achieved but for such applicability, adoption, change or compliance (taking
into consideration such Lenders or the Issuing Bank's policies and the policies
of such Lender's or the Issuing Bank's holding company with respect to capital
adequacy) by an amount deemed by such Lender or the Issuing Bank to be material,
then from time to time the Borrower shall pay to such Lender or the Issuing
Bank, as the case may be, such additional amount or amounts as shall compensate
such Lender or the Issuing Bank or such Lender's or the Issuing Bank's holding
company for any such reduction suffered.
(c) A certificate of a Lender or the Issuing Bank setting forth in
reasonable detail (i) the calculation of amount or amounts necessary to
compensate such Lender or the Issuing Bank or its holding company, as
applicable, as specified in paragraph (a) or (b) above and (ii) the facts and
circumstances giving rise to such compensation, shall be delivered to the
Borrower and shall be conclusive absent manifest error. The Borrower shall pay
such Lender or the Issuing Bank the amount shown as due on any such certificate
delivered by it within 10 Business Days after its receipt of the same.
(d) Failure or delay on the part of any Lender or the Issuing Bank to
demand compensation for any increased costs or reduction in amounts received or
receivable or reduction in return on capital shall not constitute a waiver of
such Lender's or the Issuing Bank's right to demand such compensation; provided,
however, that neither any Lender nor the Issuing Bank may demand compensation
under this Section 2.14 for any period commencing earlier than 60 days prior to
such demand. The protection of this Section 2.14 shall be available to each
Lender and the Issuing Bank regardless of any possible contention of the
invalidity or inapplicability of the law, rule, regulation, agreement, guideline
or other change or condition that shall have occurred or been imposed; provided,
however, that each Lender and the Issuing Bank shall take reasonable actions
<PAGE>
54
(which shall not require such Lender or the Issuing Bank to incur an
unreimbursed loss or unreimbursed cost or expense or otherwise take any action
precluded by legal or regulatory restrictions or suffer any disadvantage or
burden deemed by it to be significant) to avoid any need to claim compensation
under this Section 2.14 arising out of any reasonably foreseeable change in
circumstances.
(e) Without prejudice to the survival of any other agreement contained
herein, the agreements and obligations contained in this Section 2.14 shall
survive the payment in full of the principal of and interest on all Loans made
hereunder, the expiration or cancellation of all Letters of Credit and the
reimbursement of all draws thereunder.
SECTION 2.15. Change in Legality. (a) Notwithstanding any other provision
of this Agreement, if after the date of this Agreement, any change in any law or
regulation or in the interpretation thereof by any Governmental Authority
charged with the administration or interpretation thereof shall make it unlawful
for any Lender to make or maintain any Eurodollar Loan or to give effect to its
obligations as contemplated hereby with respect to any Eurodollar Loan, then, by
written notice to the Borrower and to the Administrative Agent:
(i) such Lender may declare that Eurodollar Loans shall not thereafter
(for the duration of such unlawfulness) be made by such Lender hereunder
(or be continued for additional Interest Periods and ABR Loans will not
thereafter (for such duration) be converted into Eurodollar Loans),
whereupon any request for a Eurodollar Borrowing (or to convert an ABR
Borrowing to a Eurodollar Borrowing or to continue a Eurodollar Borrowing,
for an additional Interest Period) shall, as to such Lender only, be deemed
a request for an ABR Loan (or a request to continue an ABR Loan as such for
an additional Interest Period or to convert a Eurodollar Loan into an ABR
Loan, as the case may be), unless such declaration shall be subsequently
withdrawn; and
(ii) such Lender may require that all outstanding Eurodollar Loans
made by it be converted to ABR Loans, in which event all such Eurodollar
Loans shall be automatically converted to ABR Loans as of the
<PAGE>
55
effective date of such notice as provided in paragraph (b) below (and
Section 2.16 shall not apply to any such automatic conversion).
In the event any Lender shall exercise its rights under clause (i) or (ii)
above, all payments and prepayments of principal that would otherwise have been
applied to repay the Eurodollar Loans that would have been made by such Lender
or the converted Eurodollar Loans of such Lender shall instead be applied to
repay the ABR Loans made by such Lender in lieu of, or resulting from the
conversion of, such Eurodollar Loans.
(b) For purposes of this Section 2.15, a notice to the Borrower by any
Lender shall be effective as to each Eurodollar Loan made by such Lender, if
lawful, on the last day of the Interest Period currently applicable to such
Eurodollar Loan; in all other cases such notice shall be effective on the date
of receipt by the Borrower.
SECTION 2.16. Indemnity. The Borrower shall indemnify each Lender against
any loss or expense that such Lender may sustain or incur as a direct
consequence of (a) any event, other than a default by such Lender in the
performance of its obligations hereunder, which results in (i) such Lender
receiving or being deemed to receive any amount on account of the principal of
any Eurodollar Loan prior to the end of the Interest Period in effect therefor,
(ii) the conversion of any Eurodollar Loan to an ABR Loan, or the conversion of
the Interest Period with respect to any Eurodollar Loan, in each case other than
on the last day of the Interest Period in effect therefor, or (iii) any
Eurodollar Loan to be made by such Lender (including any Eurodollar Loan to be
made pursuant to a conversion or continuation under Section 2.10) not being made
after notice of such Loan shall have been given by the Borrower hereunder (any
of the events referred to in this clause (a) being called a "Breakage Event") or
(b) any default in the making of any payment or prepayment required to be made
hereunder. In the case of any Breakage Event, such loss shall include an amount
equal to the excess, as reasonably determined by such Lender, of (i) its cost of
obtaining funds for the Eurodollar Loan that is the subject of such Breakage
Event for the period from the date of such Breakage Event to the last day of the
Interest Period in effect (or that would have been in effect) for such Loan over
(ii) the amount of interest likely to be realized by such Lender in redeploying
the funds released or not utilized by reason of such
<PAGE>
56
Breakage Event for such period. A certificate of any Lender setting forth in
reasonable detail (i) the calculation of any amount or amounts which such Lender
is entitled to receive pursuant to this Section 2.16 and (ii) the facts and
circumstances giving rise to such entitlement, shall be delivered to the
Borrower (in the case of a claim under clause (a) above, within 60 days of the
applicable Breakage Event) and shall be conclusive absent manifest error.
Without prejudice to the survival of any other agreement contained herein, the
agreements and obligations contained in this Section 2.16 shall survive the
payment in full of the principal of and interest on all Loans made hereunder,
the expiration or cancellation of all Letters of Credit and the reimbursement of
all draws thereunder.
SECTION 2.17. Pro Rata Treatment. Except as required under Section 2.15 and
subject to Section 9.06(b), each Borrowing, each payment or prepayment of
principal of any Borrowing, each payment of interest on the Loans, each payment
of the Commitment Fees, each reduction of Commitments and each refinancing of
any Borrowing with, conversion of any Borrowing to or continuation of any
Borrowing as a Borrowing of any Type shall be allocated pro rata among the
Lenders in accordance with their respective applicable Commitments (or, if such
Commitments shall have expired or been terminated, in accordance with the
respective principal amounts of their outstanding Loans). In computing any
Lender's portion of any Borrowing to be made hereunder, the Administrative Agent
may, in its discretion, round each Lender's percentage of such Borrowing to the
next higher or lower whole dollar amount.
SECTION 2.18. Sharing of Setoffs. If any Lender shall, through the exercise
of a right of banker's lien, setoff or counterclaim against the Borrower, or
pursuant to a secured claim under Section 506 of Title 11 of the United States
Code or other security or interest arising from, or in lieu of, such secured
claim, received by such Lender under any applicable bankruptcy, insolvency or
other similar law or otherwise, or by any other means, obtain pavement
(voluntary or involuntary) in respect of any Loan or Loans or L/C Disbursement
as a result of which the unpaid principal portion of its Term Loans and
Revolving Loans and participations in L/C Disbursements shall be proportionately
less than the unpaid principal portion of the Term Loans and Revolving Loans and
participations in L/C Disbursements of any other Lender, it shall be deemed
simultaneously to have purchased from such other Lender at face value, and shall
<PAGE>
57
promptly pay to such other Lender the purchase price for, a participation in the
Term Loans and Revolving Loans and L/C Exposure, as the case may be of such
other Lender, so that the aggregate unpaid principal amount of the Term Loans
and Revolving Loans and L/C Exposure and participations in Term Loans and
Revolving Loans and L/C Exposure held by each Lender shall be in the same
proportion to the aggregate unpaid principal amount of all Term Loans and
Revolving Loans and L/C Exposure then outstanding as the principal amount of its
Term Loans and Revolving Loans and L/C Exposure prior to such exercise of
banker's lien, setoff or counterclaim or other event was to the principal amount
of all Term Loans and Revolving Loans and L/C Exposure outstanding prior to such
exercise of banker's lien, setoff or counterclaim or other event; provided,
however, that if any such purchase or purchases or adjustments shall be made
pursuant to this Section 2.18 and the payment giving rise thereto shall
thereafter be recovered, such purchase or purchases or adjustments shall be
rescinded to the extent of such recovery and the purchase price or prices or
adjustment restored without interest. The Borrower expressly consents to the
foregoing arrangements and agrees that any Lender holding a participation in a
Term Loan or Revolving Loan or L/C Disbursement deemed to have been so purchased
may exercise any and all rights of banker's lien, setoff or counterclaim with
respect to any and all moneys owing by the Borrower to such Lender by reason
thereof as fully as if such Lender had made a Loan directly to the Borrower in
the amount of such participation.
SECTION 2.19. Payments (a) Subject to Section 9.06(b), the Borrower shall
make each payment (including principal of or interest on any Borrowing or any
L/C Disbursement or any Fees or other amounts) hereunder and under any other
Loan Document not later than 1:00 p.m., New York City time, on the date when due
in immediately available dollars, without setoff, defense or counterclaim (but
without prejudice, waiver or effect of estoppel with respect to any defense or
counterclaim). Each such payment (other than Issuing Bank Fees, which shall be
paid directly to the Issuing Bank) shall be made to the Administrative Agent at
its offices at 270 Park Avenue, New York, New York.
(b) Whenever any payment (including principal of or interest on any
Borrowing, any Fees or any other amounts) hereunder or under any other Loan
Document shall become due, or otherwise would occur, on a day that is not a
Business Day, such payment may be made on the next succeeding Busi-
<PAGE>
58
ness Day, and such extension of time shall in such case be included in the
computation of interest or Fees, if applicable.
SECTION 2.20. Taxes. (a) Any and all payments by the Borrower hereunder and
under any other Loan Document shall be made, in accordance with Section 2.19,
free and clear of and without deduction for any and all current or future taxes,
levies, imposts, deductions, charges or withholdings, and all liabilities with
respect thereto, excluding (i) income taxes imposed on the net income of the
Administrative Agent, any Lender or the Issuing Bank (or any transferee or
assignee thereof, including a participation holder (any such entity a
"Transferee")) and (ii) franchise taxes imposed on the net income of the
Administrative Agent, any Lender or the Issuing Bank (or Transferee), in each
case by the jurisdiction (A) under the laws of which the Administrative Agent,
such Lender or the Issuing Bank (or Transferee) is organized or any political
subdivision thereof or (B) in which the applicable lending office of the
Administrative Agent, such Lender or the Issuing Bank (or any Transferee) is
located or any political subdivision thereof (all such nonexcluded taxes,
levies, imposts, deductions, charges, withholdings and liabilities, collectively
or individually, being called "Taxes"). If the Borrower shall be required to
deduct any Taxes from or in respect of any sum payable hereunder or under any
other Loan Document to the Administrative Agent, any Lender or the Issuing Bank
(or any Transferee), (i) the sum payable shall be increased by the amount (an
"additional amount") necessary so that after making all required deductions
(including deductions applicable to additional sums payable under this Section
2.20) the Administrative Agent, such Lender or the Issuing Bank (or Transferee),
as the case may be, shall receive an amount equal to the sum it would have
received had no such deductions been made, (ii) the Borrower shall make such
deductions and (iii) the Borrower shall pay the full amount deducted to the
relevant Governmental Authority in accordance with applicable law.
(b) In addition, the Borrower agrees to bear and shall pay to the relevant
Governmental Authority in accordance with applicable law any current or future
stamp or documentary taxes or any other excise or property taxes, charges or
similar levies (including mortgage recording taxes and similar fees) that arise
from any payment made hereunder or under any other Loan Document or from the
execution, delivery or registration of, or otherwise with
<PAGE>
59
respect to, this Agreement or any other Loan Document ("Other Taxes').
(c) The Borrower shall indemnify the Administrative Agent, each Lender and
the Issuing Bank (or Transferee) for the full amount of Taxes and Other Taxes
paid by the Administrative Agent, such Lender or the Issuing Bank (or
Transferee), as the case may be, and any liability (including penalties,
interest and expenses (including reasonable attorney's fees and expenses))
arising therefrom or with respect thereto, whether or not such Taxes or Other
Taxes were correctly or legally asserted by the relevant Governmental Authority.
A certificate as to the amount of such payment or liability prepared by the
Administrative Agent, a Lender or the Issuing Bank (or Transferee), or the
Administrative Agent on its behalf, and setting forth in reasonable detail (i)
the calculation of and (ii) the facts and circumstances giving rise to such
payment or liability, absent manifest error, shall be final, conclusive and
binding for all purposes. Such indemnification shall be made within 30 days
after the date the Administrative Agent, any Lender or the Issuing Bank (or
Transferee), as the case may be, makes written demand therefor. Neither any
Lender nor the Issuing Bank (or Transferee) may make any claim for
indemnification more than 180 days after such Lender or the Issuing Bank (or
Transferee), as applicable, knows of the payment or liability with respect to
which such indemnification is to be sought (such 180 days to be reduced to 60
days if at the time of such claim for indemnification such Lender (or
Transferee) holds Loans or participations therein or the Issuing Bank has
outstanding Letters of Credit, as applicable).
(d) If the Administrative Agent, a Lender or the Issuing Bank (or
Transferee) receives a refund in respect of any Taxes or Other Taxes as to which
it has been indemnified by the Borrower or with respect to which the Borrower
has paid additional amounts pursuant to this Section 2.20, it shall within 30
days from the date of such receipt pay over such refund to the Borrower (but
only to the extent of indemnity payments made, or additional amounts paid, by
the Borrower under this Section 2.20 with respect to the Taxes or Other Taxes
giving rise to such refund), net of all out-of-pocket expenses of the
Administrative Agent, such Lender or the Issuing Bank (or Transferee) and
without interest (other than interest paid by the relevant Governmental
Authority with respect to such refund); provided, however, that the Borrower,
upon the request of the Administrative
<PAGE>
60
Agent, such Lender or the Issuing Bank (or Transferee), shall repay the amount
paid over to the Borrower (plus penalties, interest or other charges) to the
Administrative Agent, such Lender or the Issuing Bank (or Transferee) in the
event the Administrative Agent, such Lender or the Issuing Bank (or Transferee)
is required to repay such refund to such Governmental Authority.
(e) As soon as practicable after the date of any payment of Taxes or Other
Taxes by the Borrower to the relevant Governmental Authority, the Borrower shall
deliver to the Administrative Agent, at its address referred to in Section 9.01,
the original or a certified copy of a receipt issued by such Governmental
Authority evidencing payment thereof.
(f) Without prejudice to the survival of any other agreement contained
herein, the agreements and obligations contained in this Section 2.20 shall
survive the payment in full of the principal of and interest on all Loans made
hereunder, the expiration or cancellation of all Letters of Credit and the
reimbursement of all draws thereunder.
(g) Each Lender (or Transferee) that is organized under the laws of a
jurisdiction other than the United States, any State thereof or the District of
Columbia (a "Non-U.S. Lender") shall deliver to the Borrower and the
Administrative Agent two copies of either United States Internal Revenue Service
Form 1001 or Form 4224, or, in the case of a Non-U.S. Lender claiming exemption
from U.S. Federal withholding tax under Section 871(h) or 881(c) of the Code
with respect to payments of "portfolio interest", Form W-8, or any subsequent
versions thereof or successors thereto (and, if such Non-U.S. Lender delivers a
Form W-8, certificate representing that such Non-U.S. Lender is not a bank for
purposes of Section 881(c) of the Code, is not a 10-percent shareholder (within
the meaning of Section 871(h)(3)(B) of the Code) of the Borrower and is not a
controlled foreign corporation related to the Borrower (within the meaning of
Section 864(d)(4) of the Code)), properly completed and duly executed by such
Non-U.S. Lender claiming complete exemption from, or reduced rate of, U.S.
Federal withholding tax on payments by the Borrower under this Agreement and the
other Loan Documents. Such forms shall be delivered by each Non-U.S. Lender on
or before the date it becomes a party to this Agreement (or, in the case of a
Transferee that is a participation holder, on or before
<PAGE>
61
the date such participation holder becomes a Transferee hereunder) and on or
before the date, if any, such Non-U.S. Lender changes its applicable lending
office by designating a different lending office (a "New Lending Office"). In
addition, each Non-U.S. Lender shall deliver such forms promptly upon the
obsolescence or invalidity of any form previously delivered by such Non-U.S.
Lender. Notwithstanding any other provision of this paragraph (g), a Non-U.S.
Lender shall not be required to deliver any form pursuant to this paragraph (g)
that such Non-U.S. Lender is not legally able to deliver.
(h) The Borrower shall not be required to indemnify any Non-U.S. Lender or
to pay any additional amounts to any Non-U.S. Lender, in respect of United
States Federal withholding tax pursuant to paragraph (a) or (c) above to the
extent that (i) the obligation to withhold amounts with respect to United States
Federal withholding tax existed on the date such Non-U.S. Lender became a party
to this Agreement (or, in the case of a Transferee that is a participation
holder, on the date such participation holder became a Transferee hereunder) or,
with respect to payments to a New Lending Office, the date such Non-U.S. Lender
designated such New Lending Office with respect to a Loan; provided, however,
that this paragraph (h) shall not apply (x) to any Transferee or New Lending
Office that becomes a Transferee or New Lending Office as a result of an
assignment, participation, transfer or designation made at the request of the
Borrower and (y) to the extent the indemnity payment or additional amounts any
Transferee, or any Lender (or Transferee), acting through a New Lending Office,
would be entitled to receive (without regard to this paragraph (h)) do not
exceed the indemnity payment or additional amounts that the person making the
assignment, participation or transfer to such Transferee, or Lender (or
Transferee) making the designation of such New Lending Office, would have been
entitled to receive in the absence of such assignment, participation, transfer
or designation or (ii) the obligation to pay such additional amounts would not
have arisen but for a failure by such Non-U.S. Lender to comply with the
provisions of paragraph (g) above.
(i) Nothing contained in this Section 2.20 shall require any Lender or the
Issuing Bank (or any Transferee) or the Administrative Agent to make available
any of its tax returns (or any other information that it deems to be
confidential or proprietary).
<PAGE>
62
SECTION 2.21. Assignment of Commitments under Certain Circumstances; Duty
To Mitigate. (a) In the event (i) any Lender or the Issuing Bank delivers a
certificate requesting compensation pursuant to Section 2.14, (ii) any Lender or
the Issuing Bank delivers a notice described in Section 2.15, (iii) the Borrower
is required to pay any additional amount to any Lender or the Issuing Bank or
any Governmental Authority on account of any Lender or the Issuing Bank pursuant
to Section 2.20 or (iv) the Administrative Agent notifies the Borrower of any
Lender's failure to fund as provided in Section 2.02(d) or 2.02(f), the Borrower
may, at its sole expense and effort, upon notice to such Lender or the Issuing
Bank and the Administrative Agent, require such Lender or the Issuing Bank to
transfer and assign, without recourse (in accordance with and subject to the
restrictions contained in Section 9.04), all its interests, rights and
obligations under this Agreement to an assignee that shall assume such assigned
obligations (which assignee may be another Lender, if a Lender accepts such
assignment); provided, however, that (x) such assignment shall not conflict with
any law, rule or regulation or order of any court or other Governmental
Authority having jurisdiction, (y) the Borrower or such assignee shall have paid
to the affected Lender or the Issuing Bank in immediately available funds an
amount equal to the sum of the principal of the outstanding Loans and
participations in L/C Disbursements of such Lender or the Issuing Bank plus all
other amounts (excluding interest and Fees, which shall be paid when due to the
assigning Lender or the Issuing Bank under Sections 2.06 and 2.05, respectively)
accrued for the account of such Lender or the Issuing Bank hereunder (including
any amounts under Sections 2.14, 2.16 and 2.20) and (z) if prior to any such
transfer and assignment the circumstances or event that resulted in such
Lender's or the Issuing Bank's claim for compensation under Section 2.14 or
notice under Section 2.1 or the amounts paid pursuant to Section 2.20, as the
case may be, cease to cause such Lender or the Issuing Bank to suffer increased
costs or reductions in amounts received or receivable or reduction in return on
capital, or cease to have the consequences specified in Section 2.15, or cease
to result in amounts being payable under Section 2.20, as the case may be
(including as a result of any action taken by such Lender or the Issuing Bank
pursuant to paragraph (b) below), or if such Lender or the Issuing Bank shall
waive its right to claim further compensation under Section 2.14 in respect of
such circumstances or event or shall withdraw its notice under Section 2.15 or
shall waive its right to
<PAGE>
63
further payments under Section 2.20 in respect of such circumstances or event or
shall fund as provided in Section 2.02(d) or 2.02(f), as the case may be, then
such Lender or the Issuing Bank shall not thereafter be required to make any
such transfer and assignment hereunder.
(b) If (i) any Lender or the Issuing Bank shall request compensation under
Section 2.14, (ii) any Lender or the Issuing Bank delivers a notice described in
Section 2.15 or (iii) the Borrower is required to pay any additional amount to
any Lender or the Issuing Bank or any Governmental Authority on account of any
Lender or the Issuing Bank, pursuant to Section 2.20, then such Lender or the
Issuing Bank shall use reasonable efforts (which shall not require such Lender
or the Issuing Bank to incur an unreimbursable loss or unreimbursable cost or
expense or otherwise take any action inconsistent with its internal policies or
legal or regulatory restrictions or suffer any disadvantage or burden deemed by
it in good faith to be significant) (x) to file any certificate or document
reasonably requested in writing by the Borrower or (y) to assign its rights and
delegate and transfer its obligations hereunder to another of its offices,
branches or affiliates, if such filing or assignment would reduce its claims for
compensation under Section 2.14 or enable it to withdraw its notice pursuant to
Section 2.15 or would reduce amounts payable pursuant to Section 2.20, as the
case may be, in the future. The Borrower shall pay all reasonable costs and
expenses incurred by any Lender or the Issuing Bank in connection with any such
filing or assignment, delegation and transfer.
SECTION 2.22. Letters of Credit. (a) General. The Borrower may request the
issuance, after the Merger Date, of a Letter of Credit, in a form reasonably
acceptable to the Administrative Agent and the Issuing Bank, appropriately
completed, for the account of the Borrower, at any time and from time to time
while the L/C Commitment remains in effect. This Section 2.22 shall not be
construed to impose an obligation upon the Issuing Bank to issue any Letter of
Credit that is inconsistent with the terms and conditions of this Agreement.
(b) Notice of Issuance, Amendment, Renewal, Extension; Certain Conditions.
In order to request the issuance of a Letter of Credit (or to amend, renew or
extend an existing Letter of Credit), the Borrower shall hand deliver or
telecopy to the Issuing Bank and the Administrative Agent (reasonably in advance
of the requested
<PAGE>
64
date of issuance, amendment, renewal or extension) a notice requesting the
issuance of a Letter of Credit, or identifying the Letter of Credit to be
amended, renewed or extended, the date of issuance, amendment, renewal or
extension, the date on which such Letter of Credit is to expire (which shall
comply with paragraph (c) below), the amount of such Letter of Credit, the name
and address of the beneficiary thereof and such other information as shall be
necessary to prepare such Letter of Credit. Following receipt of such notice and
prior to the issuance of the requested Letter of Credit or the applicable
amendment, renewal or extension, the Administrative Agent shall notify the
Borrower and the Issuing Bank of the amount of the Aggregate Revolving Credit
Exposure after giving effect to (i) the issuance, amendment, renewal or
extension of such Letter of Credit, (ii) the issuance or expiration of any other
Letter of Credit that is to be issued or shall expire prior to the requested
date of issuance of such Letter of Credit and (iii) the borrowing or repayment
of any Revolving Credit Loans that (based upon notices delivered to the
Administrative Agent by the Borrower) are to be borrowed or repaid prior to the
requested date of issuance of such Letter of Credit. A Letter of Credit shall be
issued, amended, renewed or extended only if, and upon issuance, amendment,
renewal or extension of each Letter of Credit the Borrower shall be deemed to
represent and warrant that, after giving effect to such issuance, amendment,
renewal or extension (A) the L/C Exposure shall not exceed $30,000,000, and (B)
the Aggregate Revolving Credit Exposure shall not exceed the Total Revolving
Credit Commitment.
(c) Expiration Date. Each Letter of Credit shall expire at the close of
business on the earlier of the date one year after the date of the issuance of
such Letter of Credit and the date that is five Business Days prior to the
Post-Merger Facilities Maturity Date, unless such Letter of Credit expires by
its terms on an earlier date.
(d) Participations. By the issuance of a Letter of Credit and without any
further action on the part of the Issuing Bank or the Lenders, the Issuing Bank
hereby grants to each Lender, and each such Lender hereby acquires from the
applicable Issuing Bank, a participation in such Letter of Credit equal to such
Lender's Pro Rata Percentage of the aggregate amount available to be drawn under
such Letter of Credit, effective upon the issuance of such Letter of Credit. In
consideration and in furtherance of the foregoing, each Lender hereby absolutely
and unconditionally
<PAGE>
65
agrees to pay to the Administrative Agent, for the account of the Issuing Bank,
in accordance with Section 2.02(f), such Lender's Pro Rata Percentage of each
L/C Disbursement made by the Issuing Bank and not reimbursed by the Borrower
forthwith on the date due as provided in paragraph (e) below. Each Lender
acknowledges and agrees that its obligation to acquire participations pursuant
to this paragraph (d) in respect of Letters of Credit is absolute and
unconditional and shall not be affected by any circumstance whatsoever,
including the occurrence and continuance of a Default or an Event of Default,
and that each such payment shall be made without any offset, abatement,
withholding or reduction whatsoever.
(e) Reimbursement. If the Issuing Bank shall make any L/C Disbursement in
respect of a Letter of Credit, the Borrower shall pay the amount of such L/C
Disbursement to the Administrative Agent, for the account of the Issuing Bank,
not later than two hours after the Borrower shall have received notice from the
Issuing Bank that payment of such draft has been made, or, if the Borrower shall
have received such notice later than 10:00 a.m., New York City time, on any
Business Day, not later than 10:00 a.m., New York City time, on the immediately
following Business Day. The Borrower's obligations to reimburse L/C
Disbursements as provided in this paragraph (e) shall be absolute, unconditional
and irrevocable, and shall be performed strictly in accordance with the terms of
this Agreement, under any and all circumstances whatsoever, and irrespective of:
(i) any lack of validity or enforceability of any Letter of Credit or
any Loan Document, or any term or provision therein;
(ii) any amendment or waiver of or any consent to departure from all
or any of the provisions of any Letter of Credit or any Loan Document;
(iii) the existence of any claim, setoff, defense or other right that
the Borrower, any other party guaranteeing, or otherwise obligated with,
the Borrower, any Subsidiary or other Affiliate thereof or any other person
may at any time have against the beneficiary under any Letter of Credit,
the Issuing Bank, the Administrative Agent or any Lender or any other
person, whether in connection with this
<PAGE>
66
Agreement, any other Loan Document or any other related or unrelated
agreement or transaction;
(iv) any draft or other document presented under a Letter of Credit
proving to be forged, fraudulent, invalid or insufficient in any respect or
any statement therein being untrue or inaccurate in any respect;
(v) payment by the Issuing Bank under a Letter of Credit against
presentation of a draft or other document that does not comply with the
terms of such Letter of Credit; and
(vi) any other act or omission to act or delay of any kind of the
Issuing Bank, the Lenders, the Administrative Agent or any other person or
any other event or circumstance whatsoever, whether or not similar to any
of the foregoing, that might, but for the provisions of this Section 2.22,
constitute a legal or equitable discharge of the Borrower's obligations
hereunder;
provided, however, that any payment by the Borrower under this paragraph (e)
shall be without prejudice to, and shall not have any effect of estoppel or
waiver with respect to, any claim of the Borrower against the Issuing Bank under
paragraph (f) below.
(f) Liability of Issuing Bank. Without limiting the generality of paragraph
(e) above, it is expressly understood and agreed that the absolute and
unconditional obligation of the Borrower hereunder to reimburse L/C
Disbursements shall not be excused by the gross negligence or wilful misconduct
of the Issuing Bank. However, the foregoing shall not be construed to excuse the
Issuing Bank from liability to the Borrower to the extent of any direct damages
(as opposed to consequential damages, claims in respect of which are hereby
waived by the Borrower to the extent permitted by applicable law) suffered by
the Borrower that are caused by the Issuing Bank's gross negligence or wilful
misconduct in determining whether drafts and other documents presented under a
Letter of Credit comply with the terms thereof; it is understood that the
Issuing Bank may accept documents that appear on their face to be in order,
without responsibility for further investigation, regardless of any notice or
information to the contrary and, in making any payment under any Letter of
Credit, (i) the Issuing Bank's exclusive reliance on the documents presented to
it
<PAGE>
67
under such Letter of Credit as to any and all matters set forth therein,
including reliance on the amount of any draft presented under such Letter of
Credit, whether or not the amount due to the beneficiary thereunder equals the
amount of such draft and whether or not any document presented pursuant to such
Letter of Credit proves to be insufficient in any respect, if such document on
its face appears to be in order, and whether or not any other statement or any
other document presented pursuant to such Letter of Credit proves to be forged
or invalid or any statement therein proves to be inaccurate or untrue in any
respect whatsoever and (ii) any noncompliance in any immaterial respect of the
documents presented under such Letter of Credit with the terms thereof shall, in
each case, be deemed not to constitute wilful misconduct or gross negligence of
the Issuing Bank.
(g) Disbursement Procedures. The Issuing Bank shall, promptly following its
receipt thereof, examine all documents purporting to represent a demand for
payment under a Letter of Credit. The Issuing Bank shall as promptly as possible
give telephonic notification, confirmed by telecopy, to the Administrative Agent
and the Borrower of such demand for payment and whether the Issuing Bank has
made or will make an L/C Disbursement thereunder; provided, however, that any
failure to give or delay in giving such notice shall not relieve the Borrower of
its obligation to reimburse the Issuing Bank and the Lenders with respect to any
such L/C Disbursement. The Administrative Agent shall promptly give each Lender
notice thereof.
(h) Interim Interest. If the Issuing Bank shall make any L/C Disbursement
in respect of a Letter of Credit, then, unless the Borrower shall reimburse such
L/C Disbursement in full on such date, the unpaid amount thereof shall bear
interest for the account of the Issuing Bank, for each day from and including
the date of such L/C Disbursement, to but excluding the earlier of the date of
payment or the date on which interest shall commence to accrue thereon at the
rate per annum that would apply to such amount if such amount were an ABR Loan.
(i) Resignation or Removal of the Issuing Bank. The Issuing Bank may resign
at any time by giving 180 days' prior written notice to the Administrative
Agent, the Lenders and the Borrower, and may be removed at any time by the
Borrower by notice to the Issuing Bank, the Administrative Agent and the
Lenders. Subject to the next
<PAGE>
68
succeeding paragraph, upon the acceptance of any appointment as the Issuing Bank
hereunder by a Lender that shall agree to serve as successor Issuing Bank, such
successor shall succeed to and become vested with all the interests, rights and
obligations of the retiring Issuing Bank and the retiring Issuing Bank shall be
discharged from its obligations to issue additional Letters of Credit hereunder.
At the time such removal or resignation shall become effective, the Borrower
shall pay all accrued and unpaid Fees pursuant to Section 2.05(c)(ii). The
acceptance of any appointment as the Issuing Bank hereunder by a successor
Lender shall be evidenced by an agreement entered into by such successor, in a
form satisfactory to the Borrower and the Administrative Agent, and, from and
after the effective date of such agreement, (i) such successor Lender shall have
all the rights and obligations of the previous Issuing Bank under this Agreement
and the other Loan Documents and (ii) references herein and in the other Loan
Documents to the term "Issuing Bank" shall be deemed to refer to such successor
or to any previous Issuing Bank, or to such successor and all previous Issuing
Banks, as the context shall require. After the resignation or removal of the
Issuing Bark hereunder, the retiring Issuing Bank shall remain a party hereto
and shall continue to have all the rights and obligations of an Issuing Bank
under this Agreement and the other Loan Documents with respect to Letters of
Credit issued by it prior to such resignation or removal, but shall not be
required to issue additional Letters of Credit.
(j) Cash Collateralizatlon. If any Event of Default shall occur and be
continuing, the Borrower shall, on the Business Day it receives notice from the
Administrative Agent, deposit in an account with the Collateral Agent, for the
benefit of the Revolving Credit Lenders, an amount in cash equal to the L/C
Exposure as of such date. Such deposit shall be held by the Collateral Agent as
collateral for the payment and performance of the Obligations. The Collateral
Agent shall have exclusive dominion and control, including the exclusive right
of withdrawal, over such account. Other than any interest earned on the
investment of such deposits in Permitted Investments, which investments shall be
made at the option and sole discretion of the Collateral Agent, such deposits
shall not bear interest. Interest or profits, if any, on such investments shall
accumulate in such account. Moneys in such account shall (i) automatically be
applied by the Collateral Agent to reimburse the Issuing Bank for L/C
<PAGE>
69
Disbursements for which it has not been reimbursed, (ii) be held for the
satisfaction of the reimbursement obligations of the Borrower for the L/C
Exposure at such time and (iii) if the maturity of the Loans has been
accelerated (but subject to the consent of Revolving Credit Lenders holding
participations in outstanding Letters of Credit representing greater than 50% of
the aggregate undrawn amount of all outstanding Letters of Credit), be applied
to satisfy the Obligations. If the Borrower is required to provide an amount of
cash collateral hereunder as a result of the occurrence of an Event of Default,
such amount (to the extent not applied as aforesaid) shall be returned, together
with any remaining interest, to the Borrower within two Business Days after all
Events of Default have been cured or waived.
ARTICLE III
Representations and warranties
The Borrower represents and warrants to the Administrative Agent, the
Collateral Agent, the Issuing Bank and each of the Lenders that:
SECTION 3.01. Organization; Powers. The Borrower and each Subsidiary (a) is
a corporation duly organized, validly existing and in good standing under the
laws of the jurisdiction of its organization, (b) has all requisite power and
authority to own its property and assets and to carry on its business as now
conducted and as proposed to be conducted, (c) is qualified to do business in,
and is in good standing in, every jurisdiction where such qualification is
required, except where the failure so to qualify could not reasonably be
expected to result in a Material Adverse Effect, and (d) has the corporate power
and authority to execute, deliver and perform its obligations under each of the
Loan Documents, the Merger Agreement and each other agreement or instrument
contemplated hereby to which it is or will be a party and, in the case of the
Borrower, to borrow hereunder.
SECTION 3.02. Authorization. The execution, delivery and performance by
each Loan Party of the Merger Agreement, each of the Loan Documents and the
borrowings hereunder (collectively, the "Transactions") and the Acquisition (a)
have been duly authorized by all requisite corporate and, if required,
stockholder action (other than
<PAGE>
70
any action by the stockholders of the Company to approve the Merger) and (b)
will not (i) violate (A) any provision of law, statute, rule or regulation, or
of the certificate or articles of incorporation or other constitutive documents
or by-laws of the Borrower or any Subsidiary, (B) any order of any Governmental
Authority or (C) any provision of any indenture, agreement or other instrument
to which the Borrower or any Subsidiary is a party or by which any of them or
any of their property is or may be bound, (ii) be in conflict with, result in a
breach of or constitute (alone or with notice or lapse of time or both) a
default under, or give rise to any right to accelerate or to require the
prepayment, repurchase or redemption of any obligation under any such indenture,
agreement or other instrument or (iii) result in the creation or imposition of
any Lien upon or with respect to any property or assets now owned or hereafter
acquired by the Borrower or any Subsidiary (other than any Lien created under
the Security Documents), other than (in the case of clauses (b)(i)(C) and (ii)
above) for such matters that, individually or in the aggregate, could not
reasonably be expected to have a Material Adverse Effect.
SECTION 3.03. Enforceability. This Agreement has been duly executed and
delivered by the Borrower and constitutes, and each other Loan Document when
executed and delivered by each Loan Party thereto will constitute, a legal,
valid and binding obligation of such Loan Party enforceable against such Loan
Party in accordance with its terms, except as enforceability thereof may be
limited by bankruptcy, insolvency or similar laws of general application
affecting creditors' rights.
SECTION 3.04. Governmental Approvals. No action, consent or approval of,
registration or filing with or any other action by any Governmental Authority is
or will be required in connection with the Transactions or the Acquisition,
except for (a) the filing of Uniform Commercial Code financing statements, (b)
recordation of the Mortgages, (c) the items described in Section 3.22, (d)
securing documentation from the New Jersey Department of Environmental
Protection to the effect that the requirements of the New Jersey Industrial Site
Recovery Act have been complied with and that the Acquisition may proceed and
(e) such as have been made or obtained and are in full force and effect.
<PAGE>
71
SECTION 3.05. Financial Statements. (a) The Borrower has heretofore
furnished to the Lenders its consolidated balance sheets and statements of
income, shareholders' equity and cash flows (i) as of and for the fiscal year
ended December 31, 1994, audited by and accompanied by the opinion of BDO
Seidman, independent public accountants, and (ii) as of and for the fiscal
quarter and the portion of the fiscal year ended July 1, 1995, certified by a
Financial Officer. Such financial statements present fairly the financial
condition and results of operations of the Borrower and its consolidated
Subsidiaries as of such dates and for such periods. Such balance sheets and the
notes thereto disclose all material liabilities, direct or contingent, of the
Borrower and its consolidated Subsidiaries as of the dates thereof. Such
financial statements were prepared in accordance with GAAP applied on a
consistent basis, subject (in the case of the statements referred to in clause
(ii) above) to normal, year-end recurring adjustments.
(b) The Borrower has heretofore furnished to the Lenders its unaudited pro
forma consolidated balance sheet as of July 1, 1995, and pro forma consolidated
income statement for the two fiscal quarters ended July 1, 1995, prepared giving
effect to the Transactions and the Acquisition as if they had occurred on July
1, 1995, and December 31, 1994, respectively. Such pro forma financial
statements have been prepared in good faith by the Borrower, based on the
assumptions used to prepare the pro forma financial information contained in the
Confidential Information Memorandum (which assumptions are believed by the
Borrower on the date hereof and on the Tender Offer Date to be reasonable), are
based on the best information available to the Borrower as of the date of
delivery thereof, accurately reflect all adjustments required to be made to give
effect to the Transactions and the Acquisition and present fairly on a pro forma
basis the estimated consolidated financial position of the Borrower and the
Subsidiaries as of July 1, 1995, and estimated consolidated results of
operations of the Borrower and the Subsidiaries for the two fiscal quarters
ended July 1, 1995, assuming that the Transactions and the Acquisition had
actually occurred at July 1, 1995, and December 31, 1994, respectively.
(c) The Borrower has heretofore furnished to the Lenders the consolidated
balance sheets and statements of operations, stockholders' equity and cash flows
of the
<PAGE>
72
Company (i) as of and for the fiscal year ended December 31, 1994, audited by
and accompanied by the opinion of Coopers & Lybrand LLP, independent public
accountants, and (ii) as of and for the fiscal quarter and the portion of the
fiscal year ended June 30, 1995. The Borrower has no knowledge that these
financial statements have not been prepared in accordance with GAAP applied on a
consistent basis (except to the extent set forth in those financial statements,
including the notes, if any) or do not present fairly in all material respects
the consolidated financial position of the Company as of their respective dates,
and the consolidated results of operations and changes in financial condition
and cash flows for the periods presented, subject, in the case of the unaudited
interim financial statements, to normal, recurring, year-end adjustments.
SECTION 3.06. No Material Adverse Change. There has been no material
adverse change in the business, assets, operations, prospects or condition,
financial or otherwise, of the Borrower and the Subsidiaries, taken as a whole,
since December 31, 1994.
SECTION 3.07. Title to Properties; Possession under Leases. (a) Each of the
Borrower and the Subsidiaries has good and marketable title to, or valid
leasehold interests in, all its material properties and assets (including all
Mortgaged Property). All such material properties and assets are free and clear
of Liens, other than Liens expressly permitted by Section 6.02, and no material
portion of any Mortgaged Property is subject to any lease, license, sublease or
other agreement granting to any person any right to use, occupy or enjoy such
portion.
(b) Each of the Borrower and the Subsidiaries has complied with all
obligations under all material leases to which it is a party and all such leases
are in full force and effect. Each of the Borrower and the Subsidiaries enjoys
peaceful and undisturbed possession under all such material leases.
(c) Neither the Borrower nor any Subsidiary has received any notice of, nor
has any knowledge of, any pending or contemplated condemnation proceeding
affecting the Mortgaged Properties or any sale or disposition thereof in lieu of
condemnation.
(d) Neither the Borrower nor any Subsidiary is obligated under any right of
first refusal, option or other
<PAGE>
73
contractual right to sell, assign or otherwise dispose of any Mortgaged Property
or any interest therein.
SECTION 3.08. Subsidiaries. Schedule 3.08 sets forth as of the Tender Offer
Date a list of the Subsidiaries (other than the Company and its subsidiaries)
and the percentage ownership interest of the Borrower therein. The shares of
capital stock or other ownership interests so indicated on Schedule 3.08 are
fully paid and non-assessable and are owned by the Borrower, directly or
indirectly, free and clear of all Liens (other than Liens pursuant to the
Security Documents).
SECTION 3.09. Litigation; Compliance with Laws. (a) Except as disclosed in
the Tender Offer Materials or the Company's Schedule 14D-9 with respect to the
Tender Offer, there are not any actions, suits or proceedings at law or in
equity or by or before any Governmental Authority now pending or, to the
knowledge of the Borrower, threatened against or affecting any Transaction Party
or any business, property or rights of any such person (i) that involve any Loan
Document, the Transactions or the Acquisition or (ii) as to which there is a
likelihood of an adverse determination and that, if adversely determined, could
reasonably be expected, individually or in the aggregate, to result in a
Material Adverse Effect.
(b) None of the Borrower and the Subsidiaries or any of their respective
material properties or assets (including the Mortgaged Properties) is in
violation of, nor will the continued operation of such material properties and
assets as currently conducted violate, any law, rule or regulation (including
any Health Care Law, any Environmental Law, any zoning or building ordinance,
code or approval or any building permit) or any restriction of record or
agreements affecting the Mortgaged Property, or is in default with respect to
any judgment, writ, injunction, decree or order of any Governmental Authority,
other than, in each case, such violations and defaults that, individually and in
the aggregate, could not reasonably be expected to result in a Material Adverse
Effect.
(c) Certificates of occupancy and material permits (or other documents
expressly provided for under applicable law in lieu thereof) are in effect for
each Mortgaged Property as currently constructed, and true and complete copies
of such certificates of occupancy have been
<PAGE>
74
delivered to the Collateral Agent as mortgagee with respect to each Mortgaged
Property.
SECTION 3.10. Agreements. (a) Neither the Borrower nor any Subsidiary is a
party to any agreement or instrument or subject to any corporate restriction
that has resulted or could reasonably be expected to result in a Material
Adverse Effect.
(b) Neither the Borrower nor any of the Subsidiaries is in default in any
manner under any provision of any indenture or other agreement or instrument
evidencing Indebtedness, the General Shareholders Agreement dated September 30,
1994, or any other agreement or instrument to which it is a party or by which it
or any of its properties or assets are or may be bound, other than such defaults
that, individually and in the aggregate, could not reasonably be expected to
result in a Material Adverse Effect.
SECTION 3.11. Federal Reserve Regulations. (a) Neither the Borrower nor any
Subsidiary is engaged principally, or as one of its important activities, in the
business of extending credit for the purpose of buying or carrying Margin Stock.
(b) No part of the proceeds of any Loan or any Letter of Credit will be
used, whether directly or indirectly, and whether immediately, incidentally or
ultimately, for any purpose that entails a violation of, or that is inconsistent
with, the provisions of the Regulations of the Board, including, to one extent
applicable, Regulation G, U or X. Margin Stocks do not constitute 25% or more of
the assets of the Borrower and the Subsidiaries, taken as a whole.
(c) No Indebtedness of the Borrower or any Subsidiary (other than the
Obligations) is "directly or indirectly secured" (within the meaning of
Regulation U and Regulation G) by any Margin Stock.
SECTION 3.12. Investment Company Act; Public Utility Holding Company Act.
Neither the Borrower nor any Subsidiary is (a) an "investment company" as
defined in, or subject to regulation under, the Investment Company Act of 1940,
(b) a "holding company" as defined in, or subject to regulation under, the
Public Utility Holding Company Act of
<PAGE>
75
1935 or (c) otherwise subject to any law, rule or regulation that limits its
ability to incur Indebtedness.
SECTION 3.13. Use of Proceeds. The Borrower will use the proceeds of the
Loans and will request the issuance of Letters of Credit only for the purposes
specified in the preamble to this Agreement.
SECTION 3.14. Tax Returns. Each of the Borrower and the Subsidiaries has
filed or caused to be filed all Federal, state, local and foreign tax returns or
materials required to have been filed by it and has paid or caused to be paid
all taxes due and payable by it and all assessments received by it, except taxes
that are being contested in good faith by appropriate proceedings and for which
the Borrower or such Subsidiary, as applicable, shall have set aside on its
books (in accordance with GAAP accounting requirements) adequate reserves.
SECTION 3.15. No Material Misstatements. (a) the Confidential Information
Memorandum or (b) information, report, financial statement, schedule authored
by, and furnished by or on behalf of, the Borrower in writing to the
Administrative Agent in connection with the negotiation of any Loan Document or
included therein or delivered pursuant thereto contains any material
misstatement of fact or omits to state any material fact necessary to make the
statements therein, in the light of the circumstances under which they are made
misleading; provided, however, that to the extent any such information, report,
financial statement, exhibit or schedule was based upon or constitutes a
forecast or projection, the Borrower represents only that (x) it acted in good
faith and utilized reasonable assumptions and due care in the preparation of
such information, report, financial statement, exhibit or schedule and (y) with
respect to the projections contained in the Confidential Information Memorandum,
as of the date of this Agreement and as of the Closing Date, the Borrower
believes the assumptions underlying such projections are reasonable.
SECTION 3.16. Employee Benefit Plans. Each of the Borrower and the ERISA
Affiliates is in compliance in all respects with the applicable provisions of
ERISA and the Code and the regulations and published interpretations thereunder,
except for such failures to comply that, individually and in the aggregate,
could not reasonably be expected to result in a Material Adverse Effect. No
ERISA
<PAGE>
76
Event has occurred or is reasonably expected to occur that, when taken together
with all other such ERISA Events, could reasonably be expected to result in a
Material Adverse Effect. As of the date of this Agreement, none of the Plans is
a "defined benefit plan" as defined in Section 3(35) of ERISA or Section 414(j)
of the Code. The present value of all benefit liabilities under each Plan (based
on those assumptions used for purposes of Statement of Financial Accounting
Standards No. 87) did not, as of the last annual valuation date applicable
thereto, exceed by more than $15,000,000 the fair market value of the assets of
such Plan, and the present value of all benefit liabilities of all underfunded
Plans (based on those assumptions used for purposes of Statement of Financial
Accounting Standards No. 87) did not, as of the last annual valuation dates
applicable thereto, exceed by more than $15,000,000 the fair market value of the
assets of all such underfunded Plans.
SECTION 3.17. Environmental Matters. (a) The properties owned or operated
by the Borrower and the Subsidiaries (the "Properties") do not contain any
Hazardous Materials in amounts or concentrations that constitute a violation of,
or could give rise to under, any Environmental Law, other than such violations
and liabilities that, individually and in the aggregate, could not reasonably be
expected to result in a Material Adverse Effect.
(b) The Properties and all operations of the Borrower and the Subsidiaries
are in compliance, and in the last six years have been in compliance, with all
Environmental Laws and all Environmental Permits have been obtained and are in
effect, other than such items that, individually and in the aggregate, could not
reasonably be expected to result in a Material Adverse Effect.
(c) There have not been any Releases or threatened Releases at, from, under
or, to the knowledge of the Borrower, proximate to the Properties or otherwise
in connection with the operations of the Borrower or the Subsidiaries, which
Releases or threatened Releases, in the aggregate, could reasonably be expected
to result in a Material Adverse Effect.
(d) Neither the Borrower nor any Subsidiary has received any notice of an
Environmental Claim in connection with the Properties or the operations of the
Borrower or the Subsidiaries or with regard to any person whose liabilities for
environmental matters the Borrower or the Subsidiaries
<PAGE>
77
has retained or assumed, in whole or in part, contractually, or to the knowledge
of the Borrower by operation of law or otherwise, which, individually or in the
aggregate, could reasonably be expected to result in a Material Adverse Effect,
nor do the Borrower or the Subsidiaries have any knowledge that any such notice
is likely to be received or is being threatened.
(e) Hazardous-Materials have not been transported from the Properties, nor
have Hazardous Materials been generated, treated, stored or disposed of at, on
or under any Property in a manner that could reasonably be expected to give rise
to any material liability under any Environmental Law, nor has the Borrower or
Subsidiary retained or assumed any liability, contractually, or to the knowledge
of the Borrower by operation of law or otherwise, with respect to the
generation, treatment, storage or disposal of Hazardous Materials, which
transportation, generation, treatment, storage or disposal, or retained or
assumed liabilities, individually or in the aggregate, could reasonably be
expected to result in a Material Adverse Effect.
SECTION 3.18. Insurance. Schedule 3.18 sets forth a true, complete and
correct description of all insurance maintained by the Borrower or the
Subsidiaries as of the date hereof and the Closing Date. As of each such date,
such insurance is in full force and effect and all premiums due have been paid.
The Borrower and the Subsidiaries have insurance in such amounts and covering
such risks and liabilities as are in accordance with normal industry practice.
SECTION 3.19. Solvency. (a) The fair salable value of the assets of the
Borrower and each Subsidiary exceeds and shall, immediately following each of
the Tender Offer Date and the Merger Date and the consummation of the related
financings, exceed the amount that will be required to be paid on or in respect
of the existing debts and other liabilities (including contingent liabilities)
of the Borrower or such Subsidiary as they mature.
(b) The assets of the Borrower and each Subsidiary do not, and upon
consummation of the Acquisition will not, constitute unreasonably small capital
for the Borrower or such Subsidiary to carry out its business as now conducted
and as proposed to be conducted, including the capital needs of the Borrower or
such Subsidiary, taking
<PAGE>
78
into account the particular capital requirements of the business conducted by
the Borrower and each Subsidiary, and the projected capital requirements and
capital availability thereof.
(c) The Borrower and each Subsidiary do not intend to and shall not incur
debts beyond their respective ability to pay such debts as they mature taking
into account the timing and amounts of cash to be received by the Borrower and
such Subsidiary and of amounts to be payable on or in respect of obligations of
the Borrower and such Subsidiary. The cash flow of the Borrower and each
Subsidiary, after taking into account all anticipated uses of the cash of the
Borrower and each Subsidiary, will at all times be sufficient to pay all such
amounts on or in respect of debt of the Borrower or such Subsidiary when such
amounts are required to be paid.
(d) The representations made in this Section 3.19 with respect to any
Subsidiary that is a Guarantor are made after taking into consideration and
giving effect to the Indemnity, Contribution and Subrogation Agreement.
SECTION 3.20. Location of Real Property and Leased Premises. (a) Schedule
3.20(a) lists completely and correctly as of the date of this Agreement all real
property owned by the Borrower and the Subsidiaries and the addresses thereof
and, to the knowledge of the Borrower, all real property owned by the Company
and its subsidiaries as of the date of this Agreement and the addresses thereof.
The Borrower and the Subsidiaries own in all the real property set forth on
Schedule 3.20(a) as owned by the Borrower or any Subsidiary and, to the
knowledge of the Borrower, the Company and its subsidiaries own in fee all the
real property set forth on Schedule 3.20(a) as owned by the Company or any of
its subsidiaries.
(b) Schedule 3.20(b) lists completely and correctly as of the date of this
Agreement all material real property leased by the Borrower and the Subsidiaries
and the addresses thereof and, to the knowledge of the Borrower, all real
property leased by the Company and its subsidiaries as of the date of this
Agreement and the addresses thereof. The Borrower and the Subsidiaries, as the
case may be, have valid leasehold interests in all the material real property
set forth on Schedule 3.20(b) as leased by the Borrower or any Subsidiary and,
to the knowledge of the Borrower, the Company and its subsidiaries, as the case
may be, have valid
<PAGE>
79
leasehold interests in all the real property set forth on Schedule 3.20(b) as
leased by the Company or any of its subsidiaries.
SECTION 3.21. Labor Matters. As of the date of this Agreement and the
Closing Date, there are no strikes, lockouts or slowdowns against the Borrower
or any Subsidiary pending or, to the knowledge of the Borrower, threatened. The
hours worked by and payments made to employees of the Borrower and the
Subsidiaries have not been in violation of the Fair Labor Standards Act or any
other applicable Federal, state, local or foreign law dealing with such matters.
All payments due from the Borrower or any Subsidiary, or for which any claim may
be made against the Borrower or any Subsidiary, on account of wages and employee
health and welfare insurance and other benefits, have been paid or accrued as a
liability on the books of the Borrower or such Subsidiary. The consummation of
the Acquisition will not give rise to any right of termination or right of
renegotiation on the part of any union under any collective bargaining agreement
to which the Borrower or any Subsidiary is bound.
SECTION 3.22. Tender Offer; Merger. (a) All consents and approvals of,
filings and registrations with and other actions in respect of all Governmental
Authorities required in order to make or consummate the Tender Offer, to
purchase Shares pursuant thereto and to consummate the Merger have been
obtained, given, filed or taken and are in full force and effect, other than (i)
the filing of the certificates of merger necessary to accomplish the Merger
with, and their acceptance by, the Secretary of State of the State of Delaware
and any necessary approval of the Merger by the stockholders of the Company, in
each case pursuant to the General Corporation Law of the State of Delaware, (ii)
filings and other actions required pursuant to the Securities Act of 1933, the
Securities Exchange Act of 1934 and the respective rules and regulations
thereunder in connection with the Merger and any necessary approval thereof by
the stockholders of the Company and (iii) filings and other actions required
pursuant to state securities or blue sky laws in connection with the Merger.
(b) The Tender Offer Materials and all amendments or supplements thereto
disseminated to the public on or prior to the Tender Offer Date at the time of
their dissemination to the public did not and will not on the Tender Offer Date,
and the Tender Offer Materials and all
<PAGE>
80
amendments or supplements thereto that were or will be disseminated to the
public after the Tender Offer Date did not or will not at the time of their
dissemination to the public, contain any untrue statement of a material fact or
omit to state any material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were or are made,
not misleading. Copies of the Tender Offer Materials and all amendments or
supplements thereto will be delivered to the Administrative Agent not later than
the time they are made available to the public or filed with the Securities and
Exchange Commission.
(c) The Merger Agreement has been duly authorized, executed and delivered
by each of the Borrower, Acquisition Co. and the Company and constitutes a
legal, valid and binding obligation of each such corporation, enforceable in
accordance with its terms. A true, correct and complete copy of the Merger
Agreement has been furnished to the Administrative Agent.
(d) As of the date of this Agreement and as of the Closing Date, (i) each
of the representations and warranties made by the Borrower and Acquisition Co.
in the Merger Agreement is true and correct in all material respects and (ii)
the Borrower does not have any knowledge of any circumstances or conditions that
would render the representations and warranties of the Company in the Merger
Agreement untrue or incorrect in any material respect.
(e) Prior to the Tender Offer Date, none of the Transaction Parties
purchased or otherwise acquired any Shares for a price per Share in excess of
the price specified in Section 1.1 (a) of the Merger Agreement, other than
Shares acquired by the Company not in violation of the Merger Agreement.
SECTION 3.23. Capitalization of the Borrower. As of the date of this
Agreement, the authorized capital stock of the Borrower consists of 529,295
shares of common stock, par value $0.01 per share, of which 273,742 shares are
issued and outstanding. All such outstanding shares of Stock are fully paid and
nonassessable.
<PAGE>
81
ARTICLE IV
Conditions of Lending
The obligations of the Lenders to make Loans and of the Issuing Bank to
issue, renew or extend Letters of Credit hereunder are subject to the
satisfaction of the following conditions:
SECTION 4.01. All Credit Events. On the date of each Borrowing and each
issuance, renewal or extension of a Letter of Credit (each such event being
called a "Credit Event"):
(a) The Administrative Agent shall have received any notice of such
Borrowing required by Section 2.03 or, in the case of the issuance, renewal or
extension of a Letter of Credit, the Issuing Bank and the Administrative Agent
shall have received a notice requesting the issuance of such Letter of Credit as
required by Section 2.22(b).
(b) The representations and warranties set forth in Article III shall be
true and correct in all material respects on and as of the date of such Credit
Event with the same effect as though made on and as of such date, except to the
extent such representations and warranties expressly relate to an earlier date.
(c) The Loan Parties, taken as a whole, shall be in compliance in all
material respects with all the terms and provisions set forth in this Agreement
and in the other Loan Documents, and at the time of and immediately after such
Credit Event, no Event of Default or Default shall have occurred and be
continuing.
(d) The Lenders shall be satisfied, in the exercise of good faith, that, so
long as the Shares constitute Margin Stock, 50% of the loan value (determined in
accordance with Regulation U) of the Shares held by the Borrower or Acquisition
Co., together with the good faith loan value (determined in accordance with
Regulation U) of all the other Collateral, shall exceed the outstanding
principal amount of the Loans and the L/C Exposure (taking into account the
Loans to be made and Letters of Credit to be issued on the date of such Credit
Event).
<PAGE>
82
Each Credit Event shall be deemed to constitute a representation and warranty by
the Borrower on the date of such Credit Event as to the matters specified in
paragraphs (b) and (c) above.
SECTION 4.02. First Credit Event. On the Closing Date
(a) The Administrative Agent shall have received, on behalf of itself,
the Lenders and the Issuing Bank, a favorable written opinion of (i)
Proskauer Rose Goetz & Mendelsohn LLP, counsel for the Borrower,
substantially to the effect set forth in Exhibit I-1 and (ii) each local
counsel listed on Schedule 4.02(a), substantially to the effect set forth
in Exhibit I-2, in each case (A) dated the Closing Date, (B) addressed to
the Issuing Bank, the Administrative Agent and the Lenders, and (C)
covering such other matters relating to the Loan Documents, the
Transactions and the Acquisition as the Administrative Agent shall
reasonably request, and the Borrower hereby requests such counsel to
deliver such opinions.
(b) All legal matters incident to this Agreement and the other Loan
Documents shall be reasonably satisfactory to the Administrative Agent.
(c) The Administrative Agent shall have received (i) a copy of the
certificate or articles of incorporation, including all amendments thereto,
of each Loan Party, certificates of a recent date by the Secretary of State
of the state of its organization, and a certificate as to the good standing
of each Loan Party as of a recent date, from such Secretary of State; (ii)
a certificate of the Secretary or Assistant Secretary of each Loan Party
dated the Closing Date and certifying (A) that attached thereto is a true
and complete copy of the by-laws of such Loan Party as in effect on the
Closing Date and at all times since a date prior to the date of the
resolutions described in clause (B) below, (B) that attached thereto is a
true and complete copy of resolutions duly adopted by the Board of
Directors of such Loan Party authorizing the execution, delivery and
performance of the Loan Documents to which such person is a party and, in
the case of the Borrower, the borrowings hereunder, and that such
resolutions have not been modified, rescinded or amended and are in full
force and effect, (C) that
<PAGE>
83
the certificate or articles of incorporation of such Loan Party have not
been amended since the date of the last amendment thereto shown on the
certificate of good standing furnished pursuant to clause (i) above, and
(D) as to the incumbency and specimen signature of each officer executing
any Loan Document or any other document delivered in connection herewith on
behalf of such Loan Party; (iii) a certificate of another officer as to the
incumbency and specimen signature of the Secretary or Assistant Secretary
executing the certificate pursuant to clause (ii) above; and (iv) such
other documents as the Administrative Agent may reasonably request.
(d) The Administrative Agent shall have received a certificate, dated
the Closing Date and signed by a Financial Officer of the Borrower,
confirming compliance with the conditions precedent set forth in Sections
4.01(b) and 4.04(c).
(e) The Administrative Agent shall have received all Fees and other
amounts due and payable on or prior to the Closing Date, including, to the
extent invoiced, reimbursement or payment of all reasonable out-of-pocket
expenses required to be reimbursed or paid by the Borrower hereunder or
under any other Loan Document.
(f) The Pledge Agreement shall have been duly executed by the Borrower
and each Subsidiary (other than the Company and its subsidiaries) and
delivered to the Collateral Agent and shall be in full force and effect,
and all the outstanding capital stock of the Subsidiaries held by the
Borrower or any such Subsidiary shall have been duly and validly pledged
thereunder to the Collateral Agent for the ratable benefit of the Secured
Parties, and certificates representing such shares, accompanied by
instruments of transfer and undated stock powers endorsed in blank, shall
be in the actual possession of the Collateral Agent or, in the case of
Book-Entry Shares, transferred into an account of the Collateral Agent
maintained with the applicable Book-Entry Transfer Facility; provided,
however, that (i) neither the Borrower nor any Domestic Subsidiary shall be
required to pledge more than 65% of the capital stock of any Foreign
Subsidiary and (ii) no Foreign Subsidiary shall be required to pledge the
capital stock of any Foreign Subsidiary.
<PAGE>
84
(g) (i) The Security Agreement shall have been duly executed by the
Borrower and each Subsidiary (other than the Company and its subsidiaries)
and shall have been delivered to the Collateral Agent and shall be in full
force and effect on such date and each document (including each Uniform
Commercial Code financing statement) required by law or reasonably
requested by the Collateral Agent to be filed, registered or recorded in
order to create in favor of the Collateral Agent for the benefit of the
Secured Parties a valid and perfected first priority security interest in
and lien on the Collateral (subject to any Lien expressly permitted by
Section 6.02 and in existence on the Closing Date) described in such
agreement shall have been delivered to the Collateral Agent; provided,
however, that the Foreign Subsidiaries and the Puerto Rico Subsidiary shall
not be required to execute the Security Agreement and (ii) the Chattel
Mortgages shall have been duly executed by the Puerto Rico Subsidiary and
shall have been delivered to the Collateral Agent and shall be in full
force and effect on such date and each document required by law or
reasonably requested by the Collateral Agent to be filed, registered or
recorded in order to create in favor of the Collateral Agent for the
benefit of the Secured Parties a valid and perfected first priority
security interest in and lien on the Collateral (subject to any Lien
expressly permitted by Section 6.02 and in existence on the Closing Date)
described in such agreement shall have been delivered to the Collateral
Agent.
(h) The Collateral Agent shall have received the results of a search
of the Uniform Commercial Code (or equivalent) filings made with respect to
the Loan Parties in the states (or other jurisdictions) in which the chief
executive office of each such person is located, any offices of such
persons in which records have been kept relating to Accounts and the other
jurisdictions in which Uniform Commercial Code filings (or equivalent
filings) are to be made pursuant to paragraph (g) above, together with
copies of the financing statements (or similar documents) disclosed by such
search, and accompanied by evidence satisfactory to the Collateral Agent
that the Liens indicated in any such financing statement (or similar
document) would be permitted under Section 6.02 or have been released.
<PAGE>
85
(i) The Collateral Agent shall have received a Perfection Certificate
with respect to the Loan Parties dated the Closing Date and duly executed
by a Responsible Officer of the Borrower.
(j) (i) Each of the Security Documents, in form and substance
satisfactory to the Lenders, relating to each of the Mortgaged Properties
shall have been duly executed by the parties thereto and delivered to the
Collateral Agent and shall be in full force and effect, (ii) each of such
Mortgaged Properties shall not be subject to any Lien other than those
permitted under Section 6.02, (iii) a lender's title insurance policy, in
form and substance acceptable to the Collateral Agent, insuring such
Security Document as a first lien on such Mortgaged Property (subject to
any Lien permitted by Section 6.02 and in existence on the Closing Date)
shall have been received by the Collateral Agent) and (iv) the Collateral
Agent shall have received such other documents, including a policy or
policies of title insurance issued by a nationally recognized title
insurance company, together with such endorsements, coinsurance and
reinsurance as may be requested by the Collateral Agent, insuring the
Mortgages as valid first liens on the Mortgaged Properties, free of Liens
other than those permitted under Section 6.02 and in existence on the
Closing Date, together with such surveys and legal opinions required to be
furnished pursuant to the terms of the Mortgages or as reasonably requested
by the Collateral Agent or the Lenders.
(k) The Guarantee Agreement shall have been duly executed by each
Subsidiary (other than the Company and its subsidiaries), shall have been
delivered to the Collateral Agent and shall be in full force and effect;
provided, however, that no Foreign Subsidiary shall be required to execute
the Guarantee Agreement.
(l) The Indemnity, Subrogation and Contribution Agreement shall have
been duly executed by each Loan Party, shall have been delivered to the
Collateral Agent and shall be in full force and effect.
(m) The Administrative Agent shall have received a copy of, or a
broker's or insurance company certificate as to coverage under, the
insurance
<PAGE>
86
policies required by Section 5.02 and the applicable provisions of the
Security Documents.
(n) The Shares to be purchased with the proceeds of the Loans to be
made on the Closing Date shall have been validly tendered to Acquisition
Co. in accordance with the Tender Offer Materials, and not withdrawn, and
shall be available for purchase pursuant to the Tender Offer.
(o) All conditions to the purchase of Shares in the Tender Offer shall
have been satisfied without giving effect to any waiver or amendment
thereof not approved by the Required Lenders, and Acquisition Co. shall
have accepted for payment pursuant to the Tender Offer a majority of the
Shares (on a fully diluted basis) (excluding any Shares tendered through
"guaranteed delivery" procedures and not yet delivered to Acquisition Co.
or its agents); provided, however, that the approval of the Required
Lenders shall not be required for any extension of the Tender Offer.
(p) There shall not be any action, suit or proceeding at law or in
equity or by or before any Governmental Authority pending or, to the
knowledge of the Borrower, threatened against or affecting any Transaction
Party or any business, property or rights of such person and relating to
the Transactions or the Acquisition (i) that could reasonably be expected
to result in a Material Adverse Effect or (ii) that is reasonably likely to
restrain, prevent or impose materially burdensome conditions on any
Transaction or the Acquisition.
(q) To the extent applicable, the Borrower shall have delivered to
each Lender a statement on Form U-1 or Form G-3 complying with the
requirements of Regulation U or Regulation G, as applicable.
(r) No change, and no development or event involving a prospective
change, in respect of the assets, capitalization, corporate structure,
securities, condition (financial or otherwise), prospects or results of
operations of the Borrower or the Company shall have occurred that is
deemed by the Lenders, in their good faith judgment, to involve a
reasonable likelihood of a Material Adverse Effect.
<PAGE>
87
(s) The Administrative Agent shall have received a customary
collateral review, reasonably satisfactory in form and substance to the
Administrative Agent.
(t) The Administrative Agent shall have received (i) the financial
statements referred to in Section 3.05(b) and (ii) consolidated income
statement projections, consolidated cash flow projections, consolidated
balance sheet projections and related assumptions for the Borrower for each
year until the Post-Merger Facilities Maturity Date, after giving effect to
the Transactions and the Acquisition.
(u) The Administrative Agent shall have received for each Mortgaged
Property a copy of the original permanent or temporary certificate of
occupancy, if any, issued upon completion of such Mortgaged Property (or
any amendment issued upon completion of any alteration) by the appropriate
Governmental Authority.
(v) The Administrative Agent shall have received (i) an environmental
assessment report in form, scope and substance reasonably satisfactory to
the Lenders, from Dames & Moore, as to any material environmental hazards,
liabilities or Remedial Action to which the Borrower or any of the
Subsidiaries may be subject and the Lenders shall be reasonably satisfied
with the nature and cost of any such hazards, liabilities or Remedial
Action and with the Borrower's plans with respect thereto and (ii) written
evidence of compliance with the New Jersey Industrial Site Recovery Act
pursuant to paragraph (I) of Annex A to the Merger Agreement.
(w) The Lenders shall have received a solvency letter from Valuation
Research Corporation satisfactory to the Lenders confirming the solvency of
the Borrower after giving effect to the Acquisition.
(x) The Administrative Agent shall have received evidence reasonably
satisfactory to it of the termination or cancellation of, and payment in
full of all amounts outstanding under or in respect of, (i) the Credit
Agreement dated as of November 25, 1992, among the Borrower, the Banks
named therein and Citibank, N.A., as agent, (ii) the Standby Letter of
Credit Agreement dated October, 1992, between the Borrower and Mellon Bank,
N.A., (iii) the $10,000,000 promissory
<PAGE>
88
note dated November 22, 1994, from the Borrower to Midlantic National Bank
and (iv) the Financing Agreement dated March 9, 1992, between Danbury
Pharmacal Puerto Rico, Inc. (formerly known as Danbury Pharmacal Caribe,
Inc.), and Banco Popular de Puerto Rico.
SECTION 4.03. Additional Conditions Precedent. On the date of the initial
Term Facility Borrowing or Post-Merger Revolving Facility Borrowing:
(a) The Merger shall have been, or simultaneously therewith shall be,
consummated in accordance with applicable law and the terms of the Merger
Agreement (and without giving effect to any waiver or amendment not
approved by the Required Lenders).
(b) The Company and each of its subsidiaries shall have become parties
to the Guarantee Agreement, the Security Agreement, the Pledge Agreement
and the Indemnity, Subrogation and Contribution Agreement and the
conditions set forth in paragraphs (f), (g), (h), (i), (j), (k), (1) and
(m) of Section 4.02 (but without giving effect to the first parenthetical
in each paragraph) shall, insofar as they relate to the Company and its
subsidiaries, have been satisfied on and as of such date as if all
references therein to the Closing Date were references to such date. The
Administrative Agent shall have received, with respect to the Company and
each of its subsidiaries, the certificates contemplated by Section 4.02(c)
and an opinion of counsel to the Company substantially in the form of
Exhibit J.
ARTICLE V
Affirmative Covenants
The Borrower covenants and agrees with each Lender that so long as this
Agreement shall remain in effect and until the Commitments have been terminated
and the principal of and interest on each Loan, all Fees and all other expenses
or amounts payable under any Loan Document have been paid in full and all
Letters of Credit have been canceled or have expired and all amounts drawn
thereunder
<PAGE>
89
have been reimbursed in full, unless the Required Lenders shall otherwise
consent in writing, the Borrower shall, and shall cause each Subsidiary to:
SECTION 5.01. Existence. Businesses and Properties. (a) Do or cause to be
done all things necessary to preserve, renew and keep in full force and effect
its legal existence, except as otherwise expressly permitted under Section 6.05.
(b) Do or cause to be done all things necessary to obtain, preserve, renew,
extend and keep in full force and effect the rights, licenses, permits,
franchises, authorizations, patents, copyrights, trademarks and trade names
material to the conduct of its business; comply with all applicable laws, rules,
regulations and decrees and orders of any Governmental Authority, whether now in
effect or hereafter enacted, except where the failure to comply could not
reasonably be expected to result in a Material Adverse Effect; and at all times
maintain and preserve all property material to the conduct of such business and
keep such property in good repair, working order and condition and from time to
time make, or cause to be made, all needful and proper repairs, renewals,
additions, improvements and replacements thereto necessary, in the Borrower's
reasonable judgment, in order that the business carried on in connection
therewith may be properly conducted at all times.
SECTION 5.02. Insurance. (a) Keep its insurable properties adequately
insured at all times by financially sound and reputable insurers; and maintain
such other insurance, to such extent and against such risks, including fire and
other risks insured against by extended coverage, as is customary with companies
in the same or similar businesses operating in the same or similar locations.
(b) If at any time the area in which the Premises (as defined in the
Mortgages) are located is designated a "flood hazard area" in any Flood
Insurance Rate Map published by the Federal Emergency Management Agency (or any
successor agency), obtain flood insurance in such total amount as may be
required by applicable law and otherwise comply with the National Flood
Insurance Program as set forth in the Flood Disaster Protection Act of 1973, as
it may be amended from time to time.
(c) With respect to any Mortgaged Property, carry and maintain
comprehensive general liability insurance,
<PAGE>
90
including the "broad form CGL endorsement" and coverage against claims made for
personal injury (including bodily injury, death and property damage) and
umbrella liability insurance against any and all claims, in no event for a
combined single limit of less than $1,000,000, naming the Collateral Agent as an
additional insured, on forms reasonably satisfactory to the Collateral Agent.
Cause all policies insuring against damage to the Mortgaged Property to be
endorsed or otherwise amended to include a "standard" or "New York" lender's
loss payable endorsement, in form and substance satisfactory to the
Administrative Agent and the Collateral Agent, which endorsement shall provide
that, from and after the Closing Date, the insurance carrier shall give the
Administrative Agent or the Collateral Agent at least 30 days' prior notice of
termination of such policies.
(d) In connection with the covenants set forth in this Section 5.02, it is
understood and agreed that:
(i) none of the Administrative Agent, the Lenders, the Issuing Bank,
or their respective agents or employees shall be liable for any loss or
damage insured by the insurance policies required to be maintained under
this Section 5.02, it being understood that (A) the Borrower and the other
Loan Parties shall look solely to their insurance companies or any other
parties other than the aforesaid parties for the recovery of such loss or
damage and (B) such insurance companies shall have no rights of subrogation
against the Administrative Agent, the Collateral Agent, the Lenders, the
Issuing Bank or their agents or employees; provided, however, that the
insurance policies do not provide waiver of subrogation rights against such
parties, as required above, then the Borrower hereby agrees, to the extent
permitted by law, to waive (and to cause each Subsidiary to waive) its
right of recovery, if any, against the Administrative Agent, the Collateral
Agent, the Lenders, the Issuing Bank and their agents and employees; and
(ii) the designation of any form, type or amount of insurance coverage
by the Administrative Agent, the Collateral Agent or the Required Lenders
under this Section 5.02 shall in no event be deemed a representation,
warranty or advice by the Administrative Agent, the Collateral Agent or the
Lenders that such insurance is adequate for the purposes of the business
<PAGE>
91
of the Borrower and the Subsidiaries or the protection of their properties.
SECTION 5.03. Obligations and Taxes. Pay its Indebtedness and pay or
perform its other material obligations in accordance with their terms and pay
and discharge when due all taxes, assessments and governmental charges or levies
imposed upon it or upon its income or profits or in respect of its property,
before the same shall become delinquent or in default, as well as all lawful
claims for labor, materials and supplies or otherwise that, if unpaid, might
give rise to a Lien upon such properties or any part thereof; provided, however,
that such payment and discharge shall not be required with respect to any such
obligation, tax, assessment, charge, levy or claim so long as the validity,
amount or entitlement thereof shall be contested in good faith by appropriate
proceedings and the Borrower shall have set aside on its books adequate reserves
with respect thereto in accordance with GAAP and such contest operates to
suspend enforcement of any related Lien and, in the case of a Mortgaged
Property, there is no material risk of forfeiture of such property.
SECTION 5.04. Financial Statements, Reports, etc. In the case of the
Borrower, furnish to the Administrative Agent:
(a) within 100 days after the end of each fiscal year, its
consolidated balance sheet and related statements of operations,
stockholders' equity and cash flows showing the financial condition of the
Borrower and its consolidated Subsidiaries as of the close of such fiscal
year and the results of its operations and the operations of such
Subsidiaries during such year, all audited by BDO Seidman LLP or other
independent public accountants of recognized national standing and
accompanied by an opinion of such accountants (which shall not be qualified
in any material respect) to the effect that such consolidated financial
statements fairly present the financial condition and results of operations
of the Borrower and its consolidated Subsidiaries on a consolidated basis
in accordance with GAAP consistently applied;
(b) within 60 days after the end of each of the first three fiscal
quarters of each fiscal year, its consolidated balance sheet and related
statements of operations, stockholders' equity and cash flows showing
<PAGE>
92
the financial condition of the Borrower and its consolidated Subsidiaries
as of the close of such fiscal quarter and the results of its operations
and the operations of such Subsidiaries during such fiscal quarter and the
then elapsed portion of the fiscal year, all certified by one of its
Financial Officers as fairly presenting the financial condition and results
of operations of the Borrower and its consolidated Subsidiaries on a
consolidated basis in accordance with GAAP consistently applied, subject to
normal year-end audit adjustments;
(c) concurrently with any delivery of financial statements under
clause (a) or (b) above, a certificate of the accounting firm (in the case
of delivery under clause (a) above) or Financial Officer (in the case of
delivery under clause (b) above) opining on or certifying such statements
(which certificate, when furnished by an accounting firm, may be limited to
accounting matters and disclaim responsibility for legal interpretations)
certifying that, to the knowledge of the signer, no Event of Default or
Default has occurred or, if such an Event of Default or Default has
occurred, specifying the nature and extent thereof and any corrective
action taken or proposed to be taken with respect thereto, and attaching
calculations showing compliance with Sections 6.13, 6.14, 6.15, 6.16, 6.17
and 6.18 and the Interest Expense Coverage Ratio as of the end of such
fiscal period;
(d) promptly after the same become publicly available, copies of all
periodic and other reports, proxy statements and other materials filed by
the Borrower or any Subsidiary with the Securities and Exchange Commission,
or any Governmental Authority succeeding to any or all of the functions of
said Commission, or with any national securities exchange, or distributed
to its shareholders, as the case may be;
(e) as soon as available, and in any event no later than 100 days
after the end of each fiscal year, commencing with the fiscal year ending
December 30, 1995, forecasted financial projections for the Borrower
through the end of the then-current fiscal year (including a description of
the underlying assumptions and management's discussion of historical
results), all certified by a Financial Officer of the Borrower to be a good
faith estimate of the forecasted financial
<PAGE>
93
projections and results of operations for the period through the
then-current fiscal year; and
(f) promptly, from time to time, such other information regarding the
operations, business affairs and financial condition of the Borrower or any
Subsidiary, or compliance with the terms of any Loan Document, as the
Administrative Agent or any Lender may reasonably request.
SECTION 5.05. Litigation and Other Notices. Furnish to the Administrative
Agent, the Issuing Bank and each Lender prompt written notice of the following:
(a) any Event of Default or Default, specifying the nature and extent
thereof and the corrective action (if any) taken or proposed to be taken
with respect thereto;
(b) the filing or commencement of, or any threat or notice of
intention of any person to file or commence, any action, suit or
proceeding, whether at law or in equity or by or before any Governmental
Authority, against the Borrower or any Subsidiary thereof that could
reasonably be expected to result in a Material Adverse Effect; and
(c) any effect or impairment known to the Borrower that has resulted
in, or could reasonably be expected to result in, a Material Adverse
Effect.
SECTION 5.06. Employee Benefits. (a) Comply in all respects with the
applicable provisions of ERISA and the Code, except where the failure to comply
could not reasonably be expected to result in a Material Adverse Effect, and (b)
furnish to the Administrative Agent (i) as soon as possible after, and in any
event within 20 days after any Responsible Officer of the Borrower or any ERISA
Affiliate knows, any ERISA Event has occurred that, alone or together with any
other ERISA Events that have occurred could reasonably be expected to result in
liability of the Borrower in an aggregate amount exceeding $1,000,000, a
statement of a Financial Officer of the Borrower setting forth details as to
such ERISA Event and the action, if any, that the Borrower proposes to take with
respect thereto.
SECTION 5.07. Maintaining Records; Access to Properties and Inspections.
Keep proper books of record and
<PAGE>
94
account in which full, true and correct entries in conformity with GAAP and all
requirements of applicable law are made of all material dealings and
transactions in relation to its business. The Borrower will, and will cause each
Subsidiary to, permit any representatives designated by the Administrative Agent
or any Lender to visit and inspect the financial records and the properties of
the Borrower or any Subsidiary upon prior notice to a Financial Officer of the
Borrower, at mutually agreed times during normal business hours and as often as
reasonably requested and to make extracts from and copies of such financial
records (such visits and inspections to be coordinated, to the extent possible,
through the Administrative Agent). Permit any representatives designated by the
Administrative Agent or any Lender to discuss the affairs, finances and
condition of the Borrower or any Subsidiary with the officers thereof (all in a
manner reasonably calculated not to materially disrupt the normal business
operations and activities of the Borrower and the Subsidiaries) and independent
accountants therefor.
SECTION 5.08. Use of Proceeds. Use the proceeds of the Loans and request
the issuance of Letters of Credit only for the purposes set forth in the
preamble to this Agreement.
SECTION 5.09. Compliance with Environmental Laws. Comply, and cause all
lessees and other persons occupying its Properties to comply, in all material
respects with all Environmental Laws and Environmental Permits applicable to its
operations and Properties; obtain and renew all material Environmental Permits
necessary for its operations and Properties; and conduct any Remedial Action in
accordance with Environmental Laws; provided, however, that neither the Borrower
nor any Subsidiary shall be required to undertake any Remedial Action to the
extent that its obligation to do so is being contested in good faith and by
proper proceedings and appropriate reserves are being maintained with respect to
such circumstances.
SECTION 5.10. Preparation of Environmental Reports. If a Default caused by
reason of a breach of Section 3.17 or 5.09 shall have occurred and be
continuing, at the written request of the Required Lenders through the
Administrative Agent, provide to the Lenders within 45 days after such request,
at the expense of the Borrower, an environmental site assessment report for the
Properties which are the subject of such default prepared by an
<PAGE>
95
environmental consulting firm acceptable to the Administrative Agent and
indicating the presence or absence of Hazardous Materials and the estimated cost
of any compliance or Remedial Action required by Environmental Laws in
connection with such Properties.
SECTION 5.11. Further Assurances. Execute any and all further documents,
financing statements, agreements and instruments, and take all further action
(including filing Uniform Commercial Code and other financing statements,
mortgages and deeds of trust) that may be required under applicable law, or that
the Required Lenders, the Administrative Agent or the Collateral Agent may
reasonably request, in order to effectuate the transactions contemplated by the
Loan Documents and in order to grant, preserve, protect and perfect the validity
and first priority of the security interests created or intended to be created
by the Security Documents. The Borrower shall cause any subsequently acquired or
organized Subsidiary to became a party to the Guarantee Agreement and the
Indemnity Subrogation and Contribution Agreement and each applicable Security
Document; provided, however, that no Foreign Subsidiary shall be required to
become a party to the Guarantee Agreement or to any Security Document. In
addition, from time to time, the Borrower shall, at its cost and expense,
promptly secure the Obligations by pledging or creating, or causing to be
pledged or created, perfected security interests with respect to such of its
assets and properties as the Administrative Agent or the Required Lenders shall
designate (it being understood that it is the intent of the parties that the
Obligations shall be secured by, among other things, substantially all the
assets of the Borrower and the Domestic Subsidiaries (including real and other
properties acquired subsequent to the Closing Date)). Such security interests
and Liens shall be created under the Security Documents and other security
agreements, mortgages, deeds of trust and other instruments and documents in
form and substance satisfactory to the Collateral Agent, and the Borrower shall
deliver or cause to be delivered to the Lenders all such instruments and
documents (including legal opinions, title insurance policies and lien searches)
as the Collateral Agent shall reasonably request to evidence compliance with
this Section 5.11. The Borrower shall provide such evidence as the Collateral
Agent shall reasonably request as to the perfection and priority status of each
such security interest and Lien.
<PAGE>
96
SECTION 5.12. Rate Protection Agreements. In the case of the Borrower,
within 100 days following the Merger Date, enter into (and thereafter maintain
in effect) Rate Protection Agreements providing for interest rate protection on
customary terms, for a period of at least two years following the Merger Date,
with respect to at least 50% of the sum of the aggregate principal amount of the
then-outstanding Term Loans.
SECTION 5.13. Merger. (a) Use best efforts, consistent with applicable law,
to effect the Merger as promptly as practicable after the consummation of the
Tender Offer.
(b) If the Borrower or Acquisition Co. shall own at least 90% of the Shares
following the consummation of the Tender Offer, effect the Merger without a
meeting of stockholders of the Company within seven days.
SECTION 5.14. Board of Directors of the Company. In the case
of the Borrower, exercise its rights with respect to the Company's Board of
Directors under Section 1.4 of the Merger Agreement as soon as practicable
following the consummation of the Tender Offer.
ARTICLE VI
Negative Covenants
The Borrower covenants and agrees with each Lender that, so long as this
Agreement shall remain in effect and until the Commitments have been terminated
and the principal of and interest on each Loan, all Fees and all other expenses
or amounts payable under any Loan Document have been paid in full and all
Letters of Credit have been canceled or have expired and all amounts drawn
thereunder have been reimbursed in full, unless the Required Lenders shall
otherwise consent in writing, the Borrower shall not, and shall not cause or
permit any Subsidiary to:
SECTION 6.01. Indebtedness. Incur, create, assume or permit to exist any
Indebtedness, except:
(a) Indebtedness existing on the date of this Agreement and set forth
in Schedule 6.01;
<PAGE>
97
(b) Indebtedness created hereunder or under any other Loan Document;
(c) in the case of any Subsidiary, Indebtedness owed to the Borrower
or any wholly owned Subsidiary that is a Guarantor, which Indebtedness is
evidenced by a note or notes pledged to the Collateral Agent under the
Pledge Agreement;
(d) prior to the Merger Date, Indebtedness of any subsidiary of the
Company owed to the Company;
(e) in the case of the Borrower, Indebtedness under Rate Protection
Agreements entered into in the ordinary course of business on terms and
with counterparties reasonably satisfactory to the Administrative Agent
(and any Lender is hereby deemed to be satisfactory);
(f) Indebtedness of the Company and its subsidiaries incurred after
the date of this Agreement and prior to the Tender Offer Date and not
incurred in violation of the Merger Agreement;
(g) Subordinated Debt issued after the Merger Date;
(h) accounts payable, rent obligations (other than Capital Lease
Obligations) and operating expenses incurred in the ordinary course of
business;
(i) in the case of the Borrower, reimbursement obligations in favor of
any Lender in respect of letters of credit issued by such Lender after the
date of this Agreement and prior to the Merger Date and not in excess of
$2,000,000, in the aggregate for all Lenders, at any time outstanding;
(j) purchase money Indebtedness incurred in the ordinary course of
business after the date of this Agreement (including financings through
industrial revenue and similar bonds) to finance Capital Expenditures
permitted under Section 6.13; provided, however, that such Indebtedness is
incurred within 90 days after the making of the Capital Expenditure so
financed;
<PAGE>
98
(k) in the case of the Borrower, Indebtedness issued as consideration
for the repurchase of stock or options, as permitted by Section 6.06
(a)(ii), not in excess of $5,000,000 aggregate principal amount outstanding
at any time;
(l) Indebtedness consisting of Guarantees of Indebtedness permitted
under clause (h) above; and
(m) other Indebtedness of the Borrower not in excess of $10,000,000
aggregate principal amount at any time outstanding, of which up to
$3,500,000 may be in the form of Capital Lease Obligations and the balance
shall be unsecured.
SECTION 6.02. Liens. Create, incur, assume or permit to exist any Lien on
any property or assets (including stock or other securities of any person,
including any Subsidiary) now owned or hereafter acquired by it or on any income
or revenues or rights in respect of any thereof, except:
(a) any Lien on property or assets of the Borrower and the
Subsidiaries existing on the date of this Agreement and set forth in
Schedule 6.02; provided, however, that such Lien shall secure only those
obligations that it secures on the date hereof;
(b) any Lien created under the Loan Documents;
(c) any Lien existing on any property or asset prior to the
acquisition thereof by the Borrower or any Subsidiary; provided, however,
that (i) such Lien is not created in contemplation of or in connection with
such acquisition, (ii) such Lien does not apply to any other property or
assets of the Borrower or any Subsidiary and (iii) such Lien does not (A)
materially interfere with the use and occupancy of any Mortgaged Property,
(B) materially reduce the fair market value of such Mortgaged Property but
for such Lien or (C) result in any material increase in the cost of
operating, occupying or owning or leasing such Mortgaged Property;
(d) any Lien incurred by the Company or any of its subsidiaries after
the date of this Agreement and prior to the Tender Offer Date and not
incurred in violation of the Merger Agreement; provided, however, that such
<PAGE>
99
Lien shall be discharged or released on or prior to the Merger Date;
(e) any Lien for taxes, assessments or government charges not yet due
or that are being contested in compliance with Section 5.03;
(f) carriers', warehousemen's, mechanics', materialmen's, repairmen's
or other like Liens arising in the ordinary course of business and securing
obligations that are not due and payable or that are being contested in
compliance with Section 5.03;
(g) pledges and deposits made in the ordinary course of business in
compliance with workmen's compensation, unemployment insurance and other
social security laws or regulations;
(h) deposits to secure the performance of bids, trade contracts (other
than for Indebtedness), leases (other than Capital Lease Obligations),
statutory obligations, surety and appeal bonds, performance bonds and other
obligations of a like nature incurred in the ordinary course of business;
(i) zoning restrictions, easements, rights-of-way, restrictions on use
of real property and other similar encumbrances incurred in the ordinary
course of business that, in the aggregate, are not substantial in amount
and do not materially detract from the value of the property subject
thereto or interfere with the ordinary conduct or the business of the
Borrower or any Subsidiary;
(j) unpaid vendors' Liens, rights of reclamation or other like Liens
of sellers of inventory arising in the ordinary course of business and
securing obligations not past due;
(k) any purchase money security interest in fixed assets; provided,
however, that (i) such security interest only secures Indebtedness
permitted under Section 6.01(j), (ii) such security interest is created and
perfected substantially simultaneously with the incurrence of such
Indebtedness, (iii) such security interest applies only to fixed assets the
purchase of which is financed with such Indebtedness and (iv) the
Indebtedness secured thereby is not less than 75% nor
<PAGE>
100
more than 85% of the fair market value of the fixed assets subject to such
security interest (measured at the date of incurrence of such security
interest); and
(l) any Lien represented by the interest of a lessor in property the
subject of a Capital Lease Obligation of the Borrower permitted by Section
6.01(m); and
(m) any Lien in favor of Bayer AG or any of its subsidiaries in
respect of securities of a Permitted Foreign Company (other than a
Permitted Foreign Company described in clause (c) of the definition
thereof).
SECTION 6.03. Sale and Lease-Back Transactions. Enter into any Sale and
Lease-Back Transaction.
SECTION 6.04. Investments, Loans and Advances. Purchase, hold or acquire
any capital stock, evidences of indebtedness or other securities of, make or
permit to exist any loans or advances to, Guarantee any Indebtedness of, or make
or permit to exist any investment or any other interest in, any other person,
except:
(a) investments by the Borrower existing on or subscribed to prior to
the date of this Agreement in the capital stock of the Subsidiaries;
(b) investments in the Shares;
(c) investments by the Company existing on the Tender Offer Date in
the capital stock of its subsidiaries; provided, however, that none of such
investments shall have been made in violation of the Merger Agreement;
(d) loans and advances to officers or employees of the Borrower or any
Subsidiary in the ordinary course of business not in excess of $1,500,000
at any time outstanding;
(e) investments in, or loans and advances to, wholly owned
Subsidiaries that are Guarantors or, in the case of an investment, that
shall become wholly owned Subsidiaries that are Guarantors following such
investment;
<PAGE>
101
(f) Guarantees entered into in the ordinary course of business of
Indebtedness of wholly owned Subsidiaries that are Guarantors;
(g) Permitted Investments;
(h) investments existing on or subscribed to prior to the date of this
Agreement and set forth on Schedule 6.04;
(i) in the case of the Borrower and the Subsidiaries other than
Permitted Foreign Companies, investments in, and loans or advances to,
Permitted Foreign Companies in a net aggregate amount not to exceed
$10,000,000 in any fiscal year plus, commencing with fiscal year 1997, 50%
of the excess, if any, of (A) $10,000,000 over (B) the aggregate amount of
such investments, loans and advances made during the preceding fiscal year;
(j) in the case of the Borrower and the Subsidiaries other than
Permitted Foreign Companies, Guarantees of Indebtedness of Permitted
Foreign Companies; provided, however, that any payment on such a Guarantee
shall not be permitted under this clause (j) (but may be permitted under
clause (i) above or clause (l) below);
(k) in the case of Permitted Foreign Companies, any investment in, or
loan or advance to, or Guarantee of Indebtedness of, any Permitted Foreign
Company; and
(l) other or additional investments, loans and advances in a net
aggregate amount not to exceed $10,000,000 at any time prior to the last
day of fiscal year 1997 and $15,000,000 thereafter.
SECTION 6.05. Mergers, Consolidations and Sales of Assets. Other than the
Tender Offer and the Merger, merge into or consolidate with any other person, or
permit any other person to merge into or consolidate with it, or sell, transfer,
lease or otherwise dispose of (in one transaction or in a series of
transactions) all or any substantial part of its assets (whether now owned or
hereafter acquired) or any capital stock of any Subsidiary, except that (a) the
Borrower and any Subsidiary may sell inventory in the ordinary course of
business, (b) if at the time thereof and immediately after giving effect thereto
no
<PAGE>
102
Event of Default or Default shall have occurred and be continuing (i) any wholly
owned Subsidiary may merge into the Borrower in a transaction in which the
Borrower is the surviving corporation and (ii) any wholly owned Subsidiary may
merge into or consolidate with any other Subsidiary in a transaction in which
the surviving entity is a wholly owned Subsidiary and (c) if at the time thereof
and immediately after giving effect thereto no Event of Default or Default shall
have occurred and be continuing, any Subsidiary may dissolve or liquidate
through a transfer of its assets to its shareholders.
SECTION 6.06. Dividends and Distributions; Restrictions on Ability of
Subsidiaries To Pay Dividends. (a) Other than the payment for Shares in the
Merger (including Shares with respect to which appraisal rights shall be
exercised) and payments required by the Merger Agreement in respect of options
covering Shares, declare or pay, directly or indirectly, any dividend or make
any other distribution (by reduction of capital or otherwise), whether in cash,
property, securities or a combination thereof, with respect to any shares of its
capital stock or directly or indirectly redeem, purchase, retire or otherwise
acquire for value (or permit any Subsidiary to purchase or acquire) any shares
of any class of its capital stock or set aside any amount for any such purpose;
provided, however, that (i) any Subsidiary may declare and pay dividends or make
other distributions to the Borrower or any wholly owned Subsidiary that is a
Guarantor, (ii) if at the time thereof and immediately after giving effect
thereto no Event of Default shall have occurred and be continuing, the Borrower
may repurchase stock or options from former directors, former officers and
former employees (or their legal representatives) in the ordinary cause of
business in accordance with any duly instituted stock option plan, (iii) the
Borrower may perform its obligations under the agreements referred to in Section
6.07(d) and (iv) after December 30, 1995, the Borrower may declare and pay
dividends with respect to its common stock if (A) at the time thereof and
immediately after giving effect thereto, no Event of Default or Default shall
have occurred and be continuing, (B) at the time thereof and after giving effect
to any Indebtedness to be incurred in connection therewith, the Leverage Ratio
shall not be greater than 2.5 to 1.0 and (C) after giving effect thereto, the
aggregate amount of all such dividends since December 31, 1995, shall not exceed
25% of Net Income for the period from and including October 1,
<PAGE>
103
1995, to and including the last day of the most recent complete fiscal quarter.
(b) Other than the Merger Agreement and this Agreement, permit any
Subsidiary to, directly or indirectly, create or otherwise cause or suffer to
exist or become effective any encumbrance or restriction on the ability of any
such Subsidiary to (i) pay any dividends or make any other distributions on its
capital stock or any other interest or (ii) make or repay any loans or advances
to the Borrower or the parent of such Subsidiary.
SECTION 6.07. Transactions with Affiliates. Sell or transfer any property
or assets to, or purchase or acquire any property or assets from, or otherwise
engage in any other transactions with, any of its Affiliates, except that the
Borrower or any Subsidiary may engage in any of the foregoing transactions in
the ordinary course of business at prices and on terms and conditions not less
favorable to the Borrower or such Subsidiary than could be obtained on an
arm's-length basis from unrelated third parties; provided, however, that the
foregoing shall not apply to:
(a) loans and advances permitted by Section 6.04(d);
(b) the formation of any Permitted Foreign Company;
(c) transactions between or among the Borrower and wholly owned
Subsidiaries that are Guarantors;
(d) transactions required 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
Agreement; and
(e) the grant of stock options by the Borrower to its directors,
officers and employees in the ordinary course of business and the exercise
of such stock options; and
(f) the consummation of the Merger.
SECTION 6.08. Business of Borrower and Subsidiaries. (a) Own, manage or
operate any business not
<PAGE>
104
principally engaged in a segment of the pharmaceutical or health-care industry
or ancillary thereto.
(b) Make any change materially adverse to the Lenders in the nature of
its business as carried on at the date of this Agreement.
SECTION 6.09. Operating Leases. Permit the aggregate rental expense for the
Borrower and the Subsidiaries for any fiscal year, determined on a consolidated
basis in accordance with GAAP, to exceed $8,000,000.
SECTION 6.10. Amendments of Certain Agreements; Conduct of Acquisition. (a)
Amend, waive, modify or terminate any provisions of its constitutive documents
or any agreement if the effect of such amendment, waiver, modification or
termination could reasonably be expected to have a Material Adverse Effect.
(b) Amend, waive or modify any provision of the Merger Agreement in any
material respect or, after the Closing Date, terminate the Merger Agreement;
provided, however, that the approval of the Lenders shall not be required for
any extension of the Tender Offer.
(c) Pay more than $250,000,000 (net of any cash paid to the Company upon
the exercise of outstanding options) to shareholders to acquire all the
outstanding Shares (other than Shares with respect to which appraisal rights
shall be exercised) and acquire, redeem or terminate all outstanding rights to
acquire Shares.
SECTION 6.11. Fiscal Year. Change the end of its fiscal year; provided,
however, that approval from the Required Lenders for any such changes shall not
be unreasonably withheld.
SECTION 6.12. Payment on Other Indebtedness. Make any distribution, whether
in cash, property, securities or a combination thereof, other than scheduled
payments of principal and interest as and when due (to the extent not prohibited
by applicable subordination provisions), in respect of, or pay, or offer to
commit to pay, or directly or indirectly redeem, repurchase, retire or otherwise
acquire for consideration, or set apart any sum for the aforesaid purposes, any
Indebtedness (other than the
<PAGE>
105
Obligations), except for payments in the form of common stock of the Borrower.
SECTION 6.13. Capital Expenditures. Permit the aggregate amount of Capital
Expenditures made (a) for the period from and including September 1, 1995, to
and including December 30, 1995, to exceed $10,000,000 or (b) In any fiscal
year, commencing with fiscal year 1996, to exceed $25,000,000 plus, commencing
with fiscal year 1997, 50% of the excess, if any, of (i) $25,000,000 over (ii)
actual Capital Expenditures for the preceding fiscal year.
SECTION 6.14. Leverage Ratio. Permit the Leverage Ratio as of any date
during any period specified below to be in excess of the ratio set forth below
next to such period:
Period Ratio
From and including the last day
of fiscal 1995 to but
excluding the last day of
the second fiscal quarter
of 1996
5.00 to 1.00
From and including the last
day of the second fiscal
quarter of 1996 to but
excluding the last day of
the third fiscal quarter or
1996 4.75 to 1.00
From and including the last
day of the third fiscal
quarter of 1996 to but
excluding the last day of
fiscal 1996 4.50 to 1.00
From and including the last
day of fiscal 1996 to but
excluding the last day of
fiscal 1997 4.00 to 1.00
From and including the last
day of fiscal 1997 to but
excluding the last day of
fiscal 1998 3.50 to 1.00
Thereafter 3.00 to 1.00
<PAGE>
106
SECTION 6.15. Senior Debt Ratio. Permit the ratio of (i) Senior Debt as of
any date during any period specified below to (ii) EBITDA for the most recent
complete four fiscal quarter period ended on or prior to such date to be in
excess of the ratio set forth below next to such period:
Period Ratio
From and including the last
day of fiscal 1995 to but
excluding the last day of
the second fiscal quarter
of 1996 5.00 to 1.00
From and including the last
day of the second fiscal
quarter of 1996 to but
excluding the last day of
the third fiscal quarter of
1996 4.75 to 1.00
From and including the last
day of the third fiscal
quarter of 1996 to but
excluding the last day
of fiscal 1996 4.50 to 1.00
From and including the last
day of fiscal 1996 to but
excluding the last day of
fiscal 1997 4.00 to 1.00
From and including the last
day of fiscal 1997 to but
excluding the last day of
fiscal 1998 3.00 to 1.00
Thereafter 2.50 to 1.00
<PAGE>
107
SECTION 6.16. Net Worth. Permit Net Worth as of any date during any period
specified below to be less than the amount set forth below next to such period:
Period Amount
From and including the last
day of the third fiscal
quarter of 1995 to but
excluding the last day of
fiscal 1996 $145,000,000
From and including the last
day of fiscal 1996 to but
excluding the last day of
fiscal 1997 $170,000,000
From and including the last
day of fiscal 1997 to but
excluding the last day of
fiscal 1998 $225,000,000
From and including the last
day of fiscal 1998 to but
excluding the last day of
fiscal 1999 $275,000,000
Thereafter $350,000,000
SECTION 6.17. Working Capital. Permit the ratio of Current Assets to
Current Liabilities as of the last day of any fiscal quarter to be less than
1.75 to 1.Q0.
SECTION 6.18. Fixed Charge Coverage Ratio. Permit the Fixed Charge Coverage
Ratio as of any date to be less than 1.5 to 1.0.
ARTICLE VII
Events of Default
In case of the happening of any of the following events ("Events of
Default"):
(a) any material representation or warranty made or deemed made by any
Loan Party in any Loan Document or in connection with the borrowings or
issuances of Letters of Credit hereunder, or any representation,
<PAGE>
108
warranty, statement or information contained in any report, certificate,
financial statement or other instrument authored and furnished by any Loan
Party to the Administrative Agent in connection with or pursuant to any
Loan Document, shall prove to have been false or misleading in any material
respect when so made, deemed made or furnished;
(b) default shall be made in the payment of any principal of any Loan
or the reimbursement with respect to any L/C Disbursement when and as the
same shall become due and payable, whether at the due date thereof or at a
date fixed for prepayment thereof or by acceleration thereof or otherwise;
(c) default shall be made in the payment of any Fee or any interest on
any Loan or L/C Disbursement or any other amount (other than an amount
referred to in clause (b) above) due under any Loan Document, when and as
the same shall become due and payable, and such default shall continue
unremedied for a period of three Business Days;
(d) default shall be made in the due observance or performance by the
Borrower or any Subsidiary of any covenant, condition or agreement
contained in Section 5.01(a), 5.05 or 5.08 or in Article VI;
(e) default shall be made in the due observance or performance by the
Borrower or any Subsidiary of any covenant, condition or agreement
contained in any Loan Document (other than those specified in clause (b),
(c) or (d) above) and such default shall continue unremedied for a period
of 30 days after notice thereof from the Administrative Agent or any Lender
to the Borrower;
(f) the Borrower or any Subsidiary shall (i) fail to pay any principal
or interest, regardless of amount, due in respect of any Indebtedness in a
principal amount in excess of $5,000,000, when and as the same shall become
due and payable, or (ii) fail to observe or perform any other term,
covenant, condition or agreement contained in any agreement or instrument
evidencing or governing any such Indebtedness if the effect of any failure
referred to in this clause (ii) is to cause, or to permit the holder or
holders of such Indebtedness or a trustee on its or their behalf (with
<PAGE>
109
or without the giving of notice, the lapse of time or both) to cause, such
Indebtedness to become due prior to its stated maturity;
(g) an involuntary proceeding shall be commenced or an involuntary
petition shall be filed in a court of competent jurisdiction seeking (i)
relief in respect of the Borrower or any Subsidiary, or of a substantial
part of the property or assets of the Borrower or a Subsidiary, under Title
11 of the United States Code, as now constituted or hereafter amended, or
any other Federal, state or foreign bankruptcy, insolvency, receivership or
similar law, (ii) the appointment of a receiver, trustee, custodian,
sequestrator, conservator or similar official for the Borrower or any
Subsidiary or for a substantial part of the property or assets of the
Borrower or a Subsidiary or (iii) the winding-up or liquidation of the
Borrower or any Subsidiary; and such proceeding or petition shall continue
undismissed for 60 days or an order or decree approving or ordering any of
the foregoing shall be entered;
(h) the Borrower or any Subsidiary shall (i) voluntarily commence any
proceeding or file any petition seeking relief under Title 11 of the United
States Code, as now constituted or hereafter amended, or any other Federal,
state or foreign bankruptcy, insolvency, receivership or similar law, (ii)
consent to the institution of, or fail to contest in a timely and
appropriate manner, any proceeding or the filing of any petition described
in clause (g) above, (iii) apply for or consent to the appointment Of a
receiver, trustee, custodian, sequestrator, conservator or similar official
for the Borrower or any Subsidiary or for a substantial part of the
property or assets of the Borrower or any Subsidiary, (iv) file an answer
admitting the material allegations of a petition filed against it in any
such proceeding, (v) make a general assignment for the benefit of
creditors, (vi) become unable, admit in writing its inability or fail
generally to pay its debts as they become due or (vii) take any action for
the purpose of effecting any of the foregoing;
(i) one or more judgments for the payment of money in an aggregate
amount in excess of $5,000,000 (net of amounts covered by insurance) shall
be rendered against the Borrower, any Subsidiary or any combination thereof
<PAGE>
110
and the same shall remain undischarged for a period of 30 consecutive days
during which execution shall not be effectively stayed, or any action shall
me legally taken by a judgment creditor to levy upon assets or properties
of the Borrower or any Subsidiary to enforce any such judgment;
(j) an ERISA Event shall have occurred that, in the opinion of the
Required Lenders, when taken together with all other such ERISA Events that
have occurred, could reasonably be expected to result in liability of the
Borrower and the ERISA Affiliates in an aggregate amount exceeding
$5,000,000;
(k) any security interest purported to be created by any Security
Document shall be asserted by the Borrower or any other Loan Party not to
be a valid, perfected, first priority (except as otherwise expressly
provided in this Agreement or such Security Document) security interest in
the securities, assets or properties covered thereby, except to the extent
(i) that any such loss of perfection or priority results from the failure
of the Collateral Agent to maintain possession of certificates representing
securities pledged under the Pledge Agreement, the failure of the
Collateral Agent to make filings in the jurisdictions indicated on the
Perfection Certificate or the failure of the Collateral Agent to make any
necessary continuation filing or (ii) that such loss is covered by a
lender's title insurance policy and the related insurer promptly after such
loss shall have acknowledged in writing that such loss is covered by such
title insurance policy;
(l) (i) the Pledge Agreement shall not, or shall cease to, be
effective to create in favor of the Collateral Agent, for the ratable
benefit of the Secured Parties, a legal, valid and enforceable security
interest in the Collateral (as defined in the Pledge Agreement) or the
Pledge Agreement shall not, or shall cease to, constitute a perfected Lien
on, and security interest in, all right, title and interest of the pledgors
thereunder in such Collateral, in each case prior and superior in right to
any other person, (ii) the Security Agreement or the Chattel Mortgage shall
not, or shall cease to, be effective to create in favor of the Collateral
Agent, for the ratable benefit of the Secured Parties, a legal, valid and
enforceable
<PAGE>
111
security interest in the Collateral (as defined in the Security Agreement)
or the Mortgaged Property (as defined in the Chattel Mortgage), as
applicable, or the Security Agreement or the Chattel Mortgage shall not, or
shall cease to, constitute a perfected Lien on, and security interest in,
all right, title and interest of the grantors thereunder in such Collateral
or Mortgaged Property, as applicable, in each case prior and superior in
right to any other person, other than with respect to Liens expressly
permitted by Section 6.02, or (iii) the Mortgages shall not, or shall cease
to, be effective to create in favor of the Collateral Agent, for the
ratable benefit of the Secured Parties, a legal, valid and enforceable Lien
on all of the Loan Parties' right title and interest in and to the
Mortgaged Properties thereunder and the proceeds thereof, or the Mortgages
shall not, or shall cease to, constitute a perfected Lien on, and security
interest in, all right, title and interest of the Borrower and the
Subsidiaries in such Mortgaged Properties and the proceeds thereof, in each
case prior and superior in right to any other person, other than with
respect to Liens expressly permitted by Section 6.02, except in each case
to the extent (A) that any such loss of perfection or priority results from
the failure of the Collateral Agent to maintain possession of certificates
representing securities pledged under the Pledge Agreement or mortgage
notes pledged under any other Security Document, the failure of the
Collateral Agent to make filings in the jurisdictions indicated on the
Perfection Certificate (or instruct the Borrower to make such filings) or
the failure of the Collateral Agent to make any necessary continuation
filing (or instruct the Borrower to make such filings), (B) that such loss
is covered by a lender's title insurance policy and the related insurer
promptly after such loss shall have acknowledged in writing that such loss
is covered by such title insurance policy, or (C) the aggregate fair market
value of all Collateral with respect to which such loss applies is less
than $1,000,000;
(m) the Guarantee Agreement shall cease to be, or shall be asserted by
the Borrower or any other Loan Party not to be, a legal, valid and binding
obligation of (i) any Specified Guarantor or (ii) multiple Guarantors that,
taken together, would constitute a Specified Guarantor; or
<PAGE>
112
(n) there shall have occurred a Change in Control;
then, and in every such event (other than an event with respect to the Borrower
described in clause (g) or (h) above), and at any time thereafter during the
continuance of such event, the Administrative Agent may, and at the request of
the Required Lenders shall, by notice to the Borrower, take either or both of
the following actions, at the same or different times: (i) terminate forthwith
the Commitments and (ii) declare the Loans then outstanding to be forthwith due
and payable in whole or in part, whereupon the principal of the Loans so
declared to be due and payable, together with accrued interest thereon and any
unpaid accrued Fees and all other liabilities of the Borrower accrued hereunder
and under any other Loan Document, shall become forthwith due and payable,
without presentment, demand, protest or any other notice of any kind, all of
which are hereby expressly waived by the Borrower, anything contained herein or
in any other Loan Document to the contrary notwithstanding; and in any event
with respect to the Borrower described in paragraph (g) or (h) above, the
Commitments shall automatically terminate and the principal of the Loans then
outstanding, together with accrued interest thereon and any unpaid accrued Fees
and all other liabilities of the Borrower accrued hereunder and under any other
Loan Document, shall automatically become due and payable, without presentment,
demand, protest or any other notice of any kind, all of which are hereby
expressly waived by the Borrower, anything contained herein or in any other Loan
Document to the contrary notwithstanding.
ARTICLE VIII
The Administrative Agent and the Collateral Agent
In order to expedite the transactions contemplated by this Agreement,
Chemical Bank is hereby appointed to act as Administrative Agent and Collateral
Agent on behalf of the Lenders and the Issuing Bank (for purposes of this
Article VIII, the Administrative Agent and the Collateral Agent are referred to
collectively as the "Agents"). Each of the Lenders and each assignee of any such
Lender, hereby irrevocably authorizes the Agents to take such actions on behalf
of such Lender or assignee or the Issuing Bank and to exercise such powers as
are specifically delegated to the Agents by the terms and provisions hereof and
of the other Loan Documents, together with such actions and powers as are
<PAGE>
113
reasonably incidental thereto. The Administrative Agent is hereby expressly
authorized by the Lenders and the Issuing Bank, without hereby limiting any
implied authority, (a) to receive on behalf of the Lenders and the Issuing Bank
all payments of principal of and interest on the Loans, all payments in respect
of L/C Disbursements and all other amounts due to the Lenders hereunder, and
promptly to distribute to each Lender or the Issuing Bank its proper share of
each payment so received; (b) to give notice on behalf of each of the Lenders to
the Borrower of any Event of Default specified in this Agreement of which the
Administrative Agent has actual knowledge acquired in connection with its agency
hereunder; and (c) to distribute to each Lender copies of all notices, financial
statements and other materials delivered by the Borrower pursuant to this
Agreement as received by the Administrative Agent. Without limiting the
generality of the foregoing, the Agents are hereby expressly authorized to
execute any and all documents (including releases) with respect to the
Collateral and the rights of the Secured Parties with respect thereto, as
contemplated by and in accordance with the provisions of this Agreement and the
Security Documents.
Each Lender specifically acknowledges the provisions of Section 9.06(b),
which provide that, under certain circumstances, payments otherwise due to a
Defaulting Lender need not be made. Each Lender further acknowledges that one of
the consequences of such provisions is that amounts received by the
Administrative Agent for the account of the Lenders may not be distributed on a
pro rata basis. The Administrative Agent shall be conclusively entitled to rely
on any notice furnished pursuant to Section 9.06(b), and neither the
Administrative Agent nor any of its directors, officers, employees or agents
shall be liable as such for any action taken or omitted by them as contemplated
or required by Section 9.06(b) or in reliance upon any such notice except to the
extent of its gross negligence or willful misconduct in determining whether any
notice under Section 9.06(b) on its face meets the requirements thereof. The
exculpation provided in the immediately preceding sentence shall be available
notwithstanding: (a) any dispute as to whether a Lender is a Defaulting Lender;
(b) any dispute as to whether a Default shall have occurred and be continuing;
(c) any dispute as to the amount of any Defaulted Advance; (d) any other dispute
as to the validity of any set-off under Section 9.06(b); or (e) the belief of
the Administrative Agent as to any of the foregoing matters.
<PAGE>
114
Neither the Agents nor any of their respective directors, officers,
employees or agents shall be liable as such for any action taken or omitted by
any of them except for its or his own gross negligence or willful misconduct, or
be responsible for any statement, warranty or representation herein or the
contents of any document delivered in connection herewith, or be required to
ascertain or to make any inquiry concerning the performance or observance by the
Borrower or any other Loan Party of any of the terms, conditions, covenants or
agreements contained in any Loan Document. The Agents shall not be responsible
to the Lenders for the due execution, genuineness, validity, enforceability or
effectiveness of this Agreement or any other Loan Documents, instruments or
agreements. The Agent shall in all cases be fully protected in acting, or
refraining from acting, in accordance with written instructions signed by the
Required Lenders and, except as otherwise specifically provided herein, such
instructions and any action or inaction pursuant thereto shall be binding on all
the Lenders. Each Agent shall, in the absence of knowledge to the contrary, be
entitled to rely on and instrument or document believed by it in good faith to
be genuine and correct and to have been signed or sent by the proper person or
persons. Neither the Agents nor any of their respective directors, officers,
employees or agents shall have any responsibility to the Borrower or any other
Loan Party on account of the failure of or delay in performance or breach by any
Lender or the Issuing Bank of any of its obligations hereunder or to any Lender
or the Issuing Bank on account of the failure of or delay in performance or
breach by any other Lender or the Issuing Bank or the Borrower or any other Loan
Parry of any or their respective obligations hereunder or under any other Loan
Document or in connection herewith or therewith. Each of the Agents may execute
any and all duties hereunder by or through agents or employees and shall be
entitled to rely upon the advice of legal counsel selected by it with respect to
all matters arising hereunder and shall not be liable for any action taken or
suffered in good faith by it in accordance with the advice of such counsel.
The Lenders hereby acknowledge that neither Agent shall be under any duty
to take any discretionary action permitted to be taken by it pursuant to the
provisions of this Agreement unless it shall be requested in writing to do so by
the Required Lenders.
<PAGE>
115
Subject to the appointment and acceptance of a successor Agent as provided
below, either Agent may resign at any time by notifying the Lenders and the
Borrower. Upon any such resignation, the Required Lenders shall have the right
to appoint a successor with the prior approval of the Borrower (such approval
not to be unreasonably withheld or delayed). If no successor shall have been so
appointed by the Required Lenders and shall have accepted such appointment
within 30 days after the retiring Agent gives notice of its resignation, then
the retiring Agent may, on behalf of the Lenders, appoint a successor Agent
which shall be a bank with an office in New York, New York, having a combined
capital and surplus of at least $500,000,000 or an Affiliate of any such bank.
Upon the acceptance of any appointment as Agent hereunder by a successor bank,
such successor shall succeed to and become vested with all the rights,
powers,privileges and duties of the retiring Agent and the retiring Agent shall
be discharged from its duties and obligations hereunder. After the Agent's
resignation hereunder, the provisions of this Article and Section 9.05 shall
continue in effect for its benefit in respect of any actions taken or omitted to
be taken by it while it was acting as Agent.
With respect to the Loans made by it hereunder, each Agent in its
individual capacity and not as Agent shall have the same rights and powers as
any other Lender and may exercise the same as though it were not an Agent, and
the Agents and their Affiliates may accept deposits from, lend money to and
generally engage in any kind of business with the Borrower or any Subsidiary or
other Affiliate thereof as if it were not an Agent.
Each Lender agrees (a) to reimburse the Agents, on demand, in the amount of
its pro rata share (based on its Commitments hereunder) of any reasonable
out-of-pocket expenses incurred for the benefit of the Lenders by the Agents,
including counsel fees and compensation of agents and employees paid for
services rendered on behalf of the Lenders, that shall not have been reimbursed
by the Borrower and (b) to indemnify and hold harmless each Agent and any of its
directors, officers, employees or agents, on demand, in the amount of such pro
rata share, from and against any and all liabilities, taxes, obligations,
losses, damages, penalties, actions, judgments, suits, costs, expenses or
disbursements of any kind or nature whatsoever that may be imposed on, incurred
by or asserted against it in its capacity as Agent or any of them in any way
relating to or
<PAGE>
116
arising out of this Agreement or any other Loan Document or any action taken or
omitted by it or any of them under this Agreement or any other Loan Document, to
the extent the same shall not have been reimbursed by the Borrower, provided,
however, that no Lender shall be liable to an Agent or any such other
indemnified person for any portion of such liabilities, obligations, losses,
damages, penalties, actions, judgments, suits, costs, expenses or disbursements
resulting from the gross negligence or willful misconduct of such Agent or any
of its directors, officers, employees or agents. In the event any Agent is
subsequently reimbursed by any Loan Party for any such expenses, liabilities,
taxes, obligations, losses, damages, penalties, judgments, costs or
disbursements, such Agent shall reimburse each Lender, pro rata, to the extent
of any payment made by such Lender with respect thereto under this paragraph.
Each Lender acknowledges that it has, independently and without reliance
upon the Agents or any other Lender and based on such documents and information
as it has deemed appropriate, made its own credit analysis and decision to enter
into this Agreement. Each Lender also acknowledges that it will, independently
and without reliance upon the Agents or any other Lender and based on such
documents and information as it shall from time to time deem appropriate,
continue to make its own decisions in taking or not taking action under or based
upon this Agreement or any other Loan Document, any related agreement or any
document furnished hereunder or thereunder.
ARTICLE IX
Miscellaneous
SECTION 9.01. Notices. Notices and other communications provided for herein
shall be in writing and shall be delivered by hand or overnight courier service,
mailed by certified or registered mail or sent by telecopy, as follows:
(a) if to the Borrower, to it at 100 Campus Drive, Florham Park, NJ
07932, Attention of the Chief Financial Officer, Telecopy No. (201)
593-5580), with a copy to the General Counsel (Telecopy No. (201)
593-5820);
<PAGE>
117
(b) if to the Administrative Agent, to Chemical Bank Agency Services,
Grand Central Tower, 140 East 45th Street, New York, New York 10017,
Attention of Janet Belden (Telecopy No. (212) 622-0122), with a copy to
Chemical Bank, at 270 Park Avenue, New York 10017, Attention of David
Corcoran (Telecopy No. (212) 972-0009); and
(c) if to a Lender, to it at its address (or telecopy number)
set-forth in Schedule 2.01 or in the Assignment and Acceptance pursuant to
which such Lender shall have become a party hereto.
All notices and other communications given to any party hereto in accordance
with the provisions of this Agreement shall be deemed to have been given on the
date of receipt if delivered by hand or overnight courier service or sent by
telecopy or on the date five Business Days after dispatch by certified or
registered mail if mailed, in each case delivered, sent or mailed (properly
addressed) to such party as provided in this Section 9.01 or in accordance with
the latest unrevoked direction from such party given in accordance with this
Section 9.01.
SECTION 9.02. Survival of Agreement. All covenants, agreements,
representations and warranties made by the Borrower herein and in the
certificates or other instruments prepared or delivered in connection with or
pursuant to this Agreement or any other Loan Document shall be considered to
have been relied upon by the Lenders and the Issuing Bank and shall survive the
making by the Lenders of the Loans and the issuance of Letters of Credit by the
Issuing Bank, regardless of any investigation made by the Lenders or the Issuing
Bank or on their behalf, and shall continue in full force and effect as long as
the principal of or any accrued interest on any Loan or any Fee or any other
amount payable under this Agreement or any other Loan Document is outstanding
and unpaid or any Letter of Credit is outstanding and so long as the Commitments
have not been terminated. The provisions of Sections 2.14, 2.16, 2.20 and 9.05
shall remain operative and in full force and effect regardless of the expiration
of the term of this Agreement, the consummation of the transactions contemplated
hereby, the repayment of any Loans, the expiration of the Commitments, the
expiration of any Letter of Credit, the Invalidity or unenforceability of any
term or provision of his Agreement or any other Loan Document, or any
investigation made by or on behalf of the Administrative
<PAGE>
118
Agent, the Collateral Agent, any Lender or the Issuing Bank.
SECTION 9.03. Binding Effect. This Agreement shall become effective when it
shall have been executed by the Borrower and the Administrative Agent and when
the Administrative Agent shall have received counterparts hereof which, when
taken together, bear the signatures of each of the other parties hereto, and
thereafter shall be binding upon and inure to the benefit of the parties hereto
and their respective permitted successors and assigns.
SECTION 9.04. Successors and Assigns. (a) Whenever in this Agreement any of
the parties hereto is referred to, such reference shall be deemed to include the
permitted successors and assigns of such party; and all covenants, promises and
agreements by or on behalf of the Borrower, the Administrative Agent, the
Issuing Bank or the Lenders that are contained in this Agreement shall bind and
inure to the benefit of their respective successors and assigns
(b) Each Lender may assign to one or more assignees all or a portion of its
interests, rights and obligations under this Agreement (including all or a
portion of its Commitments and the Loans at the time owing to it); provided,
however, that (i) except in the case of an assignment to a Lender or an
Affiliate of such Lender, (x) the Borrower and the Administrative Agent (and, in
the case of any assignment of a Revolving Credit Commitment, the Issuing Bank)
must give their prior written consent to such assignment (which consent shall
not be unreasonably withheld), (y) no assignment may be offered or made to any
pharmaceutical company or to any Affiliate of a pharmaceutical company and (z)
the amount of the Commitment and Loans of the assigning Lender subject to each
such assignment (determined as of the date the Assignment and Acceptance with
respect to such assignment is delivered to the Administrative Agent) shall not
be less than $10,000,000 (or, if less, the entire remaining amount of such
Lender's Commitment), (ii) the parties to each such assignment shall execute and
deliver to the Administrative Agent an Assignment and Acceptance, with a copy
thereof furnished to the Borrower, together (except in the case of any
assignment to an Affiliate of the assigning Lender) with a processing and
recordation fee of $3,500 and (iii) the assignee, if it shall not be a Lender,
shall deliver to the Administrative Agent an Administrative Questionnaire Upon
acceptance and recording pursuant to paragraph (e) below, from and after
<PAGE>
119
the effective date specified in each Assignment and Acceptance, which effective
date shall be at least five Business Days after the execution thereof, (A) the
assignee thereunder shall be a party hereto and, to the extent of the interest
assigned by such Assignment and Acceptance, have the rights and obligations of a
Lender under this Agreement and (B) the assigning Lender thereunder shall, to
the extent of the interest assigned by such Assignment and Acceptance, be
released from its obligations under this Agreement (and, in the case of an
Assignment and Acceptance covering all or the remaining portion of an assigning
Lender's rights and obligations under this Agreement, such Lender shall cease to
be a party hereto but shall continue to be entitled to the benefits of Sections
2.14, 2.16, 2.20 and 9.05, as well as to any interest and Fees accrued for its
account and not yet paid).
(c) By executing and delivering an Assignment and Acceptance, the assigning
Lender thereunder and the assignee thereunder shall be deemed to confirm to and
agree with each other and the other parties hereto as follows: (i) such
assigning Lender warrants that it is the legal and beneficial owner of the
interest being assigned thereby free and clear of any adverse claim and that its
Commitments and the outstanding balances of its Term Loans and Revolving Loans,
in each case without giving effect to assignments thereof which have not become
effective, are as set forth in such Assignment and Acceptance, (ii) except as
set forth in (i) above, such assigning Lender makes no representation or
warranty and assumes no responsibility with respect to any statements,
warranties or representations made in or in connection with this Agreement, or
the execution, legality, validity, enforceability, genuineness, sufficiency or
value of this Agreement, any other Loan Document or any other instrument or
document furnished pursuant hereto, or the financial condition of the Borrower
or any Subsidiary or the performance or observance by the Borrower or any
Subsidiary of any of its obligations under this Agreement, any other Loan
Document or any other instrument or document furnished pursuant hereto; (iii)
such assignee represents and warrants that it is legally authorized to enter
into such Assignment and Acceptance and that neither it nor any of its
Affiliates is engaged in the pharmaceutical or health-care industry; (iv) such
assignee confirms that it has received a copy of this Agreement, together with
copies of the most recent financial statements referred to in Section 3.05(a) or
delivered pursuant to Section 5.04 and such other documents and information as
it has deemed appropriate to make its own
<PAGE>
120
credit analysis and decision to enter into such Assignment and Acceptance; (v)
such assignee shall independently and without reliance upon the Administrative
Agent, the Collateral Agent, such assigning Lender or any other Lender and based
on such documents and information as it shall deem appropriate at the time,
continue to make its own credit decisions in taking or not taking action under
this Agreement; (vi) such assignee appoints and authorizes the Administrative
Agent and the Collateral Agent to take such action as agent on its behalf and to
exercise such powers under this Agreement as are delegated to the Administrative
Agent and the Collateral Agent, respectively, by the terms hereof, together with
such powers as are reasonably incidental thereto; and (vii) such assignee agrees
that it shall perform in accordance with their terms all the obligations which
by the terms of this Agreement are required to be performed by it as a Lender.
(d) The Administrative Agent, acting for this purpose as an agent of the
Borrower, shall maintain at one of its offices in The City of Net York a copy of
each Assignment and Acceptance delivered to it and a register for the
recordation of the names and addresses of the Lenders, and the Commitment of,
and principal amount of the Loans owing to, each Lender pursuant to the terms
hereof from time to time (the "Register"). The entries in the Register shall be
conclusive and the Borrower, the Administrative Agent, the Issuing Bank, the
Collateral Agent and the Lenders may treat each person whose name is recorded in
the Register pursuant to the terms hereof as a Lender hereunder for all purposes
of this Agreement, notwithstanding notice to the contrary. The Register shall be
available for inspection by the Borrower, the Issuing Bank, the Collateral Agent
and any Lender, at any reasonable time and from time to time upon reasonable
prior notice.
(e) Upon its receipt of a duly completed Assignment and Acceptance executed
by an assigning Lender and an assignee, an Administrative Questionnaire
completed in respect of the assignee (unless the assignee shall already be a
Lender hereunder), the processing and recordation fee referred to in paragraph
(b) above and, if required, the written consent of the Borrower, the Issuing
Bank and the Administrative Agent to such assignment, the Administrative Agent
shall (i) accept such Assignment and Acceptance, (ii) record the information
contained therein in the Register and (iii) give prompt notice thereof to the
Lenders and the Issuing Bank. No assignment shall be
<PAGE>
121
effective unless it has been recorded in the Register as provided in this
paragraph (e).
(f) Each Lender may without the consent of the Borrower, the Issuing Bank
or the Administrative Agent sell participations to one or more banks or other
entities in all or a portion of its rights and obligations under this Agreement
(including all or a portion of its Commitment and the Loans owing to it);
provided, however, that (i) such Lender's obligations under this Agreement shall
remain unchanged, (ii) such Lender shall remain solely responsible to the other
parties hereto for the performance of such obligations, (iii) each participating
bank or other entity shall be entitled to the benefit of the cost protection
provisions contained in Sections 2.14, 2.16 and 2.20 to the same extent as if it
were a Lender, but not in an amount greater than that of the Lender from which
it acquired its participation (and any entitlement thereto of such participant
shall reduce pro tanto the right of such Lender to claim the benefit of such
provisions), (iv) a participation may not be offered or sold to any
pharmaceutical company or to any Affiliate of a pharmaceutical company and (v)
the Borrower, the Administrative Agent, the Issuing Bank and the Lenders shall
continue to deal solely and directly with such Lender in connection with such
Lender's rights and obligations under this Agreement, and such Lender shall
retain the sole right to enforce the obligations of the Borrower relating to the
Loans or L/C Disbursements and to approve any amendment, modification or waiver
of any provision of this Agreement (other than amendments, modifications or
waivers decreasing any fees payable hereunder or the amount of principal of or
the rate at which interest is payable on the Loans, extending any scheduled
principal payment date or date fixed for the payment of interest on the Loans or
changing or extending the Commitments).
(g) Notwithstanding Section 9.17, any Lender or participant may, in
connection with any assignment or participation or proposed assignment or
participation pursuant to this Section 9.04, disclose to the assignee or
participant or proposed assignee or participant any information relating to the
Borrower furnished to such Lender by or on behalf of the Borrower; provided,
however, that, prior to any such disclosure of information designated by the
Borrower as confidential, each such assignee or participant or proposed assignee
or participant shall execute an agreement (a copy of which shall be given to the
<PAGE>
122
Borrower) whereby such assignee or participant shall agree to preserve the
confidentiality of such confidential information on terms no less restrictive
than those applicable to the Lenders pursuant to Section 9.17.
(h) Any Lender may at any time assign all or any portion of its rights
under this Agreement or any note issued in connection herewith to a Federal
Reserve Bank to secure extensions of credit by such Federal Reserve Bank to such
Lender; provided, however, that no such assignment shall release a Lender from
any of its obligations hereunder or substitute any such Bank for such Lender as
a party hereto. In order to facilitate such an assignment to a Federal Reserve
Bank, the Borrower shall, at the request of the assigning Lender, duly execute
and deliver to the assigning Lender a promissory note or notes evidencing the
Loans made to the Borrower by the assigning Lender hereunder.
(i) The Borrower shall not assign or delegate any of its rights or duties
hereunder without the prior written consent of the Administrative Agent, the
Issuing Bank and each Lender, and any attempted assignment without such consent
shall be null and void.
(j) In the event that Standard & Poor's, Moody's Investors Service, Inc.,
and Thompson's BankWatch (or InsuranceWatch Ratings Service, in the case of
Lenders that are insurance companies (or Best's Insurance Reports, if such
insurance company is not rated by InsuranceWatch Ratings Service)) shall, after
the date that any Lender becomes a Lender, downgrade the long-term certificate
of deposit ratings of such Lender, and the resulting ratings shall be below
BBB-, Baa3 and C (or BE, in the case of a Lender that is an insurance company
(or B. in the case of an insurance company not rated by InsuranceWatch Ratings
Service)), then the Issuing Bank shall have the right, but not the obligation,
at its own expense, upon notice to such Lender and the Administrative Agent, to
replace (or to request the Borrower to use its reasonable efforts to replace)
such Lender with an assignee (in accordance with and subject to the restrictions
contained in paragraph (b) above), and such Lender hereby agrees to transfer and
assign without recourse (in accordance with and subject to the restrictions
contained in paragraph (b) above) all its interests, rights and obligations in
respect of its Revolving Credit Commitment to such assignee; provided, however,
that (i) no such assignment shall conflict with any
<PAGE>
123
law, rule and regulation or order of any Governmental Authority and (ii) the
Issuing Bank or such assignee, as the case may be, shall pay to such Lender in
immediately available funds on the date of such assignment the principal of and
interest accrued to the date of payment on the Loans made by such Lender
hereunder and all other amounts accrued for such Lender's account or owned to it
hereunder.
SECTION 9.05. Expenses; Indemnity. (a) The Borrower shall pay all
reasonable out-of-pocket expenses reasonably incurred by the Administrative
Agent, the Collateral Agent and the Issuing Bank in connection with the
syndication of the credit facilities provided for herein and the preparation and
administration of this Agreement and the other Loan Documents or in connection
with any amendments, modifications or waivers of the provisions hereof or
thereof) (whether or not the transactions hereby or thereby contemplated shall
be consummated) or incurred during the continuance of a Default by the
Administrative Agent, the Collateral Agent or any Lender in connection with the
enforcement or protection of its rights in connection with this Agreement and
the other Loan Documents or in connection with the Loans made or Letters of
Credit issued hereunder, including the reasonable fees, charges and
disbursements of Cravath, Swaine & Moore, counsel for the Administrative Agent
and the Collateral Agent, and, in connection with any such enforcement or
protection, the reasonable fees, charges and disbursements of any other counsel
for the Administrative Agent, the Collateral Agent or any Lender; provided,
however, that the Borrower shall not be required to pay for separate counsel for
the Administrative Agent and the Collateral Agent.
(b) The Borrower shall indemnify the Administrative Agent, the Collateral
Agent, each Lender and the Issuing Bank, each Affiliate of any of the foregoing
persons and each of their respective directors, officers, employees and agents
(each such person being called an "Indemnitee") against, and hold each
Indemnitee harmless from, any and all losses, claims, damages, liabilities and
related expenses, including reasonable counsel fees, charges and disbursements,
incurred by or asserted against any Indemnitee arising out of, in any way
connected with, or as a result of (i) the execution or delivery of this
Agreement or any other Loan Document or any agreement or instrument contemplated
thereby, the performance by the parties thereto of their respective obligations
thereunder or the consummation of the Transactions and the other transactions
<PAGE>
124
contemplated thereby (excluding, in the case of each Indemnitee other than
Chemical Bank and its Affiliates, legal expenses incurred prior to the date of
this Agreement), (ii) the use of the proceeds of the Loans or issuance of
Letters of Credit, (iii) any claim, litigation, investigation or proceeding
relating to any of the foregoing, whether or not any Indemnitee is a party
thereto, (iv) any actual or alleged presence or Release of Hazardous Materials
on any property owned or operated by the Borrower or any Subsidiary, or any
Environmental Claim related in any way to the Borrower or the Subsidiaries or
(v) in the case of the Administrative Agent, its Affiliates and each of their
respective directors, officers, employees and agents, any claims by any Lender
arising out of any exercise or attempted exercise by the Borrower of rights
under Section 9.06(b); provided, however, that such indemnity shall not, as to
any Indemnitee, be available to the extent that such losses, claims, damages,
liabilities or related expenses are determined by a court of competent
jurisdiction by final and nonappealable judgment to have resulted from the gross
negligence or willful misconduct of such Indemnitee (limited, in the case of
clause (v) above, to gross negligence or wilful misconduct in determining
whether any notice under Section 9.06(b) on its face meets the requirements
thereof).
(c) The provisions of this Section 9.05 shall remain operative and in full
force and effect regardless of the expiration of the term of this Agreement, the
consummation of the transactions contemplated hereby, the repayment of any of
the Loans, the expiration of the Commitments, the expiration of any Letter of
Credit, the invalidity or unenforceability of any term or provision of this
Agreement or any other Loan Document, or any investigation made by or on behalf
of the Administrative Agent, the Collateral Agent, any Lender or the Issuing
Bank. All amounts due under this Section 9.05 shall be payable on written demand
therefor.
SECTION 9.06. Rights of Setoff. (a) If an Event of Default shall have
occurred and be continuing, each Lender is hereby authorized at any time and
from time to time, to the fullest extent permitted by law, to set off and apply
any and all deposits (general or special, time or demand, provisional or final)
at any time held and other indebtedness at any time owing by such Lender to or
for the credit or the account of the Borrower against any of and all the
obligations of the Borrower now or hereafter existing under this Agreement and
other Loan Documents held by such
<PAGE>
125
Lender, irrespective of whether or not such Lender shall have made any demand
under this Agreement or such other Loan Document and although such obligations
may be unmatured. The rights of each Lender under this paragraph (a) are in
addition to other rights and remedies (including other rights of setoff) which
such Lender may have.
(b) If, at any time, (i) any Lender shall be a Defaulting Lender and shall
owe a Defaulted Advance to the Borrower, (ii) no Default shall have occurred and
be continuing and neither the Required Lenders (determined without regard for
the proviso in the definition thereof) nor the Administrative Agent shall have
asserted in writing to the Borrower that a Default shall have occurred and be
continuing and (iii) the Borrower shall be required to make any payment
hereunder or under any Loan Document to or for the account of such Defaulting
Lender, then, unless the Borrower otherwise notifies the Administrative Agent,
the Borrower shall, to the fullest extent permitted by law, set off and apply
the amount of such payment against the Defaulted Advance. Prior to the due time
for any payment with respect to which the Borrower intends to exercise its
rights under this paragraph (b), the Borrower will deliver to the Administrative
Agent a notice signed by a Responsible Officer stating (A) that the conditions
set forth in clauses (i) and (ii) above are satisfied, (B) the amount of the
Defaulted Advance and the applicable Defaulting Lender and (C) the amount to be
set off.
SECTION 9.07. Applicable Law. THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS
(OTHER THAN LETTERS OF CREDIT AND AS EXPRESSLY SET FORTH IN OTHER LOAN
DOCUMENTS) SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE
STATE OF NEW YORK. EACH LETTER OF CREDIT SHALL BE GOVERNED BY, AND SHALL BE
CONSTRUED IN ACCORDANCE WITH, THE LAWS OR RULES DESIGNATED IN SUCH LETTER OF
CREDIT, OR IF NO SUCH LAWS OR ROLES ARE DESIGNATED, THE UNIFORM CUSTOMS AND
PRACTICE FOR DOCUMENTARY CREDITS (1993 REVISION), INTERNATIONAL CHAMBER OF
COMMERCE, PUBLICATION NO. 500 (THE "UNIFORM CUSTOMS") AND, AS TO MATTERS NOT
GOVERNED BY THE UNIFORM CUSTOMS, THE LAWS OF THE STATE OF NEW YORK.
SECTION 9.08. Waivers; Amendment. (a) No failure or delay of the
Administrative Agent, the Collateral Agent, any Lender or the Issuing Bank in
exercising any power or right hereunder or under any other Loan Document shall
operate as a waiver thereof, nor shall any single or partial exercise of any
such right or power, or any
<PAGE>
126
abandonment or discontinuance of steps to enforce such a right or power,
preclude any other or further exercise thereof or the exercise of any other
right or power. The rights and remedies of the Administrative Agent, the
Collateral Agent, the Issuing Bank and the Lenders hereunder and under the other
Loan Documents are cumulative and are not exclusive of any rights or remedies
that they would otherwise have. No waiver of any provision of this Agreement or
any other Loan Document or consent to any departure by the Borrower therefrom
shall in any event be effective unless the same shall be permitted by paragraph
(b) below, and then such waiver or consent shall be effective only in the
specific instance and for the purpose for which given. No notice or demand on
the Borrower in any case shall entitle the Borrower to any other or further
notice or demand in similar or other circumstances.
(b) Neither this Agreement nor any provision hereof may be waived, amended
or modified except pursuant to an agreement or agreements in writing entered
into by the Borrower and the Required Lenders; provided, however, that no such
agreement shall (i) decrease the principal amount of, or extend the maturity of
or any scheduled principal payment date or date for the payment of any interest
on any Loan or any date for reimbursement of an L/C Disbursement, or waive or
excuse any such payment or any part thereof, or decrease the rate of interest on
any Loan or L/C Disbursement, without the prior written consent of each Lender
directly affected thereby, (ii) change or extend the Commitment or decrease the
Commitment Fees or L/C Participation Fees of any Lender or extend the time for
payment thereof without the prior written consent of such Lender, or (iii) amend
or modify the provisions of Section 2.16 or 9.04(i), the provisions of this
Section 9.08 or the definition of the term "Required Lenders" without the prior
written consent of each Lender, (iv) release all or a substantial part of the
Collateral, or release any Specified Guarantor, without the prior written
consent of Lenders having Loans, L/C Exposures and unused Revolving Credit and
Term Loan Commitments at such time representing at least 80% of the sum of all
Loans outstanding, L/C Exposures and unused Revolving Credit and Term Loan
Commitments at such time, or (v) amend, modify or otherwise affect the rights or
duties of the Administrative Agent, the Collateral Agent or the Issuing Bank
hereunder or under any other Loan Document without the prior written consent of
the Administrative Agent, the Collateral Agent or the Issuing Bank.
<PAGE>
127
SECTION 9.09. Interest Rate Limitation. Notwithstanding anything herein to
the contrary, if at any time the interest rate applicable to any Loan or
participation in any L/C Disbursement, together with all fees, charges and other
amounts which are treated as interest on such Loan or participation in such L/C
Disbursement under applicable law (collectively the "Charges"), shall exceed the
maximum lawful rate (the "Maximum Rate") which may be contracted for, charged,
taken, received or reserved by the Lender holding such Loan or participation in
accordance with applicable law, the rate of interest payable in respect of such
Loan or participation hereunder, together with all Charges payable in respect
thereof, shall be limited to the Maximum Rate and, to the extent lawful, the
interest and Charges that would have been payable in respect of such Loan or
participation but were not payable as a result or the operation of this Section
shall be cumulated and the interest and Charges payable to such Lender in
respect of other Loans or participations or periods shall be increased (but not
above the Maximum Rate therefor) until such cumulated amount, together with
interest thereon at the Federal Funds Effective Rate to the date of repayment,
shall have been received by such Lender.
SECTION 9.10. Entire Agreement. This Agreement, the Fee Letter and the
other Loan Documents constitute the entire contract between the parties relative
to the subject matter hereof. Any other previous agreement among the parties
with respect to the subject matter hereof is superseded by this Agreement and
the other Loan Documents. Nothing in this Agreement or in the other Loan
Documents, expressed or implied, is intended to confer upon any party other than
the parties hereto and thereto any rights, remedies, obligations or liabilities
under or by reason of this Agreement or the other Loan Documents.
SECTION 9.11. WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY WAIVES, TO THE
FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY
JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF, UNDER
OR IN CONNECTION WITH THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS. EACH
PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY
OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD
NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B)
ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER
INTO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS, AS APPLICABLE, BY, AMONG
<PAGE>
128
OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION 9.11.
SECTION 9.12. Severability. In the event any one or more of the provisions
contained in this Agreement or in any other Loan Document should be held
invalid, illegal or unenforceable in any respect, the validity, legality and
enforceability of the remaining provisions contained herein and therein shall
not in any way be affected or impaired thereby. The parties shall endeavor in
good-faith negotiations to replace the invalid, illegal or unenforceable
provisions with valid provisions the economic effect of which comes as close as
possible to that of the invalid, illegal or unenforceable provisions.
SECTION 9.13. Counterparts. This Agreement may be executed in counterparts
(and by different parties hereto on different counterparts), each of which shall
constitute an original but all of which when taken together shall constitute a
single contract, and shall become effective as provided in Section 9.03.
Delivery of an executed signature page to this Agreement by facsimile
transmission shall be as effective as delivery of a manually signed counterpart
of this Agreement.
SECTION 9.14. Headings. Article and Section headings and the Table of
Contents used herein are for convenience of reference only, are not part of this
Agreement and are not to affect the construction of, or to be taken into
consideration in interpreting, this Agreement.
SECTION 9.15. Jurisdiction; Consent to Service of Process. (a) Each party
hereto hereby irrevocably and unconditionally submits, for itself and its
property, to the nonexclusive jurisdiction o
f any New York State court or
Federal court of the United States of America sitting in New York City, and any
appellate court from any thereof, in any action or proceeding arising out of or
relating to this Agreement or the other Loan Documents, or for recognition or
enforcement of any judgment, and each party hereto hereby irrevocably and
unconditionally agrees that all claims in respect of any such action or
proceeding may be heard and determined in such New York State or, to the extent
permitted by law, in such Federal court. Each party hereto agrees that a final
judgment in any such action or proceeding shall be conclusive and may be
enforced in other jurisdictions by suit on the judgment or in any other manner
provided by law. Nothing in this Agreement shall affect any
<PAGE>
129
right that the Administrative Agent, the Collateral Agent, the Issuing Bank or
any Lender may otherwise have to bring any action or proceeding relating to this
Agreement or the other Loan Documents against the Borrower or its properties in
the courts of any jurisdiction.
(b) Each party hereto hereby irrevocably and unconditionally waives, to the
fullest extent it may legally and effectively do so, any objection which it may
now or hereafter have to the laying of venue of any suit, action or proceeding
arising out of or relating to this Agreement or the other Loan Documents in any
New York State or Federal court. Each party hereto hereby irrevocably waives, to
the fullest extent permitted by law, the defense of an inconvenient forum to the
maintenance of such action or proceeding in any such court.
(c) Each party hereto irrevocably consents to service of process in the
manner provided for notices in Section 9.01. Nothing in this Agreement will
affect the right of any party to this Agreement to serve process in any other
manner permitted by law.
SECTION 9.16. Mortgaged Property Casualty and Condemnation. (a)
Notwithstanding any other provision of this Agreement or the Security Documents,
the Collateral Agent is authorized, at its option (for the benefit of the
Secured Parties), to collect and receive, to the extent payable to the Borrower
or any other Loan Party, all insurance proceeds, damages, claims and rights of
action under any insurance policies with respect to any casualty or other
insured damage ("Casualty") to any portion of any Mortgaged Property
(collectively "Insurance Proceeds"), unless the amount of the related Insurance
Proceeds is less than $1,000,000 and an Event of Default shall not have occurred
and be continuing. The Borrower shall notify the Collateral Agent and the
Administrative Agent, in writing, promptly after the Borrower or any Subsidiary
obtains notice or knowledge of any Casualty to a Mortgaged Property, which
notice shall set forth a description of such Casualty and the Borrower's good
faith estimate of the amount of related damages. The Borrower shall, subject to
the foregoing limitations, endorse and transfer or cause to be endorsed or
transferred any Insurance Proceeds received by it or any other Loan Party to the
Collateral Agent.
(b) In the event of any Casualty of less than or equal to 50% of the
useable square footage of the
<PAGE>
130
improvements of any Mortgaged Property, the Borrower shall, subject to the
conditions contained in paragraph (f) below, restore such Mortgaged Property to
substantially its same condition immediately prior to such Casualty. In the
event of any Casualty of greater than 50% of the useable square footage of the
improvements of any Mortgaged Property and so long as no Default or Event of
Default has occurred and is continuing, the Borrower shall have the option to:
(i) subject to the conditions contained in paragraph (f) below,
restore such Mortgaged Property to a condition substantially similar to its
condition immediately prior to such Casualty and to invest the balance, if
any, of any Insurance Proceeds in equipment or other assets used in the
Borrower's principal lines of business within 20 months after the receipt
thereof, provided that the Borrower, pending such reinvestment, promptly
deposits such excess Insurance Proceeds in a cash collateral account
established with the Collateral Agent for the benefit of the Secured
Parties,
(ii) replace such Mortgaged Property with property of utility
comparable to that of the replaced Mortgaged Property and to invest the
balance, if any, of any Insurance Proceeds, in equipment, vehicles or other
assets used in the Borrowers principal lines of business within 20 months
after the receipt thereof, provided that the Borrower, pending such
reinvestment, promptly deposits such excess Insurance Proceeds in a cash
collateral account established with the Collateral Agent for the benefit of
the Secured Parties, or
(iii) apply the related Insurance Proceeds to (after reimbursement of
the reasonable costs, if any, incurred by the Collateral Agent in
connection with such Casualty) prepay Loans (in the order set forth in
Section 2.13(d)).
Any Insurance Proceeds on account of damage to fixed assets, fixtures, plant or
equipment that are not applied to restore or replace such Mortgaged Property or
reinvested in the Borrower's principal lines of business as contemplated above
shall be applied (after reimbursement of the reasonable costs, if any, incurred
by the Collateral Agent in connection with such Casualty) to prepay Loans (in
the order set forth in Section 2.13(d)).
<PAGE>
131
(c) If required to do so, the Borrower shall make the election contemplated
by paragraph (b) above by notifying the Collateral Agent and the Administrative
Agent promptly after the later to occur of (i) 10 Business Days after the
Borrower and its insurance carrier reach a final determination of the amount of
any Insurance Proceeds and (ii) 90 days after the occurrence of the Casualty. If
the Borrower shall be required or shall elect to restore the Mortgaged Property,
the insufficiency of any Insurance Proceeds to defray the entire expense of such
restoration shall in no way relieve the Borrower of such obligation so to
restore. In the event the Borrower shall be required to restore or shall notify
the Collateral Agent and the Administrative Agent of its election to restore,
the Borrower shall diligently and continuously prosecute the restoration of the
Mortgaged Property to completion. In the event of a Casualty where the Borrower
is required to make the election set forth in paragraph (b) above and the
Borrower shall fail to notify the Collateral Agent and the Administrative Agent
of its election within the period set forth above or shall elect not to restore
the Mortgaged Property, the Borrower shall apply such Insurance Proceeds (after
reimbursement of all reasonable costs incurred by the Collateral Agent in
connection with the applicable Casualty) to prepay Loans (in the order set forth
in Section 2.13(d)). In addition, upon such prepayment, the Borrower shall be
obligated to place the remaining portion, if any, of the Mortgaged Property in a
safe condition that is otherwise in compliance with the requirements of
applicable Governmental Authorities and the provisions of this Agreement and the
applicable Mortgage.
(d) The Borrower shall notify the Collateral Agent and the Administrative
Agent immediately upon obtaining knowledge of the institution of any action or
proceeding for the taking of any Mortgaged Property, or any part thereof or
interest therein, for public or quasi-public use under the power of eminent
domain, by reason of any public improvement or condemnation proceeding, or in
any other manner (a "Condemnation"). No settlement or compromise of any claim in
connection with any such action or proceeding shall be made without the consent
of the Collateral Agent, which consent shall not be unreasonably withheld. The
Collateral Agent is authorized, at its option (for the benefit of the Secured
Parties), to collect and receive, for application in accordance with paragraphs
(e) and (f) below, all proceeds of any such Condemnation (in each case, the
"Condemnation Proceeds"), unless the amount
<PAGE>
132
of the related Condemnation Proceeds is less than $1,000,000 and an Event of
Default shall not have occurred and be continuing. The Borrower shall execute or
cause to be executed such further assignments of any Condemnation Proceeds as
the Collateral Agent may reasonably require.
(e) In the event of any Condemnation of the Mortgaged Property or any part
thereof, and subject to paragraph (f) below, the Borrower shall apply any
Condemnation Proceeds first, in the case of a partial Condemnation, to the
repair or restoration of any integrated structure subject to such Condemnation
or, in the case of a total Condemnation or a Condemnation of substantially all a
Mortgaged Property (a "substantially all" Condemnation), to the location of a
replacement property, acquisition of such replacement property and construction
of the replacement structures, and second, shall apply the remainder of such
Condemnation Proceeds (after reimbursement of the reasonable costs, if any,
incurred by the Collateral Agent in connection with such Condemnation) to prepay
Loans (in the order set forth in Section 2.13(d)).
(f) Except as otherwise specifically provided in this Section 9.16, all
Insurance Proceeds (other than Insurance Proceeds arising out of any Casualty
but not on account of damage to fixed assets, fixtures, plant or equipment) and
all Condemnation Proceeds (i) are to be applied to the restoration of the
applicable Mortgaged Property (after reimbursement of the reasonable costs, if
any, incurred by the Collateral Agent in connection with the applicable Casualty
or Condemnation, including reasonable attorneys' fees, other charges and
disbursements and costs allocable to inspecting the Work (as defined below)) and
(ii) shall be applied to the payment of the cost of restoring or replacing the
Mortgaged Property so damaged, destroyed or taken or of the portion or portions
of the Mortgaged Property not so taken (the "Work") and (iii) shall be paid out
from time to time to the Borrower as and to the extent the Work (or the location
and acquisition of any replacement of any Mortgaged Property) progresses for the
payment thereof, but subject to each of the following conditions:
(A) the Borrower must promptly commence the restoration process
or the location, acquisition and replacement process in connection
with the Mortgaged Property;
<PAGE>
133
(B) the Work shall be in the charge of an architect or engineer
and before the Borrower commences any Work, other than temporary work
to protect property or prevent interference with business, the
Collateral Agent shall have received the plans and specifications and
the general contract for the Work from the Borrower (which plans and
specifications shall provide for such Work that, upon completion
thereof, the improvements shall (x) be in compliance with all
requirements of applicable Governmental Authorities such that all
representations and warranties of the Borrower relating to the
compliance of such Mortgaged Property with applicable laws, rules or
regulations in this Agreement or the Security Documents shall be
correct in all respects and (y) be at least equal in value and general
utility to the improvements that were on such Mortgaged Property (or
that were on the Mortgaged Property that has been replaced, if
applicable) prior to the Casualty or Condemnation, and in the case of
a Condemnation, subject to the effect of such Condemnation;
(C) except as provided in clause (D) below, each request for
payment shall be made on seven days' prior notice to the Collateral
Agent and shall be accompanied by a certificate to be made by a
Responsible Officer of the Borrower, stating (x) that all the Work
completed has been done in substantial compliance with the plans and
specifications and (y) that the sum requested is justly required to
reimburse the Borrower for payments by the Borrower to, or is justly
due to, the contractor, subcontractors, materialmen, laborers,
engineers, architects or other persons rendering services or materials
for the Work (giving a brief description of such services and
materials) and that, when added to all sums previously paid out by the
Collateral Agent, does not exceed the value of the Work done to the
date of such certificate;
(D) each request for payment in connection with the acquisition
of a replacement Mortgaged Property shall be made on 30 days' prior
notice to the Collateral Agent and, in connection therewith, (x) each
such request shall be accompanied by a copy of the sales contract or
other document governing the acquisition of the replacement property
by the Borrower and a certificate of the Borrower stating that the sum
requested represents the sales price under such contract or document
and the related reasonable
<PAGE>
134
transaction fees and expenses (including brokerage fees) and setting
forth in sufficient detail the various components of such requested
sum and (y) the Borrower shall (I) in addition to any other items
required to be delivered under this Section 9.16), provide the
Administrative Agent and the Collateral Agent with such opinions,
documents, certificates, title insurance policies, surveys and other
insurance policies as they may reasonably request and (II) take such
other actions as the Administrative Agent and the Collateral Agent may
reasonably deem necessary or appropriate (including actions with
respect to the delivery to the Collateral Agent of a first priority
Mortgage with respect to such real property for the ratable benefit of
the Secured Parties);
(E) there shall be no Default or Event of Default that has
occurred and is continuing (other than any Default or Event of Default
arising out of such Casualty or Condemnation);
(F) the request for any payment after the Work has been completed
shall be accompanied by a copy of any certificate or certificates
required by law to render occupancy of the improvements being rebuilt,
repaired or restored legal; and
(G) after commencing the Work, the Borrower shall continue to
perform the Work diligently and in good faith to completion in
accordance with the approved plans and specifications.
(g) Notwithstanding any other provisions of this Section 9.16, if the
Borrower shall have elected to replace a Mortgaged Property in connection with a
total or "substantially all" Condemnation as contemplated in paragraph (e)
above, all Condemnation Proceeds held by the Collateral Agent in connection
therewith shall be applied to prepay Loans (in the order set forth in Section
2.13(d)) if (i) the Borrower notifies the Collateral Agent and the
Administrative Agent that it does not intend to replace the related Mortgaged
Property, (ii) a Responsible Officer of the Borrower shall not have notified the
Administrative Agent and the Collateral Agent in writing that the Borrower has
acquired or has entered into a binding contract to acquire land upon which it
will construct the replacement property within six months after the related
Condemnation or (iii) the Borrower shall have not have begun construction of
<PAGE>
135
the replacement structures within one year after the related Condemnation and
the principal reason for such failure to begin construction is the failure of
the Borrower to diligently pursue the replacement of the related Mortgaged
Property.
(h) Any amounts held by the Collateral Agent pursuant to this Section 9.16
shall be held as collateral for the payment and performance of the Obligations.
Except as otherwise expressly specified in this Section 9.16, the Collateral
Agent shall have exclusive dominion and control, including the exclusive right
of withdrawal, over such amounts. At the option of the Collateral Agent, such
amounts may be invested in Permitted Investments (in which event interest
thereon shall be added to such amounts and be subject to this Section 9.16) or,
if the Borrower so directs, used to prepay Revolving Credit Borrowings (in which
event any reborrowing of such amounts shall be applied in accordance with this
Section 9.16). Except as provided in the preceding sentence, such amounts shall
not bear interest. Nothing in this Section 9.16 shall prevent the Collateral
Agent from applying at any time all or any part of the Insurance Proceeds or
Condemnation Proceeds to the curing of any Event of Default under this
Agreement.
(i) Any Insurance Proceeds not on account of damage to fixed assets,
fixtures, plant or equipment need not be applied to restoration, repair or the
prepayment of Loans and, if received by the Collateral Agent, shall promptly be
paid over to the Borrower unless an Event of Default shall be continuing.
SECTION 9.17. Confidentiality . The Administrative Agent, the Collateral
Agent, the Issuing Bank and each of the Lenders agrees to keep confidential (and
to use its best efforts to cause its respective agents and representatives to
keep confidential) the Information (as defined below) and all copies thereof,
extracts therefrom and analyses or other materials based thereon, except that
the Administrative Agent, the Collateral Agent, the Issuing Bank or any Lender
shall be permitted to disclose Information (a) to such of its respective
officers, directors, employees, agents, affiliates and representatives as need
to know such Information, (b) to the extent requested by any regulatory
authority, (c) to the extent otherwise required by applicable laws and
regulations or by any subpoena or similar legal process, upon prior notice
thereof (unless prohibited by the terms of such subpoena or process) to the
<PAGE>
136
Borrower in a manner reasonably calculated to afford the Borrower an opportunity
to seek a protective order or other injunctive relief, (d) in connection with
any suit, action or proceeding relating to the enforcement or protection of its
rights hereunder or under the other Loan Documents or (e) to the extent such
Information (i) becomes publicly available other than as a result of a breach of
this Section 9.17 or (ii) becomes available to the Administrative Agent, the
Issuing Bank, any Lender or the Collateral Agent on a nonconfidential basis from
a source other than the Borrower. For the purposes of this Section 9.17,
"Information" stall mean all financial statements, certificates, reports,
agreements and information (including all analyses, compilations and studies
prepared by the Administrative Agent, the Collateral Agent, the Issuing Bank or
any Lender based on any of the foregoing) that are received from the Borrower
and related to the Borrower, any shareholder of the Borrower or any employee,
customer or supplier of the Borrower, other than any of the foregoing that were
available to the Administrative Agent, the Collateral Agent, the Issuing Bank or
any Lender on a nonconfidential basis prior to its disclosure thereto by the
Borrower, and which are in the case of Information provided after the date
hereof, clearly identified at the time of delivery as confidential. The
provisions of this Section 9.17 shall remain operative and in full force and
effect regardless of the expiration and term of this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorized officers as of the day and year
first above written.
SCHEIN PHARMACEUTICAL, INC.,
by __________________________
Name:
Title:
<PAGE>
Schedule 1.01
-------------
CERTAIN PERMITTED HOLDERS
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 December
31, 1993 (including trustee thereunder)
Trust established by Stanley M. Bergman under trust agreement dated April 14,
1995 (including trustee thereunder)
Voting Trustee under Voting trust agreement dated September 30, 1994 (including
trustee thereunder)
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE 2.01
=============================================================================================================================
Name and Address of Lender Contact Person Tender Pre-Merger Term Post-Merger
and Telecopy Facility Revolving Facility Revolving
Number Commitment Credit Commitment Credit
Commitment Commitment
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Chemical Bank Andy 16,071,433 6,428,567 16,071,433 6,428,567
270 Park Avenue Tymoszewicz
New York, NY 10017 212-270-3279
- -----------------------------------------------------------------------------------------------------------------------------
The Bank of Nova Scotia Frank 14,285,714 5,714,286 14,285,714 5,714,286
1 Liberty Plaza Monfalcone
New York, NY 10006 212-225-5090
- -----------------------------------------------------------------------------------------------------------------------------
The Chase Manhattan Bank N.A. Thomas Conroy 14,285,714 5,714,286 14,285,714 5,714,286
One Chase Manhattan Plaza 201-288-8231
New York, NY 10061
- -----------------------------------------------------------------------------------------------------------------------------
Citibank, N.A. Joseph Stein 14,285,714 5,714,286 14,285,714 5,714,286
399 Park Avenue 212-793-3053
New York, NY 10043
- -----------------------------------------------------------------------------------------------------------------------------
Credit Lyonnais, New York and John C. Oberle 14,285,714 5,714,286 14,285,714 5,714,286
Cayman Islands Branches 212-459-3179
1301 Avenue of the Americas
New York, NY 10019
- -----------------------------------------------------------------------------------------------------------------------------
Deutsche Bank AG New York Colin Taylor 14,285,714 5,714,286 14,285,714 5,714,286
and/or Cayman Islands 212-474-8212
Branches
31 West 52nd Street
New York, NY 10019
- -----------------------------------------------------------------------------------------------------------------------------
Mellon Bank, N.A. Caroline R. 14,285,714 5,714,286 14,285,714 5,714,286
3 Mellon Bank Center Walsh, AVP
153-2332 212-702-5269
Pittsburgh, PA 15259
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------
NatWest Bank N.A. Pauline McHugh 14,285,714 5,714,286 14,285,714 5,714,286
175 Water Street 212-602-2330
New York, NY 10038
- -------------------------------------------------------------------------------------------------------
The Bank of Tokyo Trust Paul Tine 8,928,571 3,571,429 8,928,571 3,571,429
Company 212-782-6402
1251 Avenue of the Americas
New York, NY 10116-3138
- -------------------------------------------------------------------------------------------------------
Comerica Bank Chris 8,928,571 3,571,429 8,928,571 3,571,429
500 Woodward Avenue Georvassilis
9th Floor, MC 3280 313-222-3330
Detroit MI 48226
- -------------------------------------------------------------------------------------------------------
Credit Suisse Andrea Shkane 8,928,571 3,571,429 8,928,571 3,571,429
12 East 49th Street 212-238-5389
New York, NY 10019
- -------------------------------------------------------------------------------------------------------
Bayerische Hypotheken-und Christian 8,928,571 3,571,429 8,928,571 3,571,429
Wechsel-Bank Walter
Aktiengesellschaft, New York 212-440-0741
Branch
32 Old Slip
Financial Square, 32nd Floor
New York, NY 10005
- -------------------------------------------------------------------------------------------------------
Midlantic Bank, N.A. Sharon Giddes 8,928,571 3,571,429 8,928,571 3,571,429
499 Thornall Street 908-321-2144
Edison, NJ 08818
- -------------------------------------------------------------------------------------------------------
Cooperatieve Centrale Dana Herrienway 8,928,571 3,571,429 8,928,571 3,571,429
Raiffeisen-Boerenleenbank 212-916-7637
B.A., "Rabobank Nederland",
New York Branch
245 Park Avenue, 36th Floor
New York, 10167
- -------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Societe Generale Michelle Martin 8,928,571 3,571,429 8,928,571 3,571,429
1221 Avenue of the Americas 212-278-7430
New York, NY 10020
- -----------------------------------------------------------------------------------------------------------------------------
Key Bank of New York Lawrence A. 8,928,571 3,571,429 8,928,571 3,571,429
One Washington Center Mack
P.O. Box 2880 216-689-4981
Newburgh, NY 12550
- -----------------------------------------------------------------------------------------------------------------------------
Westdeutsche Landesbank Radim Cechura 8,928,571 3,571,429 8,928,571 3,571,429
Girozentrale 212-852-6148
1211 Avenue of the Americas
New York, NY 10036
- -----------------------------------------------------------------------------------------------------------------------------
ABN-Amro Bank David Stack 5,357,143 2,142,857 5,357,143 2,142,857
500 Park Avenue, 2nd Floor 212-832-7465
New York, NY 10022
- -----------------------------------------------------------------------------------------------------------------------------
Bank of Montreal Thomas Peer 5,357,143 2,142,857 5,357,143 2,142,857
115 South Lasalle 212-605-1454
Chicago, IL 60603
- -----------------------------------------------------------------------------------------------------------------------------
The Bank Of New York Walter Parelli 5,357,143 2,142,857 5,357,143 2,142,857
1 Wall Street, 22nd Floor 212-635-6999
New York, NY 10286
- -----------------------------------------------------------------------------------------------------------------------------
Commerzbank Martin Faenger 5,357,143 2,142,857 5,357,143 2,142,857
Aktiengesellschaft, New York 212-266-7594
Branch
2 World Financial Center
New York, NY 10281-1050
- -----------------------------------------------------------------------------------------------------------------------------
The Daiwa Bank, Ltd., New Stuart C. 5,357,143 2,142,857 5,357,143 2,142,857
York Branch Gruskin
666 Fifth Avenue 212-554-7152
New York, NY 10103-0300
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------
DG Bank Deutsche L.H. Siegel 5,357,143 2,142,857 5,357,143 2,142,857
Genossenschaftsbank, Cayman 212-745-1556
Island Branch /1550
609 Fifth Avenue
New York, NY 10017
- ----------------------------------------------------------------------------------------------------------
First Union National Bank Chris Klos 5,357,143 2,142,857 5,357,143 2,142,857
301 S. College Street 704-374-2802
19th Floor
Charlotte, NC 28288-0745
- ----------------------------------------------------------------------------------------------------------
The Nippon Credit Bank, Ltd. Nancy Acevedo 5,357,143 2,142,857 5,357,143 2,142,857
245 Park Avenue, 30th Floor 212-490-3895
New York, NY 10167
- ----------------------------------------------------------------------------------------------------------
United Jersey Bank Brian Daugherty 5,357,143 2,142,857 5,357,143 2,142,857
25 East Salem Street 201-343-6723
6th Floor
Hackensack, NJ 07602
- ----------------------------------------------------------------------------------------------------------
The Yasuda Trust and Banking Eric Pelletier 5,357,143 2,142,857 5,357,143 2,142,857
Company, Limited, New York 212-373-5796
Branch
666 Fifth Avenue, Suite 801
New York, NY 10103
- ----------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Schedule 3.08
-------------
Subsidiaries and percentage owned therein
Name % Ownership
<S> <C>
Schein Pharmaceutical International, Inc. 100.0%
Schein Pharmaceutical B.V. 100.0%*
Schein Pharmaceutical (Bermuda) Ltd. 100.0%*
Schein Pharmaceutical PA. Inc. 100.0%
Schein Pharmaceutical Service Company 100.0%
Steris Laboratories, Inc. 100.0%
Danbury Pharmacal, Inc. 100.0%
Danbury Pharmacal Puerto Rico, Inc.** 100.0%
SM Acquiring Co., Inc. 100.0%
</TABLE>
* - Shares held by Schein Pharmaceutical International, Inc.
* - Shares held by Danbury Pharmacal, Inc.
<PAGE>
Schedule 3.18
-------------
INSURANCE
[ATTACHED]
<PAGE>
Schedule 3.18
INSURANCE
MARSH &
McLENNAN
P.O. Box 1966
Morristown, NJ 07962 1966
Telephone 201 285-4600
Schein Pharmaceutical Inc. As of
INSURANCE OUTLINE Schedule B July 11, 1995
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Coverage Company Policy Number Term Average
Annual
Cost
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
EMPLOYERS' LIABILITY (WORKERS' COMPENSATION)
- --------------------------------------------
Limits:
$1,000,000 each accident
$1,000,000 policy limit
$1,000,000 each employee
Liberty Mutual WC1-121-080471-085(AOS) 6/10/95-96
GENERAL LIABILITY (EXCLUDING PRODUCTS)
- -------------------------------------
Limits:
$ 1,000,000 BI/PD per occurrence
$ 1,000,000 per fire legal
$ 5,000 medical pay per person
$ 1,000,000 personal and advertising injury
$20,000,000 general aggregate limit (products/completed operations)
Liberty Mutual TBI-121-080471-055 6/30/95-96
AUTOMOBILE LIABILITY
- --------------------
Limits:
$1,000,000 combined single limit
Liberty Mutual AS2-121-080471-015(CA,NY) 6/30/95-96
Liberty Mutual AS2-121-080471-025(VA)
Liberty Mutual AS2-121-080471-035(TX) 6/30/95-96
Liberty Mutual AS2-121-080471-045(AO) 6/30/95-96
Liberty Mutual AS2-121-080471-105(NJ,MA,LA) 6/30/95-96
Liberty Mutual AS2-121-080471-115(Puerto Rico)
</TABLE>
<PAGE>
SCHEDULE 3.18
INSURANCE
44 Whippany road MARSH &
PO BOX 1966 MCLENNAN
Morristown, NJ 07962 1966
Telephone 201 285-4600
SCHEIN PHARMACEUTICAL, INC.
<TABLE>
<CAPTION>
INSURANCE OUTLINE Schedule B As of July 11, 1995
- ------------------------------------------------------------------------------------------------------------------------------------
Average
Coverage Company Policy Term Annual
Number Cost
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PRODUCTS LIABILITY
- ------------------
Limits:
$10,000,000 each occurrence
Continental Excess & ADT000496 3/8/95 - 96
Surplus
EXCESS LIABILITY (Products Only)
- ----------------
Limits:
$15,000,000 each loss and aggregate per form
Zurich RB/Gerling 509/DL064595 3/8/95 - 96
EXCESS LIABILITY (Excluding Products)
- ----------------
Limits:
$10,000,000 each occurrence and aggregate
National Union Fire BRI098472 6/30/95 - 96
Insurance Company
$15,000,000 each occurrence and aggregate
excess of $10,000,000
Zurich Insurance TBD 6/30/95 - 96
Company
EXCESS LIABILITY (Including Products)
- ----------------
Limits:
$25,000,000 each occurrence and aggregate
X.L. Insurance Company XLUMB-01037 6/30/95 - 96
CJBO322/Schein95
</TABLE>
<PAGE>
Schedule 3.18
-------------
INSURANCE
MARSH &
McLENNAN
44 Whippany Road
P.O. Box 1966
Morristown, NJ 07962 1966
Telephone 201 285-4600
INSURANCE OUTLINE SCHEIN HOLDINGS, INC. As of July 11, 1995
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Coverage Company Policy Number Term Average
Annual
Cost
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
I. Directors & Officers Liability
A. Primary National Union Fire Insurance 443-18-49 September 30, 1994-1995
------- Company of Pittsburgh, Pa. (AIG)
Limit of Liability: $10,000,000
Corporate Reimbursement
Retention $250,000
B. First Excess The Fidelity and Casualty XMO-001956 September 30, 1994-1995
------------ Company of New York (Continental)
Limit of Liability/Aggregate: $5,000,000 Excess of Primary $10,000,000 and
applicable retention
C. Second Excess Federal Insurance Company 81274904-A September 30, 1994-1995
------------- (Chubb & Son, Inc.)
Limit of Liability/Aggregate: $5,000,000 Excess of underlying $15,000,000
and applicable retention
II. Directors & Officers Liability - Run-off Coverage:
A. Primary National Union Fire Insurance 443-74-19 September 30, 1994-2000
------- Company of Pittsburgh, Pa. (AIG)
Limit of Liability: $10,000,000
Retention: $5,000 Non-Indemnifiable per Individual
Wrongful Act
$25,000 Non-Indemnifiable Aggregate
Wrongful Act
$250,000 Indemnifiable - Corporate
Reimbursement
B. Excess Federal Insurance Company 81274904-A September 30, 1994-2000
------ (Chubb & Son, Inc.)
Limit of Liability: $10,000,000 Excess of Primary $10,000,000
and applicable retention
</TABLE>
<PAGE>
SCHEDULE 3.18
INSURANCE
MARSH &
44 Whippany Road McLENNAN
P.O. BOX 1966
Morristown, NJ 07962-1966
Telephone 201-285-4600
<TABLE>
<CAPTION>
INSURANCE OUTLINE SCHEIN HOLDINGS, INC. As of July 1, 1995
- --------------------------------------------------------------------------------------------------------------------------
Average
Policy Annual
Coverage Company Number Term Cost
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
III. PENSION TRUST LIABLITY Aetna Casualty & Surety Company 038FF100961470BCA June 30, 1995-1996
Limit of Liability/Aggregate: $3,000,000
Deductible None
IV. CRIME COVERAGE Federal Insurance Company 81338591-C CCG June 30, 1995-1996
(Chubb & Son, Inc.)
Coverage Limit of Liability Deductible
-------- ------------------ ----------
Employee Theft $10,000,000 $100,000
Premises $10,000,000 $100,000
Transit $10,000,000 $100,000
Depositors Forgery $10,000,000 $100,000
Computer Theft & Funds Transfer $10,000,000 $100,000
Money Orders & Counterfeit Currency $10,000,000 $100,000
Credit Card Forgery $10,000,000 $100,000
Computer Theft of Merchandise $10,000,000 $100,000
$10,000,000 $100,000
V. SPECIAL RISK COVERAGE Reliance Insurance Company NFK1394206 June 30, 1995-2000
Note: The contents of this policy are confidential.
</TABLE>
<PAGE>
SCHEDULE 3.18
INSURANCE
44 Whippany Road MARSH &
P.O. BOX 1966 MCLENNAN
Morristown, NJ 07962 1966
Telephone 201 285-4600
Schein Pharmaceutical, Inc. Property Program
<TABLE>
<CAPTION>
INSURANCE OUTLINE As of 6/30/95
- ------------------------------------------------------------------------------------------------------------------------------------
Average
Coverage Company Policy Term Annual
Number Cost
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
All Risk Property Coverage for Industrial Risk 31363753 6/30/95-6/30/96
all Real and Personal Property Insurers
Including Boiler & Machinery.
Blanket Limits - $523,250,000
All Risk Property Coverage for Puerto-Rican 31363713 6/30/95-6/30/96
alll Real & Personal Property American Insurance
Including Boiler & Machinery Company/Reinsured by IRL
Blanket Limits - $70,257,000 31363753
Sublimits Include:
- ------------------
$50,000,000 Flood & Non-California
Earthquake/annual
aggregates applied
separately except:
$30,000,000 Puerto Rican Plant
$1,000,000 Critical Earthquake and
Flood Zone A for
Contingent BI Locations
$1,000,000 Miscellaneous unnamed
locations for Flood and
Earthquake in critical areas
$15,000,000 Contingent Business
Interruption for non-critical
locations for Earthquake
and non-Zone A Flood
(Exclude 10 year Flood Zone)
$15,000,000 Flood at Danbury, CT
$10,000,000 Extra Expense except:
$2,000,000 Florham Park, New Jersey
$500,000 Miscellaneous unnamed locations
$1,000,000 Property in Transit
$5,000,000 Electronic Data Processing
</TABLE>
<PAGE>
Schedule 3.18
-------------
Page 2
INSURANCE
MARSH &
McLENNAN
14 Whippany road
P.O. Box 1966
Morristown, NJ 07962 1966
Telephone 201 285-4600
Schein Pharmaceutical Inc. As of
INSURANCE OUTLINE Property Program (Continued) 6/30/95
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Coverage Company Policy Number Term Average
Annual
Cost
- --------------------------------------------------------------------------------------------------------
<S> <C>
$10,000,000 Accounts Receivable
$5,000,000 Newly Acquired
HPR locations
$2,500,000 New Acquired non-HPR
locations
$10,000,000 Off Premises - 24 hr.
waiting period
$5,000,000 Valuable Papers &
Records
$5,000,000 or 25% of loss, whichever
is greater for Debris
Removal
$25,000 Annual aggregate for
Pollution Clean-up
$200,000 Property at Exhibitions
$100,000 Property taken Off-Premises
for Protection of Imminent
Damage
$250,000 Leasehold Interst
$2,040,000 Rents
$1,000,000 Expediting Expense
$5,000,000 Unnamed Locations
Deductibles:
Per occurrence $25,000
Deductible for Puerto Rico Windstorm 2% of 100% PD values
CAP $500,000 combined 5 X ADV for BI values
Deductible for Zone 1 Earthquake*: 5% of 100 values for
Property Damage
* Zone 1 includes California, Nevada, Alaska, Puerto Rico
Earthquake Business Interruption 10 X ADV except:
Puerto Rico Earthquake combined
PD & BI $250,000 at Puerto Rico locations
</TABLE>
<PAGE>
SCHEDULE 3.18
INSURANCE
44 Whippany Road MARSH &
P.O. Box 1966 MCLENNAN
Morristown, NJ 07962 1966
Telephone 201 285-4600
Schein Pharmaceutical, Inc. Property Program (Continued)
<TABLE>
<CAPTION>
INSURANCE OUTLINE As of 6/30/95
- ------------------------------------------------------------------------------------------------------------------------------------
Average
Coverage Company Policy Term Annual
Number Cost
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Deductibles, Continued...
Flood Zone A $250,000
Flood Zone B for Unnamed/
CBI Locations $100,000
All other Flood $25,000
Transit $10,000
Boiler & Machinery:
for Property Damage $10,000
for Business Interr. 1 X ADV
</TABLE>
<PAGE>
SCHEDULE 3.18
INSURANCE
MARSH &
McLENNAN
Page 4
44 Whippany Road
P.O. BOX 1966
Morristown, NJ 07962-1966
Telephone 201 285-4600
INSURANCE OUTLINE Schein Pharmaceutical, Inc. (Continued)
As of 6/30/95
<TABLE>
<CAPTION>
========================================================================================================
Policy Average
Coverage Company Number Term Annual
Cost
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$5,000,000 Excess of $1,000,000 New York Marine 080871M395 6/30/95-9/30/96
All Risk Property Coverage for and General Insurance
DIC Perils, All Risk Contingent Company
Business Interruption locations &
$4,000,000 Property in Transit
$2.5MM part of $5MM participation
$5,000,000 Excess of $1,000,000 RI.I Insurance Co. IMF020224 6/30/95-9/30/96
All Risk Property Coverage for
DIC Perils, All Risk Contingent
Business Interruption locations &
$4,000,000 Property in Transit
$2.5MM part of $5MM participation
$5,000,000 Excess of $1,000,000 Travelers Insur. Co. 751K3850 6/30/95-6/30/96
Boiler & Machinery for
Contingent Business Interruption
locations
All Risk Ocean Cargo Coverage, Fireman's Fund 0018399 6/30/95 effective
Warehouse to Warehouse World- Insurance Co. continuous, until
Wide, including transit via cancelled
air, land or water
Limits of Liability
$2,000 Parcel Post
$1,000,000 any Domestic Conveyance
$2,000,000 any one occurrence - if on deck - $200,000
Deductible: $1,500 per occurrence
- ---------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Schedule 3.20 (a)
-----------------
LIST OF OWNED LOCATIONS
-----------------------
Danbury Pharmacal, Inc.
12 Stoneleigh Avenue
Carmel, NY 10512
Steris Laboratories, Inc.
620 North 51st Avenue
Phoenix AZ 85043
Danbury Pharmacal Puerto Rico, Inc.
Humacao Industrial Park
Road 3, KM 76.9
Humacao, Puerto Rico 00792
Marsam Pharmaceuticals, Inc.
Building 30 & 31
Olney Avenue
Cherry Hill Industrial Center
Cherry Hill, NJ 08003
<PAGE>
Schedule 3.20 (b)
-----------------
LIST OF MATERIAL LEASED LOCATIONS
---------------------------------
Danbury Pharmacal, Inc.
131 West Street
Danbury, CT 06810
Danbury Pharmacal, Inc.
1961 Route 6
Carmel NY 10512
Schein Pharmaceutical, Inc.
Eastern Distribution Center
Mt. Ebo Corp Park
Route 22
Brewster, NY 10509
Schein Pharmaceutical, Inc.
Western Distribution Center
1825 S. 43rd Avenue
Suite B
Phoenix, AZ 85009-6022
Schein Pharmaceutical, Inc.
100 Campus Drive
Florham Park, NJ 07932
Marsam Pharmaceuticals, Inc.
Building 15
Olney Avenue
Cherry Hill Industrial Center
Cherry Hill, NJ 08003
<PAGE>
Schedule 4.02(a)
----------------
LIST OF LOCAL COUNSEL
1. McConnell Valdes
P.O Box 364225
San Juan, Puerto Rico 00936-4225
Tel: 809-759-9292
Fax: 809-759-9225
Attn: Salvador Casellas, Esq.
Real property and chattel in Puerto Rico.
2. Lewis & Roca
40 N. Central Avenue
Suite 1800
Phoenix, AZ 85004-4429
Tel: 602-262-5311
Fax: 602-262-5747
Kevin Olson, Esq.
Real property and chattel in Arizona.
3. Pitney, Hardin, Kipp & Szuch
200 Campus Drive
Florham Park, NJ 07932
Tel: 201-966-8109
Fax: 201-966-1550
Joel Rosen, Esq.
Real property and chattel in New Jersey.
4. Cummings & Lockwood
10 Stamford Forum
P.O. Box 120
Stamford, CT 06804
Tel: 203-351-4527
Fax: 203-351-4534
Glenn Angiolillo, Esq.
Chattel only (no leasehold mortgage) in Connecticut.
5. Proskauer Rose Goetz & Mendelsohn LLP
1585 Broadway
New York, NY 10036
Attn: Aaron Kindelehrer
Real property and chattel in New York.
<PAGE>
Schedule 6.01
-------------
EXISTING INDEBTEDNESS
1. The Indebtedness referred to in Section 4.02 (x).
2. Capitalized leases not in excess of $950,000.
3. Agreement to Purchase Building #15 in Cherry Hill Industrial Center
under Agreement of Sale dated January 1, 1994 between Marsam
Pharmaceuticals, Inc. and Cherry Hill Industrial Sites, Inc.
<PAGE>
Schedule 6.02
-------------
EXISTING LIENS
1. Liens securing Indebtedness referred to in Section 4.02(x) (iv).
2. Liens uncovered in all UCC searches performed in connection with the
Credit Agreement, including without limitation, those listed on the
attachments hereto.
<PAGE>
SCHEDULE 6.02
EXISTING LIENS
SCHEIN PHARMACEUTICAL, INC.
NEW JERSEY SECRETARY OF STATE
<TABLE>
<CAPTION>
DATE OF SECURED PARTY
FILING DEBTOR OR ASSIGNEE FILING # NATURE
=======================================================================================
<S> <C> <C> <C> <C>
04-19-94 SCHEIN NORTHERN TELECOM 1565399 EQUIPMENT
PHARMACEUTICAL, INC. FINANCE CORP.
- ---------------------------------------------------------------------------------------
05-12-94 SCHEIN CIT GROUP EQUIPMENT 1570324 EQUIPMENT
PHARMACEUTICAL, INC. FINANCING, INC.
- ---------------------------------------------------------------------------------------
10-07-93 SCHEIN CIT GROUP EQUIPMENT 1534353 EQUIPMENT
PHARMACEUTICAL, INC. FINANCING, INC.
- ---------------------------------------------------------------------------------------
10-07-93 SCHEIN CIT GROUP EQUIPMENT 1534354 EQUIPMENT
PHARMACEUTICAL, INC. FINANCING, INC.
- ---------------------------------------------------------------------------------------
10-13-93 SCHEIN CIT GROUP EQUIPMENT 1535000 EQUIPMENT
PHARMACEUTICAL, INC. FINANCING, INC.
- ---------------------------------------------------------------------------------------
01-14-94 SCHEIN CIT GROUP EQUIPMENT 1550357 EQUIPMENT
PHARMACEUTICAL, INC. FINANCING, INC.
- ---------------------------------------------------------------------------------------
10-20-93 SCHEIN CIT GROUP EQUIPMENT 1536204 EQUIPMENT
PHARMACEUTICAL, INC. FINANCING, INC.
- ---------------------------------------------------------------------------------------
10-21-93 SCHEIN CIT GROUP EQUIPMENT 1536222 EQUIPMENT
PHARMACEUTICAL, INC. FINANCING, INC.
- ---------------------------------------------------------------------------------------
05-17-94 SCHEIN SHARP ELECTRONIC 1570900 EQUIPMENT
PHARMACEUTICAL, INC. CREDIT CO.
- ---------------------------------------------------------------------------------------
05-05-94 SCHEIN NEW YORK SYSTEMS 1569087 EQUIPMENT
PHARMACEUTICAL, INC. EXCHANGE
- ---------------------------------------------------------------------------------------
01-20-94 SCHEIN CIT GROUP EQUIPMENT 1550717 EQUIPMENT
PHARMACEUTICAL, INC. FINANCING, INC.
- ---------------------------------------------------------------------------------------
06-05-95 SCHEIN BAYER NTFC CAPITAL 1637983 EQUIPMENT
PHARMACEUTICAL CORPORATION
SERVICES, INC.
- ---------------------------------------------------------------------------------------
05-30-95 SCHEIN PITNEY BOWES CREDIT 1637093 EQUIPMENT
PHARMACEUTICAL, INC. CORPORATION
- ---------------------------------------------------------------------------------------
06-14-93 SCHEIN NEW YORK SYSTEMS 1515052 EQUIPMENT
PHARMACEUTICAL, INC. EXCHANGE, INC.
- ---------------------------------------------------------------------------------------
01-20-94 SCHEIN NORTHERN TELECOM 1550718 EQUIPMENT
PHARMACEUTICAL, INC. FINANCE
CORPORATION
=======================================================================================
</TABLE>
<PAGE>
SCHEDULE 6.02
EXISTING LIENS
SCHEIN PHARMACEUTICAL, INC.
NEW STATE SECRETARY OF STATE
<TABLE>
<CAPTION>
DATE OF SECURED PARTY
FILING DEBTOR OR ASSIGNEE FILING # NATURE
=======================================================================================
<S> <C> <C> <C> <C>
01-10-94 SCHEIN CIT GROUP EQUIPMENT 005475 EQUIPMENT
PHARMACEUTICAL, INC. FINANCING, INC.
- ---------------------------------------------------------------------------------------
05-12-94 SCHEIN CIT GROUP EQUIPMENT 095810 EQUIPMENT
PHARMACEUTICAL, INC. FINANCING, INC.
- ---------------------------------------------------------------------------------------
01-07-93 SCHEIN SHARP FINANCIAL 003704 EQUIPMENT
PHARMACEUTICAL, INC. SERVICES
- ---------------------------------------------------------------------------------------
10-07-93 SCHEIN CIT GROUP EQUIPMENT 212040 EQUIPMENT
PHARMACEUTICAL, INC. FINANCING, INC.
- ---------------------------------------------------------------------------------------
10-15-93 SCHEIN CIT GROUP EQUIPMENT 217624 EQUIPMENT
PHARMACEUTICAL, INC. FINANCING, INC.
- ---------------------------------------------------------------------------------------
10-18-93 SCHEIN CIT GROUP EQUIPMENT 219058 EQUIPMENT
PHARMACEUTICAL, INC. FINANCING, INC.
- ---------------------------------------------------------------------------------------
01-13-93 SCHEIN IBM CREDIT 007755 EQUIPMENT
PHARMACEUTICAL, INC. CORPORATION
- ---------------------------------------------------------------------------------------
05-29-94 SCHEIN XEROX CORPORATION 104185 EQUIPMENT
PHARMACEUTICAL, INC.
- ---------------------------------------------------------------------------------------
04-11-94 SCHEIN NORTHERN TELECOM 070276 EQUIPMENT
PHARMACEUTICAL, INC. FINANCE
CORPORATION
=======================================================================================
</TABLE>
<PAGE>
SCHEDULE 6.02
EXISTING LIENS
SCHEIN PHARMACEUTICAL, INC.
ARIZONA SECRETARY OF STATE
<TABLE>
<CAPTION>
DATE OF SECURED PARTY
FILING DEBTOR OR ASSIGNEE FILING # NATURE
=======================================================================================
<S> <C> <C> <C> <C>
02-25-91 SCHEIN VALLEY LEASING 654774 EQUIPMENT
PHARMACEUTICAL COMPANY
- ---------------------------------------------------------------------------------------
12-08-93 SCHEIN ZIONS CREDIT 654774 CHANGE OF
PHARMACEUTICAL CORPORATION ASSIGNEE
- ---------------------------------------------------------------------------------------
10-12-93 SCHEIN CIT GROUP 761297 EQUIPMENT
PHARMACEUTICAL EQUIPMENT
FINANCING, INC.
- ---------------------------------------------------------------------------------------
10-12-93 SCHEIN CIT GROUP 761562 EQUIPMENT
PHARMACEUTICAL EQUIPMENT
FINANCING, INC.
- ---------------------------------------------------------------------------------------
04-11-94 SCHEIN NORTHERN 782116 EQUIPMENT
PHARMACEUTICAL TELECOM
=======================================================================================
</TABLE>
SCHEIN PHARMACEUTICAL, INC.
PUTNAM COUNTY, NEW YORK
<TABLE>
<CAPTION>
DATE OF SECURED PARTY
FILING DEBTOR OR ASIGNEE FILING # NATURE
=======================================================================================
<S> <C> <C> <C> <C>
10-12-93 SCHEIN PHARM., INC. CIT GROUP EQUIPMENT 1993-850 EQUIPMENT
FINANCING, INC.
- ---------------------------------------------------------------------------------------
4-13-94 SCHEIN PHARM., INC. NORTHERN TELECOM 1994-300 EQUIPMENT
- ---------------------------------------------------------------------------------------
5-13-94 SCHEIN CIT GROUP EQUIPMENT 1994-390 EQUIPMENT
PHARMACEUTICAL, INC. FINANCING, INC.
- ---------------------------------------------------------------------------------------
10-21-93 SCHEIN CIT GROUP EQUIPMENT 1993-881 EQUIPMENT
PHARMACEUTICAL, INC. FINANCING, INC.
- ---------------------------------------------------------------------------------------
8-11-94 SCHEIN [INDECIPHERABLE] 1994-679
PHARMACEUTICAL, INC.
=======================================================================================
</TABLE>
<PAGE>
SCHEDULE 6.02
EXISTING LIENS
SCHEIN PHARMACEUTICAL, INC.
MARICOPA COUNTY, ARIZONA
<TABLE>
<CAPTION>
DATE OF SECURED PARTY
FILING DEBTOR OR ASSIGNEE FILING # NATURE
=====================================================================================
<S> <C> <C> <C> <C>
01-04-94 SCHEIN ZIONS CREDIT 94-0005530 EQUIPMENT
PHARMACEUTICAL, INC. CORPORATION
=====================================================================================
</TABLE>
DANBURY PHARMACAL, INC.
CONNECTICUT SECRETARY OF STATE
<TABLE>
<CAPTION>
DATE OF SECURED PARTY
FILING DEBTOR OR ASSIGNEE FILING # NATURE
====================================================================================
<S> <C> <C> <C> <C>
01-22-86 DANBURY CITICORP 631629 EQUIPMENT
PHARMACAL, INC. INDUSTRIAL CREDIT
- ------------------------------------------------------------------------------------
01-22-86 DANBURY CITICORP 895542 EQUIPMENT
PHARMACAL, INC. INDUSTRIAL CREDIT
====================================================================================
</TABLE>
<PAGE>
SCHEDULE 6.02
EXISTING LIENS
DANBURY PHARMACAL INC.
NEW YORK SECRETARY OF STATE
<TABLE>
<CAPTION>
DATE OF SECURED PARTY
FILING DEBTOR OR ASSIGNEE FILING # NATURE
=====================================================================================
<S> <C> <C> <C> <C>
09-25-90 DANBURY CITICORP 206483 EQUIPMENT
PHARMACAL, INC. INDUSTRIAL CREDIT
- -------------------------------------------------------------------------------------
01-13-86 DANBURY CITICORP 010995 EQUIPMENT
PHARMACAL, INC. INDUSTRIAL CREDIT
- -------------------------------------------------------------------------------------
04-12-93 DANBURY MINOLTA LEASING 078529 EQUIPMENT
PHARMACAL, INC. SERVICES
- -------------------------------------------------------------------------------------
02-10-93 DANBURY CITICORP 031308 EQUIPMENT
PHARMACAL, INC. INDUSTRIAL CREDIT
- -------------------------------------------------------------------------------------
04-06-92 DANBURY NORTHERN 069322 EQUIPMENT
PHARMACAL, INC. TELECOM
- -------------------------------------------------------------------------------------
04-07-94 DANBURY MINOLTA LEASING 067628 EQUIPMENT
PHARMACAL, INC. SERVICES
- -------------------------------------------------------------------------------------
03-01-94 DANBURY MINOLTA LEASING 039122 EQUIPMENT
PHARMACAL, INC. SERVICES
- -------------------------------------------------------------------------------------
08-12-93 DANBURY TOKAI FINANCIAL 173461 EQUIPMENT
PHARMACAL, INC. SERVICES
=====================================================================================
</TABLE>
DANBURY PHARMACAL, INC.
PUTNAM COUNTY
<TABLE>
<CAPTION>
DATE OF SECURED PARTY
FILING DEBTOR OR ASSIGNEE FILING # NATURE
=====================================================================================
<S> <C> <C> <C> <C>
04-13-93 DANBURY MINOLTA LEASING 1993-268 EQUIPMENT
PHARMACAL, INC. SERVICES
- -------------------------------------------------------------------------------------
02-18-92 DANBURY NORTHERN 1992-133 EQUIPMENT
PHARMACAL, INC. TELECOM
- -------------------------------------------------------------------------------------
05-03-94 DANBURY MINOLTA LEASING 1994-156 EQUIPMENT
PHARMACAL, INC. SERVICES
- -------------------------------------------------------------------------------------
04-11-94 DANBURY MINOLTA LEASING 1994-286 EQUIPMENT
PHARMACAL, INC. SERVICES
- -------------------------------------------------------------------------------------
08-13-93 DANBURY TOKAI FINANCIAL 1993-677 EQUIPMENT
PHARMACAL, INC. SERVICES
- -------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Schedule 6.04
-------------
EXISTING INVESTMENTS
Nature of
Name Investment
- ---- ----------
Elensys Care Services Inc. Con. Pfd. Stk.
Triomed (Proprietary) Limited, South Africa Common Stock
*Brovar S&P (Proprietary) Ltd., South Africa Common Stock
*Ethical Generics Limited, UK Common Stock
Schein Bayer Pharm. Svcs. Common Stock
*Schein Pharmaceutical Canada, Inc. Common Stock
Duramed Pharmaceuticals, Inc. Convertable Note
Miscellaneous investments not exceeding $250,000 in aggregate.
* Currently owned 100% by Schein Pharmaceutical, Inc. or one of its
affiliates; it is contemplated that a 50% interest will be transferred to
an affiliate of Bayer AG.
<PAGE>
[LOGO ] CHEMICAL
EXHIBIT A
to the Credit Agreement
CHEMICAL BANK
140 East 45th Street
New York, NY 10017-3162
212-622-0001
Fax 212 6222-0002
Telex 353006 ABSC NYK
SCHEIN PHARMACEUTICAL, INC.
ADMINISTRATIVE QUESTIONNAIRE
Please accurately complete the following information and return via FAX to the
attention of Janet Belden at Chemical Bank as soon as possible.
FAX NUMBER: 212-622-0122
LEGAL NAME OF YOUR INSTITUTION TO APPEAR IN DOCUMENTATION:
- ---------------------------------------------------------
- --------------------------------------------------------------------------------
GENERAL INFORMATION - DOMESTIC LENDING OFFICE:
- ---------------------------------------------
Institution Name:
--------------------------------------------------------------
Street Address:
--------------------------------------------------------------
City, State, Zip Code:
--------------------------------------------------------
GENERAL INFORMATION - EURODOLLAR LENDING OFFICE:
- -----------------------------------------------
Institution Name:
--------------------------------------------------------------
Street Address:
--------------------------------------------------------------
City, State, Zip Code:
--------------------------------------------------------
CONTACTS/NOTIFICATION METHODS:
- -----------------------------
CREDIT CONTACTS:
Primary Contact:
--------------------------------------------------------------
Street Address:
--------------------------------------------------------------
City, State, Zip Code:
--------------------------------------------------------
Phone Number:
----------------------------------------------------------------
FAX Number:
--------------------------------------------------------------
Backup Contact:
--------------------------------------------------------------
Street Address:
--------------------------------------------------------------
City, State, Zip Code:
--------------------------------------------------------
Phone Number:
----------------------------------------------------------------
FAX Number:
--------------------------------------------------------------
<PAGE>
TAX WITHHOLDING:
- ---------------
Non Resident Alien Y* N
------ ------
* Form 4225 Enclosed
Tax ID Number
---------------------
CONTACTS/NOTIFICATION METHODS:
- -----------------------------
ADMINISTRATIVE CONTACTS - BORROWINGS, PAYDOWNS, INTEREST, FEES, ETC.
Contact:
----------------------------------------------------------------------
Street Address:
----------------------------------------------------------------
City, State, Zip Code:
--------------------------------------------------------
Phone Number:
-----------------------------------------------------------------
FAX Number:
-----------------------------------------------------------------
PAYMENT INSTRUCTIONS:
- --------------------
Name of Bank where funds are to be transferred:
--------------------------------------------------------------------------
Routing Transit/ABA number of Bank where funds are to be transferred:
--------------------------------------------------------------------------
Name of Account, if applicable:
--------------------------------------------------------------------------
Account Number:
----------------------------------------------------------------
Additional Information:
-------------------------------------------------------
-------------------------------------------------------
It is very important that all of the above information is accurately filled in
and returned promptly. If there is someone other than yourself who should
receive this questionnaire, please notify me of their name and FAX number and we
will FAX them a copy of the Questionnaire. If you have any questions, please
call me on 212-622-0011.
<PAGE>
EXHIBIT B
to the Credit Agreement
[FORM OF]
ASSIGNMENT AND ACCEPTANCE
Reference is made to the Credit Agreement dated as of September 1, 1995
(as amended, restated, supplemented or otherwise modified from time to time, the
"Credit Agreement"), among Schein Pharmaceutical, Inc., the Lenders listed from
time to time party thereto (the "Lenders") and Chemical Bank, as Administrative
Agent, as Issuing Bank and as Collateral Agent. Capitalized terms used herein
but not defined herein shall have the meanings assigned to such terms in the
Credit Agreement.
1. The Assignor named below hereby sells and assigns, without recourse,
to the Assignee name below,/1/ and the Assignee hereby purchases and assumes,
without recourse to the Assignor, from the Assignor, effective as of the
Effective Date set forth below (but not prior to registration of the information
contained herein in the Register pursuant to Section 9.04(d) of the Credit
Agreement), the interests set forth below (the "Assigned Interest") in the
Assignor's rights and obligations under the Credit Agreement and other Loan
Documents, including, without limitation, the amounts and percentages set forth
below of (i) the Commitments of the Assignor on the Effective Date, (ii) the
Loans owning the Assignor which are outstanding on the Effective Date and
(iii) participations in Letters of Credit acquired by the Assignor from the
Issuing Bank which are outstanding on the Effective Date. Each of the Assignor
and the Assignee hereby makes and agrees to be bound by all the representations,
warranties and agreements set forth in Section 9.04(c) of the Credit Agreement,
a copy of which has been received by each such party. From and after the
Effective Date (x) the Assignee shall be a party to and be bound by the
provisions of the Credit Agreement and, to the extent of the interests assigned
by this Assignment and Acceptance, have the rights and obligations of a Lender
thereunder and under the Loan Documents and (y) the Assignor shall, to the
extent of the interests assigned by the Assignment and Acceptance, relinquish
its rights and be released from its obligations under the Credit Agreement.
- ---------------------------
/1/Assignee may not be a pharmaceutical company or any Affiliate of a
pharmaceutical company.
<PAGE>
2
2. This Assignment and Acceptance is being delivered to the
Administrative Agent together with (i) if the Assignee is organized under the
laws of a jurisdiction outside the United States, the forms specified in Section
2.20(g) of the Credit Agreement, duly completed and executed by such Assignee,
(ii) if the Assignee is not already a Lender under the Credit Agreement, an
Administrative Questionnaire in the form of Exhibit B to the Credit Agreement
and (iii) a processing and recordation fee of $3,500. The Administrative Agent
shall record the information contained in this Assignment and Acceptance in the
Register pursuant to Section 9.04(d) of the Credit Agreement.
3. This Assignment and Acceptance shall be governed by, and construed in
accordance with, the laws of the State of New York.
Date of Assignment:
Legal Name of Assignor:
Legal Name of Assignee:
Assignee's Address for Notices:
Effective Date of
Assignment (may not
be fewer than 5
Business Days after
Date of Assignment):
<PAGE>
3
Percentage Assigned
of
Facility/Commitment
(set forth to at
Facility/Commitment Principal least 8 decimals), as
- ------------------- Amount Assigned 2/ a percentage of the
--------------- - Applicable Facility
and the Applicable
Commitments of all
Lenders
---------------------
Pre-Merger Revolving $ %
Credit
Post-Merger $ %
Revolving Credit
Tender Facility $ %
Term Facility $ %
- --------------
2/ Not less than $10,000,000 or the entire remaining amount of such
-
Commitment.
<PAGE>
The terms set forth above are
hereby agreed to by:
- ----------------------------,
as Assignor.
by
- ----------------------------
Name:
Title
- ----------------------------,
as Assignee.
by
- ----------------------------
Name:
Title:
Consented to by:
CHEMICAL BANK, as
Administrative Agent and
Issuing Bank,
by
-------------------
Name:
Title:
SCHEIN PHARMACEUTICAL, INC.,
by
-------------------
Name:
Title:
<PAGE>
EXHIBIT C
FORM OF BORROWING REQUEST
Chemical Bank, as Administrative Agent for
the Lenders referred to below,
270 Park Avenue
New York, NY 10017
Attention of Janet Belden
Ladies and Gentlemen:
The undersigned, Schein Pharmaceutical, Inc. (the "Borrower"), refers to
the Credit Agreement dated as of September 1, 1995 (the "Credit Agreement"),
among the Borrower, the Lenders party thereto (the "Lenders") and Chemical Bank,
as Administrative Agent for the Lenders (in such capacity, the "Administrative
Agent") as issuing bank (in such capacity, the "Issuing Bank") and as collateral
agent (in such Capacity, the "Collateral Agent"). Capitalized terms used herein
and not otherwise defined herein shall have the meanings assigned to such terms
in the Credit Agreement. The Borrower hereby gives you notice pursuant to
Section 2.03 of the Credit Agreement that it requests a Borrowing under the
Credit Agreement, and in that connection sets forth below the terms on which
such Borrowing is requested to be made:
(A) Date of Borrowing
(which is a Business Day) _____________________
(B) Principal Amount of
Borrowing 1/ _____________________
-
(C) Interest rate basis 2/ _____________________
-
- ------------
1/ In Dollars in an integral multiple of $1,000,000, but in any event
-
not exceeding the Total Revolving Credit Commitment or the aggregate amount of
the Term Loan Commitments, as applicable, then available, and, in the case of a
Eurodollar Borrowing, not less than $5,000,000, or equal to the remaining
available balance of the applicable Commitments.
2/ Specify Eurodollar Loan or ABR Loan.
-
<PAGE>
2
(D) Interest Period and the last
day thereof 3/ ___________________
-
(E) Funds are requested to be
disbursed to the Borrower at:
Bank Name: ____________________
Bank Address: ____________________
Account Number: ____________________
SCHEIN PHARMACEUTICAL, INC.,
by
-----------------------
Name:
Title:
- -----------
3/ Which shall be subject to the definition of "Interest Period" and end
-
not later than the applicable Maturity Date.
<PAGE>
EXHIBIT 4.4
OFFERING MEMORANDUM CONFIDENTIAL
$100,000,000
[LOGO] SCHEIN PHARMACEUTICAL
SENIOR FLOATING RATE NOTES DUE 2004
-----------------
Schein Pharmaceutical, Inc. ("Schein" or the "Company") is offering (the
"Offering") $100,000,000 of Senior Floating Rate Notes due 2004 (the "Notes").
Interest on the Notes will be payable quarterly on January 15, April 15, July
15 and October 15 of each year, commencing on January 15, 1998, at a rate per
annum equal to the Applicable LIBOR Rate (as defined herein). Interest on the
Notes will be reset quarterly. The Notes will mature on December 15, 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 redemption prices set forth
herein, plus accrued and unpaid interest thereon, to the date of redemption.
Upon the occurrence of a Change of Control (as defined herein), 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 thereon, to the date of repurchase. The Company currently
expects to repurchase or redeem a portion of the Notes offered hereby. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and "Description of Notes."
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. 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 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 September 27, 1997, as adjusted for the Offering, the
Company and its Restricted Subsidiaries (as defined herein) would have had
secured indebtedness of approximately $160.6 million outstanding. The
obligations of the Company and the Guarantors (as defined herein) under the
Senior Credit Agreement are secured by substantially all of the assets of the
Company and the Guarantors. As of September 27, 1997, as adjusted for the
Offering, the Company would have had approximately $69.8 million of undrawn
availability under the Senior Credit Agreement. The Indenture relating to the
Notes (the "Indenture") will permit 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 will
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 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."
The Notes have been designated eligible for trading in the Private
Offerings, Resales and Trading through Automated Linkages (PORTAL) market. The
Company and the Restricted Subsidiaries have agreed, for the benefit of all
holders of the Notes, that, after the sale of the Notes, they will file a
registration statement relating to an exchange offer for the Notes under the
Securities Act (as defined herein) for another series of notes with
substantially the same terms as the Notes offered hereby. See "Exchange Offer
and Registration Rights Agreement."
-----------------
SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE NOTES.
-----------------
The offering price of the Notes is 97.500% plus accrued interest, if any, from
December 24, 1997.
-----------------
THE NOTES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT") OR ANY STATE SECURITIES LAWS AND, UNLESS SO
REGISTERED, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EXEMPTION FROM,
OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES LAWS. ACCORDINGLY, THE
NOTES ARE BEING OFFERED AND SOLD HEREBY ONLY TO (A) QUALIFIED
INSTITUTIONAL BUYERS (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT)
IN RELIANCE ON THE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT PROVIDED BY RULE 144A THEREUNDER, AND (B) TO A LIMITED
NUMBER OF INSTITUTIONAL "ACCREDITED INVESTORS" (AS DEFINED IN RULE
501(A)(1), (2), (3) OR (7) UNDER THE SECURITIES ACT) THAT EXECUTE AND
DELIVER A LETTER CONTAINING REPRESENTATIONS AND AGREEMENTS.
PROSPECTIVE PURCHASERS ARE HEREBY NOTIFIED THAT SELLERS OF THE NOTES
MAY BE RELYING ON THE EXEMPTION FROM PROVISIONS OF SECTION 5 OF THE
SECURITIES ACT PROVIDED BY RULE 144A. FOR CERTAIN RESTRICTIONS ON
RESALES, SEE "TRANSFER RESTRICTIONS."
-----------------
The Notes are offered by the Company, subject to prior sale, when, as and if
delivered to and accepted by the Initial Purchaser (as defined herein) and
subject to certain other conditions. The Initial Purchaser reserves the right
to withdraw, cancel or modify such offer and to reject orders in whole or in
part. It is expected that delivery of the Notes to qualified institutional
buyers will be made against payment therefor on or about December 24, 1997, in
book-entry form through the facilities of The Depository Trust Company.
Delivery of Notes to institutional accredited investors will be made in
certificated form on the same date. See "Description of Notes--Book-Entry;
Delivery and Form" and "Description of Notes--Certificated Securities."
SOCIETE GENERALE
Securities Corporation
December 19, 1997
<PAGE>
[INSERT PICTURES.]
The information in the captions above is presented as of December 3, 1997
and is subject to change. No assurance can be given that any of the Company's
products covered by pending Abbreviated New Drug Applications ("ANDAs") or
other products under development will be successfully developed or approved by
the United States Food and Drug Administration ("FDA") or achieve significant
revenue or profitability.
----------------
INFeD(R) is a registered trademark of the Company; and Ferrlecit(R) and
Unipine XL(R) are registered trademarks of Makoff R&D Laboratories, Inc. and
Ethical Holdings plc, respectively.
----------------
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE NOTES, INCLUDING
OVERALLOTMENT, STABILIZING TRANSACTIONS AND SYNDICATE SHORT COVERING
TRANSACTIONS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "PLAN OF
DISTRIBUTION."
THIS OFFERING MEMORANDUM (THE "OFFERING MEMORANDUM") IS BEING PROVIDED ON A
CONFIDENTIAL BASIS TO QUALIFIED INSTITUTIONAL BUYERS AND TO A LIMITED NUMBER
OF INSTITUTIONAL ACCREDITED INVESTORS FOR INFORMATIONAL USE SOLELY IN
CONNECTION WITH THE CONSIDERATION OF THE PURCHASE OF THE NOTES. ITS USE FOR
ANY OTHER PURPOSE IS NOT AUTHORIZED. IT MAY NOT BE COPIED OR REPRODUCED IN
WHOLE OR IN PART, NOR MAY IT BE DISTRIBUTED OR ANY OF ITS CONTENTS BE
DISCLOSED TO ANYONE OTHER THAN THE PROSPECTIVE INVESTORS TO WHOM IT IS BEING
PROVIDED.
THE INFORMATION CONTAINED IN THIS OFFERING MEMORANDUM HAS BEEN PROVIDED BY
THE COMPANY ON A CONFIDENTIAL BASIS SOLELY TO THE PROSPECTIVE PURCHASERS OF
THE NOTES. NO REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, IS MADE BY THE
INITIAL PURCHASER AS TO THE ACCURACY OR COMPLETENESS OF THE INFORMATION
CONTAINED IN THIS OFFERING MEMORANDUM (INCLUDING, WITHOUT LIMITATION, THE
FINANCIAL DATA CONTAINED HEREIN), AND NOTHING CONTAINED IN THIS OFFERING
MEMORANDUM IS, OR SHALL BE RELIED UPON AS, A PROMISE OR REPRESENTATION BY THE
INITIAL PURCHASER AS TO THE PAST OR THE FUTURE. THE INITIAL PURCHASER DOES NOT
ASSUME ANY RESPONSIBILITY FOR THE ACCURACY OR COMPLETENESS OF SUCH
INFORMATION. IN MAKING AN INVESTMENT DECISION, PROSPECTIVE INVESTORS MUST RELY
ON THEIR OWN EXAMINATION OF THE COMPANY AND THE TERMS OF THE OFFERING,
INCLUDING THE MERITS AND RISKS INVOLVED. THE CONTENTS OF THIS OFFERING
MEMORANDUM ARE NOT TO BE CONSTRUED AS LEGAL, BUSINESS OR TAX ADVICE. EACH
PROSPECTIVE INVESTOR SHOULD CONSULT ITS OWN ATTORNEY, BUSINESS ADVISOR AND TAX
ADVISOR AS TO LEGAL, BUSINESS OR TAX ADVICE. PROSPECTIVE INVESTORS MAY OBTAIN
ADDITIONAL INFORMATION UPON REQUEST FROM THE INITIAL PURCHASER OR THE COMPANY
THAT THEY MAY REASONABLY REQUIRE IN CONNECTION WITH THE DECISION TO PURCHASE
ANY OF THE NOTES.
THE NOTES DESCRIBED HEREIN HAVE NOT BEEN REGISTERED WITH, RECOMMENDED BY OR
APPROVED BY THE SECURITIES AND EXCHANGE COMMISSION (THE "COMMISSION") OR ANY
OTHER FEDERAL OR STATE SECURITIES COMMISSION OR REGULATORY AUTHORITY, NOR HAS
ANY SUCH COMMISSION OR REGULATORY AUTHORITY REVIEWED OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS OFFERING MEMORANDUM. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
THE NOTES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY
NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE SECURITIES ACT AND
APPLICABLE STATE SECURITIES LAWS OR PURSUANT TO REGISTRATION OR EXEMPTION
THEREFROM. PROSPECTIVE INVESTORS SHOULD BE AWARE THAT THEY MAY BE REQUIRED TO
BEAR THE FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD OF TIME.
EACH PURCHASER OF NOTES OFFERED HEREBY WILL BE DEEMED TO HAVE MADE CERTAIN
ACKNOWLEDGEMENTS, REPRESENTATIONS AND AGREEMENTS AS SET FORTH UNDER "TRANSFER
RESTRICTIONS."
EACH PROSPECTIVE PURCHASER OF THE NOTES MUST COMPLY WITH ALL LAWS AND
REGULATIONS APPLICABLE TO IT IN FORCE IN ANY JURISDICTION IN WHICH IT
PURCHASES, OFFERS OR SELLS THE NOTES OR POSSESSES OR DISTRIBUTES THIS OFFERING
MEMORANDUM AND MUST OBTAIN ANY CONSENT, APPROVAL OR PERMISSION REQUIRED TO BE
OBTAINED BY IT FOR THE PURCHASE, OFFER OR SALE BY IT OF THE NOTES UNDER THE
LAWS AND
i
<PAGE>
REGULATIONS APPLICABLE TO IT IN FORCE IN ANY JURISDICTION TO WHICH IT IS
SUBJECT OR IN WHICH IT MAKES SUCH PURCHASES, OFFERS OR SALES, AND NEITHER THE
COMPANY NOR THE INITIAL PURCHASER SHALL HAVE ANY RESPONSIBILITY THEREFOR.
THIS OFFERING MEMORANDUM DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF ANY OFFER TO BUY ANY OF THE NOTES BY ANY PERSON IN ANY
JURISDICTION IN WHICH IT IS UNLAWFUL FOR SUCH PERSON TO MAKE AN OFFERING OR A
SOLICITATION.
THIS OFFERING IS BEING MADE IN THE UNITED STATES IN RELIANCE UPON AN
EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT FOR AN OFFER AND SALE OF
SECURITIES WHICH DOES NOT INVOLVE A PUBLIC OFFERING. EACH PURCHASER OF THE
NOTES OFFERED HEREBY IN MAKING ITS PURCHASE WILL BE DEEMED TO HAVE MADE
CERTAIN ACKNOWLEDGEMENTS, REPRESENTATIONS AND AGREEMENTS AS SET FORTH HEREIN
UNDER "TRANSFER RESTRICTIONS."
This Offering Memorandum is highly confidential and has been prepared by the
Company solely for use in connection with this Offering. The Initial Purchaser
reserves the right to reject any offer to purchase any of the Notes, in whole
or in part, for any reason, or to sell less than all of the Notes offered
hereby or for which any prospective purchaser has subscribed. This Offering
Memorandum is personal to each offeree and does not constitute an offer to any
other person or to the public generally to subscribe for or otherwise acquire
the Notes. Distribution of this Offering Memorandum to any person other than
the offeree and those persons, if any, retained to advise such offeree with
respect hereto is unauthorized, and any disclosure of any of its contents,
without the prior written consent of the Company, is prohibited. Each person
receiving this Offering Memorandum represents that such person's investment
decision is based solely on this Offering Memorandum and that such person is
not relying on any other information it may have received from the Company,
the Initial Purchaser or any other person. Each prospective purchaser, by
accepting delivery of this Offering Memorandum, agrees to the foregoing and to
make no photocopies of this Offering Memorandum or any documents delivered
pursuant hereto and, if the offeree does not purchase the Notes, or the
Offering is terminated, to return this Offering Memorandum and all documents
delivered pursuant hereto to Societe Generale Securities Corporation, 1221
Avenue of the Americas, New York, New York 10020, Attention: High Yield
Capital Markets.
MARKET DATA USED THROUGHOUT THIS OFFERING MEMORANDUM WERE OBTAINED FROM
INTERNAL COMPANY SURVEYS, INDUSTRY PUBLICATIONS AND CURRENTLY AVAILABLE
INFORMATION. INDUSTRY PUBLICATIONS GENERALLY STATE THAT THE INFORMATION
CONTAINED THEREIN HAS BEEN OBTAINED FROM SOURCES BELIEVED TO BE RELIABLE, BUT
THERE CAN BE NO ASSURANCE AS TO THE ACCURACY AND COMPLETENESS OF SUCH
INFORMATION. THE COMPANY HAS NOT INDEPENDENTLY VERIFIED SUCH MARKET DATA.
SIMILARLY, INTERNAL COMPANY SOURCES, WHILE BELIEVED BY THE COMPANY TO BE
RELIABLE, HAVE NOT BEEN VERIFIED BY ANY INDEPENDENT SOURCES.
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS OFFERING
MEMORANDUM, AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATION
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE
INITIAL PURCHASER. THE INFORMATION CONTAINED HEREIN IS AS OF THE DATE HEREOF
AND SUBJECT TO CHANGE, COMPLETION OR AMENDMENT WITHOUT NOTICE. NEITHER THE
DELIVERY OF THIS OFFERING MEMORANDUM AT ANY TIME NOR ANY SUBSEQUENT COMMITMENT
TO ENTER INTO ANY FINANCING SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE INFORMATION SET FORTH HEREIN
OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
ii
<PAGE>
THIS OFFERING MEMORANDUM CONTAINS CERTAIN "FORWARD-LOOKING STATEMENTS"
CONCERNING THE COMPANY'S OPERATIONS, OPERATING PERFORMANCE AND FINANCIAL
CONDITION, WHICH ARE SUBJECT TO INHERENT UNCERTAINTIES AND RISKS, INCLUDING
THOSE IDENTIFIED UNDER "RISK FACTORS." ACTUAL RESULTS COULD DIFFER MATERIALLY
FROM THOSE ANTICIPATED IN THIS OFFERING MEMORANDUM. WHEN USED IN THIS OFFERING
MEMORANDUM, THE WORDS "ESTIMATE," "PROJECT," "ANTICIPATE," "EXPECT," "INTEND,"
"BELIEVE" AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING
STATEMENTS.
IT IS EXPECTED THAT DELIVERY OF THE NOTES WILL BE MADE AGAINST PAYMENT
THEREFOR ON OR ABOUT THE DATE SPECIFIED IN THE LAST PARAGRAPH OF THE COVER
PAGE OF THIS OFFERING MEMORANDUM, WHICH WILL BE THE THIRD BUSINESS DAY
FOLLOWING THE DATE HEREOF. SEE "PLAN OF DISTRIBUTION."
Notes to be resold to qualified institutional buyers as set forth herein
will initially be issued in the form of one Global Note (the "Global Note").
The Global Note will be deposited on the date of the closing of the sale of
the Notes offered hereby (the "Closing Date") with, or on behalf of, The
Depository Trust Company (the "Depositary") and registered in the name of Cede
& Co., as nominee of the Depositary (such nominee being referred to herein as
the "Global Note Holder"). Beneficial interests in the Global Note
representing the Notes will be shown on, and transfers thereof to qualified
institutional buyers will be effected through, records maintained by the
Depositary and its participants. Notes that are issued to institutional
accredited investors as described under "Description of Notes--Book-Entry;
Delivery and Form" and "Description of Notes--Certificated Securities" will be
issued in the form of registered definitive certificates (the "Certificated
Notes"). See "Description of Notes--Book-Entry; Delivery and Form" and
"Description of Notes--Certificated Securities."
NOTICE TO NEW HAMPSHIRE RESIDENTS
NEITHER THE FACT THAT A REGISTRATION STATEMENT OR AN APPLICATION FOR A
LICENSE HAS BEEN FILED UNDER RSA 421-B WITH THE STATE OF NEW HAMPSHIRE NOR THE
FACT THAT A SECURITY IS EFFECTIVELY REGISTERED OR A PERSON IS LICENSED IN THE
STATE OF NEW HAMPSHIRE CONSTITUTES A FINDING BY THE SECRETARY OF STATE THAT
ANY DOCUMENT FILED UNDER RSA 421-B IS TRUE, COMPLETE AND NOT MISLEADING.
NEITHER ANY SUCH FACT NOR THE FACT THAT AN EXEMPTION OR EXCEPTION IS AVAILABLE
FOR A SECURITY OR A TRANSACTION MEANS THAT THE SECRETARY OF STATE HAS PASSED
IN ANY WAY UPON THE MERITS OR QUALIFICATIONS OF, OR RECOMMENDED OR GIVEN
APPROVAL TO, ANY PERSON, SECURITY OR TRANSACTION. IT IS UNLAWFUL TO MAKE, OR
CAUSE TO BE MADE, TO ANY PROSPECTIVE PURCHASER, CUSTOMER OR CLIENT, ANY
REPRESENTATION INCONSISTENT WITH THE PROVISIONS OF THIS PARAGRAPH.
NOTICE TO FLORIDA RESIDENTS
PURSUANT TO SECTION 517.061(11)(a)(5) OF THE FLORIDA SECURITIES ACT, YOU
HAVE THE RIGHT TO RESCIND YOUR SUBSCRIPTION (UNLESS YOU ARE AN INSTITUTIONAL
INVESTOR DESCRIBED IN SECTION 517.061(7) OF THE FLORIDA SECURITIES ACT) BY
GIVING NOTICE OF SUCH RESCISSION BY TELEPHONE, TELEGRAPH OR LETTER, WITHIN
THREE DAYS AFTER YOU FIRST TENDER CONSIDERATION TO THE INITIAL PURCHASER. IF
NOTICE IS NOT RECEIVED BY SUCH TIME, THE FOREGOING RIGHT OF RESCISSION SHALL
BE NULL AND VOID.
iii
<PAGE>
OFFERING MEMORANDUM 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 Offering Memorandum, 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, including 24 ANDAs filed with FDA. The Company
supplements its internal product development, manufacturing and marketing
capabilities through strategic collaborations. Schein generated net revenues of
$478.0 million and EBITDA (as defined) of $55.8 million during the 12 months
ended September 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 350 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 the 12 months ended September 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 20% of the Company's net revenues in the nine
months ended September 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 120-person direct sales and marketing force is 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.
1
<PAGE>
The Company's commitment to product development has resulted in 23 ANDA
approvals during the past three years and its current pipeline of 24 pending
ANDAs and over 60 additional products under development. During the past three
fiscal years, the Company, directly and through its strategic collaborations,
has expended approximately $74.0 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 140-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 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 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 Elan Corporation plc ("Elan") and Ethical Holdings plc ("Ethical"); 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 Elensys Care
Services, Inc. ("Elensys") and MGI.
Schein's objective is to become the leading generic pharmaceutical company in
the approximately $10 billion generic pharmaceutical industry in the United
States. 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 350
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.
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.
2
<PAGE>
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 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 the Company expects that a New Drug
Application ("NDA") for its next generation injectable iron product will be
filed with FDA in the first half of 1998. 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.
Expand Market Penetration through Direct Sales and Innovative Marketing
Programs. The Company believes its 120-person direct sales and marketing force
is the largest in the U.S. generic pharmaceutical industry. This sales and
marketing force includes 90 field representatives, 20 telemarketing
representatives and 10 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 developed and 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 (as
defined herein) in the nephrology market and MGI in the oncology market.
3
<PAGE>
THE OFFERING
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 January 15, 1998.
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 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 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. 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 September 27, 1997,
as adjusted for the Offering, the Company and its
Restricted
4
<PAGE>
Subsidiaries would have had secured indebtedness
of approximately $160.6 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. As of September 27, 1997, as
adjusted for the Offering, the Company would have
had approximately $69.8 million of undrawn
availability under the Senior Credit Agreement.
The Indenture relating to the Notes will permit
the Company and the 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 Notes will be
issued will contain 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."
Exchange Offer and
Registration................ The Company has agreed to (i) file, within 45
days after the Issue Date (as defined herein), a
registration statement (the "Exchange Offer
Registration Statement") with respect to an offer
to exchange the Notes (the "Registered Exchange
Offer") for a series of notes of the Company with
terms identical in all material respects to the
Notes (the "Exchange Notes"), (ii) use
commercially reasonable efforts to cause such
Exchange Offer Registration Statement to be
declared effective within the earlier of (A) 90
days after the Issue Date or (B) 30 days after
the effectiveness of the consummation of the
initial public offering of the Company's Common
Stock and (iii) consummate the Registered
Exchange Offer within 150 days after the Issue
Date. Such Exchange Notes, if issued, will bear
the rate of interest of the Notes immediately
prior to the consummation of the Exchange Offer
(as defined herein). In the event that the
applicable
5
<PAGE>
laws or interpretations of the staff of the
Commission do not permit the Company to effect
the Registered Exchange Offer, the Company will
use commercially reasonable efforts to cause to
become effective a shelf registration statement
(the "Shelf Registration Statement") with respect
to the resale of Notes and to keep the Shelf
Registration Statement effective until 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.
The Company shall cause such Shelf Registration
Statement to be declared effective on or prior to
the latter of (x) the 120th day after the Issue
Date or (y) the 45th day after the publication of
the change in law or interpretation. In the event
that the Company does not comply with certain
covenants set forth in the Exchange and
Registration Rights Agreement (as defined herein)
to be executed by the Company and the Initial
Purchaser, the Company will be obligated to pay
certain additional interest to the holders of the
Notes. See "Exchange and Registration Rights
Agreement."
Transfer Restrictions;
Absence of a Public Market
for the Notes.............. The Notes have not been registered under the
Securities Act and are subject to restrictions on
transferability and resale. The Notes are new
securities, and there is currently no established
market for the Notes. If issued, the Exchange
Notes will generally be freely transferable
(subject to the 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
Notes or, if issued, the Exchange 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 Notes, or, if issued, the Exchange Notes, on
any securities exchange or on any automated
dealer quotation system. See "Transfer
Restrictions."
Use of Proceeds............. The Company is amending the terms of the Senior
Subordinated Loan Agreement (as defined herein)
to allow for the issuance of the Notes and
intends to use the net proceeds of the Offering
to repay the Senior Subordinated Loan (as defined
herein). See "Use of Proceeds."
RISK FACTORS
Prospective purchasers of the Notes should carefully consider the information
set forth under the caption "Risk Factors" and all other information set forth
in this Offering Memorandum before making any investment in the Notes.
6
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER SEPTEMBER
------------------------------------------------ ----------------------
1992 1993 1994 1995 (1) 1996 1996 1997
-------- -------- -------- -------- -------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net revenues............ $319,875 $393,926 $385,428 $391,846 $476,295 $352,172 $353,829
Cost of sales........... 207,276 217,653 237,380 250,507 320,675 236,721 240,562
-------- -------- -------- -------- -------- -------- --------
Gross profit........... 112,599 176,273 148,048 141,339 155,620 115,451 113,267
COSTS AND EXPENSES:
Selling, general and
administrative........ 55,763 64,489 71,416 73,250 84,366 61,149 57,950
Research and
development........... 14,234 18,055 19,170 28,324 27,030 23,044 22,854
-------- -------- -------- -------- -------- -------- --------
42,602 93,729 57,462 39,765 44,224 31,258 32,463
Amortization of
goodwill and other
intangibles........... -- -- -- 3,399 10,195 7,713 7,722
Special compensation,
restructuring and
relocation (2)........ 7,417 8,426 33,594 -- -- -- --
Acquired in-process
Marsam research and
development (1)....... -- -- -- 30,000 -- -- --
-------- -------- -------- -------- -------- -------- --------
Operating income........ 35,185 85,303 23,868 6,366 34,029 23,545 24,741
Interest expense, net.. 2,315 1,467 1,493 10,005 23,285 16,081 20,456
Other expense (income),
net (3)............... 195 9,215 579 779 4,156 1,745 (4,536)
-------- -------- -------- -------- -------- -------- --------
Income (loss) before
provision for income
taxes and minority
interest............... 32,675 74,621 21,796 (4,418) 6,588 5,719 8,821
Provision for income
taxes (4)............. 12,490 29,096 15,165 10,482 5,191 3,573 5,095
Minority interest...... 2,173 (343) -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Net income (loss)....... $ 18,012 $ 45,868 $ 6,631 $(14,900) $ 1,397 $ 2,146 $3,726
======== ======== ======== ======== ======== ======== ========
OTHER DATA:
EBITDA (as defined) (5). $ 39,748 $ 91,864 $ 61,074 $ 50,396 $ 54,932 $ 39,174 $ 40,037
Depreciation and
amortization........... 6,105 7,328 8,464 17,395 25,450 18,018 19,749
Capital expenditures,
net.................... 17,416 22,806 16,135 13,986 11,309 8,625 8,992
Ratio of earnings to
fixed charges (6)...... 10.6x 26.9x 8.0x -- 1.3x 1.3x 1.4x
PRO FORMA DATA:
Cash interest expense
(7).................... $ 23,488 $ 16,788 $ 17,897
Ratio of EBITDA (as
defined) to cash
interest expense....... 2.3x 2.3x 2.2x
Ratio of total debt to
EBITDA
(as defined) (8)....... -- -- 4.7x
<CAPTION>
DECEMBER AS OF AS ADJUSTED
------------------------------------------------ SEPTEMBER SEPTEMBER
1992 1993 1994 1995 1996 1997 1997 (9)
-------- -------- -------- -------- -------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital......... $ 82,731 $ 87,035 $ 98,610 $ 92,021 $ 99,111 $ 93,480 $ 89,280
Total assets............ 211,744 227,861 269,729 522,410 544,312 520,699 524,899
Total debt.............. 44,625 27,563 45,927 280,558 286,480 256,413 260,613
Stockholders' equity.... 85,761 130,336 140,164 125,692 129,980 137,084 137,084
</TABLE>
7
<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 3 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. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and Notes 2 and
12 to the Consolidated Financial Statements of the Company.
(3) Other expense (income), net in 1992 includes $0.5 million of an
extraordinary income item.
(4) Provision for income taxes in 1993 includes an adjustment to reduce income
taxes by $1.1 million relating to the adoption of Statement of Financial
Accounting Standards No. 109.
(5) EBITDA is defined as income (loss) before provision for income taxes and
minority interest, interest expense, net and depreciation and amortization,
excluding gains on sales of securities and non-cash items (special
compensation, acquired in-process Marsam research and development,
contingent settlement accruals, equity in net losses of international
investments and other non-cash items). The Company has included information
concerning EBITDA in this Offering Memorandum 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 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.
(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 cash interest expense is defined as historical interest expense,
net adjusted for (i) the exclusion of amortization of deferred financing
fees of $2.2 million in fiscal 1996 and $0.9 million and $2.3 million in
the nine months ended September 1996 and 1997, respectively, (ii) interest
expense as if the Offering had occurred on December 31, 1995 and the
proceeds were used to repay the Senior Subordinated Loan or its predecessor
debt and (iii) interest expense associated with drawdowns under the
revolving credit facility under the Senior Credit Agreement which were used
to pay the $4.2 million in fees and expenses incurred as a result of the
Offering.
(8) The ratio of total debt to EBITDA (as defined) is computed by dividing (i)
EBITDA (as defined) for the twelve months ended September 1997 by (ii)
total debt as of September 1997 as adjusted for the Offering.
(9) As adjusted to give effect to the Offering and the payment of $4.2 million
in fees and expenses in connection therewith, using proceeds from the
Company's revolving credit facility under the Senior Credit Agreement.
8
<PAGE>
RISK FACTORS
Prospective investors in the Notes should carefully consider the following
risk factors, in addition to the other information set forth in this Offering
Memorandum, before making an investment in the Notes offered hereby. This
Offering Memorandum contains statements which constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act
of 1995. 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 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
Substantial Leverage
The Company is highly leveraged. As of September 27, 1997, as adjusted for
the Offering, the Company would have had total consolidated indebtedness of
$260.6 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 principal payments over the next several years. 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
9
<PAGE>
view of the Company's high level of debt. See "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" and "Description of Notes."
Ranking of Notes
The 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 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 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.
Further, as of September 27, 1997, as adjusted for the Offering, the Senior
Credit Agreement would have provided the Company with $69.8 million of undrawn
availability, which, if drawn, 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."
As of September 27, 1997, as adjusted for the Offering, the aggregate
principal amount of secured indebtedness of the Company and the Guarantors
which would have effectively ranked senior to the Notes and the Subsidiary
Guarantees would have been approximately $160.6 million.
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
10
<PAGE>
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
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 will contain 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 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."
11
<PAGE>
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
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 also provides that certain change of control
events with respect to the Company constitute a default thereunder. Any future
credit agreements or other agreements to which the Company becomes a party may
contain similar restrictions and provisions. In the event a Change of Control
occurs at a time when the Company is prohibited from purchasing the Notes, or
if the Company is required to make an asset sale offer pursuant to the terms
of 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 or takeover of the Company and, thus, the removal
of incumbent management. See "Description of Notes--Change of Control."
Lack of Public Market; Restrictions on Transferability
The Company does not intend to apply for a listing of the Notes, or if
issued, the Exchange Notes, on any securities exchange or on any automated
dealer quotation system. There is currently no established market for the
Notes, and there can be no assurance as to the liquidity of markets that may
develop for the Notes, the ability of the holders of the Notes to sell their
Notes or the price at which such holders would be able to sell their Notes. If
such market were to exist, the Notes could trade at prices that may be lower
than the initial market values thereof depending on many factors, including
prevailing interest rates, the Company's operating results and the market for
similar securities. The Notes are expected to be designated for trading in the
PORTAL market. The Initial Purchaser has advised the Company that it currently
intends to make a market with respect to 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. In addition, such market
making activity will be subject to the limits imposed by the Securities Act
and the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and
may be limited during the pendency of the Exchange Offer or the effectiveness
of a shelf registration statement in lieu thereof. See "Exchange and
Registration Rights Agreement," "Transfer Restrictions" and "Plan of
Distribution."
12
<PAGE>
The Notes are being offered in reliance upon an exemption from registration
under the Securities Act and applicable state securities laws. Therefore, the
Notes may be transferred or resold only in a transaction registered under or
exempt from the Securities Act and applicable state securities laws. Pursuant
to the Exchange and Registration Rights Agreement, the Company and the
Guarantors have agreed to file the Exchange Offer Registration Statement with
the Commission and to use their best efforts to cause such registration
statement to become effective with respect to the Exchange Notes. If issued,
the Exchange Notes generally will be permitted to be resold or otherwise
transferred by each holder without the requirement of further registration.
The Exchange Notes, however, also will 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 Notes being tendered
for exchange. No assurance can be given as to the liquidity of the trading
market for the Exchange Notes, or, in the case of non-exchanging holders of
Notes, the trading market for the Notes following the Exchange Offer. See
"Exchange and Registration Rights Agreement."
The liquidity of, and trading market for, the Notes or the Exchange 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.
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."
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 1996 and the nine months ended September 1997 were
$88.0 million and $72.1 million, respectively, or 19% and 20%, respectively,
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 (the "Consultant") whose involvement has been substantial. The
Company expects that the Consultant will be involved with the Company
13
<PAGE>
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,"
"Business--Government Regulations" and "Certain Transactions."
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 an 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 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
In early 1996, FDA conducted an inspection of the operations of the
Company's subsidiary, Steris Laboratories, Inc. ("Steris"), located in
Phoenix, Arizona. At the conclusion of that inspection, FDA identified various
cGMP manufacturing and reporting deficiencies in Steris' operations. Steris
has subsequently been advised by FDA that it will not approve any ANDAs for
products manufactured at the Steris facility until FDA confirms that the
manufacturing and reporting deficiencies have been corrected. Ten of the
Company's pending ANDAs have been filed from the Steris facility. Following
the 1996 inspection, Steris implemented numerous measures to correct these
deficiencies and place Steris in compliance with applicable FDA manufacturing
and reporting requirements.
14
<PAGE>
In July 1997, FDA conducted a follow-up inspection of the Steris facility.
At the conclusion of that inspection, FDA identified additional cGMP
deficiencies at the Steris facility. Steris has implemented measures intended
to correct these deficiencies and believes that a full reinspection will be
required before FDA will approve ANDAs for new products manufactured at the
Steris facility. While the Company is currently discussing with FDA the timing
of this reinspection, no assurance can be given as to when it will take place.
Following the 1996 inspection of Steris, FDA's Office of Regulatory Affairs
staff commenced an investigation of Steris' operations that focused primarily
on drug stability issues, including Steris' alleged failure to notify FDA on
an adequate and timely basis of drug stability problems with respect to
certain products manufactured at the Steris facility. On the basis of this
investigation, the U.S. Department of Justice ("DOJ") notified Steris in a
letter dated July 28, 1997 that the alleged reporting deficiencies constituted
serious breaches of regulatory obligations and indicated that it would be
willing to negotiate a settlement of the alleged violations with Steris. The
contemplated settlement will require Steris to pay a substantial misdemeanor
fine for failure to observe application reporting requirements for two drugs
during 1994 and 1995. While the Company does not expect any other sanctions to
arise in respect of this matter, any such sanctions could have a material
adverse effect on the Company's business, results of operations and financial
condition.
In 1995, FDA inspected the operations of the Company's subsidiary, Danbury
Pharmacal, Inc. ("Danbury"), which operates facilities in Carmel, New York and
Danbury, Connecticut. As a result of observations made by FDA relating to
Danbury's compliance with cGMP requirements and the integrity of the data
submitted by Danbury in support of certain ANDAs, Danbury voluntarily audited
all data submitted in connection with 26 of its pending and approved ANDAs.
Since the 1995 inspection, FDA has continued to approve ANDAs for products
manufactured by Danbury. In August 1997, FDA reinspected the Carmel and
Danbury facilities. FDA observed certain cGMP deficiencies which the Company
has corrected in a manner satisfactory to FDA. FDA is currently conducting an
additional inspection of those facilities, which the Company believes
primarily will involve evaluations of the ANDA audits and the procedural
changes Danbury instituted to remedy cGMP deficiencies observed during the
1995 FDA inspection.
In June 1997, FDA conducted an ANDA preapproval and cGMP inspection at the
Company's Marsam subsidiary, located in Cherry Hill, New Jersey. Although the
inspection focused primarily on issues relating to the manufacture of certain
drug products that are the subject of five pending ANDAs, the inspection also
included an examination of Marsam's general compliance with cGMP requirements.
Marsam was informed at the conclusion of the inspection that FDA intended to
withhold approval of the five ANDAs until certain alleged cGMP deficiencies
are corrected. Marsam has provided FDA with information it believes
demonstrates that the alleged deficiencies are not significant and that
corrective measures have been implemented. FDA has begun a follow-up
inspection to determine whether these corrective actions have been implemented
satisfactorily. Seven of the Company's pending ANDAs have been filed from the
Marsam facility.
There can be no assurance that FDA will determine that the Company has
adequately corrected the alleged deficiencies or that approval of any of the
pending or subsequently submitted ANDAs by the Company will be forthcoming. In
addition, there can be no assurance that FDA, following the reinspection of
the Steris, Danbury and Marsam facilities and its review of their respective
responses to the alleged cGMP deficiencies, will not seek to impose additional
regulatory sanctions against the Company and its subsidiaries. See "--
Dependence Upon New Products and Effect of Product Lifecycles" and "Business--
Government Regulations."
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
15
<PAGE>
wholesalers and retailers will increase competitive pricing pressure 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. For the nine months ended September 1997 and for the year
ended December 1996, sales to the Company's ten largest customers represented
approximately 70% of the Company's total net revenues. For the nine months
ended September 1997, three customers accounted for 17%, 16% and 11%,
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 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 exist or be able 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
16
<PAGE>
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), which govern the voting of their
common stock (the "Common Stock") until March 2000. The shares subject to
these agreements represent a majority of the shares of Common Stock
outstanding. 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. Accordingly, Mr. Sperber is able to control substantially
all matters requiring stockholder approval, including the election of
directors. These agreements remain 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.
Bayer Corporation, which owns 28.3% of the outstanding shares of Common
Stock, is a party to an agreement with the Company (the "Standstill") that,
among other things, prevents Bayer Corporation from acquiring or seeking to
acquire control of the Company until 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 a number of shares that would enable Bayer Corporation to own
a majority of the outstanding shares of Common Stock. During the Standstill,
Bayer Corporation has, under the terms of the Restructuring Agreements, the
right to acquire, including under certain circumstances the right to acquire
from the Company and certain of its principal stockholders, a significant
number of additional shares of Common Stock.
As long as Bayer Corporation owns 10% or more of the outstanding Common
Stock, Bayer Corporation has the right to nominate one member of the Company's
Board of Directors and the right to nominate one or more additional directors,
depending on the number of shares it owns. Until May 15, 2001, the Company may
not undertake certain actions without the consent of Bayer Corporation,
including, among other things, engaging in any business not principally in a
segment of the pharmaceutical or health care industry or amending the
Company's charter or by-laws to require more than majority approval to elect a
majority of the Board of Directors, merge, consolidate or sell all or
substantially all the Company's assets. 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 Company may not undertake
certain other actions 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. See
"Management--Board of Directors" and "Certain Transactions--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, certain non-recurring expenses related to the
Company's restructuring and relocation in 1994, 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."
17
<PAGE>
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
The Company is amending the terms of the Senior Subordinated Loan Agreement
to allow for the issuance of the Notes and intends to use the net proceeds of
the Offering to repay the Senior Subordinated Loan.
18
<PAGE>
CAPITALIZATION
The following table sets forth the total short-term debt and total
capitalization of the Company as of September 1997 (i) on a historical basis
and (ii) as adjusted to give effect to the Offering and the payment of $4.2
million in fees and expenses in connection therewith using proceeds from the
Company's revolving credit facility under the Senior Credit Agreement. This
table should be read in conjunction with the Consolidated Financial Statements
of the Company and the notes thereto included elsewhere in this Offering
Memorandum. See "Use of Proceeds."
<TABLE>
<CAPTION>
SEPTEMBER 1997
--------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
SHORT-TERM DEBT:
Revolving credit facility (1)........................... $ 26,000 $ 30,200
Current portion of term loan facility................... 6,842 6,842
Current portion of capitalized lease obligations........ 101 101
-------- --------
Total short-term debt................................. $ 32,943 $ 37,143
======== ========
LONG-TERM DEBT:
Term loan facility...................................... $123,158 $123,158
Senior Subordinated Loan................................ 100,000 --
Senior Floating Rate Notes Due 2004..................... -- 100,000
Capitalized lease obligations........................... 312 312
-------- --------
Total long-term debt.................................. 223,470 223,470
-------- --------
STOCKHOLDERS' EQUITY:
Common Stock, $.01 par value; 529 authorized shares, 273
issued
and outstanding, actual and as adjusted................ 3 3
Additional paid-in capital.............................. 38,876 38,876
Retained earnings....................................... 92,107 92,107
Other................................................... 6,098 6,098
-------- --------
Total stockholders' equity............................ 137,084 137,084
-------- --------
Total capitalization................................ $360,554 $360,554
======== ========
</TABLE>
- --------
(1) After giving effect to the Offering, the Company would have had
approximately $69.8 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."
19
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data with respect to the
Company's financial position at December 1995 and 1996, and its results of
operations for the years ended December 1994, 1995 and 1996, has been derived
from the audited consolidated financial statements of the Company included
elsewhere in this Offering Memorandum. The selected consolidated financial
information with respect to the Company's financial position at December 1992,
1993 and 1994, and its results of operations for the years ended December 1992
and 1993, has been derived from the audited consolidated financial statements
of the Company which are not included in this Offering Memorandum. The
information for the interim periods is unaudited; however, in the opinion of
management, all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of such information have been included. The
interim results of operations may not be indicative of the results for the
full year. 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" included elsewhere in this Offering
Memorandum.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER SEPTEMBER
------------------------------------------------ ----------------------
1992 1993 1994 1995 (1) 1996 1996 1997
-------- -------- -------- -------- -------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net revenues............ $319,875 $393,926 $385,428 $391,846 $476,295 $352,172 $353,829
Cost of sales........... 207,276 217,653 237,380 250,507 320,675 236,721 240,562
-------- -------- -------- -------- -------- -------- --------
Gross profit........... 112,599 176,273 148,048 141,339 155,620 115,451 113,267
COSTS AND EXPENSES:
Selling, general and
administrative........ 55,763 64,489 71,416 73,250 84,366 61,149 57,950
Research and
development........... 14,234 18,055 19,170 28,324 27,030 23,044 22,854
-------- -------- -------- -------- -------- -------- --------
42,602 93,729 57,462 39,765 44,224 31,258 32,463
Amortization of
goodwill and other
intangibles........... -- -- -- 3,399 10,195 7,713 7,722
Special compensation,
restructuring and
relocation (2)........ 7,417 8,426 33,594 -- -- -- --
Acquired in-process
Marsam research and
development (1)....... -- -- -- 30,000 -- -- --
-------- -------- -------- -------- -------- -------- --------
Operating income........ 35,185 85,303 23,868 6,366 34,029 23,545 24,741
Interest expense, net.. 2,315 1,467 1,493 10,005 23,285 16,081 20,456
Other expense (income),
net (3)............... 195 9,215 579 779 4,156 1,745 (4,536)
-------- -------- -------- -------- -------- -------- --------
Income (loss) before
provision for income
taxes and minority
interest............... 32,675 74,621 21,796 (4,418) 6,588 5,719 8,821
Provision for income
taxes (4)............. 12,490 29,096 15,165 10,482 5,191 3,573 5,095
Minority interest...... 2,173 (343) -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Net income (loss)....... $ 18,012 $ 45,868 $ 6,631 $(14,900) $ 1,397 $ 2,146 $3,726
======== ======== ======== ======== ======== ======== ========
OTHER DATA:
EBITDA (as defined) (5). $ 39,748 $ 91,864 $ 61,074 $ 50,396 $ 54,932 $ 39,174 $ 40,037
Depreciation and
amortization........... 6,105 7,328 8,464 17,395 25,450 18,018 19,749
Capital expenditures,
net.................... 17,416 22,806 16,135 13,986 11,309 8,625 8,992
Ratio of earnings to
fixed charges (6)...... 10.6x 26.9x 8.0x -- 1.3x 1.3x 1.4x
PRO FORMA DATA:
Cash interest expense
(7).................... $ 23,488 $ 16,788 $ 17,897
Ratio of EBITDA (as
defined) to cash
interest expense....... 2.3x 2.3x 2.2x
Ratio of total debt to
EBITDA (as defined)
(8).................... -- -- 4.7x
<CAPTION>
DECEMBER AS OF AS ADJUSTED
------------------------------------------------ SEPTEMBER SEPTEMBER
1992 1993 1994 1995 1996 1997 1997 (9)
-------- -------- -------- -------- -------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital......... $ 82,731 $ 87,035 $ 98,610 $ 92,021 $ 99,111 $ 93,480 $ 89,280
Total assets............ 211,744 227,861 269,729 522,410 544,312 520,699 524,899
Total debt.............. 44,625 27,563 45,927 280,558 286,480 256,413 260,613
Stockholders' equity.... 85,761 130,336 140,164 125,692 129,980 137,084 137,084
</TABLE>
20
<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 3 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. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and Notes 2 and
12 to the Consolidated Financial Statements of the Company.
(3) Other expense (income), net in 1992 includes $0.5 million of an
extraordinary income item.
(4) Provision for income taxes in 1993 includes an adjustment to reduce income
taxes by $1.1 million relating to the adoption of Statement of Financial
Accounting Standards No. 109.
(5) EBITDA is defined as income (loss) before provision for income taxes and
minority interest, interest expense, net and depreciation and
amortization, excluding gains on sales of securities and non-cash items
(special compensation, acquired in-process Marsam research and
development, contingent settlement accruals, equity in net losses of
international investments and other non-cash items). The Company has
included information concerning EBITDA in this Offering Memorandum 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 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.
(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 cash interest expense is defined as historical interest expense,
net adjusted for (i) the exclusion of amortization of deferred financing
fees of $2.2 million in fiscal 1996 and $0.9 million and $2.3 million in
the nine months ended September 1996 and 1997, respectively, (ii) interest
expense as if the Offering had occurred on December 31, 1995 and the
proceeds were used to repay the Senior Subordinated Loan or its
predecessor debt and (iii) interest expense associated with drawdowns
under the revolving credit facility under the Senior Credit Agreement
which were used to pay the $4.2 million in fees and expenses incurred as a
result of the Offering.
(8) The ratio of total debt to EBITDA (as defined) is computed by dividing (i)
EBITDA (as defined) for the twelve months ended September 1997 by (ii)
total debt as of September 1997 as adjusted for the Offering.
(9) As adjusted to give effect to the Offering and the payment of $4.2 million
in fees and expenses in connection therewith, using proceeds from the
Company's revolving credit facility under the Senior Credit Agreement.
21
<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
Offering Memorandum. This Offering Memorandum 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 Offering Memorandum should be read as being applicable
to all related forward-looking statements wherever they appear in this
Offering Memorandum. See "Risk Factors."
OVERVIEW
The Company currently manufactures and markets two classes of pharmaceutical
products, generic products and branded products. 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 significant 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.
Net revenues from INFeD as a portion of total net revenues increased from
16% in 1994 to 20% in the nine months ended September 1997. Gross profit
margins on INFeD exceed gross profit margins on the Company's generic products
generally; accordingly, the gross profit from increased sales of INFeD have
offset the reduction in gross profit from generic products during the periods
presented.
The following table sets forth the net revenues of the Company's generic and
branded businesses for each of the periods shown:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER SEPTEMBER
-------------------- -----------------
1994 1995 1996 1996 1997
------ ------ ------ -------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Generic business:
Core products......................... $291.9 $300.8 $331.6 $ 247.6 $ 221.4
Nortriptyline......................... 32.6 19.0 9.0 7.3 4.5
Vecuronium bromide.................... -- -- 34.2 23.2 30.8
Patent settlement revenues............ -- 5.0 13.5 13.5 25.0
------ ------ ------ -------- --------
Total generic revenues................ 324.5 324.8 388.3 291.6 281.7
Branded business:
INFeD................................. 60.9 67.0 88.0 60.6 72.1
------ ------ ------ -------- --------
Net revenues........................ $385.4 $391.8 $476.3 $ 352.2 $ 353.8
====== ====== ====== ======== ========
</TABLE>
22
<PAGE>
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 for $312.4 million and
agreed with the Company to pursue future strategic alliances. Charges for
special compensation, restructuring and relocation incurred in connection with
the reorganization aggregated $7.4 million, $8.4 million and $33.6 million for
1992, 1993 and 1994, respectively.
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.
RESULTS OF OPERATIONS
The following table sets forth certain selected income statement data as a
percentage of net revenues for the periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER SEPTEMBER
----------------------- ------------
1994 1995 1996 1996 1997
------ ------ ------ ----- -----
<S> <C> <C> <C> <C> <C>
Net revenues............................ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales........................... 61.6 63.9 67.3 67.2 68.0
------ ------ ------ ----- -----
Gross profit............................ 38.4 36.1 32.7 32.8 32.0
Costs and expenses:
Selling, general and administrative... 18.5 18.7 17.7 17.4 16.4
Research and development.............. 5.0 7.2 5.7 6.5 6.4
Amortization of goodwill and other
intangibles.......................... -- 0.9 2.1 2.2 2.2
Special compensation, restructuring
and relocation....................... 8.7 -- -- -- --
Acquired in-process Marsam research
and development...................... -- 7.7 -- -- --
------ ------ ------ ----- -----
Operating income........................ 6.2 1.6 7.2 6.7 7.0
Interest expense, net................. 0.4 2.5 4.9 4.6 5.8
Other expense (income), net........... 0.2 0.2 0.9 0.5 (1.3)
------ ------ ------ ----- -----
Income (loss) before provision for
income taxes........................... 5.6 (1.1) 1.4 1.6 2.5
Provision for income taxes............ 3.9 2.7 1.1 1.0 1.4
------ ------ ------ ----- -----
Net income (loss)....................... 1.7% (3.8)% 0.3% 0.6% 1.1%
====== ====== ====== ===== =====
</TABLE>
Nine Months Ended September 1997 Compared to Nine Months Ended September 1996
Net revenues increased $1.6 million, or 0.5%, from $352.2 million in 1996 to
$353.8 million in 1997. In the branded business, sales increased $11.5
million, which offset a decline in sales of generic products of $9.9 million.
The increase in branded product sales reflected largely an increase in units
sold. The decline in generic revenues resulted from a $26.2 million decline in
the sales of core products and a $2.8 million decline in sales of
nortriptyline, offset by an $11.5 million increase in patent settlement
revenues received in the first quarter of 1997 and a $7.6 million increase in
sales of vecuronium bromide. The decrease in sales of core products reflected
the strategic decision in the second half of 1996 to discontinue certain low-
margin manufactured products and to reduce selling efforts on outsourced
products as well as competitive pressures on other core products, which was
offset by the impact of a $6.4 million increase in sales of new products.
Gross profit decreased $2.2 million, or 1.9%, from $115.5 million in 1996 to
$113.3 million in 1997. The gross profit margin decreased from 32.8% in 1996
to 32.0% in 1997. This decline in gross profit was largely comprised of a
decline in gross profit on core products which was partially offset by
increased gross profit on INFeD, vecuronium bromide and new products. Gross
profit from patent settlements received in the first quarters of 1996 and 1997
contributed an additional $5.6 million, reduced by increased manufacturing
variances and other
23
<PAGE>
costs of $4.6 million. In the third quarter of 1997 compared to the third
quarter of 1996, the gross profit margin decreased from 32.6% to 29.7%,
reflecting a less favorable mix of products sold as well as competitive price
pressures.
Selling, general and administrative expenses decreased $3.2 million, or
5.2%, from $61.1 million in 1996 to $58.0 million in 1997. Selling, general
and administrative expenses as a percent of net revenues decreased from 17.4%
in 1996 to 16.4% in 1997. The decrease in selling, general and administrative
expenses was due primarily to the effects of various cost reduction
initiatives, including a reduction in the retail field sales force. In the
third quarter of 1997, the Company experienced increased selling, general and
administrative expenses compared to earlier quarters of 1997 due primarily to
higher brand marketing expenses.
Research and development expenses decreased $0.2 million, or 0.8%, from
$23.0 million in 1996 to $22.8 million in 1997. However, expenses in the third
quarter of 1997 increased compared to earlier 1997 quarters largely reflecting
costs associated with a development project nearing launch stage.
Amortization of goodwill and other intangibles was unchanged compared to the
comparable period in 1996.
As a result of the factors discussed above, operating income increased $1.2
million, or 5.1%, from $23.5 million in 1996 to $24.7 million in 1997.
Interest expense, net increased $4.4 million, or 27.2%, from $16.1 million
in 1996 to $20.5 million in 1997 principally due to higher amortization of
deferred financing expenses of $2.5 million and increased interest costs of
$1.5 million resulting from refinancing of senior debt with higher cost
subordinated debt in December 1996.
Other expense (income), net changed by $6.3 million from an expense of $1.7
million in 1996 to income of $4.5 million in 1997. Gains on the sale of
marketable securities of $9.9 million, primarily in the third quarter of 1997,
offset increased equity losses from the Company's investment in international
joint ventures of $1.0 million and other expenses.
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 62.5% in 1996 to 57.8% in 1997, primarily as a result of higher
income offsetting fixed non-deductible expenses.
1996 Compared to 1995
Net revenues increased $84.4 million, or 21.6%, from $391.9 million in 1995
to $476.3 million in 1996. In the generic business, net revenues increased
$63.5 million, and in the branded business, net revenues increased $21.0
million, driven by increased unit sales of INFeD. Increased revenues of
generic products consisted of $34.2 million in sales generated by vecuronium
bromide, a new product launched in March 1996, an $8.5 million increase in
patent settlement revenues and a $30.8 million increase in sales of the
Company's core products, offset in part by a decline in nortriptyline sales of
$10.0 million. The sales of core products increased primarily from the Marsam
Acquisition, which increased core product sales by $31.4 million, and from
$7.6 million in sales of new products, offset by an $8.2 million decrease in
sales of the Company's other core products, due primarily to price decreases.
The Company's gross profit increased $14.3 million, or 10.1%, from $141.3
million in 1995 to $155.6 million in 1996. The gross profit margin fell from
36.1% in 1995 to 32.7% in 1996. An increase in gross profit of $31.2 million
was attributable to the Company's branded business, vecuronium bromide and
patent settlement revenues, which was partially offset by a $12.6 million
increase in manufacturing and regulatory costs.
Selling, general and administrative expenses increased $11.1 million, or
15.2%, from $73.3 million in 1995 to $84.4 million in 1996. Selling, general
and administrative expenses decreased as a percentage of net revenues from
18.7% in 1995 to 17.7% in 1996. Selling, general and administrative expenses
increased due primarily to increased sales volume, the full year impact of the
Marsam Acquisition of $2.6 million and an increase in promotional activities
in support of new product launches.
24
<PAGE>
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 $27.7
million from $6.3 million in 1995 to $34.0 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 debt financing for the Marsam Acquisition and
higher interest rates.
Other expense (income), net increased by $3.4 million from $0.8 million in
1995 to $4.2 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. The 1996 effective income
tax rate of 78.9% represented a decrease from the 1995 effective rate of
237.3% primarily due to the impact of certain non-recurring and non-deductible
expenses, which were largely comprised of the acquired in-process Marsam
research and development charge of $30.0 million.
1995 Compared to 1994
Net revenues increased $6.4 million, or 1.7%, from $385.4 million in 1994 to
$391.8 million in 1995. In the branded business, net revenues increased $6.1
million, and in the generic business, net revenues increased $0.3 million. The
increase in net revenues in the branded business resulted from an increased
number of units of INFeD sold. In the generic business, the changes consisted
of increases of $4.8 million in sales of new products, $5.0 million in new
patent settlement revenues and $14.0 million from the impact of the Marsam
Acquisition. These increases in the generic business were offset by a $13.6
million decrease in sales of nortriptyline and a $4.1 million decrease in
sales of the Company's other core products due primarily to price declines.
The Company's gross profit decreased $6.7 million, or 4.5%, from $148.0
million in 1994 to $141.3 million in 1995. The gross profit margin decreased
from 38.4% in 1994 to 36.1% in 1995. The decrease was primarily a result of a
$12.8 million decrease attributable to lower selling prices of nortriptyline
and decreased gross profit on other core products due to competitive pricing
pressures. This was partially offset by a $4.0 million increase representing
the impact of the Marsam Acquisition, an increase in gross profit in the
Company's branded business and decreased manufacturing and regulatory costs.
Selling, general and administrative expenses increased $1.9 million, or
2.6%, from $71.4 million in 1994 to $73.3 million in 1995. The increase in
selling, general and administrative expenses was due primarily to an increase
in sales volume, an increase in promotional activities in support of the
Company's branded business, new product launches and the Marsam Acquisition.
Selling, general and administrative expenses increased as a percentage of net
revenues from 18.5% in 1994 to 18.7% in 1995.
Research and development expenses increased $9.1 million, or 47.8%, from
$19.2 million in 1994 to $28.3 million in 1995. Of the $9.1 million increase,
$2.1 million represented spending in connection with a worldwide technology
licensing and development agreement which the Company entered into during
September 1994, and the remaining increase in research and development
expenses was attributable to various new in-house development projects.
Amortization of goodwill and other intangibles of $3.4 million and acquired
in-process Marsam research and development charges of $30.0 million in 1995
resulted from the Company's Marsam Acquisition in September 1995. See Note 3
to the Consolidated Financial Statements of the Company.
25
<PAGE>
The corporate reorganization and relocation were completed during 1994,
resulting in a $33.6 million charge. There were no restructuring or relocation
expenses incurred during 1995.
As a result of the factors discussed above, operating income decreased $17.5
million from $23.9 million in 1994 to $6.4 million in 1995.
Interest expense, net increased $8.5 million from $1.5 million in 1994 to
$10.0 million in 1995. The increase was due primarily to the increase in
average debt associated with the debt financing for the Marsam Acquisition
funded in September 1995.
The Company's effective tax rate is higher than the statutory rate due to
the effect of significant non-deductible expenses. The 1995 effective income
tax rate of 237.3% increased from the 1994 effective income tax rate of 69.6%,
primarily due to the impact of certain non-recurring and non-deductible
expenses, which were largely comprised of the acquired in-process Marsam
research and development charge of $30.0 million. The 1994 effective income
tax rate also reflects the impact of non-deductible expenses, primarily
special compensation charges in connection with the corporate reorganization
completed during 1994.
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 plans to use the proceeds of the Offering as set
forth under "Use of Proceeds."
Net cash provided by operating activities was $27.1 million and $10.8
million in the nine months ended September 1997 and in the year ended December
1996, respectively. The net cash provided by operating activities during 1997
was primarily attributable to net income, as adjusted for non-cash charges, of
$15.9 million and decreases in inventories and accounts receivable aggregating
$11.4 million. The net cash provided by operating activities during 1996 was
primarily attributable to net income, as adjusted for non-cash charges, of
$27.9 million and an increase in accounts payable and accrued expenses of
$11.9 million, offset by an increase in inventories and accounts receivable of
$31.0 million.
Net cash provided by investing activities for the nine months ended
September 1997 and used in investing activities for the year ended December
1996 was $1.2 million and $20.0 million, respectively. Cash provided by
investing activities in 1997 resulted from the proceeds of sales of marketable
securities of $11.6 million, offset primarily by capital expenditures, net of
$9.0 million. The 1996 use of cash in investing activities was primarily due
to capital expenditures, net, purchase of product rights and licenses and
investments in international joint ventures of $17.4 million.
Net cash used in financing activities for the nine months ended September
1997 of $30.1 million resulted from the net repayment of debt. Net cash
provided by financing activities for the year ended December 1996 of $3.6
million was primarily due to net proceeds of debt.
In September 1995, the Company entered into a secured revolving credit and
term loan agreement (as amended, 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. 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") provided by Societe
Generale, New York branch, an affiliate of the Initial Purchaser and a lead-
manager of the Senior Credit Agreement. As a result of this payment and a
scheduled payment, the term loan facility was reduced to $145.0 million at
December 1996. In the first nine months of 1997, the Company made principal
payments of $15.0 million, thus reducing the term loan portion to $130.0
million at September 1997. Quarterly principal payments on the term loan
commence in September 1998 and end in the year 2001. Amortization
26
<PAGE>
amounts will total $13.7 million, $34.2 million, $41.0 million and $41.1
million in years 1998 through 2001, respectively. In addition to such
principal payments, the Company is required to make additional principal
payments in certain circumstances. Amounts outstanding under the revolving
credit facility were $41.0 million and $26.0 million as of December 1996 and
September 1997, respectively.
Borrowings under the Senior Credit Agreement bear interest, which is payable
at least quarterly, at a rate equal to a floating alternate base rate (derived
from the greater of the prime rate of the Credit Agent (as defined herein),
the three-month secondary market rate for certificates of deposit plus 1.00%
and the Federal Funds rate plus 1/2 of 1.00%), plus a margin ranging from zero
to 1.50% or at a rate equal to LIBOR (as defined herein) plus a margin ranging
from 0.75% to 2.50%, depending on the type of borrowing and the Company's
performance against certain criteria. Outstanding borrowings under the Senior
Subordinated Loan through January 31, 1998 bear interest, payable quarterly,
at a rate equal to a floating alternate base rate (derived from the greater of
Societe Generale's prime rate, the three-month secondary market rate for
certificates of deposit plus 1.00% and the Federal Funds rate plus 1/2 of
1.00%) plus a margin of 3.00% or a rate equal to LIBOR plus a margin of 4.00%.
The original obligations under the Senior Subordinated Loan will be
effectively replaced by the Notes offered hereby. See "Description of Certain
Indebtedness."
The Company believes that its existing credit facilities and cash expected
to be generated from operations are sufficient to finance its current level of
operations and currently contemplated capital expenditures.
The Company has signed a non-binding letter dated October 7, 1997 with
Cheminor Drugs Limited and its subsidiaries ("Cheminor") and Dr. Reddy's
Laboratories Limited and its subsidiaries ("Reddy") outlining the parties'
intent to enter into a strategic alliance 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 in certain 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 contemplated arrangement, the
Company would purchase 2.0 million publicly traded shares of Cheminor Drugs
Limited for $10.0 million, and under certain circumstances have the right and
the obligation to purchase an additional 1.0 million shares for $5.0 million.
Cheminor would have the right to make fair market value purchases of the
Company's Common Stock, once the shares are publicly traded; the purchase
price could be payable from profits otherwise due Cheminor from the alliance.
Each party would also be entitled to representation on the other company's
board of directors consistent with its equity interest. See "Certain
Transactions."
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 has filed a registration statement covering an initial public
offering (the "Common Stock Offering") of its Common Stock. Consummation of
each of this Offering and the Common Stock Offering is not contingent upon
consummation of the other. There can be no assurance that the filing will
become effective or that any shares will be sold. If the Common Stock Offering
occurs, the Company intends to use a portion of the net proceeds from the
Common Stock Offering to repurchase or redeem a portion of the Notes offered
hereby.
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.
27
<PAGE>
The following tables present unaudited quarterly financial data for the
years 1995 and 1996, and for the nine months ended September 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>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 1995 YEAR ENDED DECEMBER 1996 SEPTEMBER 1997
(UNAUDITED) (UNAUDITED) (UNAUDITED)
---------------------------------- ------------------------------------ --------------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH FIRST SECOND THIRD
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
------- ------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues:
Net product
sales.......... $83,978 $98,880 $ 96,344 $107,644 $109,949 $120,398 $108,325 $124,123 $106,839 $114,441 $107,549
Patent
settlements.... 5,000 -- -- -- 13,500 -- -- -- 25,000 -- --
------- ------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total net
revenues....... 88,978 98,880 96,344 107,644 123,449 120,398 108,325 124,123 131,839 114,441 107,549
------- ------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Gross profit..... 34,454 39,141 33,303 34,441 42,420 37,620 35,411 40,169 44,722 36,568 31,977
Cost and
expenses:
Selling, general
and
administrative. $18,214 18,298 17,955 18,783 19,907 20,755 20,487 23,217 19,227 18,478 20,245
Research and
development.... 7,579 7,996 7,331 5,418 7,242 8,119 7,683 3,986 6,744 7,434 8,676
Amortization of
goodwill and
other
intangibles.... -- -- 1,128 2,271 2,548 2,550 2,615 2,482 2,550 2,598 2,574
Acquired in-
process Marsam
research &
development.... -- -- 30,000 -- -- -- -- -- -- -- --
------- ------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Operating income
(loss).......... 8,661 12,847 (23,111) 7,969 12,723 6,196 4,626 10,484 16,201 8,058 482
Interest
expense, net... 743 954 2,790 5,518 5,321 5,379 5,382 7,203 6,884 6,850 6,722
Other expense
(income), net.. 519 607 456 (803) 126 79 1,539 2,412 1,809 (426) (5,919)
------- ------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Income (loss)
before
provision for
income taxes... 7,399 11,286 (26,357) 3,254 7,276 738 (2,295) 869 7,508 1,634 (321)
Provision for
income taxes... 2,996 4,571 1,693 1,222 3,343 733 (503) 1,618 3,625 1,315 155
------- ------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net income
(loss).......... 4,403 6,715 (28,050) 2,032 3,933 5 (1,792) (749) 3,883 319 (476)
======= ======= ======== ======== ======== ======== ======== ======== ======== ======== ========
</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 asserting performance.
28
<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.
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 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.
29
<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, including 24 ANDAs filed with FDA. The Company
supplements its internal product development, manufacturing and marketing
capabilities through strategic collaborations. Schein generated net revenues
of $478.0 million and EBITDA (as defined) of $55.8 million during the 12
months ended September 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 350 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 the 12
months ended September 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 20% of the Company's net revenues in
the nine months ended September 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 120-person direct sales and marketing force is 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 $10 billion generic 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) pursue strategic collaborations to
supplement product development and manufacturing resources; (iii) 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; (iv) develop and market branded drugs for
select therapeutic categories; and (v) expand market penetration through
direct sales and innovative marketing programs.
The Company's commitment to product development has resulted in 23 ANDA
approvals during the past three years and its current pipeline of 24 pending
ANDAs and over 60 additional products under development. During the past three
fiscal years, the Company, directly and through its strategic collaborations,
has expended
30
<PAGE>
approximately $74.0 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 140-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 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
Elensys and 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 1996, sales of generic drugs
accounted for approximately $10 billion out of a total U.S. prescription
pharmaceutical market of approximately $83 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 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
31
<PAGE>
to their branded counterparts, third party payors, such as insurance
companies, company health plans, health 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 forcing 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 $10 billion generic pharmaceutical industry in
the United States. 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 350
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.
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.
32
<PAGE>
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 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 the Company expects that an NDA for its next
generation injectable iron product will be filed with FDA in the first half of
1998. 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.
Expand Market Penetration through Direct Sales and Innovative Marketing
Programs. The Company believes its 120-person direct sales and marketing force
is the largest in the U.S. generic pharmaceutical industry. This sales and
marketing force includes 90 field representatives, 20 telemarketing
representatives and 10 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 developed and 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 350 dosage forms and strengths under
approximately 200 approved ANDAs. Schein is currently the sole generic source
for 47 pharmaceutical products.
33
<PAGE>
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
---------------------------- NINE MONTHS ENDED
1992 1993 1994 1995 1996 SEPTEMBER 1997
---- ---- ---- ---- ---- -----------------
<S> <C> <C> <C> <C> <C> <C>
Generic business:
Manufactured sterile dosage........ 16% 18% 25% 30% 38% 37%
Manufactured solid dosage.......... 58 55 40 35 28 30
Purchased products................. 18 16 19 18 15 13
--- --- --- --- --- ---
Total generic...................... 92 89 84 83 81 80
Branded business:
INFeD.............................. 8 11 16 17 19 20
--- --- --- --- --- ---
Total............................ 100% 100% 100% 100% 100% 100%
=== === === === === ===
</TABLE>
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 sterile dosage product portfolio is comprised of approximately
110 products and accounted for approximately 37% of the Company's total net
revenues in the nine months ended September 1997. This portfolio includes
vecuronium bromide, an anesthetic product that is currently the Company's
largest selling generic product. 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 sterile
dosage products accounted for more than 6% of net revenues in the nine months
ended September 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 solid dosage product portfolio is comprised of approximately
50 products and accounted for approximately 30% of the Company's total net
revenues in the nine months ended September 1997. None of the Company's solid
dosage products accounted for more than 6% of net revenues in the nine months
ended September 1997. The Company's solid dosage portfolio includes two
products for which the Company is currently the sole generic source.
The Company supplements its manufactured product line with purchased
products. The margins received by the Company on these products, however, are
generally lower than the 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% for the nine months ended
September 1997.
Branded Products
Until 1992, the Company's 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 20% 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 (ESRD) 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
34
<PAGE>
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 expected to be filed by Makoff R&D
Laboratories, Inc. in first half of 1998
Unipine XL 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 excess. 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 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 1996
35
<PAGE>
and the nine months ended September 1997 were $88.0 million and $72.1 million,
respectively, and accounted for 19% and 20%, respectively, 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.
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. In 1996, pursuant to an
exclusive trademark and distribution agreement with Makoff R&D Laboratories
("R&DL"), a specialty renal pharmaceutical company, the Company acquired 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 has completed Phases I, II and III clinical trials and
expects to file an NDA in the first half of 1998. See "--Government
Regulations--NDA Process."
Other Products
Unipine XL. In the U.K., the Company is currently manufacturing and
marketing Unipine XL, a once- a-day version of nifedipine used in the
treatment of hypertension, pursuant to a license obtained from Ethical. The
Company is also preparing for Unipine XL'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 approximately $74.0
million investment in product development over the past three fiscal years,
the Company has 24 ANDAs pending with FDA and over 60 products under
development internally and with third parties. The Company believes that this
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 140 research and development professionals and
supported by others with expertise in manufacturing, technology, legal,
regulatory and intellectual property issues.
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 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.
36
<PAGE>
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 promote the use of its primary branded product, INFeD, beyond the dialysis
market to other therapeutic areas, such as oncology and gastroenterology.
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, Elensys and MGI. The Company has recently
entered into a non-binding letter of intent regarding Cheminor and Reddy. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
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 SQUARE LEASE
PROPERTY LOCATION LEASE 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 109,800 (3) 1999
Distribution Centers
Eastern................. Brewster, NY (1) Lease 98,500 2007
Western ................ 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) The Company has an option to purchase this facility.
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
37
<PAGE>
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 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.
SALES AND MARKETING
The Company believes that it has one of the largest direct sales and
marketing forces in the generic drug industry, with approximately 90 field
representatives, 20 telemarketing representatives and 10 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
38
<PAGE>
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 serve as
depots for 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 revenues are sold through wholesalers, with approximately 82% of
these 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 17%, 16% and 11%, respectively, of the Company's total
net revenues for the nine months ended September 1997 and accounted for 16%,
15% and 11%, respectively, of the Company's total net revenues in fiscal 1996.
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 has one of the largest generic sales and marketing organizations
in the U.S. generic pharmaceutical industry, with a sales and marketing
organization of 120 people serving the retail, institutional, alternative
site, managed care and other generic drug purchasing markets, including a 20-
person telemarketing sales force and 10 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.
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 developed and implemented a unique vendor managed
inventory program, Schein Pharmaceutical Managed Auto Replenishment
Technology ("S.M.A.R.T.(TM)"), 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 offers a patient compliance program through which consumers
receive prescription refill reminders from their pharmacies.
. The Company has designed the Generic Acceptance and Intervention Network
("G.A.I.N.(TM)"), a patient-focused education program to promote the use
of generic products for its customers.
Branded Products
The Company has a sales and marketing organization of 20 people dedicated to
marketing INFeD. The Company also has established a co-promotion arrangement
with Bayer Corporation under which 150 of Bayer's
39
<PAGE>
specialty sales representatives devote a portion of their time in the United
States and Puerto Rico detailing INFeD to the nephrology market. 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
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."
40
<PAGE>
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 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.
41
<PAGE>
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.
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
42
<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. 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 September 1997, the Company had approximately 1,850 employees, of which
830 were engaged in manufacturing, 380 were engaged in quality control and
quality assurance, 240 were engaged in administration, finance and human
resources, 140 were engaged in research and product development, 140 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.
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 intends to comply with the subpoena.
43
<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
---- --- ---------
<C> <C> <S>
Martin Sperber 66 Chairman of the Board of Directors, Chief Executive
Officer and President
Marvin Samson 56 Executive Vice President and Director
Dariush Ashrafi 50 Executive Vice President, Chief Financial Officer and
Director
Paul Feuerman 38 Senior Vice President, General Counsel, and Director
David R. Ebsworth* 43 Director
Richard L. Goldberg* 61 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 for 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.
Marvin Samson has been Executive Vice President and Director since the
Marsam Acquisition. Mr. Samson is also President, Chief Executive Officer and
Chairman of the Board of Marsam, a company he founded in 1985. Prior thereto,
Mr. Samson was CEO, President and founder of Elkins-Sinn, Inc., a manufacturer
of generic injectable products. Currently, Mr. Samson is Chairman of the
Generic Pharmaceutical Industry Association, a member of the board of
directors of Sabratek Corp. (NASDAQ), and a member of the board of trustees of
the Philadelphia College of Pharmacy, the West Jersey Hospital System and the
American Society of Hospital Pharmacists Foundation. Mr. Samson received his
B.S. degree in chemistry from Temple 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.
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.
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 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).
44
<PAGE>
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 six directors, four of whom--Martin Sperber,
Marvin Samson, 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.
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 is entitled to nominate a number of members of the Board of
Directors of the Company, rounded down 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 nominated David R. Ebsworth as a member of the Board of
Directors. The Voting Trustee (as defined herein) (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's
nominee(s). Until the Voting Trust Termination Date, Bayer and certain of the
Company's principal stockholders must vote for the election of the Voting
Trustee's nominees.
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 "Risk
Factors--Control of the Company" and "Certain Transactions."
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.
45
<PAGE>
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 year ended December 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
----------------------
ANNUAL COMPENSATION (1) AWARDS PAYOUTS
--------------------------- ---------- -----------
OTHER ANNUAL SECURITIES
NAME AND PRINCIPAL SALARY BONUS COMPENSATION UNDERLYING LTIP ALL OTHER
POSITION (2) (3) ($) ($) ($) OPTIONS PAYOUTS ($) COMPENSATION ($)
------------------ ------- ------ ------------ ---------- ----------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Martin Sperber.......... 700,000 -- 9,929 (4) -- -- 10,305 (4)
Chairman, Chief
Executive Officer and
President
Marvin Samson........... 400,000 70,000 -- 200 -- 37,786 (5)
Executive Vice
President
Dariush Ashrafi......... 341,000 59,700 10,257 (6) 200 75,000 24,321 (6)
Executive Vice
President and Chief
Financial Officer
Paul Feuerman........... 185,000 32,400 7,738 (7) 200 100,000 13,397 (7)
Senior Vice President
and General Counsel
</TABLE>
- --------
(1) The compensation described in this table does not include medical, group
life insurance 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) Michael Casey, who served as the Company's Executive Vice President until
September 5, 1997, received $326,442 in Salary, $61,300 in Bonus, 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 profit
sharing contribution, $1,125 in 401(k) employer matching contribution and
$1,092 for the cost of term life insurance coverage provided by the
Company.
(3) James McGee, who served as the Company's Executive Vice President and
Chief Operating Officer until May 15, 1997, 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 payouts and $180,833 in All
Other Compensation. Other Annual Compensation includes $2,515 in tax
payments for a company car, $661 in tax payments for the supplemental
retirement plan, $113 in tax payments for state unemployment insurance and
$95,536 in tax payments for a relocation loan made on behalf of Mr. McGee.
All Other Compensation includes $7,500 for profit sharing contribution,
$1,125 in 401(k) employer matching contribution, $21,550 in supplemental
retirement plan contribution, $1,448 for the cost of term life insurance
coverage provided by the Company, $104,540 for forgiven equity loss loan
and associated tax deposit and $44,670 for the value of split dollar life
insurance policy.
(4) Other Annual Compensation includes $8,426 in tax payments for a company
car, $1,391 in tax payments for supplemental retirement plan and $112 in
tax payments for state unemployment insurance made on behalf of Mr.
Sperber. All Other Compensation includes $7,500 for profit sharing
contribution, $1,125 in 401(k) employer matching contribution and $1,680
for the cost of term life insurance coverage provided by the Company.
(5) All Other Compensation includes $7,500 for profit sharing contribution,
$250 in 401(k) employer matching contribution, $16,660 in supplemental
retirement plan contribution, $909 for the cost of term life insurance
provided by the Company and $12,467 for the value of split dollar life
insurance policy.
(6) Other Annual Compensation includes $10,257 in tax payments for an
allowance in lieu of a company car made on behalf of Mr. Ashrafi. All
Other Compensation includes $7,500 for profit sharing contribution, $1,125
in 401(k) employer matching contribution, $14,550 in supplemental
retirement plan contribution and $1,146 for the cost of term life
insurance coverage provided by the Company.
(7) Other Annual Compensation includes $7,586 in tax payments for a company
car, $39 in tax payments for the supplemental retirement plan and $113 in
tax payments for state unemployment insurance made on behalf of Mr.
Feuerman. All Other Compensation includes $7,500 for profit sharing
contribution, $1,125 in 401(k) employer matching contribution, $4,150 in
supplemental retirement plan contribution and $622 for the cost of term
life insurance provided by the Company.
46
<PAGE>
EMPLOYMENT AGREEMENTS
The Company entered into an employment agreement with Martin Sperber dated
September 30, 1994 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, 1999, 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, 1999 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,
1999. If Mr. Sperber voluntarily terminates his employment prior to January 1,
1999 (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, 1999, 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 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 an annual 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% (or 40%, if Mr. Sperber's employment is terminated due to
his voluntary resignation) of the average total cash compensation for the
highest three of the last five 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).
Pursuant to an employment agreement with Marsam dated July 28, 1995, to
which the Company agreed to be bound by certain provisions, Marvin Samson was
appointed an Executive Vice President and Director of the Company, as well as
President, Chief Executive Officer and Chief Operating Officer of Marsam, for
an initial
47
<PAGE>
term that commenced on the date of the Marsam Acquisition and terminates on
the fifth anniversary of that date (the "Initial Term"), which term is
automatically extended for one-year periods unless earlier terminated upon 180
days advance written notice by either party. During the Initial Term, Mr.
Samson may terminate the agreement at any time, but the Company may only
terminate Mr. Samson for cause. If the Company terminates Mr. Samson's
employment other than for cause during the Initial Term, Mr. Samson is
entitled to severance compensation in the amount of his annual salary, as well
as comparable health and disability insurance coverage (or reimbursement
therefor), for the remainder of the Initial Term (or any extension thereof).
If Mr. Samson terminates the agreement prior to the end of the Initial Term,
he is entitled to continue receiving 50% of his salary and comparable
insurance benefits (or reimbursement therefor) starting on the date of
termination and ending on the earlier of the third anniversary of the
termination or the fifth anniversary of the Marsam Acquisition. Mr. Samson
currently receives base annual compensation of $400,000. In 1996, the
Company's Board of Directors determined to award a $70,000 bonus to Mr.
Samson, payable to Mr. Samson in 1997. Mr. Samson is also entitled to
participate in and receive benefits from the Company's bonus, stock option,
pension, profit-sharing, insurance and other employee benefit plans. In
addition, the agreement provides that during any time when the Company is
obligated to pay Mr. Samson a salary or consulting fee, Mr. Samson is also
entitled to an automobile, or, at the Company's option, an automobile
allowance. Mr. Samson is prohibited from competing with the Company (or owning
more than 3% of the outstanding equity of a competing business) during the
term of his employment or consultancy with the Company, during any period in
which the Company is making severance compensation payments or upon
termination for cause by the Company until the earlier of the sixth
anniversary of the Marsam Acquisition and the fourth anniversary of the
termination.
The Company, at its option, may retain Mr. Samson as a consultant for a
period of one year after the Initial Term (or any extension thereof) or after
Mr. Samson terminates the agreement. As a consultant, Mr. Samson is entitled
to receive a consulting fee in an amount equal to his base salary immediately
prior to termination, as well as comparable health and disability insurance
coverage (or reimbursement therefor). Such consulting fee may be reduced
dollar-for-dollar by any compensation received by Mr. Samson for other
employment that he is engaged in at the time. The Company, at its option, may
terminate the consultancy upon 30 days prior written notice.
The agreement also provides that Mr. Samson, having been elected a director
of the Company effective on the date of the Marsam Acquisition, is entitled to
have his name included in the slate of the Company's management nominees for
re-election as a director during the term of the agreement. Mr. Samson is also
entitled to designate three of Marsam's seven board members.
Following termination of Mr. Samson's employment other than for cause, Mr.
Samson will be entitled to an annual pension for a period of ten years. A
compensation continuation agreement dated October 19, 1991 provides for a
payment in the first year equal to 100% of his prior year base salary and a
payment equal to 50% of his base salary for the subsequent nine years. The
Company has also agreed to provide certain benefits to Mr. Samson in the form
of payments on the split dollar life insurance contract insuring the lives of
Mr. Samson and his wife.
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. Mr. Ashrafi currently receives annual
base compensation of $341,000. In 1996, the Company's Board of Directors
determined to award a $59,700 bonus to Mr. Ashrafi, payable to Mr. Ashrafi in
1997. Pursuant to a deferred compensation agreement dated April 17, 1995,
between the Company and Mr. Ashrafi, Mr. Ashrafi is entitled to receive a
bonus of $300,000, payable in quarterly payments in the amount of $75,000. 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
48
<PAGE>
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. Mr. Feuerman currently
receives annual base compensation of $225,000. In 1996, the Company's Board of
Directors determined to award a $32,400 bonus, payable to Mr. Feuerman in
1997. Pursuant to a deferred compensation agreement dated August 8, 1996,
between the Company and Mr. Feuerman, Mr. Feuerman 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. 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 for one year following termination
and his 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 May 15, 1997. Under an agreement dated September 20, 1996, Mr.
McGee is entitled to receive as severance a lump sum payment, some portion of
his annual base salary as and when bonuses are paid to certain senior
executives in respect of fiscal 1997 and 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, plus an additional consulting fee equal to
some portion of his annual base salary to be paid as and when bonuses are paid
to senior executive officers of the Company in respect of fiscal 1998.
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") 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 25,586 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 4,252 shares under the 1997 Plan at the then fair market value.
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.
49
<PAGE>
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 189 shares of Common Stock
under the Non-Employee Director Plan.
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).
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 ($9,500 for the
1997 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. The Company makes a mandatory matching
contribution to the Company Retirement Plan of $.25 for each dollar
contributed to the Company Retirement Plan as a basic contribution, up to the
first 3% 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 1997,
the Company made a discretionary, non-matching contribution under the Company
Retirement Plan for 1996 equal to 5% of compensation.
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.
50
<PAGE>
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). 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.
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.
51
<PAGE>
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.
In 1994, the Company entered into a three-year co-promotion agreement with
Bayer covering the Company's INFeD product. Under the terms of the agreement,
in 1994, 1995 and 1996, in exchange for promotional support, the Company
shared with Bayer the net profits of INFeD in excess of specified threshold
amounts. In early 1997, this agreement was amended and extended to December
1997. The parties are currently negotiating a further extension of this
agreement. This amended agreement provides that in exchange for promotional
support, the Company pays Bayer 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 $2.9 million for
the first nine months of 1997. There were no selling expenses under the first
agreement for 1994 and 1995. See "--Restructuring Agreements."
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. Bayer and Schein are each currently evaluating
the extent of their continued participation in certain of these ventures.
The Company, together with the Pharmaceutical, Consumer Healthcare, Afga
Film and Diagnostics divisions of Bayer, has created a collaboration called
Bayer Healthcare Partners. Bayer Healthcare Partners is a marketing tool
through which the various participants combine their sales efforts to offer a
package of goods and services designed to be more attractive to a customer,
most likely a managed health care provider. The participants share in the
costs and profits associated with sales of the covered products to that
customer.
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, 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. In 1995 and 1996, the Company recorded in the aggregate net
product sales and settlements from patent challenges of $106.0 million and
related gross profits of $62.6 million (after deducting payments to the
Consultant of $17.4 million). See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Results of Operations."
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 current projects
under the Consulting Agreement, 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 setting forth the basis for a
possible patent challenge. The Consultant has rendered opinions with respect
to each of the two patented drug products that are the
52
<PAGE>
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.
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 $6.4 million, $5.3 million and $8.6 million in 1994, 1995
and 1996, respectively, and $5.5 million and $5.4 million for the nine months
ended September 1996 and the nine months ended September 1997, respectively.
Other than certain common stockholders, there is no affiliation between Henry
Schein, Inc. and the Company, and all transactions between the Company and
Henry Schein, Inc. are on an arm's-length basis.
The Company has signed a non-binding letter dated October 7, 1997 with
Cheminor and Reddy outlining the parties' intent to enter into a strategic
alliance agreement. As part of the contemplated arrangement, Cheminor could
purchase shares of the Company's Common Stock, once the shares are publicly
traded, at fair market value; the purchase price could be payable from the
profits otherwise due Cheminor from the alliance. Cheminor would have certain
rights to acquire additional shares from time to time, at fair market value,
to maintain its percentage interest in the Company. In addition, Cheminor
would have representation on the Company's Board of Directors consistent with
its equity investment through the purchase of the Company's shares once they
are publicly traded. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
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 September 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.
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"). 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. 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 Bayer Corporation owns less
than 10% of the Company's outstanding Common Stock (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, 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
53
<PAGE>
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 May 15, 2001, 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, merge, consolidate or sell all or substantially all the
Company's assets 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 or
identified in the Restructuring Agreements. In addition, until the earlier of
(i) the Governance Termination Date and (ii) the date on which the shares of
the Company's Common Stock that are 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
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"). Under the Standstill, 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 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.
After the Standstill Period, Bayer Corporation has the right, exercisable
within six months of the end of the Standstill Period and if there is an
insufficient number of shares of Common Stock available on the open market for
Bayer Corporation to acquire a majority of the outstanding Common Stock of the
Company on the open market, to acquire from the Family Stockholders and then
from the Company, a number of shares that should enable Bayer Corporation to
own a majority of the outstanding Common Stock of the Company.
Notwithstanding the Standstill, Bayer Corporation generally may acquire
Common Stock (a) unless Bayer Corporation has sold shares of Common Stock
other than to a Permitted Assignee, (I) in connection with its exercise of
certain preemptive rights or (II) if, after the Qualified Public Offering
Date, necessary to own at least 21% more of the Company's outstanding Common
Stock than certain 10% holders and (b) up to the "New Percentage," defined as:
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 Restructuring Agreements, if Bayer Corporation and its affiliates
for any reason acquire shares in excess of the New Percentage, until May 15,
2001, Bayer Corporation 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 (as defined herein), shall not acquire shares if, as a consequence of
the acquisition such individual, together with such individual's Family Group,
owns in excess of (a) in the case of Marvin Schein and his Family Group,
35.85% of the Common Stock of the Company, (b) in the case of Pamela Schein
and her Family Group, 27.55% of the Common Stock of the Company and (c) in the
case of Pamela Joseph and her Family Group, 12.97% of the Common Stock of the
Company.
54
<PAGE>
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 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
of the Company 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 of the Company to any one person, its affiliates or
Family Group members in any three-month period and (II) 4% of the outstanding
Common Stock of the Company 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 A.G., if Bayer A.G. 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 and the Continuing Stockholders 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. The Continuing Stockholders may transfer their shares as
provided in the preceding paragraph. A "Permitted Assignee" is (a) a successor
to all or substantially all the business and assets of Bayer Corporation or a
majority-owned subsidiary of Bayer A.G. 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
A.G. except in certain open market transactions and except to the extent that
Bayer A.G. first offered to purchase such shares from the Family Stockholders
and the Family Stockholders did not sell such shares.
55
<PAGE>
The Company may not transfer any of its shares to Bayer A.G., except to the
extent that Bayer A.G. 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.
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 A.G. 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 A.G. would own a majority of the shares of Common
Stock of the Company, 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 A.G.
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 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 wishes to
sell the shares of Common Stock.
56
<PAGE>
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
September 27, 1997, the Company had pre-paid $120 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 approximately $26.0 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,
(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 $13.7 million, $34.2
million, $41.0 million, and $41.1 million in 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.
The Senior Subordinated Loan is being repaid from the proceeds of the Notes
offered hereby. See "Use of Proceeds."
57
<PAGE>
DESCRIPTION OF NOTES
GENERAL
The Notes are to be issued under an indenture, to be 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 following summary of certain provisions 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
The Notes will be limited to $100.0 million aggregate principal amount, and
will mature on December 15, 2004. Each Note will bear interest at the floating
rate described below payable quarterly in arrears on January 15, April 15,
July 15 and October 15, commencing on January 15, 1998, to holders of record
on the immediately preceding December 31, March 31, June 30 and September 30,
respectively.
Interest on the Notes will accrue at a rate equal to the Applicable LIBOR
Rate and will be calculated on a formula basis by multiplying the principal
amount of the Notes then outstanding by the Applicable LIBOR Rate, and
multiplying such product by the LIBOR Fraction.
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 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
8.9375%. Notwithstanding the foregoing, the Applicable LIBOR Rate for the
initial quarterly period shall be 8.9375%.
"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.
58
<PAGE>
"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, if redeemed prior to January
15, 1998 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.
SINKING FUND
The Notes will not be entitled to the benefit of any sinking fund or other
mandatory redemption obligation prior to maturity.
59
<PAGE>
GUARANTEES
All of the Company's existing and future Restricted Subsidiaries (referred
to herein as the "Guarantors"), will 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 September 27, 1997, as adjusted for the Offering, the
Company and its Restricted Subsidiaries would have had secured indebtedness of
approximately $160.6 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. As of September 27, 1997,
as adjusted for the Offering, the Company would have had approximately $69.8
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 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.
60
<PAGE>
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 prohibits the purchase of the Notes by the Company prior to full
repayment of Indebtedness thereunder 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 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 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;
61
<PAGE>
(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 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
62
<PAGE>
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 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.
63
<PAGE>
(b) 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 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
64
<PAGE>
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.
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
65
<PAGE>
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) 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
66
<PAGE>
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 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
67
<PAGE>
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
cased 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.
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.
68
<PAGE>
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 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
69
<PAGE>
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 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
70
<PAGE>
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 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.
71
<PAGE>
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.
"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.
72
<PAGE>
"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.
"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
73
<PAGE>
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
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
74
<PAGE>
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 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.
75
<PAGE>
"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 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
76
<PAGE>
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.
"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
77
<PAGE>
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 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.
78
<PAGE>
"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 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.
79
<PAGE>
"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 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
80
<PAGE>
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.
"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 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 on the date of the closing of the
sale of the Notes (the "Closing Date") with, or on behalf of, The Depository
Trust Company (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. Interests in the Global Note will be available for purchase only
by "qualified institutional buyers," as defined in Rule 144A under the
Securities Act ("QIBs").
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. For a description of the restrictions on the transfer of
Certificated Securities, see "Transfer Restrictions."
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"
81
<PAGE>
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. For certain other
restrictions on the transferability of the Notes, see "Transfer Restrictions."
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 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
82
<PAGE>
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).
83
<PAGE>
EXCHANGE AND REGISTRATION RIGHTS AGREEMENT
The Company and the Initial Purchaser will enter into an exchange and
registration rights agreement (the "Exchange and Registration Rights
Agreement") prior to or concurrently with the issuance of the Notes offered
hereby. Pursuant to the Exchange and Registration Rights Agreement, the
Company will agree (i) to file with the Commission on or prior to 45 days
after the date of issuance of the Notes (the "Issue Date") a registration
statement (the "Exchange Offer Registration Statement"), with respect to an
offer to exchange the Notes (the "Registered Exchange Offer") for senior notes
of the Company with terms identical in all material respects to those of the
Notes ("Exchange 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 initial public offering of the
Company's Common Stock. Upon the effectiveness of the Exchange Offer
Registration Statement, the Company will commence the Registered Exchange
Offer to holders of the Notes who are not prohibited by any law or policy of
the Commission from participating in the Registered 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 Notes. If (i) any change in law or
applicable 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 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 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, 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 Registered
Exchange Offer would not be permitted by a policy of the Commission, the
Company will commence the Registered Exchange Offer and will use its
reasonable best efforts to consummate the Registered 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.
Although the Company intends to file the registration statements described
above, as required, there can be no assurance that such registration
statements will be filed, or, if filed, that they will become effective. 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 Registered 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
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 Registered Exchange Offer or the effectiveness of a Shelf
Registration Statement, as the case may be.
84
<PAGE>
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 Exchange and Registration Rights Agreement will also provide that the
Company (i) shall cause the Exchange Offer Registration Statement to remain
continuously effective for a period of at least 20 Business Days (or longer if
required by applicable law) from its effective date, and shall supplement or
amend the prospectus contained therein to the extent necessary to permit such
prospectus (as supplemented or amended) to be delivered by broker-dealers in
connection with any resale of any such Exchange 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 Exchange and Registration Rights Agreement
(including certain indemnification rights and obligations).
Each holder of the Notes that wishes to exchange such Notes for Exchange
Notes in the Exchange Offer will be required to make certain representations,
including representations that (i) any Exchange 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 Exchange
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.
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
Exchange Notes. If a holder is a broker-dealer that will receive Exchange
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 Exchange 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
Exchange and 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.
Notwithstanding any other provision set forth above, the Company may delay
the filing of any Registration Statement for up to 90 days if (i) the Company
would, in the opinion of its counsel, be required to disclose in such
Registration Statement information not otherwise then required by law to be
publicly disclosed and (ii) in the judgment of the Board of Directors of the
Company, there is a reasonable likelihood that such disclosure, or any other
action to be taken in connection with any Registration Statement, would
adversely affect any existing or prospective material business situation,
transaction, or negotiation or otherwise materially and adversely affect the
Company.
85
<PAGE>
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. The Company will provide a copy of the Exchange and Registration
Rights Agreement to prospective purchasers of Notes identified to the Company
by the Initial Purchaser upon request.
The foregoing description of the Exchange and Registration Rights Agreement
is a summary only, does not purport to be complete and is qualified in its
entirety by reference to all provisions of the Exchange and Registration
Rights Agreement.
86
<PAGE>
TRANSFER RESTRICTIONS
Each purchaser of Notes from the Initial Purchaser, by its acceptance
thereof, will be deemed to have acknowledged, represented to and agreed with
the Company and the Initial Purchaser as follows:
1. It understands and acknowledges that the Notes have not been
registered under the Securities Act or any other applicable securities law,
and that the Notes are being offered for resale in transactions not
requiring registration under the Securities Act or any other securities
laws, including sales pursuant to Rule 144A and, unless so registered, may
not be offered, sold or otherwise transferred except in compliance with the
registration requirements of the Securities Act or any other applicable
securities laws, pursuant to any exemption therefrom or in a transaction
not subject thereto and in each case in compliance with the conditions for
transfer set forth in paragraph (4) below.
2. It is not an "affiliate" (as defined in Rule 144 under the Securities
Act) of the Company or acting on behalf of the Company and is either:
(a) a "Qualified Institutional Buyer" as defined in Rule 144A
("QIB"), and is aware that any sale of the Notes to it will be made in
reliance on Rule 144A and such acquisition will be for its own account
or for the account of another QIB; or
(b) an "Institutional Accredited Investor" within the meaning of Rule
501(a)(1), (2), (3) and (7) under the Securities Act or, if the Notes
are to be purchased for one or more accounts ("investor accounts") for
which it is acting as fiduciary or agent, each such account is an
Institutional Accredited Investor on a like basis. It is aware that the
minimum principal amount of Notes that may be purchased by an
Institutional Accredited Investor (including each investor account) is
$250,000. In the normal course of its business, it invests in or
purchases securities similar to the Notes and it has such knowledge and
experience in financial and business matters that it is capable of
evaluating the merits and risks of purchasing the Notes. It is aware
that it (or any investor account) may be required to bear the economic
risk of an investment in the Notes of an indefinite period of time and
it (or such account) is able to bear such risk for an indefinite
period.
3. It acknowledges that neither the Company, the Initial Purchaser nor
any person representing the Company or the Initial Purchaser has made any
representation to it with respect to the Company or the Offering, other
than the information contained in this Offering Memorandum, which has been
delivered to it and upon which it is relying in making its investment
decision with respect to the Notes. It has had access to such financial and
other information concerning the Company and the Notes as it has deemed
necessary in connection with its decision to purchase the Notes, including
an opportunity to ask questions of and request information from the Company
and the Initial Purchaser.
4. It is purchasing the Notes for its own account or for one or more
investor accounts for which it is acting as a fiduciary or agent, in each
case not with a view to, or for offer or sale in connection with, any
distribution thereof in violation of the Securities Act, subject to any
requirement of law that the disposition of its property or the property of
such investor account or accounts be at all times within its or their
control and subject to its or their ability to resell such Notes pursuant
to Rule 144A or any exemption from registration available under the
Securities Act. It agrees on its own behalf and on behalf of any investor
account for which it is purchasing the Notes, and each subsequent holder of
the Notes by its acceptance thereof will agree, to offer, sell or otherwise
transfer such Notes prior to the date which is two years after the later of
the date of original issue and the last date that the Company or any
affiliate of the Company was the owner of such Notes (or any predecessor
thereto) (the "Resale Restriction Termination Date") only (i) to the
Company, (ii) pursuant to a registration statement that has been declared
effective under the Securities Act, (iii) for so long as the Notes are
eligible for resale pursuant to Rule 144A, to a person it reasonably
believes is a QIB that purchases for its own account or for the account of
a QIB to whom notice is given that the transfer is being made in reliance
on Rule 144A, (iv) pursuant to offers and sales that occur outside the
United States within the meaning of Regulation S under the Securities Act,
(v) to an Institutional Accredited Investor (as defined in Rule 501(a)(1),
(2), (3) and (7) under the Securities Act) that is
87
<PAGE>
purchasing for its own account or for the account of such an Institutional
Accredited Investor, in each case in a minimum principal amount of the
Notes of $250,000 or (vi) pursuant to any other available exemption from
the registration requirements of the Securities Act, subject in each of the
foregoing cases to any requirement of law that the disposition of its
property or the property of such investor account or accounts be at all
times within its or their control. The foregoing restrictions on resale
will not apply subsequent to the Resale Restriction Termination Date. If
any resale or other transfer of the Notes is proposed to be made pursuant
to clause (v) above prior to the Resale Restriction Termination Date, the
transferor shall deliver a letter from the transferee substantially in the
form of Annex A hereto to the Company and the Trustee, which shall provide,
among other things, that the transferee is an Institutional Accredited
Investor that is acquiring such Notes not for distribution in violation of
the Securities Act, and for the transferee's representations to the same
effect as set forth in paragraph 5 below, with respect to the transferee's
purchase and holding of such Notes. Each purchaser acknowledges that the
Company and the Trustee reserve the right prior to any offer, sale or other
transfer prior to the Resale Restriction Termination Date of the Notes
pursuant to clauses (iv), (v) and (vi) above to require the delivery of an
opinion of counsel, certifications and/or other information satisfactory to
the Company and the Trustee. Each purchaser acknowledges that each Note
will contain a legend substantially to the following effect.
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS. NEITHER THIS
SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD,
ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE
ABSENCE OF SUCH REGISTRATION UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT
SUBJECT TO, REGISTRATION.
THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF AGREES TO OFFER, SELL
OR OTHERWISE TRANSFER SUCH SECURITY, PRIOR TO THE DATE (THE "RESALE
RESTRICTION TERMINATION DATE") WHICH IS TWO YEARS AFTER THE LATER OF THE
ORIGINAL ISSUE DATE HEREOF AND THE LAST DATE ON WHICH THE ISSUER OR ANY
AFFILIATE OF THE ISSUER WAS THE OWNER OF THIS SECURITY (OR ANY PREDECESSOR OF
SUCH SECURITY), ONLY (A) TO THE ISSUER, (B) PURSUANT TO A REGISTRATION
STATEMENT THAT HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) FOR
SO LONG AS THE SECURITIES ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A, TO A
PERSON IT REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED
IN RULE 144A UNDER THE SECURITIES ACT THAT PURCHASES FOR ITS OWN ACCOUNT OR
FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN
THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (D) PURSUANT TO
OFFERS AND SALES THAT OCCUR OUTSIDE THE UNITED STATES WITHIN THE MEANING OF
REGULATION S UNDER THE SECURITIES ACT, (E) TO AN INSTITUTIONAL ACCREDITED
INVESTOR WITHIN THE MEANING OF RULE 501(a)(1), (2), (3) OR (7) UNDER THE
SECURITIES ACT THAT IS ACQUIRING THE SECURITY FOR ITS OWN ACCOUNT, OR FOR THE
ACCOUNT OF SUCH AN INSTITUTIONAL ACCREDITED INVESTOR, IN EACH CASE IN A
MINIMUM PRINCIPAL AMOUNT OF THE SECURITIES OF $250,000, FOR INVESTMENT
PURPOSES AND NOT WITH A VIEW TO OR FOR OFFER OR SALE IN CONNECTION WITH ANY
DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT, OR (F) PURSUANT TO ANOTHER
AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT,
SUBJECT TO THE ISSUER'S AND THE TRUSTEE'S RIGHT PRIOR TO ANY SUCH OFFER, SALE
OR TRANSFER PURSUANT TO CLAUSES (D), (E) AND (F) TO REQUIRE THE DELIVERY OF AN
OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO
EACH OF THEM, AND IN THE CASE OF THE FOREGOING CLAUSE (E), A CERTIFICATE OF
TRANSFER IN THE FORM APPEARING ON THE OTHER SIDE OF THIS SECURITY IS COMPLETED
AND DELIVERED BY THE TRANSFEROR TO THE ISSUER AND THE TRUSTEE. THIS LEGEND
WILL BE REMOVED UPON THE REQUEST OF THE HOLDER AFTER THE RESALE RESTRICTION
TERMINATION DATE.
88
<PAGE>
5. Each purchaser, by its purchase of the Notes, shall be deemed to have
represented that (i) if it is an insurance company, the funds to be used to
purchase the Notes by it constitute (A) assets of an insurance company
general account maintained by it and the acquisition and holding of each
such Note by such account is exempt under United States Department of Labor
Prohibited Transaction Class Exemption ("PTCE") 95-60 or (B) assets of an
insurance company pooled separate account and the acquisition and holding
of each such Note by such account is exempt under PTCE 90-1, and (ii) no
part of the funds to be used to purchase the Notes to be purchased by it
constitute assets of any plan or employee benefit plan such that the use of
such assets constitutes a non-exempt prohibited transaction under ERISA or
the Code. The representation is based upon the purchaser's determination
that a statutory or administrative exemption is applicable or that the
Company and its Affiliates are not parties in interest or disqualified
persons with respect to the purchaser or holder plan or employee benefit
plan. As used in this paragraph, the terms "employee benefit plan" and
"party in interest" shall have the meanings assigned to such terms in
Section 3 of ERISA, the term "Affiliate" shall have the meaning assigned to
such term in Section 407(d)(7) of ERISA and the terms "disqualified person"
and "plan" shall have the meanings assigned to such terms in Section 4975
of the Code. If any resale or other transfer of the Notes is proposed to be
made pursuant to clause (v) of paragraph 4 above prior to the Resale
Restriction Termination Date, the transferor shall deliver a letter from
the transferee to the Company and the Trustee, which shall contain a
representation of the transferee with respect to the transferee's purchase
and holding of the Notes, substantially as set forth in paragraph 3 of
Annex A hereto.
6. It acknowledges that the Company, the Initial Purchaser and others
will rely upon the truth and accuracy of the foregoing acknowledgments,
representations and agreements and agrees that, if any of the
acknowledgments, representations or warranties deemed to have been made by
it by its purchase of Notes are no longer accurate, it shall promptly
notify the Company and the Initial Purchaser. If it is acquiring any Notes
as a fiduciary or agent for one or more investor accounts, it represents
that it has sole investment discretion with respect to each such account
and that it has full power to make the foregoing acknowledgments,
representations and agreements on behalf of each such account.
89
<PAGE>
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following summary describes the principal U.S. federal income tax
consequences resulting from the ownership and disposition of the Notes by U.S.
Holders (as defined below) that are initial purchasers of Notes. Except where
noted, it deals only with Notes held as capital assets and does not deal with
special situations, such as those of dealers in securities or currencies,
financial institutions, tax-exempt entities, life insurance companies, persons
holding Notes as part of a hedging, conversion or constructive sale
transaction or a straddle or holders whose "functional currency" is not the
U.S. dollar. Furthermore, the discussion below is based upon provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), and regulations,
rulings and judicial decisions thereunder as of the date hereof, and such
authorities may be repealed, revoked or modified so as to result in United
States federal income tax consequences different from those discussed below.
Persons considering the purchase, ownership or disposition of Notes should
consult their own tax advisors concerning the United States federal income tax
consequences in light of their particular situations as well as any
consequences arising under the laws of any other taxing jurisdiction.
As used herein, a "U.S. Holder" is (i) a citizen or resident of the United
States, (ii) a corporation or partnership created or organized in or under the
laws of the United States or a State thereof (including the District of
Columbia), (iii) an estate the income of which is subject to United States
federal income taxation regardless of source or (iv) a trust if (a) a U.S.
court is able to exercise primary supervision over the trust's administration
and (b) one or more U.S. persons have the authority to control all of the
trust's substantial decisions. The term also includes certain former citizens
of the United States.
ORIGINAL ISSUE DISCOUNT
For purposes of the Code, each Note will be deemed to have been issued with
original issue discount ("OID") equal to the difference between the Note's
stated redemption price at maturity (i.e., the sum of all payments to be made
on the Note other than stated interest payments) and its "issue price." U.S.
Holders of Notes should be aware that they generally must include OID in gross
income in advance of the receipt of cash attributable to that income. A U.S.
Holder must include in gross income the sum of the daily portions of OID which
accrue under a constant yield method with respect to such instrument for each
day during the accrual period (or portion of the accrual period) in which such
U.S. Holder held such Notes, regardless of the U.S. Holder's method of
accounting for tax purposes. The amount of OID which accrues in an accrual
period is an amount equal to the excess (if any) of (i) the product of the
Note's "adjusted issue price" at the beginning of such accrual period and its
yield to maturity (determined on the basis of compounding at the end of each
accrual period and appropriately adjusted to take into account the length of
the particular accrual period) over (ii) the sum of the stated interest
payments, if any, allocable to the accrual period. The daily portion of OID is
determined by allocating to each day in any accrual period a ratable portion
of OID allocable to the accrual period. The "adjusted issue price" of a Note
at the beginning of any accrual period is the sum of the issue price of such
Note plus the OID allocable to all prior accrual periods reduced by payments
on the Note other than stated interest. An "accrual period" may be of any
length and the accrual periods may even vary in length over the term of the
debt instrument, provided that each accrual period is no longer than one year
and each scheduled payment of principal or interest occurs at the end of an
accrual period. Under these rules, U.S. Holders generally will have to include
in income increasingly greater amounts of OID in successive accrual periods.
Generally, a U.S. Holder's tax basis in the debt instrument will be increased
by the amount of OID that is included in such U.S. Holder's income pursuant to
the foregoing rules through the day preceding the day of disposition and will
be decreased by the amount of any cash payments received (other than a payment
of stated interest).
Special rules apply to the calculation of OID in the case of a debt
instrument whose issuer has an intention to call the instrument before
maturity. The Company intends to take the position that under applicable
Treasury Regulations (the "OID Regulations") the special rules will not apply
to the Notes.
Under the OID Regulations, a U.S. Holder may elect to treat all interest and
discount on a Note (including stated interest and OID) as income by using the
constant yield method applicable to OID, subject to certain limitations and
exceptions. Such an election must be made for the taxable year in which the
U.S. Holder acquires the Note and may not be revoked unless approved by the
IRS.
90
<PAGE>
SALE, EXCHANGE OR REDEMPTION
A U.S. Holder's adjusted tax basis in a Note will, in general, be the U.S.
Holder's cost for the Note increased by OID. The sale, exchange or redemption
of a Note generally will be a taxable event for federal income tax purposes. A
U.S. Holder generally will recognize gain or loss on the sale, exchange or
redemption of a Note in an amount equal to the difference between (i) the
amount of cash plus the fair market value of any property received upon such
sale, exchange or redemption (other than the amount of such consideration
received in respect of accrued but unpaid interest which will be taxable as
such) and (ii) the U.S. Holder's adjusted tax basis in such Note. Such gain or
loss will be capital gain or loss. Under recently enacted legislation, capital
gains of individuals derived in respect of capital assets held for more than
one year are eligible for reduced rates of taxation which may vary depending
upon the holding period of such capital assets. Prospective investors should
consult their own tax advisors with respect to the tax consequences of the new
legislation. The deductibility of capital losses is subject to limitations.
BACKUP WITHHOLDING AND INFORMATION REPORTING
Certain noncorporate U.S. Holders may be subject to backup withholding at a
rate of 31% on payments made on a Note. Backup withholding will apply only if
a U.S. Holder (i) fails to furnish its taxpayer identification number ("TIN")
which, in the case of an individual, would be his or her social security
number, (ii) furnishes an incorrect TIN, (iii) is notified by the IRS that it
has failed to properly report payments of interest and dividends or (iv) under
certain circumstances, fails to certify, under penalties of perjury, that it
has furnished a correct TIN. Amounts withheld under the backup withholding
rules are not an additional tax and may be refunded, or credited against the
U.S. Holder's United States federal income tax liability, provided that the
required information is furnished to the IRS. The Company will furnish
annually to the IRS and to certain record U.S. Holders of the Notes
information relating to the amount of OID, if any, accruing during the
calendar year. The Company's determination of OID generally is binding on a
U.S. Holder for U.S. federal income tax purposes but is not binding on the
IRS, and there can be no assurance that the IRS will not challenge such
determination.
91
<PAGE>
PLAN OF DISTRIBUTION
Subject to the terms and conditions set forth in the Purchase Agreement (the
"Purchase Agreement") by and among the Company, the Guarantors and Societe
Generale Securities Corporation (the "Initial Purchaser"), the Company agrees
to sell to the Initial Purchaser, and the Initial Purchaser agrees to
purchase, $100.0 million principal amount of the Notes.
The Purchase Agreement provides that the obligations of the Initial
Purchaser thereunder are subject to certain conditions precedent, and that the
Initial Purchaser is committed to take and pay for $100.0 million aggregate
principal amount of Notes, if any are taken. The Company will separately pay a
commission to the Initial Purchaser of 3.000% of the principal amount of the
Notes purchased. The Initial Purchaser proposes to offer the Notes at the
applicable initial offering price set forth on the cover page of this Offering
Memorandum (the "Note Offering Price"). After the Notes are released for sale,
the Note Offering Price and other selling terms may from time to time be
varied by the Initial Purchaser.
The Company and the Restricted Subsidiaries have agreed in the Purchase
Agreement to indemnify the Initial Purchaser against certain liabilities under
the Securities Act, and to contribute to payments that the Initial Purchaser
may be required to make in respect thereof.
The Initial Purchaser proposes to offer the Notes for resale in transactions
not requiring registration under the Securities Act or applicable state
securities laws, including sales pursuant to Rule 144A. The Initial Purchaser
proposes to offer the Notes for resale initially at the offering price set
forth on the cover page of this Offering Memorandum. After the initial
offering, the offering price and other selling terms may be changed at any
time without notice. The Initial Purchaser will not offer or sell the Notes
except to persons it reasonably believes to be QIBs or Institutional
Accredited Investors. Each purchaser of the Notes offered hereby in making its
purchase will, by its purchase, be deemed to have made certain
acknowledgements, representations, warranties and agreements as set forth
under "Transfer Restrictions" and, in the case of purchasers that are
Institutional Accredited Investors, will be required to complete and deliver
to the Initial Purchaser a purchaser questionnaire prior to acceptance of any
order.
The Notes have been designated eligible for trading in the PORTAL market.
The Notes have not been registered under the Securities Act and may not be
offered or sold except as set forth above. The Initial Purchaser has advised
the Company that the Initial Purchaser currently intends to make a market in
the Notes; however, it is not obligated to do so and any market making may be
discontinued by the Initial Purchaser at any time without notice. In addition,
such market making activity may be limited during the Exchange Offer described
below and the pendency of the effectiveness of the applicable Registration
Statement. Accordingly, no assurance can be given as to the liquidity of or
the trading market for the Notes.
In connection with the Offering, the Initial Purchaser may engage in
overallotment, stabilizing transactions and syndicate covering transactions.
Overallotment involves sales in excess of the offering size, which creates a
short position for the Initial Purchaser. Stabilizing transactions involve
bids to purchase the Notes in the open market for the purpose of pegging,
fixing or maintaining the price of the Notes. Syndicate covering transactions
involve purchases of the Notes in the open market after the distribution has
been completed in order to cover short positions. Such stabilizing
transactions and syndicate covering transactions may cause the price of the
Notes to be higher than it would otherwise be in the absence of such
transactions. Such activities, if commenced, may be discontinued at any time.
The Company has covenanted with the Initial Purchaser (i) that within 45
days after the Issue Date, the Company will file with the Commission an
Exchange Offer Registration Statement under the Securities Act with respect to
an issue of Exchange Notes and (ii) to use commercially reasonable efforts to
cause such 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 effectiveness of the registration statement
filed in connection with an initial public offering of the Company's Common
Stock. Upon effectiveness of that Exchange Offer Registration
92
<PAGE>
Statement, the Company will offer to the holders of the Notes the opportunity
to exchange their Notes for a like principal amount of Exchange Notes, which
Exchange Notes will be issued without the legend described above under
"Transfer Restrictions" and (generally other than by an affiliate of the
Company) may be reoffered and resold by the holder without restrictions or
limitations under the Securities Act. The Company has also covenanted with the
Initial Purchaser to consummate the Registered Exchange Offer within 150 days
after the Issue Date. Additionally, the Company has covenanted that if any
change in law or applicable interpretations of the staff of the Commission
does not permit the Company to effect the Registered Exchange Offer, the
Company will file with the Commission and use commercially reasonable efforts
to cause to be declared effective a Shelf Registration Statement with respect
to the resale of Notes and to keep the Shelf Registration Statement effective
until 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. The Company shall cause such Shelf Registration Statement to be
declared effective on or prior to the latter of (x) the 120th day after the
Issue Date or (y) the 45th day after the publication of the change in law or
interpretation. See "Exchange and Registration Rights Agreement."
It is expected that delivery of the Notes will be made against payment
therefor on or about the date specified in the last paragraph of the cover
page of this Offering Memorandum, which will be the third business day
following the date hereof.
Societe Generale, an affiliate of Societe Generale Securities Corporation,
is the lender under the Senior Subordinated Loan Agreement, dated as of
December 20, 1996, as amended (the "Senior Subordinated Loan Agreement"), with
the Company and a lender under the Senior Credit Agreement. Societe Generale
and Societe Generale Securities Corporation have from time to time provided
investment banking and financial advisory services to the Company and its
affiliates, and they may continue to provide such services and/or participate
in various general financings and banking transactions with the Company and
its affiliates. The Company has agreed to pay Societe Generale Securities
Corporation a fee of $750,000 for financial advisory services rendered to the
Company in connection with the amendment of the Senior Subordinated Loan
Agreement.
93
<PAGE>
INDEPENDENT PUBLIC ACCOUNTANTS
The financial statements of the Company included in this Offering Memorandum
have been audited by BDO Seidman LLP, independent certified public
accountants, to the extent and for the periods set forth in their report
appearing elsewhere herein, and are included in reliance upon such report
given upon the authority of said firm as experts in auditing and accounting.
LEGAL MATTERS
The legality of the Notes being offered hereby will be 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. Certain food and drug regulatory matters will be passed upon for the
Company by King & Spalding, Washington, District of Columbia. Certain legal
matters in connection with the sale of the Notes offered hereby will be passed
upon for the Initial Purchaser by Simpson Thacher & Bartlett (a partnership
which includes professional corporations), New York, New York.
AVAILABLE INFORMATION
Immediately following the Offering, the Company will not be subject to the
periodic reporting and other informational requirements of the Exchange Act.
Until its acquisition by the Company in 1995, Marsam was subject to the
periodic reporting and other informational requirements of the Exchange Act,
and therefore, its Forms 10-K and 10-Q for periods prior to its acquisition
are available from the Commission. The Company has agreed that,
notwithstanding that it may not be subject to the reporting requirements of
Sections 13 or 15(d) of the Exchange Act, for so long as any Notes are
outstanding, the Company will furnish to the Trustee and the holders of the
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.
94
<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 30, 1995, December 28, 1996 and
September 27, 1997 (unaudited)............................................ F-3
Consolidated Statements of Operations for each of the years ended December
31, 1994, December 30, 1995 and December 28, 1996, and the nine-month
periods ended September 28, 1996 and September 27, 1997 (unaudited)....... F-4
Consolidated Statements of Stockholders' Equity for each of the years ended
December 31, 1994, December 30, 1995 and December 28, 1996, and the nine-
month period ended September 27, 1997 (unaudited)......................... F-5
Consolidated Statements of Cash Flows for each of the years ended December
31, 1994, December 30, 1995 and December 28, 1996, and the nine-month
periods ended September 28, 1996 and September 27, 1997 (unaudited)....... 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 30, 1995 and December 28,
1996, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
28, 1996. 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 30, 1995 and
December 28, 1996, and the consolidated results of their operations and their
cash flows for each of the three years in the period ended December 28, 1996
in conformity with generally accepted accounting principles.
BDO Seidman, LLP
New York, New York
February 7, 1997
F-2
<PAGE>
SCHEIN PHARMACEUTICAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 28, SEPTEMBER 27,
1995 1996 1997
IN THOUSANDS ------------ ------------ -------------
(UNAUDITED)
ASSETS
------
<S> <C> <C> <C>
Current Assets:
Cash and cash equivalents............ $ 7,837 $ 2,139 $ 388
Accounts receivable, less allowance
for possible losses of $3,835,
$2,434 and $2,849................... 57,212 72,261 67,574
Inventories.......................... 115,960 131,265 124,011
Prepaid expenses and other current
assets.............................. 7,598 4,070 3,792
Deferred income taxes................ 9,656 9,354 8,843
-------- -------- --------
Total Current Assets............... 198,263 219,089 204,608
Property, Plant and Equipment, net..... 108,566 107,740 107,348
Product Rights, Licenses and Regulatory
Approvals, net........................ 94,566 92,685 88,102
Goodwill, net.......................... 106,786 102,695 99,448
Other Assets........................... 14,229 22,103 21,193
-------- -------- --------
$522,410 $544,312 $520,699
======== ======== ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C> <C>
Current Liabilities:
Accounts payable..................... $ 31,225 $ 31,492 $ 30,196
Accrued expenses..................... 34,939 40,755 42,758
Income taxes......................... -- 6,641 5,231
Revolving credit and current
maturities of long-term debt........ 40,078 41,090 32,943
-------- -------- --------
Total Current Liabilities.......... 106,242 119,978 111,128
Long-Term Debt, less current
maturities............................ 240,480 245,390 223,470
Deferred Income Taxes.................. 41,321 40,166 39,979
Other Liabilities...................... 8,675 8,798 9,038
Commitments and Contingencies
Stockholders' Equity:
Common stock, $.01 par value; 529
authorized shares; issued and
outstanding 274 shares at December
30, 1995 and 273 shares at December
28, 1996 and September 27, 1997..... 3 3 3
Additional paid-in capital........... 39,832 38,876 38,876
Retained earnings.................... 86,984 88,381 92,107
Other................................ (1,127) 2,720 6,098
-------- -------- --------
Total Stockholders' Equity......... 125,692 129,980 137,084
-------- -------- --------
$522,410 $544,312 $520,699
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
SCHEIN PHARMACEUTICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
-------------------------------------- ---------------------------
DECEMBER 31, DECEMBER 30, DECEMBER 28, SEPTEMBER 28, SEPTEMBER 27,
1994 1995 1996 1996 1997
IN THOUSANDS ------------ ------------ ------------ ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues............ $385,428 $391,846 $476,295 $352,172 $353,829
Cost of sales........... 237,380 250,507 320,675 236,721 240,562
-------- -------- -------- -------- --------
Gross profit.......... 148,048 141,339 155,620 115,451 113,267
Costs and expenses:
Selling, general and
administrative....... 71,416 73,250 84,366 61,149 57,950
Research and
development.......... 19,170 28,324 27,030 23,044 22,854
Amortization of
goodwill and other
intangibles.......... -- 3,399 10,195 7,713 7,722
Special compensation,
restructuring and
relocation........... 33,594 -- -- -- --
Acquired in-process
Marsam research and
development.......... -- 30,000 -- -- --
-------- -------- -------- -------- --------
Operating income........ 23,868 6,366 34,029 23,545 24,741
Interest expense,
net.................. 1,493 10,005 23,285 16,081 20,456
Other expenses
(income), net........ 579 779 4,156 1,745 (4,536)
-------- -------- -------- -------- --------
Income (loss) before
provision for income
taxes.................. 21,796 (4,418) 6,588 5,719 8,821
Provision for income
taxes.................. 15,165 10,482 5,191 3,573 5,095
-------- -------- -------- -------- --------
Net income (loss)....... $ 6,631 $(14,900) $ 1,397 $ 2,146 $ 3,726
======== ======== ======== ======== ========
</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 28, 1996 AND NINE MONTHS ENDED SEPTEMBER 27, 1997
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
----------------- ------------- PAID-IN RETAINED
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS OTHER
IN THOUSANDS ------- ------- ------ ------ ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance December 25,
1993................... 207 $ 207 267 $ 3 $13,685 $127,129 $(10,688)
Net income............ -- -- -- -- -- 6,631 --
Recognition of stock
compensation......... -- -- -- -- 12,965 (3,079) 8,703
Stock issued in
exchange for minority
interest............. -- -- 7 -- 13,182 (1,818) --
Restructuring
charges.............. -- -- -- -- -- (1,508) --
Redemption of
preferred stock...... (207) (207) -- -- -- (25,471) --
Amortization of
options issued as
compensation......... -- -- -- -- -- -- 430
------- ------- --- ---- ------- -------- --------
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
(Period subsequent to
December 28, 1996 to
September 27, 1997 is
unaudited)...........
Net income............ -- -- -- -- -- 3,726 --
Amortization of
options issued as
compensation......... -- -- -- -- -- -- 292
Unrealized gains from
marketable
securities........... -- -- -- -- -- -- 3,059
Foreign currency
translation
adjustments.......... -- -- -- -- -- -- 27
------- ------- --- ---- ------- -------- --------
Balance, September 27,
1997 (Unaudited)....... -- $ -- 273 $ 3 $38,876 $ 92,107 $ 6,098
======= ======= === ==== ======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
SCHEIN PHARMACEUTICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
-------------------------------------- ---------------------------
DECEMBER 31, DECEMBER 30, DECEMBER 28, SEPTEMBER 28, SEPTEMBER 27,
1994 1995 1996 1996 1997
IN THOUSANDS ------------ ------------ ------------ ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Operating activities:
Net income (loss)...... $ 6,631 $ (14,900) $ 1,397 $ 2,146 $ 3,726
Depreciation and
amortization.......... 8,464 17,395 25,450 18,018 19,749
Provision for deferred
income taxes.......... (6,321) 3,084 (3,342) (985) (1,237)
Acquired in-process
Marsam research
and development....... -- 30,000 -- -- --
Special compensation... 29,039 -- -- -- --
Gain on sale of
marketable
securities............ (9,883)
Other.................. 759 694 4,360 2,192 3,530
Changes in assets and
liabilities:
Accounts receivable.... (13,224) (579) (15,743) (9,779) 4,167
Inventories............ (13,187) 69 (15,305) (30,714) 7,254
Prepaid expenses and
other assets.......... (2,056) (3,744) 2,048 572 278
Accounts payable,
income taxes, accrued
expenses and other
liabilities........... 16,064 (12,393) 11,891 9,821 (513)
-------- --------- --------- --------- ---------
Net cash provided by
(used in) operating
activities............. 26,169 19,626 10,756 (8,729) 27,071
-------- --------- --------- --------- ---------
Cash flows from
investing activities:
Capital expenditures,
net................... (16,135) (13,986) (11,309) (8,625) (8,992)
Product rights and
licenses.............. (4,190) (3,035) (4,089) (1,460) --
Acquisition of Marsam,
net of cash acquired.. -- (229,746) -- -- --
Investment in
international joint
ventures.............. -- (3,520) (2,036) (503) (150)
Proceeds from sale of
marketable
securities............ -- -- -- -- 11,575
Other, net............. (358) (1,156) (2,582) (434) (1,188)
-------- --------- --------- --------- ---------
Net cash provided by
(used in) investing
activities............. (20,683) (251,443) (20,016) (11,022) 1,245
-------- --------- --------- --------- ---------
Cash flows from
financing activities:
Principal payments on,
or repayments of,
debt.................. (67,237) (167,119) (261,078) (102,057) (143,067)
Proceeds from issuance
of debt............... 85,601 401,750 267,000 114,000 113,000
Sale (repurchase) of
other non-current
assets, net........... 1,836 (5,700) (2,360) -- --
Restructuring charges.. (1,508) -- -- -- --
Redemption of preferred
stock................. (20,678) -- -- -- --
-------- --------- --------- --------- ---------
Net cash provided by
(used in) financing
activities............. (1,986) 228,931 3,562 11,943 (30,067)
-------- --------- --------- --------- ---------
Net increase (decrease)
in cash and cash
equivalents............ 3,500 (2,886) (5,698) (7,808) (1,751)
Cash and cash
equivalents, beginning
of year................ 7,223 10,723 7,837 7,837 2,139
-------- --------- --------- --------- ---------
Cash and cash
equivalents, end of
year................... $ 10,723 $ 7,837 $ 2,139 $ 29 $ 388
======== ========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
SCHEIN PHARMACEUTICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF SEPTEMBER 1997 AND FOR THE NINE-MONTHS ENDED SEPTEMBER 28,
1996 AND SEPTEMBER 27, 1997 IS UNAUDITED)
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. 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.
In 1995, Schein Holdings, Inc. ("SHI"), the former parent holding
corporation of Schein Pharmaceutical, Inc., was merged into Schein
Pharmaceutical, Inc. The Company was the only asset held 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 and majority-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. Of the years presented in these statements, 1994
includes 53 weeks.
Interim Financial Information
The financial statements as of September 27, 1997 and for the nine months
ended September 28, 1996 and September 27, 1997 are unaudited but reflect all
adjustments (consisting only of normal recurring adjustments) which are, in
the opinion of management, necessary for a fair presentation of financial
position and results of operations. Operating results for the nine months
ended September 27, 1997 are not necessarily indicative of the results that
may be expected for the fiscal year ending December 27, 1997.
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)
(INFORMATION AS OF SEPTEMBER 1997 AND FOR THE NINE-MONTHS ENDED SEPTEMBER 28,
1996 AND SEPTEMBER 27, 1997 IS UNAUDITED)
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 20
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)
(INFORMATION AS OF SEPTEMBER 1997 AND FOR THE NINE-MONTHS ENDED SEPTEMBER 28,
1996 AND SEPTEMBER 27, 1997 IS UNAUDITED)
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 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
asserting 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 has
not determined whether either of these two standards will have a material
impact on its financial statement disclosure.
F-9
<PAGE>
SCHEIN PHARMACEUTICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF SEPTEMBER 1997 AND FOR THE NINE-MONTHS ENDED SEPTEMBER 28,
1996 AND SEPTEMBER 27, 1997 IS UNAUDITED)
NOTE 2--RESTRUCTURING
As discussed in Note 1, SHI, the former parent corporation of the Company,
was merged into the Company in 1995. Prior to September 1994, in addition to
its ownership of the Company, SHI was engaged in the manufacture, distribution
and sale of dental, medical and veterinary products ("Henry Schein"). In 1992,
SHI initiated a series of transactions as part of a corporate reorganization
plan (the "Restructuring") to split off Henry Schein to certain SHI
stockholders and realign the ownership interests of SHI. In September 1994,
the series of transactions culminated when the capital stock of Henry Schein
was distributed to individuals (and certain trusts established by them) who
were holders (or beneficiaries of trusts and estates which were holders) of
SHI's common stock prior to September 30, 1994 ("Historical SHI
Stockholders").
The transactions related to the Restructuring were initiated in December
1992 when SHI contributed the net assets of Henry Schein to a newly formed
company which was owned by SHI. Schein Pharmaceutical, Inc. and Henry Schein
both issued common stock to their respective chief executive officers
("CEOs"), which were forfeitable if certain conditions were not satisfied, and
paid cash bonuses to reimburse them for the personal income tax effects of the
stock issuance and reimbursements. SHI subsequently issued shares of its
common stock in exchange for the Schein Pharmaceutical, Inc. stock issuance
and these shares were reflected in the 1992 financial statements.
The Restructuring continued in 1993, when Historical SHI Stockholders and
Company management agreed to a transaction whereby an investor would purchase
a portion of SHI's outstanding shares from Historical SHI Stockholders and
seek future strategic alliances (the "Minority Investor Transaction").
Following governmental regulatory review and Surrogate Court approval, the
closing occurred on September 30, 1994. The Restructuring transactions
recorded in 1994 are as follows:
(i) SHI distributed the shares of Henry Schein to the Historical SHI
Stockholders.
(ii) SHI issued 6,945 shares of its common stock in exchange for the
minority interest-redeemable stock in Schein Pharmaceutical, Inc.'s
subsidiaries. The $13.2 million fair value of the shares issued exceeded
the minority interest previously recorded by $7.3 million. Of this amount,
$5.5 million was classified as special compensation expense in 1994 (for
Schein Pharmaceutical, Inc. employees) and $1.8 million was recorded as a
distribution by the Company to Henry Schein (for the CEO of Henry Schein).
(iii) As a result of the Minority Investor Transaction described above,
the shares of common stock issued to the CEOs of the Company and Henry
Schein became free of the forfeiture provisions. Accordingly, the shares
were revalued using the September 30, 1994 fair value. The amounts relating
to (1) the Company's CEO totaled $18.6 million and was recorded as special
compensation expense, and (2) Henry Schein's CEO totaled $5.7 million, and
the excess of that amount over the 1992 fair value totaled $3.1 million,
which was recorded as a capital distribution.
(iv) SHI retained the services of investment banking and financial
advisory firms. Of the fees paid to these firms, $1.5 million was charged
to retained earnings, as such amount related to the Minority Investor
Transaction.
(v) SHI redeemed its outstanding preferred stock for $25.7 million,
paying $20.7 million in cash and canceling a $5.0 million loan to a
preferred stockholder.
(vi) SHI established a supplemental retirement program for its CEO and
recognized as current expense the Company's obligation under the plan,
estimated at $5.0 million. This liability is included in Other Liabilities
in the accompanying balance sheets.
F-10
<PAGE>
SCHEIN PHARMACEUTICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF SEPTEMBER 1997 AND FOR THE NINE-MONTHS ENDED SEPTEMBER 28,
1996 AND SEPTEMBER 27, 1997 IS UNAUDITED)
Professional fees incurred by the Company of $4.2 million in 1994 in
connection with the Restructuring were recorded as restructuring expense.
NOTE 3--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. 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.
The following summarized, unaudited pro forma results of operations for 1994
and 1995 assume the acquisition occurred as of the beginning of 1994. In
preparing the pro forma data, adjustments have been made for the amortization
of goodwill and other intangibles acquired, the interest expense related to
borrowing agreements to finance the purchase price and, in 1994 only, the
write-off of acquired in-process Marsam research and development projects.
Since the valuation of Marsam's net assets and in-process research and
development projects may have differed at January 1, 1994 from amounts
recorded at September 1, 1995, the information presented is not necessarily
indicative of results of operations that would have occurred had the
acquisition been consummated at the beginning of the respective periods, or of
future results of the combined companies.
<TABLE>
<CAPTION>
YEAR ENDED
-------------------------
DECEMBER 31, DECEMBER 30,
1994 1995
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Net revenues....................................... $420,441 $417,041
Net income (loss).................................. (39,763) 5,781
</TABLE>
During 1995 and 1996, the Company invested approximately $3.5 million and
$2.0 million, respectively, and $0.2 million for the nine months ended
September 27, 1997, 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 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. The
Company recorded losses of approximately $0.3 million and $3.3 million in
fiscal 1995 and fiscal 1996, respectively, and $1.6 million and $2.7 million
for the nine months ended September 28, 1996 and September 27, 1997,
respectively, as its share of the operating results of these businesses.
Additionally, the Company incurred expenses of approximately $2.1 million and
$2.9 million in fiscal 1995 and fiscal 1996, respectively, and approximately
$2.0 million and $1.8 million for the nine months ended September 28, 1996 and
September 27, 1997, to identify, evaluate, and establish these and other
potential international business ventures. All equity losses and other
expenses resulting from the Company's investments in international businesses
in fiscal 1995 and fiscal 1996 are included in other expense, 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, during which time the
businesses incur expenses to register products in anticipation of future
sales.
F-11
<PAGE>
SCHEIN PHARMACEUTICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF SEPTEMBER 1997 AND FOR THE NINE-MONTHS ENDED SEPTEMBER 28,
1996 AND SEPTEMBER 27, 1997 IS UNAUDITED)
NOTE 4--INVENTORIES
Inventories are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 28, SEPTEMBER 27,
1995 1996 1997
------------ ------------ -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Finished products.................... $ 47,874 $ 59,632 $ 50,223
Work in-process...................... 20,671 27,332 36,893
Raw materials and supplies........... 47,415 44,301 36,895
-------- -------- --------
$115,960 $131,265 $124,011
======== ======== ========
</TABLE>
NOTE 5--PROPERTY, PLANT AND EQUIPMENT
Major classes of property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 28, SEPTEMBER 27,
1995 1996 1997
------------ ------------ -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Land................................ $ 4,725 $ 4,725 $ 4,725
Buildings and improvements.......... 60,770 63,019 63,829
Plant and office equipment.......... 85,126 97,825 100,521
Construction-in-progress............ 6,949 3,310 7,976
-------- -------- --------
157,570 168,879 177,051
Less: Accumulated depreciation and
amortization....................... 49,004 61,139 69,703
-------- -------- --------
$108,566 $107,740 $107,348
======== ======== ========
</TABLE>
Depreciation and amortization expense for property, plant and equipment
amounted to $8.3 million, $10.5 million, and $12.1 million in fiscal 1994,
fiscal 1995 and fiscal 1996, respectively, and $9.2 million and $8.5 million
for the nine months ended September 28, 1996 and September 27, 1997,
respectively.
NOTE 6--INTANGIBLE AND OTHER ASSETS
Product Rights, Licenses and Regulatory Approvals, net, consists of the
following:
<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 28, SEPTEMBER 27,
1995 1996 1997
------------ ------------ -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Product rights and licenses.......... $ 8,522 $ 12,611 $ 12,522
Regulatory approvals, products....... 78,000 78,000 78,000
Regulatory approvals, facilities..... 10,000 10,000 10,000
------- -------- --------
96,522 100,611 100,522
Less: Accumulated amortization....... 1,956 7,926 12,420
------- -------- --------
$94,566 $ 92,685 $ 88,102
======= ======== ========
</TABLE>
Accumulated amortization of goodwill was $1.4 million, $5.8 million and $9.0
million at December 30, 1995, December 28, 1996 and September 27, 1997,
respectively.
F-12
<PAGE>
SCHEIN PHARMACEUTICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF SEPTEMBER 1997 AND FOR THE NINE-MONTHS ENDED SEPTEMBER 28,
1996 AND SEPTEMBER 27, 1997 IS UNAUDITED)
Included in Other Assets in the accompanying balance sheets are marketable
securities consisting of equity securities of:
<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 28, SEPTEMBER 27,
1995 1996 1997
------------ ------------ -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Cost................................. $3,317 $ 5,660 $ 3,918
Gross unrealized gain................ 60 6,686 11,322
------ ------- -------
Fair value........................... $3,377 $12,346 $15,240
====== ======= =======
</TABLE>
Included in Other expenses (income), net for the nine months ended September
27, 1997, the Company recorded $9.9 million of realized gains of securities
sold.
NOTE 7--ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Included in accounts payable are outstanding checks of approximately $5.4
million, $6.2 million and $5.0 million as of December 30, 1995, December 28,
1996 and September 27, 1997, respectively.
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 28, SEPTEMBER 27,
1995 1996 1997
------------ ------------ -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Salaries and related expenses....... $15,398 $18,300 $17,703
Profit-sharing expenses............. 1,673 8,637 8,060
Other............................... 17,868 13,818 16,995
------- ------- -------
$34,939 $40,755 $42,758
======= ======= =======
</TABLE>
NOTES 8--TAXES ON INCOME
Provisions for Federal, state and Puerto Rico income taxes consist of the
following:
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------
DECEMBER 31, DECEMBER 30, DECEMBER 28,
1994 1995 1996
------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal.............................. $15,786 $ 5,736 $7,404
State and Puerto Rico................ 5,700 1,662 1,129
------- ------- ------
21,486 7,398 8,533
------- ------- ------
Deferred:
Federal.............................. (3,497) 2,131 (2,215)
State and Puerto Rico................ (2,824) 953 (1,127)
------- ------- ------
(6,321) 3,084 (3,342)
------- ------- ------
$15,165 $10,482 $5,191
======= ======= ======
</TABLE>
F-13
<PAGE>
SCHEIN PHARMACEUTICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF SEPTEMBER 1997 AND FOR THE NINE-MONTHS ENDED SEPTEMBER 28,
1996 AND SEPTEMBER 27, 1997 IS UNAUDITED)
Deferred tax assets and liabilities are classified as current and non-
current as follows:
<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 28,
1995 1996
------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Deferred Taxes, Current:
Deferred tax assets........................... $ 9,764 $ 9,354
Deferred tax liabilities...................... (108) --
-------- --------
9,656 9,354
-------- --------
Deferred Taxes, Non-Current:
Deferred tax assets........................... 6,905 8,268
Deferred tax liabilities...................... (48,226) (48,434)
-------- --------
(41,321) (40,166)
-------- --------
$(31,665) $(30,812)
======== ========
</TABLE>
Differences between the Federal statutory rate and the Company's effective
tax rate are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------
DECEMBER 31, DECEMBER 30, DECEMBER 28,
1994 1995 1996
------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Statutory rate....................... $ 7,629 $(1,546) $2,309
State and Puerto Rico................ 1,869 1,722 241
Special compensation charges......... 5,553 -- --
Amortization of goodwill............. -- 505 1,515
Effect of partially tax-exempt
operations in Puerto Rico........... -- -- (519)
Equity in net loss of unconsolidated
affiliates.......................... -- -- 1,202
Write-off of acquired in-process
Marsam research and development..... -- 10,500 --
Other, net........................... 114 (699) 443
------- ------- ------
$15,165 $10,482 $5,191
======= ======= ======
</TABLE>
Temporary differences which give rise to a significant portion of deferred
tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 28,
1995 1996
------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Gross Deferred Tax Assets:
Inventory valuation.......................... $ 4,358 $ 5,220
Accounts receivable allowances............... 3,139 2,694
Net operating loss carryforwards, state and
Puerto Rico................................. 1,700 1,880
Deferred compensation expense................ 4,238 4,806
Other........................................ 3,126 3,022
-------- --------
16,561 17,622
-------- --------
Gross Deferred Tax Liabilities:
Write-up of acquired Marsam assets to fair
value....................................... (35,361) (32,692)
Depreciation and amortization................ (12,744) (12,461)
Unrealized gains from marketable securities.. -- (2,489)
Other........................................ (121) (792)
-------- --------
(48,226) (48,434)
-------- --------
$(31,665) $(30,812)
======== ========
</TABLE>
F-14
<PAGE>
SCHEIN PHARMACEUTICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF SEPTEMBER 1997 AND FOR THE NINE-MONTHS ENDED SEPTEMBER 28,
1996 AND SEPTEMBER 27, 1997 IS UNAUDITED)
NOTE 9--BORROWINGS
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 28, SEPTEMBER 27,
1995 1996 1997
------------ ------------ -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Revolving credit and term loan
agreement......................... $280,000 $186,000 $156,000
Senior subordinated loan........... -- 100,000 100,000
Capitalized lease obligations...... 558 480 413
-------- -------- --------
280,558 286,480 256,413
Less: Current Maturities........... 40,078 41,090 32,943
-------- -------- --------
$240,480 $245,390 $223,470
======== ======== ========
</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. In December 1996, the Company prepaid $100.0
million of the term loan portion of the credit agreement using the proceeds
from a new senior subordinated loan (see below). As a result of this payment
and a scheduled payment, the term loan facility was reduced to $145.0 million.
Quarterly principal payments on the term loan commence in September 1998 and
end in the year 2001. The revolving credit usage was $30.0 million, $41.0
million and $26.0 million as of December 30, 1995, December 28, 1996 and
September 27, 1997, respectively. The $100.0 million revolving credit line is
available through December 2001. 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.
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 7.14%, 8.10% and 7.80% at December 30, 1995, December 28, 1996 and
September 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) of leverage to EBITDA, working capital and fixed
charge coverage. Amounts available for dividends as of December 28, 1996 were
not material.
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 was 9.60% and 9.72% as of
December 28, 1996 and September 27, 1997, respectively. Outstanding borrowings
under the senior subordinated loan agreement bear interest, payable quarterly,
at a rate equal to LIBOR plus 4% or the bank's floating base rate plus 3%,
through January 31, 1998. Thereafter, the principal amount of the loan will be
increased to reflect related fees due and will mature in five years. Interest
will be due semi-annually and the interest rate will be fixed at a new rate.
See Note 17--Subsequent Events.
F-15
<PAGE>
SCHEIN PHARMACEUTICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF SEPTEMBER 1997 AND FOR THE NINE-MONTHS ENDED SEPTEMBER 28,
1996 AND SEPTEMBER 27, 1997 IS UNAUDITED)
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. The amounts
amortized in 1995 and 1996 were $0.7 million and $2.6 million, respectively.
At December 28, 1996, aggregate required principal payments for the
succeeding four years, the remaining term under existing long-term debt
agreements, excluding the revolving credit facility, are $15.3 million in
1998, $38.2 million in 1999, $45.8 million in 2000 and $45.8 million in 2001.
NOTE 10--COMMITMENTS AND CONTINGENCIES
COMMITMENTS
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 28,
1996, future net minimum annual rental payments under the noncancelable leases
are as follows (in thousands):
<TABLE>
<S> <C>
1997................................................................ $ 5,484
1998................................................................ 4,778
1999................................................................ 4,223
2000................................................................ 3,602
2001................................................................ 3,129
2002-2007........................................................... 14,145
-------
Total minimum lease payments........................................ $35,361
=======
</TABLE>
Total rental expense for the fiscal years ended 1994, 1995 and 1996 was
approximately $3.7 million, $4.7 million and $5.4 million, respectively and
$3.9 million and $4.1 million for the nine months ended September 28, 1996 and
September 27, 1997, 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
1997 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 $4.2 million, $4.9
million and $3.5 million for the fiscal years ended 1994, 1995 and 1996,
respectively and $3.7 million and $4.7 million for the nine months ended
September 28, 1996 and September 27, 1997, respectively.
The Company has entered into deferred compensation agreements with certain
officers of the Company. As of December 1996, obligations under these
agreements were approximately $6.6 million, assuming the officers remain with
the Company over the vesting period of four years. These agreements provide
for accelerated vesting
F-16
<PAGE>
SCHEIN PHARMACEUTICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF SEPTEMBER 1997 AND FOR THE NINE-MONTHS ENDED SEPTEMBER 28,
1996 AND SEPTEMBER 27, 1997 IS UNAUDITED)
if there is a change in control of the Company and under certain other
conditions. The Company expensed $2.7 million, $2.0 million, and $4.8 million
in the fiscal years ended 1994, 1995, and 1996, respectively, and $1.7 million
and $1.1 million in the nine months ended September 28, 1996 and September 27,
1997, respectively, in connection with these agreements.
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 bested 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 $5.3 million under the
agreement, consisting of a $5.0 million licensing fee, which was capitalized,
and $0.3 million in development costs, which were charged to research and
development expense. The Company paid and expensed $2.1 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. The remaining commitment under the agreement as of
December 28, 1996 was $21.6 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.
Consulting Agreement
The Company has a series of agreements (collectively, the "Consulting
Agreement") with a patent attorney (the "Consultant"). Under the Consulting
Agreement, the Consultant, together with the Company, identified certain
patents on branded pharmaceutical products which might be 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.
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 would normally have expired) or
one half of the proceeds of any settlement.
In 1994, the Company settled two such patent challenges. One of the
settlements involved a license grant to the Company to market the product
which was the subject of the challenge beginning in 1996. The other allows for
future cash payments and/or license rights to the Company. In connection with
the second settlement, the Company received revenues of $5 and $12.5 million
in 1995 and 1996, respectively, and $12.5 million and $25.0 million in the
nine months ended September 28, 1996 and September 27, 1997, which are
included in Net revenues in the accompanying statements of operations.
F-17
<PAGE>
SCHEIN PHARMACEUTICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF SEPTEMBER 1997 AND FOR THE NINE-MONTHS ENDED SEPTEMBER 28,
1996 AND SEPTEMBER 27, 1997 IS UNAUDITED)
Profit-sharing expenses pursuant to the Consulting Agreement and included in
Cost of sales were $2.5 million in fiscal 1995, $14.9 million in fiscal 1996
and $9.3 million and $24.5 million for the nine months ended September 28,
1996 and September 27, 1997, respectively. In 1994, there were no related
profit-sharing expenses.
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 30, 1995, December 28, 1996 and September 22, 1997, the Company
had 183,722, 183,244 and 183,244 Class A issued and outstanding, respectively.
The Company had 90,020 Class B for all periods presented.
During 1996, the Company agreed to repurchase 478 Common Shares for
approximately $1.0 million from a former executive of the Company. These
shares were retired in 1996.
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 a 1993 Stock Option Plan, a 1995 Non-Employee Director Stock Option
Plan, and effective March 3, 1997, a 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 55,797 shares under the plans. However, 3,503 shares
under the 1993 Stock Option Plan will not be granted.
F-18
<PAGE>
SCHEIN PHARMACEUTICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF SEPTEMBER 1997 AND FOR THE NINE-MONTHS ENDED SEPTEMBER 28,
1996 AND SEPTEMBER 27, 1997 IS UNAUDITED)
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%. 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 and 1996
by approximately $1.0 million and $2.3 million, respectively.
The following table summarizes information about stock options outstanding
at December 28, 1996:
<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
$1,000.00............. 1,859 6.9 $1,000.00 1,749 $1,000.00
$2,000.00............. 22,156 7.8 2,000.00 13,507 2,000.00
------ --- --------- ------ ---------
24,015 7.8 $1,922.49 15,256 $1,885.59
====== === ========= ====== =========
</TABLE>
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 29, 1993............. 12,340 $1,838.85
Granted (at $2,000.00 per share)................... 5,094 2,000.00
Exercised.......................................... -- --
Canceled (at $2,000.00 per share).................. (1,078) 2,000.00
------ ---------
Shares under option at December 31, 1994............. 16,356 1,878.21
Granted (at $2,000.00 per share)................... 3,601 2,000.00
Exercised.......................................... -- --
Canceled (at $2,000.00 per share).................. (77) 2,000.00
------ ---------
Shares under option at December 30, 1995............. 19,880 1,900.35
Granted (at $2,000.00 per share)................... 4,887 2,000.00
Exercised.......................................... -- --
Canceled (at $1,000.00 to $2,000.00 per share)..... (752) 1,832.70
------ ---------
Shares under option at December 28, 1996............. 24,015 1,922.49
Granted (at $1,500.00 per share)................... 8,031 1,500.00
Exercised.......................................... -- --
Canceled (at $2,000.00 per share).................. (2,365) 2,000.00
------ ---------
Shares under option at September 27, 1997 (at
$1,000.00 to $2,000.00 per share)................... 29,681 $1,801.95
====== =========
Options exercisable at December
1994............................................... 8,951 $1,955.70
1995............................................... 10,780 $1,926.18
1996............................................... 15,256 $1,885.59
Weighted average fair value of options granted dur-
ing:
1995............................................... $ 915.12
1996............................................... $ 896.67
</TABLE>
F-19
<PAGE>
SCHEIN PHARMACEUTICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF SEPTEMBER 1997 AND FOR THE NINE-MONTHS ENDED SEPTEMBER 28,
1996 AND SEPTEMBER 27, 1997 IS UNAUDITED)
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--SPECIAL COMPENSATION, RESTRUCTURING AND RELOCATION
Special compensation, restructuring and relocation expense in fiscal 1994
consists of the following:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Special compensation--see Note 2............................. $23,582
Excess of fair value of shares exchanged or amounts paid on
exchange of minority interest............................... 5,457
Professional fees for Restructuring.......................... 4,215
Relocation of corporate headquarters......................... 340
-------
$33,594
=======
</TABLE>
NOTE 13--INTEREST EXPENSE, NET
Interest expense, net, consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
-------------------------------------- ---------------------------
DECEMBER 31, DECEMBER 30, DECEMBER 28, SEPTEMBER 28, SEPTEMBER 27,
1994 1995 1996 1996 1997
------------ ------------ ------------ ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest expense........ $1,875 $10,150 $23,715 $16,165 $20,536
Interest income......... (382) (145) (430) (84) (80)
------ ------- ------- ------- -------
$1,493 $10,005 $23,285 $16,081 $20,456
====== ======= ======= ======= =======
</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
$6.4 million, $5.3 million and $8.6 million in fiscal 1994, 1995 and 1996,
respectively, and $5.5 million and $5.4 million for the nine months ended
September 28, 1996 and September 27, 1997. Included in accounts receivable at
both December 30, 1995, December 28, 1996 and September 27, 1997 are amounts
due from Henry Schein for sale of products of approximately $0.9 million, $0.9
million and $0.8 million, respectively.
In 1994, the Company entered into a 3-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 $2.9
million for the nine months ended September 27, 1997. There were no selling
expenses under this agreement for 1994 and 1995. Included in Accrued expenses
in the accompanying balance sheet as of December 28, 1996 and September 27,
1997 are approximately $1.3 million and $1.7 million, respectively, of selling
expenses under the agreement.
NOTE 15--SUPPLEMENTAL CASH FLOW INFORMATION
In connection with the Restructuring (see Note 2), there were certain non-
cash transactions. In 1994, non-cash transactions were 1) the issuance of SHI
common stock in exchange for all minority interests in Schein Pharmaceutical's
subsidiaries, the formula value of which approximated $6.2 million, 2) a $1.8
million
F-20
<PAGE>
SCHEIN PHARMACEUTICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF SEPTEMBER 1997 AND FOR THE NINE-MONTHS ENDED SEPTEMBER 28,
1996 AND SEPTEMBER 27, 1997 IS UNAUDITED)
distribution to Henry Schein for the excess of the fair value of the common
stock issued in exchange for the minority interest in Schein Pharmaceutical's
subsidiaries over amounts previously recorded, 3) a distribution of $3.1
million to Henry Schein in recognition of the adjusted fair value of the
Company's stock distributed in 1992, and 4) a $5.0 million cancellation of a
preferred stock stockholder loan in connection with the redemption of
preferred stock.
The Company paid taxes of approximately $22.8 million, $8.9 million and $5.8
million for the years ended 1994, 1995 and 1996, respectively. The Company
paid interest of approximately $1.5 million, $8.0 million and $23.2 million
for the years ended 1994, 1995 and 1996, respectively.
In 1994, the Company accrued a $3 million product licensing commitment which
was paid in early 1995. The amount was capitalized under Product Rights,
Licenses and Regulatory Approvals in the accompanying balance sheets.
As discussed in Note 3, the Company acquired all the capital stock of Marsam
for $245 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
Cash paid for Marsam stock..................................... (245)
-----
Liabilities assumed............................................ $ 48
=====
</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.
NOTE 16--MAJOR PRODUCT AND CUSTOMERS
One product generated 16%, 17% and 19% of net revenues for fiscal 1994, 1995
and 1996, respectively, and 17% and 20% for the nine months ended September
28, 1996 and September 27, 1997, respectively.
Four customers contributed 13%, 12%, 12% and 10%, respectively, of 1994 net
revenues. Three customers generated 13%, 11% and 10%, respectively, of 1995
net revenues, respectively. Three customers contributed 16%, 15% and 11%,
respectively, of 1996 net revenues. Three customers contributed 17%, 16% and
11%, respectively, of revenues for the period ended September 27, 1997. 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 EVENTS
In November 1997, the Company entered into a Commitment Letter with an
investment banking firm providing for the issuance and sale of $100 million of
Senior Floating Rate Notes due 2004. Interest on the notes will be due
quarterly at a LIBOR-based rate. The Company expects this offering to be
completed in December 1997, at which time the proceeds will be used to retire
the existing $100 million senior subordinated loan (Note 9).
The Company has filed a registration statement covering an initial public
offering under which it anticipates raising net proceeds of approximately $45
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.
F-21
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Marsam Pharmaceuticals Inc.
Cherry Hill, New Jersey
We have audited the accompanying consolidated balance sheets of Marsam
Pharmaceuticals Inc. and subsidiary as of December 31, 1994 and 1993, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1994. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Marsam
Pharmaceuticals Inc. and subsidiary as of December 31, 1994 and 1993, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1994, in conformity with
generally accepted accounting principles.
Coopers & Lybrand LLP
2400 Eleven Penn Center
Philadelphia, Pennsylvania
February 24, 1995
F-22
<PAGE>
MARSAM PHARMACEUTICALS INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1994 1993
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... $10,470,300 $ 6,836,700
Investments available-for-sale, at fair market
value............................................. 4,710,000 8,341,900
Accounts receivable, net of reserves of $1,222,400
and $574,600 at December 31, 1994 and 1993........ 6,147,800 6,567,100
Inventory.......................................... 10,830,200 9,602,300
Deferred income taxes.............................. 526,400 --
Other current assets............................... 2,111,800 741,400
----------- -----------
Total current assets............................... 34,796,500 32,089,400
Property and equipment, net of accumulated
depreciation of $7,009,200 and $5,641,300 at
December 31, 1994 and 1993........................ 20,042,100 17,039,100
Deposits for property and equipment................ 250,000 253,600
Deferred income taxes.............................. 253,200 --
Other assets....................................... 1,520,100 --
----------- -----------
Total assets..................................... $56,861,900 $49,382,100
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................... $ 2,012,500 $ 1,095,600
Accrued compensation............................... 346,800 391,300
Accrued liabilities................................ 1,342,500 337,400
Deferred revenue................................... 1,175,000 --
----------- -----------
Total liabilities................................ 4,876,800 1,824,300
=========== ===========
Long-term liabilities:
Deferred compensation.............................. 813,800 533,600
Deferred income taxes.............................. 14,500 155,900
----------- -----------
Total liabilities................................ 5,705,100 2,513,800
=========== ===========
COMMITMENTS AND CONTINGENCIES (NOTE 8)
Stockholders' equity:
Preferred stock, par value $.01 per share;
authorized 1,000,000 shares....................... -- --
Common stock, par value $.01 per share; authorized
30,000,000 shares at December 31, 1993; issued and
outstanding 11,047,562 shares at December 31, 1994
and 11,017,986 shares at December 31, 1993........ 110,500 110,200
Additional paid-in capital......................... 51,739,500 51,093,900
Retained earnings (deficit)........................ (693,200) (4,335,800)
----------- -----------
Total stockholders' equity....................... 51,156,800 46,868,300
----------- -----------
Total liabilities and stockholders' equity..... $56,861,900 $49,382,100
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-23
<PAGE>
MARSAM PHARMACEUTICALS INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1994 1993 1992
----------- ----------- -----------
<S> <C> <C> <C>
Net sales................................ $35,012,800 $23,500,900 $16,722,400
Cost of goods sold....................... 26,127,600 18,059,500 14,895,900
----------- ----------- -----------
Gross profit............................ 8,885,200 5,441,400 1,826,500
----------- ----------- -----------
Operating costs and expenses:
Selling, general and administrative..... 4,741,900 2,486,800 3,004,300
Research and development................ 2,536,500 2,009,100 2,702,300
----------- ----------- -----------
Total operating expenses................ 7,278,400 4,495,900 5,706,600
----------- ----------- -----------
Income (loss) from operations.......... 1,606,800 945,500 (3,880,100)
Other income, net........................ 1,903,000 1,067,400 1,034,700
----------- ----------- -----------
Income (loss) before income taxes...... 3,509,800 2,012,900 (2,845,400)
Provision for income taxes............... (132,800) 40,000 110,000
----------- ----------- -----------
Net income (loss)...................... $ 3,642,600 $ 1,972,900 $(2,955,400)
=========== =========== ===========
Net income (loss) per common and common
equivalent share........................ $ 0.33 $ 0.18 $ (0.27)
=========== =========== ===========
Weighted average common & common
equivalent
shares outstanding...................... 11,163,100 11,168,000 10,948,900
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-24
<PAGE>
MARSAM PHARMACEUTICALS INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
------------------- ADDITIONAL
NO. OF PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT
---------- -------- ----------- -----------
<S> <C> <C> <C> <C>
BALANCES, JANUARY 1, 1992.......... 10,945,136 $109,500 $50,541,900 $(3,353,300)
---------- -------- ----------- -----------
Exercise of stock options.......... 10,275 100 53,800 --
Common stock grant................. 5,500 0 47,400 --
Net loss........................... -- -- -- (2,955,400)
---------- -------- ----------- -----------
BALANCES, DECEMBER 31, 1992........ 10,960,911 109,600 50,643,100 (6,308,700)
Exercise of stock options.......... 57,075 600 450,800 --
Net income......................... -- -- -- 1,972,900
---------- -------- ----------- -----------
BALANCES, DECEMBER 31, 1993........ 11,017,986 110,200 51,093,900 (4,335,800)
Exercise of stock options.......... 23,826 200 586,800 --
Common stock grant................. 5,750 100 58,800 --
Net income......................... -- -- -- 3,642,600
---------- -------- ----------- -----------
BALANCES, DECEMBER 31, 1994........ 11,047,562 $110,500 $51,739,500 $ (693,200)
========== ======== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-25
<PAGE>
MARSAM PHARMACEUTICALS INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1994 1993 1992
----------- ----------- ------------
<S> <C> <C> <C>
Cash flows from operations:
Net income........................... $ 3,642,600 $ 1,972,900 $ (2,955,400)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization........ 1,367,900 1,137,700 1,085,100
Inventory write-offs................. (113,900) (155,500) 280,500
Increase in accounts receivable
reserves............................ 647,800 574,600 --
Deferred compensation expense........ 280,200 206,300 253,000
Deferred tax provision (benefit)..... (555,900) 24,800 110,000
(Gain) loss on sale of property...... -- 5,300 (4,200)
Common stock grant................... 58,900 -- 47,400
(Increase) decrease in accounts
receivable.......................... (228,500) (5,929,200) 1,629,900
(Increase) in inventory.............. (1,114,000) (2,465,700) (4,913,100)
(Increase) in other assets........... (1,370,400) (311,100) (93,800)
Increase (decrease) in accounts
payable............................. 916,900 (436,300) 324,700
Increase (decrease) in accrued
expenses............................ 505,800 (840,900) 565,000
Increase (decrease) in deferred
revenue............................. 1,175,000 -- (101,800)
----------- ----------- ------------
Net Cash provided by operating ac-
tivities.......................... 5,212,400 (6,217,100) (3,772,700)
----------- ----------- ------------
Investment activities:
Purchase of investments "available-
for-sale"........................... (500,000) (3,628,300) (4,446,800)
Sale of investments "available-for-
sale"............................... 4,131,900 4,233,200 --
Purchase of property and equipment... (3,662,500) (1,151,400) (2,080,800)
Proceeds from sale of property....... -- -- 8,800
Deposits on property and equipment... (250,000) (150,400) (202,400)
Purchase of long-term investments.... (1,520,100) -- --
----------- ----------- ------------
Net Cash used in investment activi-
ties.............................. (1,800,700) (696,900) (6,721,200)
----------- ----------- ------------
Financing activities:
Proceeds from issuance of common
stock............................... 221,900 451,400 53,900
----------- ----------- ------------
Net cash provided by financing
activities.......................... 221,900 451,400 53,900
----------- ----------- ------------
Increase (decrease) in cash and cash
equivalents........................... 3,633,600 (6,462,600) (10,440,000)
Cash and cash equivalents, beginning of
period................................ 6,836,700 13,299,300 23,739,300
----------- ----------- ------------
Cash and cash equivalents, end of
period................................ $10,470,300 $ 6,836,700 $ 13,299,300
=========== =========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-26
<PAGE>
MARSAM PHARMACEUTICALS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS:
The Company was founded in 1985 and is engaged in the business of
developing, manufacturing, marketing and distributing generic injectable
prescription drug products. The Company markets penicillin, cephalosporin and
other injectable products.
The Company, prior to 1993, operated under joint venture agreements with
E.R. Squibb & Sons, Inc. ("Squibb") and Geneva Pharmaceuticals, Inc.
("Geneva"). Both joint ventures required the Company to manufacture its
products and ship them to its joint venture partner, with the partner then
being responsible for marketing and distributing the Company's products. The
joint venture agreement with Squibb (as amended, the "Joint Agreement") was in
place from December 1985 to June 1990, and was replaced with a restructure and
release agreement (the "Restructure Agreement") which required each party to
manufacture for the other certain products through May 1993. The Restructure
Agreement was later extended to December 31, 1994.
The joint venture agreement with Geneva (the "Distribution Agreement") was
executed in June 1990 and was in place until July 1992, at which time the
Company filed a complaint against Geneva asserting certain breaches by Geneva
of its fiduciary duties to the Company and of its contractual obligations
under the Distribution Agreement. The financial statements for 1992 include
approximately $1,100,000 of costs related to the termination of the
Distribution Agreement. In July 1993 the Company and Geneva executed a
settlement agreement (the "Settlement Agreement") which resolved the
outstanding litigation between the two companies. Pursuant to the Settlement
Agreement, Geneva paid the sum of $550,000 to the Company to balance the
accounts between the parties and in full settlement of all claims and
counterclaims. In 1993, as a result of the settlement, the Company reduced
previously accrued liabilities by approximately $600,000.
In 1993 the Company began to develop its own sales and marketing force to
sell its products under the Marsam label and other private labels. The Company
markets these products to pharmaceutical wholesalers and distributors,
hospitals, home infusion companies and other medical providers. In 1994, more
than 75% of revenues were from direct sales of Marsam-label products.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation:
The consolidated financial statements include to accounts of Marsam
Pharmaceuticals Inc. and subsidiary. All intercompany transactions are
eliminated in consolidation investments in corporate joint ventures in which
the Company has a 20 to 50 percent ownership are accounted for by the equity
method. Other investments, less than 20 percent owned, are carried at their
original cost. Equity and cost investments are included in other assets in the
consolidated financial statements.
Revenue Recognition:
Sales to Geneva in 1992 were at a price equal to the estimated production
cost per unit plus 10% for products manufactured by Marsam and the amount per
unit actually paid plus 5% for sourced injectable products ("Transfer Price").
At the time of shipment to Geneva, revenue was recognized at the Transfer
Price less one-half of the applicable 10% or 5% profit. The portion of the
profit which was deferred was recognized as revenue when Geneva shipped the
Products. Net Proceeds were earned when the products were sold by Geneva. Net
Proceeds were to generally represent Geneva's net sales of the Products less
the applicable Transfer Price and certain specific distribution and operating
costs.
Principal Customers:
Sales to Squibb were $8,090,100, $8,126,500, and $7,375,800 for each of the
years ended December 31, 1994, 1993 and 1992, respectively.
F-27
<PAGE>
MARSAM PHARMACEUTICALS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Sales to Geneva were $578,700 and $7,297,400 for the years ended December
31, 1993 and 1992, respectively.
Sales of Marsam label products are sold predominately through pharmaceutical
wholesalers to third parties under contract with the Company; thus, no one
customer comprises a significant portion of sales.
Credit Risk:
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash and cash
equivalents, investments, and accounts receivable. The Company invests cash
and cash equivalents in savings and money market accounts of high credit
qualified financial institutions, as well as high credit commercial paper and
time deposits. Investments are placed in investment grade debt. Accounts
receivable are substantially comprised of amounts from sales to relatively few
large contract and wholesale customers. Credit limits, ongoing credit
evaluation and account monitoring procedures are utilized to minimize the risk
of loss. Collateral is generally not required.
Cash Equivalents:
Cash equivalents consist of those securities with maturities of three months
or less when purchased.
Investments:
Effective January 1, 1994, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 115, "Accounting for Certain Investments
in Debt and Equity Securities." There was no cumulative effect of adopting
SFAS 115 as of January 1, 1994, and prior period financial statements have not
been restated. At December 31, 1994 the Company owned current "available-for-
sale" marketable securities which are carried at fair market value on the
balance sheet. Unrealized gains or losses are recorded directly to
stockholders equity, net of applicable income taxes. At December 31, 1994,
there were no unrealized gains or losses related to these securities, as the
cost was equal to fair value on that date.
Prior to 1994, the Company recorded investments in marketable securities at
the lower of cost or fair market value. At December 31, 1993, the Company had
investments with a cost equal to their fair market value.
For the years ending December 31, 1994, 1993, and 1992, the Company realized
interest and dividend income of $732,100, $521,100 and $990,700, respectively,
which is included in other income.
Inventories:
Inventories are stated at the lower of cost or market. Cost is determined by
the first in, first out method.
Property and Equipment:
Property and equipment is stated at cost. Depreciation of property and
equipment is computed using the straight-line method based on the estimated
useful lives of the assets, which range from five to forty years. Amortization
of leasehold improvements is recorded ratably over the remaining lease term or
useful life, if shorter.
Maintenance and repairs are charged to expense as incurred; major renewals
and improvements are capitalized. Gains or losses on the disposition of fixed
assets are reflected in income.
Income Taxes:
The Company records deferred taxes by using the asset and liability method.
Under this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets
F-28
<PAGE>
MARSAM PHARMACEUTICALS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
and liabilities and are measured using the enacted tax rates and laws that
will be in effect when the differences are expected to reverse. Valuation
allowances are established when necessary to reduce deferred tax assets to the
amounts expected to be realized. Federal tax credits are recognized as
deferred tax assets.
Net Income (Loss) per Share:
Net income (loss) per share was calculated based upon the weighted average
common and common equivalent shares outstanding. Common share equivalents
included in the calculation represent shares issuable upon assumed exercise of
stock options which would have a dilutive effect in years where there are
earnings. Equivalents had no material effect on the computation in 1994, 1993,
or 1992.
Statements of Cash Flows:
At December 31, 1994, 1993 and 1992, approximately $454,800, $85,900 and
$279,700, respectively of amounts payable relating to the acquisition of
property and equipment were excluded from the statement of cash flows. In 1994
and 1992, the Company paid income taxes of $5,200 and $5,800, respectively.
3. INVENTORY:
At December 31, 1994 and 1993, inventory consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31
----------------------
1994 1993
----------- ----------
<S> <C> <C>
Raw materials (including components)................. $ 5,954,700 $6,294,900
Work-in-process...................................... 95,900 379,700
Finished goods....................................... 4,779,600 2,927,700
----------- ----------
$10,830,200 $9,602,300
=========== ==========
</TABLE>
4. PROPERTY AND EQUIPMENT:
At December 31, 1994 and 1993, property and equipment were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1994 1993
----------- -----------
<S> <C> <C>
Land................................................ $ 548,000 $ 348,000
Building and improvements........................... 10,297,900 6,668,800
Machinery and equipment............................. 9,850,400 7,445,700
Furniture and fixtures.............................. 907,500 818,600
Vehicles............................................ 84,800 84,800
Machinery and equipment and leasehold improvements
under installation................................. 5,362,700 7,314,500
----------- -----------
27,051,300 22,680,400
Less accumulated depreciation and amortization...... 7,009,200 5,641,300
----------- -----------
$20,042,100 $17,039,100
=========== ===========
</TABLE>
F-29
<PAGE>
MARSAM PHARMACEUTICALS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. INCOME TAXES:
The provision for (benefit from) income taxes for the years ended December
31, 1994, 1993, and 1992 includes to following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1994 1993 1992
--------- ------- --------
<S> <C> <C> <C>
Current provision:
Federal....................................... $ 423,100 $15,200 $ --
State......................................... -- -- --
Deferred provision (benefit):
Federal....................................... $(514,900) $13,900 $110,000
State......................................... (41,000) 10,900 --
--------- ------- --------
$(132,800) $40,000 $110,000
========= ======= ========
</TABLE>
In 1994 and 1993, current federal income tax expense was generated on
alternative minimum taxable income. The current federal income tax provisions
on earnings for 1994 and 1993 were offset by the utilization of federal net
operating loss carryforwards. Utilization of federal net operating loss
carryforwards in 1994, created by tax expense for employee stock options,
resulted in a $365,100 increase to additional paid-in capital. There was no
current federal income tax provision for 1992, due to the loss incurred by the
Company. A deferred federal income tax benefit arose in 1994 due to the
recognition of the Company's deferred tax assets. In the fourth quarter of
1994, a net $300,000 benefit was recognized due to a reduction in the deferred
tax asset valuation allowance. A deferred federal income tax provision arose
in 1993 and 1992 from temporary differences on which net operating loss
carryforwards could not be utilized. At December 31, 1994, the Company had
utilized the balance of its net operating loss carryforwards for federal tax
purposes. At December 31, 1994 the Company had utilized the balance of its
alternative minimum tax net operating loss carryforwards and had available
alternative minimum tax credit carryforwards of $198,600 which do not expire.
The current state income tax provisions for 1994 and 1993 were offset by
utilization of state net operating loss carryforwards. There was no current
state income tax provision for 1992 due to the loss incurred by the Company.
In 1994, a deferred state income tax benefit arose from the recognition of the
Company's deferred tax assets. In 1993, a deferred state income tax provision
arose from temporary differences on which net operating loss carryforwards
could not be utilized. At December 31, 1994, the Company had available state
net operating loss carryforwards of $1,877,600 to offset future state taxable
income. The state net operating loss carryforwards expire 1996 through 1999.
F-30
<PAGE>
MARSAM PHARMACEUTICALS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The components of the net deferred income tax asset (liability) at December
31, 1994 and 1993 were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1994 1993
---------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards
Federal.......................................... $ -- $ 1,523,900
State............................................ 169,000 391,100
Federal tax credits............................... 936,600 402,100
Accounts receivable, inventory and other
reserves......................................... 624,300 339,400
Deferred revenue.................................. 399,500 --
Other............................................. 462,900 322,100
---------- -----------
2,592,300 2,978,600
Valuation allowance............................... (867,400) (2,630,900)
---------- -----------
Deferred tax assets.............................. 1,724,900 347,700
---------- -----------
Deferred tax liabilities:
Depreciation...................................... 529,400 390,500
Other............................................. 430,400 113,100
---------- -----------
Deferred tax liabilities......................... 959,800 503,600
---------- -----------
Net deferred income tax asset (liability)........ $ 765,100 $ (155,900)
========== ===========
</TABLE>
6. SETTLEMENT AGREEMENT WITH GREAT LAKES CHEMICAL CORPORATION:
On July 18, 1994, the Company and Great Lakes Chemical Corporation ("GLCC")
executed a comprehensive settlement agreement which resolved the outstanding
litigation between them concerning the failure of GLCC to supply the Company
certain raw materials in accordance with the agreement between them. Under the
terms of the settlement, GLCC paid $2.35 million to the Company and agreed to
begin supplying the Company with an inhaled anesthetic raw material commencing
upon the availability of production quantities from its existing facility and
continuing for at least five years after completion of a new, larger
production facility. The payment received by the Company on July 19, 1994, is
being ratably recognized as income during the period of July 1, 1994 through
June 30, 1995, the period during which the Company expected to market the
product but will be unable to market because of GLCC'S failure to supply the
raw material. For the year ended December 31, 1994, the Company recognized
$1,175,000, of the $2.35 million received from GLCC, as other income. The
balance of $1,175,000 is included as deferred revenue at December 31, 1994.
If GLCC fails to deliver agreed quantities of product by specified dates, or
if the product does not receive FDA approval by July 15, 1995, the Company is
entitled to be reimbursed for lost profits associated with the inability of
the Company to market the product. Such payments can be received until January
15, 1998.
7. INVESTMENT IN BUSINESS:
On September 23, 1994, the Company purchased, for $1,500,000, a minority
equity interest in Sabratek Corporation ("Sabratek"), a medical device
manufacturer. The Company received one million shares of cumulative
convertible preferred stock of Sabratek in return for its investment. The
Company has committed to an additional investment of $500,000 provided that
Sabratek achieves certain goals. The Company has also received warrants to
purchase an additional 1.5 million shares of Sabratek. The Company accounts
for this investment under the cost method, as the Company has a less than 20%
interest in Sabratek.
F-31
<PAGE>
MARSAM PHARMACEUTICALS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. COMMITMENTS AND CONTINGENCIES:
Purchase Commitments:
At December 31, 1994 and 1993, commitments for capital expenditures
approximated $638,000 and $1,592,000, respectively, relating to the purchase
of equipment for the Company's manufacturing facilities.
In January 1994, the Company entered into an agreement to lease warehousing
space on an adjacent property for a 3 year term (67,800 square feet for the
first two years and 109,800 square feet for the final year), expiring February
28, 1997. Future minimum rental payments under the lease are $158,500,
$252,800 and $45,200 in 1995, 1996 and 1997, respectively. The Company has
agreed to purchase this property, which consists of a building of
approximately 109,800 square feet on approximately 8.8 acres of land, in March
1997. The purchase price is $5,319,000 and includes a $250,000 deposit which
was paid during 1994, and two installment payments of $3,000,000 in March 1997
and $2,069,000 in October 1997.
Total rent expense for the years ended December 31, 1994, 1993, and 1992
aggregated $166,700, $78,300 and $70,700.
Product Liability:
The Company has product liability insurance for $5 million per occurrence,
$5 million in the aggregate on a claims made basis. Management is not aware of
any occurrences which could give rise to a product liability claim.
9. CAPITAL TRANSACTIONS:
Stock Option Plan:
On December 6, 1986, the Company adopted a Stock Option Plan (the "1986
Stock Option Plan"), under which an aggregate of 675,000 shares of Common
Stock could have been issued pursuant to nonqualified and incentive stock
options granted to certain officers, employees, directors, consultants and
advisors. Options were granted at an exercise price not less than the fair
market value of the shares on the date of grant. Such options generally became
exercisable in equal installments over a four-year period. Options issued
prior to 1992 expire 5 years from the date of grant. Subsequent options expire
10 years from the date of grant.
On May 26, 1993, the Company adopted a new Stock Option Plan (the "1993
Stock Option Plan"), under which an aggregate of 750,000 shares of Common
Stock may be issued pursuant to nonqualified and incentive stock options
granted to certain officers, employees, directors, consultants and advisors.
All options granted May 26, 1993 and later are from the 1993 Stock Option
Plan. Options under the 1993 Stock Option Plan may be granted at an exercise
price not less than the fair market value of the shares on the date of grant.
Such options generally become exercisable in equal installments over a four-
year period. Options expire 10 years from the date of grant.
F-32
<PAGE>
MARSAM PHARMACEUTICALS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A summary of share transactions under the Company's Stock Option Plans
follows:
<TABLE>
<CAPTION>
1993 PLAN 1986 PLAN
--------- ---------
<S> <C> <C>
Balances at December 31,
1991 ($4.33-13.75 per
share).................. -- 129,975
Granted ($8.63-14.00 per
share).................. -- 356,250
Exercised ($4.33-10.00
per share)............. -- (10,275)
Canceled ($8.00-14.00
per share)............. -- (8,125)
------- -------
Balances at December 31,
1992 ($4.33-14.00 per
share).................. -- 467,825
Granted ($9.00-22.00 per
share)................. 301,800 102,800
Exercised ($4.33-14.00
per share)............. -- (57,075)
Canceled ($4.33-16.25
per share)............. (3,500) (22,775)
------- -------
Balances at December 31,
1993 ($8.00-22.00 per
share).................. 298,300 490,775
Granted ($11.00-20.25
per share)............. 142,000 --
Exercised ($8.00-14.00
per share)............. -- (23,826)
Canceled ($8.63-19.88
per share)............. (11,700) (4,500)
------- -------
Balances at December 31,
1994 ($8.00-22.00 per
share).................. 428,600 462,449
======= =======
</TABLE>
Total options exercisable under both plans at December 31, 1994 were
292,987. The total number of shares available for option under both plans were
321,400, 451,700 and 132,700 as of December 31, 1994, 1993 and 1992,
respectively.
F-33
<PAGE>
MARSAM PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
1995 1994
------------ ------------
<S> <C> <C>
Net revenues......................................... $ 21,310,900 $ 15,619,000
Cost of goods sold................................... 15,589,100 11,337,900
------------ ------------
Gross profit....................................... 5,721,800 4,281,100
------------ ------------
Operating costs and expenses:
Selling, general and administrative................ 2,789,000 2,266,100
Research and development........................... 1,818,100 1,079,500
------------ ------------
Total operating expenses......................... 4,607,100 3,345,600
------------ ------------
Income from operations........................... 1,114,700 935,500
Other income, net.................................... 1,587,000 304,300
------------ ------------
Income before income taxes....................... 2,701,700 1,239,800
Provision for income taxes....................... 810,400 40,000
------------ ------------
Net income......................................... $ 1,891,300 $ 1,199,800
============ ============
Net income per common & common equivalent share...... $ 0.17 $ 0.11
============ ============
Fully diluted weighted average common & common
equivalent shares outstanding....................... 11,454,800 11,158,200
------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-34
<PAGE>
MARSAM PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, 1995
-------------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents...................................... $ 8,131,600
Investments available-for-sale, at fair market value........... 7,010,000
Accounts receivable, net of reserves of $1,867,400............. 5,958,800
Inventory...................................................... 14,871,300
Deferred income taxes.......................................... 473,800
Other current assets........................................... 2,054,000
-----------
Total current assets......................................... 38,499,500
Property and equipment, net of accumulated depreciation of
$7,857,600.................................................... 20,691,700
Deposits for property and equipment............................ 431,300
Deferred income taxes.......................................... 208,400
Other assets................................................... 1,482,700
-----------
Total assets................................................. $61,313,600
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................... $ 4,501,300
Accrued compensation........................................... 508,700
Accrued liabilities............................................ 1,811,900
Deferred revenue............................................... --
-----------
Total current liabilities.................................... 6,821,900
Long-term liabilities:
Deferred compensation.......................................... 966,600
Deferred income taxes.......................................... 49,400
-----------
Total liabilities............................................ 7,837,900
Commitments and contingencies
Stockholders' equity:
Preferred stock, par value $.01 per share; authorized
1,000,000 shares.............................................. --
Common stock, par value $.01 per share; authorized
30,000,000 shares; issued and outstanding 11,083,487.......... 110,800
Additional paid-in capital..................................... 52,166,800
Retained earnings.............................................. 1,198,100
-----------
Total stockholders' equity..................................... 53,475,700
-----------
Total liabilities and stockholders' equity................... $61,313,600
===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-35
<PAGE>
MARSAM PHARMACEUTICALS INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
--------------------------
1995 1994
------------ ------------
<S> <C> <C>
Cash flows from operations:
Net income....................................... $ 1,891,300 $ 1,199,800
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization.................... 848,400 617,400
Deferred compensation expense.................... 152,800 108,000
Deferred tax provision........................... 132,300 16,000
Decrease in accounts receivable.................. 189,000 1,533,100
(Increase) in inventory.......................... (4,041,100) (738,500)
(Increase) (decrease) in other assets............ 95,200 (807,800)
Increase in accounts payable..................... 2,424,000 2,951,400
Increase in accrued expenses..................... 631,300 181,800
(Decrease) in deferred liabilities............... (1,175,000) --
------------ ------------
Net cash provided by operating activities...... 1,148,200 5,061,200
------------ ------------
Investment activities:
Purchase of investments available-for-sale....... (2,800,000) --
Sale of investments available-for-sale........... 500,000 1,325,400
Purchase of property and equipment............... (1,433,200) (351,500)
Deposits on property and equipment............... (181,300) (1,128,400)
------------ ------------
Net cash used in investment activities......... (3,914,500) (154,500)
------------ ------------
Financing activities:
Proceeds from issuance of common stock........... 427,600 213,200
------------ ------------
Net cash provided by financing activities...... 427,600 213,200
------------ ------------
Increase (decrease) in cash and cash equivalents... (2,338,700) 5,119,900
Cash and cash equivalents, beginning of period..... 10,470,300 6,836,700
------------ ------------
Cash and cash equivalents, end of period........... $ 8,131,600 $ 11,956,600
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-36
<PAGE>
MARSAM PHARMACEUTICALS INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Marsam
Pharmaceuticals Inc. and Subsidiary have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the applicable regulations of the Securities and Exchange Commission.
Accordingly, the accompanying unaudited consolidated financial statements do
not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting only of normal recurring
accruals) considered necessary for a fair presentation have been included. For
further information, reference is made to the financial statements and
footnotes thereto included herein.
The consolidated financial statements include the accounts of Marsam
Pharmaceuticals Inc. and Subsidiary. All intercompany transactions are
eliminated in consolidation. Investments in corporate joint ventures in which
the Company has a 20 to 50 percent ownership are accounted for by the equity
method. Other investments, less than 20 percent owned, are carried at their
original cost. Equity and cost investments are included in other assets in the
consolidated financial statements.
2. INVENTORY
At June 30, 1995, inventory consisted of the following:
<TABLE>
<CAPTION>
JUNE 30, 1995
-------------
<S> <C>
Raw Materials (including components)......................... $ 7,623,200
Work-in-process.............................................. 366,800
Finished goods............................................... 6,881,300
-----------
$14,871,300
===========
</TABLE>
3. SETTLEMENT AGREEMENT WITH GREAT LAKES CHEMICAL CORPORATION
On July 18, 1994, the Company and Great Lakes Chemical Corporation (GLCC)
executed a comprehensive settlement agreement which resolved the outstanding
litigation between them concerning the failure of GLCC to supply the Company
certain raw materials. Under the terms of the settlement, GLCC paid $2.35
million to the Company and agreed to begin supplying the Company with the
inhaled anesthetic raw material commencing upon the availability of production
quantities from its existing facility and continuing for at least five years
after completion of a new, larger production facility. The payment, received
by the Company on July 19, 1994, was ratably recognized as income during the
period of July 1, 1994 through June 30, 1995, the period during which the
Company originally expected to launch the product. For the three and six-month
periods ended June 30, 1995, the Company recognized $587,500 and $1,175,000,
respectively, of the $2.35 million received from GLCC, as other income.
If GLCC fails to deliver agreed quantities of product by specified dates the
Company is entitled to be reimbursed for lost profits associated with the
inability of the Company to market the product. Such payments can be received
until January 15, 1998.
4. INCOME TAXES
The provision for income tax expenses is based on an estimated full year
effective income tax rate. The rate reflects the Company's utilization of
certain federal tax credits and its federal and state net operating loss
carryforwards during 1995. The provision for income tax for the same periods
in 1994 was insignificant due to the availability of federal and state net
operating loss carryforwards.
F-37
<PAGE>
MARSAM PHARMACEUTICALS INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
5. NET INCOME PER SHARE
Net income per share is based on fully diluted weighted average common and
common equivalent shares outstanding for the three and six-month periods ended
June 30, 1995 and 1994.
F-38
<PAGE>
ANNEX A
FORM OF TRANSFEREE LETTER OF REPRESENTATION
Schein Pharmaceutical, Inc.
100 Campus Drive
Florham Park, NJ 07932
Attn: Chief Financial Officer
Ladies and Gentlemen:
This certificate is delivered to request a transfer of $ principal
amount of the Senior Floating Rate Notes Due 2004 (the "Notes") of Schein
Pharmaceutical, Inc. (the "Company").
Upon transfer, the Notes would be registered in the name of the new
beneficial owner as follows:
Name: _________________________________________________________
Address: ______________________________________________________
Taxpayer ID Number: ___________________________________________
The undersigned represents and warrants to you that:
1. We are an institutional "accredited investor" (as defined in Rule
501(a)(1),(2),(3) or (7) under the Securities Act of 1933, as amended (the
"Securities Act")) purchasing for our own account or for the account of such
an institutional "accredited investor" at least $250,000 principal amount of
the Notes, and we are acquiring the Notes not with a view to, or for offer or
sale in connection with, any distribution in violation of the Securities Act.
We have such knowledge and experience in financial and business matters as to
be capable of evaluating the merits and risk of our investment in the Notes
and we invest in or purchase securities similar to the Notes in the normal
course of our business. We and any accounts for which we are acting are each
able to bear the economic risk of our or its investment.
2. We understand that the Notes have not been registered under the
Securities Act and, unless so registered, may not be sold except as permitted
in the following sentence. We agree on our own behalf and on behalf of any
investor account for which we are purchasing Notes to offer, sell or otherwise
transfer such Notes prior to the date which is two years after the later of
the date of original issue and the last date on which the Company or any
affiliate of the Company was the owner of such Notes (or any predecessor
thereto) (the "Resale Restriction Termination Date") only (a) to the Company,
(b) pursuant to a registration statement which has been declared effective
under the Securities Act, (c) in a transaction complying with the requirements
of Rule 144A under the Securities Act, to a person we reasonably believe is a
qualified institutional buyer under Rule 144A (a "QIB") that purchases for its
own account or for the account of a QIB and to whom notice is given that the
transfer is being made in reliance on Rule 144A, (d) pursuant to offers and
sales that occur outside the United States within the meaning of Regulation S
under the Securities Act, (e) to an institutional "accredited investor"
(within the meaning of Rule 501(a)(1),(2),(3), or (7) under the Securities
Act) that is purchasing for its own account or for the account of such an
institutional "accredited investor", in each case in a minimum principal
amount of Notes of $250,000 or (f) pursuant to any other available exemption
from the registration requirements of the Securities Act, subject in each of
the foregoing cases to any requirement of law that the disposition of our
property or the property of such investor account or accounts be at all times
within our or their control and in compliance with any applicable state
securities laws. The foregoing restrictions on resale will not apply
subsequent to the Resale Restriction Termination Date. If any resale or other
transfer of the Notes is proposed to be made pursuant to clause (e) above
prior to the Resale Restriction Termination Date, the transferor shall deliver
a letter from the transferee substantially in the form of this letter to the
Company and the Trustee, which shall provide, among other things, that the
transferee is an institutional "accredited investor" (within the meaning of
Rule 501(a)(1),(2),(3) or (7) under the Securities Act) that is acquiring such
Notes for investment purposes and not for distribution in violation of the
Securities Act. Each purchaser acknowledges that the Company and the Trustee
reserve the right prior to any offer, sale or other transfer prior to the
Resale Termination Date of the Notes pursuant to clause (d),(e) or (f) above
to require the delivery of an opinion of counsel, certifications and/or other
information satisfactory to the Company and the Trustee.
A-1
<PAGE>
3. We agree on our own behalf and on behalf of any investor account for
which we are purchasing the Notes that (i) if it is an insurance company, the
funds to be used to purchase the Notes by it constitute (A) assets of an
insurance company general account maintained by it and the acquisition and
holding of each such Note by such account is exempt under United States
Department of Labor Prohibited Transaction Class Exemption ("PTCE") 95-60 or
(B) assets of an insurance company pooled separate account and the acquisition
and holding of each such Note by such account is exempt under PTCE 90-1, and
(ii) no part of the funds to be used to purchase the Notes to be purchased by
it constitute assets of any plan or employee benefit plan such that the use of
such assets constitutes a non-exempt prohibited transaction under the Employee
Retirement Income Security Act of 1974, as amended ("ERISA") or the Internal
Revenue Code of 1986, as amended (the "Code"). The representation is based
upon the purchaser's determination that a statutory or administrative
exemption is applicable or that the Company and its Affiliates are not parties
in interest or disqualified persons with respect to the purchaser or holder
plan or employee benefit plan. As used in this paragraph, the terms "employee
benefit plan" and "party in interest" shall have the meanings assigned to such
terms in Section 3 of ERISA, the term "Affiliate" shall have the meaning
assigned to such term in Section 407(d)(7) of ERISA and the terms
"disqualified person" and "plan" shall have the meanings assigned to such
terms in Section 4975 of the Code.
TRANSFEREE: _________________________
By: _________________________________
Name:
Title:
A-2
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
No person has been authorized to give any information or to make any
representations other than those contained in this Offering Memorandum, and,
if given or made, such information or representations must not be relied upon
as having been authorized. This Offering Memorandum 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 Offering Memorandum 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>
Offering Memorandum Summary............................................... 1
Risk Factors.............................................................. 9
The Company............................................................... 18
Use of Proceeds........................................................... 18
Capitalization............................................................ 19
Selected Consolidated Financial Data...................................... 20
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 22
Business.................................................................. 30
Management................................................................ 44
Certain Transactions...................................................... 52
Description of Certain Indebtedness....................................... 57
Description of Notes...................................................... 58
Exchange and Registration Rights Agreement................................ 84
Transfer Restrictions..................................................... 87
Certain Federal Income Tax Consequences................................... 90
Plan of Distribution...................................................... 92
Independent Public Accountants............................................ 94
Legal Matters............................................................. 94
Available Information..................................................... 94
Index to Consolidated Financial Statements................................ F-1
Form of Transferee Letter of Representation............................... A-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
$100,000,000
[LOGO] SCHEIN PHARMACEUTICAL
SENIOR FLOATING RATE NOTES
DUE 2004
------------------
OFFERING MEMORANDUM
------------------
SOCIETE GENERALE
SecuritiesCorporation
December 19, 1997
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
EXHIBIT 10.20
EMPLOYMENT AGREEMENT dated September 30, 1994 between SCHEIN
PHARMACEUTICAL, INC., a Delaware corporation (the "Company"), and Martin Sperber
("Sperber").
Sperber is currently Chairman of the Board, Chief Executive Officer and
President of the Company. The Company recognizes that Sperber has made
substantial contributions to the success of the Company over a long period of
time and desires to assure the Company of Sperber's continued service and
Sperber desires to continue to perform services for the Company.
In consideration of the agreements hereinafter set forth, the Company
and Sperber agree as follows:
1. EMPLOYMENT
----------
1.1 Capacity; Duties. The Company hereby employs Sperber as the
----------------
Company's Chairman of the Board, Chief Executive Officer and President. Sperber
shall have supervision over the business and affairs of the Company and its
subsidiaries, shall report and be responsible only to the Board of Directors
of the Company, and shall have powers and authority superior to those of any
other officer or employee of the Company or any of its subsidiaries and any
other person involved with the business and affairs of the Company or any of its
subsidiaries. (While Sperber currently holds certain titles and
responsibilities, it is
<PAGE>
contemplated that, at some point, one or more, but not all, of such titles
and/or responsibilities will with Sperber's consent, which consent may be
withheld in his sole discretion, be conferred by the Board of Directors upon
another person or persons without any diminution in the compensation or benefits
payable to Sperber hereunder, so long as Sperber continues to devote
substantially all of his business time to the Company in at least one of his
current capacities). Sperber accepts such employment and agrees to devote
substantially all of his business time and effort in furtherance of his duties
and responsibilities hereunder. In such connection, Sperber shall not be
required to relocate his residence or perform services which would make the
continuance of his current residence inconvenient to him.
1.2 Employment Period. Sperber's employment shall be for the period
-----------------
commencing on January 1, 1994 and ending on the fifth anniversary thereof (the
"Employment Expiration Date"), unless terminated earlier pursuant to Section 4
hereof (the "Employment Period").
2. COMPENSATION
------------
2.1 Base Salary. As compensation for Sperber's employment hereunder,
-----------
Sperber shall be entitled to receive a base salary (the "Base Salary") at a rate
of $600,000 per annum for the first two years of the Employment Period and
$700,000 per annum for the next three years of the Employment Period, payable
2
<PAGE>
in accordance with the Company's normal payroll practices for its senior
executive officers from time to time in effect.
2.2 Incentive Compensation. Sperber shall be entitled to receive for
----------------------
each year of the Employment Period, in addition to his Base Salary, such
incentive compensation as determined by the Compensation Committee of the Board
of Directors (the "Compensation Committee") based on Sperber's performance
during that year (the "Incentive Compensation"). It is contemplated that the
Compensation Committee will award Incentive Compensation to Sperber in the range
of $250,000 to $500,000 per year, in the absence of extraordinary circumstances,
whether positive or negative, when and as the Company awards incentive bonuses
to its other senior executives; provided that if Sperber's employment is
terminated during any year prior to the Employment Expiration Date, the
Incentive Compensation for such year shall be based on objective criteria, if
any, established by the Compensation Committee; and provided, further, that if
no such objective criteria have been established by the Compensation Committee,
the Incentive Compensation for such year shall be an amount equal to $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 (other than Sperber) in the year Sperber's
employment is terminated less the sum of the minimum cash incentive compensation
contemplated for such executives for such year (as set forth in the cash
incentive compensation range established for such executives, in
3
<PAGE>
the absence of extraordinary circumstances, by the Compensation Committee), by
(ii) the sum of the maximum cash incentive compensation contemplated for such
executives for such year (as set forth in the cash incentive compensation range
established for such executives, in the absence of extraordinary circumstances,
by the Compensation Committee) less the sum of the minimum cash incentive
compensation contemplated for such executives for such year (as set forth in the
cash incentive compensation range established for such executives, in the
absence of extraordinary circumstances, by the Compensation Committee) and (y)
$250,000.
2.3 Expenses. The Company shall promptly reimburse Sperber for all
--------
expenses reasonably incurred by him in performance of his duties under this
Agreement, in accordance with the Company's policies and practices in effect
from time to time.
3. BENEFITS
--------
3.1 Benefits. During the Employment Period, Sperber shall be entitled
--------
to participate, to the extent eligible thereunder, in all benefit and perquisite
plans, policies and programs, in accordance with the terms thereof, as are
generally provided from time to time by the Company for its senior executive
officers and without limiting the foregoing, those benefits and perquisites
listed on Schedule 1 attached hereto; provided, that if such benefit or
--------
perquisite is one that is
4
<PAGE>
generally provided by the Company on the date hereof to its senior executive
officers, Sperber's right to participate in such benefit or perquisite plan
shall continue only as long as such benefit or perquisite is provided to the
senior executive officers of the Company. Unless Sperber's employment shall have
been terminated for Cause (as defined in Section 4.3 hereof), during the period
commencing on the date Sperber ceases to be an employee of the Company and
continuing for the life of Sperber and for the life of his spouse, the Company
shall continue the participation of Sperber and his spouse in all health,
medical and dental benefit plans, policies and programs in effect from time to
time with respect to the senior executive officers of the Company generally (at
the same levels and at the same premium cost, if any, to the senior executive
officers of the Company generally); provided that, if Sperber's or his spouse's
continued participation thereunder is not possible under the general terms and
provisions thereof, the Company shall provide such benefits at such levels to
Sperber and his spouse either by obtaining other insurance or by self-insuring
such amounts and shall make such additional payments to Sperber and his
spouse as may be necessary to put the recipient in the same after-tax position
as if such benefits were provided under such plans, policies and programs, net
of any payments or benefits either of them shall receive with respect to health,
medical and dental costs other than pursuant to this Section 3.1.
5
<PAGE>
3.2 Supplemental Retirement Plan. Commencing on the first day of the
----------------------------
month following the month in which Sperber is no longer employed by the Company
on a full-time basis for any reason (including death) other than a termination
for Cause, or such later date as Sperber (or his Spouse, if he is not then
living) shall determine, and continuing monthly thereafter during Sperber's (and
upon Sperber's death, his Spouse's) lifetime, the Company shall pay to Sperber
(and upon Sperber's death, his Spouse if she shall then be living) an amount
equal to 45% of Average Monthly Cash Compensation (as defined below), reduced by
(i) the hypothetical monthly amount that would be receivable by Sperber under
the Company's Qualified Retirement Plans (as defined below) if Sperber's
benefits thereunder were being paid as a straight life annuity commencing at age
65, and (ii) the hypothetical monthly and primary social security that would be
received by Sperber if he commenced social security at age 65. Notwithstanding
the foregoing, if Sperber is married at the time of commencement of the
aforesaid benefit, such benefit (but not including the reduction in the benefit
attributable to amounts to be received under the Company's Qualified Retirement
Plans) shall be actuaria11y adjusted until such time as Sperber shall no longer
be married to his Spouse (including by reason of his Spouse's death) to take
into account the hypothetical payment of a reduced joint-and-50% annuity form of
benefit to Sperber and his Spouse rather than the aforesaid straight life
annuity form of benefit. For purposes of this Section, "Average Monthly Cash
Compensation" shall mean Sperber's Average Total Cash
6
<PAGE>
Compensation divided by 12; "Average Total Cash Compensation" shall mean the
average of the highest three of the last five full fiscal years of Total Cash
Compensation (as defined below) occurring prior to the date Sperber's employment
is terminated; "Total Cash Compensation" shall mean (y) for any full fiscal year
during the Employment Period, the sum of Sperber's Base Salary and Incentive
Compensation earned in respect of such fiscal year, or (z) for any full fiscal
year occurring prior to the Employment Period, the sum of Sperber's aggregate
base salary and incentive compensation earned in respect of such fiscal year as
reflected on the Company's books and records; "Qualified Retirement Plans" shall
mean any plan which the Company sponsors or in which it participates and which
is qualified under Section 401(a) of the Internal Revenue Code of 1986, as
amended (the "Code"), provided that if the benefit under such plan includes
amounts attributable to Sperber's salary reduction or after-tax contribution to
such plan, the amounts attributable to such contributions and earnings thereon
shall be disregarded in determining the monthly amount attributable to such
plan, and "Spouse" shall mean Sperber's spouse, if any, to whom he is married at
the time of commencement of the benefits described in this Section 3.2. In
converting the benefits into a life annuity form or spousal benefit, the
calculations shall be made at the time of commencement of benefits and not
recalculated (unless and until Sperber shall no longer be married to his Spouse
(including by reason of his Spouse's death)), and an interest rate equal to the
Pension Benefit Guaranty Corporation interest rate for immediate
7
<PAGE>
annuities in effect on the first day of the calendar year in which benefits are
to commence shall be used and the 83 IA Male mortality table shall be used. It
is expressly acknowledged and agreed that the determination of the amounts
payable to Sperber and his Spouse under this Section 3.2 shall not in any way
cause Sperber or his Spouse to elect to take monthly distributions from the
Company's Qualified Retirement Plans or any other payment form, and any and all
permissible payment elections shall be available to him and his Spouse.
4. TERMINATION
-----------
4.1 Termination of Employment. Sperber's employment shall terminate
-------------------------
prior to the Employment Expiration Date only (a) upon Sperber's death; (b) by
action of the Board of Directors with or without Cause or due to Sperber's
Disability (as defined in Section 4.2 hereof); (c) by Sperber following a
material breach of this Agreement or the Sperber Option Agreement by the Company
which is not cured within 30 days after notice from Sperber thereof; or (d) by
Sperber upon 30 days prior written notice to the Company.
4.2 Disability. If, by reason of physical or mental disability,
----------
Sperber is unable to carry out his duties for more than 180 days in any twelve-
month period ("Disability"), the Company may terminate Sperber's employment
hereunder. During any period of Disability prior to such termination, Sperber
shall continue to receive all compensation and other benefits provided
8
<PAGE>
herein as if he had not been disabled at the time, in the amounts and in the
manner provided herein, provided that the Company shall be entitled to a credit
with regard to the amount, if any, paid to Sperber during such period under any
long term or other disability plan maintained by the Company for the benefit of
Sperber.
4.3 Cause. For purposes of this Agreement, the term "Cause" shall be
-----
limited to any action by Sperber during the Employment Period (i) involving
willful malfeasance having a material adverse effect on the Company (other than
his voluntary resignation pursuant to Sections 4.1(c) or 4.1(d) hereof), or (ii)
constituting a material breach of this Agreement which is not cured within 30
days after notice from the Company thereof.
5. CONSEQUENCES OF TERMINATION
---------------------------
5.1 Death. If Sperber's employment hereunder is terminated by reason
-----
of Sperber's death, Sperber's estate shall be paid those obligations accrued
hereunder at the date of his death, consisting of, for this purpose, only (a)
Sperber's unpaid Base Salary through the date of termination, (b) any deferred
compensation earned (together with any accrued earnings thereon) but not yet
paid, (c) any Incentive Compensation awarded to Sperber but not yet paid for the
year preceding the year of termination, (d) any Incentive Compensation for the
year of termination as determined in accordance with Section 2.2 hereof, (e)
any accrued vacation pay, and (f) any other amounts or
9
<PAGE>
benefits owing to Sperber or his beneficiaries under the then applicable benefit
plans, policies and programs of the Company. (Such amounts specified in clauses
(a) through (f) above are hereinafter referred to as "Accrued Obligations".)
Unless otherwise previously directed by Sperber (or, in the case of any benefit
plan qualified under Section 401(a) of the Code (a "Qualified Plan"), as may be
required by such Qualified Plan), all Accrued Obligations shall be paid, to the
extent such obligations are able to be paid in a lump sum, to Sperber's estate
or designated beneficiaries, as the case may be, in a lump sum in cash within 30
days after the date of Sperber's death, and otherwise, in accordance with the
terms of the relevant plan or applicable law. Sperber shall also be entitled to
all rights and benefits, to the extent not duplicative of the Accrued
Obligations, under benefit and incentive plans in accordance with the
respective terms of such plans. Nothing in this Section 5.1 shall be deemed to
limit the right of Sperber's spouse to receive the benefits referred to in
Sections 3.1 and 3.2 hereof.
5.2 Disability. If Sperber's employment is terminated by reason of
----------
Sperber's Disability, unless otherwise directed by Sperber, Sperber shall be
paid all Accrued Obligations, to the extent such obligations are able to be paid
in a lump sum, in a lump sum in cash within 30 days after the date of
termination due to Sperber's Disability, and otherwise, in accordance with the
terms of the relevant plan or applicable law. Nothing in this Section 5.2 shall
be deemed to limit Sperber's and his spouse's
10
<PAGE>
right to receive the benefits referred to in Sections 3.1 and 3.2 hereof.
5.3 Termination for Cause. If Sperber's employment with the Company is
---------------------
terminated for Cause, Sperber shall receive only Accrued Obligations (other than
the obligation specified in clause (d) of Section 5.1 hereof) at the date of
termination, to be paid to Sperber, if able to be paid in a lump sum, in a lump
sum in cash within 30 days after the date of termination, and otherwise, in
accordance with the terms of the relevant plan or applicable law. Benefits and
rights under any benefit or incentive plan shall be paid or retained in
accordance with the terms of such plan.
5.4 Company Termination Without Cause. If Sperber's employment with the
---------------------------------
Company is terminated pursuant to Section 4.1(c) hereof or by the Company
without Cause, the Company shall pay or provide, as the case may be, the
following payments and benefits upon such termination:
(a) The Company shall pay to Sperber, if able to be paid in a lump sum,
in a lump sum in cash within thirty days after the date of termination, and
otherwise, in accordance with the terms of the relevant plan or applicable law,
any Accrued Obligations at the date of termination.
(b) The Company shall pay to Sperber, as severance pay, the Base Salary
payable to Sperber from the date of
11
<PAGE>
termination through the Employment Expiration Date, payable when and as the
Company pays salary to its senior executives.
(c) The Company shall pay to Sperber, as severance pay, when and as the
Company pays salary to its senior executives an amount equal to the product of
(i) a fraction, the numerator of which is the Incentive Compensation earned by
Sperber for the last full year of employment 1mmediately prior to termination,
as determined in accordance with Section 2.2 hereof, and the denominator of
which is 365 and (ii) the number of days from the date of termination
through the Employment Expiration Date; provided, however, that the maximum
-------- -------
amount that the Company shall pay to Sperber under this Section 5.4(c) is the
product of (I) the amount referred to in clause (i) above and (II) 730.
(d) Nothing contained in this Section 5.4 shall be deemed to limit in
any way Sperber's and his spouse's right to receive the benefits referred to in
Sections 3.1 and 3.2 hereof.
5.5 Sperber's Voluntary Resignation. If Sperber voluntarily
--------------------------------
terminates his employment with the Company prior to the Employment Expiration
Date other than pursuant to Section 4.1(c) hereof, the Company shall pay or
provide, as the case may be, the following payments and benefits upon such
termination:
(a) The Company shall pay to Sperber, if able to be paid in a lump sum,
in a lump sum in cash within thirty days after the date of termination, and
otherwise, in accordance with
12
<PAGE>
the terms of the relevant plan or applicable law, any Accrued Obligations at
the date of termination.
(b) The Company shall pay to Sperber, as severance pay, if any, a
lump sum in an amount determined by the Compensation Committee of the Board of
Directors.
(c) Nothing contained in this Section 5.5 shall be deemed to limit
in any way Sperber's and his spouse's right to receive the benefits referred
to in Sections 3.1 and 3.2 hereof.
6. CONFIDENTIAL INFORMATION, NON-COMPETITION, ETC.
-----------------------------------------------
(a) Sperber shall not, without the prior written consent of the Company,
communicate or divulge (other than in the regular course of the Company's
business) to anyone other than the Company, its subsidiaries and those
designated by it, any confidential information, knowledge or data relating to
the Company or any of its subsidiaries or affiliates, or to any of their
respective businesses, obtained by Sperber before or during the Employment
Period from the Company or any of its subsidiaries, except to the extent (A)
Sperber determines in good faith that it is in the best interest of the Company
to do so, (B) Sperber is compelled pursuant to an order of a court or other body
having jurisdiction over such matter to do so (in which case the Company shall
be given prompt notice of such intention to divulge and an opportunity to object
to such disclosure), or (C) such information, knowledge or data is public
knowledge or
13
<PAGE>
generally known within the Company's industry other than through improper
disclosure by Sperber.
(b) Until the second anniversary of the date on which the Company makes
its final Base Salary payment to Sperber pursuant to this Agreement, Sperber
will not (other than on behalf of the Company) directly or indirectly:
(i) as an individual proprietor, partner, stockholder, officer,
employee, director, joint venturer, investor, lender, consultant or in
any other capacity whatsoever (other than as the holder of not more than
three percent of the total outstanding stock of a publicly held
company), engage in the business of developing, producing, marketing or
selling products developed or being developed, produced, marketed or
sold by the Company while Sperber was employed or retained as consultant
by the Company; or
(ii) recruit, solicit or induce, or attempt to induce, any
employee or employees of the Company (other than his personal secretary)
to terminate their employment with, or otherwise cease their
relationship with, the Company.
(c) If any restriction set forth in Section 6(b) hereof is found by any
court of competent jurisdiction or arbitrator to be unenforceable because it
extends for too long a period of time or over too great a range of activities or
in too broad a geographic area, it shall be interpreted to extend only
14
<PAGE>
over the maximum period of time, range or activities or geographic area as to
which it may be enforceable.
(d) The restrictions contained in Sections 6(a) and 6(b) hereof are
necessary for the protection of the business and goodwill of the Company and are
considered by Sperber to be reasonable to such purpose. Sperber agrees that any
breach of Sections 6(a) or 6(b) hereof will cause the Company substantial and
irreparable damage and therefore, in the event of any such breach, in addition
to such other remedies which may be available, the Company shall have the right
to seek specific performance and injunctive relief. In no event shall an
asserted violation of the provisions of Sections 6(a) or 6(b) hereof constitute
a basis for deferring or withholding any amounts otherwise payable to Sperber
under this Agreement.
(e) Upon termination of Sperber's employment with the Company, Sperber
shall promptly deliver to the Company all records, files, memoranda, notes,
data, reports, price lists, customer lists, plans, computer programs,
software, software documentation, laboratory and research notebooks and other
documents (and all copies or reproductions of such materials in his possession
or control) belonging to the Company.
7. NO MITIGATION; NO SET-OFF
-------------------------
The Company agrees that if Sperber's employment with the Company is
terminated (including, without limitation, as provided in Section 4.1(c) hereof)
prior to the Employment
15
<PAGE>
Expiration Date for any reason whatsoever, Sperber is not required to seek other
employment or to attempt in any way to reduce any amounts payable to Sperber by
the Company pursuant to this Agreement. Further, the amount of any payment
provided for in this Agreement shall not be reduced by any compensation earned
by Sperber as the result of employment by another employer or otherwise; and the
amount of any benefit (other than the health, medical and dental benefits
provided for in Section 3.1 hereof) provided for in this Agreement shall not be
reduced by any benefit provided to Sperber as the result of employment by
another employer or otherwise. The Company's obligations to make the payments
provided for in this Agreement and otherwise to perform its obligations
hereunder or under any other agreement shall not be affected by any
circumstances, including without limitation any set-off, counterclaim,
recoupment, defense or other right which the Company or any other person may
have against Sperber.
8. LEGAL FEES
----------
If Sperber sues to collect or negotiates and reaches a settlement
for any part or all of the payments provided for hereunder (or otherwise
successfully enforces the terms of this Agreement) by or through a lawyer or
lawyers, the Company shall advance all reasonable costs of such collection or
enforcement, including reasonable legal fees and disbursements and other fees
and expenses which Sperber may incur, promptly after submission of
documentation reasonably acceptable to the Company in respect
16
<PAGE>
of such costs and expenses. All amounts paid by the Company shall promptly be
refunded to the Company if and when a court of competent jurisdiction issues an
unappealable order to the effect that the Company is entitled to have such sums
refunded.
9. SUCCESSORS; BINDING AGREEMENT
-----------------------------
(a) The Company shall require any successor (whether direct or indirect,
by purchase, merger, consolidation or otherwise) to all or substantially all of
the business or assets of the Company to expressly assume and agree in writing
to perform this Agreement in the same manner and to the same extent that the
Company would be required to perform it if no such succession had taken place,
provided that Sperber need only be the senior executive officer with the
authority, powers and responsibilities set forth in Section 1.1 hereof with
respect to the subsidiary or subdivision which operates the business of the
Company as it exists on the date of such business combination. Failure of the
Company to obtain such express assumption and agreement at or prior to the
effectiveness of any such succession shall be a breach of this Agreement and
shall entitle Sperber to compensation and benefits from the Company in the same
amount and on the same terms to which Sperber would be entitled hereunder if the
Company terminated his employment without Cause, except that for purposes of
implementing the foregoing, the date on which any such succession becomes
effective shall be deemed the date of termination. As used in this Agreement,
"Company" shall mean the Company as hereinbefore defined and any successor to
its business
17
<PAGE>
or assets as aforesaid which assumes and agrees to perform this Agreement by
operation of law, or otherwise.
(b) The Company may not assign this Agreement except in connection with,
and to the acquiror of, all or substantially all of the business or assets of
the Company, provided such acquiror expressly assumes and agrees in writing to
perform this Agreement as provided in Section 9(a) hereof.
(c) This Agreement shall inure to the benefit of and be enforceable by
Sperber and his personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees. If Sperber should die
while any amount would still be payable to him hereunder had he continued to
live, a11 such amounts, unless otherwise provided herein, shall be paid in
accordance with the terms of this Agreement to his devisee, legatee or other
designee or, if there is not such designee, to his estate.
(d) The parties agree that Sperber's current spouse is a third party
beneficiary of the provisions of Sections 3.1, 3.2 and Article 5 hereof, with
the right to enforce such provisions as fully as if she were a party to this
Agreement.
10. MISCELLANEOUS
-------------
(a) Any notices or other communications required or permitted to be
given hereunder shall be in writing and shall be deemed to have been duly made
or given when hand delivered, one
18
<PAGE>
business day after being transmitted by telecopier (confirmed by mail) or sent
by overnight courier against receipt, or five days after being mailed by
registered or certified mail, postage prepaid, return receipt requested to the
party to whom such communication is given at the address set forth below, which
address may be changed by notice given in accordance with this Section:
If to the Company:
Schein Pharmaceutical, Inc.
100 Campus Drive
Florham, N.J. 07932
Attention: Corporate Secretary
If to Sperber:
Martin Sperber
6 Casper Court
Florham Park, N.J. 07932
(b) If any provision of this Agreement shall be declared to be invalid
or unenforceable, in whole or in part, such invalidity or unenforceability shall
not affect the remaining provisions hereof which shall remain in full force and
effect.
(c) No provision of this Agreement may be modified, waived or discharged
orally, but only by a waiver, modification or discharge in writing signed by
Sperber and such officer as may be designated by the Board. No waiver by
either party hereto at any time of any breach by the other party hereto of, or
in compliance with, any condition or provision of this Agreement to be performed
by such other party shall be deemed a waiver of
19
<PAGE>
similar or dissimilar provisions or conditions at the time or at any prior or
subsequent time. No agreements or representations, oral or otherwise, express or
implied, with respect to the subject matter hereof have been made by either
party which are not expressly set forth in this Agreement.
(d) This Agreement represents the entire agreement of the parties and
shall supersede any and all previous contracts, arrangements or understandings
between the Company and Sperber with respect to the subject matter hereof.
(e) This Agreement shall be construed, interpreted, and governed in
accordance with the laws of New York, without reference to rules relating to
conflicts of law.
(f) The section headings herein are for the purpose of convenience only
and are not intended to define or limit the contents of any section.
(g) The parties may sign this Agreement in counterparts, all of which
shall be considered one and the same instrument.
20
<PAGE>
IN WITNESS WHEREOF, the parties hereto have set their hands as of the
day and year first above written.
SCHEIN PHARMACEUTICAL, INC.
By: /s/
-------------------------------
Authorized Officer
/s/ Martin Sperber
----------------------------------
MARTIN SPERBER
21
<PAGE>
AMENDMENT NO. 1
TO THE
EMPLOYMENT AGREEMENT DATED
SEPTEMBER 30, 1994 BETWEEN
SCHEIN PHARMACEUTICAL, INC. AND MARTIN SPERBER
Reference is made to the Employment Agreement dated September 30, 1994 between
Schein Pharmaceutical, Inc. and Martin Sperber (the "Employment Agreement").
Capitalized terms not otherwise defined herein shall have the meaning ascribed
thereto in the Employment Agreement.
1. Section 1.2 of the Employment Agreement is amended to read in its
entirety as follows:
"1.2 Employment Period. Sperber's employment shall be for the
-----------------
period commencing on January 1, 1994 and ending on January 1, 2000 (the
"Employment Expiration Date"), unless terminated earlier pursuant to Section 4
hereof (the "Employment Period")."
2. In Section 3.2 of the Employment Agreement the definition of "Average
Total Cash Compensation" shall be amended to read as follows:
'"Average Total Cash Compensation" shall mean the average of the highest
three of the last six full fiscal years of Total Cash Compensation (as defined
below) occurring prior to the date Sperber's employment is terminated;'
Except as amended hereby, the Employment Agreement shall continue in full force
and effect.
Dated as of March 6, 1998
SCHEIN PHARMACEUTICAL, INC.
/s/ Martin Sperber
- ------------------------- BY: Paul Feuerman
Martin Sperber ------------------------
Authorized Officer
<PAGE>
EXHIBIT 10.44
CO-PROMOTION AGREEMENT
BETWEEN
MILES INC.
AND
SCHEIN PHARMACEUTICAL, INC.
<PAGE>
Co-Promotion Agreement
This Agreement is made and effective as of the 1st day of August, 1994,
(hereinafter referred to as the "Effective Date"), by and between Miles Inc., a
corporation of the State of Indiana (hereinafter"Miles") and Schein
Pharmaceutical, Inc. a corporation of the State of Delaware
(hereinafter"Schein").
WHEREAS, Schein is the holder of an NDA covering a pharmaceutical product
marketed by Schein under the brand name INFeD(R) (iron dextran injection, U.S.P.
50 mg/ml) (hereinafter "Product") indicated for treating iron deficiency, and
Schein desires to enhance market share of Product in the United States
pharmaceutical market place; and
WHEREAS, Miles has considerable knowledge in promoting, detailing and marketing
pharmaceutical products in the United States and has in place a large, well-
experienced detailing force; and
WHEREAS, Miles and Schein believe that a joint promotion and detailing
arrangement regarding Product would be desirable and fully compatible with each
party's business objectives.
NOW, THEREFORE, for and in consideration of the mutual covenants contained
herein, Miles and Schein hereby agree as follows:
Article 1: Definitions
- ----------------------
1.01 "Affiliate" shall mean:
(a) An organization which owns, directly or indirectly, a controlling
interest in Miles or Schein by stock ownership or otherwise; or
(b) An organization having its majority ownership directly or
indirectly common to the majority ownership of Miles or Schein.
1.02 "Product" shall mean iron dextran injectable.
1.03 "United States" shall mean the United States of America.
-1-
<PAGE>
1.04 "Net Sales" shall mean *** ******* ***** ****** ** *********** *****
******* ** ****** **** *** ********* ******** ******** ** ************
******* ****** *** *** *********** **** ******* ** *** ******* ** ***
****** ******* **** ***** ********** ************ ****** **************
***** ******* ** ********** ********* ***** ******* ** ******* ** *****
************ ******* ** ******** ** **** ******** ** *******
************* ***************
1.05 "Threshold Value" with respect to a Detailing Year shall mean the
dollar amount specified for such year under Article lil.
1.06 "Joint Detailing Years~' shall mean the period of time commencing on
the Effective Date of this Agreement and ending on the last day of the
Third Detailing Year, subject to extension or termination in accordance
with Section 4.12 and Article VIII. A "Detailing Year" shall be the
twelve (12) month period commencing on each August 1st of the Term.
1.07 "Promotional Costs" shall mean all out-of-pocket costs incurred by
Schein in the marketing and promotion of the Product, including without
limitation in the development and production of promotional materials,
but excluding costs associated with sales representatives and
administrative overhead.
1.08 "Standard Cost" shall mean ******** *** *** ************ *************
******** ****** ********* *** ** ********** **** **** **********
******* *** ********* ******** ********** ********** ************
******** ************ *** ** ********
1.09 "Confidential Information" shall mean information which relates to the
Product, including financial statements, costs and expense data,
production data, trade secrets, secret processes and formulae,
marketing and consumer data or any other information which is not
generally ascertainable from public or published information,
regardless of whether such information was provided pursuant to the
terms of this Agreement, by request of the other party or in any other
manner. Schein reserves the right to limit the disclosure to Miles of
any Confidential Information which, in the sole opinion of Schein. is
not necessary to achieve the purposes of this Agreement.
1.10 In the terms defined herein, the singular shall include the plural and
vice versa.
---- -----
-2-
<PAGE>
Article II: Grants and Obligations
- ----------------------------------
2.01 Schein hereby grants to Miles during the Joint Detailing Years the
right to promote and detail the Product in the United States jointly
with Schein in accordance with the provisions of this Agreement.
2.02 During the Joint Detailing Years, Schein shall not authorize, or grant
the right to, any third party to detail the Product in the United
States.
(a) During the Joint Detailing Years, Miles will be diligent in its
efforts consistent with its customary business practices and legal
requirements to deploy its sales force to promote and detail
throughout the United States the Product in such manner and with
such expedition as Miles itself would have adopted in promoting
and detailing a pharmaceutical product of its own invention.
During the Joint Detailing Years and for a period of one (1) year
thereafter, Miles will not promote or detail any pharmaceutical
product with indications similar to those of the Product.
(b) The Product will be presented in a primary position in at least
fifty percent (50%) of Miles' sales representative calls to
dialysis centers and nephrologists and in no less than a secondary
position in the remainder of such calls.
2.03 During the Joint Detailing Years, Schein will be diligent in its
efforts consistent with its customary business practices and legal
requirements to promote and market the Product throughout the United
States. Notwithstanding the foregoing, the parties acknowledge that it
is Schein's present intention that Schein's brand sales representatives
will continue to promote the Product, and Schein will reassign its
other sales representatives to promote products other than the Product.
-3-
<PAGE>
Article III: Payments
- ---------------------
3.01 (a) Schein shall pay to Miles in each Detailing Year amounts equal to
***** ******* ***** of the Incremental Net Profit.
Incremental Net Profit is calculated as:
*** ***** ** ******* **** ********* ***** **** ************ *****
******* *** *** ********** ********* **** **** *** *** ** ***
******** **** ********** ** *** ****** ** ***** ** *******
********** *** *********** ***** ****** *** **** ** ****** ***
************ ***** ***** ** *** ******* **** ** *** ***********
***** ****** *** ***** *** ******* ** **** ** *********** *****
**** **** *********** ******
*** ** ** ***** ** ******* *******
(b) The Threshold Value for each Detailing Year shall be as follows:
********* **** ********* ***** **** ***********
************** *************** ****************
***** ******** *****
************** *****
***** *********** **********
****** ********** *********
***** ********** *********
(c) Within sixty (60) days prior to the start of the second Detailing
Year and each Detailing Year thereafter, Schein and Miles will
meet for the purposes of reviewing the Threshold Value (and
applicable Base Promotional Costs) for the coming Detailing Year
and negotiating in good faith any appropriate adjustment to the
Threshold Value (and applicable Base Promotional Costs) for
reasons including, but not limited to, the effect of a competitive
product in the market, and additional indications or delivery
systems for the Product.
(d) Within thirty (30) days after the close of each quarter during
each Detailing Year, Schein shall remit to Miles all payments
accruing under this Article during such quarter. The payment shall
be accompanied by an accounting reporting for such quarter Net
Sales both as to aggregate quantities and dollar amounts of such
Net Sales of the Product subject to payments hereunder for such
quarter.
*redacted pursuant to confidential treatment request.
-4-
<PAGE>
Article IV: Cooperation. Rights and Responsibilities
- ----------------------------------------------------
It is among the objectives of the parties, to jointly promote and detail the
Product in the United States in the most effective and efficient fashion during
the Joint Detailing Years. To achieve this objective, the parties agree, during
the Joint Detailing Years, as follows:
4.01 The parties shall each appoint an authorized representative
("Coordinator") between whom communications will be directed. Each
party will notify the other as to the name of the individual so
appointed. Each party may replace its Coordinator at any time, upon
written notice to the other party.
4.02 (a) The Coordinators shall establish a team ("Team") directed by the
Coordinators and consisting of representatives of each party which
will meet from time to time, at mutually agreeable times and
locations, to discuss and coordinate the joint promotion and
detailing of the Product in the United States and the strategies
and programs that should be developed to maximize Net Sales of the
Product. Illustratively, the Team shall:
(i) guide all continuing joint promotion and detailing efforts
with respect to the Product in the United States. Schein will
have the final authority and responsibility, with the
cooperation and assistance of Miles, for developing
detailing, marketing and promotional strategies and other
matters with respect to the Product, and Schein shall have
the final right of approval for all such strategies and other
matters.
(b) From time to time, but in no event less than once a year, the Team
shall develop and formulate joint marketing plans for specified
periods (collectively the "Marketing Plan") which shall set forth
detailing, promotion and marketing strategies relating to the
Product. The marketing planning process shall be a joint effort
under the leadership and authority of Schein. The provisions of
the Marketing Plan shall be agreed to by the Coordinators, and if
the Coordinators cannot agree, then the matters in dispute shall
be referred to the President of Miles Pharmaceutical Division and
the Chairman of Schein. Schein, however, shall have the.final
responsibility for, and control over, and the final right of
approval for, the development and content of the Marketing Plan.
Schein retains the right to determine in its discretion the
appropriate manner and timing of execution of all marketing and
promotional plans and strategies, including without limitation the
selection of ad agencies, the development and production of
promotional materials.
-5-
<PAGE>
(c) A party shall have the right to comment upon and make
recommendations to the other party regarding the other party's
activities under this Agreement, which recommendations the-_ other
party shall thoroughly evaluate and consider.
(d) Each party shall bear its own costs associated with its
participation in the Team and associated with its detailing,
marketing and promotional activities under this Agreement, except
as provided in Section 3.01.
4.03 (a) During the Joint Detailing Years and subject to any other
provision of this Agreement, each party will provide the other
with all information which the disclosing party deems significant
and relevant to the detailing and promotion of the Product within
a reasonable time after such information becomes known to the
party, provided such information is not received under a secrecy
obligation. Within thirty (30) days after the close of each
quarter during each Detailing Year, Miles will provide to Schein a
report of Miles Product detail call activity by medical specialty
for the quarter then ended, along with a summary of feedback from
Miles sales representatives concerning their detailing efforts for
that quarter.
(b) During the Joint Detailing Years, each party shall promptly notify
the other party of all information coming into its possession
concerning unexpected side effects, injury, toxicity or
sensitivity reactions as provided in Appendix I hereto.
4.04 Schein shall retain all proprietary and property interests in the
Product until the point of sale and in all supporting sales and
promotional material. Miles will not have nor represent that it has any
control or proprietary or property interests in the Product or in any
sales or promotional material. Nothing contained herein shall be deemed
to grant Miles, either expressly or impliedly, a license or other right
or interest in any patent, trademark or other similar property of
Sch,Shein or its Affiliates except as may be necessary for Miles to
promote and detail the Product as provided in this Agreement. Miles
acknowledges that Schein shall retain all copyrights in and to all
sales, promotional and training materials created or used in connection
with the promotion of the Product.
4.05 (a) Miles shall not be required to distribute any sales and
promotional material which:
-6-
<PAGE>
(i) does not present Product to the Medical and paramedical
communities and to the trade as joining with Schein in the
detailing and promotion of the Product; and
(ii) does not mention the Product; or
(iii) includes reference to another Schein pharmaceutical in
addition to the Product. At Schein's request and at Miles'
sole option, Miles may distribute sales and promotion
material of the type identified in this subsection (a).
Should Miles elect to distribute such material, it shall be
supplied to Miles by Schein free of all charge. Schein shall
not be require to distribute any sales and promotion
material which contains a reference:
(1) to Miles (other than in connection with the joint
detailing and promotion of the Product in accordance
with this Agreement); or
(2) any Miles pharmaceutical. All materials distributed by
Schein promoting the Product during the Joint Detailing
years and intended to be part of the co-promotion
arrangement covered by this Agreement shall mention
Miles as the joint promoter of the Product.
(b) During the Joint Detailing Years, Schein shall also provide Miles,
at Schein's cost, with reasonable quantities of training materials
which have been created and developed by Schein relating to the
Product. Miles shall have the responsibility for, and control
over, the manner in which it trains its sales force with respect
to the Product.
4.06 In implementing the obligations contained in Article II, each party
shall have sole discretion as to the manner (which shall not be
inconsistent with the Marketing Plan, and provided that Miles will not
utilize any promotional materials not created by Schein) in which it
promotes and details (including any expenditure of funds in connection
therewith) the Product in the United States. Each party shall bear its
own costs incurred in the performance of any obligations hereunder,
subject to the provisions of Section 3.01. Neither party shall have any
responsibility for the hiring, firing or compensation of the other
party's employees or for any employee benefits. No employee or
representative of a party shall have any authority to bind or obligate
the other party to this Agreement for any sum or in any manner
whatsoever, or to create or impose any contractual or other liability
on the other party without said party's authorized written approval.
For all
-7-
<PAGE>
purposes, and notwithstanding any other provisions of this Agreement to
the contrary Miles' legal relationship under this Agreement to Schein
shall be that of independent contractor. Each party shall be
responsible for ensuring that its promotional activities under this
Agreement are in full compliance with all applicable laws, rules,
regulations and orders, including without limitation applicable FDA
regulations, and are consistent with the Product approval and package
insert.
4.07 (a) Schein shall use commercially reasonable efforts consistent with
Schein's overall business strategy, as determined by Schein, to
insure that sufficient stock of the Product will be available in
its inventory to promptly fill orders from the trade in the Joint
Detailing Years for sales of the Product in the United States.
All orders for Products are subject to acceptance by Schein, in
whole or in part.
(b) Prior to or upon the signing of this Agreement and at least
thirty (30) days prior to each calendar quarter during the Joint
Detailing Years, Miles and Schein will confer to establish a
forecast of anticipated sales of Product by month for the
succeeding twelve (12) month period. Such forecasts shall be made
to assist Schein in planning its Product production and shall be
non-binding.
4.08 (a) During the Joint Detailing Years, Miles and Schein will be
presented and described, by each party hereto, to the medical and
paramedical communities and to the trade as joining in the
detailing and promotion of the Product, and all written
information (including, but not limited to, journal
advertisements, direct mail, sales pieces and other promotional
material) and, to the extent practicable, all oral information,
disseminated or presented, respectively, to such communities and
trade regarding the detailing and promoting of the Product in the
United States will state this arrangement, if such information is
intended to be part of the co-promotion arrangement covered by
this Agreement. Neither party shall distribute or have
distributed any such information. ,, which bears the name of the
other without the prior written approval of the other, which
approval shall not be unreasonably withheld. Nothing herein
contained shall require the Miles name or logo to appear on the
Product's label, container label or package insert.
(b) Each party, at its option, may issue press releases or other
public announcements relating to the Product or the arrangement
contemplated by this Agreement, provided, however, that;
-8-
<PAGE>
(i) neither party shall issue a press release or public
announcement which has, as a major focus, either the joint
detailing and promotion of the Product in the United States
or such arrangement, without the prior written approval of
the other party, which approval shall not be unreasonably
withheld; and
(ii) all other press releases and public announcements will
describe the Product and the arrangement contemplated by
this Agreement in a manner consistent with those releases
and announcements previously approved by the other party.
4.09 (a) Schein shall have the sole right and responsibility for, and shall
bear all costs related to, obtaining and maintaining the
authorization and/or ability to market a pharmaceutical product in
the United States including, without limitation, the following:
(1) Responding to Product and medical complaints relating to the
Product. Miles agrees that it shall refer any such complaints
which it receives to Schein in accordance with Appendix I
hereto:
(2) All Product returns must be authorized by Schein. Miles shall
not solicit or accept any returns of Product and shall advise
the customer that Product is to be returned to Schein. If
despite the foregoing any Product is returned to Miles, then
it shall be shipped to Schein's nearest distribution facility
or, at Schein's option, may be handled through the One Box
return system. Costs of returns are to be included in the
computation of Net Sales as provided in Paragraph 1.04.
(3) Handling all recalls of the Product. At Schein's request and
Miles' option, Miles will assist Schein in receiving the
recalled Product and any direct documented costs incurred by
Miles with respect to participating in such recall shall be
reimbursed by Schein;
(4) Communicating with any governmental agencies and satisfying
their requirements regarding the authorization and/or
continued authorization to market the Product in commercial
quantities in the United States; provided, however, that
Miles shall be able to communicate with such agencies
regarding the Product if:
-9-
<PAGE>
(i) in the reasonable opinion of Miles' counsel, such
communication is necessary to comply with the terms of
this Agreement or the requirements of any law,
governmental order or regulation; and
(ii) Miles, if practical, made a request of such agency to
communicate with Schein instead, and such agency
refused such request; but in any such event, unless in
the reasonable opinion of Miles' counsel, there is a
legal prohibition against doing so, Schein shall be
immediately notified of such agency's request and of
Miles' intention to make such communication and Schein
shall be permitted to accompany Miles to any meeting
with such agency, take part in any such communications
and receive copies of all such communications provided
in no event shall Miles take any action which would
impose any liability or obligation on Schein, without
Schein's prior written consent; and
(5) Handling product distribution, inventory and receivables;
except that the costs thereof shall be governed by Section
3.01 (a).
(b) Each party shall respond to medical questions or inquiries
relating to the Product directed to such party. Within a
reasonable time from the date of this Agreement, but in no event
later than the Effective Date, Schein shall provide Miles with all
reasonably necessary information which would enable Miles to
respond properly and promptly to any such questions or inquiries.
Schein shall use its best efforts to keep such information
current. Schein and Miles shall coordinate responses to
anticipated inquiries and questions. Each party shall be
responsible for ensuring that its responses are in full compliance
with all applicable laws, rules, regulations and orders, including
without limitation applicable FDA regulations, and are consistent
with the Product approval and package insert.
4.10 Schein shall send to Miles, on a monthly basis, a copy of its monthly
ex-factory sales report for the preceding month showing ex-factory
sales of the Product.
Additionally, Schein shall authorize Miles to access, on a monthly
basis and at Miles' expense, its monthly DDD sales report on the
Product.
-10-
<PAGE>
4.11 Notwithstanding the Marketing Plan or any other provision herein to the
contrary, Schein will have the right and responsibility for
establishing and modifying the terms and conditions with respect to the
sale of the Product, including the price at which the Product will be
sold, any discount attributable to payments on receivables,
distribution of the Product and the like.
4.12 Subject to Article VII hereof, the joint promotion and detailing of the
Product shall cease at the end of the Third Detailing Year; provided
that the joint promotion and detailing of the Product and the term of
this Agreement shall automatically be extended for successive one (1)
year periods unless at least sixty (60) days before the expiration of
the then-current term-, either party gives written notice to the other
that it does not wish to extend this Agreement. At the end of the Third
Detailing Year (or, if later, at the end of any extension of the term
of this Agreement or on termination under any circumstance) Miles shall
have no further obligations to promote and detail the Product and, upon
request by Schein, shall return to Schein all sales, marketing,
training and other materials which it has in its possession relating to
Product. Schein shall have the right to continue to distribute
materials bearing the Miles name, until the inventories of such
materials are depleted.
Article V: Warranties and Indemnification
- -----------------------------------------
5.01 Each party warrants and represents to the other that it has the full
right and authority to enter into this Agreement, and that it is not
aware of any impediment that would inhibit its ability to perform its
obligations under this Agreement.
5.02 Schein warrants and represents that, to the best of its knowledge, the
Product package insert adequately describes the toxicity and
sensitivity reactions associated with the Product when administered in
accordance with the package insert. Miles acknowledges that the Product
is a "black box" product, with significant known side effects,
including death.
5.03 Schein warrants and represents that it has no knowledge of the
existence of any U.S. patent which would prevent Schein from making,
using or selling the Product in the United States or would prevent
Schein and Miles from jointly promoting or detailing the Product in the
United States. Miles acknowledges that neither Schein nor any of its
Affiliates holds any patent covering the Product.
-11-
<PAGE>
5.04 (a) One party shall indemnify, protect and hold the other party
harmless against any and all damages, costs, expenses, lawsuits
and liabilities directly or indirectly result,resulting from
claims, suits or judgments arising out of said one party's
negligence (as between Schein or Miles) with resect to the Product
or components thereof or the detailing, promoting or other
obligations of said party hereunder. The other party shall
promptly notify said one party of any claims or suits for which
the other party may assert indemnification from said one party
hereunder and the other party shall permit said one party, or its
insurer, at said one party's expense, to assume or participate in
the defense of any such claims or suits and the other party shall
cooperate with said one party or its insurer in such defense when
reasonably requested to do so.
(b) One party shall indemnify, protect and hold the other party
harmless against any and all damages, costs, expenses, lawsuits,
and liabilities directly or indirectly resulting from claims,
suits or judgments with respect to the Product or components
thereof or the detailing, promoting or other obligations of said
one party hereunder to the extent that such damages, costs,
expenses, lawsuits and liabilities are due to the contributory
negligence of said one party. The other party shall promptly
notify said one party of any such claims or suits for which the
other party may assert contribution or indemnification from said
one party and each party shall permit the other party or its
insurer at the other party's expense, to participate in the
defense of any and all such claims or suits and each party shall
reasonably cooperate with the other party or its insurer in such
defense when requested to do so.
(c) Without limitation, as between Miles and Schein, if an above-
described claim, suit or judgment (or any portion thereof) is
based solely on:
(i) the failure of the Product to meet any specifications in the
Schein New Drug Application approved by the U.S. Food and
Drug Administration ("FDA") or supplements thereto;
(ii) misrepresentations or deficiencies in or omissions from the
Product's package insert approved by the FDA;
then Miles shall not be deemed negligent with respect to such
matters and shall be fully and completely indemnified by Schein
under Section 5.04 (a) with respect to such claim, suit or judgment
(or portion thereof) which solely involved such matters, and Schein
-12-
<PAGE>
shall be permitted, at its sole cost, to assume full control over
the defense of any such claim or suit (or portion thereof)0.
(d) This Section 5.04 shall survive the termination of this Agreement.
Article VI: Reports
- -------------------
6.01 Schein shall keep such records as are required to determine accurately
under United States generally accepted accounting principals the sums
due to under this Agreement. Such records shall be retained by Schein
and shall be made available for reasonable review and/or audit, at the
request and expense of Miles by an independent Certified Public
Accountant appointed by Miles and reasonably acceptable to Schein and
subject to appropriate confidentiality undertakings for the purposes of
verifying Schein' accounting reports hereunder and determining the
correctness of such reports during the one hundred and twenty (120) day
period following the close of the applicable Detailing Year, in respect
of New Sales for the Detailing Year then ended.
6.02 All sums due to Miles shall be payable to Miles in U.S. dollars by
Schein at the following address:
Miles Inc.
Pharmaceutical Division
400 Morgan Lane
West Haven, Connecticut 06516
or at such other address within the United States that Miles may
designate in writing to Schein.
6.03 Notwithstanding anything in this Agreement to the contrary, in the
event that Schein' actual Net Sales of the Product in the United States
are reduced, due to Adjustments after such Net Sales have been accrued
pursuant to the terms of this Agreement, then Net Sales for the
Detailing Year in which such Adjustments occur shall: be reduced
accordingly and Miles shall return to Schein within sixty (60) days of
receipt of a notice from Schein requesting such return, any dollar
amounts which were paid to Miles in respect of Net Sales during such
Detailing Year which are in excess of the dollar amounts which would
have been paid to Miles if Net Sales for such period reflected the Net
Sales actually received by Schein, taking into account such
Adjustments.
-13-
<PAGE>
Article VII: Term and Termination
- ---------------------------------
7.01 Unless sooner terminated d as herein provided, or extended in
accordance with Paragraph 4. 12, this Agreement shall expire, subject
to Paragraph 7.03 below. after the Third Detailing Year.
7.02 Either party may terminate this Agreement at any time for any reason
whatsoever with one hundred and twenty (120) days written notice;
provided no such termination shall be effective prior to April 1, 1996,
unless the grounds for termination is Miles' or Schein's failure to
fulfill its obligations under Section 2.02 or 2.03, respectively.
7.03 Termination of this Agreement shall be without prejudice to either
party's right to obtain performance of any obligations provided for in
this Agreement which survive termination by their terms.
Article VIII: Force Majeure
- ---------------------------
8.01 The performance by either party of any covenants or obligations on its
part to be performed hereunder (other than an obligation of either to
pay money to the other) shall be excused by floods, strikes or other
labor disturbances, riots, fires, accidents, wars, embargoes, delays of
carriers, inability to obtain materials from sources of supply, acts,
injunctions, or restraints of governments (whether or not now
threatened), or any cause preventing such performance whether similar
or dissimilar to the foregoing beyond the reasonable control of the
party bound by such covenant or its obligation, provided, however, that
the party affected shall exert its reasonable diligent efforts to
eliminate or cure or overcome any of such causes and to resume
performance of its covenants with all possible speed.
Article IX: Dispute Resolution
- ------------------------------
9.01 Both parties are obligated to undertake all reasonable efforts in order
to solve in an amicable way any controversy arising in connection with
this Agreement. However, in the event that disputes arise that cannot
be resolved at the immediate level, the dispute shall be referred to
the President of Miles Pharmaceutical Division and the chairman of
Schein.
Article X: Miscellaneous Provisions
- -----------------------------------
10.01 This Agreement shall be governed by and interpreted under the laws of
the United States and of the State of New Jersey.
-14-
<PAGE>
10.02,(a) For a period of ten (10) years from the Effective Date of this
Agreement or five (5) years from the termination hereof, whichever
occurs later:
(i) each party agrees not to use Confidential Information
furnished by the other party for any purpose inconsistent
with this Agreement; and
(ii) each party will treat Confidential Information furnished by
the other party as if it were its own proprietary
information and will not disclose it to any third party
other than its Affiliates or consultants without the prior
written consent of the other party who furnished such
information.
(iii) Miles shall not have the right for a period of five (5)
years from the termination of this Agreement to disclose,
publish and/or use for its benefit or for the benefit of any
third party any Confidential Information, sales, marketing,
training or other information provided to Miles by or on
behalf of Schein or its Affiliates received under this
Agreement to promote, achieve and/or maintain the sale and
use of the Product or any other pharmaceutical specialty
with indications similar to those of Product without the
prior written consent of Schein.
10.03 A party shall be relieved of any and all of the obligations of Section
11.02(a) with respect to Confidential Information if:
(a) such Confidential Information was known to the party receiving the
Confidential Information prior to receipt from the disclosing
party; or
(b) such Confidential Information was at the time of disclosure to the
party receiving the Confidential Information generally available
to the public or which became generally available to the public
through no fault attributable to the party receiving the
Confidential Information;
(c) such Confidential Information was made available to the party
receiving the Confidential Information for its use or disclosure
from any third person who was at the time of transmitting such
Confidential Information not under a non-disclosure obligation to
the other party.
10.04 This Agreement shall be binding upon, and shall inure to the benefit of
successors to a party hereto, but shall not otherwise be assignable
without the prior written consent of both parties.
-15-
<PAGE>
10.05 Any notice required to be given hereunder shall be considered properly
given if sent by certified mail, return receipt requested to the
respective address of each party as follows:
Office of the President
Miles Inc.
Pharmaceutical Division
400 Morgan Lane
West Haven. Connecticut 06516
and
Chairman of the Board
Schein Pharmaceutical, Inc.
100 Campus Drive
Florham Park, NJ 07932
or to such other address as the addressee shall have last furnished in
writing in accord with this provision to the addresser.
10.07 If any provision of this Agreement is held to be invalid, such invalidity
shall not affect the validity of the remaining provisions.
10.08 All captions herein are for convenience only and shall not be interpreted
as having any substantive meaning.
10.09 All covenants, agreements, representations and warranties made hereunder
shall be deemed to have been relied upon notwithstanding any investigation
heretofore or hereafter made and shall survive the execution of this
Agreement.
10.10 This Agreement constitutes the entire agreement between the parties hereto
with respect to the within subject matter and supersedes all previous
agreements, whether written or oral. It may be changed only in writing
signed by properly authorized representatives of Miles and Schein.
10.11 Neither party shall be entitled to assign its rights hereunder without the
express written consent of the other party hereto.
-16-
<PAGE>
IN WITNESS WHEREOF, Miles and Schein have caused this Agreement to be duly
executed by their authorized representatives, in duplicate on the dates written
hereinbelow.
Attest: Miles Inc.
By /s/ By /s/ Horst K. D. Wallrabe
___________________________ ___________________________
Horst K. D. Wallrabe,
Executive Vice President
Miles Inc. and
President
Pharmaceutical Division
Date November 11, 1994
--------------------------
Attest: Schein Pharmaceutical, In,
By /s/ P. K. McCullough By /s/ Martin Sperber
___________________________ ___________________________
Martin Sperber
Chairman of the Board and
Chief Executive Officer
Date Dec 9, 1994
--------------------------
-17-
<PAGE>
APPENDIX I
COMPLAINT HANDLING PROCEDURES
The purpose of this appendix is to establish written procedures for the
communication and processing of Product complaints received by Miles.
Acting in accord with this Agreement will facilitate compliance with Federal
Requirements as set forth in 21 CFR 211.198 (complaint files) and 21 CFR
310.305/21 CFR 314.80 (postmarketing reporting of adverse drug reactions).
A. Complaint Reporting:
1. Complaints reported directly to Miles will be summarized and forwarded
to the Supervisor of Clinical Affairs at Schein.
2. All adverse drug experience complaints reported to Miles will be
communicated to Schein within three working days of report receipt.
Schein will be responsible for completion and submission to the Food
and Drug Administration of Form FDA-3500A where appropriate .
3. Complaint reports which may meet NDA-Field Alert Report Criteria t21
CFR 314.81 (b) (1)] will be promptly communicated to Schein enabling
FDA notification by Schein within three working days. Schein will
advise Miles of NDA Field Alert Report submission and forward a copy
of any such report to the Complaint Coordinator (see A.1 above) of
Miles.
B. Complaint Investigation:
1. Schein will investigate all complaints, including complaints
associated with Product's active or inactive ingredients,
container/closure system, general Product quality, distribution or
handling.
C. Communications with Complainant:
1. Schein will be responsible for review of complaint evaluation
information and preparation of a written response.
2. In situations requiring submission of adverse drug experience reports,
Schein will be responsible for any follow-up communications which may
be required in order to facilitate timely completion and submission of
FDA
D. Product Recall:
1. In carrying out a recall, both parties will fully cooperate in
notifying customers to follow instructions as read upon by the
parties.
<PAGE>
AMENDMENT NUMBER 1 TO CO-PROMOTION AGREEMENT
--------------------------------------------
This Amendment to Co-Promotion Agreement (the "Amendment") is entered into
as of the 1st day of January 1997 between Miles, Inc., an Indiana corporation,
now known as Bayer Corporation ("Bayer"), and Schein Pharmaceutical, Inc., a
Delaware corporation ("Schein").
Introduction
------------
A. Bayer and Schein entered into a Co-Promotion Agreement, dated August
1, 1994 (the "Agreement").
B. Pursuant to the terms of the Agreement Bayer and Schein agreed to
jointly promote and detail the Product (as defined in the Agreement) in the
United States.
C. The parties wish to amend the Agreement in accordance with the terms
of this Amendment.
NOW, THEREFORE, in consideration of the mutual covenants and promises
herein contained, and for other good and valuable consideration, it is agreed as
follows:
1. Definitions In This Amendment and Incorporation. Unless otherwise
-----------------------------------------------
defined, all terms used herein shall have the meaning ascribed to them in the
Agreement, and the terms and provisions of the Agreement are incorporated herein
by reference as though set forth in full.
2. Definitions. The following is added to the end of Section 1.06 of the
-----------
Agreement: "Effective as of December 29, 1996, a 'Detailing Year' shall be the
twelve (12) month period commencing on the last Sunday in December of the Term".
3. Grants and Obligations.
----------------------
The second paragraph of Article II, Section 2.01 of the Agreement is
hereby deleted in its entirety and replaced by the following:
"During the Joint Detailing Years, Schein shall not authorize, or
grant the right to, any third party to detail the Product in
the United States in the field of Nephrology: provided, however,
that Schein may authorize, or grant the right to, any third party
to detail and promote the Product in the United States in a field
other than Nephrology.
<PAGE>
4. Payments.
--------
Article III, Subsections 3.01 (a), (b), (c) and (d) of the Agreement
are hereby deleted in their entirety and replaced by the following:
"3.01 (a) Effective January 1, 1997, Schein shall pay to Bayer in
each Detailing Year the following: (i) the aggregate amount of
********** ******* ** **** ***** ************ ** ******** ****,
within sixty (60) days after the close of each fiscal quarter
during a Detailing Year, plus (ii) an amount equal to *** *****
** *** ***** ****** *** ********* ********* *** **** **** ******
*** ******* ****** in each Detailing Year, payable annually
within sixty (60) days after the end of such Detailing Year. The
annual payment relating to *** ***** shall be accompanied by an
accounting of such *** ***** indicating aggregate quantities and
dollar amounts of the Product. For purposes of this Agreement,
***** **** ******* ***** **** *** ********** *** *********** for
the Detailing Year commencing December 29, 1996, and (ii) for
each Detailing Year thereafter, Schein and Bayer shall meet
within sixty (60) days prior to the start of such Detailing Year
for the purposes of reviewing the Base Line Figure for such
****** ********* **** *** *********** ** **** ***** ***
*********** ********** ** *** **** **** ****** *** *******
********** *** *** ******* *** *** ****** ** * ***********
******* ** *** ******* *** ********** *********** ** ********
******* *** *** ******** ******* ** ** ** **** ** **** ********
*** ****** ***** ***** *** *** ********** ************** ********
** ****** ******* *********** **** ******** **** ****** ********
** *** ******* ** *** ********** **** ******* ** *** ** **** ***
***** ********* ** ********
5. Reaffirmation of Agreement and Other Document. Except as modified
---------------------------------------------
herein, all of the covenants, terms and conditions of the Agreement remain in
full force and effect and are hereby ratified and reaffirmed in all respects. In
the event of any conflict, inconsistency or incongruity between the terms and
conditions of this Amendment and the covenants, terms and conditions of the
Agreement the terms and conditions of this Amendment shall govern and control.
6. Counteparts. This Amendment may be executed in two or more
-----------
counterparts each of which together shall constitute an original but which,
when taken together, shall
* redacted pursuant to confidential treatment request.
2
<PAGE>
constitute but one instrument and shall become effective when copies hereof,
when taken together, bear the signatures of all required parties and persons.
IN WITNESS WHEREOF, this Amendment is executed as of the day and year first
above written.
BAYER CORPORATION
By: /s/ Gerald B. Rosenberg
----------------------------
Name: Gerald B. Rosenberg
--------------------------
Title: Senior Vice President and General Manager
-----------------------------------------
SCHEIN PHARMACEUTICAL, INC.
By: /s/ Michael D. Casey
-------------------------
Name: Michael D. Casey
-----------------------
Title: President Retail Specialty Product Division
-------------------------------------------
3
<PAGE>
AMENDMENT NO. 2 TO CO-PROMOTION AGREEMENT
-----------------------------------------
This Amendment Number 2 to Co-Promotion Agreement (the "Amendment") is
entered into as of the 1st day of January 1997 between Bayer Corporation,
formerly known as Miles, Inc. ("Bayer") and Schein Pharmaceutical, Inc.
("Schein").
Introduction
------------
A. Bayer and Schein entered into a Co-Promotion Agreement, dated August 1,
1994 which was amended by Amendment Number 1 to Co-Promotion Agreement dated
January 1, 1997 (collectively, the "Agreement").
B. Pursuant to the terms of the Agreement, Bayer and Schein agreed to jointly
promote and detail the Product (as defined in the Agreement) in the United
States.
C. Bayer Puerto Rico Inc. ("Bayer Puerto Rico") and Schein entered into a
Promotion Agreement, dated February 1, 1995 (the "Puerto Rico Agreement").
D. Pursuant to the terms of the Puerto Rico Agreement, Bayer Puerto Rico and
Schein agreed to jointly promote and detail the Product (as defined in the
Agreement) in Puerto Rico.
E. Bayer and Schein wish to amend the Agreement to include Bayer Puerto Rico's
obligations with respect to promotion of the Product in Puerto Rico in the
Agreement. Bayer Puerto Rico and Schein simultaneously herewith have terminated
the Puerto Rico Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and promises
herein contained, and for other good and valuable consideration, it is agreed as
follows:
1. Definitions In This Amendment Number 2 and Incorporation. Unless
--------------------------------------------------------
otherwise defined, all terms used herein shall have the meaning ascribed to them
in the Agreement, and the terms and provisions of the Agreement are incorporated
by reference as though set forth in full.
2. Definitions.
-----------
(a) Section 1.03 is deleted in its entirety and replaced with the following:
" `Territory' shall mean the United States and Puerto Rico."
(b) Except for Section 10.01 of the Agreement, in all places where the defined
term "United States" appears it is hereby replaced with the defined term
"Territory."
3. Addition of Bayer Puerto Rico as Party to the Agreement. With respect
-------------------------------------------------------
to its promotion of the Product in Puerto Rico, Bayer Puerto Rico agrees to the
terms and conditions in the Agreement.
4
<PAGE>
4. Reaffirmation of Agreement and Other Documents. Except as modified
----------------------------------------------
herein, all of the covenants, terms and conditions of the Agreement remain in
full force and effect and are hereby ratified and reaffirmed in all respects. In
the event of any conflict, inconsistency or incongruity between the terms and
conditions of this Amendment and the covenants, terms and conditions of the
Agreement the terms and conditions of this Amendment shall govern and control.
5. Counterparts. This Amendment may be executed in two or more
------------
counterparts, each of which together shall constitute an original but which,
when taken together, shall constitute but one instrument and shall become
effective when copies hereof, when taken together, bear the signatures of all
required parties and persons.
IN WITNESS WHEREOF, this Amendment is executed as of the day and year first
above written.
BAYER CORPORATION BAYER PUERTO RICO INC.
By:________________ By:________________
Name:______________ Name:______________
Title:_____________ Title:_____________
SCHEIN PHARMACEUTICAL, INC.
By:________________
Name:______________
Title:_____________
5
<PAGE>
AMENDMENT NO. 3 TO CO-PROMOTION AGREEMENT
-----------------------------------------
This Amendment Number 3 to Co-Promotion Agreement (the "Amendment") is entered
into as of the 28th day of January 1998 between Bayer Corporation, formerly
known as Miles, Inc. ("Bayer") and Schein Pharmaceutical, Inc. ("Schein").
Introduction
------------
A. Bayer and Schein entered into a Co-Promotion Agreement, dated August 1, 1994
which was amended by Amendment Number 1 to Co-Promotion Agreement dated January
1, 1997 and Amendment Number 2 to Co-Promotion Agreement dated January 1, 1997
(collectively, the "Agreement").
B. Pursuant to the terms of the Agreement, Bayer and Schein agreed to jointly
promote and detail the Product (as defined in the Agreement) in the United
States and Puerto Rico.
C. The parties wish to amend the Agreement in accordance with the terms of this
Amendment.
NOW THEREFORE, in consideration of the mutual covenants and promises
herein contained, and for other good and valuable consideration, it is agreed as
follows:
1. Definitions In This Amendment and Incorporation. Unless otherwise
-----------------------------------------------
defined, all terms used herein shall have the meaning ascribed to them in the
Agreement, and the terms and provisions of the Agreement are incorporated herein
by reference as though set forth in full.
2. Grants and Obligations.
----------------------
Article II, Section 2.02 is hereby amended to add the following:
"(c) Without limiting the generality of the foregoing, Bayer
will assign ** ********** sales representatives and ** ******
******* ********* sales specialists to promote and detail the
Product. Additionally, Bayer will use best efforts to insure
a sufficient amount of selling time will be allotted to
promoting and detailing the Product. ** ** ********** ***
****** **** ******* ******** ***** *************** **** **
****** ******* *** ****** *** *********
3. 1998 Base Line Figure.
---------------------
In accordance with Article III, Section 3.01 (a) (ii), the Base Line
Figure for the 1998 Detailing Year shall be ************
* Redacted pursuant to confidential treatment request.
<PAGE>
4. Cooperation Rights and Responsibilities.
---------------------------------------
Article IV is hereby amended to add a new Section as follows:
"4.13 Each of Schein and Bayer agrees that during the term of this
Agreement and for a period of one year after the termination of this
Agreement for whatever reason, neither it nor any of its Affiliates
shall, except with the prior written consent of the other party,
offer employment to or employ any person in the other party's sales
force if such person was involved in promoting the Product under
this Agreement.
5. Reaffirmation of Agreement and Other Documents. Except as modified
----------------------------------------------
herein, all covenants, terms and conditions of the Agreement remain in full
force and effect and are hereby ratified and reaffirmed in all respects. In the
event of any conflict, inconsistency or incongruity between the terms and
conditions of this Amendment and the convenants, terms and conditions of the
Agreement, the terms and conditions of this Amendment shall govern and control.
6. Counterparts. This amendment may be executed in two or more
-----------
counterparts, each of which together shall constitute an original but which,
when taken together, shall constitute but one instrument and shall become
effective when copies hereof, when taken together, bear the signatures of all
required parties and persons.
IN WITNESS WHEREOF, this Amendment is executed as of the day and year
first above written.
Bayer Corporation
By: Gerald Rosenberg
-------------------------
Name: Gerald Rosenberg
-----------------------
Title: Sr. V.P. General Manager
---------------------
SCHEIN PHARMACEUTICAL, INC.
By: Adam A. Levitt
------------------------
Name: Adam A. Levitt
-----------------------
Title: V.P. Brand Products Group
-------------------------
<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, except for
Note 1 which is as of , 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.
March 10, 1998
BDO SEIDMAN, LLP
