SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934
Filed by the Registrant {X}
Filed by a Party Other than the Registrant { }
Check the appropriate box:
{ } Preliminary Proxy Statement
{ } Confidential, for Use of the Commission only (as permitted by
Rule 14a-6(e)(2))
{ X } Definitive Proxy Statement
{ } Definitive Additional Materials
{ } Soliciting Material Pursuant to ss. 240.14a-11(c) or ss. 240.14a-12
SCHEIN PHARMACEUTICAL, INC.
(Name of Registrant as Specified in its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
{ X } No fee required.
{ } Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and
0-11.
1. Title of each class of securities to which transaction applies:
2. Aggregate number of securities to which transaction applies:
3. Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11:
4. Proposed maximum aggregate value of transaction:
5. Total fee paid:
{ } Fee paid previously with preliminary materials.
{ } Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting
fee was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
1. Amount Previously Paid:
2. Form, Schedule or Registration Statement No.:
3. Filing Party:
4. Date Filed:
<PAGE>
SCHEIN PHARMACEUTICAL, INC.
100 Campus Drive
Florham Park, New Jersey 07932
April 16, 1999
Dear Stockholder:
On behalf of the Board of Directors, I cordially invite you to attend the
1999 Annual Meeting of Stockholders of Schein Pharmaceutical, Inc. The Annual
Meeting will be held on Wednesday, May 19, 1999, beginning at 10:00 a.m., local
time, at The Madison Hotel, One Convent Road, Morristown, New Jersey 07960. The
formal Notice of Annual Meeting is set forth in the enclosed material.
The matters expected to be acted upon at the meeting are described in the
attached Proxy Statement. During the meeting, stockholders will have the
opportunity to ask questions and comment on the Company's operation.
It is important that your views be represented whether or not you are able
to be present at the Annual Meeting. Please sign and return the enclosed proxy
card promptly.
We appreciate your investment in Schein Pharmaceutical, Inc. and urge you
to return your proxy card as soon as possible.
Sincerely,
Martin Sperber
Chairman of the Board of Directors,
Chief Executive Officer and President
<PAGE>
SCHEIN PHARMACEUTICAL, INC.
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
Notice is hereby given that the Annual Meeting of Stockholders of Schein
Pharmaceutical, Inc. (the "Company") will be held on Wednesday, May 19, 1999,
beginning at 10:00 a.m., local time, at The Madison Hotel, One Convent Road,
Morristown, New Jersey 07960 for the following purposes:
1. to elect two directors, each for a term of three years expiring in 2002;
2. to adopt the Company's 1999 Stock Option Plan;
3. to ratify the appointment of BDO Seidman, LLP as the Company's independent
auditors for the fiscal year ending December 25, 1999; and
4. to transact such other business as may lawfully come before the meeting and
any postponement or adjournment thereof.
Information with respect to the above matters is set forth in the Proxy
Statement that accompanies this Notice. Financial and other information
concerning the Company is contained in the enclosed Annual Report to
Stockholders for the fiscal year ended December 26, 1998.
The Board of Directors has fixed the close of business on April 9, 1999 as
the record date for determining stockholders entitled to notice of and to vote
at the meeting. A complete list of the stockholders of record entitled to vote
at the meeting will be produced at the time and place of the meeting and will be
open to stockholders of record during the whole time thereof.
<PAGE>
So that we may be sure your shares will be voted at the meeting, please
date, sign and return the enclosed proxy card promptly. For your convenience, a
postpaid return envelope is enclosed for your use in returning your proxy card.
If you attend the meeting, you may revoke your proxy and vote in person.
By Order of the Board of Directors,
Paul Feuerman
Secretary
Florham Park, New Jersey
April 16, 1999
YOU ARE CORDIALLY INVITED TO ATTEND THE ANNUAL MEETING IN PERSON. EVEN IF
YOU PLAN TO BE PRESENT, PLEASE MARK, SIGN, DATE AND RETURN THE ENCLOSED PROXY
CARD AT YOUR EARLIEST CONVENIENCE IN THE ENCLOSED ENVELOPE, WHICH REQUIRES NO
POSTAGE IF MAILED IN THE UNITED STATES. IF YOU ATTEND THE MEETING, YOU MAY VOTE
EITHER IN PERSON OR BY YOUR PROXY.
<PAGE>
SCHEIN PHARMACEUTICAL, INC.
100 Campus Drive
Florham Park, New Jersey 07932
April 16, 1999
------------------------
PROXY STATEMENT
------------------------
ANNUAL MEETING OF STOCKHOLDERS
To Be Held May 19, 1999
GENERAL INFORMATION
The enclosed proxy is solicited by the Board of Directors of Schein
Pharmaceutical, Inc., a Delaware corporation (the "Company"), for use at the
Annual Meeting of Stockholders (the "Meeting" or "Annual Meeting") to be held on
Wednesday, May 19, 1999, beginning at 10:00 a.m., local time, at The Madison
Hotel, One Convent Road, Morristown, New Jersey 07960, and at any postponement
or adjournment thereof.
The securities of the Company entitled to vote at the Annual Meeting
consist of shares of common stock, $0.01 par value ("Common Stock"), of the
Company. At the close of business on April 9, 1999 (the "Record Date"), there
were outstanding and entitled to vote 32,613,587 shares of Common Stock. The
holders of record of Common Stock on the Record Date will be entitled to one
vote per share. The Company's Certificate of Incorporation does not provide for
cumulative voting in the election of directors.
The Annual Report to Stockholders for the year ended December 26, 1998 is
being furnished with this Proxy Statement to the holders of record of Common
Stock on the Record Date. The Annual Report does not form any part of the
material for the solicitation of proxies. The Notice of Annual Meeting of
Stockholders, this Proxy Statement and the enclosed proxy card will be first
mailed to stockholders on or about April 16, 1999.
VOTING AND PROXY PROCEDURES
Properly executed proxies received in time for the Meeting will be voted in
accordance with the directions given in the proxy. The enclosed proxy card
provides a means for the holders of Common Stock to vote for both nominees for
director listed therein or to withhold authority to vote for one or both of such
nominees. Stockholders are urged to specify their choices on the proxy, but if
no choice is specified, eligible shares will be voted for (1) the election of
the two
<PAGE>
nominees for director named herein, (2) the adoption of the Company's 1999 Stock
Option Plan as described in more detail herein and (3) the ratification of the
appointment of BDO Seidman, LLP ("BDO") as the Company's independent auditors
for the fiscal year ending December 25, 1999. At the date of this Proxy
Statement, management of the Company knows of no other matters which are likely
to be brought before the Annual Meeting. However, if any other matters should
properly come before the Annual Meeting, the persons named in the enclosed proxy
card will have discretionary authority to vote such proxy in accordance with
their best judgment on such matters.
If the enclosed proxy card is executed and returned, it may nevertheless be
revoked by a duly executed later dated proxy, by written notice filed with the
Secretary of the Company at the Company's corporate office at any time before
the proxy is exercised, or by voting in person at the Annual Meeting.
The holders of a majority of the total shares of Common Stock issued and
outstanding at the close of business on the Record Date, whether present in
person or represented by proxy, will constitute a quorum for the transaction of
business at the Annual Meeting. In accordance with the rules of the New York
Stock Exchange, the affirmative vote of a majority of the votes cast at the
Annual Meeting on the proposal to adopt the Company's 1999 Stock Option Plan is
required for approval; provided that the total votes cast on the proposal
represents over 50% of all shares of Common Stock entitled to vote on the
proposal. The affirmative vote of a plurality of the votes cast at the Annual
Meeting is required for the election of directors, and the affirmative vote of a
majority of the votes cast at the Annual Meeting is required for the
ratification of the appointment of BDO as the Company's independent auditors for
the fiscal year ending December 25, 1999 and for any other matters as may
properly come before the Annual Meeting or any postponement or adjournment
thereof.
Abstentions are counted toward the calculation of a quorum but are not
treated as either a vote for or against a proposal. Any unvoted position in a
brokerage account will be considered as not voted and will not be counted toward
fulfillment of quorum requirements. Thus, abstentions and broker non-votes will
not be included in vote totals and will not affect the outcome of the vote.
Martin Sperber, the Chairman of the Board of Directors, Chief Executive
Officer and President of the Company, has the right to vote 20,005,243 shares of
Common Stock outstanding on the Record Date (approximately 61.3 % of the
outstanding shares) in his individual capacity and as voting trustee under a
voting trust agreement with certain principal stockholders of the Company. Mr.
Sperber has indicated to the Company that he intends to vote all such shares for
the election of the two nominees for director, the adoption of the Company's
1999 Stock Option Plan and the ratification of BDO as the Company's independent
auditors. See "Restructuring Agreements."
The cost of solicitation of proxies will be paid by the Company. In
addition to solicitation by mail, proxies may be solicited by the directors,
officers and employees of the Company, without additional compensation, by
personal interview, telephone, telegram or otherwise.
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<PAGE>
Arrangements will also be made with brokerage firms and other custodians,
nominees and fiduciaries who hold the Common Stock of record for the forwarding
of solicitation materials to the beneficial owners thereof. The Company will
reimburse such brokers, custodians, nominees and fiduciaries for reasonable
out-of-pocket expenses incurred by them in connection therewith. The Company has
no present plans to hire special employees or paid solicitors to assist in
obtaining proxies.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth as of February 26, 1999 certain information
with respect to shares of Common Stock beneficially owned by each of its
directors and nominees for directors, by each executive officer named in the
Summary Compensation Table, by all of its directors and executive officers as a
group and by persons who are known to the Company to be the beneficial owners of
more than five percent of the issued and outstanding shares of Common Stock.
Such persons have sole voting power and sole dispositive power with respect to
all shares set forth in the table unless otherwise specified in the footnotes to
the table.
<TABLE>
<CAPTION>
NAME, ADDRESS AND NATURE NUMBER OF SHARES
OF BENEFICIAL OWNERSHIP(1) BENEFICIALLY OWNED(2) (3) PERCENT OF CLASS
-------------------------- ------------------------- -----------------
<S> <C> <C>
Martin Sperber(4) .............................. 20,556,057 62.1%
Marvin H. Schein(5)(6) ......................... 9,252,100 28.4
135 Duryea Road
Melville, NY 11747
Bayer Corporation .............................. 8,141,910 25.0
100 Bayer Road
Pittsburgh, PA 15205
Trusts established by Pamela Schein(5)(6) ...... 7,144,410 21.9
Pamela Joseph(6) ............................... 2,785,440 8.6
Dariush Ashrafi ................................ 128,546 *
Javier Cayado .................................. 60,005 *
Paul Feuerman .................................. 72,486 *
Paul Kleutghen ................................. 67,944 *
David R. Ebsworth .............................. 7,518 *
Richard L. Goldberg ............................ 12,518 *
Harvey Rosenthal ............................... - *
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
NAME, ADDRESS AND NATURE NUMBER OF SHARES
OF BENEFICIAL OWNERSHIP(1) BENEFICIALLY OWNED(2) (3) PERCENT OF CLASS
-------------------------- ------------------------- -----------------
<S> <C> <C>
Directors and Executive Officers as a
Group (8 persons)(4) ........................... 20,905,074 62.5
</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 power with respect to all of the Common Stock shown as
beneficially owned by them, except as noted below.
(3) Includes shares issuable upon the exercise of options which will become
exercisable on or before April 27, 1999 to the following: Martin
Sperber (552,475), Dariush Ashrafi (121,100), Javier Cayado (59,500),
Paul Feuerman (71,225), Paul Kleutghen (65,975), David Ebsworth
(7,518), Richard Goldberg (7,518) and the Directors and Executive
Officers as a Group (885,311).
(4) Includes (a) 621,632 shares for which Mr. Sperber either is the direct
beneficial owner or holds in trust for his family members' benefit; and
(b) 19,381,950, 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
election of directors.
(5) Includes all shares for which such stockholder is either the direct
beneficial owner or holds in trust for his or her family members and/or
charities for which such stockholder is trustee.
(6) All shares are held by Mr. Sperber as voting trustee under the Voting
Trust Agreement. See "Restructuring Agreements."
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<PAGE>
MATTERS TO COME BEFORE THE ANNUAL MEETING
PROPOSAL 1: ELECTION OF DIRECTORS
The Company's Certificate of Incorporation provides that the Board of
Directors will consist of not fewer than five or more than nine persons, unless
otherwise determined by the Board of Directors. The Board of Directors has fixed
the authorized number of directors at six.
The Certificate of Incorporation of the Company provides that the Board of
Directors shall be divided into three classes, with such classes to be as nearly
equal in number as the total number of directors constituting the entire Board
of Directors permits. The terms of office of the respective classes expire in
successive years. At the Annual Meeting, two members are to be elected to the
Board of Directors to serve for a term of three years until the annual meeting
of stockholders in 2002. Each of the nominees is now a director of the Company
and is standing for reelection. The Board of Directors has no reason to believe
that either of the nominees will be unable to serve if elected to office and, to
the knowledge of the Board, the nominees intend to serve the entire term for
which election is sought. Should either or both of the nominees named herein
become unable or unwilling to accept nomination or election, the persons named
in the proxy will vote for such other person or persons as the Board of
Directors may recommend.
Pursuant to the Restructuring Agreements (as defined on page 25), until
Bayer Corporation 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 equal to the product of the number of members of the
Board of Directors and its percentage stockholdings of Common Stock at the time
of nomination. In this regard, Bayer Corporation nominated Dr. Ebsworth as a
member of the Board of Directors. Additionally, under the Restructuring
Agreements, the Voting Trustee under the Voting Trust Agreement (currently Mr.
Sperber) is entitled to nominate the balance of the members of the Board of
Directors until the Voting Trust Termination Date (as defined on page 26). 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. See "Restructuring Agreements."
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<PAGE>
Nominees for Election to Term Expiring 2002
Richard L. Goldberg
Mr. Goldberg, 63, 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. Mr. Goldberg is a member of the
Compensation Committee of the Board of Directors of the Company.
Martin Sperber
Mr. Sperber, 67, has been Chairman, Chief Executive Officer, President and
a 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.
Incumbent Directors - Term Expiring 2000
Dariush Ashrafi
Mr. Ashrafi, 52, has been Executive Vice President and Chief Financial
Officer since October 1995, and a director of the Company 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.
Harvey Rosenthal
Mr. Rosenthal, 56, has been a director of the Company since August 1998.
Mr. Rosenthal served as President and Chief Operating Officer of Melville
Corporation from December 1993 to October 1996, and as a member of its board of
directors until June 1997. Prior to assuming his position as President and Chief
Operating Officer, Mr. Rosenthal held key positions at CVS, a chain drugstore
company and division of Melville, for over 24 years, including 10 years as
President and CEO. Mr. Rosenthal is a member of the board of directors of LoJack
Corporation and a member of the board of trustees for EQ Advisors Trust. He is
also a trustee and executive committee member of the Dana-Farber Cancer
Institute. Mr. Rosenthal is a graduate of Harvard
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<PAGE>
College and earned an MBA from Harvard Business School. He also holds an
Honorary Doctor of Science in Pharmacy from Massachusetts College of Pharmacy.
Incumbent Directors - Term Expiring 2001
David R. Ebsworth
Dr. Ebsworth, 45, became a director of the Company in September 1994 in
connection with 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). Dr. Ebsworth is a member of the Compensation
Committee of the Board of Directors of the Company.
Paul Feuerman
Mr. Feuerman, 39, 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 of the Company 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.
-----------------------------
The Company's Certificate of Incorporation provides that nominations for
the election of directors may be made: (a) by or at the direction of the Board
of Directors or (b) by or on behalf of a stockholder of the Company, or a duly
authorized proxy for such stockholder, who is a stockholder of record at the
time of giving notice and who shall be entitled to vote for the election of
directors at the meeting. Nominations by stockholders shall be made by notice,
in writing to the Secretary of the Company delivered or mailed to, and received
at, the principal executive offices of the Company not fewer than 60 days or
more than 90 days prior to the anniversary date of the immediately preceding
annual meeting, provided that if 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. Each such 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, as amended (the "Exchange Act"), (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 Company's books, of such stockholder, (ii) the class and
number of shares of stock of the Company beneficially owned by such stockholder
and represented by proxy and (iii) a description of all arrangements or
understandings between such stockholder and any other person or persons
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<PAGE>
(including their names) in connection with such nomination and any material
interest of such stockholder in such nomination.
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 and administers the Company's stock option
plans. The members of the Compensation Committee are Dr. Ebsworth and Mr.
Goldberg.
The Company's Board of Directors currently functions as the Company's Audit
Committee and 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.
Meetings of the Board of Directors
During the fiscal year ended December 26, 1998, the Board of Directors met
13 times and the Compensation Committee met five times. All directors attended
all meetings of the Board of Directors and committee of which they are members.
Compensation of Directors
Directors who are also officers of the Company do not receive any fee or
remuneration for services as members of the Board of Directors. Commencing
August 24, 1998, each outside director receives a retainer at an annual rate of
$20,000, unless he waives such retainer in favor of receiving a greater number
of options under the Company's 1995 Non-Employee Director Stock Option Plan, as
amended (the "Non-Employee Director Plan"), as well as a fee of $1,000 for each
meeting of the Board of Directors he attends in person and $500 if he
participates by telephone. No fees are paid to directors for attendance at or
participation in any meeting of a committee of the Board of Directors. In fiscal
1998, Dr. Ebsworth and Mr. Goldberg (each of whom waived the annual retainer)
each received $5,500 and Mr. Rosenthal (who did not waive the annual retainer)
received $20,500. As a result of waiving the annual retainer, Dr. Ebsworth and
Mr. Goldberg each received additional options to purchase shares of Common Stock
as described below.
Under the Non-Employee Director Plan, on January 1 of each year, each
outside director is automatically granted options to purchase a number of shares
of Common Stock determined by dividing $50,000 ($100,000 in the case of an
outside director who has waived the annual retainer) by the Fair Market Value of
a share of Common Stock on the grant date. The exercise price per share is 100%
of the Fair Market Value on the date of grant. The options vest over a period of
three years and expire after ten years. In fiscal 1998, Dr. Ebsworth and Mr.
Goldberg each were
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<PAGE>
granted (i) options to purchase up to 395 shares of Common Stock at a price per
share of $29.25 and (ii) options to purchase up to 4,725 shares of Common Stock
at a price per share of $14.29, and Mr. Rosenthal was granted options to
purchase up to 623 shares of Common Stock at a price per share of $29.25.
Vote Required
The affirmative vote of a plurality of the votes cast at the Annual Meeting
is required for the election of directors.
Recommendation of the Board of Directors
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A
VOTE FOR THE ELECTION OF EACH OF THE NOMINEES.
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<PAGE>
EXECUTIVE COMPENSATION
Compensation Committee Report on Executive Compensation
The Compensation Committee has furnished the following report on the
Company's executive compensation policies. This report describes the
Compensation Committee's compensation policies applicable to the Company's
executive officers and provides specific information regarding the compensation
of the Company's Chief Executive Officer. (The information contained in the
"Report of the Compensation Committee of the Board of Directors" shall not be
deemed to be "soliciting material" or to be "filed" with the Securities and
Exchange Commission (the "Commission"), nor shall such information be
incorporated by reference into any future filings under the Securities Act of
1933, as amended (the "Securities Act"), or the Exchange Act, except to the
extent that the Company specifically incorporates it by reference into such
filing.)
Report of the Compensation Committee of the Board of Directors
The Compensation Committee of the Board of Directors, which also serves as
the Stock Option Committee, has responsibility for determining the Company's
compensation program for its executive officers, including the named executive
officers. In so doing, the Committee seeks to ensure that the program is
competitive in level and structure with the programs of other pharmaceutical
businesses and comparable-size companies in general, and that it is both
supportive of the Company's financial and operating objectives and aligned with
the financial interests of the Company's stockholders. The Company and the
Compensation Committee receive advice from an independent executive compensation
consulting firm regarding the program, and members of the Committee regularly
discuss the performance of executive officers with the Chief Executive Officer
and, as occasion permits, observe the executive officers' performances directly.
Program Components and Orientation
The Company's executive officer compensation program is intended to enable
the Company to attract and retain high quality, effective executives whose
ultimate responsibility is to enhance stockholder value, and to compensate these
persons based on their and the Company's performance and on the longer-term
value they create for the Company's stockholders. The components of the
compensation program consist of base salary, annual incentive payments and
periodic grants of stock options.
The competitiveness of the Company's compensation program is measured
relative to the practices of other pharmaceutical companies and comparable-size
companies in general. Salaries, incentive payment opportunities and stock option
grants are generally oriented to the 50th to 75th percentile of competitive
practices, with exceptions occurring when considered necessary by the Committee,
on the recommendation of the Chief Executive Officer, to achieve objectives
significant to the Company's interest at the time.
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<PAGE>
Base Salary
The Committee annually reviews executive officer salaries (other than for
the Company's Chief Executive Officer whose salary is set forth in his
employment agreement) and, after consideration with the Chief Executive Officer,
makes adjustments as warranted based on competitive practices and the
individual's performance. Salary increases, if made, generally occur during the
first quarter of the calendar year retroactive to January 1st of that year.
Salaries of the named executive officers for 1998, excluding Mr. Sperber,
reflect an average increase of approximately 11.6%, placing these salaries in
about the 75th to 90th percentile of competitive practices in the view of the
Company's executive compensation consulting firm.
Annual Incentive Compensation
Annual incentive compensation for executive officers under the Company's
Management Incentive Plan ("MIP") is designed to incentivize these key people
and reward the achievement of pre-established corporate, business unit and
individual performance goals annually determined by the Chief Executive Officer.
Corporate and business unit goals are typically financial, while individual
performance goals are person-specific and include items such as compliance,
pipeline management and production targets.
Following year-end, the Chief Executive Officer reviews that year's
corporate, business unit and individual performances against MIP goals and award
opportunities previously established and determines MIP award payments, all of
which is then presented to the Committee for its consideration and action.
Against the background of the Company's financial results for 1998, no MIP
awards were recommended or made to the named executive officers.
Stock Options
The Committee believes that stock options play a major role in directly
aligning the long-term financial interests of the Company's officers and
stockholders and makes grants on an annual or more frequent basis. In 1998, the
Committee granted options to the named executive officers at an average exercise
price of $15 per share. These grants took into account the options previously
granted to each of the named executive officers, none of which had been
exercised, and reflected a special grant to all employees, including the named
executive officers, at the time of the Company's initial public offering.
The Chief Executive Officer
Against the background of the Company's financial results, Mr. Sperber had
voluntarily reduced by 10% his contractual salary of $700,000 for 1998, and the
Committee, in concurrence with Mr. Sperber, did not award any incentive
compensation to him for 1998.
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<PAGE>
Deductibility of Executive Compensation
Section 162(m) of the Internal Revenue Code prohibits the Company from
deducting annual compensation in excess of $1 million paid to any of the named
executive officers, unless such compensation satisfies certain conditions. No
named executive officer was paid compensation in excess of $1 million in 1998.
The Company intends to structure future compensation in a manner that will
achieve maximum deductibility under Section 162(m) without materially
interfering with its corporate objectives or structure.
Members of the Compensation Committee
David R. Ebsworth
Richard L. Goldberg
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<PAGE>
Compensation Committee Interlocks and Insider Participation
David R. Ebsworth is an Executive Vice President of Bayer Corporation,
which has relationships and agreements with the Company referred to under
Restructuring Agreements on page 25, and Certain Transactions on page 30.
Richard L. Goldberg is a member of Proskauer Rose LLP, which rendered legal
services to the Company in 1998 and continues to render such services in 1999.
Neither of these directors is or has been an officer or employee of the Company.
Executive Compensation Summary Table
The following table sets forth certain information concerning compensation
for the fiscal years ended December 26, 1998, December 27, 1997 and December 28,
1996 of the Company's Chief Executive Officer and the four other most highly
compensated executive officers (the "named executive officers").
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
- ------------------------------------------------------------------------------
Long-Term Compensation
----------------------
Annual Compensation(1) Awards Payouts
------------------------------------ ---------- ----------
Securities
Other Annual Underlying LTIP All Other
Name and Principal Position Salary Bonus Compensation Options(#) Payouts($)(2) Compensation(3)
- ------------------------------------ ------ ----- ------------ ---------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Martin Sperber ..................... 1998 $630,000 $ -- $ 9,381 220,000 $ $14,220(4)
Chairman of the Board of 1997 700,000 400,000 9,436 -- 10,880(4)
Directors, Chief Executive 1996 700,000 -- 9,929 -- 10,305(4)
Officer and President
Dariush Ashrafi .................... 1998 347,000 -- 5,418 77,500 75,000 41,176(5)
Executive Vice President, Chief 1997 341,000 93,000 10,300 57,750 75,000 22,709(5)
Financial Officer and Director 1996 341,000 59,700 143,725 21,000 75,000 24,321(5)
Javier Cayado ...................... 1998 239,000 -- 10,209 72,250 75,000 40,862(6)
Senior Vice President, Technical 1997 220,000 37,000 398 10,500 100,000 29,343(6)
Operations 1996 220,000 40,500 969 10,500 125,000 16,910(6)
Paul Feuerman ...................... 1998 239,000 -- 8,011 73,575 150,000 23,712(7)
Senior Vice President, General 1997 225,000 61,000 8,596 15,750 100,000 17,625(7)
Counsel and Director 1996 185,000 32,400 7,738 21,000 100,000 13,799(7)
Paul Kleutghen ..................... 1998 239,000 -- 10,364 51,875 150,000 42,514(8)
Senior Vice President, Strategic 1997 211,000 37,300 9,362 8,925 100,000 36,531(8)
Development 1996 211,000 38,800 24,415 21,000 100,000 47,115(8)
</TABLE>
- -----------------
(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.
-13-
<PAGE>
(3) Includes the Company's Book Equity Appreciation Rights Program (the
"BEARs Program"), which allows certain employees to benefit from an
increase in the Company's book value (calculated according to a formula
defined in the BEARs 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.
(4) In 1998 All Other Compensation includes $8,000 for The Retirement Plan of
Schein Pharmaceutical, Inc. & Affiliates (the "Company Retirement Plan")
discretionary contribution, $1,420 for the cost of term life insurance
coverage provided by the Company and $4,800 for the Company Retirement
Plan matching contributions. 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.
(5) In 1998 All Other Compensation includes $14,000 for the Company's
Supplemental Retirement Plan (the "Supplemental Retirement Plan")
contribution, $8,000 for the Company Retirement Plan discretionary
contribution, $13,204 for the value of the Split Dollar Life Insurance
Plan (the "Life Insurance Plan"), $4,800 for the Company Retirement Plan
employer matching contribution and $1,172 for the cost of term life
insurance coverage provided by the Company. 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.
(6) In 1998 All Other Compensation includes $8,017 for the value of the BEARs
Program, $8,000 for the Company Retirement Plan discretionary
contribution, $13,300 for the value of the Life Insurance Plan, $5,965
for the Supplemental Retirement Plan contribution, $4,800 for the Company
Retirement Plan employer matching contribution and $780 for the cost of
term life insurance coverage provided by the Company. 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.
(7) In 1998 All Other Compensation includes $3,207 for the value of the BEARs
Program, $8,000 for the Company Retirement Plan discretionary
contribution, $6,925 for the Supplemental Retirement Plan contribution,
$4,800 for the Company Retirement Plan matching contribution and $780 for
the cost of term life insurance coverage provided by the Company. 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
-14-
<PAGE>
Company Retirement Plan matching contribution and $756 for 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.
(8) In 1998 All Other Compensation includes $4,009 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, $5,777 for the Supplemental Retirement Plan contribution,
$4,800 for the Company Retirement Plan matching contribution, $1,340 for
the value of the Life Insurance Plan and $780 for the cost of term life
insurance provided by the Company. 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. At
December 26, 1998, Mr. Kleutghen had a balance on the personal loan of
$3,930. 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.
-15-
<PAGE>
Option Grants for Fiscal 1998
The following table provides information concerning grants of stock options
by the Company to the named executive officers in fiscal 1998.
<TABLE>
<CAPTION>
OPTION GRANTS DURING FISCAL 1998
- -------------------------------------------------------------------------------------------------------------------
Potential Realizable
Value at Assumed Annual
Number of % of Total Rates of Stock Price
Securities Options Appreciation for Option
Underlying Granted Exercise Term
Options to Employees Price Per Expiration ------------------------
Name Date of Grant Gtanted in 1998 Share Date 5% 10%
- -------------------- -------------- ----------- ------------ -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Martin Sperber ..... 01/23/98 73,500 $14.2857 01/23/08 660,331 1,673,425
04/09/98 73,500 17.0000 04/09/08 785,803 1,991,379
12/17/98 75,000 13.6250 12/17/08 642,645 1,628,602
-----------
222,000 10.8
===========
Dariush Ashrafi .... 01/23/98 26,250 14.2857 01/23/08 235,832 597,652
04/09/98 26,250 17.0000 04/09/08 280,644 711,207
12/17/98 25,000 13.6250 12/17/08 214,215 542,867
-----------
77,500 3.8
===========
Jay Cayado 01/23/98 13,125 14.2857 01/23/08 117,916 298,826
04/09/98 34,125 17.0000 04/09/08 364,837 924,569
12/17/98 25,000 13.6250 12/17/08 214,215 542,867
-----------
72,250 3.5
===========
Paul Feuerman 01/23/98 13,125 14.2857 01/23/08 117,916 298,826
04/09/98 47,250 17.0000 04/09/08 505,159 1,280,172
12/17/98 25,000 13.6250 12/17/08 214,215 542,867
-----------
85,375 3.6
===========
Paul Kleutghen 01/23/98 13,125 14.2857 01/23/08 117,916 298,826
04/09/98 26,250 17.0000 04/09/08 280,644 711,207
12/17/98 12,500 13.6250 12/17/08 107,107 271,433
-----------
51,875 2.5
===========
</TABLE>
Option Exercises and Values for Fiscal 1998
The following table provides information concerning options exercised in
fiscal 1998 by the named executive officers and the value of such officers'
unexercised options at December 26, 1998.
-16-
<PAGE>
<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES IN FISCAL 1998 AND FISCAL YEAR-END
OPTION VALUES
- ------------------------------------------------------------------------------------------------------------------------
Value of Unexercised
Number of Securities In-The-Money
Underlying Unexercised Options at
Shares Options at Fiscal Year-End Fiscal Year-End
Acquired Value --------------------------- ---------------------------
Name On Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ---------------------------- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Martin Sperber 0 0 503,475 222,000 0 0
Dariush Ashrafi 0 0 77,350 152,400 0 0
Jay Cayado 0 0 36,750 82,750 0 0
Paul Feuerman 0 0 42,350 102,875 0 0
Paul Kleutghen 0 0 46,375 64,825 0 0
</TABLE>
Employment Agreements
Agreements with Mr. Sperber. 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 by Mr. Sperber
following 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, if no such criteria is
established by the Compensation Committee, $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.
-17-
<PAGE>
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.
The Company entered into 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 his
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 will be immediately canceled. 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).
Agreements with Mr. Ashrafi. 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. 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. Pursuant to a 1995 deferred compensation
agreement with the Company, Mr. Ashrafi is entitled to receive an LTIP payment
of $300,000, payable in quarterly payments in the amount of $18,750.
-18-
<PAGE>
Agreements with Mr. Cayado. The Company entered into an employment
agreement with Javier 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. 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. Pursuant to a 1996 deferred compensation
agreement with the Company, 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.
Agreements with Mr. Feuerman. 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 of 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. 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. Pursuant to a 1996 deferred compensation
agreement with the Company, Mr. Feuerman is entitled to receive an LTIP payment
of $500,000, payable annually in two installments of $100,000 each, followed by
two installments of $150,000 each.
Agreements with Mr. Kleutghen. 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 of 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. 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 his full-time employment elsewhere. Pursuant to a 1996 deferred compensation
agreement with the Company, Mr. Kleutghen is entitled to receive an LTIP payment
of $500,000, payable in annual installments of $100,000 each on December 31,
1996 and 1997 and two annual installments of $150,000 each on December 31, 1998
and 1999.
-19-
<PAGE>
PERFORMANCE GRAPH
The following graph compares the cumulative total stockholder return on the
Common Stock with the cumulative total stockholder return of the S&P Smallcap
600 Index and a peer group index*. The graph assumes that a $100 investment was
made on April 9, 1998 (the date of the Company's initial public offering) in
each of the Common Stock, the S&P Smallcap 600 Index and the peer group index,
and that all dividends were reinvested quarterly.
Comparison of Cumulative Total Return Among Schein Pharmaceutical Inc., the S&P
Smallcap 600 Index, and a Peer Group Index
[GRAPH OMITTED]
Total Return
Stock Price Plus Reinvested Dividends
<TABLE>
<CAPTION>
Date Schein Pharmaceutical Inc. The S&P Smallcap 600 Index Peer Group Index
- ---- -------------------------- -------------------------- ----------------
<S> <C> <C> <C>
April 9, 1998 $100 $100 $100
June 30, 1998 $115.76 $ 96.84 $109.62
September 30, 1998 $ 36.96 $ 76.59 $111.93
December 26, 1998 $ 53.80 $ 90.93 $118.48
</TABLE>
The foregoing graph is based on historical data and is not necessarily
indicative of future performance. This graph shall not be deemed to be
"soliciting material" or to be "filed" with the Commission or subject to
Regulations 14A and 14C under the Exchange Act or to the liabilities of Section
18 under the Exchange Act.
- --------
* Based on information for a self-constructed peer group consisting of the
following companies:
Alpharma Inc., Barr Laboratories Inc., IVAX Corporation, Mylan
Laboratories, Inc., Teva Pharmaceutical Industries Ltd. and Watson
Pharmaceuticals Inc.
-20-
<PAGE>
PROPOSAL 2: ADOPTION OF THE COMPANY'S 1999 STOCK OPTION PLAN
The Board of Directors has approved the Schein Pharmaceutical, Inc. 1999
Stock Option Plan (the "1999 Plan") to enable the Company to offer employees of
the Company and its affiliates stock-based incentives -- which may be either
incentive stock options ("ISOs") or nonqualified stock options. This creates a
means to raise the level of stock ownership by employees to attract, retain and
motivate the employees who are important to the success and growth of the
business of the Company and to create a long-term mutuality of interest between
those employees and the stockholders of the Company.
At the Annual Meeting, the stockholders of the Company will be asked to
adopt the 1999 Plan. The Board of Directors recommends adoption of the 1999
Plan. The following is a summary of the principal provisions of the 1999 Plan.
Administration
The 1999 Plan will be administered and interpreted by a committee appointed
by the Board of Directors consisting of two or more non-employee members of the
Board of Directors (the "Committee"). The 1999 Plan is designed so that if each
of the members of the Committee is a "non-employee director" as provided by Rule
16b-3 under the Exchange Act and an "outside director" as defined under Section
162(m) of the Internal Revenue Code (the "Code") to the extent then required,
the grant (other than a grant at a below market purchase price) and exercise of
options will comply with those provisions. It is anticipated that the Board of
Directors will appoint a Committee that will be comprised of "outside
directors." The Committee will have the full authority to administer and
interpret the 1999 Plan and take all actions in connection with the 1999 Plan
and the options thereunder as the Committee, in its sole discretion, deems
necessary or desirable. In the event that the Board of Directors does not
appoint a committee to administer the 1999 Plan, the functions of the Committee
will be exercised by the Board of Directors.
Eligibility
All employees of the Company and its affiliates are eligible to be granted
nonqualified stock options. Only employees of the Company and those affiliates
of the Company that qualify as subsidiary or parent corporations (within the
meaning of Section 424 of the Code) are eligible to be granted ISOs under the
1999 Plan.
Description of Options
Term. The Committee may grant nonqualified stock options and ISOs to
purchase shares of Common Stock. The Committee will determine the number of
shares of Common Stock subject to each option, the term of each option (which
may not exceed ten years (or five years in the case of an ISO granted to a 10%
stockholder, as determined under Section 422 of the Code)), the purchase price,
the vesting schedule (if any), and the other material terms of each option.
Unless otherwise provided in the applicable option agreement, all options
granted and not previously exercised will become vested and immediately
exercisable upon a change of control of the Company, as defined in the 1999
Plan. In the event that the participant's employment is
-21-
<PAGE>
terminated for "Cause," as defined in the 1999 Plan, or the participant violates
an agreement between him or her and the Company or any of its affiliates, all
outstanding options held by the participant will immediately be canceled.
Purchase price. In the case of ISOs, the purchase price of an option may
not be less than 100% of the fair market value of a share of Common Stock at the
time of grant, or 110% of such fair market value if the optionee owns more than
10% of the shares of Common Stock (or common stock of a parent or subsidiary
corporation as determined under Section 422 of the Code) outstanding at the time
of grant. In the case of nonqualified stock options, the purchase price of an
option may not be less than the par value of a share of Common Stock.
Exercise. Payment of the purchase price may be made in cash or by check,
bank draft or money order payable to the order of the Company, through the
delivery of irrevocable instructions to a broker to deliver to the Company an
amount equal to the aggregate purchase price, or on such other terms and
conditions as may be acceptable to the Committee and in accordance with
applicable law. If permitted by the Committee, the purchase price may be paid by
delivery of unencumbered shares of Common Stock that have been held for such
period as required by applicable accounting standards to avoid a charge to
earnings, a combination of shares of Common Stock and cash, a promissory note,
or by a combination of cash (or cash and shares of Common Stock) and a
promissory note. The Committee, in its discretion, may permit delivery of Common
Stock acquired pursuant to the exercise of a nonqualified stock option to be
deferred and may grant "reload" options such that the number of options granted
is equal to the number of options exercised or the number of shares of Common
Stock used to pay the purchase price of options or withholding taxes.
Available Shares. Under the 1999 Plan, options to purchase an aggregate of
not more than 3,250,000 shares of Common Stock may be granted from time to time
to employees of the Company or its affiliates. The number of shares of Common
Stock which may be subject to option grants is subject to certain adjustments to
reflect changes in the Company's capital structure or business by reason of
certain corporate transactions or events. In general, if options are for any
reason canceled, expire or terminate unexercised, the shares covered by the
options will again be available for the grant of options. In addition, if shares
of Common Stock are exchanged by a participant as full or partial payment to the
Company, or for withholding, in connection with the exercise of a stock option,
or the number shares of Common Stock otherwise deliverable has been reduced for
withholding, the shares exchanged or reduced will again be available for
purposes of granting nonqualified stock options under the 1999 Plan.
The maximum number of shares of Common Stock with respect to which options
may be granted to any employee under the 1999 Plan during any fiscal year may
not exceed 750,000.
-22-
<PAGE>
Awards
Because future awards under the 1999 Plan will be based upon prospective
factors including the nature of services to be rendered by prospective employees
and consultants of the Company and their potential contributions to the success
of the Company, actual awards cannot be determined at this time.
On March 31, 1999, the closing sale price per share of Common Stock on the
New York Stock Exchange was $13.00.
Amendment and Termination
The Board of Directors may modify, suspend or terminate the 1999 Plan in
whole or in part. However, to the extent required by applicable law, certain
modifications affecting the 1999 Plan must be approved by the Company's
stockholders. In addition, any change in the 1999 Plan that may adversely affect
an optionee's rights under an outstanding option requires the consent of the
optionee.
Miscellaneous
Options under the 1999 Plan are generally nontransferable, except that the
Committee may, in its sole discretion, permit the transfer of nonqualified stock
options, in whole or in part and in such circumstances, and under such
conditions, as specified by the Committee at the time of grant or thereafter.
The 1999 Plan is not subject to any of the requirements of the Employee
Retirement Income Security Act of 1974, as amended. The 1999 Plan is not, nor is
it intended to be, qualified under Section 401(a) of the Code.
Material Federal Income Tax Consequences
The rules concerning the federal income tax consequences with respect to
options granted and to be granted pursuant to the 1999 Plan are quite technical.
Moreover, the applicable statutory provisions are subject to change, possibly
with retroactive effect, as are their interpretations and applications which may
vary in individual circumstances. The following summary is designed to provide a
general understanding of the material federal income tax consequences relating
to the 1999 Plan:
Incentive Stock Options. In general, an employee will not realize taxable
income upon either the grant or the exercise of an ISO and the Company will not
realize an income tax deduction at either time. If the recipient does not sell
the Common Stock received pursuant to the exercise of an ISO within either (1)
two years after the date of the grant of the ISO or (2) one year after the date
of exercise, a subsequent sale of the Common Stock will result in long-term
capital gain or loss to the recipient and will not result in a tax deduction to
the Company. Capital gains rates may be reduced in the case of a longer holding
period.
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If the recipient disposes of the Common Stock acquired upon exercise of the
ISO within either of the above-mentioned time periods, the recipient will
generally realize as ordinary income an amount equal to the lesser of: (1) the
fair market value of the Common Stock on the date of exercise over the purchase
price, and (2) the amount realized upon disposition over the purchase price.
In this event, the Company generally will be entitled to an income tax
deduction equal to the amount recognized as ordinary income. Any gain in excess
of the amount realized by the recipient as ordinary income will be taxed at the
rates applicable to short-term or long-term capital gains, depending on the
holding period.
Nonqualified Stock Options. A recipient will not realize any taxable income
upon the grant of a nonqualified stock option and the Company will not receive a
deduction at the time of grant unless the option has a readily ascertainable
fair market value at the time of grant. Upon the exercise of a nonqualified
stock option, the recipient generally will realize ordinary income in an amount
equal to the excess of the fair market value of the Common Stock on the date of
exercise over the purchase price. Upon a subsequent sale of the such Common
Stock by the recipient, the recipient will recognize short-term or long-term
capital gain or loss depending upon his or her holding period for the Common
Stock. The Company will generally be allowed a deduction equal to the amount
recognized by the recipient as ordinary income. Any officers and directors of
the Company subject to Section 16(b) of the Exchange Act may also be subject to
special tax rules regarding the income tax consequences concerning their
nonqualified stock options.
All Stock Options. With regard to both ISOs and nonqualified stock options,
in the event that the exercisability or vesting of any award is accelerated
because of a change of control, payments relating to the awards (or a portion
thereof), either alone or together with certain other payments, may constitute
parachute payments under Section 280G of the Code, which excess amounts may be
subject to excise taxes payable by the employee.
In addition, any entitlement to a tax deduction on the part of the Company
is subject to the applicable tax rules (including, without limitation, Section
162(m) of the Code regarding a $1 million limitation on deductible
compensation). In general, Section 162(m) of the Code denies a publicly held
corporation a deduction for federal income tax purposes for compensation in
excess of $1 million per year per person to its chief executive officer and the
four other officers whose compensation is disclosed in its proxy statement,
subject to certain exceptions. Stock options will generally qualify under one of
these exceptions if: (1) they are granted under a plan that states the maximum
number of shares with respect to which options may be granted to any recipient
during a specified period, (2) the purchase price is no less than fair market
value at the time of the grant, (3) the plan under which the options are granted
is approved by stockholders, and (4) the plan is administered by a compensation
committee comprised of outside directors. Except with respect to options granted
at a below-market purchase price, the 1999 Plan is designed to permit these
requirements to be satisfied.
Vote Required
Approval of the 1999 Plan requires the affirmative vote of the holders of a
majority of the outstanding shares of Common Stock represented at the Annual
Meeting, provided that the total
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votes cast on the 1999 Plan represents over 50% of all of the outstanding shares
of Common Stock as of the Record Date.
Recommendation of the Board of Directors
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A
VOTE FOR THE ADOPTION OF THIS PROPOSAL
PROPOSAL 3: RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
The Board of Directors requests that the stockholders ratify its selection
of BDO to serve as the Company's independent auditors for the fiscal year ending
December 25, 1999. BDO examined the consolidated financial statements of the
Company for the fiscal year ended December 26, 1998. Representatives of BDO will
be present at the Annual Meeting to make a statement if they desire to do so and
to respond to questions by stockholders.
Vote Required
The affirmative vote of a majority of the shares voted at the meeting is
required for the ratification of the Board's selection of BDO as the Company's
independent auditors for the fiscal year ending December 25, 1999.
Recommendation of the Board of Directors
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A
VOTE FOR THE ADOPTION OF THIS PROPOSAL.
RESTRUCTURING AGREEMENTS
At February 26, 1999, 20,556,057 shares of Common Stock (approximately
62.1% of the outstanding shares) were beneficially owned by Martin Sperber,
principally through voting control pursuant to the Voting Trust Agreement dated
September 30, 1994. Mr. Sperber, acting as voting trustee, is able to control
substantially all matters requiring stockholder approval, including the election
of directors.
In September 1994, in connection with Bayer Corporation's acquisition of
its 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
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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, Pamela Joseph and certain trusts established by them or for their issue
(collectively, the "Family Stockholders") (i.e., approximately 59.5% of the
shares of Common Stock outstanding at February 26, 1999). 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 issuance
of Common Stock by the Company or sales of Common Stock by Continuing
Stockholders (as defined below)). The Restructuring Agreements provide that Mr.
Sperber may designate certain individuals to succeed him as Voting Trustee.
The Restructuring Agreements provide that, until Bayer Corporation owns
less than 10% of the 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 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. 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 (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 of Common Stock by
Bayer Corporation other than to a Permitted Assignee (as defined below), the
Company may not, without Bayer Corporation's consent, among other things, (a)
own, manage or operate any business not principally engaged in a segment of the
pharmaceutical or health care industry or any business ancillary thereto, (b)
amend or restate the Company's charter or by-laws to require more than majority
approval to elect a majority of the Board of Directors or (c) engage in
transactions with any affiliate on terms more favorable to the affiliate than
could be obtained in an arm's-length transaction, other than intercompany
transactions and transactions under the Restructuring Agreements.
The Restructuring Agreements impose certain restrictions on Bayer
Corporation and its affiliates until May 15, 2001 (the "Standstill Period").
Specifically, the Restructuring Agreements provide that Bayer Corporation may
purchase shares of Common Stock to increase its ownership 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 (the "Standstill").
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
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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 to acquire
control of the Company 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) 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 person who was a stockholder as
of September 30, 1994) and (iii) if, on May 15, 2001, the total number of shares
issued and outstanding (less restricted securities, as defined therein) 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.
Under the Restructuring Agreements, if Bayer Corporation for any reason
acquires shares of Common Stock in excess of the New Percentage (as defined
below), 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. The "New Percentage" means 30% before May 15, 1999, 33
1/3% thereafter and before May 15, 2000, 36 2/3% thereafter and before May 15,
2001.
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 below), 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, (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
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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 of the Company 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 shares
of 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 shares of Common Stock to any one person, its affiliates or Family
Group members in any three-month period and (II) 4% of the outstanding shares of
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 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 certain registration rights.
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 of Common
Stock 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 Corporation 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 of Common Stock 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 (as
defined above)
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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 shares of Common Stock 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 of Common
Stock 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 of Common Stock 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 Period 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 June
15, 2000, Bayer Corporation is permitted under the Restructuring Agreements, and
in good faith wishes, to sell
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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 Bayer Corporation wishes to sell the shares of
Common Stock.
CERTAIN OTHER AGREEMENTS
In February 1998, the Company entered into a strategic alliance agreement
with Cheminor Drugs Limited ("Cheminor"), Dr. Reddy's Laboratories Limited and
Reddy-Cheminor, Inc. As part of the arrangement, each party is 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 any shares of Common Stock and, accordingly, is not
entitled to representation on the Company's Board of Directors.
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.
The Company has a co-promotion agreement which expires in June 1999 with
Bayer Corporation, covering INFeD(R). Under the terms of the agreement, in
exchange for promotional support, the Company shares with Bayer Corporation
financial results in excess of specified threshold amounts. The Company incurred
selling expenses under the agreement (in the form of payments to Bayer) of
approximately $3.0 million, $4.2 million and $3.0 million in 1998, 1997 and
1996, respectively.
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. The Company and Bayer sell
products to certain of these ventures for resale in their local markets. From
time to time, the Company or Bayer has acquired the other party's interest in
the joint venture. Each of the Company and Bayer continues to evaluate its
relative position in markets where it has a multisource business.
During 1998, 1997 and 1996, the Company invested approximately $0.3
million, $0.2 million and $2.0 million, respectively, to acquire up to a 50%
interest in each of several international pharmaceutical businesses. At December
31, 1998, the Company had guaranteed $6.1 million of borrowings of these
businesses. These businesses are jointly owned with subsidiaries of Bayer AG.
The Company generally anticipates that these international businesses
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would not have significant revenues or operations for a period of at least 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.
In 1997, the Company, together with the Pharmaceutical, Consumer
Healthcare, Afga Film and Diagnostics divisions of Bayer Corporation, 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 fiscal 1997 and in fiscal 1998, the
Company incurred expenses of approximately $0.1 million and $0.4 million,
respectively, in connection with this arrangement. Under its existing
arrangement with Bayer Healthcare Partners, the Company is not required to share
revenues or profits with other participants.
In the ordinary course of business, the Company sells pharmaceutical
products to affiliates, including Henry Schein, Inc., for distribution to their
customers. Net sales to affiliates were $8.6 million, $ 12.5 million and $ 8.6
million in fiscal 1998, 1997 and 1996, respectively, which includes net sales to
Henry Schein, Inc. of $5.1 million, $10.0 million, and $8.6 million in fiscal
1998, 1997 and 1996, respectively. Certain of the Company's principal
stockholders are principal stockholders of Henry Schein, Inc. All transactions
between the Company and its affiliates 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. The loan was repaid in full on March 5, 1999, including
accrued and unpaid interest.
Richard L. Goldberg is a member of Proskauer Rose LLP, which rendered legal
services to the Company in 1998 and continues to render such services in 1999.
Mr. Goldberg is not an officer or employee of the Company.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's directors,
executive officers and persons who beneficially own more than 10% of the
Company's outstanding Common Stock to file with the Commission initial reports
of ownership and reports of changes in ownership of the Common Stock. Based
solely upon a review of Forms 3, 4 and 5 furnished to the Company with respect
to fiscal 1998, the Company believes that its executive officers, directors and
beneficial owners of more than 10% of the Company's outstanding Common Stock
complied with Section 16(a) filing requirements, except that during 1998, an
Initial Report on Form 3 was not timely filed with respect to Harvey Rosenthal
when he became a director of the Company due to clerical oversight.
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STOCKHOLDER PROPOSALS
Proposals of stockholders intended to be presented at the 2000 annual
meeting of stockholders must be received by the Company in writing no later than
December 14, 1999 to be eligible for inclusion in the Company's proxy statement
for that meeting. If notice of a stockholder proposal is not received by the
Company on or before February 29, 2000, the persons named in the enclosed form
of proxy will have discretionary authority to vote all proxies with respect
thereto in accordance with their best judgment.
OTHER MATTERS
Upon written request addressed to the Company's Director of Investor
Relations at 100 Campus Drive, Florham Park, New Jersey 07932 from any person
solicited herein, the Company will provide, at no cost, a copy of the Form 10-K
Annual Report filed with the Commission for the fiscal year ended December 26,
1998.
Management of the Company does not know of any matters to be brought before
the Annual Meeting other than the matters set forth in the Notice of Annual
Meeting of Stockholders and matters incident to the conduct of the Meeting.
However, if any other matters should properly come before the Annual Meeting,
the persons named in the enclosed proxy card will have discretionary authority
to vote all proxies with respect thereto in accordance with their best judgment.
BY ORDER OF THE BOARD OF DIRECTORS
Paul Feuerman
Secretary
DATED: April 16, 1999
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SCHEIN PHARMACEUTICAL, INC.
PROXY -- ANNUAL MEETING OF STOCKHOLDERS -- May 19, 1999
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned stockholder of Schein Pharmaceutical, Inc. (the "Company")
hereby appoints Martin Sperber, Dariush Ashrafi and Paul Feuerman, and each of
them, proxies of the undersigned with full power of substitution to vote at the
Annual Meeting of Stockholders of the Company to be held on Wednesday, May 19,
1999, beginning at 10:00 a.m., local time, at The Madison Hotel, One Convent
Road, Morristown, New Jersey 07960, and at any postponement or adjournment
thereof, the number of votes which the undersigned would be entitled to cast if
personally present:
Please mark, sign, date and return in the enclosed envelope.
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^ FOLD AND DETACH HERE ^
<PAGE>
This proxy when properly executed will be voted in the Please mark
manner directed herein by the undersigned stockholder. your votes as [ X ]
If no direction is given, this proxy will be voted FOR indicated in
the nominees listed in Proposal 1 and FOR Proposals 2 this example.
and 3.
(1) Election of Directors Martin Sperber Richard L. Goldberg
FOR all nominees WITHHOLD AUTHORITY INSTRUCTIONS: TO WITHHOLD AUTHORITY TO
listed to the right to vote for all VOTE FOR ANY INDIVIDUAL
(except as marked nominees NOMINEE, DRAW A LINE
to the contrary) listed to the right THROUGH OR STRIKE OUT
THAT NOMINEE'S NAME
[ ] [ ] AS SET FORTH ABOVE.
(2) Proposal to (3) Proposal to ratify the (4) To consider and
adopt the appointment of BDO Seidman, act upon any other
Company's 1999 LLP as the Company's matter which may
Stock Option Independent Auditors properly come
Plan. for the fiscal year before the meeting
ending December 25, 1999. or any adjournment
thereof.
FOR AGAINST ABSTAIN FOR AGAINST ABSTAIN
[ ] [ ] [ ] [ ] [ ] [ ]
All as more particularly described in the Proxy Statement dated April 16, 1999,
relating to such meeting, receipt of which is hereby acknowledged.
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Signature_______________________ Signature_______________________ Date__________
Please sign your name exactly as it appears hereon. Joint owners must each sign.
When signing as attorney, executor, administrator, trustee or guardian, please
give your full title as it appears hereon
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^ FOLD AND DETACH HERE ^
