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[SCHEIN PHARMACEUTICAL, INC. LETTERHEAD]
MEMORANDUM
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TO: Non-Employee Directors
FROM: Oliver Esman
RE: Election to Exercise Stock Options granted under the
Schein Pharmaceutical, Inc. 1995 Non-Employee Stock Option
Plan
DATE: June 19, 2000
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THIS DOCUMENT CONSTITUTES PART OF A PROSPECTUS
COVERING SECURITIES THAT HAVE BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933
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As you know, Watson Pharmaceuticals, Inc. ("WATSON") has entered into an
agreement to acquire all of the outstanding common stock of Schein
Pharmaceutical, Inc. ("SCHEIN COMMON STOCK") through a two-step transaction
comprised of a cash tender offer (the "TENDER OFFER") followed by a merger (the
"MERGER"). The following information explains the effect of the proposed
acquisition on your stock options ("STOCK OPTIONS") under the Schein
Pharmaceutical, Inc. 1995 Non-Employee Stock Option Plan (the "1995 OPTION
PLAN").
Please also refer to the enclosed documents entitled "Offer to Purchase for Cash
All Outstanding Shares of Common Stock of Schein Pharmaceutical, Inc." by Watson
Pharmaceuticals, Inc. and the related Letter of Transmittal which describe the
terms of the Tender Offer.
A. IF ANY OF YOUR STOCK OPTIONS ARE NOT CURRENTLY VESTED.
Any Stock Options granted to you under the 1995 Option Plan which are not
currently vested (prior to the expiration date of the Tender Offer) will become
fully vested and immediately exercisable upon the consummation of the Tender
Offer. However, prior to the consummation of the Tender Offer, you may only
exercise your Stock Options to the extent that they are vested -- without regard
to the Tender Offer. PLEASE REFER TO THE ENCLOSED DOCUMENTS ENTITLED "OFFER TO
PURCHASE FOR CASH ALL OUTSTANDING SHARES OF COMMON STOCK OF SCHEIN
PHARMACEUTICAL, INC." AND THE RELATED LETTER OF TRANSMITTAL WHICH DESCRIBE THE
TERMS OF THE TENDER OFFER.
Following the consummation of the Tender Offer, you may elect to exercise all or
any part of your Stock Options for shares of Schein Common Stock until the last
trading day on which Schein Common Stock is traded on the New York Stock
Exchange immediately preceding the date of the Merger.
B. IF ANY OF YOUR STOCK OPTIONS ARE CURRENTLY VESTED.
If any Stock Options granted to you under the 1995 Option Plan are currently
vested (prior to the consummation of the Tender Offer), you may elect to
exercise all or any part of them for shares of Schein Common Stock until the
last trading day on which Schein Common Stock is traded on the New York Stock
Exchange immediately preceding the date of the Merger. Again, while all of the
Stock Options granted to you under the 1995 Option Plan will become fully vested
upon the consummation of the Tender Offer, prior to the consummation of the
Tender Offer, you may only exercise your Stock Options to the extent that they
are currently vested.
If you have questions regarding the terms of your Stock Options, please contact
Paul Feuerman at 973-593-5960.
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C. IF YOU EXERCISE YOUR VESTED STOCK OPTIONS UNDER THE 1995 STOCK OPTION PLAN.
If you exercise your Stock Options under the 1995 Option Plan by 5:00 P.M. New
York City time on June 29, 2000 (to the extent they are currently vested), you
may tender the shares of Schein Common Stock you acquire upon such exercise
pursuant to the terms of the Tender Offer. You may also sell such shares in an
open market transaction or otherwise. If you do not tender these shares of
Schein Common Stock in the Tender Offer (or otherwise sell them), upon the
Merger each such share will be exchanged for the number of shares of Watson
common stock ("WATSON COMMON STOCK") and/or cash that other holders of Schein
Common Stock will receive for each share of Schein Common Stock in the Merger.
Keep in mind that you could receive substantially more valuable consideration
for your shares of Schein Common Stock in the Merger than if you tender them in
the Tender Offer. PLEASE REFER TO THE ENCLOSED DOCUMENTS ENTITLED "OFFER TO
PURCHASE FOR CASH ALL OUTSTANDING SHARES OF COMMON STOCK OF SCHEIN
PHARMACEUTICAL, INC." AND THE RELATED LETTER OF TRANSMITTAL WHICH DESCRIBE THE
TERMS OF THE TENDER OFFER.
IF YOU INTEND TO EXERCISE YOUR STOCK OPTIONS, PLEASE NOTIFY
PAUL FEUERMAN (973-593-5960) WHO WILL ASSIST YOU IN
DETERMINING ANY RESTRICTIONS THAT MAY BE APPLICABLE TO YOU
UNDER SECTION 16(b) OF THE SECURITIES EXCHANGE ACT OF 1934.
D. IF YOU DO NOT EXERCISE YOUR STOCK OPTIONS UNDER THE 1995 STOCK OPTION PLAN.
If you do not exercise the Stock Options granted to you under the 1995 Option
Plan, upon the consummation of the Merger, those Stock Options will be
automatically assumed by Watson and become options to purchase the number of
shares of Watson Common Stock and/or cash that you would have received in the
Merger (as if you had held such shares of Schein Common Stock immediately prior
to the Merger).
For example:
Assume that you have Stock Options to buy 100 shares of Schein
Common Stock at an exercise price of $16 per share. Also,
assume, for purposes of this example only, that, upon the
Merger, each share of Schein Common Stock (not already acquired
by Watson pursuant to the Tender Offer) will be exchanged for
1/2 share of Watson Common Stock. In accordance with the above
formula, upon exercise of your Stock Options for $1,600, you
will receive 50 shares of Watson Common Stock. PLEASE NOTE THAT
THIS EXAMPLE IS FOR ILLUSTRATION PURPOSES ONLY AND DOES NOT
INDICATE THE AMOUNT THAT YOU WOULD ACTUALLY RECEIVE UPON
EXERCISE OF YOUR STOCK OPTIONS FOLLOWING THE MERGER.
III. TAX CONSEQUENCES OF EXERCISE OF YOUR STOCK OPTIONS.
The following discussion of the principal U.S. federal income tax consequences
of Stock Options to non-employee directors under the 1995 Option Plan is based
on statutory authority and judicial and administrative interpretations as of the
date of this memorandum, which are subject to change at any time (possibly with
retroactive effect). This discussion is limited to the U.S. federal income tax
consequences to individuals who are citizens or residents of the U.S., other
than those individuals who are taxed on a residence basis in a foreign country,
and the U.S. federal income tax effects on Schein in connection with 1995 Option
Plan and awards granted thereunder. This discussion does not address federal
estate tax (other than as it applies to the transfer of Stock Options), social
security or state and local tax issues which may arise in connection with the
Plan. SINCE THE U.S. FEDERAL INCOME TAX LAW IS TECHNICAL AND COMPLEX AND SUBJECT
TO CHANGE, WE URGE YOU TO CONSULT WITH YOUR PERSONAL TAX ADVISOR.
On the exercise of a Stock Option, the amount by which the fair market value of
the Schein Common Stock (or such other securities and/or cash which is
substituted for the Schein Common Stock as a result of the Merger) on the date
of exercise exceeds the exercise price of an exercised Stock Option will be
taxable to you
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as ordinary income. Your subsequent disposition of shares acquired upon exercise
of the Stock Option will ordinarily result in a capital gain or loss.
Because you are a director of Schein, you should consult with your tax advisor
as to whether, as a result of Section 16(b) of the Securities Exchange Act of
1934 (the "EXCHANGE ACT") and the rules and regulations thereunder, the timing
of income recognition is deferred for any period following the exercise of a
Stock Option (the "DEFERRAL PERIOD"). If there is a Deferral Period, absent a
written election (pursuant to Section 83(b) of the Internal Revenue Code, as
amended) filed with the Internal Revenue Service within 30 days after the date
of transfer of the shares of Schein Common Stock pursuant to the exercise of the
Stock Option to include in income, as of the transfer date, the excess (on such
date) of the fair market value of such shares over the exercise price, your
recognition of income could, in certain instances, be deferred until the
expiration of the Deferral Period.
The tax basis of Schein Common Stock acquired on the exercise of a Stock Option
will be equal to the amount of any cash paid on exercise, plus the amount of
ordinary income you recognized as a result of the receipt of such shares. The
holding period for such shares for purposes of determining short or long-term
capital gain will begin upon the exercise of the Stock Option (subject to
special rules if a Deferral Period applies). Capital gains rates may be further
reduced in the case of a longer holding period.
If you exercise a Stock Option by delivering other shares of Schein Common Stock
previously owned by you, you will not recognize gain or loss with respect to the
exchange of such shares, even if their then fair market value is different from
your tax basis. You, however, will be taxed as described above with respect to
the exercise of the Stock Option as if you had paid the exercise price in cash,
and Schein generally will be entitled to an equivalent tax deduction. So long as
you receive a separate identifiable stock certificate therefor, the tax basis
and the holding period for that number of shares of Schein Common Stock received
on such exercise that is equal to the number of shares surrendered on such
exercise will be equal to the tax basis and include the holding period of those
shares surrendered. Your tax basis and holding period for the additional shares
received on exercise of the Stock Option paid for, in whole or in part, with
shares of Schein Common Stock will be the same as if you had exercised the Stock
Option solely for cash.
Schein generally will be entitled, subject to the possible application of
Section 280G of the Internal Revenue Code of 1986, as amended, to a deduction in
connection with your exercise of a Stock Option in an amount equal to the income
you recognize.
PLEASE REFER TO THE ENCLOSED DOCUMENT ENTITLED "OFFER TO PURCHASE FOR CASH ALL
OUTSTANDING SHARES OF COMMON STOCK OF SCHEIN PHARMACEUTICAL, INC." FOR A
DESCRIPTION OF THE TAX CONSEQUENCES TO SCHEIN STOCKHOLDERS WITH RESPECT TO THE
TENDER OFFER AND MERGER.
AVAILABLE INFORMATION
This document and the documents incorporated by reference in Schein's
registration statements on Forms S-8 filed with the Securities and Exchange
Commission, together constitute the "Prospectus" for the offer and sale of
shares of Schein Common Stock pursuant to the 1995 Option Plan.
The following documents (or indicated portions thereof), which have been filed
by Schein with the Securities and Exchange Commission, are incorporated by
reference into the Prospectus:
(a) Schein's Annual Report on Form 10-K for the year ended December 25,
1999;
(b) Schein's Quarterly Report on Form 10-Q for the quarter ended March 25,
2000;
(c) Schein's Current Reports on Form 8-K, filed on May 4, 2000 and May 31,
2000; and
(d) The description of the Schein Common Stock contained in its
Registration Statement on Form S-1 filed with the Securities and Exchange
Commission on February 26, 1998, including any amendments or reports filed for
the purpose of updating such description.
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All documents filed by Schein with the Securities and Exchange Commission
pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to
the date of this Prospectus and prior to the termination of the offering of the
securities described herein pursuant to the 1995 Option Plan shall be deemed to
be incorporated by reference into this Prospectus and to be a part hereof from
the date of filing of such documents and all other documents or materials
provided to Schein's stockholders.
Any statement in a document incorporated or deemed to be incorporated by
reference in this Prospectus shall be deemed to be modified or superseded for
the purposes of this Prospectus to the extent that a statement contained herein
or in any other subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus.
Schein will provide, without charge, all documents or materials provided to
Schein's stockholders to each person participating in the 1995 Option Plan, and,
upon written or oral request of such person, a copy of any and all of the
documents incorporated by reference in this Prospectus (excluding the exhibits
to such documents, unless such exhibits are specifically incorporated by
reference into such documents). Requests should be directed to Investor
Relations, Schein Pharmaceutical, Inc., 100 Campus Drive, Florham Park, NJ
07932, telephone number (973) 593-5535.
No person is authorized to give information or to make any representations other
than those contained in this Prospectus and, if given or made, such information
or representations must not be relied upon as having been authorized by Schein.
This Prospectus does not constitute an offer to sell or a solicitation of an
offer to buy any of the securities covered hereby in any jurisdiction or to any
person to whom it is unlawful to make such offer in such jurisdiction. Neither
the delivery of this Prospectus nor any sale made hereunder shall create, under
any circumstances, any implication that there has been no change in the facts
herein set forth since the date hereof.
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If you want to elect to EXERCISE all or any part of your Stock Options, please
call ChaseMellon Shareholder Services at 800-411-6657. Please note that any
election that you make will be irrevocable.
If you want to TENDER any or all of the shares of Schein Common Stock underlying
your vested stock options granted under the 1995 Option Plan, please refer to
the enclosed documents entitled "Offer to Purchase for Cash All Outstanding
Shares of Common Stock of Schein Pharmaceutical, Inc. and the related Letter of
Transmittal which describe the terms of the Tender Offer, and the Confidential
Instructions.
Should you have any questions regarding this memorandum, please contact Oliver
Esman at (973) 593-5984.
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