EXHIBIT 4.7
OFFERING MEMORANDUM CONFIDENTIAL
$100,000,000
[LOGO] SCHEIN PHARMACEUTICAL
SENIOR FLOATING RATE NOTES DUE 2004
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Schein Pharmaceutical, Inc. ("Schein" or the "Company") is offering (the
"Offering") $100,000,000 of Senior Floating Rate Notes due 2004 (the "Notes").
Interest on the Notes will be payable quarterly on January 15, April 15, July
15 and October 15 of each year, commencing on January 15, 1998, at a rate per
annum equal to the Applicable LIBOR Rate (as defined herein). Interest on the
Notes will be reset quarterly. The Notes will mature on December 15, 2004
unless previously redeemed. The Notes will be redeemable, in whole or in part,
at the option of the Company, at any time, at the redemption prices set forth
herein, plus accrued and unpaid interest thereon, to the date of redemption.
Upon the occurrence of a Change of Control (as defined herein), each holder of
Notes may require the Company to repurchase such holder's Notes, in whole or
in part, at a repurchase price of 101% of the principal amount, plus accrued
and unpaid interest thereon, to the date of repurchase. The Company currently
expects to repurchase or redeem a portion of the Notes offered hereby. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and "Description of Notes."
The indebtedness evidenced by the Notes will be senior unsecured obligations
of the Company, will rank pari passu in right of payment with all existing and
future senior indebtedness of the Company and will rank senior in right of
payment to all existing and future indebtedness of the Company that is, by its
terms, expressly subordinated to the Notes. Holders of secured indebtedness of
the Company, including the lenders under the Senior Credit Agreement (as
defined herein), will have claims with respect to the assets constituting
collateral for such indebtedness that are prior to the claims of holders of
the Notes. In the event of a default on the Notes, or a bankruptcy,
liquidation or reorganization of the Company, such assets will be available to
satisfy obligations with respect to the indebtedness secured thereby before
any payment therefrom could be made on the Notes. To the extent that the value
of such collateral is not sufficient to satisfy the indebtedness secured
thereby, amounts remaining outstanding on such indebtedness would be entitled
to share with the Notes and their claims with respect to any other assets of
the Company. As of September 27, 1997, as adjusted for the Offering, the
Company and its Restricted Subsidiaries (as defined herein) would have had
secured indebtedness of approximately $160.6 million outstanding. The
obligations of the Company and the Guarantors (as defined herein) under the
Senior Credit Agreement are secured by substantially all of the assets of the
Company and the Guarantors. As of September 27, 1997, as adjusted for the
Offering, the Company would have had approximately $69.8 million of undrawn
availability under the Senior Credit Agreement. The Indenture relating to the
Notes (the "Indenture") will permit the Company and the Restricted
Subsidiaries to incur additional Indebtedness (as defined herein), including
Secured Indebtedness (as defined herein), subject to certain limitations. See
"Description of Notes."
All of the Company's existing and future Restricted Subsidiaries will
unconditionally guarantee on a senior unsecured basis the performance and
punctual payment when due, whether at maturity, by acceleration or otherwise,
of all obligations of the Company under the Indenture and the Notes (the
"Subsidiary Guarantees"). Each of the Guarantors has guaranteed the Company's
indebtedness under the Senior Credit Agreement on a senior secured basis. The
Subsidiary Guarantees will rank pari passu in right of payment with all
existing and future unsecured senior indebtedness of the Guarantors and senior
in right of payment to all future subordinated indebtedness of the Guarantors.
The Subsidiary Guarantee of each Guarantor will be effectively subordinated to
the prior payment in full of all secured indebtedness of such Guarantors,
including secured indebtedness under the Senior Credit Agreement. See
"Description of Notes--Guarantees."
The Notes have been designated eligible for trading in the Private
Offerings, Resales and Trading through Automated Linkages (PORTAL) market. The
Company and the Restricted Subsidiaries have agreed, for the benefit of all
holders of the Notes, that, after the sale of the Notes, they will file a
registration statement relating to an exchange offer for the Notes under the
Securities Act (as defined herein) for another series of notes with
substantially the same terms as the Notes offered hereby. See "Exchange Offer
and Registration Rights Agreement."
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SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE NOTES.
-----------------
The offering price of the Notes is 97.500% plus accrued interest, if any, from
December 24, 1997.
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THE NOTES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT") OR ANY STATE SECURITIES LAWS AND, UNLESS SO
REGISTERED, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EXEMPTION FROM,
OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES LAWS. ACCORDINGLY, THE
NOTES ARE BEING OFFERED AND SOLD HEREBY ONLY TO (A) QUALIFIED
INSTITUTIONAL BUYERS (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT)
IN RELIANCE ON THE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT PROVIDED BY RULE 144A THEREUNDER, AND (B) TO A LIMITED
NUMBER OF INSTITUTIONAL "ACCREDITED INVESTORS" (AS DEFINED IN RULE
501(A)(1), (2), (3) OR (7) UNDER THE SECURITIES ACT) THAT EXECUTE AND
DELIVER A LETTER CONTAINING REPRESENTATIONS AND AGREEMENTS.
PROSPECTIVE PURCHASERS ARE HEREBY NOTIFIED THAT SELLERS OF THE NOTES
MAY BE RELYING ON THE EXEMPTION FROM PROVISIONS OF SECTION 5 OF THE
SECURITIES ACT PROVIDED BY RULE 144A. FOR CERTAIN RESTRICTIONS ON
RESALES, SEE "TRANSFER RESTRICTIONS."
-----------------
The Notes are offered by the Company, subject to prior sale, when, as and if
delivered to and accepted by the Initial Purchaser (as defined herein) and
subject to certain other conditions. The Initial Purchaser reserves the right
to withdraw, cancel or modify such offer and to reject orders in whole or in
part. It is expected that delivery of the Notes to qualified institutional
buyers will be made against payment therefor on or about December 24, 1997, in
book-entry form through the facilities of The Depository Trust Company.
Delivery of Notes to institutional accredited investors will be made in
certificated form on the same date. See "Description of Notes--Book-Entry;
Delivery and Form" and "Description of Notes--Certificated Securities."
SOCIETE GENERALE
Securities Corporation
December 19, 1997
[INSERT PICTURES.]
The information in the captions above is presented as of December 3, 1997
and is subject to change. No assurance can be given that any of the Company's
products covered by pending Abbreviated New Drug Applications ("ANDAs") or
other products under development will be successfully developed or approved by
the United States Food and Drug Administration ("FDA") or achieve significant
revenue or profitability.
----------------
INFeD(R) is a registered trademark of the Company; and Ferrlecit(R) and
Unipine XL(R) are registered trademarks of Makoff R&D Laboratories, Inc. and
Ethical Holdings plc, respectively.
----------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE NOTES, INCLUDING
OVERALLOTMENT, STABILIZING TRANSACTIONS AND SYNDICATE SHORT COVERING
TRANSACTIONS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "PLAN OF
DISTRIBUTION."
THIS OFFERING MEMORANDUM (THE "OFFERING MEMORANDUM") IS BEING PROVIDED ON A
CONFIDENTIAL BASIS TO QUALIFIED INSTITUTIONAL BUYERS AND TO A LIMITED NUMBER
OF INSTITUTIONAL ACCREDITED INVESTORS FOR INFORMATIONAL USE SOLELY IN
CONNECTION WITH THE CONSIDERATION OF THE PURCHASE OF THE NOTES. ITS USE FOR
ANY OTHER PURPOSE IS NOT AUTHORIZED. IT MAY NOT BE COPIED OR REPRODUCED IN
WHOLE OR IN PART, NOR MAY IT BE DISTRIBUTED OR ANY OF ITS CONTENTS BE
DISCLOSED TO ANYONE OTHER THAN THE PROSPECTIVE INVESTORS TO WHOM IT IS BEING
PROVIDED.
THE INFORMATION CONTAINED IN THIS OFFERING MEMORANDUM HAS BEEN PROVIDED BY
THE COMPANY ON A CONFIDENTIAL BASIS SOLELY TO THE PROSPECTIVE PURCHASERS OF
THE NOTES. NO REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, IS MADE BY THE
INITIAL PURCHASER AS TO THE ACCURACY OR COMPLETENESS OF THE INFORMATION
CONTAINED IN THIS OFFERING MEMORANDUM (INCLUDING, WITHOUT LIMITATION, THE
FINANCIAL DATA CONTAINED HEREIN), AND NOTHING CONTAINED IN THIS OFFERING
MEMORANDUM IS, OR SHALL BE RELIED UPON AS, A PROMISE OR REPRESENTATION BY THE
INITIAL PURCHASER AS TO THE PAST OR THE FUTURE. THE INITIAL PURCHASER DOES NOT
ASSUME ANY RESPONSIBILITY FOR THE ACCURACY OR COMPLETENESS OF SUCH
INFORMATION. IN MAKING AN INVESTMENT DECISION, PROSPECTIVE INVESTORS MUST RELY
ON THEIR OWN EXAMINATION OF THE COMPANY AND THE TERMS OF THE OFFERING,
INCLUDING THE MERITS AND RISKS INVOLVED. THE CONTENTS OF THIS OFFERING
MEMORANDUM ARE NOT TO BE CONSTRUED AS LEGAL, BUSINESS OR TAX ADVICE. EACH
PROSPECTIVE INVESTOR SHOULD CONSULT ITS OWN ATTORNEY, BUSINESS ADVISOR AND TAX
ADVISOR AS TO LEGAL, BUSINESS OR TAX ADVICE. PROSPECTIVE INVESTORS MAY OBTAIN
ADDITIONAL INFORMATION UPON REQUEST FROM THE INITIAL PURCHASER OR THE COMPANY
THAT THEY MAY REASONABLY REQUIRE IN CONNECTION WITH THE DECISION TO PURCHASE
ANY OF THE NOTES.
THE NOTES DESCRIBED HEREIN HAVE NOT BEEN REGISTERED WITH, RECOMMENDED BY OR
APPROVED BY THE SECURITIES AND EXCHANGE COMMISSION (THE "COMMISSION") OR ANY
OTHER FEDERAL OR STATE SECURITIES COMMISSION OR REGULATORY AUTHORITY, NOR HAS
ANY SUCH COMMISSION OR REGULATORY AUTHORITY REVIEWED OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS OFFERING MEMORANDUM. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
THE NOTES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY
NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE SECURITIES ACT AND
APPLICABLE STATE SECURITIES LAWS OR PURSUANT TO REGISTRATION OR EXEMPTION
THEREFROM. PROSPECTIVE INVESTORS SHOULD BE AWARE THAT THEY MAY BE REQUIRED TO
BEAR THE FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD OF TIME.
EACH PURCHASER OF NOTES OFFERED HEREBY WILL BE DEEMED TO HAVE MADE CERTAIN
ACKNOWLEDGEMENTS, REPRESENTATIONS AND AGREEMENTS AS SET FORTH UNDER "TRANSFER
RESTRICTIONS."
EACH PROSPECTIVE PURCHASER OF THE NOTES MUST COMPLY WITH ALL LAWS AND
REGULATIONS APPLICABLE TO IT IN FORCE IN ANY JURISDICTION IN WHICH IT
PURCHASES, OFFERS OR SELLS THE NOTES OR POSSESSES OR DISTRIBUTES THIS OFFERING
MEMORANDUM AND MUST OBTAIN ANY CONSENT, APPROVAL OR PERMISSION REQUIRED TO BE
OBTAINED BY IT FOR THE PURCHASE, OFFER OR SALE BY IT OF THE NOTES UNDER THE
LAWS AND
i
REGULATIONS APPLICABLE TO IT IN FORCE IN ANY JURISDICTION TO WHICH IT IS
SUBJECT OR IN WHICH IT MAKES SUCH PURCHASES, OFFERS OR SALES, AND NEITHER THE
COMPANY NOR THE INITIAL PURCHASER SHALL HAVE ANY RESPONSIBILITY THEREFOR.
THIS OFFERING MEMORANDUM DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF ANY OFFER TO BUY ANY OF THE NOTES BY ANY PERSON IN ANY
JURISDICTION IN WHICH IT IS UNLAWFUL FOR SUCH PERSON TO MAKE AN OFFERING OR A
SOLICITATION.
THIS OFFERING IS BEING MADE IN THE UNITED STATES IN RELIANCE UPON AN
EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT FOR AN OFFER AND SALE OF
SECURITIES WHICH DOES NOT INVOLVE A PUBLIC OFFERING. EACH PURCHASER OF THE
NOTES OFFERED HEREBY IN MAKING ITS PURCHASE WILL BE DEEMED TO HAVE MADE
CERTAIN ACKNOWLEDGEMENTS, REPRESENTATIONS AND AGREEMENTS AS SET FORTH HEREIN
UNDER "TRANSFER RESTRICTIONS."
This Offering Memorandum is highly confidential and has been prepared by the
Company solely for use in connection with this Offering. The Initial Purchaser
reserves the right to reject any offer to purchase any of the Notes, in whole
or in part, for any reason, or to sell less than all of the Notes offered
hereby or for which any prospective purchaser has subscribed. This Offering
Memorandum is personal to each offeree and does not constitute an offer to any
other person or to the public generally to subscribe for or otherwise acquire
the Notes. Distribution of this Offering Memorandum to any person other than
the offeree and those persons, if any, retained to advise such offeree with
respect hereto is unauthorized, and any disclosure of any of its contents,
without the prior written consent of the Company, is prohibited. Each person
receiving this Offering Memorandum represents that such person's investment
decision is based solely on this Offering Memorandum and that such person is
not relying on any other information it may have received from the Company,
the Initial Purchaser or any other person. Each prospective purchaser, by
accepting delivery of this Offering Memorandum, agrees to the foregoing and to
make no photocopies of this Offering Memorandum or any documents delivered
pursuant hereto and, if the offeree does not purchase the Notes, or the
Offering is terminated, to return this Offering Memorandum and all documents
delivered pursuant hereto to Societe Generale Securities Corporation, 1221
Avenue of the Americas, New York, New York 10020, Attention: High Yield
Capital Markets.
MARKET DATA USED THROUGHOUT THIS OFFERING MEMORANDUM WERE OBTAINED FROM
INTERNAL COMPANY SURVEYS, INDUSTRY PUBLICATIONS AND CURRENTLY AVAILABLE
INFORMATION. INDUSTRY PUBLICATIONS GENERALLY STATE THAT THE INFORMATION
CONTAINED THEREIN HAS BEEN OBTAINED FROM SOURCES BELIEVED TO BE RELIABLE, BUT
THERE CAN BE NO ASSURANCE AS TO THE ACCURACY AND COMPLETENESS OF SUCH
INFORMATION. THE COMPANY HAS NOT INDEPENDENTLY VERIFIED SUCH MARKET DATA.
SIMILARLY, INTERNAL COMPANY SOURCES, WHILE BELIEVED BY THE COMPANY TO BE
RELIABLE, HAVE NOT BEEN VERIFIED BY ANY INDEPENDENT SOURCES.
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS OFFERING
MEMORANDUM, AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATION
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE
INITIAL PURCHASER. THE INFORMATION CONTAINED HEREIN IS AS OF THE DATE HEREOF
AND SUBJECT TO CHANGE, COMPLETION OR AMENDMENT WITHOUT NOTICE. NEITHER THE
DELIVERY OF THIS OFFERING MEMORANDUM AT ANY TIME NOR ANY SUBSEQUENT COMMITMENT
TO ENTER INTO ANY FINANCING SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE INFORMATION SET FORTH HEREIN
OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
ii
THIS OFFERING MEMORANDUM CONTAINS CERTAIN "FORWARD-LOOKING STATEMENTS"
CONCERNING THE COMPANY'S OPERATIONS, OPERATING PERFORMANCE AND FINANCIAL
CONDITION, WHICH ARE SUBJECT TO INHERENT UNCERTAINTIES AND RISKS, INCLUDING
THOSE IDENTIFIED UNDER "RISK FACTORS." ACTUAL RESULTS COULD DIFFER MATERIALLY
FROM THOSE ANTICIPATED IN THIS OFFERING MEMORANDUM. WHEN USED IN THIS OFFERING
MEMORANDUM, THE WORDS "ESTIMATE," "PROJECT," "ANTICIPATE," "EXPECT," "INTEND,"
"BELIEVE" AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING
STATEMENTS.
IT IS EXPECTED THAT DELIVERY OF THE NOTES WILL BE MADE AGAINST PAYMENT
THEREFOR ON OR ABOUT THE DATE SPECIFIED IN THE LAST PARAGRAPH OF THE COVER
PAGE OF THIS OFFERING MEMORANDUM, WHICH WILL BE THE THIRD BUSINESS DAY
FOLLOWING THE DATE HEREOF. SEE "PLAN OF DISTRIBUTION."
Notes to be resold to qualified institutional buyers as set forth herein
will initially be issued in the form of one Global Note (the "Global Note").
The Global Note will be deposited on the date of the closing of the sale of
the Notes offered hereby (the "Closing Date") with, or on behalf of, The
Depository Trust Company (the "Depositary") and registered in the name of Cede
& Co., as nominee of the Depositary (such nominee being referred to herein as
the "Global Note Holder"). Beneficial interests in the Global Note
representing the Notes will be shown on, and transfers thereof to qualified
institutional buyers will be effected through, records maintained by the
Depositary and its participants. Notes that are issued to institutional
accredited investors as described under "Description of Notes--Book-Entry;
Delivery and Form" and "Description of Notes--Certificated Securities" will be
issued in the form of registered definitive certificates (the "Certificated
Notes"). See "Description of Notes--Book-Entry; Delivery and Form" and
"Description of Notes--Certificated Securities."
NOTICE TO NEW HAMPSHIRE RESIDENTS
NEITHER THE FACT THAT A REGISTRATION STATEMENT OR AN APPLICATION FOR A
LICENSE HAS BEEN FILED UNDER RSA 421-B WITH THE STATE OF NEW HAMPSHIRE NOR THE
FACT THAT A SECURITY IS EFFECTIVELY REGISTERED OR A PERSON IS LICENSED IN THE
STATE OF NEW HAMPSHIRE CONSTITUTES A FINDING BY THE SECRETARY OF STATE THAT
ANY DOCUMENT FILED UNDER RSA 421-B IS TRUE, COMPLETE AND NOT MISLEADING.
NEITHER ANY SUCH FACT NOR THE FACT THAT AN EXEMPTION OR EXCEPTION IS AVAILABLE
FOR A SECURITY OR A TRANSACTION MEANS THAT THE SECRETARY OF STATE HAS PASSED
IN ANY WAY UPON THE MERITS OR QUALIFICATIONS OF, OR RECOMMENDED OR GIVEN
APPROVAL TO, ANY PERSON, SECURITY OR TRANSACTION. IT IS UNLAWFUL TO MAKE, OR
CAUSE TO BE MADE, TO ANY PROSPECTIVE PURCHASER, CUSTOMER OR CLIENT, ANY
REPRESENTATION INCONSISTENT WITH THE PROVISIONS OF THIS PARAGRAPH.
NOTICE TO FLORIDA RESIDENTS
PURSUANT TO SECTION 517.061(11)(a)(5) OF THE FLORIDA SECURITIES ACT, YOU
HAVE THE RIGHT TO RESCIND YOUR SUBSCRIPTION (UNLESS YOU ARE AN INSTITUTIONAL
INVESTOR DESCRIBED IN SECTION 517.061(7) OF THE FLORIDA SECURITIES ACT) BY
GIVING NOTICE OF SUCH RESCISSION BY TELEPHONE, TELEGRAPH OR LETTER, WITHIN
THREE DAYS AFTER YOU FIRST TENDER CONSIDERATION TO THE INITIAL PURCHASER. IF
NOTICE IS NOT RECEIVED BY SUCH TIME, THE FOREGOING RIGHT OF RESCISSION SHALL
BE NULL AND VOID.
iii
OFFERING MEMORANDUM SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and financial statements and
notes thereto appearing elsewhere in this Offering Memorandum, including
information under "Risk Factors." All references to the Company's operations
for a particular fiscal year refer to the 52-53 week period ended on the last
Saturday in December of that year, and all references to the Company's
operations for a particular fiscal quarter refer to the three month period
ended on the last Saturday in that quarter. Unless otherwise indicated, all
references to "Schein Pharmaceutical," "Schein" or the "Company" refer
collectively to Schein Pharmaceutical, Inc. and its predecessors and
subsidiaries.
THE COMPANY
Schein Pharmaceutical is one of the leading generic pharmaceutical companies
in the United States. The Company develops, manufactures and markets one of the
broadest generic product lines in the pharmaceutical industry through the
integration of its product development expertise, diverse, high-volume
production capacity and direct sales and marketing force. The Schein product
line includes both solid dosage and sterile dosage generic products, and the
Company is also developing a line of specialty branded pharmaceuticals. The
Company's primary branded product, INFeD, is the leading injectable iron
product in the United States. The Company has a substantial pipeline of
products under development, including 24 ANDAs filed with FDA. The Company
supplements its internal product development, manufacturing and marketing
capabilities through strategic collaborations. Schein generated net revenues of
$478.0 million and EBITDA (as defined) of $55.8 million during the 12 months
ended September 1997.
The Company believes it manufactures and markets the broadest product line of
any U.S. pharmaceutical company in terms of number and types of products. The
Company manufactures and markets approximately 160 chemical entities formulated
in approximately 350 different dosages under approximately 200 ANDAs approved
by FDA. Schein is currently the sole manufacturing source for 47 generic
pharmaceutical products, of which 45 are sterile dosage products. The Company's
solid dosage products include both immediate-release and extended-release
capsules and tablets; sterile dosage products include solutions, suspensions,
powders and lyophilized (freeze-dried) products primarily for administration as
injections, ophthalmics and otics. The manufacture of sterile dosage products
is significantly more complex than the manufacture of solid dosage products,
which limits competition in this product area. The Company currently
manufactures approximately four billion solid dosage tablets and capsules and
75 million sterile dosage vials and ampules annually. Solid dosage generic
products and sterile dosage generic products each accounted for approximately
40% of the Company's net revenues in the 12 months ended September 1997.
Since introducing INFeD in 1992, the Company has been developing a portfolio
of branded products, primarily in select therapeutic markets, such as iron
management for the nephrology, oncology and hematology markets. INFeD is used
in the treatment of certain types of anemia, particularly in dialysis patients,
and accounted for approximately 20% of the Company's net revenues in the nine
months ended September 1997. The Company markets INFeD through a 20-person
dedicated sales and marketing force, as well as through co-marketing
collaborations with Bayer Corporation in the nephrology market and MGI Pharma,
Inc. ("MGI") in the oncology market.
The Company believes its 120-person direct sales and marketing force is the
largest in the U.S. generic pharmaceutical industry. Through its customized
marketing programs, the Company markets its products to approximately 60,000
customers representing all major customer channels, including pharmaceutical
wholesalers, chain and independent drug retailers, hospitals, managed care
organizations, other group purchasing organizations and physicians.
1
The Company's commitment to product development has resulted in 23 ANDA
approvals during the past three years and its current pipeline of 24 pending
ANDAs and over 60 additional products under development. During the past three
fiscal years, the Company, directly and through its strategic collaborations,
has expended approximately $74.0 million on product pipeline development
activities, which the Company believes is among the highest product development
expenditure levels for any independent generic drug company. The Company
pursues product development through its 140-person product development staff
and various collaborations and licensing arrangements with other pharmaceutical
and drug delivery technology companies. The Company's product development
efforts focus on: (i) major branded drugs coming off patent; (ii) drugs for
which patent protection has lapsed and for which there are few or no generic
producers; (iii) drugs whose patents may be susceptible to challenge; (iv)
proprietary and branded products focused in select therapeutic areas; and (v)
generic products that require specialized development, formulation, drug
delivery or manufacturing technology.
The Company supplements its internal product development, manufacturing and
marketing capabilities from external sources. During 1994, Schein entered into
a strategic alliance with Bayer Corporation, through which Bayer Corporation
became a 28.3% stockholder of Schein, and Bayer Corporation currently
participates with Schein in several collaborations. In 1995, the Company
acquired Marsam Pharmaceuticals Inc. ("Marsam"), expanding the Company's
ability to develop and manufacture sterile penicillins and oral and sterile
cephalosporins. In addition, the Company has entered into strategic
collaborations involving product development arrangements with companies such
as Elan Corporation plc ("Elan") and Ethical Holdings plc ("Ethical"); raw
material supply arrangements with companies such as Johnson Matthey plc
("Johnson Matthey") and Abbott Laboratories ("Abbott"); and sales and marketing
arrangements with Bayer Corporation and other companies such as Elensys Care
Services, Inc. ("Elensys") and MGI.
Schein's objective is to become the leading generic pharmaceutical company in
the approximately $10 billion generic pharmaceutical industry in the United
States. The Company's strategy for achieving this objective comprises the
following five elements:
Leverage Diverse Pharmaceutical Formulation and Manufacturing Capabilities to
Extend the Breadth of Its Generic Product Line. The Company believes it
manufactures and markets the broadest product line of any U.S. pharmaceutical
company. This product line includes both solid dosage and sterile dosage
products comprising approximately 160 chemical entities in approximately 350
dosage forms and strengths under approximately 200 approved ANDAs. Solid dosage
forms include both immediate-release and extended-release capsules and tablets;
sterile dosage forms include solutions, suspensions, powders and lyophilized
(freeze-dried) products primarily for administration as injections, ophthalmics
and otics. The Company believes its diverse high-volume manufacturing
capabilities enable it to participate in segments of the generic drug industry
where competition is limited. As the U.S. generic drug market consolidates and
major drug buyers increasingly purchase from fewer suppliers, the Company
believes its high volume and diverse drug formulation and manufacturing
capabilities will constitute an important competitive advantage.
Pursue Strategic Collaborations to Supplement Product Development and
Manufacturing Resources. Schein has formed product development and marketing
alliances with several bulk pharmaceutical producers, drug delivery technology
companies and other drug manufacturers to expand the breadth of its product
development capabilities. Included among these are collaborations with drug
delivery companies, Elan and Ethical, and several bulk pharmaceutical and
finished dosage form producers. The Company plans to utilize collaborative and
licensing arrangements with third parties to share product development risk and
gain access to sales and marketing rights, dosage forms, proprietary drug
delivery technologies, specialized formulation capabilities and active
pharmaceutical ingredients.
2
Focus Product Development on Complex and Other Generic Drugs that Require
Specialized Development or Manufacturing Technology and Encounter Limited
Competition. The Company targets generic drugs for which it believes it can
achieve relatively high margins by being the first or among the first generic
manufacturers to launch the product. The Company is currently the sole generic
source for 47 products, and the Company is developing several "complex generic"
drugs that are difficult to duplicate due to formulation and/or manufacturing
complexities and other generic drugs for which raw materials are in limited
supply. In addition, the Company closely analyzes pharmaceutical patents and
initiates patent challenges where appropriate opportunities exist. Products
currently being considered for development include several that could lead to
patent challenges. The Company has generated significant revenues and profits
from generic products that have been the subject of successful patent
challenges initiated by the Company.
Develop and Market Branded Drugs for Select Therapeutic
Categories. Leveraging its broad pharmaceutical formulation, development and
manufacturing capabilities, the Company targets branded drug development and
marketing opportunities in select therapeutic categories with limited
competition. The Company's branded drug development and marketing efforts
currently focus on injectable products used in the management of iron-related
disorders. The Company's first branded product, INFeD, is the leading
injectable iron product in the U.S. Schein's near-term development plan is to
expand the Company's iron management expertise into the oncology, hematology
and gastroenterology markets, and the Company expects that a New Drug
Application ("NDA") for its next generation injectable iron product will be
filed with FDA in the first half of 1998. The Company also is pursuing
opportunities to broaden its branded pharmaceutical product line by: (i)
formulating and developing, either internally or through development
collaborations, unique products that may be patented; (ii) acquiring products
developed by other drug companies; and (iii) acquiring formulation technologies
for developing new dosage forms of existing drugs.
Expand Market Penetration through Direct Sales and Innovative Marketing
Programs. The Company believes its 120-person direct sales and marketing force
is the largest in the U.S. generic pharmaceutical industry. This sales and
marketing force includes 90 field representatives, 20 telemarketing
representatives and 10 marketing personnel and covers all major customer
groups, including chain and independent drug retailers, managed care
organizations, pharmaceutical wholesalers, hospitals and group purchasing
organizations. The Company has developed market share initiatives with selected
leading chain and wholesale customers and developed and implemented customized
marketing programs to meet specific customer needs, including customer
inventory management, patient-focused education and compliance programs. With
respect to its branded product business, the Company has a team of
approximately 20 sales representatives dedicated to marketing INFeD. This sales
and marketing force is complemented by marketing collaborations with Bayer (as
defined herein) in the nephrology market and MGI in the oncology market.
3
THE OFFERING
Issuer...................... Schein Pharmaceutical, Inc.
Securities Offered.......... $100,000,000 principal amount of Senior Floating
Rate Notes due 2004.
Maturity Date............... December 15, 2004.
Interest Payment Dates...... January 15, April 15, July 15 and October 15 of
each year, commencing on January 15, 1998.
Optional Redemption......... The Notes will be redeemable, in whole or in
part, at the option of the Company, at any time,
at the redemption prices set forth herein, plus
accrued and unpaid interest thereon, to the date
of redemption. See "Description of Notes--
Optional Redemption."
Subsidiary Guarantees....... All of the Company's existing and future
Restricted Subsidiaries will unconditionally
guarantee on a senior unsecured basis the
performance and punctual payment when due,
whether at maturity, by acceleration or
otherwise, of all obligations of the Company
under the Indenture and the Notes. The Subsidiary
Guarantees will rank pari passu in right of
payment with all existing and future unsecured
senior indebtedness of the Guarantors and senior
in right of payment to all future subordinated
indebtedness of the Guarantors. Each of the
Guarantors has guaranteed the Company's
indebtedness under the Senior Credit Agreement on
a senior secured basis. The Subsidiary Guarantee
of each Guarantor will be effectively
subordinated to the prior payment in full of all
secured indebtedness of such Guarantors,
including secured indebtedness under the Senior
Credit Agreement. See "Description of Notes--
Guarantees."
Ranking..................... The indebtedness evidenced by the Notes will be
senior unsecured obligations of the Company, will
rank pari passu with all existing and future
senior indebtedness of the Company and will rank
senior in right of payment to all existing and
future indebtedness of the Company that is, by
its terms, expressly subordinated to the Notes.
Holders of secured indebtedness of the Company,
including the lenders under the Senior Credit
Agreement, will have claims with respect to the
assets constituting collateral for such
indebtedness that are prior to the claims of
holders of the Notes. In the event of a default
on the Notes, or a bankruptcy, liquidation or
reorganization of the Company, such assets will
be available to satisfy obligations with respect
to the indebtedness secured thereby before any
payment therefrom could be made on the Notes. To
the extent that such collateral is not sufficient
to satisfy the indebtedness secured thereby,
amounts remaining outstanding on such
indebtedness would be entitled to share with the
Notes and their claims with respect to any other
assets of the Company. As of September 27, 1997,
as adjusted for the Offering, the Company and its
Restricted
4
Subsidiaries would have had secured indebtedness
of approximately $160.6 million outstanding. The
obligations of the Company and the Guarantors
under the Senior Credit Agreement are secured by
substantially all of the assets of the Company
and the Guarantors. As of September 27, 1997, as
adjusted for the Offering, the Company would have
had approximately $69.8 million of undrawn
availability under the Senior Credit Agreement.
The Indenture relating to the Notes will permit
the Company and the Restricted Subsidiaries to
incur additional Indebtedness, including Secured
Indebtedness, subject to certain limitations. See
"Description of Notes."
Change of Control........... Upon a Change of Control, each holder of Notes
may require the Company to repurchase any or all
outstanding Notes owned by such holder at 101% of
the principal amount thereof, plus accrued and
unpaid interest thereon, to the date of
repurchase. See "Description of Notes--Change of
Control."
Restrictive Covenants....... The Indenture under which the Notes will be
issued will contain certain covenants pertaining
to the Company and its Restricted Subsidiaries,
including but not limited to covenants with
respect to the following matters: (i) limitations
on indebtedness; (ii) limitations on restricted
payments such as dividends, repurchases of the
Company's or subsidiaries' stock, repurchases of
subordinated obligations and investments; (iii)
limitations on liens; (iv) limitations on
engaging in certain lines of business; (v)
limitations on mergers, consolidations and
transfers of all or substantially all assets;
(vi) limitations on restrictions on distributions
from restricted subsidiaries; (vii) limitations
on sales of assets and of stock of subsidiaries;
(viii) limitations on transactions with
affiliates; (ix) limitations on the sale of
capital stock of restricted subsidiaries; and (x)
limitations on sale and leaseback transactions.
However, all of these covenants are subject to a
number of important qualifications and
exceptions. See "Description of Notes--Certain
Covenants."
Exchange Offer and
Registration................ The Company has agreed to (i) file, within 45
days after the Issue Date (as defined herein), a
registration statement (the "Exchange Offer
Registration Statement") with respect to an offer
to exchange the Notes (the "Registered Exchange
Offer") for a series of notes of the Company with
terms identical in all material respects to the
Notes (the "Exchange Notes"), (ii) use
commercially reasonable efforts to cause such
Exchange Offer Registration Statement to be
declared effective within the earlier of (A) 90
days after the Issue Date or (B) 30 days after
the effectiveness of the consummation of the
initial public offering of the Company's Common
Stock and (iii) consummate the Registered
Exchange Offer within 150 days after the Issue
Date. Such Exchange Notes, if issued, will bear
the rate of interest of the Notes immediately
prior to the consummation of the Exchange Offer
(as defined herein). In the event that the
applicable
5
laws or interpretations of the staff of the
Commission do not permit the Company to effect
the Registered Exchange Offer, the Company will
use commercially reasonable efforts to cause to
become effective a shelf registration statement
(the "Shelf Registration Statement") with respect
to the resale of Notes and to keep the Shelf
Registration Statement effective until three
years from the Issue Date or such shorter period
that will terminate when all the Notes covered by
the Shelf Registration Statement have been sold.
The Company shall cause such Shelf Registration
Statement to be declared effective on or prior to
the latter of (x) the 120th day after the Issue
Date or (y) the 45th day after the publication of
the change in law or interpretation. In the event
that the Company does not comply with certain
covenants set forth in the Exchange and
Registration Rights Agreement (as defined herein)
to be executed by the Company and the Initial
Purchaser, the Company will be obligated to pay
certain additional interest to the holders of the
Notes. See "Exchange and Registration Rights
Agreement."
Transfer Restrictions;
Absence of a Public Market
for the Notes.............. The Notes have not been registered under the
Securities Act and are subject to restrictions on
transferability and resale. The Notes are new
securities, and there is currently no established
market for the Notes. If issued, the Exchange
Notes will generally be freely transferable
(subject to the restrictions discussed elsewhere
herein) but will be new securities for which
there will not initially be a market.
Accordingly, there can be no assurance as to the
development or liquidity of any market for the
Notes or, if issued, the Exchange Notes. The
Notes have been designated eligible for trading
in the PORTAL market. The Initial Purchaser has
advised the Company that it currently intends to
make a market in the Notes. However, the Initial
Purchaser is not obligated to do so, and any
market making with respect to the Notes may be
discontinued at any time without notice. The
Company does not intend to apply for a listing of
the Notes, or, if issued, the Exchange Notes, on
any securities exchange or on any automated
dealer quotation system. See "Transfer
Restrictions."
Use of Proceeds............. The Company is amending the terms of the Senior
Subordinated Loan Agreement (as defined herein)
to allow for the issuance of the Notes and
intends to use the net proceeds of the Offering
to repay the Senior Subordinated Loan (as defined
herein). See "Use of Proceeds."
RISK FACTORS
Prospective purchasers of the Notes should carefully consider the information
set forth under the caption "Risk Factors" and all other information set forth
in this Offering Memorandum before making any investment in the Notes.
6
SUMMARY CONSOLIDATED FINANCIAL DATA
NINE MONTHS ENDED
YEAR ENDED DECEMBER SEPTEMBER
------------------------------------------------ ----------------------
1992 1993 1994 1995 (1) 1996 1996 1997
-------- -------- -------- -------- -------- --------- -----------
(DOLLARS IN THOUSANDS)
STATEMENT OF OPERATIONS
DATA:
Net revenues............ $319,875 $393,926 $385,428 $391,846 $476,295 $352,172 $353,829
Cost of sales........... 207,276 217,653 237,380 250,507 320,675 236,721 240,562
-------- -------- -------- -------- -------- -------- --------
Gross profit........... 112,599 176,273 148,048 141,339 155,620 115,451 113,267
COSTS AND EXPENSES:
Selling, general and
administrative........ 55,763 64,489 71,416 73,250 84,366 61,149 57,950
Research and
development........... 14,234 18,055 19,170 28,324 27,030 23,044 22,854
-------- -------- -------- -------- -------- -------- --------
42,602 93,729 57,462 39,765 44,224 31,258 32,463
Amortization of
goodwill and other
intangibles........... -- -- -- 3,399 10,195 7,713 7,722
Special compensation,
restructuring and
relocation (2)........ 7,417 8,426 33,594 -- -- -- --
Acquired in-process
Marsam research and
development (1)....... -- -- -- 30,000 -- -- --
-------- -------- -------- -------- -------- -------- --------
Operating income........ 35,185 85,303 23,868 6,366 34,029 23,545 24,741
Interest expense, net.. 2,315 1,467 1,493 10,005 23,285 16,081 20,456
Other expense (income),
net (3)............... 195 9,215 579 779 4,156 1,745 (4,536)
-------- -------- -------- -------- -------- -------- --------
Income (loss) before
provision for income
taxes and minority
interest............... 32,675 74,621 21,796 (4,418) 6,588 5,719 8,821
Provision for income
taxes (4)............. 12,490 29,096 15,165 10,482 5,191 3,573 5,095
Minority interest...... 2,173 (343) -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Net income (loss)....... $ 18,012 $ 45,868 $ 6,631 $(14,900) $ 1,397 $ 2,146 $3,726
======== ======== ======== ======== ======== ======== ========
OTHER DATA:
EBITDA (as defined) (5). $ 39,748 $ 91,864 $ 61,074 $ 50,396 $ 54,932 $ 39,174 $ 40,037
Depreciation and
amortization........... 6,105 7,328 8,464 17,395 25,450 18,018 19,749
Capital expenditures,
net.................... 17,416 22,806 16,135 13,986 11,309 8,625 8,992
Ratio of earnings to
fixed charges (6)...... 10.6x 26.9x 8.0x -- 1.3x 1.3x 1.4x
PRO FORMA DATA:
Cash interest expense
(7).................... $ 23,488 $ 16,788 $ 17,897
Ratio of EBITDA (as
defined) to cash
interest expense....... 2.3x 2.3x 2.2x
Ratio of total debt to
EBITDA
(as defined) (8)....... -- -- 4.7x
DECEMBER AS OF AS ADJUSTED
------------------------------------------------ SEPTEMBER SEPTEMBER
1992 1993 1994 1995 1996 1997 1997 (9)
-------- -------- -------- -------- -------- --------- -----------
(IN THOUSANDS)
BALANCE SHEET DATA:
Working capital......... $ 82,731 $ 87,035 $ 98,610 $ 92,021 $ 99,111 $ 93,480 $ 89,280
Total assets............ 211,744 227,861 269,729 522,410 544,312 520,699 524,899
Total debt.............. 44,625 27,563 45,927 280,558 286,480 256,413 260,613
Stockholders' equity.... 85,761 130,336 140,164 125,692 129,980 137,084 137,084
7
- --------
(1) Includes the results of Marsam from September 1995, the date of purchase.
In connection with the purchase of Marsam, the Company recognized acquired
in-process research and development. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and Note 3 to
the Consolidated Financial Statements of the Company.
(2) Special compensation, restructuring and relocation expenses includes costs
recognized by the Company in connection with its restructuring and
relocation of its corporate headquarters. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and Notes 2 and
12 to the Consolidated Financial Statements of the Company.
(3) Other expense (income), net in 1992 includes $0.5 million of an
extraordinary income item.
(4) Provision for income taxes in 1993 includes an adjustment to reduce income
taxes by $1.1 million relating to the adoption of Statement of Financial
Accounting Standards No. 109.
(5) EBITDA is defined as income (loss) before provision for income taxes and
minority interest, interest expense, net and depreciation and amortization,
excluding gains on sales of securities and non-cash items (special
compensation, acquired in-process Marsam research and development,
contingent settlement accruals, equity in net losses of international
investments and other non-cash items). The Company has included information
concerning EBITDA in this Offering Memorandum because it believes that such
information may be used by certain investors as one measure of a company's
historical ability to service debt. EBITDA should not be considered as an
alternative to, or more meaningful than, earnings from operations or other
traditional indications of a company's operating performance.
(6) The ratio of earnings to fixed charges is computed by dividing (i) income
(loss) before provision for income taxes and minority interest plus fixed
charges by (ii) fixed charges. Fixed charges consist of interest on
indebtedness including amortization of debt issuance costs and the
estimated interest component of rental expense (assumed to be one-third).
In fiscal 1995, fixed charges exceeded income (loss) before provision for
income taxes and minority interest by $4.4 million.
(7) Pro forma cash interest expense is defined as historical interest expense,
net adjusted for (i) the exclusion of amortization of deferred financing
fees of $2.2 million in fiscal 1996 and $0.9 million and $2.3 million in
the nine months ended September 1996 and 1997, respectively, (ii) interest
expense as if the Offering had occurred on December 31, 1995 and the
proceeds were used to repay the Senior Subordinated Loan or its predecessor
debt and (iii) interest expense associated with drawdowns under the
revolving credit facility under the Senior Credit Agreement which were used
to pay the $4.2 million in fees and expenses incurred as a result of the
Offering.
(8) The ratio of total debt to EBITDA (as defined) is computed by dividing (i)
EBITDA (as defined) for the twelve months ended September 1997 by (ii)
total debt as of September 1997 as adjusted for the Offering.
(9) As adjusted to give effect to the Offering and the payment of $4.2 million
in fees and expenses in connection therewith, using proceeds from the
Company's revolving credit facility under the Senior Credit Agreement.
8
RISK FACTORS
Prospective investors in the Notes should carefully consider the following
risk factors, in addition to the other information set forth in this Offering
Memorandum, before making an investment in the Notes offered hereby. This
Offering Memorandum contains statements which constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act
of 1995. Those statements appear in a number of places herein and include
statements regarding the intent, belief or current expectations of the
Company, primarily with respect to the future operating performance of the
Company or related industry developments. Prospective purchasers of the Notes
are cautioned that any such forward-looking statements are not guarantees of
future performance and involve risks and uncertainties, and that actual
results and industry developments may differ from those described in the
forward-looking statements as a result of various factors, many of which are
beyond the control of the Company. The information contained herein,
including, without limitation, the information set forth below and the
information under the heading "Management's Discussion and Analysis of
Financial Condition and Results of Operations," identifies important factors
that could cause such differences.
RISK FACTORS RELATED TO THE NOTES
Substantial Leverage
The Company is highly leveraged. As of September 27, 1997, as adjusted for
the Offering, the Company would have had total consolidated indebtedness of
$260.6 million. In addition, subject to certain restrictions set forth in the
Senior Credit Agreement and the Indenture, the Company may incur additional
indebtedness in the future for acquisitions, capital expenditures and other
corporate purposes.
The Company's high degree of leverage could have important consequences,
including the following: (i) the Company's ability to obtain additional
financing in the future for working capital, capital expenditures,
acquisitions, general corporate purposes or other purposes may be impaired;
(ii) a substantial portion of the Company's cash flow from operations must be
dedicated to the payment of principal and interest on the Notes and its other
indebtedness, thereby reducing the funds available to the Company for other
purposes; (iii) the financial covenants and other restrictions contained in
the Senior Credit Agreement and the Indenture and other agreements relating to
the Company's indebtedness require the Company to meet certain financial
tests, restrict its ability to borrow additional funds and impose limitations
on the disposition of assets; (iv) obligations in respect of the Senior Credit
Agreement are, and the Notes will be, and other indebtedness of the Company
may be, at variable rates of interest, which expose the Company to the risk of
increased interest rates; (v) all of the indebtedness outstanding under the
Senior Credit Agreement is secured by substantially all the assets of the
Company and matures prior to the maturity of the Notes; (vi) the Company may
be substantially more leveraged than certain of its competitors, which may
place the Company at a competitive disadvantage; and (vii) the Company's
substantial degree of leverage may limit its flexibility to adjust to changing
market conditions and make it more vulnerable to a downturn in general
economic conditions or its business. See "Description of Notes."
The Company's ability to make scheduled payments of the principal of, or
interest on, or to refinance its indebtedness (including the Notes) depends on
its future operating performance, which to a certain extent is subject to
economic, financial, competitive and other factors beyond its control. The
Company believes that, based on its current level of operations and
anticipated growth, its cash flow from operations will be adequate to meet its
anticipated requirements for working capital, capital expenditures, interest
payments and scheduled principal payments over the next several years. There
can be no assurance, however, that the Company's business will generate cash
flow at or above expected levels. If the Company is unable to generate
sufficient cash flow from operations in the future to service its debt, fund
working capital requirements and make necessary capital expenditures, or its
future earnings are insufficient to make all required principal payments out
of internally generated funds, the Company may be required to refinance all or
a portion of its existing debt, sell assets or obtain additional financing.
There can be no assurance that any such refinancing or asset sales would be
possible or that any additional financing could be obtained on terms
acceptable to the Company or at all, particularly in
9
view of the Company's high level of debt. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
Ability to Service Debt
The Company's ability to make scheduled payments or to refinance its
obligations with respect to its indebtedness will depend on its financial and
operating performance, which in turn will be subject to prevailing economic
conditions and to certain financial, business and other factors beyond its
control. If the Company's cash flow and capital resources are insufficient to
fund its debt service obligations, the Company may be forced to reduce or
delay planned expansion and capital expenditures, sell assets, obtain
additional equity capital or restructure its debt. There can be no assurance
that the Company's operating results, cash flow and capital resources will be
sufficient for payment of its indebtedness in the future. In the absence of
such operating results and resources, the Company could face substantial
liquidity problems and might be required to dispose of material assets or
operations to meet its debt service and other obligations, and there can be no
assurance as to the timing of such sales or the proceeds that the Company
could realize therefrom. In addition, because the Notes will bear interest at
floating rates and the Senior Credit Agreement bears interest at floating
rates, an increase in interest rates could adversely affect, among other
things, the Company's ability to meet its debt service obligations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and "Description of Notes."
Ranking of Notes
The Notes will be senior unsecured obligations of the Company and will rank
pari passu in right of payment with all current and future unsecured senior
indebtedness of the Company. The Notes will (i) rank senior in right of
payment to all subordinated indebtedness of the Company and (ii) be
guaranteed, on a senior unsecured basis, by the Restricted Subsidiaries of the
Company. The Notes will also be effectively subordinated to all existing and
future indebtedness of any subsidiary of the Company that is not a Guarantor
of the Notes.
The indebtedness incurred under the Senior Credit Agreement is secured by
substantially all of the assets of the Company. In addition, the Indenture
will permit the Company and the Guarantors to incur certain other secured
indebtedness. The holders of all existing and future secured indebtedness will
have a claim prior to the holders of the Notes with respect to any assets
pledged by the Company and the Guarantors as security for such indebtedness.
Further, as of September 27, 1997, as adjusted for the Offering, the Senior
Credit Agreement would have provided the Company with $69.8 million of undrawn
availability, which, if drawn, would effectively rank prior to the Notes and
the Subsidiary Guarantees. Upon an event of default under the Senior Credit
Agreement, the lenders thereunder would be entitled to foreclose on the assets
of the Company and the Guarantors pledged as security for the indebtedness
incurred thereunder. In such event, the assets of the Company and the
Guarantors remaining after payment of such secured indebtedness may be
insufficient to satisfy the obligations of the Company and the Guarantors with
respect to the Notes and the Subsidiary Guarantees. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources" and "Description of Notes."
As of September 27, 1997, as adjusted for the Offering, the aggregate
principal amount of secured indebtedness of the Company and the Guarantors
which would have effectively ranked senior to the Notes and the Subsidiary
Guarantees would have been approximately $160.6 million.
Fraudulent Conveyance
The issuance of the Notes and the Subsidiary Guarantees may be subject to
review by a court under federal bankruptcy law or comparable provisions of
state fraudulent transfer law. Under federal or state fraudulent transfer
laws, if a court were to find that, at the time the Notes and Subsidiary
Guarantees were issued, the Company or a Guarantor, as the case may be, (i)
issued the Notes or a Subsidiary Guarantee with the intent of hindering,
delaying or defrauding current or future creditors or (ii)(A) received less
than fair consideration or reasonably equivalent value for incurring the
indebtedness represented by the Notes or a Subsidiary Guarantee
10
and (B)(1) was insolvent or was rendered insolvent by reason of the issuance
of the Notes or such Subsidiary Guarantee, (2) was engaged, or about to
engage, in a business or transaction for which its remaining assets
constituted unreasonably small capital or (3) intended to incur, or believed
(or should have believed) it would incur, debts beyond its ability to pay as
such debts mature (as all of the foregoing terms are defined in or interpreted
under such fraudulent transfer statutes), such court could avoid all or a
portion of the Company's or a Guarantor's obligations to the holders of the
Notes or subordinate the Company's or a Guarantor's obligations to the holders
of the Notes to other existing and future indebtedness of the Company or such
Guarantor, as the case may be, the effect of which would be to entitle such
other creditors to be paid in full before any payment could be made on the
Notes, and take other action detrimental to the holders of the Notes,
including in certain circumstances, invalidating the Notes. In that event,
there would be no assurance that any repayment on the Notes would ever be
recovered by the holders of the Notes.
The definition of insolvency for purposes of the foregoing considerations
varies among jurisdictions depending upon the federal or state law that is
being applied in any such proceeding. However, the Company or a Guarantor
generally would be considered insolvent at the time it incurs the indebtedness
constituting the Notes or a Subsidiary Guarantee, as the case may be, if (i)
the fair market value (or fair saleable value) of its assets is less than the
amount required to pay its total existing debts and liabilities (including the
probable liability on contingent liabilities) as they become absolute or
matured or (ii) it is incurring debts beyond its ability to pay as such debts
mature.
There can be no assurance as to what standard a court would apply in order
to evaluate the parties' intent or to determine whether the Company or a
Guarantor, as the case may be, was insolvent at the time, or rendered
insolvent upon consummation, of the sale of the Notes or the issuance of a
Subsidiary Guarantee or that, regardless of the method of valuation, a court
would not determine that the Company or a Guarantor, as the case may be, was
insolvent at the time, or rendered insolvent upon consummation, of the
Offering. Nor can there be any assurance that a court would not determine,
regardless of whether the Company or a Guarantor was insolvent on the date the
Notes and Subsidiary Guarantees were issued, that the payments constituted
fraudulent transfers on another ground.
In addition, the Subsidiary Guarantees could also be subject to the claim
that, since the Subsidiary Guarantees were incurred for the benefit of the
Company (and only indirectly for the benefit of the Guarantors), the
obligations of the Guarantors thereunder were incurred for less than
reasonably equivalent value or fair consideration. A court could avoid a
Guarantor's obligation under its Subsidiary Guarantee, subordinate the
Subsidiary Guarantee to other indebtedness of such Guarantor or take other
action detrimental to the holders of the Notes.
Restrictions Imposed by Terms of the Company's Indebtedness
The Indenture will contain certain covenants that, among other things: (i)
limit the ability of the Company and its Restricted Subsidiaries to incur
additional indebtedness, repay other indebtedness and amend other debt
instruments; (ii) restrict the ability of the Company and its Restricted
Subsidiaries to make dividends and other restricted payments (including
investments); (iii) limit the ability of the Company and its Restricted
Subsidiaries to incur certain liens; (iv) limit the ability of the Company to
engage in other lines of business; (v) limit the ability of the Company to
consolidate or merge with or into, or to sell, assign, transfer, lease, convey
or otherwise dispose of all or substantially all of its assets to, another
person; (vi) limit the ability of the Restricted Subsidiaries to create
restrictions on the payment of dividends and other payments; (vii) limit the
ability of the Company and its Restricted Subsidiaries to make sales of assets
and stock of a subsidiary; (viii) limit transactions by the Company and its
Restricted Subsidiaries with affiliates; (ix) limit the sale of capital stock
of Restricted Subsidiaries; and (x) limit the ability of the Company and its
Restricted Subsidiaries to enter into sale and leaseback transactions. In
addition, the Senior Credit Agreement also contains certain other restrictive
covenants which are generally more restrictive than those contained in the
Indenture and limit the Company's ability to prepay its other indebtedness
(including the Notes). The Senior Credit Agreement also requires the Company
to maintain specified consolidated financial ratios and satisfy certain
consolidated financial tests. See "Description of Certain Indebtedness" and
"Description of Notes."
11
The Company's ability to comply with the covenants in the Indenture and the
Senior Credit Agreement may be affected by events beyond its control,
including prevailing economic, financial, competitive, legislative, regulatory
and other conditions. The breach of any such covenants or restrictions could
result in a default under the Indenture and/or the Senior Credit Agreement,
which would permit the holders of the Notes and/or the lenders under the
Senior Credit Agreement, as the case may be, to declare all amounts borrowed
thereunder to be due and payable, together with accrued and unpaid interest,
and the commitments of the lenders to make further extensions of credit under
the Senior Credit Agreement could be terminated. If the Company was unable to
repay its indebtedness to the lenders under the Senior Credit Agreement, such
lenders could proceed against any or all of the collateral securing the
indebtedness under the Senior Credit Agreement, which collateral will consist
of substantially all of the assets of the Company and the Guarantors. In
addition, if the Company fails to comply with the financial and operating
covenants contained in the Senior Credit Agreement, such failure could result
in an event of default thereunder, which could permit the acceleration of the
debt incurred thereunder and, in some cases, cross-acceleration and cross-
default of indebtedness outstanding under other debt instruments of the
Company, including the Notes. See "Description of Notes."
Limitation on Change in Control
Upon a Change of Control, the Company will be required to offer to purchase
all of the outstanding Notes at a price equal to 101% of the principal amount
thereof plus accrued and unpaid interest thereon to the date of repurchase.
The Senior Credit Agreement also provides that certain change of control
events with respect to the Company constitute a default thereunder. Any future
credit agreements or other agreements to which the Company becomes a party may
contain similar restrictions and provisions. In the event a Change of Control
occurs at a time when the Company is prohibited from purchasing the Notes, or
if the Company is required to make an asset sale offer pursuant to the terms
of the Notes, the Company could seek the consent of its lenders to purchase
the Notes or could attempt to refinance the borrowings that contain such
prohibition. If the Company does not obtain such a consent or refinance such
borrowings, the Company will remain prohibited from purchasing the Notes. In
such case, the Company's failure to purchase tendered Notes would constitute
an Event of Default as defined under the Indenture. If, as a result thereof, a
default occurs with respect to any other senior indebtedness, payments to the
holders of the Notes could be limited.
In addition, the Change of Control provisions may not be waived by the Board
of Directors of the Company or the Trustee without the consent of holders of
at least a majority in principal amount of the Notes. As a result, the Change
of Control provisions of the Notes may in certain circumstances discourage or
make more difficult a sale or takeover of the Company and, thus, the removal
of incumbent management. See "Description of Notes--Change of Control."
Lack of Public Market; Restrictions on Transferability
The Company does not intend to apply for a listing of the Notes, or if
issued, the Exchange Notes, on any securities exchange or on any automated
dealer quotation system. There is currently no established market for the
Notes, and there can be no assurance as to the liquidity of markets that may
develop for the Notes, the ability of the holders of the Notes to sell their
Notes or the price at which such holders would be able to sell their Notes. If
such market were to exist, the Notes could trade at prices that may be lower
than the initial market values thereof depending on many factors, including
prevailing interest rates, the Company's operating results and the market for
similar securities. The Notes are expected to be designated for trading in the
PORTAL market. The Initial Purchaser has advised the Company that it currently
intends to make a market with respect to the Notes. However, the Initial
Purchaser is not obligated to do so, and any market making with respect to the
Notes may be discontinued at any time without notice. In addition, such market
making activity will be subject to the limits imposed by the Securities Act
and the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and
may be limited during the pendency of the Exchange Offer or the effectiveness
of a shelf registration statement in lieu thereof. See "Exchange and
Registration Rights Agreement," "Transfer Restrictions" and "Plan of
Distribution."
12
The Notes are being offered in reliance upon an exemption from registration
under the Securities Act and applicable state securities laws. Therefore, the
Notes may be transferred or resold only in a transaction registered under or
exempt from the Securities Act and applicable state securities laws. Pursuant
to the Exchange and Registration Rights Agreement, the Company and the
Guarantors have agreed to file the Exchange Offer Registration Statement with
the Commission and to use their best efforts to cause such registration
statement to become effective with respect to the Exchange Notes. If issued,
the Exchange Notes generally will be permitted to be resold or otherwise
transferred by each holder without the requirement of further registration.
The Exchange Notes, however, also will constitute a new issue of securities
with no established trading market. The Exchange Offer will not be conditioned
upon any minimum or maximum aggregate principal amount of Notes being tendered
for exchange. No assurance can be given as to the liquidity of the trading
market for the Exchange Notes, or, in the case of non-exchanging holders of
Notes, the trading market for the Notes following the Exchange Offer. See
"Exchange and Registration Rights Agreement."
The liquidity of, and trading market for, the Notes or the Exchange Notes
also may be adversely affected by a general decline in the market for similar
securities. Such a decline may adversely affect such liquidity and trading
markets independent of the financial performance of, and prospects for, the
Company.
RISK FACTORS RELATED TO THE COMPANY'S OPERATIONS
Dependence Upon New Products and Effect of Product Lifecycles
The Company's results of operations depend, to a significant extent, upon
its ability to develop and commercialize new pharmaceutical products in
response to the competitive dynamics within the pharmaceutical industry.
Generally, following the expiration of patents and any other market
exclusivity periods for branded drugs, the first pharmaceutical manufacturers
successfully to market generic equivalents of such drugs achieve higher
revenues and gross profit from the sale of such generic drugs than do others
from the sale of generic equivalents subsequently approved. As competing
generic products reach the market, the prices, sales volumes and profit
margins of the first generic versions often decline significantly. For these
reasons, the Company's ability to achieve growth in revenues and profitability
depends on its being among the first companies regularly to introduce new
generic products. While the Company believes the pipeline of generic drugs and
branded drugs it currently has under development will allow it to compete
effectively, no assurance can be given that any of the drugs in its pipeline
will be successfully developed or approved by FDA, will be among the first to
the market or will achieve significant revenues and profitability. See "--
Dependence on Successful Patent Litigation," "--Competition," "--Dependence on
Regulatory Approval and Compliance," "--Pending Regulatory Matters,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business."
Dependence on Certain Existing Products
The Company derives and is expected to continue to derive a significant
portion of its revenues and gross profit from a limited number of products.
Net revenues from INFeD in 1996 and the nine months ended September 1997 were
$88.0 million and $72.1 million, respectively, or 19% and 20%, respectively,
of the Company's total net revenues, with gross profit from INFeD as a
percentage of total gross profit being significantly greater. Any material
decline in revenues or gross profit from these products could have a material
adverse effect on the Company's business, results of operations and financial
condition. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business--Products."
Dependence on Successful Patent Litigation
A significant portion of the Company's revenues and gross profit has been
derived from generic versions of branded drug products covered by patents the
Company has challenged under the Drug Price Competition and Patent Term
Restoration Act of 1984 (the "Waxman-Hatch Act"). In several successful
proceedings, the Company has been advised and represented by an independent
patent attorney (the "Consultant") whose involvement has been substantial. The
Company expects that the Consultant will be involved with the Company
13
in no more than two additional patent challenges, one of which is currently
being litigated. Through its internal efforts, and with the assistance of
third-party collaborators and advisors, the Company has identified a number of
additional patents that may be susceptible to challenge. There can be no
assurance the Company will successfully complete the development of any
additional products involving patent challenges, succeed in any pending or
future patent challenges or, if successful, receive significant revenues or
profit from the products covered by successfully challenged patents. See "--
Dependence Upon New Products and Effect of Product Lifecycles," "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Business--Government Regulations" and "Certain Transactions."
Competition
The pharmaceutical industry is intensely competitive. The Company competes
with numerous companies in the pharmaceutical industry generally and the
generic segment of the industry specifically. These competitors include
generic drug manufacturers and large pharmaceutical companies that continue to
manufacture the branded and/or generic versions of drugs after the expiration
of their patents relating to these drugs. Many of the Company's competitors
have greater financial and other resources than the Company and, therefore,
are able to spend more than the Company on research, product development and
marketing. In addition, following the expiration of patents on branded drugs,
manufacturers of these products have employed various strategies intended to
maximize their share of the markets for these products, as well as, in some
cases, generic equivalents of these products, and are expected to continue to
do so in the future. There can be no assurance that developments by others
will not render any product the Company produces or may produce obsolete or
otherwise non-competitive. See "--Dependence Upon New Products and Effect of
Product Lifecycles," "--Consolidation of Distribution Network; Customer
Concentration" and "Business--Competition."
Dependence on Regulatory Approval and Compliance
The development, manufacture, marketing and sale of pharmaceutical products
is subject to extensive federal, state and local regulation in the U.S. and
similar regulation in other countries. The Company, like its competitors, must
obtain approval from FDA before marketing most drugs, and must demonstrate
continuing compliance with current Good Manufacturing Practices ("cGMP")
regulations. Generally, for generic products an ANDA is submitted to FDA, and
for new drugs an NDA is submitted. Under certain circumstances following
product approval and market introduction, FDA can request product recalls,
seize inventories and merchandise in commerce, move to enjoin further
manufacture and product distribution, suspend distribution or withdraw FDA
approval of the product, and debar a company from submitting new applications.
FDA also can take administrative action against a company to suspend
substantive review of pending applications and withhold approvals, if it
concludes that the data and applications from that company may not be reliable
or that there are significant unresolved cGMP issues pertinent to the
manufacture of drugs at a particular facility of that company. Any such
actions are likely to have a material adverse effect on a company's business.
The Company has ANDAs currently pending before FDA and intends to file
additional ANDAs in the future. Delays in the review of these applications or
the inability of the Company to obtain approval of certain of these
applications or to market the product following approval could have a material
adverse effect on the Company's business, results of operations and financial
condition. See "--Dependence Upon New Products and Effect of Product
Lifecycles," "--Pending Regulatory Matters" and "Business--Government
Regulations."
Pending Regulatory Matters
In early 1996, FDA conducted an inspection of the operations of the
Company's subsidiary, Steris Laboratories, Inc. ("Steris"), located in
Phoenix, Arizona. At the conclusion of that inspection, FDA identified various
cGMP manufacturing and reporting deficiencies in Steris' operations. Steris
has subsequently been advised by FDA that it will not approve any ANDAs for
products manufactured at the Steris facility until FDA confirms that the
manufacturing and reporting deficiencies have been corrected. Ten of the
Company's pending ANDAs have been filed from the Steris facility. Following
the 1996 inspection, Steris implemented numerous measures to correct these
deficiencies and place Steris in compliance with applicable FDA manufacturing
and reporting requirements.
14
In July 1997, FDA conducted a follow-up inspection of the Steris facility.
At the conclusion of that inspection, FDA identified additional cGMP
deficiencies at the Steris facility. Steris has implemented measures intended
to correct these deficiencies and believes that a full reinspection will be
required before FDA will approve ANDAs for new products manufactured at the
Steris facility. While the Company is currently discussing with FDA the timing
of this reinspection, no assurance can be given as to when it will take place.
Following the 1996 inspection of Steris, FDA's Office of Regulatory Affairs
staff commenced an investigation of Steris' operations that focused primarily
on drug stability issues, including Steris' alleged failure to notify FDA on
an adequate and timely basis of drug stability problems with respect to
certain products manufactured at the Steris facility. On the basis of this
investigation, the U.S. Department of Justice ("DOJ") notified Steris in a
letter dated July 28, 1997 that the alleged reporting deficiencies constituted
serious breaches of regulatory obligations and indicated that it would be
willing to negotiate a settlement of the alleged violations with Steris. The
contemplated settlement will require Steris to pay a substantial misdemeanor
fine for failure to observe application reporting requirements for two drugs
during 1994 and 1995. While the Company does not expect any other sanctions to
arise in respect of this matter, any such sanctions could have a material
adverse effect on the Company's business, results of operations and financial
condition.
In 1995, FDA inspected the operations of the Company's subsidiary, Danbury
Pharmacal, Inc. ("Danbury"), which operates facilities in Carmel, New York and
Danbury, Connecticut. As a result of observations made by FDA relating to
Danbury's compliance with cGMP requirements and the integrity of the data
submitted by Danbury in support of certain ANDAs, Danbury voluntarily audited
all data submitted in connection with 26 of its pending and approved ANDAs.
Since the 1995 inspection, FDA has continued to approve ANDAs for products
manufactured by Danbury. In August 1997, FDA reinspected the Carmel and
Danbury facilities. FDA observed certain cGMP deficiencies which the Company
has corrected in a manner satisfactory to FDA. FDA is currently conducting an
additional inspection of those facilities, which the Company believes
primarily will involve evaluations of the ANDA audits and the procedural
changes Danbury instituted to remedy cGMP deficiencies observed during the
1995 FDA inspection.
In June 1997, FDA conducted an ANDA preapproval and cGMP inspection at the
Company's Marsam subsidiary, located in Cherry Hill, New Jersey. Although the
inspection focused primarily on issues relating to the manufacture of certain
drug products that are the subject of five pending ANDAs, the inspection also
included an examination of Marsam's general compliance with cGMP requirements.
Marsam was informed at the conclusion of the inspection that FDA intended to
withhold approval of the five ANDAs until certain alleged cGMP deficiencies
are corrected. Marsam has provided FDA with information it believes
demonstrates that the alleged deficiencies are not significant and that
corrective measures have been implemented. FDA has begun a follow-up
inspection to determine whether these corrective actions have been implemented
satisfactorily. Seven of the Company's pending ANDAs have been filed from the
Marsam facility.
There can be no assurance that FDA will determine that the Company has
adequately corrected the alleged deficiencies or that approval of any of the
pending or subsequently submitted ANDAs by the Company will be forthcoming. In
addition, there can be no assurance that FDA, following the reinspection of
the Steris, Danbury and Marsam facilities and its review of their respective
responses to the alleged cGMP deficiencies, will not seek to impose additional
regulatory sanctions against the Company and its subsidiaries. See "--
Dependence Upon New Products and Effect of Product Lifecycles" and "Business--
Government Regulations."
Consolidation of Distribution Network; Customer Concentration
The Company's principal customers are wholesale drug distributors and major
drug store chains. These customers comprise a significant part of the
distribution network for pharmaceutical products in the United States. This
distribution network is continuing to undergo significant consolidation marked
by mergers and acquisitions among wholesale distributors and the growth of
large retail drug store chains. As a result, a small number of large wholesale
distributors control a significant share of the market, and the number of
independent drug stores and small drug store chains has decreased. The Company
expects that consolidation of drug
15
wholesalers and retailers will increase competitive pricing pressure on
generic drug manufacturers. The Company believes this consolidation has caused
and may continue to cause the Company's customers to reduce purchases of the
Company's products. For the nine months ended September 1997 and for the year
ended December 1996, sales to the Company's ten largest customers represented
approximately 70% of the Company's total net revenues. For the nine months
ended September 1997, three customers accounted for 17%, 16% and 11%,
respectively, of the Company's total net revenues. The same three customers
accounted for 16%, 15% and 11%, respectively, of the Company's total net
revenues in 1996. The loss of any of these customers could materially and
adversely affect the Company's business, results of operations and financial
condition. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business--Industry Overview."
Dependence on Collaborative Relationships
The Company develops and markets certain products through collaborative
arrangements with other companies through which it gains access to dosage
forms, proprietary drug delivery technology, specialized formulation
capabilities and active pharmaceutical ingredients. The Company relies on its
collaborative partners for any number of functions, including product
formulation, approval and supply. There can be no assurance these products
will be successfully developed or that the Company's partners will perform
their obligations under these collaborative arrangements. Further, there can
be no assurance that the Company will be able to enter into future
collaborative arrangements on favorable terms, or at all. Even if the Company
enters into such collaborative arrangements, there can be no assurance that
any such arrangement will be successful. See "Business--Strategy" and
"Business--Strategic Collaborations."
Supply of Raw Materials
The principal components of the Company's products are active and inactive
pharmaceutical ingredients and certain packaging materials. Many of these
components are available only from a single source and, in many of the
Company's ANDAs, only one supplier of raw materials has been identified, even
in instances when multiple sources exist. Because FDA approval of drugs
requires manufacturers to specify their proposed suppliers of active
ingredients and certain packaging materials in their applications, FDA
approval of any new supplier would be required if active ingredients or such
packaging materials were no longer available from the specified supplier. The
qualification of a new supplier could delay the Company's development and
marketing efforts. Any interruption of supply could have a material adverse
effect on the Company's ability to manufacture its products or to obtain or
maintain regulatory approval of such products. In addition, the Company
obtains a significant portion of its raw materials from foreign suppliers.
Arrangements with international raw material suppliers are subject, among
other things, to FDA regulation, various import duties and other government
clearances. Acts of governments outside the U.S. may affect the price or
availability of raw materials needed for the development or manufacture of
generic drugs. In addition, recent changes in patent laws in jurisdictions
outside the U.S. may make it increasingly difficult to obtain raw materials
for research and development prior to the expiration of the applicable U.S.
patents. There can be no assurance that the Company will establish or, if
established, maintain good relationships with its suppliers or that such
suppliers will continue to exist or be able to supply ingredients in
conformity with legal or regulatory requirements. See "Business--Strategy" and
"Business--Manufacturing and Distribution."
Risk of Product Liability Claims; No Assurance of Adequate Insurance
The testing, manufacture and sale of pharmaceutical products involve a risk
of product liability claims and the adverse publicity that may accompany such
claims. The Company is a defendant in a number of product liability cases, the
outcome of which the Company believes should not materially and adversely
affect the Company's business, financial condition or results of operations.
Although the Company maintains what it believes to be an adequate amount of
product liability insurance coverage, there can be no assurance that the
Company's existing product liability insurance will cover all current and
future claims or that the Company will be able to maintain existing coverage
or obtain, if it determines to do so, insurance providing additional coverage
at reasonable rates. No assurance can be given that one or more of the claims
arising under any pending or future
16
product liability cases, whether or not covered by insurance, will not have a
material adverse effect on the Company's business, results of operations or
financial condition. See "Business--Product Liability; Insurance" and
"Business--Legal Proceedings."
Control of the Company
Several of the Company's current principal stockholders are parties to the
Restructuring Agreements (as defined herein), which govern the voting of their
common stock (the "Common Stock") until March 2000. The shares subject to
these agreements represent a majority of the shares of Common Stock
outstanding. Under these agreements, the voting trustee (currently Martin
Sperber, the Chairman of the Board, Chief Executive Officer and President of
the Company), has the right to vote, or direct the vote of, the shares subject
to these agreements. Accordingly, Mr. Sperber is able to control substantially
all matters requiring stockholder approval, including the election of
directors. These agreements remain in effect until March 2000, subject to
earlier termination under certain circumstances. Upon such termination, the
stockholders who are parties to these agreements may be able to control all
matters requiring stockholder approval, including the election of directors.
Bayer Corporation, which owns 28.3% of the outstanding shares of Common
Stock, is a party to an agreement with the Company (the "Standstill") that,
among other things, prevents Bayer Corporation from acquiring or seeking to
acquire control of the Company until May 15, 2001. After such date, Bayer
Corporation has the right to acquire control through open market purchases,
and under certain circumstances within six months of the end of the
Standstill, to acquire from certain principal stockholders of the Company or
from the Company a number of shares that would enable Bayer Corporation to own
a majority of the outstanding shares of Common Stock. During the Standstill,
Bayer Corporation has, under the terms of the Restructuring Agreements, the
right to acquire, including under certain circumstances the right to acquire
from the Company and certain of its principal stockholders, a significant
number of additional shares of Common Stock.
As long as Bayer Corporation owns 10% or more of the outstanding Common
Stock, Bayer Corporation has the right to nominate one member of the Company's
Board of Directors and the right to nominate one or more additional directors,
depending on the number of shares it owns. Until May 15, 2001, the Company may
not undertake certain actions without the consent of Bayer Corporation,
including, among other things, engaging in any business not principally in a
segment of the pharmaceutical or health care industry or amending the
Company's charter or by-laws to require more than majority approval to elect a
majority of the Board of Directors, merge, consolidate or sell all or
substantially all the Company's assets. In addition, until the shares of the
Company's Common Stock held by more than 300 persons who are neither current
stockholders, their permitted transferees nor employees of the Company have a
total market value in excess of $100.0 million, the Company may not undertake
certain other actions without the consent of Bayer Corporation.
Each of the provisions described above may make it more difficult for a
third party to acquire, or may discourage acquisition bids for, Schein. See
"Management--Board of Directors" and "Certain Transactions--Restructuring
Agreements."
Fluctuating Results of Operations
During the past three years, the Company's results of operations have
fluctuated materially on both an annual and a quarterly basis. These
fluctuations have resulted from several factors, including, among others, the
timing of introductions of new products by the Company and its competitors,
timing of receipt of patent settlement revenues, dependence by the Company on
a limited number of products, certain non-recurring expenses related to the
Company's restructuring and relocation in 1994, the Marsam Acquisition (as
defined herein) in 1995 and weak performance by the generic drug industry in
the second half of 1996 and continuing into the first half of 1997. The
Company believes that it will continue to experience fluctuations in net
revenues, gross profit and net income as a result of, among other things, the
timing of regulatory approvals and market introduction of new products by the
Company and its competitors, and downward pressure on pricing for generic
products available from multiple approved sources. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
17
THE COMPANY
The Company was founded in 1985. From 1992 to 1994, the Company engaged in a
series of corporate reorganization transactions, including the separation of
the Company from Henry Schein, Inc., a company engaged in the direct marketing
of health care products and services to office-based health care
practitioners, and the Company's reincorporation from New York to Delaware by
way of the merger of the Company's parent into the Company. In 1994, Bayer
Corporation purchased 28.3% of the Company's outstanding shares and agreed to
pursue future strategic alliances with the Company. In September 1995, the
Company acquired all the outstanding shares of Marsam, a developer,
manufacturer and marketer of generic injectable prescription drugs.
The Company is a Delaware corporation with its corporate offices at 100
Campus Drive, Florham Park, New Jersey 07932. Its telephone number is (973)
593-5500.
USE OF PROCEEDS
The Company is amending the terms of the Senior Subordinated Loan Agreement
to allow for the issuance of the Notes and intends to use the net proceeds of
the Offering to repay the Senior Subordinated Loan.
18
CAPITALIZATION
The following table sets forth the total short-term debt and total
capitalization of the Company as of September 1997 (i) on a historical basis
and (ii) as adjusted to give effect to the Offering and the payment of $4.2
million in fees and expenses in connection therewith using proceeds from the
Company's revolving credit facility under the Senior Credit Agreement. This
table should be read in conjunction with the Consolidated Financial Statements
of the Company and the notes thereto included elsewhere in this Offering
Memorandum. See "Use of Proceeds."
SEPTEMBER 1997
--------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
SHORT-TERM DEBT:
Revolving credit facility (1)........................... $ 26,000 $ 30,200
Current portion of term loan facility................... 6,842 6,842
Current portion of capitalized lease obligations........ 101 101
-------- --------
Total short-term debt................................. $ 32,943 $ 37,143
======== ========
LONG-TERM DEBT:
Term loan facility...................................... $123,158 $123,158
Senior Subordinated Loan................................ 100,000 --
Senior Floating Rate Notes Due 2004..................... -- 100,000
Capitalized lease obligations........................... 312 312
-------- --------
Total long-term debt.................................. 223,470 223,470
-------- --------
STOCKHOLDERS' EQUITY:
Common Stock, $.01 par value; 529 authorized shares, 273
issued
and outstanding, actual and as adjusted................ 3 3
Additional paid-in capital.............................. 38,876 38,876
Retained earnings....................................... 92,107 92,107
Other................................................... 6,098 6,098
-------- --------
Total stockholders' equity............................ 137,084 137,084
-------- --------
Total capitalization................................ $360,554 $360,554
======== ========
- --------
(1) After giving effect to the Offering, the Company would have had
approximately $69.8 million of borrowing availability under the Senior
Credit Agreement, subject to satisfaction of certain conditions. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations--Liquidity and Capital Resources."
19
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data with respect to the
Company's financial position at December 1995 and 1996, and its results of
operations for the years ended December 1994, 1995 and 1996, has been derived
from the audited consolidated financial statements of the Company included
elsewhere in this Offering Memorandum. The selected consolidated financial
information with respect to the Company's financial position at December 1992,
1993 and 1994, and its results of operations for the years ended December 1992
and 1993, has been derived from the audited consolidated financial statements
of the Company which are not included in this Offering Memorandum. The
information for the interim periods is unaudited; however, in the opinion of
management, all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of such information have been included. The
interim results of operations may not be indicative of the results for the
full year. The selected consolidated financial data presented below should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this Offering
Memorandum.
NINE MONTHS ENDED
YEAR ENDED DECEMBER SEPTEMBER
------------------------------------------------ ----------------------
1992 1993 1994 1995 (1) 1996 1996 1997
-------- -------- -------- -------- -------- --------- -----------
(DOLLARS IN THOUSANDS)
STATEMENT OF OPERATIONS
DATA:
Net revenues............ $319,875 $393,926 $385,428 $391,846 $476,295 $352,172 $353,829
Cost of sales........... 207,276 217,653 237,380 250,507 320,675 236,721 240,562
-------- -------- -------- -------- -------- -------- --------
Gross profit........... 112,599 176,273 148,048 141,339 155,620 115,451 113,267
COSTS AND EXPENSES:
Selling, general and
administrative........ 55,763 64,489 71,416 73,250 84,366 61,149 57,950
Research and
development........... 14,234 18,055 19,170 28,324 27,030 23,044 22,854
-------- -------- -------- -------- -------- -------- --------
42,602 93,729 57,462 39,765 44,224 31,258 32,463
Amortization of
goodwill and other
intangibles........... -- -- -- 3,399 10,195 7,713 7,722
Special compensation,
restructuring and
relocation (2)........ 7,417 8,426 33,594 -- -- -- --
Acquired in-process
Marsam research and
development (1)....... -- -- -- 30,000 -- -- --
-------- -------- -------- -------- -------- -------- --------
Operating income........ 35,185 85,303 23,868 6,366 34,029 23,545 24,741
Interest expense, net.. 2,315 1,467 1,493 10,005 23,285 16,081 20,456
Other expense (income),
net (3)............... 195 9,215 579 779 4,156 1,745 (4,536)
-------- -------- -------- -------- -------- -------- --------
Income (loss) before
provision for income
taxes and minority
interest............... 32,675 74,621 21,796 (4,418) 6,588 5,719 8,821
Provision for income
taxes (4)............. 12,490 29,096 15,165 10,482 5,191 3,573 5,095
Minority interest...... 2,173 (343) -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Net income (loss)....... $ 18,012 $ 45,868 $ 6,631 $(14,900) $ 1,397 $ 2,146 $3,726
======== ======== ======== ======== ======== ======== ========
OTHER DATA:
EBITDA (as defined) (5). $ 39,748 $ 91,864 $ 61,074 $ 50,396 $ 54,932 $ 39,174 $ 40,037
Depreciation and
amortization........... 6,105 7,328 8,464 17,395 25,450 18,018 19,749
Capital expenditures,
net.................... 17,416 22,806 16,135 13,986 11,309 8,625 8,992
Ratio of earnings to
fixed charges (6)...... 10.6x 26.9x 8.0x -- 1.3x 1.3x 1.4x
PRO FORMA DATA:
Cash interest expense
(7).................... $ 23,488 $ 16,788 $ 17,897
Ratio of EBITDA (as
defined) to cash
interest expense....... 2.3x 2.3x 2.2x
Ratio of total debt to
EBITDA (as defined)
(8).................... -- -- 4.7x
DECEMBER AS OF AS ADJUSTED
------------------------------------------------ SEPTEMBER SEPTEMBER
1992 1993 1994 1995 1996 1997 1997 (9)
-------- -------- -------- -------- -------- --------- -----------
(IN THOUSANDS)
BALANCE SHEET DATA:
Working capital......... $ 82,731 $ 87,035 $ 98,610 $ 92,021 $ 99,111 $ 93,480 $ 89,280
Total assets............ 211,744 227,861 269,729 522,410 544,312 520,699 524,899
Total debt.............. 44,625 27,563 45,927 280,558 286,480 256,413 260,613
Stockholders' equity.... 85,761 130,336 140,164 125,692 129,980 137,084 137,084
20
- --------
(1) Includes the results of Marsam from September 1995, the date of purchase.
In connection with the purchase of Marsam, the Company recognized acquired
in-process research and development. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and Note 3 to
the Consolidated Financial Statements of the Company.
(2) Special compensation, restructuring and relocation expenses includes costs
recognized by the Company in connection with its restructuring and
relocation of its corporate headquarters. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and Notes 2 and
12 to the Consolidated Financial Statements of the Company.
(3) Other expense (income), net in 1992 includes $0.5 million of an
extraordinary income item.
(4) Provision for income taxes in 1993 includes an adjustment to reduce income
taxes by $1.1 million relating to the adoption of Statement of Financial
Accounting Standards No. 109.
(5) EBITDA is defined as income (loss) before provision for income taxes and
minority interest, interest expense, net and depreciation and
amortization, excluding gains on sales of securities and non-cash items
(special compensation, acquired in-process Marsam research and
development, contingent settlement accruals, equity in net losses of
international investments and other non-cash items). The Company has
included information concerning EBITDA in this Offering Memorandum because
it believes that such information may be used by certain investors as one
measure of a company's historical ability to service debt. EBITDA should
not be considered as an alternative to, or more meaningful than, earnings
from operations or other traditional indications of a company's operating
performance.
(6) The ratio of earnings to fixed charges is computed by dividing (i) income
(loss) before provision for income taxes and minority interest plus fixed
charges by (ii) fixed charges. Fixed charges consist of interest on
indebtedness including amortization of debt issuance costs and the
estimated interest component of rental expense (assumed to be one-third).
In fiscal 1995, fixed charges exceeded income (loss) before provision for
income taxes and minority interest by $4.4 million.
(7) Pro forma cash interest expense is defined as historical interest expense,
net adjusted for (i) the exclusion of amortization of deferred financing
fees of $2.2 million in fiscal 1996 and $0.9 million and $2.3 million in
the nine months ended September 1996 and 1997, respectively, (ii) interest
expense as if the Offering had occurred on December 31, 1995 and the
proceeds were used to repay the Senior Subordinated Loan or its
predecessor debt and (iii) interest expense associated with drawdowns
under the revolving credit facility under the Senior Credit Agreement
which were used to pay the $4.2 million in fees and expenses incurred as a
result of the Offering.
(8) The ratio of total debt to EBITDA (as defined) is computed by dividing (i)
EBITDA (as defined) for the twelve months ended September 1997 by (ii)
total debt as of September 1997 as adjusted for the Offering.
(9) As adjusted to give effect to the Offering and the payment of $4.2 million
in fees and expenses in connection therewith, using proceeds from the
Company's revolving credit facility under the Senior Credit Agreement.
21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Consolidated Financial Data" and the Consolidated Financial
Statements of the Company and notes thereto included elsewhere in this
Offering Memorandum. This Offering Memorandum contains forward-looking
statements that involve risks and uncertainties, such as statements of the
Company's plans, objectives, expectations and intentions. The cautionary
statements made in this Offering Memorandum should be read as being applicable
to all related forward-looking statements wherever they appear in this
Offering Memorandum. See "Risk Factors."
OVERVIEW
The Company currently manufactures and markets two classes of pharmaceutical
products, generic products and branded products. The Company's results of
operations depend on the Company's ability to develop and commercialize new
pharmaceutical products. Generally, following the expiration of patents and
any other market exclusivity periods for branded drugs, the first
pharmaceutical manufacturers successfully to market generic equivalents of
such drugs achieve higher revenues and gross profit from the sale of such
generic drugs than do others from the sale of generic equivalents subsequently
approved. As competing generic equivalents reach the market, the prices, sales
volumes and profit margins of the earliest generic versions often decline
significantly. For these reasons, the Company's ability to achieve growth in
revenues and profitability depends on its being among the first companies to
introduce new generic products. During the past five years, the Company has
introduced a significant number of generic products to the market at patent
expiration dates and in a number of cases prior to patent expiration of the
branded product by successful challenges to the patent under the Waxman-Hatch
Act.
The Company's dependence on a limited number of products, the product cycles
of such products, and the timing of receipt of patent settlement revenues have
resulted in significant fluctuations in the Company's earnings. Continued
growth in the Company's revenues will depend on continued market demand for
its products, as well as the successful introduction and marketing of new
products.
Net revenues from INFeD as a portion of total net revenues increased from
16% in 1994 to 20% in the nine months ended September 1997. Gross profit
margins on INFeD exceed gross profit margins on the Company's generic products
generally; accordingly, the gross profit from increased sales of INFeD have
offset the reduction in gross profit from generic products during the periods
presented.
The following table sets forth the net revenues of the Company's generic and
branded businesses for each of the periods shown:
NINE MONTHS ENDED
YEAR ENDED DECEMBER SEPTEMBER
-------------------- -----------------
1994 1995 1996 1996 1997
------ ------ ------ -------- --------
(IN MILLIONS)
Generic business:
Core products......................... $291.9 $300.8 $331.6 $ 247.6 $ 221.4
Nortriptyline......................... 32.6 19.0 9.0 7.3 4.5
Vecuronium bromide.................... -- -- 34.2 23.2 30.8
Patent settlement revenues............ -- 5.0 13.5 13.5 25.0
------ ------ ------ -------- --------
Total generic revenues................ 324.5 324.8 388.3 291.6 281.7
Branded business:
INFeD................................. 60.9 67.0 88.0 60.6 72.1
------ ------ ------ -------- --------
Net revenues........................ $385.4 $391.8 $476.3 $ 352.2 $ 353.8
====== ====== ====== ======== ========
22
From 1992 to 1994, the Company engaged in a series of corporate
reorganization transactions, including the separation of the Company from
Henry Schein, Inc., which is engaged in the direct marketing of health care
products and services to office-based health care practitioners. In connection
with these transactions, Bayer Corporation purchased from the Company's
stockholders 28.3% of the Company's outstanding shares for $312.4 million and
agreed with the Company to pursue future strategic alliances. Charges for
special compensation, restructuring and relocation incurred in connection with
the reorganization aggregated $7.4 million, $8.4 million and $33.6 million for
1992, 1993 and 1994, respectively.
The Company acquired all the outstanding capital stock of Marsam (the
"Marsam Acquisition") in September 1995 for $245.0 million in cash, which
expanded the Company's ability to manufacture sterile penicillins and oral and
sterile cephalosporins.
RESULTS OF OPERATIONS
The following table sets forth certain selected income statement data as a
percentage of net revenues for the periods indicated:
NINE MONTHS
ENDED
YEAR ENDED DECEMBER SEPTEMBER
----------------------- ------------
1994 1995 1996 1996 1997
------ ------ ------ ----- -----
Net revenues............................ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales........................... 61.6 63.9 67.3 67.2 68.0
------ ------ ------ ----- -----
Gross profit............................ 38.4 36.1 32.7 32.8 32.0
Costs and expenses:
Selling, general and administrative... 18.5 18.7 17.7 17.4 16.4
Research and development.............. 5.0 7.2 5.7 6.5 6.4
Amortization of goodwill and other
intangibles.......................... -- 0.9 2.1 2.2 2.2
Special compensation, restructuring
and relocation....................... 8.7 -- -- -- --
Acquired in-process Marsam research
and development...................... -- 7.7 -- -- --
------ ------ ------ ----- -----
Operating income........................ 6.2 1.6 7.2 6.7 7.0
Interest expense, net................. 0.4 2.5 4.9 4.6 5.8
Other expense (income), net........... 0.2 0.2 0.9 0.5 (1.3)
------ ------ ------ ----- -----
Income (loss) before provision for
income taxes........................... 5.6 (1.1) 1.4 1.6 2.5
Provision for income taxes............ 3.9 2.7 1.1 1.0 1.4
------ ------ ------ ----- -----
Net income (loss)....................... 1.7% (3.8)% 0.3% 0.6% 1.1%
====== ====== ====== ===== =====
Nine Months Ended September 1997 Compared to Nine Months Ended September 1996
Net revenues increased $1.6 million, or 0.5%, from $352.2 million in 1996 to
$353.8 million in 1997. In the branded business, sales increased $11.5
million, which offset a decline in sales of generic products of $9.9 million.
The increase in branded product sales reflected largely an increase in units
sold. The decline in generic revenues resulted from a $26.2 million decline in
the sales of core products and a $2.8 million decline in sales of
nortriptyline, offset by an $11.5 million increase in patent settlement
revenues received in the first quarter of 1997 and a $7.6 million increase in
sales of vecuronium bromide. The decrease in sales of core products reflected
the strategic decision in the second half of 1996 to discontinue certain low-
margin manufactured products and to reduce selling efforts on outsourced
products as well as competitive pressures on other core products, which was
offset by the impact of a $6.4 million increase in sales of new products.
Gross profit decreased $2.2 million, or 1.9%, from $115.5 million in 1996 to
$113.3 million in 1997. The gross profit margin decreased from 32.8% in 1996
to 32.0% in 1997. This decline in gross profit was largely comprised of a
decline in gross profit on core products which was partially offset by
increased gross profit on INFeD, vecuronium bromide and new products. Gross
profit from patent settlements received in the first quarters of 1996 and 1997
contributed an additional $5.6 million, reduced by increased manufacturing
variances and other
23
costs of $4.6 million. In the third quarter of 1997 compared to the third
quarter of 1996, the gross profit margin decreased from 32.6% to 29.7%,
reflecting a less favorable mix of products sold as well as competitive price
pressures.
Selling, general and administrative expenses decreased $3.2 million, or
5.2%, from $61.1 million in 1996 to $58.0 million in 1997. Selling, general
and administrative expenses as a percent of net revenues decreased from 17.4%
in 1996 to 16.4% in 1997. The decrease in selling, general and administrative
expenses was due primarily to the effects of various cost reduction
initiatives, including a reduction in the retail field sales force. In the
third quarter of 1997, the Company experienced increased selling, general and
administrative expenses compared to earlier quarters of 1997 due primarily to
higher brand marketing expenses.
Research and development expenses decreased $0.2 million, or 0.8%, from
$23.0 million in 1996 to $22.8 million in 1997. However, expenses in the third
quarter of 1997 increased compared to earlier 1997 quarters largely reflecting
costs associated with a development project nearing launch stage.
Amortization of goodwill and other intangibles was unchanged compared to the
comparable period in 1996.
As a result of the factors discussed above, operating income increased $1.2
million, or 5.1%, from $23.5 million in 1996 to $24.7 million in 1997.
Interest expense, net increased $4.4 million, or 27.2%, from $16.1 million
in 1996 to $20.5 million in 1997 principally due to higher amortization of
deferred financing expenses of $2.5 million and increased interest costs of
$1.5 million resulting from refinancing of senior debt with higher cost
subordinated debt in December 1996.
Other expense (income), net changed by $6.3 million from an expense of $1.7
million in 1996 to income of $4.5 million in 1997. Gains on the sale of
marketable securities of $9.9 million, primarily in the third quarter of 1997,
offset increased equity losses from the Company's investment in international
joint ventures of $1.0 million and other expenses.
The Company's effective tax rate is higher than the statutory rate due to
the effect of significant non-deductible expenses. The effective tax rate
decreased from 62.5% in 1996 to 57.8% in 1997, primarily as a result of higher
income offsetting fixed non-deductible expenses.
1996 Compared to 1995
Net revenues increased $84.4 million, or 21.6%, from $391.9 million in 1995
to $476.3 million in 1996. In the generic business, net revenues increased
$63.5 million, and in the branded business, net revenues increased $21.0
million, driven by increased unit sales of INFeD. Increased revenues of
generic products consisted of $34.2 million in sales generated by vecuronium
bromide, a new product launched in March 1996, an $8.5 million increase in
patent settlement revenues and a $30.8 million increase in sales of the
Company's core products, offset in part by a decline in nortriptyline sales of
$10.0 million. The sales of core products increased primarily from the Marsam
Acquisition, which increased core product sales by $31.4 million, and from
$7.6 million in sales of new products, offset by an $8.2 million decrease in
sales of the Company's other core products, due primarily to price decreases.
The Company's gross profit increased $14.3 million, or 10.1%, from $141.3
million in 1995 to $155.6 million in 1996. The gross profit margin fell from
36.1% in 1995 to 32.7% in 1996. An increase in gross profit of $31.2 million
was attributable to the Company's branded business, vecuronium bromide and
patent settlement revenues, which was partially offset by a $12.6 million
increase in manufacturing and regulatory costs.
Selling, general and administrative expenses increased $11.1 million, or
15.2%, from $73.3 million in 1995 to $84.4 million in 1996. Selling, general
and administrative expenses decreased as a percentage of net revenues from
18.7% in 1995 to 17.7% in 1996. Selling, general and administrative expenses
increased due primarily to increased sales volume, the full year impact of the
Marsam Acquisition of $2.6 million and an increase in promotional activities
in support of new product launches.
24
Research and development expenses decreased $1.3 million, or 4.6%, from
$28.3 million in 1995 to $27.0 million in 1996. Acquired in-process Marsam
research and development charges of $30.0 million were fully reflected in
1995.
Amortization of goodwill and other intangibles increased $6.8 million from
$3.4 million in 1995 to $10.2 million in 1996, giving effect to the full year
impact of the Marsam Acquisition.
As a result of the factors discussed above, operating income increased $27.7
million from $6.3 million in 1995 to $34.0 million in 1996.
Interest expense, net increased $13.3 million from $10.0 million in 1995 to
$23.3 million in 1996. The increase was due primarily to the increase in
average debt associated with the debt financing for the Marsam Acquisition and
higher interest rates.
Other expense (income), net increased by $3.4 million from $0.8 million in
1995 to $4.2 million in 1996. Equity losses from the Company's investment in
international joint ventures accounted for $3.0 million of the increase.
The Company's effective tax rate is higher than the statutory rate due to
the effect of significant non-deductible expenses. The 1996 effective income
tax rate of 78.9% represented a decrease from the 1995 effective rate of
237.3% primarily due to the impact of certain non-recurring and non-deductible
expenses, which were largely comprised of the acquired in-process Marsam
research and development charge of $30.0 million.
1995 Compared to 1994
Net revenues increased $6.4 million, or 1.7%, from $385.4 million in 1994 to
$391.8 million in 1995. In the branded business, net revenues increased $6.1
million, and in the generic business, net revenues increased $0.3 million. The
increase in net revenues in the branded business resulted from an increased
number of units of INFeD sold. In the generic business, the changes consisted
of increases of $4.8 million in sales of new products, $5.0 million in new
patent settlement revenues and $14.0 million from the impact of the Marsam
Acquisition. These increases in the generic business were offset by a $13.6
million decrease in sales of nortriptyline and a $4.1 million decrease in
sales of the Company's other core products due primarily to price declines.
The Company's gross profit decreased $6.7 million, or 4.5%, from $148.0
million in 1994 to $141.3 million in 1995. The gross profit margin decreased
from 38.4% in 1994 to 36.1% in 1995. The decrease was primarily a result of a
$12.8 million decrease attributable to lower selling prices of nortriptyline
and decreased gross profit on other core products due to competitive pricing
pressures. This was partially offset by a $4.0 million increase representing
the impact of the Marsam Acquisition, an increase in gross profit in the
Company's branded business and decreased manufacturing and regulatory costs.
Selling, general and administrative expenses increased $1.9 million, or
2.6%, from $71.4 million in 1994 to $73.3 million in 1995. The increase in
selling, general and administrative expenses was due primarily to an increase
in sales volume, an increase in promotional activities in support of the
Company's branded business, new product launches and the Marsam Acquisition.
Selling, general and administrative expenses increased as a percentage of net
revenues from 18.5% in 1994 to 18.7% in 1995.
Research and development expenses increased $9.1 million, or 47.8%, from
$19.2 million in 1994 to $28.3 million in 1995. Of the $9.1 million increase,
$2.1 million represented spending in connection with a worldwide technology
licensing and development agreement which the Company entered into during
September 1994, and the remaining increase in research and development
expenses was attributable to various new in-house development projects.
Amortization of goodwill and other intangibles of $3.4 million and acquired
in-process Marsam research and development charges of $30.0 million in 1995
resulted from the Company's Marsam Acquisition in September 1995. See Note 3
to the Consolidated Financial Statements of the Company.
25
The corporate reorganization and relocation were completed during 1994,
resulting in a $33.6 million charge. There were no restructuring or relocation
expenses incurred during 1995.
As a result of the factors discussed above, operating income decreased $17.5
million from $23.9 million in 1994 to $6.4 million in 1995.
Interest expense, net increased $8.5 million from $1.5 million in 1994 to
$10.0 million in 1995. The increase was due primarily to the increase in
average debt associated with the debt financing for the Marsam Acquisition
funded in September 1995.
The Company's effective tax rate is higher than the statutory rate due to
the effect of significant non-deductible expenses. The 1995 effective income
tax rate of 237.3% increased from the 1994 effective income tax rate of 69.6%,
primarily due to the impact of certain non-recurring and non-deductible
expenses, which were largely comprised of the acquired in-process Marsam
research and development charge of $30.0 million. The 1994 effective income
tax rate also reflects the impact of non-deductible expenses, primarily
special compensation charges in connection with the corporate reorganization
completed during 1994.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has financed its business operations primarily
through a revolving credit facility and used long-term bank financing to fund
acquisitions. The Company plans to use the proceeds of the Offering as set
forth under "Use of Proceeds."
Net cash provided by operating activities was $27.1 million and $10.8
million in the nine months ended September 1997 and in the year ended December
1996, respectively. The net cash provided by operating activities during 1997
was primarily attributable to net income, as adjusted for non-cash charges, of
$15.9 million and decreases in inventories and accounts receivable aggregating
$11.4 million. The net cash provided by operating activities during 1996 was
primarily attributable to net income, as adjusted for non-cash charges, of
$27.9 million and an increase in accounts payable and accrued expenses of
$11.9 million, offset by an increase in inventories and accounts receivable of
$31.0 million.
Net cash provided by investing activities for the nine months ended
September 1997 and used in investing activities for the year ended December
1996 was $1.2 million and $20.0 million, respectively. Cash provided by
investing activities in 1997 resulted from the proceeds of sales of marketable
securities of $11.6 million, offset primarily by capital expenditures, net of
$9.0 million. The 1996 use of cash in investing activities was primarily due
to capital expenditures, net, purchase of product rights and licenses and
investments in international joint ventures of $17.4 million.
Net cash used in financing activities for the nine months ended September
1997 of $30.1 million resulted from the net repayment of debt. Net cash
provided by financing activities for the year ended December 1996 of $3.6
million was primarily due to net proceeds of debt.
In September 1995, the Company entered into a secured revolving credit and
term loan agreement (as amended, the "Senior Credit Agreement") with a group
of banks to provide funds for the Marsam Acquisition, the repayment of certain
debt, working capital and general corporate purposes. The Senior Credit
Agreement, which expires in December 2001, provided a term loan facility of
$250.0 million and a revolving credit facility of $100.0 million. In December
1996, the Company prepaid $100.0 million of the term loan portion of the
Senior Credit Agreement using the proceeds from a $100.0 million senior
subordinated loan (the "Senior Subordinated Loan") provided by Societe
Generale, New York branch, an affiliate of the Initial Purchaser and a lead-
manager of the Senior Credit Agreement. As a result of this payment and a
scheduled payment, the term loan facility was reduced to $145.0 million at
December 1996. In the first nine months of 1997, the Company made principal
payments of $15.0 million, thus reducing the term loan portion to $130.0
million at September 1997. Quarterly principal payments on the term loan
commence in September 1998 and end in the year 2001. Amortization
26
amounts will total $13.7 million, $34.2 million, $41.0 million and $41.1
million in years 1998 through 2001, respectively. In addition to such
principal payments, the Company is required to make additional principal
payments in certain circumstances. Amounts outstanding under the revolving
credit facility were $41.0 million and $26.0 million as of December 1996 and
September 1997, respectively.
Borrowings under the Senior Credit Agreement bear interest, which is payable
at least quarterly, at a rate equal to a floating alternate base rate (derived
from the greater of the prime rate of the Credit Agent (as defined herein),
the three-month secondary market rate for certificates of deposit plus 1.00%
and the Federal Funds rate plus 1/2 of 1.00%), plus a margin ranging from zero
to 1.50% or at a rate equal to LIBOR (as defined herein) plus a margin ranging
from 0.75% to 2.50%, depending on the type of borrowing and the Company's
performance against certain criteria. Outstanding borrowings under the Senior
Subordinated Loan through January 31, 1998 bear interest, payable quarterly,
at a rate equal to a floating alternate base rate (derived from the greater of
Societe Generale's prime rate, the three-month secondary market rate for
certificates of deposit plus 1.00% and the Federal Funds rate plus 1/2 of
1.00%) plus a margin of 3.00% or a rate equal to LIBOR plus a margin of 4.00%.
The original obligations under the Senior Subordinated Loan will be
effectively replaced by the Notes offered hereby. See "Description of Certain
Indebtedness."
The Company believes that its existing credit facilities and cash expected
to be generated from operations are sufficient to finance its current level of
operations and currently contemplated capital expenditures.
The Company has signed a non-binding letter dated October 7, 1997 with
Cheminor Drugs Limited and its subsidiaries ("Cheminor") and Dr. Reddy's
Laboratories Limited and its subsidiaries ("Reddy") outlining the parties'
intent to enter into a strategic alliance agreement. Cheminor will make
available to the Company its present and future dosage form generic products
on an exclusive basis in the United States and in certain countries, and the
Company will make available to Cheminor and Reddy its present and future
products on an exclusive basis for sale in India and certain other countries.
Cheminor and Reddy will make available to the Company bulk active
pharmaceutical ingredients. As part of the contemplated arrangement, the
Company would purchase 2.0 million publicly traded shares of Cheminor Drugs
Limited for $10.0 million, and under certain circumstances have the right and
the obligation to purchase an additional 1.0 million shares for $5.0 million.
Cheminor would have the right to make fair market value purchases of the
Company's Common Stock, once the shares are publicly traded; the purchase
price could be payable from profits otherwise due Cheminor from the alliance.
Each party would also be entitled to representation on the other company's
board of directors consistent with its equity interest. See "Certain
Transactions."
In the event the Company makes any significant acquisitions, it may be
required to raise additional funds through the issuance of additional debt or
equity securities. There can be no assurance that such funds, if required,
would be available or, if available, would be on terms acceptable to the
Company.
The Company has filed a registration statement covering an initial public
offering (the "Common Stock Offering") of its Common Stock. Consummation of
each of this Offering and the Common Stock Offering is not contingent upon
consummation of the other. There can be no assurance that the filing will
become effective or that any shares will be sold. If the Common Stock Offering
occurs, the Company intends to use a portion of the net proceeds from the
Common Stock Offering to repurchase or redeem a portion of the Notes offered
hereby.
QUARTERLY INFORMATION
As a result of a variety of factors, including the introduction of new
products by the Company, the timing of receipt of patent settlement revenues
and changes in the degree of competition for the Company's products, the
Company's quarterly results of operations have fluctuated significantly and
are expected to fluctuate significantly in the future.
27
The following tables present unaudited quarterly financial data for the
years 1995 and 1996, and for the nine months ended September 1997. The Company
believes all necessary adjustments have been included in the amounts stated
below to present fairly the selected quarterly information when read in
conjunction with the Consolidated Financial Statements of the Company and the
notes thereto.
NINE MONTHS ENDED
YEAR ENDED DECEMBER 1995 YEAR ENDED DECEMBER 1996 SEPTEMBER 1997
(UNAUDITED) (UNAUDITED) (UNAUDITED)
---------------------------------- ------------------------------------ --------------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH FIRST SECOND THIRD
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
------- ------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS)
Net revenues:
Net product
sales.......... $83,978 $98,880 $ 96,344 $107,644 $109,949 $120,398 $108,325 $124,123 $106,839 $114,441 $107,549
Patent
settlements.... 5,000 -- -- -- 13,500 -- -- -- 25,000 -- --
------- ------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total net
revenues....... 88,978 98,880 96,344 107,644 123,449 120,398 108,325 124,123 131,839 114,441 107,549
------- ------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Gross profit..... 34,454 39,141 33,303 34,441 42,420 37,620 35,411 40,169 44,722 36,568 31,977
Cost and
expenses:
Selling, general
and
administrative. $18,214 18,298 17,955 18,783 19,907 20,755 20,487 23,217 19,227 18,478 20,245
Research and
development.... 7,579 7,996 7,331 5,418 7,242 8,119 7,683 3,986 6,744 7,434 8,676
Amortization of
goodwill and
other
intangibles.... -- -- 1,128 2,271 2,548 2,550 2,615 2,482 2,550 2,598 2,574
Acquired in-
process Marsam
research &
development.... -- -- 30,000 -- -- -- -- -- -- -- --
------- ------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Operating income
(loss).......... 8,661 12,847 (23,111) 7,969 12,723 6,196 4,626 10,484 16,201 8,058 482
Interest
expense, net... 743 954 2,790 5,518 5,321 5,379 5,382 7,203 6,884 6,850 6,722
Other expense
(income), net.. 519 607 456 (803) 126 79 1,539 2,412 1,809 (426) (5,919)
------- ------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Income (loss)
before
provision for
income taxes... 7,399 11,286 (26,357) 3,254 7,276 738 (2,295) 869 7,508 1,634 (321)
Provision for
income taxes... 2,996 4,571 1,693 1,222 3,343 733 (503) 1,618 3,625 1,315 155
------- ------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net income
(loss).......... 4,403 6,715 (28,050) 2,032 3,933 5 (1,792) (749) 3,883 319 (476)
======= ======= ======== ======== ======== ======== ======== ======== ======== ======== ========
INFLATION
Management does not believe inflation had a material adverse effect on the
financial statements for the periods presented.
EFFECT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued two new
disclosure standards.
Statement of Financial Accounting Standards No. 130 ("SFAS No. 130"),
Reporting Comprehensive Income, establishes standards for reporting and
display of comprehensive income, its components and accumulated balances.
Comprehensive income is defined to include all changes in equity except those
resulting from investments by owners and distributions to owners. Among other
disclosures, SFAS No. 130 requires that all items that are required to be
recognized under current accounting standards as components of comprehensive
income be reported in a financial statement that is displayed with the same
prominence as other financial statements.
Statement of Financial Accounting Standards No. 131 ("SFAS No. 131"),
Disclosures about Segments of an Enterprise and Related Information, which
supersedes SFAS No. 14, Financial Reporting for Segments of a Business
Enterprise, establishes standards for the way that public enterprises report
information about operating segments in annual financial statements and
requires reporting of selected information about operating segments in interim
financial statements issued to the public. It also establishes standards for
disclosures regarding products and services, geographic areas and major
customers. SFAS No. 131 defines operating segments as components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in asserting performance.
28
Both of these new standards are effective for financial statements for
periods beginning after December 15, 1997 and require comparative information
for earlier years to be restated. Results of operations and financial position
will be unaffected by implementation of these new standards. The Company has
not determined whether either of these two standards will have a material
impact on its financial statement disclosure.
RISK MANAGEMENT
The Company is potentially subject to a concentration of credit risk with
respect to its trade receivables, the majority of which are due from
wholesalers, drug store chains and distributors. The Company performs ongoing
credit evaluations of its customers and generally does not require collateral.
The Company maintains sufficient allowances and insurance to cover potential
or anticipated losses for uncollectible accounts.
The Company considers its investment in international subsidiaries and joint
ventures to be both long-term and strategic. As a result, the Company does not
hedge the long-term translation exposure to its balance sheet. Foreign
currency translations to date have not been material.
YEAR 2000 COMPLIANCE
The Company is modifying its computer systems to be Year 2000 compliant. The
Company does not expect that the cost of modifying such systems will be
material. The Company believes it will achieve Year 2000 compliance in advance
of the year 2000 and does not anticipate any material disruption in its
operations as the result of any failure by the Company to be in compliance.
The Company does not have any information concerning the Year 2000 compliance
status of its suppliers and customers.
29
BUSINESS
GENERAL
Schein Pharmaceutical is one of the leading generic pharmaceutical companies
in the United States. The Company develops, manufactures and markets one of
the broadest generic product lines in the pharmaceutical industry through the
integration of its product development expertise, diverse, high-volume
production capacity and direct sales and marketing forces. The Schein product
line includes both solid dosage and sterile dosage generic products, and the
Company is also developing a line of specialty branded pharmaceuticals. The
Company's primary branded product, INFeD, is the leading injectable iron
product in the United States. The Company has a substantial pipeline of
products under development, including 24 ANDAs filed with FDA. The Company
supplements its internal product development, manufacturing and marketing
capabilities through strategic collaborations. Schein generated net revenues
of $478.0 million and EBITDA (as defined) of $55.8 million during the 12
months ended September 1997.
The Company believes it manufactures and markets the broadest product line
of any U.S. pharmaceutical company in terms of number and types of products.
The Company manufactures and markets approximately 160 chemical entities
formulated in approximately 350 different dosages under approximately 200
ANDAs approved by FDA. Schein is currently the sole manufacturing source for
47 generic pharmaceutical products, of which 45 are sterile dosage products.
The Company's solid dosage products include both immediate-release and
extended-release capsules and tablets; sterile dosage products include
solutions, suspensions, powders and lyophilized (freeze-dried) products
primarily for administration as injections, ophthalmics and otics. The
manufacture of sterile dosage products is significantly more complex than the
manufacture of solid dosage products, which limits competition in this product
area. The Company currently manufactures approximately four billion solid
dosage tablets and capsules and 75 million sterile dosage vials and ampules
annually. Solid dosage generic products and sterile dosage generic products
each accounted for approximately 40% of the Company's net revenues in the 12
months ended September 1997.
Since introducing INFeD in 1992, the Company has been developing a portfolio
of branded products, primarily in select therapeutic markets, such as iron
management for the nephrology, oncology and hematology markets. INFeD is used
in the treatment of certain types of anemia, particularly in dialysis
patients, and accounted for approximately 20% of the Company's net revenues in
the nine months ended September 1997. The Company markets INFeD through a 20-
person dedicated sales and marketing force, as well as through co-marketing
collaborations with Bayer Corporation in the nephrology market and MGI in the
oncology market.
The Company believes its 120-person direct sales and marketing force is the
largest in the U.S. generic pharmaceutical industry. Through its customized
marketing programs, the Company markets its products to approximately 60,000
customers representing all major customer channels, including pharmaceutical
wholesalers, chain and independent drug retailers, hospitals, managed care
organizations, other group purchasing organizations and physicians.
Schein's objective is to become the leading generic pharmaceutical company
in the approximately $10 billion generic pharmaceutical industry in the United
States. The Company's growth strategy is to: (i) leverage its diverse
pharmaceutical formulation and manufacturing capabilities to extend the
breadth of its generic product line; (ii) pursue strategic collaborations to
supplement product development and manufacturing resources; (iii) focus its
product development on complex and other generic drugs that require
specialized development or manufacturing technology and are therefore expected
to encounter limited competition; (iv) develop and market branded drugs for
select therapeutic categories; and (v) expand market penetration through
direct sales and innovative marketing programs.
The Company's commitment to product development has resulted in 23 ANDA
approvals during the past three years and its current pipeline of 24 pending
ANDAs and over 60 additional products under development. During the past three
fiscal years, the Company, directly and through its strategic collaborations,
has expended
30
approximately $74.0 million on product pipeline development activities, which
the Company believes is among the highest product development expenditure
levels for any independent generic drug company. The Company pursues product
development through its 140-person product development staff and various
collaborations and licensing arrangements with other pharmaceutical and drug
delivery technology companies. The Company's product development efforts focus
on: (i) major branded drugs coming off patent; (ii) drugs for which patent
protection has lapsed and for which there are few or no generic producers;
(iii) drugs whose patents may be susceptible to challenge; (iv) proprietary
and branded products focused in select therapeutic areas; and (v) generic
products that require specialized development, formulation, drug delivery or
manufacturing technology.
The Company supplements its internal product development, manufacturing and
marketing capabilities from external sources. During 1994, Schein entered into
a strategic alliance with Bayer Corporation, through which Bayer Corporation
became a 28.3% stockholder of Schein, and Bayer Corporation currently
participates with Schein in several collaborations. In 1995, the Company
acquired Marsam, expanding the Company's ability to develop and manufacture
sterile penicillins and oral and sterile cephalosporins. In addition, the
Company has entered into strategic collaborations involving product
development arrangements with companies such as Ethical and Elan; raw material
supply arrangements with companies such as Johnson Matthey and Abbott; and
sales and marketing arrangements with Bayer and other companies such as
Elensys and MGI.
INDUSTRY OVERVIEW
In the U.S., pharmaceutical products are marketed as either branded or
generic. Branded products are marketed under brand names and through programs
designed to attract physician and consumer loyalty. Branded drugs generally
are covered by patents at the time of their market introduction, thereby
resulting in periods of market exclusivity for the patent holders. Following
the expiration of these patents, marketing of branded drugs often continues,
particularly in cases where there is significant physician or consumer
loyalty.
Generic pharmaceuticals (also known as "multi-source" or "off-patent"
pharmaceuticals) are the chemical and therapeutic equivalents of branded
drugs. Under the Waxman-Hatch Act, generic drugs generally may be sold in the
United States following (i) FDA approval of an ANDA that includes evidence
that the generic drug is bioequivalent to its branded counterpart and (ii) the
expiration, invalidation or circumvention of any patents on the corresponding
branded drug and the expiration of any other market exclusivity periods
applicable to the branded drug.
Since the adoption of the Waxman-Hatch Act, generic pharmaceuticals have
become an increasingly important segment of the U.S. pharmaceutical market,
particularly when measured in terms of the increasing rate at which doctors'
prescriptions have allowed generic drugs to be substituted for branded drugs.
In 1996, prescriptions dispensed in the United States for generic drugs
reached 40% of the total drug prescriptions dispensed. In terms of dollar
sales, however, generic drugs have accounted for a much lower percentage of
the total U.S. pharmaceutical market. In 1996, sales of generic drugs
accounted for approximately $10 billion out of a total U.S. prescription
pharmaceutical market of approximately $83 billion.
The lower percentage of total dollar sales attributable to generic
pharmaceuticals compared to the growth in the number of generic pharmaceutical
prescriptions dispensed reflects the pricing dynamics for generic
pharmaceuticals. As the number of commercially available generic competitors
of a branded drug increases, their selling prices and gross margins decline
substantially. Generic drugs are generally sold at a 20% to 80% discount from
their branded counterparts. Intense price competition in the generic drug
industry requires companies to introduce new generic drug products regularly
in order to maintain and increase revenues.
Growth of the generic drug industry has been driven primarily by the dollar
volume of branded drugs that have lost patent protection and the rising rate
at which generic drugs have been substituted for branded drugs. Industry
sources estimate that, during the next five years, branded drugs with 1996
U.S. sales of more than $13 billion will lose patent protection. The rising
rate of generic substitution has resulted in large part from increasing
pressure within the U.S. health care industry to contain costs. Due to the
lower cost of generic drugs compared
31
to their branded counterparts, third party payors, such as insurance
companies, company health plans, health maintenance organizations, managed
care organizations, pharmacy benefit managers, group purchasing organizations,
government-based programs and others, have adopted policies that encourage or
mandate generic substitution. In addition, physicians, pharmacists and
consumers are becoming increasingly comfortable with the quality and
therapeutic equivalence of generic drugs.
A significant portion of pharmaceuticals are distributed in the United
States through wholesale drug distributors and major retail drug store chains.
During the past several years, there has been a consolidation of these
distribution channels, resulting in a smaller number of wholesale distributors
and the emergence of fewer, larger regional and nationwide retail drug store
chains. In addition to forcing generic drug manufacturers to lower their
prices and/or provide volume discounts, these customers have also been seeking
to reduce the number of sources from which they purchase pharmaceutical
products.
Participants in the generic drug market include independent generic drug
manufacturers such as the Company, generic drug subsidiaries of large branded
pharmaceutical companies and joint ventures and collaborations between branded
pharmaceutical companies and generic drug manufacturers. The participation of
branded pharmaceutical companies in the U.S. generic industry accelerated
during the first half of the 1990s as pricing pressure and generic
substitution grew. The extent to which the branded pharmaceutical companies
will continue to participate in the generic drug industry segment cannot be
predicted by the Company.
The Company believes it is well positioned to capitalize on these industry
trends by leveraging its product development, manufacturing and marketing
capabilities to expand its market penetration.
STRATEGY
The Company's objective is to become the leading generic pharmaceutical
company in the approximately $10 billion generic pharmaceutical industry in
the United States. The Company's strategy for achieving this objective
comprises the following five elements:
Leverage Diverse Pharmaceutical Formulation and Manufacturing Capabilities
to Extend the Breadth of Its Generic Product Line. The Company believes it
manufactures and markets the broadest product line of any U.S. pharmaceutical
company. This product line includes both solid dosage and sterile dosage
products comprising approximately 160 chemical entities in approximately 350
dosage forms and strengths under approximately 200 approved ANDAs. Solid
dosage forms include both immediate-release and extended-release capsules and
tablets; sterile dosage forms include solutions, suspensions, powders and
lyophilized (freeze-dried) products primarily for administration as
injections, ophthalmics and otics. The Company believes its diverse high-
volume manufacturing capabilities enable it to participate in segments of the
generic drug industry where competition is limited. As the U.S. generic drug
market consolidates and major drug buyers increasingly purchase from fewer
suppliers, the Company believes its high volume and diverse drug formulation
and manufacturing capabilities will constitute an important competitive
advantage.
Pursue Strategic Collaborations to Supplement Product Development and
Manufacturing Resources. Schein has formed product development and marketing
alliances with several bulk pharmaceutical producers, drug delivery technology
companies and other drug manufacturers to expand the breadth of its product
development capabilities. Included among these are collaborations with drug
delivery companies, Elan and Ethical, and several bulk pharmaceutical and
finished dosage form producers. The Company plans to utilize collaborative and
licensing arrangements with third parties to share product development risk
and gain access to sales and marketing rights, dosage forms, proprietary drug
delivery technologies, specialized formulation capabilities and active
pharmaceutical ingredients.
32
Focus Product Development on Complex and Other Generic Drugs that Require
Specialized Development or Manufacturing Technology and Encounter Limited
Competition. The Company targets generic drugs for which it believes it can
achieve relatively high margins by being the first or among the first generic
manufacturers to launch the product. The Company is currently the sole generic
source for 47 products, and the Company is developing several "complex
generic" drugs that are difficult to duplicate due to formulation and/or
manufacturing complexities and other generic drugs for which raw materials are
in limited supply. In addition, the Company closely analyzes pharmaceutical
patents and initiates patent challenges where appropriate opportunities exist.
Products currently being considered for development include several that could
lead to patent challenges. The Company has generated significant revenues and
profits from generic products that have been the subject of successful patent
challenges initiated by the Company.
Develop and Market Branded Drugs for Select Therapeutic
Categories. Leveraging its broad pharmaceutical formulation, development and
manufacturing capabilities, the Company targets branded drug development and
marketing opportunities in select therapeutic categories with limited
competition. The Company's branded drug development and marketing efforts
currently focus on injectable products used in the management of iron-related
disorders. The Company's first branded product, INFeD, is the leading
injectable iron product in the U.S. Schein's near-term development plan is to
expand the Company's iron management expertise into the oncology, hematology
and gastroenterology markets, and the Company expects that an NDA for its next
generation injectable iron product will be filed with FDA in the first half of
1998. The Company also is pursuing opportunities to broaden its branded
pharmaceutical product line by: (i) formulating and developing, either
internally or through development collaborations, unique products that may be
patented; (ii) acquiring products developed by other drug companies; and (iii)
acquiring formulation technologies for developing new dosage forms of existing
drugs.
Expand Market Penetration through Direct Sales and Innovative Marketing
Programs. The Company believes its 120-person direct sales and marketing force
is the largest in the U.S. generic pharmaceutical industry. This sales and
marketing force includes 90 field representatives, 20 telemarketing
representatives and 10 marketing personnel and covers all major customer
groups, including chain and independent drug retailers, managed care
organizations, pharmaceutical wholesalers, hospitals and group purchasing
organizations. The Company has developed market share initiatives with
selected leading chain and wholesale customers and developed and implemented
customized marketing programs to meet specific customer needs, including
customer inventory management, patient-focused education and compliance
programs. With respect to its branded product business, the Company has a team
of approximately 20 sales representatives dedicated to marketing INFeD. This
sales and marketing force is complemented by marketing collaborations with
Bayer in the nephrology market and MGI in the oncology market.
PRODUCTS
The Company believes it manufactures and markets the broadest number of
products of any U.S. pharmaceutical company in terms of number and types of
products. The Company's product line includes both solid dosage and sterile
dosage generic products; the Company is also developing a line of specialty
branded pharmaceuticals. The Company manufactures and markets approximately
160 chemical entities in approximately 350 dosage forms and strengths under
approximately 200 approved ANDAs. Schein is currently the sole generic source
for 47 pharmaceutical products.
33
The following table sets forth the percentages of the Company's net revenues
attributable to its generic and branded businesses:
YEAR ENDED DECEMBER
---------------------------- NINE MONTHS ENDED
1992 1993 1994 1995 1996 SEPTEMBER 1997
---- ---- ---- ---- ---- -----------------
Generic business:
Manufactured sterile dosage........ 16% 18% 25% 30% 38% 37%
Manufactured solid dosage.......... 58 55 40 35 28 30
Purchased products................. 18 16 19 18 15 13
--- --- --- --- --- ---
Total generic...................... 92 89 84 83 81 80
Branded business:
INFeD.............................. 8 11 16 17 19 20
--- --- --- --- --- ---
Total............................ 100% 100% 100% 100% 100% 100%
=== === === === === ===
Generic Products
The Company's generic business consists of the manufacturing and marketing
of sterile and solid dosage products and the marketing of certain additional
purchased products.
The Company's sterile dosage product portfolio is comprised of approximately
110 products and accounted for approximately 37% of the Company's total net
revenues in the nine months ended September 1997. This portfolio includes
vecuronium bromide, an anesthetic product that is currently the Company's
largest selling generic product. The Company is manufacturing and marketing
vecuronium bromide prior to expiration of the patent covering this product
pursuant to a licensing arrangement. None of the Company's other sterile
dosage products accounted for more than 6% of net revenues in the nine months
ended September 1997. Included in the sterile dosage product portfolio are 45
products for which the Company is currently the sole generic source, one of
which is vecuronium bromide.
The Company's solid dosage product portfolio is comprised of approximately
50 products and accounted for approximately 30% of the Company's total net
revenues in the nine months ended September 1997. None of the Company's solid
dosage products accounted for more than 6% of net revenues in the nine months
ended September 1997. The Company's solid dosage portfolio includes two
products for which the Company is currently the sole generic source.
The Company supplements its manufactured product line with purchased
products. The margins received by the Company on these products, however, are
generally lower than the margins received by the Company on products that it
manufactures. In addition, the Company believes its customers are increasingly
seeking to purchase products directly from manufacturers. The percentage of
the Company's total net revenues of generic products manufactured by others
has declined from approximately 18% in 1995 to 13% for the nine months ended
September 1997.
Branded Products
Until 1992, the Company's focus was on generic pharmaceutical products. In
1992, the Company introduced INFeD, its primary branded product, and currently
has other branded products under development. The Company focuses on products
used in the management of iron-related disorders. Currently, INFeD, an
injectable iron dextran used in the treatment of severe anemia or iron
deficiency, accounts for approximately 20% of the Company's net revenues.
INFeD is most commonly used in the U.S. to treat iron deficiency anemia in
patients with end-stage renal disease (ESRD) who are receiving therapy with
recombinant human erythropoietin (EPO). In addition to the dialysis market,
the high incidence of iron deficiency anemia related to other medical
conditions presents further opportunities for the Company to leverage its
existing INFeD sales and marketing capabilities.
The Company is seeking to expand its branded pharmaceutical business through
internal development and collaborative arrangements with other companies, with
a particular view to leveraging its expertise in iron
34
management into the nephrology, hematology and oncology markets. The following
table identifies the Company's branded product marketing and development
activities:
PRODUCT THERAPEUTIC APPLICATION STATUS
- ------- ----------------------- ------
INFeD Iron management Launched in U.S. in 1992
Ferrlecit Iron management NDA expected to be filed by Makoff R&D
Laboratories, Inc. in first half of 1998
Unipine XL Hypertension Launched in U.K. in 1996
Iron Management Market
In recent years, there has been increasing focus on improving the quality of
life of patients undergoing chronic disease therapy through, among other
means, iron management. The oxygen carrying component of red blood cells,
hemoglobin, requires iron to function efficiently. In some cases, iron
management requires the treatment of iron deficiency and, in other cases, the
treatment of iron excess. The Company is currently marketing and developing
prescription products for the treatment of anemia in the dialysis and oncology
markets, and seeks to market INFeD for the gastroenterology and bloodless
medicine markets.
Dialysis Market. The dialysis market is currently the largest market for
injectable iron and iron replacement products. Orally administered iron has
historically been, and continues to be, the first form of treatment used by
doctors to treat anemia in dialysis patients. Research has shown, however,
that orally administered iron inadequately treats iron deficiency in dialysis
patients and that injectable iron is more rapidly and directly absorbed in the
body. The National Kidney Foundation's Dialysis Outcome Quality Improvement
(DOQI) guidelines encourage more consistent use of injectable iron to
supplement the use of oral iron in dialysis patients. Approximately 60% to 65%
of dialysis patients are given injectable iron at least once a year. EPO
therapy is currently used to treat approximately 92% of all dialysis patients.
EPO allows patients to generate their own red blood cells, thus greatly
reducing the need for blood transfusions. One of the effects of EPO treatment,
however, is rapid mobilization of iron reserves and depletion of iron stores.
The Company believes that certain studies indicate that INFeD can be used
together with EPO to overcome this iron depletion effect. Accordingly, the use
of EPO therapy has created a need for iron management techniques.
Oncology Market. In the oncology market, which includes patients with cancer
and cancer-related illnesses, anemia is a significant side effect of the
disease and the drugs used in treatment of the disease. Fatigue associated
with anemia is not widely recognized or treated as part of cancer treatment
regimens. Although there is a small base of injectable iron users in this
area, the Company believes there is potential for market expansion.
Hematology and Gastroenterology. INFeD may also have applications in the
area of bloodless medicine. Bloodless medicine is surgery without the use of
blood infusions or transfusions; instead, plasma is supplemented with iron
that is administered to the patient before surgery to build up red blood cells
or after surgery to more rapidly replace red blood cells lost during surgery.
In the gastroenterology market, of the over one million patients with
inflammatory bowel disease, 30% to 70% experience anemia, mostly due to iron
deficiency.
INFeD. INFeD (iron dextran injection, USP 50 mg/mL) is a liquid complex of
ferric hydroxide and dextran that is used in the treatment of patients with
documented iron deficiency in whom oral administration is unsatisfactory or
impossible. INFeD's product label includes the following warning: "Warning:
The parenteral use of complexes of iron and carbohydrates has resulted in
anaphylactic-type reactions. Deaths associated with such administration have
been reported. Therefore, INFeD (iron dextran injection, USP 50 mg/mL) should
be used only in those patients in whom the indications have been clearly
established and laboratory investigations confirm an iron-deficient state not
amenable to oral iron therapy."
Currently, iron dextran is the only injectable iron formulation in the U.S.
market. The Company introduced its injectable iron product, INFeD, in May
1992. INFeD currently has approximately 85% of the injectable iron market, and
iron dextran products are marketed by one other company in the U.S. Net sales
of INFeD in 1996
35
and the nine months ended September 1997 were $88.0 million and $72.1 million,
respectively, and accounted for 19% and 20%, respectively, of the Company's
net revenues. Growth in sales of INFeD has been driven by the expanding use of
EPO and the growing recognition of patient outcomes and quality of life issues
associated with iron deficiency anemia in dialysis patients. For patients
being treated with EPO, injectable iron therapy has become adjunctive therapy
rather than supportive therapy, as studies have shown that anemic patients may
become resistant to EPO and that injectable iron can help to maintain EPO
responsiveness and optimize its effectiveness. The Company believes that the
dialysis market should continue to expand with the expected increase in the
ESRD population, as well as the expanding use of hemodialysis in the treatment
of ESRD patients.
Ferrlecit. Ferrlecit (sodium ferric gluconate complex in sucrose injection)
is intended to be the Company's next generation injectable iron product.
Ferrlecit is administered parenterally to treat hemodialysis patients with
iron deficiency anemia.
Ferrlecit was developed by the Nattermann Company, of Cologne (now Rhone-
Poulenc Rorer GMBH) and is widely used in Europe. In 1996, pursuant to an
exclusive trademark and distribution agreement with Makoff R&D Laboratories
("R&DL"), a specialty renal pharmaceutical company, the Company acquired the
exclusive right to market and distribute Ferrlecit in the U.S. and several
other countries for a period of ten years after market authorization has been
granted by FDA. R&DL has completed Phases I, II and III clinical trials and
expects to file an NDA in the first half of 1998. See "--Government
Regulations--NDA Process."
Other Products
Unipine XL. In the U.K., the Company is currently manufacturing and
marketing Unipine XL, a once- a-day version of nifedipine used in the
treatment of hypertension, pursuant to a license obtained from Ethical. The
Company is also preparing for Unipine XL's launch in Israel, South Africa, the
Caribbean and selected markets in Latin America and Asia.
PRODUCT DEVELOPMENT
The Company seeks to expand its product portfolio through continuing
investment in research and development. As a result of its approximately $74.0
million investment in product development over the past three fiscal years,
the Company has 24 ANDAs pending with FDA and over 60 products under
development internally and with third parties. The Company believes that this
investment in development activities should accelerate its ANDA filings and
launches in the next several years. The Company's product development
activities are conducted by 140 research and development professionals and
supported by others with expertise in manufacturing, technology, legal,
regulatory and intellectual property issues.
The Company's generic product development efforts focus on: (i) major
branded drugs coming off patent; (ii) drugs for which patent protection has
lapsed and for which there are few or no generic producers; (iii) drugs whose
patents may be susceptible to challenge; (iv) proprietary and branded products
in select therapeutic areas; and (v) generic products that require specialized
development, formulation, drug delivery or manufacturing technology. In
furtherance of its strategy to be among the first to market generic versions
of brand drugs, the Company uses its scientific, pharmacologic, manufacturing
and legal expertise to identify brand products covered by patents that are
susceptible to challenge or circumvention. When the Company decides to pursue
development of a generic version of a brand product so identified, it seeks a
source for the drug's active pharmaceutical ingredient, develops a formulation
for the drug, conducts bioequivalence studies on its formulation and prepares
an ANDA filing. The ANDA filing must include a certification from the Company
that the patent on the brand product is invalid or not infringed, and the
patent holder must be provided with notice of the filing and basis for the
certification. If the patent holder commences litigation within 45 days of the
notice, FDA may not approve the ANDA for a period of 30 months, unless the
case is resolved earlier in court or by settlement. A successful patent
challenge may result in a court determination that the patent on the brand
product is invalid, not infringed or unenforceable. Alternatively, a
settlement with the patent holder may include a license to the Company to sell
the generic version of the brand product prior to the expiration of the patent
covering the product.
36
In its branded product business, the Company intends to develop products for
the management of iron-related disorders and select other businesses, as well
as promote the use of its primary branded product, INFeD, beyond the dialysis
market to other therapeutic areas, such as oncology and gastroenterology.
STRATEGIC COLLABORATIONS
To expand its product portfolio and improve its profitability, the Company
will continue to pursue strategic collaborations to access additional dosage
forms, proprietary drug delivery technology, specialized formulation
capabilities and sources of bulk active materials. The Company has product
development arrangements with companies such as Ethical and Elan;
collaborative arrangements for direct access to raw materials with, among
others, Johnson Matthey and Abbott; and sales and marketing arrangements with
companies such as Bayer Corporation, Elensys and MGI. The Company has recently
entered into a non-binding letter of intent regarding Cheminor and Reddy. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
MANUFACTURING AND DISTRIBUTION
The Company operates five manufacturing facilities and two distribution
centers. The following table presents the facilities owned or leased by the
Company and indicates the location and type of each of these facilities:
OWN OR SQUARE LEASE
PROPERTY LOCATION LEASE FEET EXPIRATION
-------- -------- ------ ------- ----------
Manufacturing Facilities
Solid dosage............ Carmel, NY (1) (2) Own 112,000 --
Solid dosage............ Humacao, PR Own 75,000 --
Solid dosage............ Danbury, CT (2) Lease 88,000 2005
Sterile dosage.......... Phoenix, AZ (1) (2) Own 175,000 --
Sterile dosage.......... Cherry Hill, NJ (1) (2) Own 99,700 --
Lease 109,800 (3) 1999
Distribution Centers
Eastern................. Brewster, NY (1) Lease 98,500 2007
Western ................ Phoenix, AZ Lease 76,000 2000
Corporate Offices......... Florham Park, NJ (1) Lease 53,000 2005
- --------
(1) The Company maintains administrative offices at this facility.
(2) The Company maintains research laboratories at this facility.
(3) The Company has an option to purchase this facility.
Manufacturing Facilities
The Company's aggregate manufacturing capacity is among the largest of any
generic pharmaceutical company in the United States. The diversity and
capacity of these facilities are important elements of the Company's strategy
to expand the range of its existing product line and provide several
significant benefits, including (i) the ability to satisfy the growing
preference among many of the Company's customers for buying pharmaceuticals
directly from manufacturers and from fewer sources, (ii) added flexibility in
raw materials sourcing and manufacturing cost control, and (iii) economies of
scale with respect to manufacturing infrastructure functions common to solid
dosage manufacturing and/or sterile dosage manufacturing, such as water
distillation, air purification, drug formulation systems, filling and
packaging lines, and quality control and regulatory compliance. See "--
Strategy" and "--Government Regulations."
The Company has made a substantial investment in plant and equipment and
believes that it is unique in its capacity to produce a broad line of both
sterile dosage products and solid dosage products. The Company manufactures a
variety of product forms and types, including immediate-release and extended-
release solid dosage products and sterile anti-infectives, injectables,
penicillins, cephalosporins, ophthalmics and otics. The
37
Company currently produces approximately four billion tablets and capsules and
75 million vials and ampules annually and has the capacity to increase
production to six billion tablets and capsules and 100 million vials and
ampules annually. This range of manufacturing capabilities allows the Company
to participate in segments of the generic industry where competition is
limited. Further, the Company's high-volume production enables it to obtain
favorable access to raw materials, which typically represent a substantial
portion of the cost of producing drug products. See "Risk Factors--Dependence
on Regulatory Approval and Compliance."
The Company is one of only two U.S. generic manufacturers with dedicated
sterile filling facilities for cephalosporin and penicillin antibiotics, which
target the high volume institutional injectable market. In addition, the
Company's ophthalmic and otic drug manufacturing facilities target higher
margin specialty markets.
In accordance with FDA requirements for manufacturers of finished
pharmaceutical products, the Company has developed strict quality control
procedures to ensure the quality and safety of its products. The Company
employs sanitary handling procedures, customized systems for monitoring and
regulating environmental conditions and back-up systems for many of the
critical steps in the production processes. The Company performs sample
testing of raw materials and packaging supplies used in manufacturing its
products and conducts on-site audits of raw material suppliers. In its
manufacturing process, the Company maintains strict quality control procedures
and believes it is in material compliance with FDA's cGMP standards. The
Company has approximately 380 employees dedicated to quality control and
quality assurance. Because developing and obtaining approval of new generic
products requires a large investment and several years of lead time, the
Company believes that companies like itself that have modern, versatile
manufacturing facilities will have a competitive advantage in responding to
market opportunities. See "Risk Factors--Dependence on Regulatory Approval and
Compliance," "Risk Factors--Pending Regulatory Matters" and "--Government
Regulations."
The Company does not manufacture the active pharmaceutical ingredients used
in the preparation of its products. Instead, the Company purchases these
active pharmaceutical ingredients from international and domestic sources. FDA
requires pharmaceutical manufacturers to identify in their drug applications
the supplier(s) of all the raw materials for its products. If raw materials
for a particular product become unavailable from an approved supplier
specified in a drug application, any delay in the required FDA approval of a
substitute supplier could interrupt manufacture of the product, which could
materially and adversely affect the Company's profit margins and market share
for the product. To the extent practicable, the Company attempts to identify
more than one supplier in each drug application. However, in the case of
certain products (including certain products that contribute (or may
contribute) significantly to its sales and net income), the Company has
submitted drug applications that identify only one supplier. The Company has a
program of identifying alternative suppliers where practicable and, in many
cases, filing supplemental applications with FDA for approval.
The Company obtains a significant portion of its raw materials from
international suppliers. Arrangements with international raw material
suppliers are subject, among other things, to FDA, customs and other
government clearances, various duties and regulation by the country of origin.
The Company has a number of collaborative arrangements for exclusive access to
some difficult to source products.
SALES AND MARKETING
The Company believes that it has one of the largest direct sales and
marketing forces in the generic drug industry, with approximately 90 field
representatives, 20 telemarketing representatives and 10 marketing personnel.
This team is focused on enhancing pharmacist and payor knowledge of the Schein
product line and providing a differentiated level of customer service and
support. The sales and marketing force promotes Schein's newly approved
products and supports customers with innovative, value added services in
inventory management and patient education.
The Company's broad customer base, which purchases from wholesalers and
directly from the Company, includes: retail customers, including chain drug
stores, mass merchandisers, food stores and independent drug stores; wholesale
distributors; managed care providers, including group purchasing
organizations, HMOs and
38
mail order companies; alternative site customers, such as long term care
companies, home infusion companies and surgery centers; and medical/surgical
suppliers.
Most pharmaceuticals today are sold through national and regional
wholesalers, who command approximately 80% of the U.S. drug distribution
market. While pharmaceutical products are typically distributed via these
wholesalers, pharmaceutical companies often directly enter into contracts with
the retail chains, managed care and institutional customers covering the
actual acquisition price. Under these arrangements, wholesalers often serve as
depots for substantially all of a customer's product needs, allowing it to
maintain minimal inventories and receive overnight deliveries of several
manufacturers' products from a single source. Currently, approximately 64% of
the Company's revenues are sold through wholesalers, with approximately 82% of
these revenues subject to direct contracts between the Company and its
customers. In general, it is the Company's strategy to seek to enter into
purchase contracts with retail, managed care and institutional customers.
Sales to Bergen Brunswig Corporation, Cardinal Health, Inc. and McKesson Drug
Company accounted for 17%, 16% and 11%, respectively, of the Company's total
net revenues for the nine months ended September 1997 and accounted for 16%,
15% and 11%, respectively, of the Company's total net revenues in fiscal 1996.
The vast majority of the Company's products are sold under the "Schein
Pharmaceutical," "Marsam Pharmaceuticals" and "Steris Laboratories" labels. In
addition, the Company sells a limited number of products to distributors under
private labels.
The Company directs its sales and marketing activities through programs
specific to its generic product and branded product businesses.
Generic Products
The Company has one of the largest generic sales and marketing organizations
in the U.S. generic pharmaceutical industry, with a sales and marketing
organization of 120 people serving the retail, institutional, alternative
site, managed care and other generic drug purchasing markets, including a 20-
person telemarketing sales force and 10 marketing personnel supporting the 90-
person field sales organization. The Company's large sales and marketing force
permits effective coverage of all purchasers of generic products. The sales
and marketing force promotes newly approved products, encourages substitution
of the Company's generic products for branded products and supports the
customer with value added services in inventory management and patient
education.
The Company has developed market share initiatives with selected leading
chain and wholesale customers and has implemented customized marketing
programs to meet specific customer needs, including the following:
. The Company has developed and implemented a unique vendor managed
inventory program, Schein Pharmaceutical Managed Auto Replenishment
Technology ("S.M.A.R.T.(TM)"), which monitors customers' inventory levels
daily to ensure adequate stocking levels, minimize the occurrence of back
orders and returned goods and enhance inventory turnover for such key
customers.
. The Company uses state-of-the-art electronic data interchange ("EDI")
systems, which enable it to efficiently exchange data with its key
wholesale and retail customers for a variety of transactions.
. The Company offers a patient compliance program through which consumers
receive prescription refill reminders from their pharmacies.
. The Company has designed the Generic Acceptance and Intervention Network
("G.A.I.N.(TM)"), a patient-focused education program to promote the use
of generic products for its customers.
Branded Products
The Company has a sales and marketing organization of 20 people dedicated to
marketing INFeD. The Company also has established a co-promotion arrangement
with Bayer Corporation under which 150 of Bayer's
39
specialty sales representatives devote a portion of their time in the United
States and Puerto Rico detailing INFeD to the nephrology market. In addition,
as part of its marketing effort in the oncology market, the Company entered
into a co-promotion arrangement with MGI in March 1997 for MGI's 21-person
sales force to support INFeD in the oncology market.
COMPETITION
In the generic pharmaceutical business, the Company competes with a number
of companies, including independent generic manufacturers and larger
pharmaceutical companies, which sell the same generic equivalents of the
Company's products. Many companies, including large pharmaceutical firms with
financial and marketing resources and development capabilities substantially
greater than those of the Company, are engaged in developing, marketing and
selling products that compete with those offered by the Company. The selling
prices of the Company's products may decline as competition increases.
Further, other products now in use or under development by others may be more
effective than the Company's current or future products. The pharmaceutical
industry is characterized by intense competition and rapid product development
and technological change. The Company's pharmaceuticals could be rendered
obsolete or made uneconomical by the development of new pharmaceuticals to
treat the indications addressed by the Company's products, technological
advances affecting the cost of production, or marketing or pricing actions by
one or more of the Company's competitors. The Company's business, results of
operations and financial condition could be materially adversely affected by
any one or more of such developments. Competitors may also be able to complete
the regulatory process for certain products before the Company and, therefore,
may begin to market their products in advance of the Company's products. The
Company believes that competition among prescription pharmaceuticals and
generics will be based on, among other things, product efficacy, safety,
reliability, availability and price. The Company believes that various
competitive factors, including pressure from major wholesalers and delays in
generic drug approvals by FDA, led to price declines beginning in mid-1996 for
generic drugs, largely offsetting growth in unit sales.
From time to time, the Company may compete for the in-license or acquisition
of certain branded products with other pharmaceutical companies pursuing a
similar strategy. The Company's branded product competes with generic
pharmaceuticals which claim to offer equivalent therapeutic benefits at a
lower cost. In some cases, third-party payors encourage the use of lower cost
generic products by paying or reimbursing a user or supplier of a branded
prescription product a lower purchase price than would be paid or reimbursed
for a generic product, making branded products less attractive, from a cost
perspective, to buyers. The aggressive pricing activities of the Company's
generic competitors and the payment and reimbursement policies of third-party
payors could have a material adverse effect on the Company's business, results
of operations and financial condition.
GOVERNMENT REGULATIONS
The research, development and commercial activities relating to branded and
generic prescription pharmaceutical products are subject to extensive
regulation by U.S. and foreign governmental authorities. Certain
pharmaceutical products are subject to rigorous pre-clinical testing and
clinical trials and to other approval requirements by FDA in the United States
under the Federal Food, Drug and Cosmetic Act (the "FDCA") and the Public
Health Services Act and by comparable agencies in most foreign countries.
The FDCA, the Public Health Services Act, the Controlled Substances Act and
other federal statutes and regulations govern or influence all aspects of the
Company's business. Noncompliance with applicable requirements can result in
fines and other judicially imposed sanctions, including product seizures,
injunctive actions and criminal prosecutions. In addition, administrative or
judicial actions can result in the recall of products and the total or partial
suspension of the manufacturing of products, as well as the refusal of the
government to approve pending applications or supplements to approved
applications. FDA also has the authority to withdraw approvals of drugs in
accordance with statutory due process procedures. See "Risk Factors--
Dependence on Regulatory Approval and Compliance" and "Risk Factors--Pending
Regulatory Matters."
40
FDA approval is required before any dosage form of any new unapproved drug,
including a generic equivalent of a previously approved drug, can be marketed.
All applications for FDA approval must contain information relating to product
formulation, stability, manufacturing processes, packaging, labeling and
quality control. In addition, acts of foreign governments may affect the price
or availability of raw materials needed for the development or manufacture of
generic drugs.
ANDA Process
The Waxman-Hatch Act established abbreviated application procedures for
obtaining FDA approval for those drugs which are off-patent and whose non-
patent exclusivity under the Waxman-Hatch Act has expired and which are shown
to be bioequivalent to previously approved brand name drugs. Approval to
manufacture these drugs is obtained by filing an ANDA. An ANDA is a
comprehensive submission which must contain data and information pertaining to
the formulation, specifications and stability of the generic drug as well as
analytical methods and manufacturing process validation data and quality
control procedures. As a substitute for clinical studies, FDA requires data
indicating that the ANDA drug formulation is bioequivalent to a previously
approved NDA drug. In order to obtain an ANDA approval of a strength or dosage
form which differs from the referenced brand name drug, an applicant must file
and have granted an ANDA Suitability Petition. A product is not eligible for
ANDA approval if it is not bioequivalent to the referenced brand name drug or
if it is intended for a different use. However, such a product might be
approved under an NDA with supportive data from clinical trials.
The advantage of the ANDA approval process is that an ANDA applicant
generally can rely upon bioequivalence data in lieu of conducting pre-clinical
testing and clinical trials to demonstrate that a product is safe and
effective for its intended use(s). The Company files ANDAs to obtain approval
to manufacture and market its generic products. No assurance can be given that
ANDAs or other abbreviated applications will be suitable or available for the
Company's products or that the Company's proposed products will receive FDA
approval on a timely basis, if at all. While the FDCA provides for a 180-day
review period, the Company believes the average length of time between initial
submission of an ANDA and receiving FDA approval is approximately two years.
While the Waxman-Hatch Act established the ANDA, it has also fostered
pharmaceutical innovation through such incentives as market exclusivity and
patent restoration. The Waxman-Hatch Act provides two distinct market
exclusivity provisions which either preclude the submission or delay the
approval of a competitive drug application. A five-year marketing exclusivity
period is provided for new chemical compounds and a three-year marketing
exclusivity period is provided for applications containing new clinical
investigations essential to the approval of the application. The non-patent
market exclusivity provisions apply equally to patented and non-patented drug
products. Any entitlement to patent marketing exclusivity under the Waxman-
Hatch Act is based upon the term of the original patent plus any patent
extension granted under the Waxman-Hatch Act as compensation for reduction of
the effective life of a patent as a result of time spent by FDA in reviewing
the innovator's NDA. The patent and non-patent marketing exclusivity
provisions do not prevent the filing or the approval of an NDA. Additionally,
the Waxman-Hatch Act provides 180-day market exclusivity against effective
approval of another ANDA for the first ANDA applicant who (a) submits a
certificate challenging a listed patent as being invalid or not infringed and
(b) successfully defends in court any patent infringement action based on such
certification. The brand product segment of the pharmaceutical industry has
initiated legislative efforts to limit the impact of the Waxman-Hatch Act,
both on the federal and state levels. Recently, legislation has been
introduced designed to extend the patent protection on certain brand
pharmaceuticals and efforts have been made by the brand pharmaceutical
industry to introduce legislation to limit generic firms' ability to begin
research and development activities prior to patent expiration. In addition,
the brand product pharmaceutical companies have also initiated legislative
efforts in various states to limit the substitution of generic versions of
certain types of branded pharmaceuticals. The Company cannot predict whether
any such legislation will be enacted.
41
NDA Process
An NDA is a filing submitted to FDA to obtain approval for a drug not
eligible for an ANDA and must contain complete pre-clinical and clinical
safety and efficacy data or a right of reference to such data. Before dosing a
new drug in healthy human subjects or patients may begin, stringent government
requirements for pre-clinical data must be satisfied. The pre-clinical data,
typically obtained from studies in animal species, as well as from laboratory
studies, are submitted in an Investigational New Drug ("IND") application, or
its equivalent in countries outside the United States, where clinical trials
are to be conducted. The pre-clinical data must provide an adequate basis for
evaluating both the safety and the scientific rationale for the initiation of
clinical trials.
Clinical trials are typically conducted in three sequential phases, although
the phases may overlap. In Phase I, which frequently begins with the initial
introduction of the compound into healthy human subjects prior to introduction
into patients, the product is tested for safety, adverse effects, dosage,
tolerance, absorption, metabolism, excretion and other elements of clinical
pharmacology. Phase II typically involves studies in a small sample of the
intended patient population to assess the efficacy of the compound for a
specific indication, to determine dose tolerance and the optional dose range
as well as to gather additional information relating to safety and potential
adverse effects. Phase III trials are undertaken to further evaluate clinical
safety and efficacy in an expanded patient population at typically dispersed
study sites, in order to determine the overall risk-benefit ratio of the
compound and to provide an adequate basis for product labeling. Each trial is
conducted in accordance with certain standards under protocols that detail the
objectives of the study, the parameters to be used to monitor safety and the
efficacy criteria to be evaluated. Each protocol must be submitted to FDA as
part of the IND.
Data from pre-clinical testing and clinical trials may be submitted to FDA
as an NDA for marketing approval and to foreign health authorities as a
marketing authorization application. The process of completing clinical trials
for a new drug is likely to take several years and require the expenditure of
substantial resources. Preparing an NDA or marketing authorization application
involves considerable data collection, verification, analysis and expense, and
there can be no assurance that approval from FDA or any other health authority
will be granted on a timely basis, if at all. The approval process is affected
by a number of factors, primarily the risks and benefits demonstrated in
clinical trials as well as the severity of the disease and the availability of
alternative treatments. FDA or other health authorities may deny an NDA or
marketing authorization application if the regulatory criteria are not
satisfied, or such authorities may require additional testing or information.
Even after initial FDA or other health authority approval has been obtained,
further studies, including Phase IV post-marketing studies, may be required to
provide, for example, additional data on safety, and will be required to gain
approval for the use of a product as a treatment for clinical indications
other than those for which the product was initially tested. Also, FDA or
other regulatory authorities require post-marketing reporting to monitor
serious and unanticipated adverse effects of the drug. Results of post-
marketing programs may limit or expand the further marketing of the products.
Further, if there are any modifications to the drug, including changes in
indication, manufacturing process or labeling or a change in manufacturing
facility, an application seeking approval for such changes must be submitted
to FDA or other regulatory authority. Additionally, FDA regulates post-
approval promotional labeling and advertising activities to assure that such
activities are being conducted in conformity with statutory and regulatory
requirements. Failure to adhere to such requirements can result in regulatory
actions which could have a material adverse effect on the Company's business,
results of operations and financial condition.
Other Regulation
The Prescription Drug Marketing Act (the "PDMA"), which amends various
sections of the FDCA, imposes requirements and limitations upon drug sampling
and prohibits states from licensing distributors of prescription drugs unless
the state licensing program meets certain federal guidelines that include,
among other things, state licensing of wholesale distributors of prescription
drugs under federal guidelines that include minimum standards for storage,
handling and record keeping. In addition, the PDMA sets forth civil and
criminal penalties for violations of these and other provisions. Various
sections of the PDMA are still being implemented by FDA and the states.
Nevertheless, failure by the Company's distributors to comply with the
requirements of
42
the PDMA could have a material adverse effect on the Company's business,
results of operations and financial condition. See "Risk Factors--Dependence
on Regulatory Approval and Compliance" and "Risk Factors--Pending Regulatory
Matters."
Manufacturers of marketed drugs must comply with cGMP regulations and other
applicable laws and regulations required by FDA, the Drug Enforcement Agency,
the Environmental Protection Agency and other regulatory agencies. Failure to
do so could lead to sanctions, which may include an injunction suspending
manufacturing, the seizure of drug products and the refusal to approve
additional marketing applications. Manufacturers of controlled substances are
also subject to the licensing, quota and regulatory requirements of the
Controlled Substances Act. Failure to comply with the Controlled Substances
Act and the regulations promulgated thereunder could subject the Company to
loss or suspension of those licenses and to civil or criminal penalties. The
Company seeks to ensure that any third party with whom it contracts for
product manufacturing or packaging will comply with cGMPs. FDA conducts
periodic inspections to ensure compliance with these rules. However, there can
be no assurance that any such third parties will be found to be in compliance
with cGMP standards. Any such non-compliance could result in a temporary or
permanent interruption in the development and testing of the Company's planned
products or in the marketing of approved products, as well as increased costs.
Such non-compliance could have a material adverse effect on the Company's
business, results of operations and financial condition.
Products marketed outside the United States, which are manufactured in the
United States, are subject to certain FDA regulations as well as regulation by
the country in which the products are to be sold. The Company is required to
obtain approval for and maintain compliance with applicable regulations
relating to the marketing of its products outside the United States. There can
be no assurance that any such approval may be obtained or such compliance
maintained.
PRODUCT LIABILITY; INSURANCE
The testing, manufacturing and distribution of the Company's products
involve a risk of product liability claims. Pursuant to the Company's various
insurance policies, the Company is self-insured up to the first $500,000 of
claims for each occurrence and $2,500,000 in the aggregate per policy year.
Although no assurance can be given, the Company believes that its product
liability insurance is adequate. Product liability insurance, however, could
cease to be available or could cease to be available on acceptable terms,
either as a function of the market for product liability insurance for
pharmaceutical companies or the Company's own claims experience. See "Risk
Factors--Risk of Product Liability Claims; No Assurance of Adequate
Insurance."
EMPLOYEES
At September 1997, the Company had approximately 1,850 employees, of which
830 were engaged in manufacturing, 380 were engaged in quality control and
quality assurance, 240 were engaged in administration, finance and human
resources, 140 were engaged in research and product development, 140 were
engaged in sales and marketing, 80 were engaged in distribution and 40 were
engaged in regulatory affairs. No employee is represented by a union, and the
Company has never experienced a work stoppage. Management believes its
relationship with its employees is good.
LEGAL PROCEEDINGS
The Company is a defendant in several product liability cases typical for a
company in the pharmaceutical industry. The Company also is involved in other
proceedings and claims of various types. Management believes the disposition
of these matters will not have a material adverse effect on the Company.
In October 1997, the Company received a subpoena from the Department of
Health and Human Services, Office of Inspector General seeking pricing
information for two products formerly marketed by the Company, vinblastine
sulfate and vincristine sulfate. The Company is aware of a number of other
pharmaceutical manufacturers and distributors that have been served with
similar subpoenas, which the Company believes is in connection with a
government investigation into claims for reimbursement by Medicare and/or
Medicaid. The Company intends to comply with the subpoena.
43
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information regarding the directors and
executive officers of the Company.
NAME AGE POSITIONS
---- --- ---------
Martin Sperber 66 Chairman of the Board of Directors, Chief Executive
Officer and President
Marvin Samson 56 Executive Vice President and Director
Dariush Ashrafi 50 Executive Vice President, Chief Financial Officer and
Director
Paul Feuerman 38 Senior Vice President, General Counsel, and Director
David R. Ebsworth* 43 Director
Richard L. Goldberg* 61 Director
- --------
* Members of the Compensation Committee.
Martin Sperber has been Chairman, Chief Executive Officer, President and
Director of the Company since 1989. From 1985 until 1989, Mr. Sperber was
President and Chief Operating Officer of the Company. Mr. Sperber has been
employed in various positions in the Schein organization for over 40 years.
Mr. Sperber is a member of the Board of the Generic Pharmaceutical Industry
Association, a member of the Board of the American Foundation for
Pharmaceutical Education, a member of the American Pharmaceutical Association
and a member of the Council for Overseers of the Long Island University Arnold
and Marie Schwartz College of Pharmacy. Mr. Sperber received his B.S. degree
in pharmacy from Columbia University.
Marvin Samson has been Executive Vice President and Director since the
Marsam Acquisition. Mr. Samson is also President, Chief Executive Officer and
Chairman of the Board of Marsam, a company he founded in 1985. Prior thereto,
Mr. Samson was CEO, President and founder of Elkins-Sinn, Inc., a manufacturer
of generic injectable products. Currently, Mr. Samson is Chairman of the
Generic Pharmaceutical Industry Association, a member of the board of
directors of Sabratek Corp. (NASDAQ), and a member of the board of trustees of
the Philadelphia College of Pharmacy, the West Jersey Hospital System and the
American Society of Hospital Pharmacists Foundation. Mr. Samson received his
B.S. degree in chemistry from Temple University.
Dariush Ashrafi has been Executive Vice President and Chief Financial
Officer since October 1995, and Director since September 1997 and from May
1995 until September 1995 was Senior Vice President and CFO. From 1990 to
1995, Mr. Ashrafi was Senior Vice President, Chief Financial Officer and
director of The Warnaco Group, Inc., an apparel company. Prior to joining
Warnaco, he spent 18 years with Ernst & Young and became a partner in 1983.
Mr. Ashrafi received his B.S. degrees in Aeronautical and Astronautical
Engineering and in Management Science from the Massachusetts Institute of
Technology and his M.S. in Finance from the Massachusetts Institute of
Technology Sloan School.
Paul Feuerman has been General Counsel since 1991. He has been a Vice
President of the Company since January 1992, Senior Vice President since
February 1997, and a Director since September 1997. Mr. Feuerman previously
was associated with the law firm of Proskauer Rose LLP. He received his B.A.
from Trinity College and his J.D. from Columbia Law School.
David R. Ebsworth became a Director of the Company in September 1994 as part
of Bayer Corporation's investment in the Company. He is currently Executive
Vice President, Bayer Corporation and President, Pharmaceutical Division North
America. Between 1983 and 1993, Dr. Ebsworth held various management and sales
marketing positions with the Bayer companies in Germany and Canada. Dr.
Ebsworth received his B.S. and Doctor of Philosophy degrees from the
University of Surrey (England).
44
Richard L. Goldberg has been a Director of the Company since September 1994.
He is currently a Senior Partner at Proskauer Rose LLP and has been a member
of that law firm since 1990. Prior to 1990, he was a Senior Partner at Botein
Hays & Sklar. Mr. Goldberg is also a member of the board of directors of
Comtech Telecommunications Corp. (NASDAQ). He is a graduate of Brooklyn
College and received his J.D. from Columbia Law School.
BOARD OF DIRECTORS
The Board of Directors has six directors, four of whom--Martin Sperber,
Marvin Samson, Dariush Ashrafi and Paul Feuerman--are also officers of the
Company and two of whom--David R. Ebsworth and Richard L. Goldberg--are not
officers of the Company.
Pursuant to the Restructuring Agreements (as defined herein), until Bayer
(as defined herein) owns less than 10% of the Company's outstanding Common
Stock, Bayer is entitled to nominate a number of members of the Board of
Directors of the Company, rounded down to the nearest whole number, equal to
the product of (a) the number of members of the Board of Directors and (b) its
percentage stockholdings of Common Stock at the time of nomination. In this
regard, Bayer nominated David R. Ebsworth as a member of the Board of
Directors. The Voting Trustee (as defined herein) (currently Mr. Sperber) is
entitled under the Restructuring Agreements to nominate the balance of the
members of the Board of Directors until the Voting Trust Termination Date (as
defined herein). Until May 15, 2001, the Voting Trustee and certain of the
Company's principal stockholders must vote for the election of Bayer's
nominee(s). Until the Voting Trust Termination Date, Bayer and certain of the
Company's principal stockholders must vote for the election of the Voting
Trustee's nominees.
The Company's officers are elected by the Board of Directors for one-year
terms and serve at the discretion of the Board of Directors. See "Risk
Factors--Control of the Company" and "Certain Transactions."
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors of the Company has one standing committee: the
Compensation Committee.
The Compensation Committee approves the compensation for senior executives
of the Company, makes recommendations to the Board of Directors with respect
to compensation levels and administers the Company's stock option plans. The
members of the Compensation Committee are Messrs. Ebsworth and Goldberg.
The Company's Board of Directors is expected to appoint directors who are
not affiliated with the Company to an Audit Committee of the Board of
Directors. The Audit Committee will have general responsibility for
surveillance of financial controls, as well as for accounting and audit
activities of the Company. The Audit Committee will annually review the
qualifications of the Company's independent certified public accountants, make
recommendations to the Board of Directors as to their selection and review the
plan, fees and results of their audit.
LIMITATIONS ON LIABILITY
The Company's certificate of incorporation contains a provision that,
subject to certain exceptions, limits the personal liability of the Company's
directors for monetary damages to the Company and its stockholders for
breaches of fiduciary duty owed to the Company or its stockholders.
In addition, the Company has entered into agreements with its directors and
officers providing for indemnification of those individuals under certain
circumstances.
The Company has obtained director and officer liability insurance that
insures the Company's directors and officers against certain liabilities.
45
EXECUTIVE COMPENSATION
The following table sets forth certain summary information concerning
compensation paid or accrued by the Company to or on behalf of the Company's
Chief Executive Officer and each of the Company's remaining executive officers
(the "Named Executive Officers") for the year ended December 1996.
SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION
----------------------
ANNUAL COMPENSATION (1) AWARDS PAYOUTS
--------------------------- ---------- -----------
OTHER ANNUAL SECURITIES
NAME AND PRINCIPAL SALARY BONUS COMPENSATION UNDERLYING LTIP ALL OTHER
POSITION (2) (3) ($) ($) ($) OPTIONS PAYOUTS ($) COMPENSATION ($)
------------------ ------- ------ ------------ ---------- ----------- ----------------
Martin Sperber.......... 700,000 -- 9,929 (4) -- -- 10,305 (4)
Chairman, Chief
Executive Officer and
President
Marvin Samson........... 400,000 70,000 -- 200 -- 37,786 (5)
Executive Vice
President
Dariush Ashrafi......... 341,000 59,700 10,257 (6) 200 75,000 24,321 (6)
Executive Vice
President and Chief
Financial Officer
Paul Feuerman........... 185,000 32,400 7,738 (7) 200 100,000 13,397 (7)
Senior Vice President
and General Counsel
- --------
(1) The compensation described in this table does not include medical, group
life insurance or other benefits available generally to all salaried
employees of the Company, as well as certain perquisites and other
personal benefits, the value of which does not exceed the lesser of
$50,000 or 10% of the named executive officer's total salary and bonus
reported in this table.
(2) Michael Casey, who served as the Company's Executive Vice President until
September 5, 1997, received $326,442 in Salary, $61,300 in Bonus, options
covering 200 shares of Common Stock, $75,000 in LTIP payouts and $9,477 in
All Other Compensation. All Other Compensation includes $7,260 for profit
sharing contribution, $1,125 in 401(k) employer matching contribution and
$1,092 for the cost of term life insurance coverage provided by the
Company.
(3) James McGee, who served as the Company's Executive Vice President and
Chief Operating Officer until May 15, 1997, received $431,000 in Salary,
$75,400 in Bonus, $98,825 in Other Annual Compensation, options covering
200 shares of Common Stock, $2,000,000 in LTIP payouts and $180,833 in All
Other Compensation. Other Annual Compensation includes $2,515 in tax
payments for a company car, $661 in tax payments for the supplemental
retirement plan, $113 in tax payments for state unemployment insurance and
$95,536 in tax payments for a relocation loan made on behalf of Mr. McGee.
All Other Compensation includes $7,500 for profit sharing contribution,
$1,125 in 401(k) employer matching contribution, $21,550 in supplemental
retirement plan contribution, $1,448 for the cost of term life insurance
coverage provided by the Company, $104,540 for forgiven equity loss loan
and associated tax deposit and $44,670 for the value of split dollar life
insurance policy.
(4) Other Annual Compensation includes $8,426 in tax payments for a company
car, $1,391 in tax payments for supplemental retirement plan and $112 in
tax payments for state unemployment insurance made on behalf of Mr.
Sperber. All Other Compensation includes $7,500 for profit sharing
contribution, $1,125 in 401(k) employer matching contribution and $1,680
for the cost of term life insurance coverage provided by the Company.
(5) All Other Compensation includes $7,500 for profit sharing contribution,
$250 in 401(k) employer matching contribution, $16,660 in supplemental
retirement plan contribution, $909 for the cost of term life insurance
provided by the Company and $12,467 for the value of split dollar life
insurance policy.
(6) Other Annual Compensation includes $10,257 in tax payments for an
allowance in lieu of a company car made on behalf of Mr. Ashrafi. All
Other Compensation includes $7,500 for profit sharing contribution, $1,125
in 401(k) employer matching contribution, $14,550 in supplemental
retirement plan contribution and $1,146 for the cost of term life
insurance coverage provided by the Company.
(7) Other Annual Compensation includes $7,586 in tax payments for a company
car, $39 in tax payments for the supplemental retirement plan and $113 in
tax payments for state unemployment insurance made on behalf of Mr.
Feuerman. All Other Compensation includes $7,500 for profit sharing
contribution, $1,125 in 401(k) employer matching contribution, $4,150 in
supplemental retirement plan contribution and $622 for the cost of term
life insurance provided by the Company.
46
EMPLOYMENT AGREEMENTS
The Company entered into an employment agreement with Martin Sperber dated
September 30, 1994 pursuant to which Mr. Sperber serves as Chairman of the
Board, Chief Executive Officer and President of the Company. Under this
agreement, the term of Mr. Sperber's employment commenced on January 1, 1994
and terminates on January 1, 1999, unless earlier terminated by the death of
Mr. Sperber, by action of the Board of Directors with or without cause, due to
the disability of Mr. Sperber or by Mr. Sperber upon 30 days written notice or
a material breach by the Company of his employment or stock option agreement
that is not cured within 30 days. If Mr. Sperber is terminated without cause,
in addition to all accrued but unpaid compensation to the date of termination,
he is entitled to receive as severance compensation his base salary from the
date of termination through January 1, 1999 and an amount equal to the product
of (i) a fraction, the numerator of which is the amount of earned incentive
compensation for the last full year before termination and the denominator of
which is 365 and (ii) the number of days from termination until January 1,
1999. If Mr. Sperber voluntarily terminates his employment prior to January 1,
1999 (other than for an uncured breach by the Company), he is only entitled to
such severance pay as is determined by the Compensation Committee. Mr. Sperber
currently receives base annual compensation of $700,000. Mr. Sperber may also
receive incentive compensation in an amount to be determined by the
Compensation Committee. If Mr. Sperber's employment is terminated prior to
January 1, 1999, such incentive compensation shall be based on objective
criteria established by the Compensation Committee or $250,000 plus the
product of (x) the fraction derived by dividing (i) the sum of the actual cash
incentive compensation earned by each of the three most senior executives of
the Company other than Mr. Sperber in the year Mr. Sperber's employment is
terminated less the sum of the minimum cash incentive compensation
contemplated for such executives for such year, by (ii) the sum of the maximum
cash incentive compensation contemplated for such executives for such year
less the sum of the minimum cash incentive compensation contemplated for such
executives for such year and (y) $250,000. Mr. Sperber is prohibited from
competing with the Company during the term of the agreement and until the
second anniversary of the date the Company makes its final base salary payment
to Mr. Sperber pursuant to the agreement.
Following termination of Mr. Sperber's employment other than for cause, Mr.
Sperber will be entitled during his lifetime and for the life of his spouse to
continue to participate in, or receive benefits that, on an after-tax basis,
are the same as those under all medical and dental benefit plans, policies and
programs in effect at the termination of his employment. In addition, unless
Mr. Sperber's employment is terminated for cause, Mr. Sperber will be entitled
to an annual pension, beginning after the termination of his employment and
continuing until the later of the death of Mr. Sperber or his spouse, in an
amount equal to 45% (or 40%, if Mr. Sperber's employment is terminated due to
his voluntary resignation) of the average total cash compensation for the
highest three of the last five years prior to termination, reduced generally
by the sum of the amount Mr. Sperber would be entitled to receive under all of
the Company's qualified retirement plans within the meaning of Section 401(a)
of the Internal Revenue Code and under Social Security if he commenced
receiving such benefit payments at age 65. See "--Stock Options."
The Company entered an Option Agreement with Mr. Sperber dated September 30,
1994 under which Mr. Sperber was granted, as a key employee pursuant to the
Company's 1993 Stock Option Plan, a non-qualified option to purchase from the
Company up to 4,795 shares of Common Stock at a price of $2,000 per share. The
option expires on the earlier of September 30, 2004 or upon Termination of
Employment (as defined in the 1993 Stock Option Plan). In the event of Mr.
Sperber's death, disability, retirement or termination without cause, the
option remains exercisable for one year (but may be extended by the Company at
its discretion). Upon termination of Mr. Sperber's employment for cause (or
discovery of justification for termination for cause after termination for
another reason), all outstanding options are immediately cancelled. In the
event Mr. Sperber's employment is terminated for any other reason, all
outstanding options will remain exercisable for three months from the date of
termination (but may be extended at the discretion of the Company).
Pursuant to an employment agreement with Marsam dated July 28, 1995, to
which the Company agreed to be bound by certain provisions, Marvin Samson was
appointed an Executive Vice President and Director of the Company, as well as
President, Chief Executive Officer and Chief Operating Officer of Marsam, for
an initial
47
term that commenced on the date of the Marsam Acquisition and terminates on
the fifth anniversary of that date (the "Initial Term"), which term is
automatically extended for one-year periods unless earlier terminated upon 180
days advance written notice by either party. During the Initial Term, Mr.
Samson may terminate the agreement at any time, but the Company may only
terminate Mr. Samson for cause. If the Company terminates Mr. Samson's
employment other than for cause during the Initial Term, Mr. Samson is
entitled to severance compensation in the amount of his annual salary, as well
as comparable health and disability insurance coverage (or reimbursement
therefor), for the remainder of the Initial Term (or any extension thereof).
If Mr. Samson terminates the agreement prior to the end of the Initial Term,
he is entitled to continue receiving 50% of his salary and comparable
insurance benefits (or reimbursement therefor) starting on the date of
termination and ending on the earlier of the third anniversary of the
termination or the fifth anniversary of the Marsam Acquisition. Mr. Samson
currently receives base annual compensation of $400,000. In 1996, the
Company's Board of Directors determined to award a $70,000 bonus to Mr.
Samson, payable to Mr. Samson in 1997. Mr. Samson is also entitled to
participate in and receive benefits from the Company's bonus, stock option,
pension, profit-sharing, insurance and other employee benefit plans. In
addition, the agreement provides that during any time when the Company is
obligated to pay Mr. Samson a salary or consulting fee, Mr. Samson is also
entitled to an automobile, or, at the Company's option, an automobile
allowance. Mr. Samson is prohibited from competing with the Company (or owning
more than 3% of the outstanding equity of a competing business) during the
term of his employment or consultancy with the Company, during any period in
which the Company is making severance compensation payments or upon
termination for cause by the Company until the earlier of the sixth
anniversary of the Marsam Acquisition and the fourth anniversary of the
termination.
The Company, at its option, may retain Mr. Samson as a consultant for a
period of one year after the Initial Term (or any extension thereof) or after
Mr. Samson terminates the agreement. As a consultant, Mr. Samson is entitled
to receive a consulting fee in an amount equal to his base salary immediately
prior to termination, as well as comparable health and disability insurance
coverage (or reimbursement therefor). Such consulting fee may be reduced
dollar-for-dollar by any compensation received by Mr. Samson for other
employment that he is engaged in at the time. The Company, at its option, may
terminate the consultancy upon 30 days prior written notice.
The agreement also provides that Mr. Samson, having been elected a director
of the Company effective on the date of the Marsam Acquisition, is entitled to
have his name included in the slate of the Company's management nominees for
re-election as a director during the term of the agreement. Mr. Samson is also
entitled to designate three of Marsam's seven board members.
Following termination of Mr. Samson's employment other than for cause, Mr.
Samson will be entitled to an annual pension for a period of ten years. A
compensation continuation agreement dated October 19, 1991 provides for a
payment in the first year equal to 100% of his prior year base salary and a
payment equal to 50% of his base salary for the subsequent nine years. The
Company has also agreed to provide certain benefits to Mr. Samson in the form
of payments on the split dollar life insurance contract insuring the lives of
Mr. Samson and his wife.
The Company entered into an employment agreement with Dariush Ashrafi dated
May 1, 1995, pursuant to which Mr. Ashrafi serves as Executive Vice President
and Chief Financial Officer of the Company. Under this agreement, the term of
Mr. Ashrafi's employment began on May 1, 1995 and terminates 60 days after
either Mr. Ashrafi or the Company gives written notice that he or it does not
wish to continue the employment, unless earlier terminated for cause or upon
the death or disability of Mr. Ashrafi. Mr. Ashrafi currently receives annual
base compensation of $341,000. In 1996, the Company's Board of Directors
determined to award a $59,700 bonus to Mr. Ashrafi, payable to Mr. Ashrafi in
1997. Pursuant to a deferred compensation agreement dated April 17, 1995,
between the Company and Mr. Ashrafi, Mr. Ashrafi is entitled to receive a
bonus of $300,000, payable in quarterly payments in the amount of $75,000. If
Mr. Ashrafi's employment with the Company is terminated under certain
circumstances, he is entitled to receive 100% of his base salary and annual
cash bonus paid or payable by the Company to him in respect of the last full
fiscal year preceding the termination date as one lump
48
sum payment. Further, if Mr. Ashrafi is terminated other than for cause or
disability, or if he voluntarily terminates his employment in certain
instances, he is entitled to receive basic health and medical benefits until
the earlier of one year following termination and his full-time employment
elsewhere.
The Company entered into an employment agreement with Paul Feuerman dated
November 29, 1993, pursuant to which Mr. Feuerman serves as Senior Vice
President and General Counsel to the Company. Under this agreement, the term
of Mr. Feuerman's employment began on November 29, 1993 and terminates 60 days
after either Mr. Feuerman or the Company gives written notice that he or it
does not wish to continue the employment, unless earlier terminated for cause
or upon the death or disability of Mr. Feuerman. Mr. Feuerman currently
receives annual base compensation of $225,000. In 1996, the Company's Board of
Directors determined to award a $32,400 bonus, payable to Mr. Feuerman in
1997. Pursuant to a deferred compensation agreement dated August 8, 1996,
between the Company and Mr. Feuerman, Mr. Feuerman is entitled to receive a
bonus of $500,000, payable in two annual installments of $100,000 each
followed by two annual installments of $150,000 each. If Mr. Feuerman's
employment with the Company is terminated under certain circumstances, he is
entitled to receive 100% of his base salary and annual cash bonus paid or
payable by the Company to him in respect of the last full fiscal year
preceding the termination date as one lump sum payment. Further, if Mr.
Feuerman is terminated other than for cause or disability, or if he
voluntarily terminates his employment in certain instances, he is entitled to
receive basic health and medical benefits for one year following termination
and his full-time employment elsewhere.
The Company entered into an agreement dated November 29, 1993 with James C.
McGee, pursuant to which Mr. McGee served as the Company's Executive Vice
President. Mr. McGee ceased full-time employment and became a consultant to
the Company on May 15, 1997. Under an agreement dated September 20, 1996, Mr.
McGee is entitled to receive as severance a lump sum payment, some portion of
his annual base salary as and when bonuses are paid to certain senior
executives in respect of fiscal 1997 and continuing health and dental
insurance coverage. Until December 31, 1998, Mr. McGee will serve as a
consultant to the Company and is entitled to receive base consulting fees
equal to his annual base salary, plus an additional consulting fee equal to
some portion of his annual base salary to be paid as and when bonuses are paid
to senior executive officers of the Company in respect of fiscal 1998.
STOCK OPTIONS
The Company's 1997 Stock Option Plan (the "1997 Plan") provides for the
granting of options to purchase not more than an aggregate of 27,400 shares of
Common Stock, subject to adjustment under certain circumstances. In addition,
the Company's 1993 Stock Option Plan (the "1993 Plan") provided for the
granting of options to purchase not more than an aggregate of 27,400 shares of
Common Stock, subject to adjustment under certain circumstances. In addition,
the Company's 1995 Non-Employee Director Stock Option Plan (the "Non-Employee
Director Plan") provides for the granting of options to purchase not more than
an aggregate of 1,000 shares of Common Stock, subject to adjustment under
certain circumstances. Although options granted under the 1993 Plan to
purchase 25,586 shares are still outstanding, no further grants will be made
pursuant to the 1993 Plan. Some or all of the options granted under the 1997
Plan may be "incentive stock options" within the meaning of section 422 of the
Internal Revenue Code of 1986 (the "Code"). The Company has granted options to
purchase 4,252 shares under the 1997 Plan at the then fair market value.
The Compensation Committee administers the 1997 Plan. The Compensation
Committee has full power and authority to interpret the 1997 Plan, set the
terms and conditions of individual options and supervise the administration of
the 1997 Plan.
The Compensation Committee determines, subject to the provisions of the 1997
Plan, to whom options are granted, the number of shares of Common Stock
subject to an option, whether stock options will be incentive or non-
qualified, the exercise price of the options (which, in the case of non-
qualified options, may be less than the fair market value of the shares on the
date of grant) and the period during which options may be exercised. All
employees of the Company are eligible to participate in the 1997 Plan. No
options may be granted under the 1997 Plan after March 3, 2007.
49
The Compensation Committee may amend the 1997 Plan from time to time.
However, the Compensation Committee may not, without stockholder approval,
amend the 1997 Plan to increase the number of shares of Common Stock under the
1997 Plan (except for changes in capitalization as specified in the 1997
Plan).
The Non-Employee Director Plan provides for automatic annual grants of
options to purchase shares of the Company's Common Stock to non-employee
directors of the Company in amounts calculated using a formula provided in the
plan. The Company has granted options to purchase 189 shares of Common Stock
under the Non-Employee Director Plan.
The Board of Directors of the Company may amend the Non-Employee Director
Plan from time to time. However, the Board of Directors may not, without
stockholder approval, amend the plan to increase the number of shares of
Common Stock available for option grants under the plan (except for changes in
capitalization specified in the plan).
CERTAIN OTHER EMPLOYEE BENEFIT PLANS
The Company maintains the Retirement Plan of Schein Pharmaceutical, Inc. &
Affiliates (the "Company Retirement Plan"), under which employees (other than
temporary employees) of the Company may participate on the first day of the
first pay period after completing six consecutive calendar months during which
they complete at least 500 hours of service. Effective July 1, 1996, the
Company Retirement Plan became the successor to the Marsam Pharmaceuticals
Retirement Plan.
Participants generally may make basic contributions to the Company
Retirement Plan, by salary deduction, of up to 14% of their compensation from
the Company, subject to applicable federal tax limitations ($9,500 for the
1997 plan year, subject to cost of living adjustments); the amount of a
participant's basic contribution is generally excluded from gross income for
federal or state income tax purposes. The Company makes a mandatory matching
contribution to the Company Retirement Plan of $.25 for each dollar
contributed to the Company Retirement Plan as a basic contribution, up to the
first 3% of a participant's contribution; the Company also may make additional
matching contributions and may make other non-matching contributions to the
Company Retirement Plan at the discretion of the Board of Directors. In 1997,
the Company made a discretionary, non-matching contribution under the Company
Retirement Plan for 1996 equal to 5% of compensation.
Participants in the Company Retirement Plan have a 100% vested and
nonforfeitable interest in the value of their basic contribution and the
Company's matching contribution, and they acquire a 100% vested and
nonforfeitable interest in the Company's non-matching amounts at retirement,
death, disability or termination pursuant to an employee reduction plan. If
their employment terminates prior to the normal retirement date for any other
reason, participants acquire a 10% vested and nonforfeitable interest in the
Company's non-matching contribution amounts for each of the first four years
of service; and a 20% vested and nonforfeitable interest in the Company's non-
matching contribution amounts for each of the fifth, sixth and seventh years
of service; accordingly, after seven years of service, participants have a
100% vested and nonforfeitable interest in the value of the Company's non-
matching contribution amounts.
Participants are entitled to receive the amounts in their Company Retirement
Plan accounts in a single lump-sum payment on death, disability, retirement or
termination of employment. At the election of the participant, the
participant's Company Retirement Plan account is eligible for payment in
installments of either 5 or 10 years. In certain circumstances, participants
may receive loans and hardship withdrawals from their accounts in the Company
Retirement Plan.
Supplemental Retirement Plan. The Company maintains a Supplemental
Retirement Plan (the "Supplemental Retirement Plan"). Under the Supplemental
Retirement Plan, the Company pays non-qualified deferred compensation to
certain of its employees consisting of benefits based on annual compensation
in excess of limitations imposed by the Code on contributions under the
Company Retirement Plan. The Supplemental Retirement Plan is an unfunded
"pension benefit plan" subject to the Employee Retirement Income Security Act
of 1974, as amended.
50
Split Dollar Life Insurance Plan. The Company maintains a Split Dollar Life
Insurance Plan (the "Life Insurance Plan"). Under the Life Insurance Plan,
each participating officer owns a life insurance policy. Each policy is
designed to provide at age 65 an annuity equal to a specified percentage of
the participant's projected average annual salary for the final three years of
employment (less Social Security benefits and certain benefits under the
Company Retirement Plan). A cash surrender value, which is owned by the
individual and designed to fund the annuity, accumulates under each
participant's policy. The Company and the employee will share the cost of
premiums. The premiums advanced by the Company will be repaid out of the cash
value of the policies.
1993 Book Equity Appreciation Rights Program. The Company maintains a Book
Equity Appreciation Rights Program (the "Program") to allow certain employees
to benefit from an increase in the Company's book value (calculated according
to a formula defined in the Program). All participants are fully vested in
their book equity appreciation rights ("BEARs"). The Company does not intend
to make any additional grants of BEARs.
51
CERTAIN TRANSACTIONS
In 1994, the Company entered into a Heads of Agreement with Bayer
Corporation and Bayer A.G. (collectively, "Bayer"), pursuant to which the
Company and Bayer committed together to explore business opportunities for the
U.S. and abroad.
In 1994, the Company entered into a three-year co-promotion agreement with
Bayer covering the Company's INFeD product. Under the terms of the agreement,
in 1994, 1995 and 1996, in exchange for promotional support, the Company
shared with Bayer the net profits of INFeD in excess of specified threshold
amounts. In early 1997, this agreement was amended and extended to December
1997. The parties are currently negotiating a further extension of this
agreement. This amended agreement provides that in exchange for promotional
support, the Company pays Bayer a fixed dollar amount plus a fixed percentage
of sales above a threshold amount. The Company incurred selling expenses under
these agreements of approximately $3.0 million in 1996 and $2.9 million for
the first nine months of 1997. There were no selling expenses under the first
agreement for 1994 and 1995. See "--Restructuring Agreements."
Since 1994, the Company and Bayer, through their respective affiliates, have
entered into several joint ventures to own, manage or develop generic
pharmaceutical businesses outside of the U.S. Each of Schein and Bayer have
contributed various assets and rights and funded the operations of these
ventures, and in certain circumstances have guaranteed certain liabilities of
these ventures, such as leases and lines of credit. It is contemplated that
the Company and Bayer will sell products to certain of these ventures for
resale in their local markets. Bayer and Schein are each currently evaluating
the extent of their continued participation in certain of these ventures.
The Company, together with the Pharmaceutical, Consumer Healthcare, Afga
Film and Diagnostics divisions of Bayer, has created a collaboration called
Bayer Healthcare Partners. Bayer Healthcare Partners is a marketing tool
through which the various participants combine their sales efforts to offer a
package of goods and services designed to be more attractive to a customer,
most likely a managed health care provider. The participants share in the
costs and profits associated with sales of the covered products to that
customer.
Since 1985, the Company has had a series of non-exclusive agreements
(collectively, the "Consulting Agreement") with the Consultant. Under the
Consulting Agreement, the Consultant and the Company have identified certain
patents on branded pharmaceutical products that might be susceptible to a
challenge, and the Consultant has acted as litigation counsel or advising
counsel to the Company in those instances where the Company decided to proceed
with a patent challenge. For projects in which the Consultant has rendered an
opinion, the Company pays the Consultant half the adjusted gross profit from
the Company's sale of generic versions of the patented product until the date
on which the patent would normally have expired or half the proceeds of any
settlement. In 1995 and 1996, the Company recorded in the aggregate net
product sales and settlements from patent challenges of $106.0 million and
related gross profits of $62.6 million (after deducting payments to the
Consultant of $17.4 million). See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Results of Operations."
The Consultant's services are provided on a non-exclusive basis to the
Company. The Consulting Agreement does not have a specific term and continues
until the current projects under the Consulting Agreement are completed and
all payments due to the Consultant are made. There are two current projects
under the Consulting Agreement, one of which has resulted in a pending patent
challenge initiated by the Company. In accordance with the Consultant's right
to delegate responsibility for defending patent challenge litigation to other
counsel selected with the consent of the Company, responsibility for the
pending patent challenge has been delegated to other counsel. The Consultant
may terminate the Consulting Agreement for certain specified reasons at any
time. Without regard to who terminates the Consulting Agreement or the reasons
therefor, the Consultant will be entitled to payment in conjunction with any
sales or settlements with respect to any patented product for which the
Consultant has previously rendered an opinion setting forth the basis for a
possible patent challenge. The Consultant has rendered opinions with respect
to each of the two patented drug products that are the
52
respective subjects of the current projects under the Consulting Agreement,
and the Company will owe the Consultant payments to the extent that the
Company successfully develops one or both of these products and challenges the
applicable patents and thereafter markets one or both of these products, or
otherwise favorably settles any such challenge.
In the conduct of its business, the Company sells pharmaceutical products to
Henry Schein, Inc. for distribution to its customers. Net sales to Henry
Schein, Inc. were $6.4 million, $5.3 million and $8.6 million in 1994, 1995
and 1996, respectively, and $5.5 million and $5.4 million for the nine months
ended September 1996 and the nine months ended September 1997, respectively.
Other than certain common stockholders, there is no affiliation between Henry
Schein, Inc. and the Company, and all transactions between the Company and
Henry Schein, Inc. are on an arm's-length basis.
The Company has signed a non-binding letter dated October 7, 1997 with
Cheminor and Reddy outlining the parties' intent to enter into a strategic
alliance agreement. As part of the contemplated arrangement, Cheminor could
purchase shares of the Company's Common Stock, once the shares are publicly
traded, at fair market value; the purchase price could be payable from the
profits otherwise due Cheminor from the alliance. Cheminor would have certain
rights to acquire additional shares from time to time, at fair market value,
to maintain its percentage interest in the Company. In addition, Cheminor
would have representation on the Company's Board of Directors consistent with
its equity investment through the purchase of the Company's shares once they
are publicly traded. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
In connection with Mr. Ashrafi's relocation, the Company loaned Mr. Ashrafi
$150,000 at an interest rate of 6.875% per annum evidenced by a promissory
note dated May 31, 1996. As of September 1997, an aggregate principal amount
of $150,000 was outstanding on that loan.
Richard L. Goldberg, who is a Director of the Company, is a member of
Proskauer Rose LLP, which has been retained by the Company to provide legal
services.
Restructuring Agreements
At the time of Bayer Corporation's acquisition of its 28.3% interest in the
Company, the Company, Bayer Corporation, Mr. Sperber, and certain other
principal stockholders entered into certain agreements (the "Restructuring
Agreements") relating to the governance of the Company and certain other
matters.
Agreements Relating to Control of the Company. The Restructuring Agreements
provide that, until the earlier of March 1, 2000 and the effective date of a
merger, consolidation or combination that results in the voting trustee
(currently Mr. Sperber) (the "Voting Trustee") neither holding the position of
chairman of the board, president, chief executive officer or chief operating
officer of the resulting entity nor having the right to designate a majority
of the members of the board of the resulting entity (such earlier date, the
"Voting Trust Termination Date"), the Voting Trustee will have the right to
vote, or direct the vote of, all the shares of Common Stock owned by Marvin
Schein, Pamela Schein and Pamela Joseph and certain trusts established by them
or for their issue (collectively, the "Family Stockholders"). As a result of
the foregoing, the Voting Trustee as a practical matter will be able to
control substantially all matters requiring stockholder approval, including
the election of directors, until March 1, 2000. The Restructuring Agreements
provide that Mr. Sperber may designate certain individuals to succeed him as
Voting Trustee under the Restructuring Agreements.
The Restructuring Agreements provide that, until Bayer Corporation owns less
than 10% of the Company's outstanding Common Stock (the "Governance
Termination Date"), Bayer Corporation shall be entitled to nominate a number
of members of the Board of Directors of the Company, rounded down to the
nearest whole number, equal to the product of (a) the number of members of the
Board of Directors and (b) its percentage stockholdings of Common Stock of the
Company at the time of nomination. The Voting Trustee is entitled, until the
Voting Trust Termination Date, to nominate the balance of the members of the
Board of Directors. Until May 15, 2001, the Voting Trustee and the other
Continuing Stockholders (as defined herein) (to the extent their shares of
Common Stock are not voted by the Voting Trustee) must vote for the election
of Bayer Corporation's
53
nominee(s). Until the Voting Trust Termination Date, Bayer Corporation and the
Continuing Stockholders (to the extent their shares of Common Stock are not
voted by the Voting Trustee) must vote for the election of the Voting
Trustee's nominees.
Until May 15, 2001, the Company may not, without Bayer Corporation's
consent, among other things, (a) own, manage or operate any business not
principally engaged in a segment of the pharmaceutical or health care industry
or any business ancillary thereto, (b) amend or restate the Company's charter
or by-laws to require more than majority approval to elect a majority of the
Board of Directors, merge, consolidate or sell all or substantially all the
Company's assets or (c) engage in transactions with any affiliate on terms
more favorable to the affiliate than could be obtained in an arm's-length
transactions, other than intercompany transactions and transactions under or
identified in the Restructuring Agreements. In addition, until the earlier of
(i) the Governance Termination Date and (ii) the date on which the shares of
the Company's Common Stock that are held by more than 300 persons who are
neither current stockholders, their permitted transferees nor employees of the
Company have a total market value in excess of $100.0 million (the "Qualified
Public Offering Date"), the Company may not undertake certain other actions
without the consent of Bayer Corporation.
The Restructuring Agreements include the Standstill, which imposes certain
restrictions on Bayer Corporation and its affiliates until May 15, 2001 (the
"Standstill Period"). Under the Standstill, Bayer Corporation and its
affiliates may not, among other things, (a) acquire, announce an intention to
acquire or offer to acquire any assets of the Company or its subsidiaries
(other than in the ordinary course) or equity securities of the Company, (b)
participate in or encourage the formation of a group or entity that seeks to
acquire equity securities of the Company, (c) solicit proxies or become a
participant in any election contest with respect to the Company, (d) initiate
or otherwise solicit stockholders for the approval of stockholder proposals or
induce any other person to initiate any stockholder proposal, (e) seek to
place designees on, or remove any member of, the Board or Directors, (f)
deposit any equity securities in a voting trust or like arrangement, (g) seek
to control the management of the Company or negotiate with any person with
respect to any form of extraordinary transaction with the Company or other
transaction not in the ordinary course of business, or be involved in a tender
or exchange offer or other attempt to violate the Standstill or (h) request
the Company or otherwise seek to amend or waive any provision of the
Standstill.
After the Standstill Period, Bayer Corporation has the right, exercisable
within six months of the end of the Standstill Period and if there is an
insufficient number of shares of Common Stock available on the open market for
Bayer Corporation to acquire a majority of the outstanding Common Stock of the
Company on the open market, to acquire from the Family Stockholders and then
from the Company, a number of shares that should enable Bayer Corporation to
own a majority of the outstanding Common Stock of the Company.
Notwithstanding the Standstill, Bayer Corporation generally may acquire
Common Stock (a) unless Bayer Corporation has sold shares of Common Stock
other than to a Permitted Assignee, (I) in connection with its exercise of
certain preemptive rights or (II) if, after the Qualified Public Offering
Date, necessary to own at least 21% more of the Company's outstanding Common
Stock than certain 10% holders and (b) up to the "New Percentage," defined as:
30% of the Company's outstanding common stock between May 15, 1997 and May 15,
1999; 33 1/3% between May 16, 1999 and May 15, 2000; and 36 2/3% between May
16, 2000 and the end of the Standstill Period.
Under the Restructuring Agreements, if Bayer Corporation and its affiliates
for any reason acquire shares in excess of the New Percentage, until May 15,
2001, Bayer Corporation shall vote those excess shares in accordance with the
Voting Trustee's instructions and those excess shares will not be considered
in determining the number of director nominees to which Bayer Corporation is
entitled.
Under the Restructuring Agreements, each of Marvin Schein, Pamela Schein and
Pamela Joseph has agreed that such individual, and such individual's Family
Group (as defined herein), shall not acquire shares if, as a consequence of
the acquisition such individual, together with such individual's Family Group,
owns in excess of (a) in the case of Marvin Schein and his Family Group,
35.85% of the Common Stock of the Company, (b) in the case of Pamela Schein
and her Family Group, 27.55% of the Common Stock of the Company and (c) in the
case of Pamela Joseph and her Family Group, 12.97% of the Common Stock of the
Company.
54
Restrictions on Transfer. The Restructuring Agreements generally provide
that Marvin Schein, Pamela Schein, Pamela Joseph, Mr. Sperber, Stanley
Bergman, certain trusts established by these individuals (collectively, the
"Continuing Stockholders") and certain of their transferees may not transfer
any of their shares until March 1, 2000, except (a) pursuant to Rule 144 under
the Securities Act, but subject to volume limitations intended to equal the
volume limitations applicable to affiliates as set forth in Rule 144(e)(1)
(the "Maximum Rule 144 Sales Amount"), (b) in a wide distribution in an amount
that exceeds the Maximum Rule 144 Sales Amount, regardless of whether the
seller is an affiliate or Rule 144(k) is applicable, in connection with which
the seller or the underwriter confirms that no direct or indirect purchaser in
that distribution is intended to acquire more than the Maximum Rule 144 Sales
Amount, (c) to certain family members of the transferor, related trusts or
estates, or other entities owned exclusively by such transferor, family
members, trusts or estates (collectively, a "Family Group"), (d) in private
placements, to persons who own fewer than 1% of the outstanding common stock
of the Company immediately prior to the transfer and who are not affiliated
with or Family Group members of the transferor, of no more than (I) 1% of the
outstanding Common Stock of the Company to any one person, its affiliates or
Family Group members in any three-month period and (II) 4% of the outstanding
Common Stock of the Company to all persons in any twelve-month period, (e) in
connection with the exercise of certain registration rights granted to the
Company's stockholders under the Restructuring Agreements, but only if, to the
extent the number of shares sold exceeds the Maximum Rule 144 Sales Amount, it
is confirmed to the Company that it is intended that no purchaser will acquire
more than the Maximum Rule 144 Sales Amount, (f) pledges to a financial
institution or transfers to a financial institution in the exercise of its
pledge rights, (g) to Bayer Corporation as provided under the Restructuring
Agreements, (h) pursuant to a merger or a consolidation that has been approved
by the Board of Directors and stockholders of the Company, (i) in a tender
offer in which Mr. Sperber (or any member of his Family Group who acquired
shares from Mr. Sperber) sells shares and (j) in a tender offer for a majority
of the shares of Common Stock of the Company by a bidder not affiliated with
Bayer A.G., if Bayer A.G. and its affiliates have failed to pursue a tender
offer or other acquisition permitted under the Restructuring Agreements. In
addition, Continuing Stockholders have been granted registration rights.
In addition to the above restrictions, the Restructuring Agreements
generally provide that Bayer Corporation and the Continuing Stockholders may
not transfer any of their shares until May 15, 1999. However, Bayer
Corporation may transfer its shares in connection with certain registration
rights granted to Bayer Corporation under the Restructuring Agreements or to a
Permitted Assignee. The Continuing Stockholders may transfer their shares as
provided in the preceding paragraph. A "Permitted Assignee" is (a) a successor
to all or substantially all the business and assets of Bayer Corporation or a
majority-owned subsidiary of Bayer A.G. who agrees to be bound by the
Restructuring Agreements, (b) with respect to certain preemptive rights,
rights of first refusal and rights of first offer, a single purchaser who,
immediately after the purchase and for 60 days thereafter, owns at least 10%
of the shares then owned by Bayer Corporation and who agrees to be bound by
the Standstill and (c) with respect to certain registration rights, any person
referred to in (a) above and up to three non-affiliated purchasers who,
immediately after the respective purchases and for 60 days thereafter, own in
the aggregate at least 20% of the shares then owned by Bayer Corporation and
who agree to be bound by the Standstill.
If Bayer Corporation sells any of its shares in the Company to any
unaffiliated third party, then the following of Bayer Corporation's rights
under the Restructuring Agreements terminate: the right to consent to certain
transactions of the Company; the right to purchase additional shares on
Company issuances of equity securities; the right to acquire shares to
maintain an ownership percentage of more than 21% of outstanding shares over
certain 10% holders; the right to acquire from the Company or the Family
Stockholders under certain circumstances after the Standstill Period, shares
for a controlling interest in the Company; and rights of first refusal with
regard to share transfers by Continuing Stockholders. However, certain of
those rights (i.e., rights to purchase additional shares on Company issuances
of equity securities and rights of first refusal) may be transferred to a
single purchaser who owns at least 10% of the Company's shares then owned by
Bayer Corporation and who agrees to be bound by the Standstill obligations.
Mr. Sperber and Mr. Bergman may not transfer any of their shares to Bayer
A.G. except in certain open market transactions and except to the extent that
Bayer A.G. first offered to purchase such shares from the Family Stockholders
and the Family Stockholders did not sell such shares.
55
The Company may not transfer any of its shares to Bayer A.G., except to the
extent that Bayer A.G. is entitled to purchase shares under the Restructuring
Agreements and those shares are not purchased in the open market or from
Family Stockholders.
Rights of Inclusion and First Refusal. The Restructuring Agreements provide
that, if at any time prior to the Voting Trust Termination Date, any Family
Stockholder or Family Group member (an "Offeree") receives an offer from a
third party to purchase some or all of the Offeree's shares of Common Stock,
the Offeree wishes to sell the shares (other than in a transaction described
in clauses (a) through (i) of the first paragraph of "--Restrictions on
Transfer" above) and Mr. Sperber, as Voting Trustee, consents to the
transaction, the Company or its designee shall have the right of first refusal
to purchase those shares on the same terms as in the third party offer.
Under the Restructuring Agreements, if the Company fails to exercise its
right of first refusal and Bayer Corporation has not sold shares other than to
a Permitted Assignee, such right will be deemed assigned to Bayer Corporation,
provided that (a) the stockholdings of Bayer A.G. may not as a result of its
exercising such right exceed the New Percentage and (b) if as a result of its
exercising such right, Bayer A.G. would own a majority of the shares of Common
Stock of the Company, Bayer Corporation will exercise such right at a price
per share equal to the greater of (I) the price contained in the third party
offer and (II) the price determined by an investment banking firm, who will
take into consideration, among other things, that control of the Company will
pass at that time to Bayer A.G.
In addition, if, prior to the end of the Standstill or the time that Bayer
Corporation sells shares other than to a Permitted Assignee, the Company is
not entitled to exercise the right of first refusal described above and a
Continuing Stockholder is permitted under the Restructuring Agreements, and in
good faith wishes, to sell shares of Common Stock to a third party (other than
sales under Rule 144 under the Securities Act and sales under clauses (b), (i)
and (j) of the first paragraph of "--Restrictions on Transfer" above), Bayer
Corporation shall have the right of first offer to purchase those shares of
Common Stock on the same terms as the Continuing Stockholder wishes to sell
the shares of Common Stock.
The Restructuring Agreements provide that if at any time prior to the
earlier of the second anniversary of the Qualified Public Offering Date and
May 15, 2001, Bayer is permitted under the Restructuring Agreements, and in
good faith wishes, to sell shares of Common Stock to a third party, the
Company and the Continuing Stockholders shall have the right of first offer to
purchase those shares of Common Stock on the same terms as the Bayer wishes to
sell the shares of Common Stock.
56
DESCRIPTION OF CERTAIN INDEBTEDNESS
As of September 5, 1995, the Company entered into the Senior Credit
Agreement with a group of lenders. The Chase Manhattan Bank (formerly Chemical
Bank) acts as credit agent thereunder. The Senior Credit Agreement, as
amended, provides a term loan facility of $250.0 million and a revolving
credit facility of $100.0 million, each maturing on December 31, 2001. As of
September 27, 1997, the Company had pre-paid $120 million of the term loan
portion of the Senior Credit Agreement and had permanently reduced the
lenders' commitments with respect thereto and had outstandings under the
revolving credit facility of approximately $26.0 million.
The Company's borrowing can be based, at the option of the Company, on a
spread above LIBOR or an alternate base rate ("ABR"). The interest rate spread
applicable to term loan and revolving credit borrowings fluctuates based on
leverage. The spread, in the case of LIBOR loans, can range from 0.75% to
2.50% and, in the case of ABR loans, from 0% to 1.50%. The ABR is based on a
per annum rate which is the greater of (i) the prime rate of the Credit Agent,
(ii) the secondary market rate for three-month certificates of deposit as
published in Federal Reserve Statistical Release H-15 (519), plus 1%, and
(iii) the Federal Funds rate, plus one-half of 1%. A commitment fee ranging
from 0.25% to 0.50% per annum of the unused daily amount of the total
commitment is payable quarterly.
The term loan facility may be prepaid at any time by the Company. Such
facility is subject to quarterly amortization payments, beginning on September
30, 1998. Annual amortization payments will total $13.7 million, $34.2
million, $41.0 million, and $41.1 million in years 1998 through 2001,
respectively. In addition to scheduled amortization, the term loan facility is
subject to mandatory prepayment, without penalty or premium, to the extent of
(a) 75% of excess cash flow for any fiscal year, (b) a specified percentage,
based on leverage, from net proceeds derived from an equity issuance, (c) 100%
of net proceeds from a permitted debt issuance, and (d) 100% of net proceeds
from an asset sale in excess of $1.0 million, all as more fully set forth in
the Senior Credit Agreement.
The Senior Credit Agreement contains a number of affirmative covenants,
including those relating to existence; business and properties; insurance;
taxes; recordkeeping and financial reporting; and notice of certain events, as
well as negative covenants, including: limitations on indebtedness; liens;
sale and lease-back transactions; investments, loans and advances; mergers,
consolidations and sales of assets; dividends and distributions; payment of
dividends by subsidiaries; capital expenditures; transactions with affiliates;
and changes in line of business. The Company is required to maintain specified
financial ratios with respect to leverage, senior debt, fixed charge coverage
and working capital and a minimum net worth.
The Senior Credit Agreement contains customary events of default, including
covenant default, breach of representation and warranty, failure to pay
principal or interest or fees when due, cross-default to other indebtedness,
bankruptcy default, ERISA default, the occurrence of a change in control, the
guarantee agreement or any security document (as defined therein) ceasing to
be in full force and effect and any interest created by a security document
ceasing to be enforceable or ceasing to have the effect and priority purported
to be created thereby.
Borrowings under the Senior Credit Agreement are secured on a senior basis
by mortgages on real property, liens on inventory and receivables and a pledge
of subsidiary stock, which represents substantially all of the Company's
assets. The Company's obligations under the Senior Credit Agreement are
jointly and severally guaranteed on a senior secured basis by the Company's
domestic subsidiaries.
The Senior Subordinated Loan is being repaid from the proceeds of the Notes
offered hereby. See "Use of Proceeds."
57
DESCRIPTION OF NOTES
GENERAL
The Notes are to be issued under an indenture, to be dated as of December
24, 1997 (the "Indenture") between the Company, the Guarantors and The Bank of
New York, as Trustee (the "Trustee"), a copy of which is available upon
request to the Company. The following summary of certain provisions of the
Indenture and the Notes does not purport to be complete and is subject to, and
is qualified in its entirety by reference to, all the provisions of the
Indenture (including the definitions of certain terms therein and those terms
made a part thereof by the Trust Indenture Act of 1939, as amended (the "Trust
Indenture Act")) and the Notes. Capitalized terms used herein and not
otherwise defined have the meanings set forth in "--Certain Definitions."
Under certain circumstances, the Company will be able to designate current
or future Subsidiaries as Unrestricted Subsidiaries. Unrestricted Subsidiaries
will not be subject to the restrictive covenants set forth in the Indenture.
As of the date of the Indenture, all of the Company's Subsidiaries other than
Schein Pharmaceutical (Netherlands) B.V., Schein Pharmaceutical (Bermuda) Ltd.
and Schein Farmaceutica de Peru will be Restricted Subsidiaries.
TERMS OF THE NOTES
The Notes will be limited to $100.0 million aggregate principal amount, and
will mature on December 15, 2004. Each Note will bear interest at the floating
rate described below payable quarterly in arrears on January 15, April 15,
July 15 and October 15, commencing on January 15, 1998, to holders of record
on the immediately preceding December 31, March 31, June 30 and September 30,
respectively.
Interest on the Notes will accrue at a rate equal to the Applicable LIBOR
Rate and will be calculated on a formula basis by multiplying the principal
amount of the Notes then outstanding by the Applicable LIBOR Rate, and
multiplying such product by the LIBOR Fraction.
The "Applicable LIBOR Rate" means, for each quarterly period during which
any Note is outstanding subsequent to the initial quarterly period, 300 basis
points over the rate determined by the Company (notice of such rate to be sent
to the Trustee by the Company on the date of determination thereof) equal to
the average (rounded upwards, if necessary, to the nearest 1/16 of 1%) of the
offered rates for deposits in U.S. dollars for a period of three months, as
set forth on the Reuters Screen LIBO Page as of 11:00 a.m., London time, on
the Interest Rate Determination Date for such quarterly period; provided,
however, that if only one such offered rate appears on the Reuters Screen LIBO
Page, the Applicable LIBOR Rate for such quarterly period will mean such
offered rate. If such rate is not available at 11:00 a.m., London time, on the
Interest Rate Determination Date for such quarterly period, then the
Applicable LIBOR Rate for such quarterly period will mean the arithmetic mean
(rounded upwards, if necessary, to the nearest 1/16 of 1%) of the interest
rates per annum at which deposits in amounts equal to US$1 million are offered
by the Reference Banks to leading banks in the London interbank market for a
period of three months as of 11:00 a.m., London time, on the Interest Rate
Determination Date for such quarterly period. If on any Interest Rate
Determination Date, at least two of the Reference Banks provide such offered
quotations, then the Applicable LIBOR Rate for such quarterly period will be
determined in accordance with the preceding sentence on the basis of the
offered quotations of those Reference Banks providing such quotations;
provided, however, that if fewer than two of the Reference Banks are so
quoting such interest rates as mentioned above, the Applicable LIBOR Rate for
such quarterly period shall be deemed to be the applicable LIBOR Rate for the
next preceding quarterly period and in the case of the quarterly period next
succeeding the initial quarterly period, the Applicable LIBOR Rate shall be
8.9375%. Notwithstanding the foregoing, the Applicable LIBOR Rate for the
initial quarterly period shall be 8.9375%.
"Interest Rate Determination Date" means, with respect to each quarterly
period, the second London Banking Day prior to the first day of such quarterly
period.
"LIBOR Fraction" means the actual number of days in the quarterly period
divided by 360; provided, however, that the number of days in each quarterly
period shall be calculated by including the first day of such quarterly period
and excluding the last.
58
"London Banking Day" means any day in which dealings in U.S. dollars are
transacted or, with respect to any future date, are expected to be transacted
in the London interbank market.
"quarterly period" means the period from and including a scheduled payment
date (or December 24, 1997, in the case of the initial quarterly period)
through the day next preceding the following scheduled interest payment date.
"Reference Banks" means each of: Societe Generale, London Branch; The Chase
Manhattan Bank, London Branch; Deutsche Bank, London Branch; and Rabobank
Nederland, London Branch and any such replacement bank thereof as listed on
the Reuters Screen LIBO Page and their respective successors, and if any such
banks are not at the applicable time providing interest rates as contemplated
within the definition of the "Applicable LIBOR Rate," Reference Banks shall
mean the remaining bank or banks so providing such rates. In the event that
less than two of such banks are providing such rates, the Company shall use
reasonable efforts to appoint additional Reference Banks so that there are at
least two such banks providing such rates; provided, however, that such banks
appointed by the Company shall be London offices of leading banks engaged in
the London interbank market.
"Reuters Screen LIBO Page" means the display designated as page "LIBO" on
the Reuter Monitor Money Rates Service (or such other page as may replace the
LIBO page on that service for the purpose of displaying London Interbank
Offered Rates of leading banks).
If the date due for payment of interest on or principal of the Notes or the
date fixed for redemption of any Note shall not be a Business Day (as defined
herein), then payment of interest or principal need not be made on such date,
but may be made on the next succeeding Business Day with the same force and
effect as if made on the date of maturity or the date fixed for redemption,
and no interest shall accrue for the period after such date.
OPTIONAL REDEMPTION
The Notes will be redeemable, at the option of the Company, in whole or in
part, at any time, upon not less than 30 nor more than 60 days' prior notice,
at 103.000% of the principal amount thereof, plus accrued and unpaid interest
thereon to, but excluding the date of redemption, if redeemed prior to January
15, 1998 and at the following redemption prices (expressed as a percentage of
principal amount), plus accrued and unpaid interest thereon to, but excluding,
the date of redemption, if redeemed during the 12-month period commencing on
January 15 of each year:
REDEMPTION
PERIOD PRICE
------ ----------
1998.............................. 103.000%
1999.............................. 101.500%
2000.............................. 100.750%
2001 and thereafter............... 100.000%
If less than all of the Notes are to be redeemed, the Trustee shall select
the Notes or portions thereof to be redeemed pro rata, by lot or by any other
method the Trustee shall deem fair and reasonable, although no Note of $1,000
in original principal amount will be redeemed in part.
SINKING FUND
The Notes will not be entitled to the benefit of any sinking fund or other
mandatory redemption obligation prior to maturity.
59
GUARANTEES
All of the Company's existing and future Restricted Subsidiaries (referred
to herein as the "Guarantors"), will unconditionally guarantee on a senior
unsecured basis the performance and punctual payment when due, whether at
maturity, by acceleration or otherwise, of all obligations of the Company
under the Indenture and the Notes. Each of the Guarantors has guaranteed the
Company's indebtedness under the Senior Credit Agreement on a senior secured
basis. The Subsidiary Guarantee of each Guarantor will be effectively
subordinated to the prior payment in full of all secured indebtedness of such
Guarantors, including secured indebtedness under the Senior Credit Agreement.
Each Subsidiary Guarantee will be limited to an amount not to exceed the
maximum amount that can, after giving effect to all other contingent and fixed
liabilities of the applicable Guarantor, be guaranteed by such Guarantor,
without rendering such Subsidiary Guarantee voidable under applicable law
relating to fraudulent conveyance or fraudulent transfer or similar laws
affecting the rights of creditors generally. Each Guarantor will agree to pay,
in addition to the amount stated above, any and all costs and expenses
(including reasonable counsel fees and expenses) incurred by the Trustee or
any holder of a Note in enforcing any rights under the Subsidiary Guarantee
with respect to such Guarantor.
Each Subsidiary Guarantee is a continuing guarantee and shall (a) remain in
full force and effect until payment in full of all the Notes, (b) be binding
upon the relevant Guarantor, and (c) enure to the benefit of and be
enforceable by the Trustee, the holders of Notes and their successors,
transferees and assigns.
RANKING
The indebtedness evidenced by the Notes will be senior unsecured obligations
of the Company, will rank pari passu in right of payment with all existing and
future senior indebtedness of the Company and will rank senior in right of
payment to all existing and future indebtedness of the Company that is, by its
terms, expressly subordinated to the Notes. The Notes will also be effectively
subordinated to all existing and future indebtedness of any Subsidiary of the
Company that is not a Guarantor of the Notes.
Holders of secured indebtedness of the Company, including the lenders under
the Senior Credit Agreement, will have claims with respect to the assets
constituting collateral for such indebtedness that are prior to the claims of
holders of the Notes. In the event of a default on the Notes, or a bankruptcy,
liquidation or reorganization of the Company, such assets will be available to
satisfy obligations with respect to the indebtedness secured thereby before
any payment therefrom could be made on the Notes. To the extent that the value
of such collateral is not sufficient to satisfy the indebtedness secured
thereby, amounts remaining outstanding on such indebtedness would be entitled
to share with the Notes and their claims with respect to any other assets of
the Company. As of September 27, 1997, as adjusted for the Offering, the
Company and its Restricted Subsidiaries would have had secured indebtedness of
approximately $160.6 million outstanding. The obligations of the Company and
the Guarantors under the Senior Credit Agreement are secured by substantially
all of the assets of the Company and the Guarantors. As of September 27, 1997,
as adjusted for the Offering, the Company would have had approximately $69.8
million of undrawn availability under the Senior Credit Agreement. The
Indenture will permit the Company and its Restricted Subsidiaries to incur
additional Indebtedness, including Secured Indebtedness, subject to certain
limitations.
CHANGE OF CONTROL
If a Change of Control shall occur at any time, then each holder of Notes
shall have the right to require that the Company purchase such holder's Notes
in whole or in part in any integral multiple of $1,000, for a cash purchase
price (the "Change of Control Purchase Price") equal to 101% of the principal
amount of such Notes, plus accrued and unpaid interest, if any, on such Notes
to the date of purchase (the "Change of Control Purchase Date"), pursuant to
the offer described below (the "Change of Control Offer") and the other
procedures set forth in the Indenture.
60
Within 15 days following any Change of Control, the Company shall notify the
Trustee thereof and give written notice of such Change of Control to each
holder of Notes by first-class mail, postage prepaid, at his address appearing
in the security register, stating, among other things, (i) that a Change of
Control has occurred and that such Holder has the right to require the Company
to purchase each Holder's Notes, in whole or in part, at the Change of Control
Purchase Price; (ii) the Change of Control Purchase Price and the Change of
Control Purchase Date which shall be a Business Day no earlier than 30 days
nor later than 60 days from the date such notice is mailed, or such later date
as is necessary to comply with requirements under the Exchange Act; (iii) that
any Note not tendered for purchase will continue to accrue interest; (iv)
that, unless the Company defaults in the payment of the Change of Control
Purchase Price, any Notes accepted for payment pursuant to the Change of
Control Offer shall cease to accrue interest after the Change of Control
Purchase Date; and (v) certain other procedures that a holder of Notes must
follow to accept a Change of Control Offer or to withdraw such acceptance.
If a Change of Control Offer is made, there can be no assurance that the
Company will have available funds sufficient to pay the Change of Control
Purchase Price for all of the Notes that might be delivered by holders of the
Notes seeking to accept the Change of Control Offer. The Senior Credit
Agreement prohibits the purchase of the Notes by the Company prior to full
repayment of Indebtedness thereunder and, upon a Change of Control, all
amounts outstanding under the Senior Credit Agreement may become due and
payable. There can be no assurance that, in the event of a Change of Control,
the Company will be able to obtain the necessary consents from the lenders
under the Senior Credit Agreement to consummate a Change of Control Offer. The
failure of the Company to make or consummate the Change of Control Offer or
pay the Change of Control Purchase Price when due would result in an Event of
Default.
The existence of a right of the holder of Notes to require the Company to
purchase such holder's Notes upon a Change of Control may deter a third party
from acquiring the Company in a transaction which constitutes a Change of
Control.
The Company will comply with the applicable tender offer rules, including
Rule 14e-1 under the Exchange Act, and any other applicable securities laws or
regulations in connection with a Change of Control Offer.
The Company will not, and will not permit any Subsidiary to, create or
permit to exist or become effective any restriction (other than restrictions
in effect on the Issue Date with respect to Indebtedness outstanding on the
Issue Date and refinancing thereof and customary default provisions) that
would materially impair the ability of the Company to make a Change of Control
Offer to purchase the Notes or, if such Change of Control Offer is made, to
pay for the Notes tendered for purchase.
CERTAIN COVENANTS
The Indenture contains certain covenants including, among others, the
following:
Limitation on Indebtedness. (a) The Company shall not, and shall not permit
any of its Restricted Subsidiaries to, incur any Indebtedness; provided,
however, that the Company may incur Indebtedness (including through the
issuance of Disqualified Capital Stock) if on the date of such incurrence the
Consolidated Coverage Ratio would be greater than (i) 2.50:1, if such
Indebtedness is incurred prior to the expiration of 24 months after the Issue
Date, and (ii) 3.00:1 if such Indebtedness is incurred on or subsequent to the
expiration of 24 months after the Issue Date.
(b) Notwithstanding the foregoing paragraph (a), the Company and its
Restricted Subsidiaries may incur Indebtedness to the extent set forth below:
(i) the incurrence by the Company of Indebtedness under the Senior Credit
Agreement and the issuance of letters of credit thereunder (with letters of
credit being deemed to have a principal amount equal to the undrawn amount of
the letters of credit plus any unreimbursed drawings thereon) up to an
aggregate principal amount of $250.0 million outstanding at any one time, less
principal repayments of term loans and permanent commitment reductions with
respect to revolving loans and letters of credit under the Senior Credit
Agreement made after the Issuance Date with the Net Cash Proceeds of Asset
Dispositions, if any;
61
(ii) Indebtedness (x) of the Company to any Restricted Subsidiary and (y) of
any Restricted Subsidiary to the Company or any other Restricted Subsidiary;
(iii) Indebtedness of the Company represented by the Notes; (iv) any
Indebtedness of the Company (other than the Indebtedness described in clauses
(i) and (ii) above) outstanding on the date of the Indenture; (v) Indebtedness
represented by the Guarantees of the Notes and Guarantees of Indebtedness
incurred pursuant to clause (i) above; (vi) Indebtedness of the Company or any
Restricted Subsidiary under Interest Rate Agreements that are entered into by
the Company or such Restricted Subsidiary for bona fide hedging purposes (as
determined in good faith by the Board of Directors or senior management of the
Company or such Restricted Subsidiary) with respect to Indebtedness of the
Company or such Restricted Subsidiary incurred without violation of the
Indenture or with respect to customary commercial transactions of the Company
or such Restricted Subsidiary entered into in the ordinary course of business;
(vii) Indebtedness (including Capitalized Lease Obligations) incurred by the
Company or any Restricted Subsidiary to finance the purchase, lease or
improvement of property (real or personal) or equipment (whether through the
direct purchase of assets or the Capital Stock of any Person owning such
assets) in an aggregate principal amount which, when aggregated with the
principal amount of all other Indebtedness then outstanding and incurred
pursuant to this clause (vii), does not exceed $25.0 million; (viii)
Indebtedness incurred by the Company or any Restricted Subsidiary constituting
reimbursement obligations with respect to letters of credit issued in the
ordinary course of business, including, without limitation, letters of credit
in respect of workers' compensation claims or self-insurance, or other
Indebtedness with respect to reimbursement type obligations regarding workers'
compensation claims; provided, that upon the drawing of such letters of credit
or the incurrence of such Indebtedness, such obligations are reimbursed within
30 days following such incurrence; (ix) Acquired Indebtedness; provided,
however, that such Indebtedness is not incurred in contemplation of such
acquisition or merger; and provided, further that the Company would have been
able to incur such Indebtedness at the time of the incurrence thereof pursuant
to clause (a) above, determined on a pro forma basis as if such transaction
had occurred at the beginning of such four-quarter period and such
Indebtedness and the operating results of such merged or acquired entity had
been included for all purposes in such pro forma calculation as if such entity
had been a Restricted Subsidiary at the beginning of such four-quarter period;
(x) obligations in respect of performance and surety bonds and completion
guarantees provided by the Company or any Restricted Subsidiary in the
ordinary course of business; (xi) additional indebtedness in an aggregate
amount not to exceed $10.0 million at any one time outstanding; and (xii)
Refinancing Indebtedness; provided, however, that (A) the principal amount of
such Refinancing Indebtedness shall not exceed the principal or accreted
amount (in the case of any Indebtedness issued with original issue discount,
as such) of Indebtedness so extended, refinanced, renewed, replaced,
substituted or refunded (the "Refinanced Indebtedness"), (B) the Refinancing
Indebtedness shall have a Weighted Average Life to Maturity of not less than
the stated maturity of the Refinanced Indebtedness and (C) the Refinancing
Indebtedness shall rank in right of payment relative to the Notes on terms at
least as favorable to the holders of Notes as those contained in the
documentation governing the Refinanced Indebtedness.
(c) Notwithstanding any other provision of this covenant, neither the
Company nor any Restricted Subsidiary shall incur any Indebtedness (i)
pursuant to paragraph (b) above, if the proceeds thereof are used, directly or
indirectly, to repay, prepay, redeem, defease, retire, refund or refinance any
Subordinated Indebtedness unless such Indebtedness shall be subordinated to
the Notes to at least the same extent as such Subordinated Indebtedness or
(ii) pursuant to paragraph (a) or (b) if such Indebtedness is subordinate or
junior in ranking in any respect to any Senior Indebtedness unless such
Indebtedness is expressly subordinated in right of payment to such Senior
Indebtedness.
(d) The Company shall not incur any Secured Indebtedness that is not Senior
Indebtedness.
Limitation on Restricted Payments. (a) The Company shall not, and shall not
permit any Restricted Subsidiary to, directly or indirectly:
(i) declare or pay any dividend on, or make any distribution to holders
of, any shares of its Capital Stock (other than dividends or distributions
payable solely in shares of its Capital Stock (other than Disqualified
Capital Stock) or in options, warrants or other rights to acquire such
Capital Stock and other
62
than dividends and distributions paid by a Restricted Subsidiary to the
Company or to another Restricted Subsidiary);
(ii) purchase, redeem or otherwise acquire or retire for value, directly
or indirectly, any shares of the Capital Stock of the Company or any
Restricted Subsidiary or options, warrants or other rights to acquire such
Capital Stock;
(iii) make any principal payment on, or repurchase, redeem, defease,
retire or otherwise acquire for value, prior to the relevant scheduled
principal payment, sinking fund or maturity, any Subordinated Indebtedness;
or
(iv) make any Investment in any Person, including, without limitation,
any Unrestricted Subsidiary (other than a Permitted Investment)
(the foregoing actions described in clauses (i) through (iv) above being
hereinafter collectively referred to as "Restricted Payments") unless after
giving effect to the proposed Restricted Payment, (A) no Default or Event of
Default shall have occurred and be continuing and such Restricted Payment
shall not cause or constitute a Default or an Event of Default; (B)
immediately before and immediately after giving effect to such transaction on
a pro forma basis, the Company could incur $1.00 of additional Indebtedness
pursuant to paragraph (a) under "Limitation of Indebtedness"; and (C) the
aggregate amount of all such Restricted Payments (the amount of any such
Restricted Payment, if other than cash, to be determined in good faith by the
Board of Directors of the Company, whose determination shall be conclusive and
evidenced by a resolution of the Board of Directors) declared or made after
the Issue Date (including such Restricted Payment) does not exceed the sum of:
(i) 50% of the aggregate cumulative Consolidated Net Income (or, if such
aggregate cumulative Consolidated Net Income shall be a loss, minus 100% of
such loss) of the Company accrued on a cumulative basis during the period
(taken as one accounting period) from the fiscal quarter that first begins
after the Issue Date to the end of the Company's most recently ended fiscal
quarter for which internal financial statements are available at the time
of such Restricted Payment;
(ii) the aggregate Net Cash Proceeds received after the Issue Date by the
Company from the issuance or sale (other than to any of its Subsidiaries)
of its shares of Capital Stock (other than Disqualified Capital Stock) or
any options, warrants or rights to purchase such shares of Capital Stock
(other than Disqualified Capital Stock) or other cash contributions to its
capital (excluding amounts used pursuant to clauses (ii) or (iii) of
paragraph (b) below);
(iii) the aggregate Net Cash Proceeds received after the Issue Date by
the Company (other than from any of its Subsidiaries) upon the exercise of
any options, warrants or rights to purchase shares of Capital Stock (other
than Disqualified Capital Stock) of the Company;
(iv) the aggregate Net Cash Proceeds received after the Issue Date by the
Company from Indebtedness of the Company or Disqualified Capital Stock of
the Company that has been converted into or exchanged for Capital Stock
(other than Disqualified Capital Stock) of the Company or options, warrants
or rights to acquire such Capital Stock, to the extent such Indebtedness of
the Company or Disqualified Capital Stock of the Company was originally
incurred or issued for cash, plus the aggregate Net Cash Proceeds received
by the Company at the time of such conversion or exchange;
(v) to the extent not included in Consolidated Net Income, the net
reduction (received by the Company or any Restricted Subsidiary in cash) in
Investments (other than Permitted Investments) made by the Company and the
Restricted Subsidiaries since the Issue Date, not to exceed, in the case of
any Investments in any Person, the amount of Investments (other than
Permitted Investments) made by the Company and the Restricted Subsidiaries
in such Person since the Issue Date.
63
(b) Notwithstanding the foregoing, and in the case of clauses (v) and (vii)
below, so long as there is no Default or Event of Default continuing, the
foregoing provisions shall not prohibit the following actions:
(i) the payment of any dividend within 60 days after the date of
declaration thereof, if at such date of declaration such payment would be
permitted by the provisions of paragraph (a) of this "Limitation on
Restricted Payments" covenant (such payment being deemed to have been paid
on such date of declaration for purposes of the calculation required by
paragraph (a) of this "Limitation on Restricted Payments" covenant);
(ii) the repurchase, redemption, or other acquisition or retirement of
any shares of any class of Capital Stock of the Company or warrants,
options or other rights to acquire such stock in exchange for, or out of
the Net Cash Proceeds of a substantially concurrent issue and sale (other
than to a Subsidiary) for cash of, any Capital Stock (other than
Disqualified Capital Stock) of the Company or warrants, options or other
rights to acquire such Capital Stock;
(iii) any repurchase, redemption, defeasance, retirement, refinancing or
acquisition for value or payment of principal of any Subordinated
Indebtedness in exchange for, or out of the net proceeds of a substantially
concurrent issuance and sale (other than to a Subsidiary) for cash of, any
Capital Stock (other than Disqualified Capital Stock) of the Company or
warrants, options or other rights to acquire such Capital Stock;
(iv) the repurchase, redemption, defeasance, retirement or other
acquisition for value or payment of principal of any Subordinated
Indebtedness through the issuance of Refinancing Indebtedness;
(v) Investments in Permitted Foreign Companies in a net aggregate amount
not to exceed $10.0 million in any fiscal year, provided, however, that, to
the extent the net aggregate amount of such Investments in any fiscal year
is less than $10.0 million, 50% of such difference may be carried forward
and added to the $10.0 million permitted amount for the subsequent fiscal
year;
(vi) Investments in Cheminor Drugs Limited and Dr. Reddy's Laboratories
Limited having an aggregate fair market value, taken together with all
other Investments made pursuant to this clause (vi) that are at the time
outstanding, not to exceed $10.0 million; and
(vii) Additional Investments (including, without limitation, Unrestricted
Subsidiaries) having an aggregate fair market value, taken together with
all other Investments made pursuant to this clause (vii) that are at the
time outstanding, not to exceed $15.0 million at the time of such
Investment (with the fair market value of each Investment being measured at
the time made and without giving effect to subsequent changes in value).
The actions described in clauses (i) and (vii) of this paragraph (b) shall be
Restricted Payments that shall be permitted to be taken in accordance with
this paragraph (b) but shall reduce the amount that would otherwise be
available for Restricted Payments under clause (C) of paragraph (a) of this
"Limitation on Restricted Payments" covenant (provided that any dividend paid
pursuant to clause (i) of this paragraph (b) shall reduce the amount that
would otherwise be available under clause (C) of paragraph (a) of this
"Limitation on Restricted Payments" covenant when declared, but not also when
paid pursuant to such clause (i)) and the actions described in clauses (ii),
(iii), (iv), (v) and (vi) of this paragraph (b) shall be permitted to be taken
in accordance with this paragraph and shall not reduce the amount that would
otherwise be available for Restricted Payments under clause (C) of paragraph
(a).
Limitation on Liens. The Company shall not, and shall not permit any
Restricted Subsidiary to, directly or indirectly, incur, assume or suffer to
exist any Lien of any kind upon any of its property or assets (including any
shares of Capital Stock or Indebtedness of any Restricted Subsidiary), whether
owned on the Issue Date or acquired after the Issue Date, or any income or
profits therefrom, except if the Notes (or the Guarantee of the Notes, in the
case of Liens on properties or assets of any Guarantor) and all other amounts
due under the Indenture are directly secured equally and ratably with (or
prior to in the case of Liens with respect to
64
Subordinated Indebtedness) the obligation or liability secured by such Lien,
excluding, however, from the operation of the foregoing any of the following:
(a) any Lien existing as of the Issue Date;
(b) any Lien arising by reason of (i) any judgment, decree or order of
any court, so long as such Lien is in existence less than 30 days after the
entry thereof or adequately bonded or the payment of such judgment, decree
or order is covered (subject to a customary deductible) by insurance
maintained with responsible insurance companies; (ii) taxes, assessments or
other governmental charges that are not yet delinquent or are being
contested in good faith; (iii) security for payment of workers'
compensation or other insurance; (iv) good faith deposits in connection
with tenders, leases or contracts (other than contracts for the payment of
borrowed money); (v) zoning restrictions, easements, licenses,
reservations, provisions, covenants, conditions, waivers, restrictions on
the use of property or minor irregularities of title (and with respect to
leasehold interests, mortgages, obligations, liens and other encumbrances
incurred, created, assumed or permitted to exist and arising by, through or
under a landlord or owner of the leased property, with or without consent
of the lessee), none of which materially impairs the use of any property or
assets material to the operation of the business of the Company or any
Restricted Subsidiary or the value of such property or assets for the
purpose of such business; (vi) deposits to secure public or statutory
obligations, or in lieu of surety or appeal bonds with respect to matters
not yet finally determined and being contested in good faith by
negotiations or by appropriate proceedings that suspend the collection
thereof; or (vii) operation of law in favor of mechanics, materialmen,
laborers, employees or suppliers, incurred in the ordinary course of
business for sums that are not yet delinquent or are being contested in
good faith by negotiations or by appropriate proceedings that suspend the
collection thereof;
(c) any Lien now or hereafter existing on property or assets of the
Company or any Guarantor securing Indebtedness of such Person incurred
pursuant to the Senior Credit Agreement;
(d) any Lien securing Acquired Indebtedness created prior to (and not
created in connection with, or in contemplation of) the incurrence of such
Indebtedness by the Company or a Restricted Subsidiary; provided that any
such Lien extends only to the assets that were subject to such Lien
securing such Acquired Indebtedness prior to the related acquisition;
(e) leases or subleases granted by the Company or any of its Subsidiaries
to any other Person in the ordinary course of business;
(f) Liens in the nature of trustees' Liens granted pursuant to any
indenture governing any indebtedness permitted by the "Limitation on
Indebtedness" covenant in each case in favor of the trustee under such
indenture and securing only obligations to pay any compensation to such
trustee, to reimburse its expenses and to indemnify it under the terms
thereof;
(g) Liens to secure Indebtedness (including Capitalized Lease
Obligations) permitted by clause (vii) of paragraph (b) of the "Limitation
on Indebtedness" covenant covering only the assets acquired with such
Indebtedness; and
(h) any extension, renewal, refinancing or replacement, in whole or in
part, of any Lien described in the foregoing clauses (a) through (g) so
long as the amount of property or assets subject to such Lien is not
increased thereby.
Limitations on Lines of Business. The Company shall not, and shall not
permit its Restricted Subsidiaries to, engage in any business other than those
engaged in on the date of the Indenture and any other segment of the
pharmaceutical or health-care industry or ancillary thereto.
Commission Reports. Notwithstanding that the Company may not be subject to
the reporting requirements of Sections 13 or 15(d) of the Exchange Act, so
long as any Notes are outstanding, the Company will furnish to the Trustee and
the holders of Notes (i) within 45 days after the end of each of the first
three fiscal quarters of each fiscal year and 90 days of the end of each
fiscal year all quarterly and annual financial information, as the
65
case may be, that would be required to be contained in a filing with the
Commission on Forms 10-Q and 10-K if the Company were required to file any
such Forms, including a "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and, with respect to the annual
information only, a report thereon by the Company's certified independent
accountants and (ii) all current reports that would be required to be filed
with the Commission on Form 8-K if the Company were required to file such
reports. In addition, whether or not required by the rules and regulations of
the Commission, the Company will file a copy of all such information and
reports with the Commission for public availability (unless the Commission
will not accept such a filing) and make such information available to
securities analysts and prospective investors upon request. Furthermore, for
so long as any of the Notes remain outstanding, the Company has agreed to make
available to any prospective purchaser of the Notes or beneficial owner of the
Notes, in connection with any sale thereof, the information required by Rule
144(d)(4) under the Securities Act.
Limitation on Restrictions on Distributions from Restricted
Subsidiaries. The Company shall not, and shall not permit any Restricted
Subsidiary to, create or otherwise cause or permit to exist or become
effective any consensual encumbrance or restriction on the ability of any
Restricted Subsidiary (a) to pay dividends or make any other distributions on
its Capital Stock or pay any Indebtedness owed to the Company or any
Restricted Subsidiary, (b) to make any loans or advances to the Company or any
Restricted Subsidiary or (c) to transfer any of its property or assets to the
Company or any Restricted Subsidiary, except: (i) any encumbrance or
restriction pursuant to an agreement in effect at or entered into on the Issue
Date; (ii) any encumbrance or restriction with respect to a Restricted
Subsidiary pursuant to an agreement relating to any Indebtedness incurred by
such Restricted Subsidiary on or prior to the date on which such Restricted
Subsidiary was acquired by the Company (other than Indebtedness incurred as
consideration in, or to provide all or any portion of the funds or credit
support utilized to consummate, the transaction or series of related
transactions pursuant to which such Restricted Subsidiary became a Restricted
Subsidiary or was acquired by the Company) and outstanding on such date; (iii)
any encumbrance or restriction pursuant to an agreement effecting a
refinancing of Indebtedness incurred pursuant to an agreement referred to in
clause (i) or (ii) of this covenant or contained in any amendment to an
agreement referred to in clause (i) or (ii) of this covenant; provided,
however, that the encumbrances and restrictions with respect to such
Restricted Subsidiary contained in any such refinancing agreement or amendment
are no less favorable in any material respect to the holders of the Notes than
encumbrances and restrictions with respect to such Restricted Subsidiary
contained in such agreements; (iv) in the case of clause (c) above, any
encumbrance or restriction (A) that restricts in a customary manner the
subletting, assignment or transfer of any property or asset that is a lease,
license, conveyance or contract or similar property or asset that is the
subject of such encumbrance or restriction, (B) existing by virtue of any
transfer of, agreement to transfer, option or right with respect to, or Lien
on, any property or assets of the Company or any Restricted Subsidiary not
otherwise prohibited by the Indenture or (C) arising or agreed to in the
ordinary course of business, not relating to any Indebtedness, and that do
not, individually or in the aggregate, detract from the value of property or
assets of the Company or any Restricted Subsidiary in any manner material to
the Company or any Restricted Subsidiary; provided that, in each case, such
encumbrance or restriction relates to, and restricts dealings with, only the
property or asset that is the subject of such encumbrance or restriction; and
provided, further, that such encumbrance or restriction does not prohibit,
limit or otherwise restrict the making or payment of any dividend or other
distribution to the Company or any Restricted Subsidiary; (v) any restriction
with respect to a Restricted Subsidiary imposed pursuant to an agreement
entered into for the sale or disposition of all or substantially all the
Capital Stock or assets of such Restricted Subsidiary pending the closing of
such sale or disposition; and (vi) any restrictions on cash or other deposits
or net worth imposed by customers under contracts entered into in the ordinary
course of business.
Limitation on Sales of Assets and Subsidiary Stock. (a) The Company shall
not, and shall not permit any Restricted Subsidiary to, make any Asset
Disposition unless (i) the Company or such Restricted Subsidiary receives
consideration (including by way of relief from, or by any other Person
assuming sole responsibility for, any liabilities, contingent or otherwise) at
the time of such Asset Disposition at least equal to the Fair Market Value of
the shares or assets that are the subject matter of such Asset Disposition,
(ii) at least 80% of the consideration therefor received by the Company or
such Restricted Subsidiary is in the form of cash; and (iii) an
66
amount equal to 100% of the Net Available Cash from such Asset Disposition is
applied by the Company (or such Restricted Subsidiary, as the case may be) (A)
first, to the extent the Company elects (or is required by the terms of the
Senior Credit Agreement), to prepay, repay or purchase such indebtedness
incurred under the Senior Credit Agreement within 180 days after the later of
the date of such Asset Disposition or the receipt of such Net Available Cash,
(B) second, to the extent of the balance of Net Available Cash after
application in accordance with clause (A), to the extent the Company elects,
to secure letter of credit obligations to the extent such related letters of
credit have not been drawn upon or returned undrawn; (C) third, to the extent
of the balance of Net Available Cash after application in accordance with
clauses (A) and (B), to the extent the Company or such Restricted Subsidiary
elects, within one year from the later of the date of such Asset Disposition
or the receipt of such Net Available Cash, to reinvest in, Additional Assets;
and (D) fourth, to the extent of the balance of such Net Available Cash after
application in accordance with clauses (A), (B) and (C), to make an offer to
purchase Notes pursuant and subject to the conditions of the Indenture to the
holders of the Notes at a purchase price of 100% of the principal amount
thereof plus accrued and unpaid interest to the purchase date; provided,
however, that, in connection with any prepayment, repayment or purchase of
Indebtedness pursuant to clause (A) or (B) above, the Company or such
Restricted Subsidiary shall retire such Indebtedness and shall cause the
related loan commitment (if any) to be permanently reduced in an amount equal
to the principal amount so prepaid, repaid or purchased. The Company shall not
be required to make an offer for Notes pursuant to this covenant if the Net
Available Cash available therefor (after application of the proceeds as
provided in clauses (A), (B) and (C)) is less than $15.0 million (which lesser
amount shall be carried forward for purposes of determining whether an offer
is required with respect to the Net Available Cash from any subsequent Asset
Disposition).
For the purposes of clause (a)(ii) of this covenant, the following will be
deemed to be cash: (x) the assumption of Indebtedness (other than Disqualified
Capital Stock) of the Company or any Restricted Subsidiary and the release of
the Company or such Restricted Subsidiary from all liability on such
Indebtedness in connection with such Asset Disposition and (y) securities
received by the Company or any Restricted Subsidiary of the Company from the
transferee that are promptly converted by the Company or such Restricted
Subsidiary into cash.
(b) In the event of an Asset Disposition that requires the purchase of Notes
pursuant to clause (a)(iii)(D) of this covenant, the Company will be required
to purchase Notes tendered pursuant to an offer by the Company for the Notes
at a purchase price of 100% of their principal amount plus accrued interest to
the purchase date in accordance with the procedures (including prorating in
the event of oversubscription) set forth in the Indenture.
(c) The Company shall comply with the applicable tender offer rules,
including Rule 14e-1 under the Exchange Act, and any other securities laws or
regulations in connection with the repurchase of Notes pursuant to this
covenant.
Limitation on Affiliate Transactions. The Company shall not, and shall not
permit any Restricted Subsidiary to, directly or indirectly, enter into or
conduct any transaction (including the purchase, sale, lease or exchange of
any property or the rendering of any service) with any Affiliate of the
Company (an "Affiliate Transaction") unless: (i) the terms of such Affiliate
Transaction are no less favorable to the Company or such Restricted
Subsidiary, as the case may be, than those that could be obtained at the time
of such transaction in arm's-length dealings with a Person who is not an
Affiliate; (ii) in the event such Affiliate Transaction involves an aggregate
amount in excess of $1.0 million (unless such Affiliate Transaction
constitutes an agreement with Bayer A.G. or its Affiliate relating to an
Investment by the Company and an Investment by Bayer A.G. or its Affiliate in
a Permitted Foreign Company in which case the requirements of this clause
shall be applicable only if the amount being invested by the Company exceeds
$10.0 million), the terms of such transaction have been approved by a majority
of the members of the Board of Directors of the Company and by a majority of
the disinterested members of such Board, if any (and such majority or
majorities, as the case may be, determines that such Affiliate Transaction
satisfies the criteria in (i) above) and (iii) in the event such Affiliate
Transaction involves an aggregate amount in excess of $15.0 million (unless
such Affiliate Transaction constitutes an agreement with Bayer A.G. or its
Affiliate relating to an Investment by the Company and an Investment by Bayer
A.G. or its Affiliate in a Permitted Foreign Company in which case the
requirements of this clause shall be
67
applicable only if the amount being invested by the Company exceeds $25.0
million), the Company has received a written opinion from an independent
investment banking firm of nationally recognized standing that such Affiliate
Transaction is fair to the Company or such Restricted Subsidiary, as the case
may be, from a financial point of view.
The provisions of the foregoing paragraph will not prohibit (i) any
Restricted Payment permitted to be paid or made pursuant to the covenant
described under "Limitation on Restricted Payments," (ii) the performance of
the Company's or a Restricted Subsidiary's obligations under any employment
contract, stock option, collective bargaining agreement, employee benefit
plan, related trust agreement or any other similar arrangement heretofore or
hereafter entered into in the ordinary course of business, (iii) payment of
compensation to employees, officers, directors or consultants in the ordinary
course of business, (iv) maintenance in the ordinary course of business of
benefit programs or arrangements for employees, officers or directors,
including vacation plans, health and life insurance plans, deferred
compensation plans, and retirement or savings plans and similar plans, (v) any
transaction between the Company and a Restricted Subsidiary or between
Restricted Subsidiaries, (vi) any agreement in effect as of the Issue Date or
any amendment thereto or any transaction contemplated thereby, (vii)
transactions required of the Company or any Restricted Subsidiary under, or
contemplated by, the General Shareholders Agreement dated September 30, 1994,
and the Continuing Shareholders Agreement dated September 30, 1994, in each
cased as in effect on the date of this Indenture or (viii) any agreement
entered into in the ordinary course or business between the Company and a
Person who constitutes an Affiliate solely by reason of such Person being an
officer or director of the Company which agreement provides for the repurchase
by the Company, upon or following the termination of such Person's employment
or directorship with the Company, of shares of Capital Stock of the Company
owned by such Person.
Limitation on Sale of Capital Stock of Restricted Subsidiaries. The Company
(i) shall not, and shall not permit any Restricted Subsidiary to, transfer,
convey, sell or otherwise dispose of any Capital Stock of any Restricted
Subsidiary to any Person (other than to the Company or a Restricted
Subsidiary) and (ii) shall not permit any Restricted Subsidiary to issue any
of its Capital Stock to any Person other than to the Company or a Restricted
Subsidiary; provided, however, that the foregoing shall not prohibit the
transfer, conveyance, sale or other disposition of all the Capital Stock of a
Restricted Subsidiary if the Net Cash Proceeds from such transfer, conveyance,
sale or other disposition are applied in accordance with the covenant
described above under "Limitation on Sales of Assets and Subsidiary Stock";
and, provided, further, that this covenant shall not prohibit the transfer,
conveyance, sale or other disposition of less than all of the Capital Stock of
a Restricted Subsidiary or the issuance by any Restricted Subsidiary of any of
its Capital Stock to any Person as long as (A) the Net Cash Proceeds from such
transfer, conveyance, sale or other disposition or issuance are applied in
accordance with the "Limitation on Sales of Assets and Subsidiary Stock"
covenant, (B) immediately after giving effect to such transaction, no Event of
Default shall have occurred and be continuing, (C) immediately after giving
pro forma effect to such transaction, as if such transaction had occurred at
the beginning of the applicable four-quarter period, the Company would be
permitted to incur at least $1.00 of additional Indebtedness pursuant to the
Consolidated Coverage Ratio test as set forth in paragraph (a) of the
"Limitation on Indebtedness" covenant and (D) immediately after giving effect
to such transaction, such Restricted Subsidiary remains a Restricted
Subsidiary of the Company.
Limitation on Sale and Leaseback Transactions. The Indenture will provide
that the Company shall not, and shall not permit any of its Restricted
Subsidiaries to, enter into any sale and leaseback transaction; provided that
the Company may enter into a sale and leaseback transaction if (i) the Company
could have (a) incurred Indebtedness in an amount equal to the Attributable
Debt (as defined herein) relating to such sale and leaseback transaction
pursuant to the Consolidated Coverage Ratio test set forth in paragraph (a) of
the covenant "Limitation on Indebtedness" and (b) incurred a Lien to secure
such Indebtedness pursuant to the "Limitation on Liens" covenant, (ii) the
gross cash proceeds of such sale and leaseback transaction are at least equal
to the fair market value (as determined in good faith by the Board of
Directors and set forth in an Officers' Certificate delivered to the Trustee)
of the property that is the subject of such sale and leaseback transaction and
(iii) the transfer of assets in such sale and leaseback transaction is
permitted by, and the Company applies the net proceeds of such transaction in
compliance with, the "Limitation on Sales of Assets and Subsidiary Stock"
covenant.
68
MERGER AND CONSOLIDATION
The Company shall not consolidate with or merge with or into, or convey,
transfer or lease all or substantially all its assets to, any Person, unless:
(i) the resulting, surviving or transferee Person (the "Successor Company")
shall be a Person organized and existing under the laws of the United States
of America, any state thereof or the District of Columbia and the Successor
Company (if not the Company) shall expressly assume, by an indenture
supplemental to the Indenture, executed and delivered to the Trustee, in form
reasonably satisfactory to the Trustee, all the obligations of the Company
under the Notes and the Indenture; (ii) immediately after giving effect to
such transaction (and treating any Indebtedness which becomes an obligation of
the Successor Company or any Restricted Subsidiary as a result of such
transaction as having been incurred by such Successor Company or such
Restricted Subsidiary at the time of such transaction), no Event of Default
shall have occurred and be continuing; (iii) immediately after giving pro
forma effect to such transaction, as if such transaction had occurred at the
beginning of the applicable four-quarter period, the Successor Company would
be permitted to incur at least $1.00 of additional Indebtedness pursuant to
the Consolidated Coverage Ratio test set forth in paragraph (a) of the
"Limitation on Indebtedness" covenant; and (iv) the Company shall have
delivered to the Trustee an Officers' Certificate and an Opinion of Counsel,
each stating that such consolidation, merger or transfer and each supplemental
indenture (if any) comply with the Indenture.
The Successor Company shall be the successor of the Company and shall
succeed to, and be substituted for, and may exercise every right and power of,
the Company under the Indenture, but the predecessor Company in the case of a
conveyance, transfer or lease shall not be released from the obligation to pay
the principal of and interest on the Notes.
EVENTS OF DEFAULT
An Event of Default is defined in the Indenture as (i) a default in any
payment of interest on any Note when due and payable, continued for 30 days,
(ii) a default in the payment of principal of any Note when due and payable at
its Stated Maturity, upon optional redemption, upon required repurchase, upon
declaration or otherwise, (iii) the failure by the Company to comply with its
obligations under "--Merger and Consolidation," (iv) the failure by the
Company to comply for 30 days after notice with any of its obligations under
"--Change of Control" or under the covenants described under "Certain
Covenants" above (in each case, other than a failure to purchase Notes which
shall constitute an Event of Default under clause (ii) above), (v) the failure
by the Company to comply for 30 days after notice with its other covenants and
agreements contained in the Indenture or the Notes, (vi) Indebtedness of the
Company or any Restricted Subsidiary is not paid within any applicable grace
period after final maturity or is accelerated by the holders thereof because
of a default and the total amount of such Indebtedness unpaid or accelerated
exceeds $10.0 million or its foreign currency equivalent at the time (the
"cross acceleration provision"), (vii) certain events of bankruptcy,
insolvency or reorganization of the Company or a Material Subsidiary (the
"bankruptcy provisions"), (viii) any judgment or decree for the payment of
money in excess of $10.0 million or its foreign currency equivalent at the
time (to the extent not covered by insurance) is entered against the Company
or a Material Subsidiary and is not discharged and either (A) an enforcement
proceeding has been commenced by any creditor upon such judgment or decree and
is not promptly stayed or (B) such judgment or decree shall remain
undischarged or unstayed for a period of 60 days following the entry of such
judgment or decree (the "judgment default provision") or (ix) the failure of
any Subsidiary Guarantee of the Notes to be in full force and effect (except
as contemplated by the terms thereof) or the denial or disaffirmation by any
Guarantor of its obligations under the Indenture or any Subsidiary Guarantee
of the Notes if such failure is not cured, or such denial or disaffirmation is
not rescinded or revoked, within 10 days. However, a default under clauses
(iv) and (v) will not constitute an Event of Default until the Trustee or the
holders of at least 25% in principal amount of the outstanding Notes notify
the Company in writing of the default and the Company does not cure such
default within the time specified in clauses (iv) and (v) hereof after receipt
of such notice.
If an Event of Default (other than an Event of Default specified in clause
(vii) above with respect to the Company) occurs and is continuing, the
Trustee, by written notice to the Company, or the holders of at least
69
25% in outstanding principal amount of the Notes, by written notice to the
Company and the Trustee, may declare the principal of, and accrued and unpaid
interest on, all the Notes to be due and payable. Upon such a declaration,
such principal and interest shall be due and payable (i) if no Indebtedness is
outstanding under the Senior Credit Agreement, immediately, and (ii) if any
Indebtedness is outstanding under the Senior Credit Agreement, upon the first
to occur of (x) the acceleration of any such Indebtedness or (y) the fifth
Business Day after receipt by the Company and the Credit Agent of such written
notice of acceleration. If an Event of Default specified in clause (vii) above
occurs and is continuing, the principal of, and accrued and unpaid interest
on, all the Notes shall ipso facto become and be immediately due and payable
without any declaration or other act on the part of the Trustee or any
holders. Under certain circumstances, the holders of a majority in principal
amount of the outstanding Notes may rescind any such acceleration with respect
to the Notes and its consequences.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, if an Event of Default occurs and is continuing, the Trustee will be
under no obligation to exercise any trust or power under the Indenture at the
request, order or direction of any of the holders unless such holders have
offered to the Trustee indemnification satisfactory to it in its sole
discretion against all losses and expenses. Except to enforce the right of any
holder to receive payment of the principal of and interest on the Notes held
by such holder on or after the respective due dates expressed in the Notes, no
holder may pursue any remedy with respect to the Indenture or the Notes unless
(i) such holder has previously given the Trustee notice that an Event of
Default is continuing, (ii) holders of at least 25% in outstanding principal
amount of the outstanding Notes have requested the Trustee to pursue the
remedy, (iii) such holders have offered the Trustee reasonable security or
indemnity against any loss, liability or expense, (iv) the Trustee has not
complied with such request within 60 days after the receipt of the request and
the offer of security or indemnity, and (v) the holders of a majority in
principal amount of the outstanding Notes have not given the Trustee a
direction that is inconsistent with such request within such 60 day period.
Subject to certain restrictions, the holders of a majority in outstanding
principal amount of the Notes may direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee or of
exercising any trust or power conferred on the Trustee. However, the Trustee
may refuse to follow any direction that conflicts with law or the Indenture
or, subject to the provisions of the Indenture relating to the duties of the
Trustee, that the Trustee determines is unduly prejudicial to the rights of
other holders (it being understood that, subject to the provisions of the
Indenture relating to the duties of the Trustee, the Trustee shall have no
duty to ascertain whether or not such actions or forbearances are unduly
prejudicial to such holders) or would subject the Trustee to personal
liability; provided, however, that the Trustee may take any other action
deemed proper by the Trustee that is not inconsistent with such direction.
Prior to taking or refraining from taking any such action hereunder, the
Trustee shall be entitled to indemnification satisfactory to it in its sole
discretion against all losses and expenses caused by its taking or refraining
from taking such action.
The Indenture provides that if a Default or Event of Default occurs and is
continuing and if a Trust Officer has actual knowledge thereof, the Trustee
shall mail to each holder notice of the Default or Event of Default within 90
days after it occurs. Except in the case of a Default or Event of Default in
payment of principal of, or interest on, any Note (including payments pursuant
to the optional redemption or required repurchase provisions of such Note, if
any), the Trustee may withhold the notice if and so long as its board of
directors, the Executive Committee of its board of directors or a committee of
its Trust Officers in good faith determines that withholding the notice is in
the interests of the holders of the Notes. In addition, the Company is
required to deliver to the Trustee: (i) within 5 days after the occurrence
thereof, written notice in the form of an Officers' Certificate of any Event
of Default under clause (vi) above and any event which with the giving of
notice or the lapse of time would become an Event of Default under clause
(iv), (v) or (viii), its status and what action the Company is taking or
proposes to take with respect thereto and (ii) within 120 days after the end
of each fiscal year, written notice in the form of an Officers' Certificate
indicating whether the officers signing such Officers' Certificate had actual
knowledge of any Default that occurred during such previous fiscal year.
AMENDMENTS AND WAIVERS
Subject to certain exceptions, the Indenture may be amended with the consent
of the holders of a majority in principal amount of the Notes then outstanding
and any past default or compliance with any provisions may
70
be waived with the consent of the holders of a majority in principal amount of
the Notes then outstanding. However, without the consent of each holder of an
outstanding Note affected, no amendment may, among other things, (i) reduce
the amount of Notes whose holders must consent to an amendment, (ii) reduce
the rate of or extend the time for payment of interest on any Note, (iii)
reduce the principal of or extend the Stated Maturity of any Note, (iv) reduce
the premium payable upon the redemption or repurchase of any Note or change
the time at which any Note may or shall be redeemed or repurchased in
accordance with the Indenture, (v) make any Note payable in money other than
that stated in the Note, (vi) modify or affect in any manner adverse to the
holders of the Notes, the terms and conditions of the obligation of the
Company for the due and punctual payment of the principal of or interest on
the Notes or (vii) make any change in the amendment provisions which require
each holder's consent or in the waiver provisions.
Without the consent of any holder, the Company and the Trustee may amend the
Indenture to cure any ambiguity, omission, defect or inconsistency, to provide
for the assumption by a successor corporation of the obligations of the
Company under the Indenture, to provide for uncertificated Notes in addition
to or in place of certificated Notes (provided that the uncertificated Notes
are issued in registered form for purposes of Section 163(f) of the Code, or
in a manner such that the uncertificated Notes are described in Section
163(f)(2)(B) of the Code), to add Guarantees with respect to the Notes, to
secure the Notes, to add to the covenants of the Company for the benefit of
the holders of the Notes or to surrender any right or power conferred upon the
Company, to make any change that does not adversely affect the rights of any
holder or to comply with any requirement of the Commission in connection with
the qualification of the Indenture under the Trust Indenture Act.
The consent of the holders is not necessary under the Indenture to approve
the particular form of any proposed amendment. It is sufficient if such
consent approves the substance of the proposed amendment.
After an amendment under the Indenture becomes effective, the Company is
required to mail to the holders a notice briefly describing such amendment.
However, the failure to give such notice to all the holders, or any defect
therein, will not impair or affect the validity of the amendment.
TRANSFER AND EXCHANGE
A holder of Notes may transfer or exchange Notes in accordance with the
Indenture. The Company or the Trustee may require any Note presented for
registration of transfer, exchange, redemption or payment to be duly endorsed
by, or be accompanied by a written instrument or instruments of transfer in
form satisfactory to the Company and the Trustee duly executed by, the holder
or his attorney duly authorized in writing. The Company may require payment of
a sum sufficient to cover any tax or other governmental charge that may be
imposed in connection with any exchange or registration of transfer of Notes.
No service charge may be imposed for any such transaction. The Trustee may not
be required to exchange or register a transfer of (i) any Notes for a period
of 15 days next preceding the first mailing of notice of redemption of Notes
to be redeemed or (ii) any Notes selected, called or being called for
redemption except, in the case of any Note where public notice has been given
that such Note is to be redeemed in part, the portion thereof not so to be
redeemed. The Notes will be issued in registered form and the registered
holder of a Note will be treated as the owner of such Note for all purposes.
DEFEASANCE
Subject to certain conditions and to the survival of certain of the
Company's obligations under the Indenture, the Company at any time may
terminate (i) all its obligations under the Notes and the Indenture and all
obligations of the Subsidiary Guarantors under the Subsidiary Guarantee and
the Indenture ("legal defeasance option") or (ii) its obligations under
certain covenants described under "Certain Covenants," the operation of the
cross acceleration provision and the judgement default provision described
under "Events of Default" above and the limitations contained in clauses (iii)
and (iv) under "--Merger and Consolidation" above ("covenant defeasance"). The
Senior Credit Agreement prohibits the legal defeasance and covenant defeasance
of the Notes as long as there are obligations outstanding under the Senior
Credit Agreement. However, no deposit of funds shall be effective to terminate
the obligations of the Company under the Notes or the Indenture prior to 123
days following any such deposit.
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The Company may exercise its legal defeasance option notwithstanding its
prior exercise of its covenant defeasance option. If the Company exercises its
legal defeasance option, payment of the Notes may not be accelerated because
of an Event of Default. If the Company exercises its covenant defeasance
option, payment of the Notes may not be accelerated because of an Event of
Default specified in clause (iv), (v), (vi), (viii) or (ix) under "Events of
Default" above or because of the failure of the Company to comply with clause
(iii) or (iv) under "--Merger and Consolidation" above.
In order to exercise either defeasance option, the Company must irrevocably
deposit in trust (the "defeasance trust") with the Trustee money or U.S.
Government Obligations for the payment of principal of and interest on the
Notes to maturity or redemption, as the case may be, and must comply with
certain other conditions, including delivery to the Trustee of an Opinion of
Counsel to the effect that holders of the Notes will not recognize income,
gain or loss for federal income tax purposes as a result of such defeasance
and will be subject to federal income tax on the same amounts, in the same
manner and at the same times as would have been the case if such defeasance
had not occurred (and, in the case of legal defeasance only, such Opinion of
Counsel must be based on a ruling of the Internal Revenue Service or other
change in applicable federal income tax law).
CONCERNING THE TRUSTEE
The Bank of New York is to be the Trustee under the Indenture and has been
appointed by the Company as Registrar and Paying Agent with regard to the
Notes. The Bank of New York is a lender under the Senior Credit Agreement.
GOVERNING LAW
The Indenture provides that it and the Notes will be governed by, and
construed in accordance with, the laws of the State of New York without giving
effect to applicable principles of conflict of laws to the extent that the
application of the law of another jurisdiction would be required thereby.
CERTAIN DEFINITIONS
"Acquired Indebtedness" means Indebtedness of a Person (i) existing at the
time such Person becomes a Restricted Subsidiary or (ii) assumed by the
Company or a Restricted Subsidiary in connection with the acquisition of
assets from such Person. Acquired Indebtedness shall be deemed to be incurred
on the date of the related acquisition of assets from any Person or the date
the acquired Person becomes a Restricted Subsidiary.
"Additional Assets" mean (i) any property or assets (other than Indebtedness
and Capital Stock) to be used by the Company or a Restricted Subsidiary in a
Related Business; or (ii) the Capital Stock of a Person that becomes a
Restricted Subsidiary as a result of the acquisition of such Capital Stock by
the Company or another Restricted Subsidiary; provided, however, that, in the
case of clause (ii), such Person is primarily engaged in a Related Business.
"Affiliate" of any specified Person means (i) any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person or (ii) any Person who is a director or
officer (a) of such Person, (b) of any Subsidiary of such Person or (c) of any
Person described in clause (i) above. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether
through the ownership of voting securities, by contract or otherwise; and the
terms "controlling" and "controlled" have meanings correlative to the
foregoing. For purposes of the covenants described under "Certain Covenants--
Limitation on Sales of Assets and Subsidiary Stock", "--Limitation on
Restricted Payments" and "--Limitation on Affiliate Transactions" only,
"Affiliate" shall also mean any beneficial owner of (x) shares and (y) rights
or warrants to purchase shares (whether or not currently exercisable)
representing in the aggregate 10% or more of the total voting power (assuming
the exercise of any such rights or warrants) of the outstanding voting shares
of Capital Stock of the Company on a fully diluted basis and any Person who
would be an Affiliate of any such beneficial owner pursuant to the first
sentence hereof.
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"Asset Disposition" means any sale, lease, transfer, issuance or other
disposition (or series of related sales, leases, transfers, issuances or
dispositions that are part of a common plan) of shares of Capital Stock of a
Restricted Subsidiary (other than directors' qualifying shares), property or
other assets (each referred to for the purposes of this definition as a
"disposition") by the Company or any of its Restricted Subsidiaries (including
any disposition by means of a merger, consolidation or similar transaction)
other than (i) a disposition by a Restricted Subsidiary to the Company or by
the Company or a Restricted Subsidiary to a Restricted Subsidiary, (ii) a
disposition of inventory in the ordinary course of business, (iii) a
disposition of obsolete or worn out equipment or equipment that is no longer
useful in the conduct of the business of the Company and its Restricted
Subsidiaries and that is disposed of in each case in the ordinary course of
business, (iv) a transfer involving assets with a Fair Market Value not in
excess of $5 million, (v) any sale of equity interests in, or Indebtedness or
other securities of, an Unrestricted Subsidiary, and (vi) a disposition of all
or substantially all of the assets of the Company in a manner permitted
pursuant to the provisions described under "--Merger and Consolidation"; and
(vii) any exchange or assignment in the ordinary course of business with any
Person engaged in a Related Business of rights to manufacture and market drugs
or other pharmaceutical products.
"Attributable Debt" in respect of a sale and leaseback transaction means, at
the time of determination, the present value (discounted at the rate of
interest implicit in such transaction, determined in accordance with GAAP) of
the obligation of the lessee for net rental payments during the remaining term
of the lease included in such sale and leaseback transaction (including any
period for which such lease has been extended or may, at the option of the
lessor, be extended).
"Average Life" means, as of the date of determination, with respect to any
Indebtedness or Preferred Stock, the quotient obtained by dividing (i) the sum
of the products of the numbers of years from the date of determination to the
dates of each successive scheduled principal payment of such Indebtedness or
redemption or similar payment with respect to Preferred Stock multiplied by
the amount of such payment by (ii) the sum of all such payments.
"Bayer A.G." shall mean Bayer A.G., a German corporation.
"Board of Directors" means either the Board of Directors of the Company or
any committee of such Board of Directors duly authorized to act hereunder.
"Business Day" means a day other than a Saturday, Sunday or other day on
which commercial banks in New York City are authorized or required by law to
close.
"Capital Stock" means (i) any and all shares, interests, participations or
other equivalents of or interests in (however designated) corporate stock,
including, without limitation, shares of preferred or preference stock, (ii)
all partnership interests (whether general or limited) in any Person which is
a partnership, (iii) all membership interests or limited liability company
interests in any limited liability company, and (iv) all equity or ownership
interests in any Person of any other type.
"Capitalized Lease Obligations" means, without duplication, all monetary
obligations of the Company or any of its Restricted Subsidiaries under any
leasing or similar arrangement which, in accordance with GAAP, would be
classified as capitalized leases and, for purposes of the Indenture, the
amount of such obligations shall be the capitalized amount thereof, determined
in accordance with GAAP, and the stated maturity thereof shall be the date of
the last payment of rent or any other amount due under such lease prior to the
first date upon which such lease may be terminated by the lessee without
payment of a penalty.
"Change of Control" means (i) any sale, lease or other transfer (other than
a bona fide pledge of assets to secure Indebtedness incurred in accordance
with the Indenture or under the Senior Credit Agreement) by the Company or any
Restricted Subsidiary of all or substantially all of the assets of the Company
to any Person as an entirety or substantially as an entirety in one
transaction or a series of related transactions; (ii) the Company consolidates
or merges with or into another Person pursuant to a transaction in which the
outstanding Voting Shares of the Company are changed into or exchanged for
cash, securities or other property, other than any such
73
transaction where (a) the outstanding Voting Shares of the Company are changed
into or exchanged for Voting Shares (other than Disqualified Stock) of the
surviving corporation and (b) the holders of the Voting Shares of the Company
immediately prior to such transaction own, directly or indirectly, not less
than a majority of the Voting Shares of the surviving corporation immediately
after such transaction; (iii) a "person" or "group" (within the meaning of
Section 13(d) or 14(d)(2) of the Exchange Act), other than a Permitted Holder
or a group consisting solely of Permitted Holders, is or becomes the
"beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange
Act) of more than 35% of all Voting Shares of the Company then outstanding;
(iv) during any period of two consecutive years, individuals who at the
beginning of such period constituted the Board of Directors of the Company
(together with any new directors whose election by such Board of Directors or
whose nomination for election by the shareholders of the Company was approved
by a vote of 66 2/3% of the directors then still in office who were either
directors at the beginning of such period or whose election or nomination for
election was previously so approved) cease for any reason to constitute a
majority of the Board of Directors of the Company then in office; or (v) the
shareholders of the Company shall approve any plan or proposal for the
liquidation or dissolution of the Company.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commission" means the Securities and Exchange Commission.
"Consolidated Cash Flow" for any period means the Consolidated Net Income of
the Company and its consolidated Restricted Subsidiaries for such period, plus
the following to the extent deducted in calculating such Consolidated Net
Income: (i) income tax expense; (ii) Consolidated Interest Expense; (iii)
depreciation expense; (iv) amortization expense; and (v) any other non-cash
expenses, in each case for such period.
"Consolidated Coverage Ratio," as of any date of determination, means the
ratio of (i) the aggregate amount of Consolidated Cash Flow for the period
consisting of the most recent four consecutive fiscal quarters ending prior to
the date of such determination to (ii) Consolidated Interest Expense for such
period; provided, however, that (A) if the Company or any of its Restricted
Subsidiaries has incurred any Indebtedness since the beginning of such period
that remains outstanding or if the transaction giving rise to the need to
calculate the Consolidated Coverage Ratio is an incurrence of Indebtedness, or
both, Consolidated Cash Flow and Consolidated Interest Expense for such period
shall be calculated after giving effect on a pro forma basis to such
Indebtedness as if such Indebtedness had been incurred on the first day of
such period and the discharge of any other Indebtedness repaid, repurchased,
defeased or otherwise discharged with the proceeds of such new Indebtedness as
if such discharge had occurred on the first day of such period, (B) if since
the beginning of such period the Company or any of its Restricted Subsidiaries
shall have made any Asset Disposition, Consolidated Cash Flow for such period
shall be reduced by an amount equal to the Consolidated Cash Flow (if
positive) attributable to the assets which are the subject of such Asset
Disposition for such period or increased by an amount equal to the
Consolidated Cash Flow (if negative) attributable thereto for such period, and
Consolidated Interest Expense for such period shall be reduced by an amount
equal to the Consolidated Interest Expense attributable to any Indebtedness of
the Company or any of its Restricted Subsidiaries repaid, repurchased,
defeased or otherwise discharged with respect to the Company and its
continuing Restricted Subsidiaries in connection with such Asset Disposition
for such period (or, if the Capital Stock of any Restricted Subsidiary of the
Company is sold, the Consolidated Interest Expense for such period directly
attributable to the Indebtedness of such Restricted Subsidiary to the extent
the Company and its continuing Restricted Subsidiaries are no longer liable
for such Indebtedness after such sale), (C) if since the beginning of such
period the Company or any of its Restricted Subsidiaries (by merger or
otherwise) shall have made an Investment in any Restricted Subsidiary of the
Company (or any Person which becomes a Restricted Subsidiary of the Company)
or an acquisition of assets, including any Investment in a Restricted
Subsidiary of the Company or any acquisition of assets occurring in connection
with a transaction causing a calculation to be made hereunder, which
constitutes all or substantially all of an operating unit of a business,
Consolidated Cash Flow and Consolidated Interest Expense for such period shall
be calculated after giving pro forma effect thereto (including the incurrence
of any Indebtedness) as if such Investment or acquisition occurred on the
first day of such period, and (D) if since the beginning of such period any
Person (that subsequently became a Restricted Subsidiary of the Company or was
merged with or into the
74
Company or any Restricted Subsidiary of the Company since the beginning of
such period) shall have made any Asset Disposition or any Investment or
acquisition of assets that would have required an adjustment pursuant to
clause (B) or (C) above if made by the Company or a Restricted Subsidiary of
the Company during such period, Consolidated Cash Flow and Consolidated
Interest Expense for such period shall be calculated after giving pro forma
effect thereto as if such Asset Disposition, Investment or acquisition
occurred on the first day of such period. For purposes of this definition,
whenever pro forma effect is to be given to an acquisition of assets, the
amount of income or earnings relating thereto and the amount of Consolidated
Interest Expense associated with any Indebtedness incurred in connection
therewith, the pro forma calculations shall be determined in good faith by a
responsible financial or accounting Officer of the Company. If any
Indebtedness bears a floating rate of interest and is being given pro forma
effect, the interest expense on such Indebtedness shall be calculated as if
the rate in effect on the date of determination had been the applicable rate
for the entire period (taking into account any Interest Rate Agreement
applicable to such Indebtedness if such Interest Rate Agreement has a
remaining term in excess of 12 months).
"Consolidated Interest Expense" means, for any period, the total interest
expense of the Company and its Restricted Subsidiaries, plus, to the extent
not included in such interest expense and without duplication, (i) interest
expense attributable to Capitalized Lease Obligations, (ii) amortization of
debt discount and debt issuance cost, (iii) capitalized interest, (iv) non-
cash interest expense, (v) commissions, discounts and other fees and charges
owed with respect to letters of credit and bankers' acceptance financing, (vi)
interest actually paid by the Company or any such Restricted Subsidiary under
any Guarantee of Indebtedness or other obligation of any other Person, (vii)
net costs associated with Interest Rate Agreements (including amortization of
fees), and (viii) the product of (a) all Preferred Stock dividends in respect
of all Preferred Stock of Restricted Subsidiaries of the Company and
Disqualified Capital Stock of the Company held by Persons other than the
Company or a Restricted Subsidiary multiplied by (b) a fraction, the numerator
of which is one and the denominator of which is one minus the then current
combined federal, state and local statutory tax rate of the Company, expressed
as a decimal, in each case, determined on a consolidated basis in accordance
with GAAP.
"Consolidated Net Income" means, for any period, the net income (loss) of
the Company and its consolidated Restricted Subsidiaries; provided, however,
that there shall not be included in such Consolidated Net Income: (i) any net
income (loss) of any Person if such Person is not a Restricted Subsidiary,
except that subject to the limitations contained in clause (iv) below, the
Company's equity in the net income of any such Person for such period shall be
included in such Consolidated Net Income up to the aggregate amount of cash
actually distributed by such Person during such period to the Company or a
Restricted Subsidiary as a dividend or other distribution (subject, in the
case of a dividend or other distribution to a Restricted Subsidiary, to the
limitations contained in clause (iii) below); (ii) any net income (loss) of
any person acquired by the Company or a Restricted Subsidiary in a pooling of
interests transaction for any period prior to the date of such acquisition;
(iii) any net income (loss) of any Restricted Subsidiary if such Restricted
Subsidiary is subject to restrictions, directly or indirectly, on the payment
of dividends or the making of distributions by such Restricted Subsidiary,
directly or indirectly, to the Company, except that subject to the limitations
contained in (iv) below, the Company's equity in the net income of any such
Restricted Subsidiary for such period shall be included in such Consolidated
Net Income up to the aggregate amount of cash that could have been distributed
by such Restricted Subsidiary during such period to the Company or another
Restricted Subsidiary as a dividend (subject, in the case of a dividend that
could have been made to another Restricted Subsidiary, to the limitation
contained in this clause); (iv) any gain or loss realized upon the sale or
other disposition of any assets of the Company or its consolidated Restricted
Subsidiaries which are not sold or otherwise disposed of in the ordinary
course of business and any gain or loss realized upon the sale or other
disposition of any Capital Stock of any Person; (v) any extraordinary gain or
loss; (vi) the cumulative effect of a change in accounting principles; and
(vii) any loss resulting from a charge for acquired in-process research and
development expenses incurred in connection with the acquisition of any other
Person permitted under the Indenture.
"Credit Agent" means The Chase Manhattan Bank, in its capacity as issuing
bank, administrative agent and collateral agent for the lenders party to the
Senior Credit Agreement, or any successor or successors thereto.
75
"Default" means any event that is or, with the passage of time or the giving
of notice or both, would be an Event of Default.
"Disqualified Capital Stock" means, with respect to any Person, any Capital
Stock of such Person which by its terms (or by the terms of any security into
which it is convertible or for which it is exchangeable) or upon the happening
of any event (i) matures or is mandatorily redeemable pursuant to a sinking
fund obligation or otherwise, (ii) is convertible or exchangeable for
Indebtedness or Disqualified Capital Stock or (iii) is redeemable at the
option of the holder thereof, in whole or in part, in each case on or prior to
the first anniversary of the final Stated Maturity of the Notes.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Fair Market Value" means, with respect to any asset or property, the sale
value that would be obtained in an arm's-length transaction between an
informed and willing seller under no compulsion to sell and an informed and
willing buyer under no compulsion to buy as determined by the Board of
Directors in good faith and evidenced by a resolution of the Board of
Directors.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect from time to time, including those set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as approved by a significant segment of the accounting
profession. All ratios and computations based on GAAP contained in the
Indenture shall be computed in conformity with GAAP as in effect on the date
of the Indenture.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness of any other Person and
any obligation, direct or indirect, contingent or otherwise, of such Person
(i) to purchase or pay (or advance or supply funds for the purchase or payment
of) such Indebtedness or other obligation of any other Person (whether arising
by virtue of partnership arrangements, or by agreement to keep-well, to
purchase assets, goods, securities or services, to take-or-pay, or to maintain
financial statement conditions or otherwise) or (ii) entered into for purposes
of assuring in any other manner the obligee of such Indebtedness of the
payment thereof or to protect such obligee against loss in respect thereof (in
whole or in part); provided, however, that the term "Guarantee" shall not
include endorsements for collection or deposit in the ordinary course of
business. The term "Guarantee" used as a verb has a corresponding meaning.
"Guarantor" means (i) each of the Company's Restricted Subsidiaries existing
on the date hereof and (ii) each other Person that executes a Guarantee of the
obligations of the Company under the Notes and the Indenture from time to
time, and their respective successors and assigns; provided, however, that
"Guarantor" shall not include any Person that is released from its Guarantee
of the obligations of the Company under the Notes and the Indenture.
"Indebtedness" means, with respect to any Person on any date of
determination (without duplication), (i) the principal of and premium (if any)
in respect of Indebtedness of such Person for borrowed money, (ii) the
principal of and premium (if any) in respect of obligations of such Person
evidenced by bonds, debentures, notes or other similar instruments, (iii) all
obligations of such Person in respect of letters of credit or other similar
instruments (including reimbursement obligations with respect thereto) (other
than obligations with respect to letters of credit securing obligations (other
than obligations described in clauses (i), (ii) and (v)) entered into in the
ordinary course of business of such Person to the extent that such letters of
credit are not drawn upon or, if and to the extent drawn upon, such drawing is
reimbursed no later than the third business day following receipt by such
Person of a demand for reimbursement following payment on the letter of
credit), (iv) all obligations of
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such Person to pay the deferred and unpaid purchase price of property or
services (other than accounts payable to trade creditors arising in the
ordinary course of business), which purchase price is due more than six months
after the date of placing such property in service or taking delivery and
title thereto or the completion of such services, (v) all Capitalized Lease
Obligations of such Person, (vi) all Indebtedness of other Persons secured by
a Lien on any asset of such Person, whether or not such Indebtedness is
assumed by such Person; provided, however, that the amount of Indebtedness of
such Person shall be the lesser of (A) the Fair Market Value of such asset at
such date of determination or (B) the amount of such Indebtedness of such
other Persons, (vii) all Indebtedness of other Persons to the extent
Guaranteed by such Person, (viii) the amount of all obligations of such Person
with respect to the redemption, repayment or other repurchase of any
Disqualified Capital Stock or, with respect to any Restricted Subsidiary of
the Company, any Preferred Stock (but excluding, in each case, any accrued
dividends), and (ix) to the extent not otherwise included in this definition,
obligations of such Person under Interest Rate Agreements. The amount of
Indebtedness of any Person at any date shall be the outstanding balance at
such date of all unconditional obligations as described above and the
liability, upon the occurrence of the contingency giving rise to the
obligation, of any contingent obligations at such date.
"Indenture" means the Indenture as amended from time to time.
"Interest Rate Agreement" means with respect to any Person any interest rate
protection agreement, interest rate future agreement, interest rate option
agreement, interest rate swap agreement, interest rate cap agreement, interest
rate collar agreement, interest rate hedge agreement or other similar
agreement or arrangement as to which such Person is party or a beneficiary.
"Investment" in any Person means any direct or indirect advance, loan (other
than advances to customers in the ordinary course of business that are
recorded as accounts receivable on the balance sheet of such Person) or other
extension of credit (including by way of Guarantee or similar arrangement, but
excluding any debt or extension of credit represented by a bank deposit other
than a time deposit) or capital contribution to (by means of any transfer of
cash or other property to others or any payment for property or services for
the account or use of others), or any purchase or acquisition of Capital
Stock, Indebtedness or other similar instruments issued by such Person.
"Issue Date" means the date on which the Notes are originally issued.
"Lien" means any security interest, mortgage, pledge, hypothecation,
assignment, deposit arrangement, encumbrance, lien (statutory or otherwise),
charge against or interest in property, or any filing or recording of any
instrument or document in respect of the foregoing, to secure payment of a
debt or performance of an obligation or other priority or preferential
arrangement of any kind or nature whatsoever.
"Material Subsidiary" means (i) any Subsidiary of the Company which is a
"significant subsidiary" as defined in Rule 1-02(w) of Regulation S-X under
the Securities Act and the Exchange Act (as such Regulation is in effect on
the date hereof), and (ii) any other Subsidiary of the Company which is
material to the business, earnings, prospects, assets or condition, financial
or otherwise, of the Company and its Subsidiaries taken as a whole.
"Net Available Cash" from an Asset Disposition means cash payments received
(including any cash payments received by way of deferred payment of principal
pursuant to a note or installment receivable or otherwise, but only as and
when received, but excluding any other consideration received in the form of
assumption by the acquiring Person of Indebtedness or other obligations
relating to the properties or assets that are the subject of such Asset
Disposition or received in any other noncash form) therefrom, in each case net
of (i) all legal, title and recording tax expenses, commissions and other fees
and expenses incurred, and all federal, state, foreign and local taxes
required to be paid or accrued as a liability under GAAP, as a consequence of
such Asset Disposition, (ii) all payments made on any Indebtedness which is
secured by any assets subject to such Asset Disposition, in accordance with
the terms of any Lien upon such assets, or which must by its terms, or in
order to obtain a necessary consent to such Asset Disposition, or by
applicable law, be repaid out of the proceeds
77
from such Asset Disposition, (iii) all distributions and other payments
required to be made to any Person owning a beneficial interest in assets
subject to sale or minority interest holders in Subsidiaries or joint ventures
as a result of such Asset Disposition and (iv) the deduction of appropriate
amounts to be provided by the seller as a reserve, in accordance with GAAP,
against any liabilities associated with the assets disposed of in such Asset
Disposition and retained by the Company or any Restricted Subsidiary of the
Company after such Asset Disposition.
"Net Cash Proceeds," with respect to any issuance or sale of Capital Stock,
means the cash proceeds of such issuance or sale net of attorneys' fees,
accountants' fees, underwriters' or placement agents' fees, discounts or
commissions and brokerage, consultant and other fees actually incurred in
connection with such issuance or sale and net of taxes paid or payable as a
result of such issuance or sale.
"Officer" means any senior executive officer, the chief financial officer,
the principal accounting officer, the Controller, the Treasurer, the Secretary
or the Assistant Secretary of the Company.
"Officers' Certificate" means a certificate signed by any senior executive
officer and by the chief financial officer, the principal accounting officer,
the Controller, the Treasurer or the Secretary or any Assistant Secretary of
the Company and delivered to the Trustee. Each such certificate shall comply
with Section 314 of the Trust Indenture Act and include the statements
provided for in the Indenture.
"Opinion of Counsel" means an opinion in writing signed by legal counsel who
may be an employee of or counsel to the Company or who may be other counsel
satisfactory to the Trustee. Each such opinion shall comply with Section 314
of the Trust Indenture Act and include the statements provided for in the
Indenture, if and to the extent required thereby.
"Permitted Foreign Company" means (a) any corporation, business trust, joint
venture, association, company or partnership formed under the laws of a
country (or any political subdivision thereof) other than the United States,
engaged primarily in any segment of the pharmaceutical or health-care industry
or ancillary thereto and at least 50% of the equity interest of which is held,
directly or indirectly, by the Company and Bayer A.G. (provided that, if
applicable local law would not permit 50% of the equity interest in such an
entity to be held by the Company and Bayer A.G., such percentage may be as low
as 49% if the Company and Bayer A.G. otherwise Control the applicable entity),
(b) any subsidiary of a Permitted Foreign Company described in clause (a)
above and (c) any wholly owned foreign subsidiary the only material assets of
which are securities of Permitted Foreign Companies described in clause (a)
above.
"Permitted Holders" means (a)(i) Marvin H. Schein; Trust established by
Marvin H. Schein under trust agreement dated September 9, 1994 (including
trustee thereunder); Trust established by Marvin H. Schein under trust
agreement dated December 31, 1993 (including trustee thereunder); Trust
established by Pamela Schein under trust agreement dated October 26, 1994
(including trustee thereunder); trust established by the trustees under
article fourth of the Will of Jacob M. Schein for the benefit of Pamela Schein
and her issue under trust agreement dated September 29, 1994 (including
trustee thereunder); Pamela Joseph; Trust established by Pamela Joseph under
trust agreement dated September 28, 1994 (including trustee thereunder);
Martin Sperber; Trust established by Martin Sperber under trust agreement
dated December 31, 1993 (including trustee thereunder); Trust established by
Martin Sperber under trust agreement dated April 28, 1995 (including trustee
thereunder); Stanley M. Bergman; Trust established by Stanley M. Bergman under
trust agreement dated April 28, 1995 (including trustee thereunder); Trust
established by Stanley M. Bergman under trust agreement dated April 14, 1995
(including trustee thereunder); and Voting Trustee under Voting Trust
Agreement dated September 30, 1994 (including trustee thereunder), (ii) any
individual forming part of the senior management of the Company on the date of
this Indenture, (iii) any trust for the benefit of any of the foregoing and/or
any member of their immediate families and (iv) the estate or personal
representative of any of the foregoing, (b) any employee benefit plan (or
related trust) for the benefit of the employees of the Company and its
Restricted Subsidiaries and (c) Bayer A.G. and any of its subsidiaries.
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"Permitted Investment" means an Investment by the Company or any of its
Subsidiaries in (i) a Restricted Subsidiary of the Company or a Person which
will, upon making such Investment, become a Restricted Subsidiary; provided,
however, that the primary business of such Subsidiary is a Related Business;
(ii) another Person if as a result of such Investment such other Person is
merged or consolidated with or into, or transfers or conveys all or
substantially all its assets to, the Company or a Subsidiary of the Company;
provided, however, that such Person's primary business is a Related Business;
(iii) Temporary Cash Investments; (iv) receivables owing to the Company or any
of its Subsidiaries, if created or acquired in the ordinary course of business
and payable or dischargeable in accordance with customary trade terms; (v)
payroll, travel and similar advances to cover matters that are expected at the
time of such advances ultimately to be treated as expenses for accounting
purposes and that are made in the ordinary course of business; (vi) loans or
advances to employees (other than those referred to in clause (xi) below) made
in the ordinary course of business not in excess of $2.5 million outstanding
at any time; (vii) stock, obligations or securities received in settlement of
debts created in the ordinary course of business and owing to the Company or
any of its Subsidiaries or in satisfaction of judgments or claims; (viii)
Interest Rate Agreements which are entered into by the Company for bona fide
hedging purposes (as determined in good faith by the Board of Directors or
senior management of the Company) with respect to Indebtedness of the Company
incurred without violation of the Indenture or to customary commercial
transactions of the Company entered into in the ordinary course of business;
(ix) any Investment (other than a Temporary Cash Investment) evidenced by
securities or other assets received in connection with an Asset Disposition
pursuant to the "Limitations on Sales of Assets and Subsidiary Stock"
covenant; (x) Investments, the payment for which consists exclusively of
Equity Interests (exclusive of Disqualified Capital Stock) in the Company; or
(xi) loans to employees made in connection with the exercise by them of
options to purchase shares of the common stock of the Company, provided that
the proceeds of such loans are used to purchase such shares and that such
loans are secured by a pledge of such shares so purchased.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization,
government or any agency or political subdivision hereof or any other entity.
"Preferred Stock," as applied to the Capital Stock of any corporation, means
Capital Stock of any class or classes (however designated) which is preferred
as to the payment of dividends, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such corporation, over
shares of Capital Stock of any other class of such corporation.
"principal" of a Note means the principal of the Note plus the premium, if
any, payable on the Note which is due or overdue or is to become due at the
relevant time.
"property" of any Person means all types of real, personal, tangible,
intangible or mixed property owned by such Person whether or not included in
the most recent consolidated balance sheet of such Person under GAAP.
"Refinancing Indebtedness" means Indebtedness issued in exchange for, or the
proceeds of which are used to extend, refinance, renew, replace or refund any
Indebtedness permitted to be incurred under the "Limitations on Indebtedness"
covenant.
"Related Business" means any segment of the pharmaceutical or health-care
industry or ancillary thereto.
"Representative" for any issue of Indebtedness shall mean the Person acting
as agent, trustee or in a similar representative capacity for the holders of
such Indebtedness, provided that if, and for so long as, any issue of
Indebtedness lacks such a representative, then the Representative for such
issue of Indebtedness shall at all such times constitute the holders of a
majority in outstanding principal amount of the respective issue of
Indebtedness.
"Restricted Subsidiary" shall mean any Subsidiary other than an Unrestricted
Subsidiary.
"Secured Indebtedness" means any Indebtedness of the Company secured by a
Lien.
"Securities Act" means the Securities Act of 1933, as amended.
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"Senior Credit Agreement" means, collectively, the Senior Credit Agreement,
dated as of September 5, 1995, by and among the Company, the lenders named
therein, and The Chase Manhattan Bank (formerly Chemical Bank) as Credit Agent
for the lenders, including any related notes, guarantees, collateral
documents, instruments and agreements executed in connection therewith, as
such credit agreement and/or related documents may be amended, restated,
supplemented, renewed, replaced or otherwise modified from time to time
whether or not with the same agent or lenders and irrespective of any changes
in the terms and conditions thereof. Without limiting the generality of the
foregoing, the term "Senior Credit Agreement" shall include any amendment,
amendment and restatement, renewal, extension, restructuring, supplement or
modification to the Senior Credit Agreement and all refundings, refinancing
and replacements of any facility provided for therein, including any agreement
or agreements, (i) extending the maturity of any Indebtedness incurred
thereunder or contemplated thereby, (ii) adding or deleting borrowers or
guarantors thereunder, or (iii) increasing the amount of Indebtedness incurred
thereunder or available to be borrowed thereunder to the extent permitted
under this Indenture.
"Senior Indebtedness" means all Indebtedness of the Company other than
Subordinated Indebtedness.
"Stated Maturity" means, with respect to any security, the date specified in
such security as the fixed date on which the payment of principal of such
security is due and payable, including pursuant to any mandatory redemption
provision.
"Subordinated Indebtedness" means any Indebtedness of the Company (whether
outstanding on the Issue Date or thereafter incurred) that is subordinate or
junior in right of payment to the Notes.
"Subsidiary" of any Person means any corporation, association, partnership
or other business entity (a) of which more than 50% of the total voting power
of shares of Capital Stock or other interests (including partnership
interests) entitled (without regard to the occurrence of any contingency) to
vote in the election of directors, managers or trustees thereof is at the time
owned or controlled, directly or indirectly, by (i) such Person, (ii) such
Person and one or more Subsidiaries of such Person or (iii) one or more
Subsidiaries of such Person or (b) that is or would otherwise be treated on a
consolidated basis with such Person under, and in accordance with, GAAP.
Unless otherwise specified herein, each reference to a Subsidiary shall refer
to a Subsidiary of the Company.
"Temporary Cash Investments" means any of the following: (i) any Investment
in direct obligations of the United States of America or any agency thereof or
obligations Guaranteed by the United States of America or any agency thereof,
(ii) Investments in time deposit accounts, certificates of deposit and money
market deposits maturing within 180 days of the date of acquisition thereof
issued by a bank or trust company which is organized under the laws of the
United States of America, any state thereof or any foreign country recognized
by the United States of America having capital, surplus and undivided profits
aggregating in excess of $500 million (or the foreign currency equivalent
thereof) and whose long-term debt, or whose parent holding company's long-term
debt, is rated "A" (or such similar equivalent rating) or higher by at least
one nationally recognized statistical rating organization (as defined in Rule
436 under the Securities Act), (iii) repurchase obligations with a term of not
more than seven days for underlying securities of the types described in
clause (i) above entered into with a bank meeting the qualifications described
in clause (ii) above, or (iv) Investments in commercial paper, maturing not
more than 180 days after the date of acquisition, issued by a corporation
(other than an Affiliate of the Company) organized and in existence under the
laws of the United States of America or any foreign country recognized by the
United States of America with a rating at the time as of which any investment
therein is made of "P-1" (or higher) according to Moody's Investors Service,
Inc. or "A-1" (or higher) according to Standard and Poor's Ratings Group.
"Trust Indenture Act" means the Trust Indenture Act of 1939, as amended.
"Trust Officer" means the Chairman of the Board, President or any other
officer or assistant officer of the Trustee assigned by the Trustee to
administer its corporate trust matters.
"U.S. Government Obligations" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States
of America (including any agency or instrumentality thereof) for the
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payment of which the full faith and credit of the United States of America is
pledged and which are not callable or redeemable at the issuer's option.
"Unrestricted Subsidiary" means (i) Schein Pharmaceutical (Netherlands)
B.V., Schein Pharmaceutical (Bermuda) Ltd., and Schein Farmaceutica de Peru,
and (ii) any Subsidiary (other than a Subsidiary which would constitute a
Material Subsidiary) that at the time of determination shall have been
designated an Unrestricted Subsidiary by the Board of Directors of the Company
in the manner provided below and which remains so designated at the time of
determination. The Board of Directors of the Company may, by a Board
resolution delivered to the Trustee, designate any Restricted Subsidiary of
the Company (other than a Material Subsidiary) (including any newly acquired
or newly formed Subsidiary of the Company) to be an Unrestricted Subsidiary
unless such Restricted Subsidiary owns any Capital Stock of or holds any Lien
on any property of, the Company or any Restricted Subsidiary, and provided
that no Default or Event of Default shall have occurred and be continuing at
the time of or after giving effect to such designation. The Board of Directors
of the Company may designate any Unrestricted Subsidiary to be a Restricted
Subsidiary of the Company, provided that (i) no Default or Event of Default
shall have occurred and be continuing at the time of or after giving effect to
such designation and (ii) all Liens and Indebtedness of such Unrestricted
Subsidiary outstanding immediately following such designation would, if
incurred at such time, have been permitted to be incurred for all purposes of
the Indenture. Any designation by the Board of Directors of the Company
pursuant to the Indenture shall be evidenced to the Trustee by promptly filing
with the Trustee a copy of the Board resolutions giving effect to such
designation and an Officer's Certificate certifying that such designation
complied with the foregoing provisions.
"voting shares" of a Person means all classes of Capital Stock of such
Person then outstanding and normally entitled to vote in the election of
directors or managers.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
or Disqualified Capital Stock, as the case may be, at any date, the number of
years obtained by dividing (a) the sum of the products obtained by multiplying
(x) the amount of each then remaining installment, sinking fund, serial
maturity or other required payments of principal, including payment at final
maturity, in respect thereof, by (y) the number of years (calculated to the
nearest one-twelfth) that will elapse between such date and the making of such
payment, by (b) the then outstanding principal amount or liquidation
preference, as applicable, of such Indebtedness or Disqualified Stock, as the
case may be.
BOOK-ENTRY; DELIVERY AND FORM
Except as set forth below, the Notes will initially be issued in the form of
one or more registered notes in global form without coupons (each a "Global
Note"). Each Global Note will be deposited on the date of the closing of the
sale of the Notes (the "Closing Date") with, or on behalf of, The Depository
Trust Company (the "Depository") and registered in the name of Cede & Co., as
nominee of the Depository, or will remain in the custody of the Trustee
pursuant to the FAST Balance Certificate Agreement between the Depository and
the Trustee. Interests in the Global Note will be available for purchase only
by "qualified institutional buyers," as defined in Rule 144A under the
Securities Act ("QIBs").
Notes that were (i) originally issued to or transferred to institutional
"accredited investors," as defined in Rule 501(a) (1), (3) or (7) under the
Securities Act ("Institutional Accredited Investors"), who are not QIBs or to
any other persons who are not QIBs or (ii) issued as described below under
"Certificated Securities," will be issued in registered definitive form
without coupons (the "Certificated Securities"). Upon the transfer to a QIB of
Certificated Securities, such Certificated Securities may, unless the Global
Note has previously been exchanged for Certificated Securities, be exchanged
for an interest in the Global Note representing the principal amount of Notes
being transferred. For a description of the restrictions on the transfer of
Certificated Securities, see "Transfer Restrictions."
The Depository has advised the Company that it is (i) a limited purpose
trust company organized under the laws of the State of New York, (ii) a member
of the Federal Reserve System, (iii) a "clearing corporation"
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within the meaning of the Uniform Commercial Code, as amended, and (iv) a
"Clearing Agency" registered pursuant to Section 17A of the Exchange Act. The
Depository was created to hold securities for its participants (collectively,
the "Participants") and facilitates the clearance and settlement of securities
transactions between Participants through electronic book-entry changes to the
accounts of its Participants, thereby eliminating the need for physical
transfer and delivery of certificates. The Depository's Participants include
securities brokers and dealers (including the Initial Purchaser), banks and
trust companies, clearing corporations and certain other organizations. Access
to the Depository's system is also available to other entities such as banks,
brokers, dealers and trust companies (collectively, the "Indirect
Participants") that clear through or maintain a custodial relationship with a
Participant, either directly or indirectly. QIBs may elect to hold Notes
purchased by them through the Depository. QIBs who are not Participants may
beneficially own securities held by or on behalf of the Depository only
through Participants or Indirect Participants. Persons that are not QIBs may
not hold Notes through the Depository.
The Company expects that pursuant to procedures established by the
Depository (i) upon deposit of the Global Notes, the Depository will credit
the accounts of Participants designated by the Initial Purchaser with an
interest in the Global Note and (ii) ownership of the Notes will be shown on,
and the transfer of ownership thereof will be effected only through, records
maintained by the Depository (with respect to the interest of Participants),
the Participants and the Indirect Participants. The laws of some states
require that certain persons take physical delivery in definitive form of
securities that they own and that security interests in negotiable instruments
can only be perfected by delivery of certificates representing the
instruments. Consequently, the ability to transfer Notes or to pledge the
Notes as collateral will be limited to such extent. For certain other
restrictions on the transferability of the Notes, see "Transfer Restrictions."
So long as the Depository or its nominee is the registered owner of the
Global Note, the Depository or such nominee, as the case may be, will be
considered the sole owner or Holder of the Notes represented by the Global
Note for all purposes under the Indenture. Except as provided below, owners of
beneficial interests in a Global Note will not be entitled to have Notes
represented by such Global Note registered in their names, will not receive or
be entitled to receive physical delivery of Certificated Securities, and will
not be considered the owners or holders thereof under the Indenture for any
purpose, including with respect to giving of any directions, instruction or
approval to the Trustee thereunder. As a result, the ability of a person
having a beneficial interest in Notes represented by a Global Note to pledge
such interest to persons or entities that do not participate in the
Depository's system or to otherwise take action with respect to such interest,
may be affected by the lack of a physical certificate evidencing such
interest.
Accordingly, each QIB owning a beneficial interest in a Global Note must
rely on the procedures of the Depository and, if such QIB is not a Participant
or an Indirect Participant, on the procedures of the Participant through which
such QIB owns its interest, to exercise any rights of a Holder under the
Indenture or such Global Note. The Company understands that under existing
industry practice, in the event the Company requests any action of holders or
a QIB that is an owner of a beneficial interest in a Global Note desires to
take any action that the Depository, as the Holder of such Global Note, is
entitled to take, the Depository would authorize the Participants to take such
action and the Participant would authorize QIBs owning through such
Participants to take such action or would otherwise act upon the instruction
of such QIBs. Neither the Company nor the Trustee will have any responsibility
or liability for any aspect of the records relating to or payments made on
account of Notes by the Depository, or for maintaining, supervising or
reviewing any records of the Depository relating to such Notes.
Payments with respect to the principal of, premium, if any, and interest on
any Notes represented by a Global Note registered in the name of the
Depository or its nominee on the applicable record date will be payable by the
Paying Agent to or at the direction of the Depository or its nominee in its
capacity as the registered Holder of the Global Note representing such Notes
under the Indenture. Under the terms of the Indenture, the Company and the
Trustee may treat the persons in whose names the Notes, including the Global
Notes, are registered as the owners thereof for the purpose of receiving such
payment and for any and all other purposes whatsoever. Consequently, neither
the Company nor the Trustee nor the Paying Agent (if other than the Trustee)
has or will have
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any responsibility or liability for the payment of such amounts to beneficial
owners of Notes (including principal, premium, if any, and interest), or to
immediately credit the accounts of the relevant Participants with such
payment, in amounts proportionate to their respective holdings in principal
amount of beneficial interest in the Global Note as shown on the records of
the Depository. Payments by the Participants and the Indirect Participants to
the beneficial owners of Notes will be governed by standing instructions and
customary practice and will be the responsibility of the Participants or the
Indirect Participants.
CERTIFICATED SECURITIES
If (i) the Company notifies the Trustee in writing that the Depository is no
longer willing or able to act as a depository and the Company is unable to
locate a qualified successor within 90 days, (ii) the Company, at its option,
notifies the Trustee in writing that it elects to cause the issuance of Notes
in definitive form under the Indenture or (iii) upon the occurrence of certain
other events, then, upon surrender by the Depository of its Global Notes,
Certificated Securities will be issued to each person that the Depository
identifies as the beneficial owner of the Notes represented by the Global
Note. Upon any such issuance, the Trustee is required to register such
Certificated Securities in the name of such person or persons (or the nominee
of any thereof), and cause the same to be delivered thereto.
Neither the Company nor the Trustee shall be liable for any delay by the
Depository or any Participant or Indirect Participant in identifying the
beneficial owners of the related Notes and each such person may conclusively
rely on, and shall be protected in relying on, instructions from the
Depository for all purposes (including with respect to the registration and
delivery, and the respective principal amounts, of the Notes to be issued).
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EXCHANGE AND REGISTRATION RIGHTS AGREEMENT
The Company and the Initial Purchaser will enter into an exchange and
registration rights agreement (the "Exchange and Registration Rights
Agreement") prior to or concurrently with the issuance of the Notes offered
hereby. Pursuant to the Exchange and Registration Rights Agreement, the
Company will agree (i) to file with the Commission on or prior to 45 days
after the date of issuance of the Notes (the "Issue Date") a registration
statement (the "Exchange Offer Registration Statement"), with respect to an
offer to exchange the Notes (the "Registered Exchange Offer") for senior notes
of the Company with terms identical in all material respects to those of the
Notes ("Exchange Notes") and (ii) to use commercially reasonable efforts to
cause the Exchange Offer Registration Statement to be declared effective under
the Securities Act within the earlier of (A) 90 days after the Issue Date or
(B) 30 days after the consummation of the initial public offering of the
Company's Common Stock. Upon the effectiveness of the Exchange Offer
Registration Statement, the Company will commence the Registered Exchange
Offer to holders of the Notes who are not prohibited by any law or policy of
the Commission from participating in the Registered Exchange Offer. The
Company will keep the Exchange Offer open for not less than 30 days (or
longer, if required by applicable law) after the date notice of the Exchange
Offer is mailed to the holders of the Notes. If (i) any change in law or
applicable interpretations of the staff of the Commission does not permit the
Company to effect the Registered Exchange Offer as contemplated thereby or
(ii) the Initial Purchaser, as a holder of Notes, (A) is not eligible to
participate in the Exchange Offer or (B) participates in the Exchange Offer
and does not receive freely transferable Exchange Notes in exchange for
tendered Notes, the Company will file with the Commission and use commercially
reasonable efforts to cause to be declared effective on or prior to the latter
of (x) 120 days after the Issue Date or (y) 45 days after the publication of
the change in law or interpretation, a registration statement on an
appropriate form under the Securities Act relating to the offer and sale of
the Notes by the holders thereof, from time to time, in accordance with such
registration statement and Rule 415 under the Securities Act (the "Shelf
Registration Statement").
The Company will use commercially reasonable efforts to have the Exchange
Offer Registration Statement or, if applicable, a Shelf Registration Statement
(each a "Registration Statement") declared effective by the Commission as
promptly as practicable after the filing thereof. Unless the Registered
Exchange Offer would not be permitted by a policy of the Commission, the
Company will commence the Registered Exchange Offer and will use its
reasonable best efforts to consummate the Registered Exchange Offer as
promptly as practicable, but in any event on or prior to 150 days after the
Issue Date. If applicable, the Company will use commercially reasonable best
efforts to keep the Shelf Registration Statement effective for the earlier of
three years from the Issue Date or such shorter period that will terminate
when all the Notes covered by the Shelf Registration Statement have been sold,
subject to certain exceptions, including suspending the effectiveness thereof
as required by law or for certain valid business reasons.
Although the Company intends to file the registration statements described
above, as required, there can be no assurance that such registration
statements will be filed, or, if filed, that they will become effective. In
the event (to the extent applicable) that (i) (A) the Exchange Offer
Registration Statement is not filed on or prior to the 45th day following the
Issue Date, (B) the Exchange Offer Registration Statement is not declared
effective within the earlier of (x) 90 days after the Issue Date or (y) 30
days after the consummation of the initial public offering of the Company's
Common Stock or (C) the Registered Exchange Offer is not consummated on or
prior to the 150th day following the Issue Date or (ii) the Shelf Registration
Statement is not declared effective on or prior to the later of (x) the 120th
day after the Issue Date and (y) the 45th day after the publication of the
change in law or interpretation referred to in the second preceding paragraph,
the interest rate borne by the Notes shall be increased by one-half of one
percent per annum following, in the case of clause (i)(A) such 45-day period,
in the case of clauses (i)(B) such 90- or 30-day period, as the case may be,
or in the case of clause (i)(C), such 150-day period, or, in the case of
clause (ii), such 45- or 120-day period, as applicable. The aggregate amount
of such increase from the original interest rate pursuant to these provisions
will in no event exceed one-half of one percent per annum. Such increase will
cease to be effective on the date of filing of the Exchange Offer Registration
Statement, effectiveness of the Exchange Offer Registration Statement,
consummation of the Registered Exchange Offer or the effectiveness of a Shelf
Registration Statement, as the case may be.
84
Any amounts of additional interest due pursuant to the preceding paragraph
will be payable in cash, on the same original interest payment dates as the
Notes. The amount of additional interest will be determined by multiplying the
applicable additional interest rate by the principal amount of the affected
Notes of such holders, multiplied by a fraction, the numerator of which is the
number of days such additional interest rate was applicable during such
period, and the denominator of which is 360.
The Exchange and Registration Rights Agreement will also provide that the
Company (i) shall cause the Exchange Offer Registration Statement to remain
continuously effective for a period of at least 20 Business Days (or longer if
required by applicable law) from its effective date, and shall supplement or
amend the prospectus contained therein to the extent necessary to permit such
prospectus (as supplemented or amended) to be delivered by broker-dealers in
connection with any resale of any such Exchange Notes and (ii) shall pay all
expenses incident to the Exchange Offer and will indemnify certain holders of
the Notes (including any broker-dealer) against certain liabilities, including
liabilities under the Securities Act. A broker-dealer that delivers such a
prospectus to purchasers in connection with such resales will be subject to
certain of the civil liability provisions under the Securities Act, and will
be bound by the provisions of the Exchange and Registration Rights Agreement
(including certain indemnification rights and obligations).
Each holder of the Notes that wishes to exchange such Notes for Exchange
Notes in the Exchange Offer will be required to make certain representations,
including representations that (i) any Exchange Notes to be received by it
will be acquired in the ordinary course of its business, (ii) it has no
arrangement with any person to participate in the distribution of the Exchange
Notes and (iii) it is not an "affiliate," as defined in Rule 405 of the
Securities Act, of the Company or if it is an affiliate, it will comply with
the registration and prospectus delivery requirements of the Securities Act to
the extent applicable.
If a holder is not a broker-dealer, it will be required to represent that it
is not engaged in, and does not intend to engage in, the distribution of the
Exchange Notes. If a holder is a broker-dealer that will receive Exchange
Notes for its own account in exchange for Notes that were acquired as a result
of market making activities or other trading activities, it will be required
to acknowledge that it will deliver a prospectus in connection with any resale
of such Exchange Notes.
Holders of the Notes will be required to make certain representations to the
Company in order to participate in the Exchange Offer, and will be required to
deliver information to be used in connection with the Shelf Registration
Statement in order to have their Notes included in the Shelf Registration
Statement. A holder who sells Notes pursuant to the Shelf Registration
Statement generally will be required to be named as a selling security holder
in the related prospectus and to deliver a prospectus to purchasers, will be
subject to certain of the civil liability provisions under the Securities Act
in connection with such sales and will be bound by the provisions of the
Exchange and Registration Rights Agreement which are applicable to such a
holder (including certain indemnification obligations).
A holder whose Notes are included in a Registration Statement will be
required to agree not to effect any public sale or distribution of the issue
being registered or a similar security of the Company or any securities
convertible into or exchangeable or exercisable for such securities, including
a sale pursuant to Rule 144 under the Securities Act, during the 14 days prior
to, and during the 90-day period beginning on, the effective date of such
Registration Statement (except as part of such registration), if and to the
extent requested by the Company in the case of a non-underwritten public
offering or if and to the extent requested by the managing Underwriter or
Underwriters in the case of an underwritten public offering.
Notwithstanding any other provision set forth above, the Company may delay
the filing of any Registration Statement for up to 90 days if (i) the Company
would, in the opinion of its counsel, be required to disclose in such
Registration Statement information not otherwise then required by law to be
publicly disclosed and (ii) in the judgment of the Board of Directors of the
Company, there is a reasonable likelihood that such disclosure, or any other
action to be taken in connection with any Registration Statement, would
adversely affect any existing or prospective material business situation,
transaction, or negotiation or otherwise materially and adversely affect the
Company.
85
Unless the Company is then subject to Section 13 or 15(d) of the Exchange
Act, the Company will continue to provide to holders of the Notes and to
prospective purchasers of the Notes, for so long as the Notes are outstanding,
the information required by Rule 144A under the Securities Act ("Rule 144A"),
as such Rule may be amended, or any similar rule or regulation adopted by the
Commission. The Company will provide a copy of the Exchange and Registration
Rights Agreement to prospective purchasers of Notes identified to the Company
by the Initial Purchaser upon request.
The foregoing description of the Exchange and Registration Rights Agreement
is a summary only, does not purport to be complete and is qualified in its
entirety by reference to all provisions of the Exchange and Registration
Rights Agreement.
86
TRANSFER RESTRICTIONS
Each purchaser of Notes from the Initial Purchaser, by its acceptance
thereof, will be deemed to have acknowledged, represented to and agreed with
the Company and the Initial Purchaser as follows:
1. It understands and acknowledges that the Notes have not been
registered under the Securities Act or any other applicable securities law,
and that the Notes are being offered for resale in transactions not
requiring registration under the Securities Act or any other securities
laws, including sales pursuant to Rule 144A and, unless so registered, may
not be offered, sold or otherwise transferred except in compliance with the
registration requirements of the Securities Act or any other applicable
securities laws, pursuant to any exemption therefrom or in a transaction
not subject thereto and in each case in compliance with the conditions for
transfer set forth in paragraph (4) below.
2. It is not an "affiliate" (as defined in Rule 144 under the Securities
Act) of the Company or acting on behalf of the Company and is either:
(a) a "Qualified Institutional Buyer" as defined in Rule 144A
("QIB"), and is aware that any sale of the Notes to it will be made in
reliance on Rule 144A and such acquisition will be for its own account
or for the account of another QIB; or
(b) an "Institutional Accredited Investor" within the meaning of Rule
501(a)(1), (2), (3) and (7) under the Securities Act or, if the Notes
are to be purchased for one or more accounts ("investor accounts") for
which it is acting as fiduciary or agent, each such account is an
Institutional Accredited Investor on a like basis. It is aware that the
minimum principal amount of Notes that may be purchased by an
Institutional Accredited Investor (including each investor account) is
$250,000. In the normal course of its business, it invests in or
purchases securities similar to the Notes and it has such knowledge and
experience in financial and business matters that it is capable of
evaluating the merits and risks of purchasing the Notes. It is aware
that it (or any investor account) may be required to bear the economic
risk of an investment in the Notes of an indefinite period of time and
it (or such account) is able to bear such risk for an indefinite
period.
3. It acknowledges that neither the Company, the Initial Purchaser nor
any person representing the Company or the Initial Purchaser has made any
representation to it with respect to the Company or the Offering, other
than the information contained in this Offering Memorandum, which has been
delivered to it and upon which it is relying in making its investment
decision with respect to the Notes. It has had access to such financial and
other information concerning the Company and the Notes as it has deemed
necessary in connection with its decision to purchase the Notes, including
an opportunity to ask questions of and request information from the Company
and the Initial Purchaser.
4. It is purchasing the Notes for its own account or for one or more
investor accounts for which it is acting as a fiduciary or agent, in each
case not with a view to, or for offer or sale in connection with, any
distribution thereof in violation of the Securities Act, subject to any
requirement of law that the disposition of its property or the property of
such investor account or accounts be at all times within its or their
control and subject to its or their ability to resell such Notes pursuant
to Rule 144A or any exemption from registration available under the
Securities Act. It agrees on its own behalf and on behalf of any investor
account for which it is purchasing the Notes, and each subsequent holder of
the Notes by its acceptance thereof will agree, to offer, sell or otherwise
transfer such Notes prior to the date which is two years after the later of
the date of original issue and the last date that the Company or any
affiliate of the Company was the owner of such Notes (or any predecessor
thereto) (the "Resale Restriction Termination Date") only (i) to the
Company, (ii) pursuant to a registration statement that has been declared
effective under the Securities Act, (iii) for so long as the Notes are
eligible for resale pursuant to Rule 144A, to a person it reasonably
believes is a QIB that purchases for its own account or for the account of
a QIB to whom notice is given that the transfer is being made in reliance
on Rule 144A, (iv) pursuant to offers and sales that occur outside the
United States within the meaning of Regulation S under the Securities Act,
(v) to an Institutional Accredited Investor (as defined in Rule 501(a)(1),
(2), (3) and (7) under the Securities Act) that is
87
purchasing for its own account or for the account of such an Institutional
Accredited Investor, in each case in a minimum principal amount of the
Notes of $250,000 or (vi) pursuant to any other available exemption from
the registration requirements of the Securities Act, subject in each of the
foregoing cases to any requirement of law that the disposition of its
property or the property of such investor account or accounts be at all
times within its or their control. The foregoing restrictions on resale
will not apply subsequent to the Resale Restriction Termination Date. If
any resale or other transfer of the Notes is proposed to be made pursuant
to clause (v) above prior to the Resale Restriction Termination Date, the
transferor shall deliver a letter from the transferee substantially in the
form of Annex A hereto to the Company and the Trustee, which shall provide,
among other things, that the transferee is an Institutional Accredited
Investor that is acquiring such Notes not for distribution in violation of
the Securities Act, and for the transferee's representations to the same
effect as set forth in paragraph 5 below, with respect to the transferee's
purchase and holding of such Notes. Each purchaser acknowledges that the
Company and the Trustee reserve the right prior to any offer, sale or other
transfer prior to the Resale Restriction Termination Date of the Notes
pursuant to clauses (iv), (v) and (vi) above to require the delivery of an
opinion of counsel, certifications and/or other information satisfactory to
the Company and the Trustee. Each purchaser acknowledges that each Note
will contain a legend substantially to the following effect.
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS. NEITHER THIS
SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD,
ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE
ABSENCE OF SUCH REGISTRATION UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT
SUBJECT TO, REGISTRATION.
THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF AGREES TO OFFER, SELL
OR OTHERWISE TRANSFER SUCH SECURITY, PRIOR TO THE DATE (THE "RESALE
RESTRICTION TERMINATION DATE") WHICH IS TWO YEARS AFTER THE LATER OF THE
ORIGINAL ISSUE DATE HEREOF AND THE LAST DATE ON WHICH THE ISSUER OR ANY
AFFILIATE OF THE ISSUER WAS THE OWNER OF THIS SECURITY (OR ANY PREDECESSOR OF
SUCH SECURITY), ONLY (A) TO THE ISSUER, (B) PURSUANT TO A REGISTRATION
STATEMENT THAT HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) FOR
SO LONG AS THE SECURITIES ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A, TO A
PERSON IT REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED
IN RULE 144A UNDER THE SECURITIES ACT THAT PURCHASES FOR ITS OWN ACCOUNT OR
FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN
THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (D) PURSUANT TO
OFFERS AND SALES THAT OCCUR OUTSIDE THE UNITED STATES WITHIN THE MEANING OF
REGULATION S UNDER THE SECURITIES ACT, (E) TO AN INSTITUTIONAL ACCREDITED
INVESTOR WITHIN THE MEANING OF RULE 501(a)(1), (2), (3) OR (7) UNDER THE
SECURITIES ACT THAT IS ACQUIRING THE SECURITY FOR ITS OWN ACCOUNT, OR FOR THE
ACCOUNT OF SUCH AN INSTITUTIONAL ACCREDITED INVESTOR, IN EACH CASE IN A
MINIMUM PRINCIPAL AMOUNT OF THE SECURITIES OF $250,000, FOR INVESTMENT
PURPOSES AND NOT WITH A VIEW TO OR FOR OFFER OR SALE IN CONNECTION WITH ANY
DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT, OR (F) PURSUANT TO ANOTHER
AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT,
SUBJECT TO THE ISSUER'S AND THE TRUSTEE'S RIGHT PRIOR TO ANY SUCH OFFER, SALE
OR TRANSFER PURSUANT TO CLAUSES (D), (E) AND (F) TO REQUIRE THE DELIVERY OF AN
OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO
EACH OF THEM, AND IN THE CASE OF THE FOREGOING CLAUSE (E), A CERTIFICATE OF
TRANSFER IN THE FORM APPEARING ON THE OTHER SIDE OF THIS SECURITY IS COMPLETED
AND DELIVERED BY THE TRANSFEROR TO THE ISSUER AND THE TRUSTEE. THIS LEGEND
WILL BE REMOVED UPON THE REQUEST OF THE HOLDER AFTER THE RESALE RESTRICTION
TERMINATION DATE.
88
5. Each purchaser, by its purchase of the Notes, shall be deemed to have
represented that (i) if it is an insurance company, the funds to be used to
purchase the Notes by it constitute (A) assets of an insurance company
general account maintained by it and the acquisition and holding of each
such Note by such account is exempt under United States Department of Labor
Prohibited Transaction Class Exemption ("PTCE") 95-60 or (B) assets of an
insurance company pooled separate account and the acquisition and holding
of each such Note by such account is exempt under PTCE 90-1, and (ii) no
part of the funds to be used to purchase the Notes to be purchased by it
constitute assets of any plan or employee benefit plan such that the use of
such assets constitutes a non-exempt prohibited transaction under ERISA or
the Code. The representation is based upon the purchaser's determination
that a statutory or administrative exemption is applicable or that the
Company and its Affiliates are not parties in interest or disqualified
persons with respect to the purchaser or holder plan or employee benefit
plan. As used in this paragraph, the terms "employee benefit plan" and
"party in interest" shall have the meanings assigned to such terms in
Section 3 of ERISA, the term "Affiliate" shall have the meaning assigned to
such term in Section 407(d)(7) of ERISA and the terms "disqualified person"
and "plan" shall have the meanings assigned to such terms in Section 4975
of the Code. If any resale or other transfer of the Notes is proposed to be
made pursuant to clause (v) of paragraph 4 above prior to the Resale
Restriction Termination Date, the transferor shall deliver a letter from
the transferee to the Company and the Trustee, which shall contain a
representation of the transferee with respect to the transferee's purchase
and holding of the Notes, substantially as set forth in paragraph 3 of
Annex A hereto.
6. It acknowledges that the Company, the Initial Purchaser and others
will rely upon the truth and accuracy of the foregoing acknowledgments,
representations and agreements and agrees that, if any of the
acknowledgments, representations or warranties deemed to have been made by
it by its purchase of Notes are no longer accurate, it shall promptly
notify the Company and the Initial Purchaser. If it is acquiring any Notes
as a fiduciary or agent for one or more investor accounts, it represents
that it has sole investment discretion with respect to each such account
and that it has full power to make the foregoing acknowledgments,
representations and agreements on behalf of each such account.
89
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following summary describes the principal U.S. federal income tax
consequences resulting from the ownership and disposition of the Notes by U.S.
Holders (as defined below) that are initial purchasers of Notes. Except where
noted, it deals only with Notes held as capital assets and does not deal with
special situations, such as those of dealers in securities or currencies,
financial institutions, tax-exempt entities, life insurance companies, persons
holding Notes as part of a hedging, conversion or constructive sale
transaction or a straddle or holders whose "functional currency" is not the
U.S. dollar. Furthermore, the discussion below is based upon provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), and regulations,
rulings and judicial decisions thereunder as of the date hereof, and such
authorities may be repealed, revoked or modified so as to result in United
States federal income tax consequences different from those discussed below.
Persons considering the purchase, ownership or disposition of Notes should
consult their own tax advisors concerning the United States federal income tax
consequences in light of their particular situations as well as any
consequences arising under the laws of any other taxing jurisdiction.
As used herein, a "U.S. Holder" is (i) a citizen or resident of the United
States, (ii) a corporation or partnership created or organized in or under the
laws of the United States or a State thereof (including the District of
Columbia), (iii) an estate the income of which is subject to United States
federal income taxation regardless of source or (iv) a trust if (a) a U.S.
court is able to exercise primary supervision over the trust's administration
and (b) one or more U.S. persons have the authority to control all of the
trust's substantial decisions. The term also includes certain former citizens
of the United States.
ORIGINAL ISSUE DISCOUNT
For purposes of the Code, each Note will be deemed to have been issued with
original issue discount ("OID") equal to the difference between the Note's
stated redemption price at maturity (i.e., the sum of all payments to be made
on the Note other than stated interest payments) and its "issue price." U.S.
Holders of Notes should be aware that they generally must include OID in gross
income in advance of the receipt of cash attributable to that income. A U.S.
Holder must include in gross income the sum of the daily portions of OID which
accrue under a constant yield method with respect to such instrument for each
day during the accrual period (or portion of the accrual period) in which such
U.S. Holder held such Notes, regardless of the U.S. Holder's method of
accounting for tax purposes. The amount of OID which accrues in an accrual
period is an amount equal to the excess (if any) of (i) the product of the
Note's "adjusted issue price" at the beginning of such accrual period and its
yield to maturity (determined on the basis of compounding at the end of each
accrual period and appropriately adjusted to take into account the length of
the particular accrual period) over (ii) the sum of the stated interest
payments, if any, allocable to the accrual period. The daily portion of OID is
determined by allocating to each day in any accrual period a ratable portion
of OID allocable to the accrual period. The "adjusted issue price" of a Note
at the beginning of any accrual period is the sum of the issue price of such
Note plus the OID allocable to all prior accrual periods reduced by payments
on the Note other than stated interest. An "accrual period" may be of any
length and the accrual periods may even vary in length over the term of the
debt instrument, provided that each accrual period is no longer than one year
and each scheduled payment of principal or interest occurs at the end of an
accrual period. Under these rules, U.S. Holders generally will have to include
in income increasingly greater amounts of OID in successive accrual periods.
Generally, a U.S. Holder's tax basis in the debt instrument will be increased
by the amount of OID that is included in such U.S. Holder's income pursuant to
the foregoing rules through the day preceding the day of disposition and will
be decreased by the amount of any cash payments received (other than a payment
of stated interest).
Special rules apply to the calculation of OID in the case of a debt
instrument whose issuer has an intention to call the instrument before
maturity. The Company intends to take the position that under applicable
Treasury Regulations (the "OID Regulations") the special rules will not apply
to the Notes.
Under the OID Regulations, a U.S. Holder may elect to treat all interest and
discount on a Note (including stated interest and OID) as income by using the
constant yield method applicable to OID, subject to certain limitations and
exceptions. Such an election must be made for the taxable year in which the
U.S. Holder acquires the Note and may not be revoked unless approved by the
IRS.
90
SALE, EXCHANGE OR REDEMPTION
A U.S. Holder's adjusted tax basis in a Note will, in general, be the U.S.
Holder's cost for the Note increased by OID. The sale, exchange or redemption
of a Note generally will be a taxable event for federal income tax purposes. A
U.S. Holder generally will recognize gain or loss on the sale, exchange or
redemption of a Note in an amount equal to the difference between (i) the
amount of cash plus the fair market value of any property received upon such
sale, exchange or redemption (other than the amount of such consideration
received in respect of accrued but unpaid interest which will be taxable as
such) and (ii) the U.S. Holder's adjusted tax basis in such Note. Such gain or
loss will be capital gain or loss. Under recently enacted legislation, capital
gains of individuals derived in respect of capital assets held for more than
one year are eligible for reduced rates of taxation which may vary depending
upon the holding period of such capital assets. Prospective investors should
consult their own tax advisors with respect to the tax consequences of the new
legislation. The deductibility of capital losses is subject to limitations.
BACKUP WITHHOLDING AND INFORMATION REPORTING
Certain noncorporate U.S. Holders may be subject to backup withholding at a
rate of 31% on payments made on a Note. Backup withholding will apply only if
a U.S. Holder (i) fails to furnish its taxpayer identification number ("TIN")
which, in the case of an individual, would be his or her social security
number, (ii) furnishes an incorrect TIN, (iii) is notified by the IRS that it
has failed to properly report payments of interest and dividends or (iv) under
certain circumstances, fails to certify, under penalties of perjury, that it
has furnished a correct TIN. Amounts withheld under the backup withholding
rules are not an additional tax and may be refunded, or credited against the
U.S. Holder's United States federal income tax liability, provided that the
required information is furnished to the IRS. The Company will furnish
annually to the IRS and to certain record U.S. Holders of the Notes
information relating to the amount of OID, if any, accruing during the
calendar year. The Company's determination of OID generally is binding on a
U.S. Holder for U.S. federal income tax purposes but is not binding on the
IRS, and there can be no assurance that the IRS will not challenge such
determination.
91
PLAN OF DISTRIBUTION
Subject to the terms and conditions set forth in the Purchase Agreement (the
"Purchase Agreement") by and among the Company, the Guarantors and Societe
Generale Securities Corporation (the "Initial Purchaser"), the Company agrees
to sell to the Initial Purchaser, and the Initial Purchaser agrees to
purchase, $100.0 million principal amount of the Notes.
The Purchase Agreement provides that the obligations of the Initial
Purchaser thereunder are subject to certain conditions precedent, and that the
Initial Purchaser is committed to take and pay for $100.0 million aggregate
principal amount of Notes, if any are taken. The Company will separately pay a
commission to the Initial Purchaser of 3.000% of the principal amount of the
Notes purchased. The Initial Purchaser proposes to offer the Notes at the
applicable initial offering price set forth on the cover page of this Offering
Memorandum (the "Note Offering Price"). After the Notes are released for sale,
the Note Offering Price and other selling terms may from time to time be
varied by the Initial Purchaser.
The Company and the Restricted Subsidiaries have agreed in the Purchase
Agreement to indemnify the Initial Purchaser against certain liabilities under
the Securities Act, and to contribute to payments that the Initial Purchaser
may be required to make in respect thereof.
The Initial Purchaser proposes to offer the Notes for resale in transactions
not requiring registration under the Securities Act or applicable state
securities laws, including sales pursuant to Rule 144A. The Initial Purchaser
proposes to offer the Notes for resale initially at the offering price set
forth on the cover page of this Offering Memorandum. After the initial
offering, the offering price and other selling terms may be changed at any
time without notice. The Initial Purchaser will not offer or sell the Notes
except to persons it reasonably believes to be QIBs or Institutional
Accredited Investors. Each purchaser of the Notes offered hereby in making its
purchase will, by its purchase, be deemed to have made certain
acknowledgements, representations, warranties and agreements as set forth
under "Transfer Restrictions" and, in the case of purchasers that are
Institutional Accredited Investors, will be required to complete and deliver
to the Initial Purchaser a purchaser questionnaire prior to acceptance of any
order.
The Notes have been designated eligible for trading in the PORTAL market.
The Notes have not been registered under the Securities Act and may not be
offered or sold except as set forth above. The Initial Purchaser has advised
the Company that the Initial Purchaser currently intends to make a market in
the Notes; however, it is not obligated to do so and any market making may be
discontinued by the Initial Purchaser at any time without notice. In addition,
such market making activity may be limited during the Exchange Offer described
below and the pendency of the effectiveness of the applicable Registration
Statement. Accordingly, no assurance can be given as to the liquidity of or
the trading market for the Notes.
In connection with the Offering, the Initial Purchaser may engage in
overallotment, stabilizing transactions and syndicate covering transactions.
Overallotment involves sales in excess of the offering size, which creates a
short position for the Initial Purchaser. Stabilizing transactions involve
bids to purchase the Notes in the open market for the purpose of pegging,
fixing or maintaining the price of the Notes. Syndicate covering transactions
involve purchases of the Notes in the open market after the distribution has
been completed in order to cover short positions. Such stabilizing
transactions and syndicate covering transactions may cause the price of the
Notes to be higher than it would otherwise be in the absence of such
transactions. Such activities, if commenced, may be discontinued at any time.
The Company has covenanted with the Initial Purchaser (i) that within 45
days after the Issue Date, the Company will file with the Commission an
Exchange Offer Registration Statement under the Securities Act with respect to
an issue of Exchange Notes and (ii) to use commercially reasonable efforts to
cause such Exchange Offer Registration Statement to be declared effective
under the Securities Act within the earlier of (A) 90 days after the Issue
Date or (B) 30 days after the effectiveness of the registration statement
filed in connection with an initial public offering of the Company's Common
Stock. Upon effectiveness of that Exchange Offer Registration
92
Statement, the Company will offer to the holders of the Notes the opportunity
to exchange their Notes for a like principal amount of Exchange Notes, which
Exchange Notes will be issued without the legend described above under
"Transfer Restrictions" and (generally other than by an affiliate of the
Company) may be reoffered and resold by the holder without restrictions or
limitations under the Securities Act. The Company has also covenanted with the
Initial Purchaser to consummate the Registered Exchange Offer within 150 days
after the Issue Date. Additionally, the Company has covenanted that if any
change in law or applicable interpretations of the staff of the Commission
does not permit the Company to effect the Registered Exchange Offer, the
Company will file with the Commission and use commercially reasonable efforts
to cause to be declared effective a Shelf Registration Statement with respect
to the resale of Notes and to keep the Shelf Registration Statement effective
until three years from the Issue Date or such shorter period that will
terminate when all the Notes covered by the Shelf Registration Statement have
been sold. The Company shall cause such Shelf Registration Statement to be
declared effective on or prior to the latter of (x) the 120th day after the
Issue Date or (y) the 45th day after the publication of the change in law or
interpretation. See "Exchange and Registration Rights Agreement."
It is expected that delivery of the Notes will be made against payment
therefor on or about the date specified in the last paragraph of the cover
page of this Offering Memorandum, which will be the third business day
following the date hereof.
Societe Generale, an affiliate of Societe Generale Securities Corporation,
is the lender under the Senior Subordinated Loan Agreement, dated as of
December 20, 1996, as amended (the "Senior Subordinated Loan Agreement"), with
the Company and a lender under the Senior Credit Agreement. Societe Generale
and Societe Generale Securities Corporation have from time to time provided
investment banking and financial advisory services to the Company and its
affiliates, and they may continue to provide such services and/or participate
in various general financings and banking transactions with the Company and
its affiliates. The Company has agreed to pay Societe Generale Securities
Corporation a fee of $750,000 for financial advisory services rendered to the
Company in connection with the amendment of the Senior Subordinated Loan
Agreement.
93
INDEPENDENT PUBLIC ACCOUNTANTS
The financial statements of the Company included in this Offering Memorandum
have been audited by BDO Seidman LLP, independent certified public
accountants, to the extent and for the periods set forth in their report
appearing elsewhere herein, and are included in reliance upon such report
given upon the authority of said firm as experts in auditing and accounting.
LEGAL MATTERS
The legality of the Notes being offered hereby will be passed upon for the
Company by Proskauer Rose LLP, New York, New York. Richard L. Goldberg, a
partner of Proskauer Rose LLP, is a member of the Board of Directors of the
Company. Certain food and drug regulatory matters will be passed upon for the
Company by King & Spalding, Washington, District of Columbia. Certain legal
matters in connection with the sale of the Notes offered hereby will be passed
upon for the Initial Purchaser by Simpson Thacher & Bartlett (a partnership
which includes professional corporations), New York, New York.
AVAILABLE INFORMATION
Immediately following the Offering, the Company will not be subject to the
periodic reporting and other informational requirements of the Exchange Act.
Until its acquisition by the Company in 1995, Marsam was subject to the
periodic reporting and other informational requirements of the Exchange Act,
and therefore, its Forms 10-K and 10-Q for periods prior to its acquisition
are available from the Commission. The Company has agreed that,
notwithstanding that it may not be subject to the reporting requirements of
Sections 13 or 15(d) of the Exchange Act, for so long as any Notes are
outstanding, the Company will furnish to the Trustee and the holders of the
Notes (i) within 45 days after the end of each of the first three fiscal
quarters of each fiscal year and 90 days of the end of each fiscal year all
quarterly and annual financial information, as the case may be, that would be
required to be contained in a filing with the Commission on Forms 10-Q and 10-
K if the Company were required to file any such Forms, including a
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and, with respect to the annual information only, a report thereon
by the Company's certified independent accountants and (ii) all current
reports that would be required to be filed with the Commission on Form 8-K if
the Company were required to file such reports. In addition, whether or not
required by the rules and regulations of the Commission, the Company will file
a copy of all such information and reports with the Commission for public
availability (unless the Commission will not accept such a filing) and make
such information available to securities analysts and prospective investors
upon request. Furthermore, for so long as any of the Notes remain outstanding,
the Company has agreed to make available to any prospective purchaser of the
Notes or beneficial owner of the Notes, in connection with any sale thereof,
the information required by Rule 144(d)(4) under the Securities Act.
94
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
SCHEIN PHARMACEUTICAL, INC. AND SUBSIDIARIES
Report of Independent Certified Public Accountants......................... F-2
Consolidated Balance Sheets as of December 30, 1995, December 28, 1996 and
September 27, 1997 (unaudited)............................................ F-3
Consolidated Statements of Operations for each of the years ended December
31, 1994, December 30, 1995 and December 28, 1996, and the nine-month
periods ended September 28, 1996 and September 27, 1997 (unaudited)....... F-4
Consolidated Statements of Stockholders' Equity for each of the years ended
December 31, 1994, December 30, 1995 and December 28, 1996, and the nine-
month period ended September 27, 1997 (unaudited)......................... F-5
Consolidated Statements of Cash Flows for each of the years ended December
31, 1994, December 30, 1995 and December 28, 1996, and the nine-month
periods ended September 28, 1996 and September 27, 1997 (unaudited)....... F-6
Notes to Consolidated Financial Statements................................. F-7
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Schein Pharmaceutical, Inc.
We have audited the accompanying consolidated balance sheets of Schein
Pharmaceutical, Inc. and subsidiaries as of December 30, 1995 and December 28,
1996, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
28, 1996. These consolidated financial statements are the responsibility of
the management of Schein Pharmaceutical, Inc. and subsidiaries. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall consolidated financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Schein Pharmaceutical, Inc. and subsidiaries as of December 30, 1995 and
December 28, 1996, and the consolidated results of their operations and their
cash flows for each of the three years in the period ended December 28, 1996
in conformity with generally accepted accounting principles.
BDO Seidman, LLP
New York, New York
February 7, 1997
F-2
SCHEIN PHARMACEUTICAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 30, DECEMBER 28, SEPTEMBER 27,
1995 1996 1997
IN THOUSANDS ------------ ------------ -------------
(UNAUDITED)
ASSETS
------
Current Assets:
Cash and cash equivalents............ $ 7,837 $ 2,139 $ 388
Accounts receivable, less allowance
for possible losses of $3,835,
$2,434 and $2,849................... 57,212 72,261 67,574
Inventories.......................... 115,960 131,265 124,011
Prepaid expenses and other current
assets.............................. 7,598 4,070 3,792
Deferred income taxes................ 9,656 9,354 8,843
-------- -------- --------
Total Current Assets............... 198,263 219,089 204,608
Property, Plant and Equipment, net..... 108,566 107,740 107,348
Product Rights, Licenses and Regulatory
Approvals, net........................ 94,566 92,685 88,102
Goodwill, net.......................... 106,786 102,695 99,448
Other Assets........................... 14,229 22,103 21,193
-------- -------- --------
$522,410 $544,312 $520,699
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts payable..................... $ 31,225 $ 31,492 $ 30,196
Accrued expenses..................... 34,939 40,755 42,758
Income taxes......................... -- 6,641 5,231
Revolving credit and current
maturities of long-term debt........ 40,078 41,090 32,943
-------- -------- --------
Total Current Liabilities.......... 106,242 119,978 111,128
Long-Term Debt, less current
maturities............................ 240,480 245,390 223,470
Deferred Income Taxes.................. 41,321 40,166 39,979
Other Liabilities...................... 8,675 8,798 9,038
Commitments and Contingencies
Stockholders' Equity:
Common stock, $.01 par value; 529
authorized shares; issued and
outstanding 274 shares at December
30, 1995 and 273 shares at December
28, 1996 and September 27, 1997..... 3 3 3
Additional paid-in capital........... 39,832 38,876 38,876
Retained earnings.................... 86,984 88,381 92,107
Other................................ (1,127) 2,720 6,098
-------- -------- --------
Total Stockholders' Equity......... 125,692 129,980 137,084
-------- -------- --------
$522,410 $544,312 $520,699
======== ======== ========
See accompanying notes to consolidated financial statements.
F-3
SCHEIN PHARMACEUTICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED NINE MONTHS ENDED
-------------------------------------- ---------------------------
DECEMBER 31, DECEMBER 30, DECEMBER 28, SEPTEMBER 28, SEPTEMBER 27,
1994 1995 1996 1996 1997
IN THOUSANDS ------------ ------------ ------------ ------------- -------------
(UNAUDITED)
Net revenues............ $385,428 $391,846 $476,295 $352,172 $353,829
Cost of sales........... 237,380 250,507 320,675 236,721 240,562
-------- -------- -------- -------- --------
Gross profit.......... 148,048 141,339 155,620 115,451 113,267
Costs and expenses:
Selling, general and
administrative....... 71,416 73,250 84,366 61,149 57,950
Research and
development.......... 19,170 28,324 27,030 23,044 22,854
Amortization of
goodwill and other
intangibles.......... -- 3,399 10,195 7,713 7,722
Special compensation,
restructuring and
relocation........... 33,594 -- -- -- --
Acquired in-process
Marsam research and
development.......... -- 30,000 -- -- --
-------- -------- -------- -------- --------
Operating income........ 23,868 6,366 34,029 23,545 24,741
Interest expense,
net.................. 1,493 10,005 23,285 16,081 20,456
Other expenses
(income), net........ 579 779 4,156 1,745 (4,536)
-------- -------- -------- -------- --------
Income (loss) before
provision for income
taxes.................. 21,796 (4,418) 6,588 5,719 8,821
Provision for income
taxes.................. 15,165 10,482 5,191 3,573 5,095
-------- -------- -------- -------- --------
Net income (loss)....... $ 6,631 $(14,900) $ 1,397 $ 2,146 $ 3,726
======== ======== ======== ======== ========
See accompanying notes to consolidated financial statements.
F-4
SCHEIN PHARMACEUTICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
THREE YEARS ENDED DECEMBER 28, 1996 AND NINE MONTHS ENDED SEPTEMBER 27, 1997
PREFERRED STOCK COMMON STOCK ADDITIONAL
----------------- ------------- PAID-IN RETAINED
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS OTHER
IN THOUSANDS ------- ------- ------ ------ ---------- -------- --------
Balance December 25,
1993................... 207 $ 207 267 $ 3 $13,685 $127,129 $(10,688)
Net income............ -- -- -- -- -- 6,631 --
Recognition of stock
compensation......... -- -- -- -- 12,965 (3,079) 8,703
Stock issued in
exchange for minority
interest............. -- -- 7 -- 13,182 (1,818) --
Restructuring
charges.............. -- -- -- -- -- (1,508) --
Redemption of
preferred stock...... (207) (207) -- -- -- (25,471) --
Amortization of
options issued as
compensation......... -- -- -- -- -- -- 430
------- ------- --- ---- ------- -------- --------
Balance, December 31,
1994................... -- -- 274 3 39,832 101,884 (1,555)
Net loss.............. -- -- -- -- -- (14,900) --
Amortization of
options issued as
compensation......... -- -- -- -- -- -- 389
Unrealized gains from
marketable
securities........... -- -- -- -- -- -- 39
------- ------- --- ---- ------- -------- --------
Balance, December 30,
1995................... -- -- 274 3 39,832 86,984 (1,127)
Net income............ -- -- -- -- -- 1,397 --
Amortization of
options issued as
compensation......... -- -- -- -- -- -- 389
Unrealized gains from
marketable
securities........... -- -- -- -- -- -- 4,293
Repurchase and
retirement of
shares............... -- -- (1) -- (956) -- --
Foreign currency
translation
adjustments.......... -- -- -- -- -- -- (835)
------- ------- --- ---- ------- -------- --------
Balance, December 28,
1996................... -- -- 273 3 38,876 88,381 2,720
(Period subsequent to
December 28, 1996 to
September 27, 1997 is
unaudited)...........
Net income............ -- -- -- -- -- 3,726 --
Amortization of
options issued as
compensation......... -- -- -- -- -- -- 292
Unrealized gains from
marketable
securities........... -- -- -- -- -- -- 3,059
Foreign currency
translation
adjustments.......... -- -- -- -- -- -- 27
------- ------- --- ---- ------- -------- --------
Balance, September 27,
1997 (Unaudited)....... -- $ -- 273 $ 3 $38,876 $ 92,107 $ 6,098
======= ======= === ==== ======= ======== ========
See accompanying notes to consolidated financial statements.
F-5
SCHEIN PHARMACEUTICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED NINE MONTHS ENDED
-------------------------------------- ---------------------------
DECEMBER 31, DECEMBER 30, DECEMBER 28, SEPTEMBER 28, SEPTEMBER 27,
1994 1995 1996 1996 1997
IN THOUSANDS ------------ ------------ ------------ ------------- -------------
(UNAUDITED)
Cash flows from
operating activities:
Operating activities:
Net income (loss)...... $ 6,631 $ (14,900) $ 1,397 $ 2,146 $ 3,726
Depreciation and
amortization.......... 8,464 17,395 25,450 18,018 19,749
Provision for deferred
income taxes.......... (6,321) 3,084 (3,342) (985) (1,237)
Acquired in-process
Marsam research
and development....... -- 30,000 -- -- --
Special compensation... 29,039 -- -- -- --
Gain on sale of
marketable
securities............ (9,883)
Other.................. 759 694 4,360 2,192 3,530
Changes in assets and
liabilities:
Accounts receivable.... (13,224) (579) (15,743) (9,779) 4,167
Inventories............ (13,187) 69 (15,305) (30,714) 7,254
Prepaid expenses and
other assets.......... (2,056) (3,744) 2,048 572 278
Accounts payable,
income taxes, accrued
expenses and other
liabilities........... 16,064 (12,393) 11,891 9,821 (513)
-------- --------- --------- --------- ---------
Net cash provided by
(used in) operating
activities............. 26,169 19,626 10,756 (8,729) 27,071
-------- --------- --------- --------- ---------
Cash flows from
investing activities:
Capital expenditures,
net................... (16,135) (13,986) (11,309) (8,625) (8,992)
Product rights and
licenses.............. (4,190) (3,035) (4,089) (1,460) --
Acquisition of Marsam,
net of cash acquired.. -- (229,746) -- -- --
Investment in
international joint
ventures.............. -- (3,520) (2,036) (503) (150)
Proceeds from sale of
marketable
securities............ -- -- -- -- 11,575
Other, net............. (358) (1,156) (2,582) (434) (1,188)
-------- --------- --------- --------- ---------
Net cash provided by
(used in) investing
activities............. (20,683) (251,443) (20,016) (11,022) 1,245
-------- --------- --------- --------- ---------
Cash flows from
financing activities:
Principal payments on,
or repayments of,
debt.................. (67,237) (167,119) (261,078) (102,057) (143,067)
Proceeds from issuance
of debt............... 85,601 401,750 267,000 114,000 113,000
Sale (repurchase) of
other non-current
assets, net........... 1,836 (5,700) (2,360) -- --
Restructuring charges.. (1,508) -- -- -- --
Redemption of preferred
stock................. (20,678) -- -- -- --
-------- --------- --------- --------- ---------
Net cash provided by
(used in) financing
activities............. (1,986) 228,931 3,562 11,943 (30,067)
-------- --------- --------- --------- ---------
Net increase (decrease)
in cash and cash
equivalents............ 3,500 (2,886) (5,698) (7,808) (1,751)
Cash and cash
equivalents, beginning
of year................ 7,223 10,723 7,837 7,837 2,139
-------- --------- --------- --------- ---------
Cash and cash
equivalents, end of
year................... $ 10,723 $ 7,837 $ 2,139 $ 29 $ 388
======== ========= ========= ========= =========
See accompanying notes to consolidated financial statements.
F-6
SCHEIN PHARMACEUTICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF SEPTEMBER 1997 AND FOR THE NINE-MONTHS ENDED SEPTEMBER 28,
1996 AND SEPTEMBER 27, 1997 IS UNAUDITED)
NOTE 1--SUMMARY OF ACCOUNTING POLICIES
The Company and Principles of Consolidation
Schein Pharmaceutical, Inc. and its subsidiaries (the "Company") are engaged
in developing, manufacturing, marketing and distributing generic
pharmaceutical products. The Company sells to drug store chains, independent
retail pharmacies, managed care organizations, hospitals and other
institutions, both through drug wholesalers and directly, primarily in the
U.S.
In 1995, Schein Holdings, Inc. ("SHI"), the former parent holding
corporation of Schein Pharmaceutical, Inc., was merged into Schein
Pharmaceutical, Inc. The Company was the only asset held by SHI, and, as such,
the accompanying financial statements reflect the operations of the Company
for the periods reported.
The consolidated financial statements include the accounts of the Company
and its wholly-owned and majority-owned subsidiaries. Investments in
unconsolidated affiliated companies are accounted for on the equity method.
All material intercompany accounts and transactions have been eliminated in
consolidation.
Certain prior year amounts have been reclassified to conform to the current
year's presentation.
Fiscal Year
The Company reports its operations on a 52-53 week basis ending on the last
Saturday of December. Of the years presented in these statements, 1994
includes 53 weeks.
Interim Financial Information
The financial statements as of September 27, 1997 and for the nine months
ended September 28, 1996 and September 27, 1997 are unaudited but reflect all
adjustments (consisting only of normal recurring adjustments) which are, in
the opinion of management, necessary for a fair presentation of financial
position and results of operations. Operating results for the nine months
ended September 27, 1997 are not necessarily indicative of the results that
may be expected for the fiscal year ending December 27, 1997.
Cash Equivalents
The Company considers all highly liquid debt instruments and other short-
term investments with an initial maturity date of three months or less from
purchase date to be cash equivalents.
Inventories
Inventories are valued at the lower of cost or market. Cost is determined by
the first-in, first-out method.
Property, Plant, Equipment, Depreciation and Amortization
Property, plant and equipment are stated at cost. Depreciation and
amortization are computed primarily under the straight-line method over
estimated useful lives. Amortization of capital leases is computed using the
straight-line method over the lease term.
F-7
SCHEIN PHARMACEUTICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF SEPTEMBER 1997 AND FOR THE NINE-MONTHS ENDED SEPTEMBER 28,
1996 AND SEPTEMBER 27, 1997 IS UNAUDITED)
Long-Lived Assets
The Company adopted in 1995 Statement of Financial Accounting Standards
("SFAS") No. 121, Accounting for Impairment of Long-Lived Assets and for Long-
Lived Assets to be Disposed of. In accordance with SFAS No. 121, the carrying
values of long-lived assets are periodically reviewed by the Company and
impairments would be recognized if the expected future operating non-
discounted cash flows derived from an asset were less than its carrying value.
Deferred Loan Fees
Costs incurred in connection with entering into or amending debt agreements
are capitalized to Other Assets and amortized to interest expense using the
effective interest method over the lives of the related debt.
Goodwill and Product Rights, Licenses and Regulatory Approvals
Goodwill is being amortized over 25 years on a straight-line basis. Product
rights, licenses and regulatory approvals are amortized on a straight-line
basis over the expected profitable and useful lives of the underlying products
and manufacturing facilities, generally for periods ranging from 10 to 20
years.
Investments in Marketable Securities
The Company's available-for-sale marketable securities are carried at fair
market value and are included in Other Assets in the accompanying balance
sheets. Unrealized gains are recorded directly to stockholders' equity, net of
applicable income taxes. The Company uses the specific identification method
of determining cost in calculating related gains and losses. The Company does
not own held-to-maturity or trading securities.
Estimated Fair Value of Financial Instruments
The carrying amounts of financial instruments, including cash and cash
equivalents, accounts receivable, accounts payable and accrued liabilities,
approximate fair value because of the current nature of these instruments. The
carrying amounts reported for revolving credit and long-term debt approximate
fair value because the interest rates on these instruments are subject to
changes with market interest rates.
Revenue Recognition
Revenues are recognized when products are shipped. Provisions for estimated
sales allowances, returns and losses are accrued at the time revenues are
recognized.
Research and Development Expenditures
Expenditures for research and development are expensed as incurred.
Taxes on Income
The Company accounts for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes. Under this standard, deferred taxes on income are
provided for those items for which the reporting period and methods for income
tax purposes differ from those used for financial statement purposes using the
asset and liability method. Deferred income taxes are recognized for the tax
consequences of "temporary differences" by applying enacted statutory rates
applicable to future years to differences between the financial statement
carrying amounts and the tax bases of existing assets and liabilities.
F-8
SCHEIN PHARMACEUTICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF SEPTEMBER 1997 AND FOR THE NINE-MONTHS ENDED SEPTEMBER 28,
1996 AND SEPTEMBER 27, 1997 IS UNAUDITED)
Foreign Currency Translations
Assets and liabilities of international affiliates are translated at current
exchange rates and related translation adjustments are reported as a component
of stockholders' equity. Income statement accounts are translated at the
average rates during the period.
Concentration of Credit Risk
The Company is potentially subject to a concentration of credit risk with
respect to its trade receivables, the majority of which are due from
wholesalers, drug store chains, and distributors. The Company performs ongoing
credit evaluations of its customers and generally does not require collateral.
The Company maintains sufficient allowances and insurance to cover potential
or anticipated losses for uncollectible accounts.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Effect of Recently Issued Accounting Standards
In June 1997, the Financial Accounting Standards Board issued two new
disclosure standards.
Statement of Financial Accounting Standards No. 130 ("SFAS No. 130"),
Reporting Comprehensive Income, establishes standards for reporting and
display of comprehensive income, its components and accumulated balances.
Comprehensive income is defined to include all changes in equity except those
resulting from investments by owners and distributions to owners. Among other
disclosures, SFAS No. 130 requires that all items that are required to be
recognized under current accounting standards as components of comprehensive
income be reported in a financial statement that is displayed with the same
prominence as other financial statements.
Statement of Accounting Standards No. 131 ("SFAS No. 131"), Disclosures
about Segments of an Enterprise and Related Information, which supersedes SFAS
No. 14, Financial Reporting for Segments of a Business Enterprise, establishes
standards for the way that public enterprises report information about
operating segments in annual financial statements and requires reporting of
selected information about operating segments in interim financial statements
issued to the public. It also establishes standards for disclosures regarding
products and services, geographic areas and major customers. SFAS No. 131
defines operating segments as components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in
asserting performance.
Both of these new standards are effective for financial statements for
periods beginning after December 15, 1997 and require comparative information
for earlier years to be restated. Results of operations and financial position
will be unaffected by implementation of these new standards. The Company has
not determined whether either of these two standards will have a material
impact on its financial statement disclosure.
F-9
SCHEIN PHARMACEUTICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF SEPTEMBER 1997 AND FOR THE NINE-MONTHS ENDED SEPTEMBER 28,
1996 AND SEPTEMBER 27, 1997 IS UNAUDITED)
NOTE 2--RESTRUCTURING
As discussed in Note 1, SHI, the former parent corporation of the Company,
was merged into the Company in 1995. Prior to September 1994, in addition to
its ownership of the Company, SHI was engaged in the manufacture, distribution
and sale of dental, medical and veterinary products ("Henry Schein"). In 1992,
SHI initiated a series of transactions as part of a corporate reorganization
plan (the "Restructuring") to split off Henry Schein to certain SHI
stockholders and realign the ownership interests of SHI. In September 1994,
the series of transactions culminated when the capital stock of Henry Schein
was distributed to individuals (and certain trusts established by them) who
were holders (or beneficiaries of trusts and estates which were holders) of
SHI's common stock prior to September 30, 1994 ("Historical SHI
Stockholders").
The transactions related to the Restructuring were initiated in December
1992 when SHI contributed the net assets of Henry Schein to a newly formed
company which was owned by SHI. Schein Pharmaceutical, Inc. and Henry Schein
both issued common stock to their respective chief executive officers
("CEOs"), which were forfeitable if certain conditions were not satisfied, and
paid cash bonuses to reimburse them for the personal income tax effects of the
stock issuance and reimbursements. SHI subsequently issued shares of its
common stock in exchange for the Schein Pharmaceutical, Inc. stock issuance
and these shares were reflected in the 1992 financial statements.
The Restructuring continued in 1993, when Historical SHI Stockholders and
Company management agreed to a transaction whereby an investor would purchase
a portion of SHI's outstanding shares from Historical SHI Stockholders and
seek future strategic alliances (the "Minority Investor Transaction").
Following governmental regulatory review and Surrogate Court approval, the
closing occurred on September 30, 1994. The Restructuring transactions
recorded in 1994 are as follows:
(i) SHI distributed the shares of Henry Schein to the Historical SHI
Stockholders.
(ii) SHI issued 6,945 shares of its common stock in exchange for the
minority interest-redeemable stock in Schein Pharmaceutical, Inc.'s
subsidiaries. The $13.2 million fair value of the shares issued exceeded
the minority interest previously recorded by $7.3 million. Of this amount,
$5.5 million was classified as special compensation expense in 1994 (for
Schein Pharmaceutical, Inc. employees) and $1.8 million was recorded as a
distribution by the Company to Henry Schein (for the CEO of Henry Schein).
(iii) As a result of the Minority Investor Transaction described above,
the shares of common stock issued to the CEOs of the Company and Henry
Schein became free of the forfeiture provisions. Accordingly, the shares
were revalued using the September 30, 1994 fair value. The amounts relating
to (1) the Company's CEO totaled $18.6 million and was recorded as special
compensation expense, and (2) Henry Schein's CEO totaled $5.7 million, and
the excess of that amount over the 1992 fair value totaled $3.1 million,
which was recorded as a capital distribution.
(iv) SHI retained the services of investment banking and financial
advisory firms. Of the fees paid to these firms, $1.5 million was charged
to retained earnings, as such amount related to the Minority Investor
Transaction.
(v) SHI redeemed its outstanding preferred stock for $25.7 million,
paying $20.7 million in cash and canceling a $5.0 million loan to a
preferred stockholder.
(vi) SHI established a supplemental retirement program for its CEO and
recognized as current expense the Company's obligation under the plan,
estimated at $5.0 million. This liability is included in Other Liabilities
in the accompanying balance sheets.
F-10
SCHEIN PHARMACEUTICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF SEPTEMBER 1997 AND FOR THE NINE-MONTHS ENDED SEPTEMBER 28,
1996 AND SEPTEMBER 27, 1997 IS UNAUDITED)
Professional fees incurred by the Company of $4.2 million in 1994 in
connection with the Restructuring were recorded as restructuring expense.
NOTE 3--ACQUISITIONS AND INVESTMENTS IN INTERNATIONAL AFFILIATES
The Company acquired all the outstanding capital stock of Marsam
Pharmaceuticals Inc. ("Marsam") in September 1995 for $245.0 million in cash.
Marsam develops, manufactures and markets generic injectable prescription
drugs. The acquisition was accounted for as a purchase. The purchase price of
$245.0 million exceeded the book value of the net assets acquired by $193.0
million. Of the excess purchase price, $92.0 million was allocated to increase
the net assets acquired to fair value, principally related to regulatory
facility and product approvals. Acquired in-process Marsam research and
development projects were valued at $30.0 million and were expensed at the
time of the acquisition. Goodwill of $108.0 million, consisting of the
remaining excess purchase price of $71.0 million and a $37.0 million deferred
tax liability resulting from the write-up of the net assets to fair value. is
being amortized over 25 years. Marsam's results of operations have been
included in the consolidated statements of operations since the date of
acquisition.
The following summarized, unaudited pro forma results of operations for 1994
and 1995 assume the acquisition occurred as of the beginning of 1994. In
preparing the pro forma data, adjustments have been made for the amortization
of goodwill and other intangibles acquired, the interest expense related to
borrowing agreements to finance the purchase price and, in 1994 only, the
write-off of acquired in-process Marsam research and development projects.
Since the valuation of Marsam's net assets and in-process research and
development projects may have differed at January 1, 1994 from amounts
recorded at September 1, 1995, the information presented is not necessarily
indicative of results of operations that would have occurred had the
acquisition been consummated at the beginning of the respective periods, or of
future results of the combined companies.
YEAR ENDED
-------------------------
DECEMBER 31, DECEMBER 30,
1994 1995
------------ ------------
(IN THOUSANDS)
Net revenues....................................... $420,441 $417,041
Net income (loss).................................. (39,763) 5,781
During 1995 and 1996, the Company invested approximately $3.5 million and
$2.0 million, respectively, and $0.2 million for the nine months ended
September 27, 1997, to acquire up to a 50% interest in each of several
international pharmaceutical businesses. These businesses are jointly owned
with subsidiaries of Bayer AG, the parent of Bayer Corp., a minority investor
in the Company. These investments are accounted for under the equity method
and are included in Other Assets in the accompanying balance sheets. The
Company recorded losses of approximately $0.3 million and $3.3 million in
fiscal 1995 and fiscal 1996, respectively, and $1.6 million and $2.7 million
for the nine months ended September 28, 1996 and September 27, 1997,
respectively, as its share of the operating results of these businesses.
Additionally, the Company incurred expenses of approximately $2.1 million and
$2.9 million in fiscal 1995 and fiscal 1996, respectively, and approximately
$2.0 million and $1.8 million for the nine months ended September 28, 1996 and
September 27, 1997, to identify, evaluate, and establish these and other
potential international business ventures. All equity losses and other
expenses resulting from the Company's investments in international businesses
in fiscal 1995 and fiscal 1996 are included in other expense, net, in the
accompanying statements of operations. The Company generally anticipates that
these international businesses will not have significant revenues or
operations for a period of two to three years, during which time the
businesses incur expenses to register products in anticipation of future
sales.
F-11
SCHEIN PHARMACEUTICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF SEPTEMBER 1997 AND FOR THE NINE-MONTHS ENDED SEPTEMBER 28,
1996 AND SEPTEMBER 27, 1997 IS UNAUDITED)
NOTE 4--INVENTORIES
Inventories are summarized as follows:
DECEMBER 30, DECEMBER 28, SEPTEMBER 27,
1995 1996 1997
------------ ------------ -------------
(IN THOUSANDS)
Finished products.................... $ 47,874 $ 59,632 $ 50,223
Work in-process...................... 20,671 27,332 36,893
Raw materials and supplies........... 47,415 44,301 36,895
-------- -------- --------
$115,960 $131,265 $124,011
======== ======== ========
NOTE 5--PROPERTY, PLANT AND EQUIPMENT
Major classes of property, plant and equipment consist of the following:
DECEMBER 30, DECEMBER 28, SEPTEMBER 27,
1995 1996 1997
------------ ------------ -------------
(IN THOUSANDS)
Land................................ $ 4,725 $ 4,725 $ 4,725
Buildings and improvements.......... 60,770 63,019 63,829
Plant and office equipment.......... 85,126 97,825 100,521
Construction-in-progress............ 6,949 3,310 7,976
-------- -------- --------
157,570 168,879 177,051
Less: Accumulated depreciation and
amortization....................... 49,004 61,139 69,703
-------- -------- --------
$108,566 $107,740 $107,348
======== ======== ========
Depreciation and amortization expense for property, plant and equipment
amounted to $8.3 million, $10.5 million, and $12.1 million in fiscal 1994,
fiscal 1995 and fiscal 1996, respectively, and $9.2 million and $8.5 million
for the nine months ended September 28, 1996 and September 27, 1997,
respectively.
NOTE 6--INTANGIBLE AND OTHER ASSETS
Product Rights, Licenses and Regulatory Approvals, net, consists of the
following:
DECEMBER 30, DECEMBER 28, SEPTEMBER 27,
1995 1996 1997
------------ ------------ -------------
(IN THOUSANDS)
Product rights and licenses.......... $ 8,522 $ 12,611 $ 12,522
Regulatory approvals, products....... 78,000 78,000 78,000
Regulatory approvals, facilities..... 10,000 10,000 10,000
------- -------- --------
96,522 100,611 100,522
Less: Accumulated amortization....... 1,956 7,926 12,420
------- -------- --------
$94,566 $ 92,685 $ 88,102
======= ======== ========
Accumulated amortization of goodwill was $1.4 million, $5.8 million and $9.0
million at December 30, 1995, December 28, 1996 and September 27, 1997,
respectively.
F-12
SCHEIN PHARMACEUTICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF SEPTEMBER 1997 AND FOR THE NINE-MONTHS ENDED SEPTEMBER 28,
1996 AND SEPTEMBER 27, 1997 IS UNAUDITED)
Included in Other Assets in the accompanying balance sheets are marketable
securities consisting of equity securities of:
DECEMBER 30, DECEMBER 28, SEPTEMBER 27,
1995 1996 1997
------------ ------------ -------------
(IN THOUSANDS)
Cost................................. $3,317 $ 5,660 $ 3,918
Gross unrealized gain................ 60 6,686 11,322
------ ------- -------
Fair value........................... $3,377 $12,346 $15,240
====== ======= =======
Included in Other expenses (income), net for the nine months ended September
27, 1997, the Company recorded $9.9 million of realized gains of securities
sold.
NOTE 7--ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Included in accounts payable are outstanding checks of approximately $5.4
million, $6.2 million and $5.0 million as of December 30, 1995, December 28,
1996 and September 27, 1997, respectively.
Accrued expenses consist of the following:
DECEMBER 30, DECEMBER 28, SEPTEMBER 27,
1995 1996 1997
------------ ------------ -------------
(IN THOUSANDS)
Salaries and related expenses....... $15,398 $18,300 $17,703
Profit-sharing expenses............. 1,673 8,637 8,060
Other............................... 17,868 13,818 16,995
------- ------- -------
$34,939 $40,755 $42,758
======= ======= =======
NOTES 8--TAXES ON INCOME
Provisions for Federal, state and Puerto Rico income taxes consist of the
following:
YEAR ENDED
--------------------------------------
DECEMBER 31, DECEMBER 30, DECEMBER 28,
1994 1995 1996
------------ ------------ ------------
(IN THOUSANDS)
Current:
Federal.............................. $15,786 $ 5,736 $7,404
State and Puerto Rico................ 5,700 1,662 1,129
------- ------- ------
21,486 7,398 8,533
------- ------- ------
Deferred:
Federal.............................. (3,497) 2,131 (2,215)
State and Puerto Rico................ (2,824) 953 (1,127)
------- ------- ------
(6,321) 3,084 (3,342)
------- ------- ------
$15,165 $10,482 $5,191
======= ======= ======
F-13
SCHEIN PHARMACEUTICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF SEPTEMBER 1997 AND FOR THE NINE-MONTHS ENDED SEPTEMBER 28,
1996 AND SEPTEMBER 27, 1997 IS UNAUDITED)
Deferred tax assets and liabilities are classified as current and non-
current as follows:
DECEMBER 30, DECEMBER 28,
1995 1996
------------ ------------
(IN THOUSANDS)
Deferred Taxes, Current:
Deferred tax assets........................... $ 9,764 $ 9,354
Deferred tax liabilities...................... (108) --
-------- --------
9,656 9,354
-------- --------
Deferred Taxes, Non-Current:
Deferred tax assets........................... 6,905 8,268
Deferred tax liabilities...................... (48,226) (48,434)
-------- --------
(41,321) (40,166)
-------- --------
$(31,665) $(30,812)
======== ========
Differences between the Federal statutory rate and the Company's effective
tax rate are as follows:
YEAR ENDED
--------------------------------------
DECEMBER 31, DECEMBER 30, DECEMBER 28,
1994 1995 1996
------------ ------------ ------------
(IN THOUSANDS)
Statutory rate....................... $ 7,629 $(1,546) $2,309
State and Puerto Rico................ 1,869 1,722 241
Special compensation charges......... 5,553 -- --
Amortization of goodwill............. -- 505 1,515
Effect of partially tax-exempt
operations in Puerto Rico........... -- -- (519)
Equity in net loss of unconsolidated
affiliates.......................... -- -- 1,202
Write-off of acquired in-process
Marsam research and development..... -- 10,500 --
Other, net........................... 114 (699) 443
------- ------- ------
$15,165 $10,482 $5,191
======= ======= ======
Temporary differences which give rise to a significant portion of deferred
tax assets and liabilities are as follows:
DECEMBER 30, DECEMBER 28,
1995 1996
------------ ------------
(IN THOUSANDS)
Gross Deferred Tax Assets:
Inventory valuation.......................... $ 4,358 $ 5,220
Accounts receivable allowances............... 3,139 2,694
Net operating loss carryforwards, state and
Puerto Rico................................. 1,700 1,880
Deferred compensation expense................ 4,238 4,806
Other........................................ 3,126 3,022
-------- --------
16,561 17,622
-------- --------
Gross Deferred Tax Liabilities:
Write-up of acquired Marsam assets to fair
value....................................... (35,361) (32,692)
Depreciation and amortization................ (12,744) (12,461)
Unrealized gains from marketable securities.. -- (2,489)
Other........................................ (121) (792)
-------- --------
(48,226) (48,434)
-------- --------
$(31,665) $(30,812)
======== ========
F-14
SCHEIN PHARMACEUTICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF SEPTEMBER 1997 AND FOR THE NINE-MONTHS ENDED SEPTEMBER 28,
1996 AND SEPTEMBER 27, 1997 IS UNAUDITED)
NOTE 9--BORROWINGS
Long-term debt consists of the following:
DECEMBER 30, DECEMBER 28, SEPTEMBER 27,
1995 1996 1997
------------ ------------ -------------
(IN THOUSANDS)
Revolving credit and term loan
agreement......................... $280,000 $186,000 $156,000
Senior subordinated loan........... -- 100,000 100,000
Capitalized lease obligations...... 558 480 413
-------- -------- --------
280,558 286,480 256,413
Less: Current Maturities........... 40,078 41,090 32,943
-------- -------- --------
$240,480 $245,390 $223,470
======== ======== ========
In September 1995, the Company entered into a secured revolving credit and
term loan agreement (as amended, the "credit agreement") with a group of banks
to provide funds for the acquisition of Marsam, the repayment of certain of
its debt, working capital and general corporate purposes. The credit agreement
provided a term loan facility of $250.0 million and a revolving credit
facility of $100.0 million. In December 1996, the Company prepaid $100.0
million of the term loan portion of the credit agreement using the proceeds
from a new senior subordinated loan (see below). As a result of this payment
and a scheduled payment, the term loan facility was reduced to $145.0 million.
Quarterly principal payments on the term loan commence in September 1998 and
end in the year 2001. The revolving credit usage was $30.0 million, $41.0
million and $26.0 million as of December 30, 1995, December 28, 1996 and
September 27, 1997, respectively. The $100.0 million revolving credit line is
available through December 2001. Amounts borrowed under the revolving credit
facility are expected to be repaid during the next year and, accordingly, are
classified as current in the accompanying balance sheets.
Borrowings under the credit agreement bear interest, which is payable at
least quarterly, at a rate equal to the bank's floating base rate plus a
premium ranging from zero to 1.50%, or at a rate equal to LIBOR plus a premium
ranging from 0.75% to 2.50%, depending on the type of borrowing and the
Company's performance against certain criteria. The effective borrowing rate
was 7.14%, 8.10% and 7.80% at December 30, 1995, December 28, 1996 and
September 27, 1997, respectively. A commitment fee ranging from 0.25% to 0.50%
per annum of the unused daily amount of the total commitment is payable
quarterly.
Borrowings under the credit agreement are secured by a mortgage on all real
property, liens on inventory and receivables and a pledge of subsidiaries'
stock. The debt is guaranteed by the Company's domestic subsidiaries.
The credit agreement contains limitations and restrictions concerning
investments, acquisitions, capital expenditures, debt, liens, transactions
with stockholders, dividend payments and borrowings. In addition, the
agreement requires the Company to maintain minimum net worth levels and
certain ratios (as defined) of leverage to EBITDA, working capital and fixed
charge coverage. Amounts available for dividends as of December 28, 1996 were
not material.
In December 1996, the Company entered into an agreement for a $100.0 million
senior subordinated loan with a lead-manager of the credit agreement. The
proceeds of the loan were used to prepay principal on the term loan of the
credit agreement. The effective borrowing rate was 9.60% and 9.72% as of
December 28, 1996 and September 27, 1997, respectively. Outstanding borrowings
under the senior subordinated loan agreement bear interest, payable quarterly,
at a rate equal to LIBOR plus 4% or the bank's floating base rate plus 3%,
through January 31, 1998. Thereafter, the principal amount of the loan will be
increased to reflect related fees due and will mature in five years. Interest
will be due semi-annually and the interest rate will be fixed at a new rate.
See Note 17--Subsequent Events.
F-15
SCHEIN PHARMACEUTICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF SEPTEMBER 1997 AND FOR THE NINE-MONTHS ENDED SEPTEMBER 28,
1996 AND SEPTEMBER 27, 1997 IS UNAUDITED)
In connection with entering into the credit agreement, the Company incurred
costs of $5.9 million in 1995. During 1996, the Company incurred costs of $2.3
million in connection with entering into the senior subordinated loan and
amending the credit agreement. The Company capitalized these costs, which are
included in Other Assets in the accompanying balance sheets. The amounts
amortized in 1995 and 1996 were $0.7 million and $2.6 million, respectively.
At December 28, 1996, aggregate required principal payments for the
succeeding four years, the remaining term under existing long-term debt
agreements, excluding the revolving credit facility, are $15.3 million in
1998, $38.2 million in 1999, $45.8 million in 2000 and $45.8 million in 2001.
NOTE 10--COMMITMENTS AND CONTINGENCIES
COMMITMENTS
Operating Leases
The Company leases facilities and equipment under operating leases expiring
through 2007. Some of the leases have renewal options and most contain
provisions for passing through certain incremental costs. At December 28,
1996, future net minimum annual rental payments under the noncancelable leases
are as follows (in thousands):
1997................................................................ $ 5,484
1998................................................................ 4,778
1999................................................................ 4,223
2000................................................................ 3,602
2001................................................................ 3,129
2002-2007........................................................... 14,145
-------
Total minimum lease payments........................................ $35,361
=======
Total rental expense for the fiscal years ended 1994, 1995 and 1996 was
approximately $3.7 million, $4.7 million and $5.4 million, respectively and
$3.9 million and $4.1 million for the nine months ended September 28, 1996 and
September 27, 1997, respectively.
The Company has an agreement to lease warehousing space through September
1999, and then purchase this property for $5.3 million in October 1999. In
1997 the Company intends to exercise its option to purchase this property. The
property consists of a building of approximately 109,800 square feet on
approximately 8.5 acres of land. The purchase price includes a $0.3 million
deposit paid in 1994.
Employee Benefit Plans
During 1996, the Company merged its defined contribution retirement plans
into one plan. The discretionary contributions to the plan vest to employees
over several years. Additionally, employees are permitted to make pre-tax
contributions to the plan with the Company making matching contributions. The
contributions to these plans which were charged to operations, as determined
by the Board of Directors, amounted to approximately $4.2 million, $4.9
million and $3.5 million for the fiscal years ended 1994, 1995 and 1996,
respectively and $3.7 million and $4.7 million for the nine months ended
September 28, 1996 and September 27, 1997, respectively.
The Company has entered into deferred compensation agreements with certain
officers of the Company. As of December 1996, obligations under these
agreements were approximately $6.6 million, assuming the officers remain with
the Company over the vesting period of four years. These agreements provide
for accelerated vesting
F-16
SCHEIN PHARMACEUTICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF SEPTEMBER 1997 AND FOR THE NINE-MONTHS ENDED SEPTEMBER 28,
1996 AND SEPTEMBER 27, 1997 IS UNAUDITED)
if there is a change in control of the Company and under certain other
conditions. The Company expensed $2.7 million, $2.0 million, and $4.8 million
in the fiscal years ended 1994, 1995, and 1996, respectively, and $1.7 million
and $1.1 million in the nine months ended September 28, 1996 and September 27,
1997, respectively, in connection with these agreements.
The Company established an unfunded supplemental retirement program for its
CEO during 1994. The estimated obligation of $5.0 million is included in Other
Liabilities in the accompanying balance sheets.
The Company maintains a Book Equity Appreciation Rights Program (the
"Program") to allow certain employees to benefit from an increase in the
Company's book value as calculated according to a formula defined in the
Program. All participants are fully bested in their book equity appreciation
rights ("BEARs") and the Company does not intend to make any additional grants
of BEARs. Amounts charged to results of operations were not material in any
period presented.
Product Technology Licensing and Development
On September 1, 1994, the Company entered into a worldwide technology
licensing and development agreement with a U.K.-based pharmaceutical
development company for the development of a portfolio of oral controlled
release and/or transdermal products. Under the terms of the agreement, the
Company is obligated to pay product licensing fees and development costs
totaling $32.0 million, dependent on achievement of interim milestones. In
1994, the Company incurred obligations totaling $5.3 million under the
agreement, consisting of a $5.0 million licensing fee, which was capitalized,
and $0.3 million in development costs, which were charged to research and
development expense. The Company paid and expensed $2.1 million in development
costs in 1995. In 1996, the Company incurred obligations totaling $3.0
million, consisting of a $0.5 million licensing fee, which was capitalized,
and $2.5 million in development costs which were charged to research and
development expense. The remaining commitment under the agreement as of
December 28, 1996 was $21.6 million, subject to the completion of interim
milestones.
On September 30, 1996, the Company entered into a marketing and distribution
agreement with a corporation to jointly commercialize a certain product. Under
the terms of the agreement, the Company is obligated to pay product licensing
fees and development costs of $12.0 million, dependent on the achievement of
certain milestones. In 1996, the Company paid and capitalized a $2.0 million
product license fee.
Consulting Agreement
The Company has a series of agreements (collectively, the "Consulting
Agreement") with a patent attorney (the "Consultant"). Under the Consulting
Agreement, the Consultant, together with the Company, identified certain
patents on branded pharmaceutical products which might be susceptible to a
challenge and the Consultant acted as counsel to the Company in those
instances where it decided to proceed with a patent challenge.
The Consulting Agreement generally provides that if a challenge based on an
opinion of the Consultant results in either a favorable judicial determination
which enables the Company to market a generic version of the product or in a
settlement, the Company will pay the Consultant one half of the adjusted gross
profit (as defined) from its sales of the generic versions of the patented
product (until the date on which the patent would normally have expired) or
one half of the proceeds of any settlement.
In 1994, the Company settled two such patent challenges. One of the
settlements involved a license grant to the Company to market the product
which was the subject of the challenge beginning in 1996. The other allows for
future cash payments and/or license rights to the Company. In connection with
the second settlement, the Company received revenues of $5 and $12.5 million
in 1995 and 1996, respectively, and $12.5 million and $25.0 million in the
nine months ended September 28, 1996 and September 27, 1997, which are
included in Net revenues in the accompanying statements of operations.
F-17
SCHEIN PHARMACEUTICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF SEPTEMBER 1997 AND FOR THE NINE-MONTHS ENDED SEPTEMBER 28,
1996 AND SEPTEMBER 27, 1997 IS UNAUDITED)
Profit-sharing expenses pursuant to the Consulting Agreement and included in
Cost of sales were $2.5 million in fiscal 1995, $14.9 million in fiscal 1996
and $9.3 million and $24.5 million for the nine months ended September 28,
1996 and September 27, 1997, respectively. In 1994, there were no related
profit-sharing expenses.
CONTINGENCIES
Litigation
The Company is a defendant in several product liability cases. These cases
are typical for a company in the pharmaceutical industry. The Company also is
involved in other proceedings and claims of various types. Management
presently believes that the disposition of all such known proceedings and
claims, individually or in the aggregate, will not have a material adverse
effect on the Company's financial position, operations or liquidity.
NOTE 11--STOCKHOLDERS' EQUITY AND STOCK OPTIONS
Common Stock
The Company has Class A Common Shares ("Class A") and Class B Common Shares
("Class B"). Each of the two classes of stock are identical except that Class
B shares are currently non-voting. Upon the earlier occurrence of an initial
public offering or May 15, 1999, each authorized share of Class B will be
automatically reclassified as and converted into one new Class A share.
Upon the closing of the Company's planned initial public offering, the Class
A and Class B will convert on a one-for-one basis to new shares of the
Company's common stock.
At December 30, 1995, December 28, 1996 and September 22, 1997, the Company
had 183,722, 183,244 and 183,244 Class A issued and outstanding, respectively.
The Company had 90,020 Class B for all periods presented.
During 1996, the Company agreed to repurchase 478 Common Shares for
approximately $1.0 million from a former executive of the Company. These
shares were retired in 1996.
Stock Option Plan
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, Accounting for Stock- Based Compensation. SFAS No. 123 encourages
entities to adopt that method in place of the provisions of Accounting
Principles Board Opinion Number 25, Accounting for Stock Issued to Employees
("APB No. 25"), for all arrangements under which employees receive shares of
stock or other equity instruments of the employer or the employer incurs
liabilities to employees in amounts based on the price of its stock. The
Company continues to account for such transactions in accordance with APB No.
25 and, as required by SFAS No. 123, has provided pro forma information
regarding net income as if compensation cost for the Company's stock option
plan had been determined in accordance with the fair value method prescribed
by SFAS No. 123.
Under a 1993 Stock Option Plan, a 1995 Non-Employee Director Stock Option
Plan, and effective March 3, 1997, a 1997 Stock Option Plan the Company may
grant non-qualified and incentive stock options to certain officers, employees
and directors. The options expire ten years from the grant date. The options
may be exercised subject to continued service (three to five years) and
certain other conditions. Accelerated vesting occurs following a change in
control of the Company and under certain other conditions. The Company may
grant an aggregate of 55,797 shares under the plans. However, 3,503 shares
under the 1993 Stock Option Plan will not be granted.
F-18
SCHEIN PHARMACEUTICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF SEPTEMBER 1997 AND FOR THE NINE-MONTHS ENDED SEPTEMBER 28,
1996 AND SEPTEMBER 27, 1997 IS UNAUDITED)
The Company estimates the fair value of each stock option at the grant date
by using the Black-Scholes option-pricing model with the following weighted
average assumptions used for grants in 1995 and 1996: no dividend yield,
expected volatility of 0.01%, risk free interest rates of 5% to 7%, expected
lives of 10 years and a discount for marketability of 25%. If compensation
cost for the Company's stock option plan had been determined in accordance
with SFAS No. 123, net income (loss) would have been reduced in 1995 and 1996
by approximately $1.0 million and $2.3 million, respectively.
The following table summarizes information about stock options outstanding
at December 28, 1996:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------- ---------------------
WEIGHTED
AVERAGE WEIGHTED
REMAINING WEIGHTED AVERAGE
NUMBER CONTRACTUAL AVERAGE NUMBER EXERCISE
OUTSTANDING LIFE (YEARS) EXERCISE PRICE EXERCISABLE PRICE
----------- ------------ -------------- ----------- ---------
Exercise Prices
$1,000.00............. 1,859 6.9 $1,000.00 1,749 $1,000.00
$2,000.00............. 22,156 7.8 2,000.00 13,507 2,000.00
------ --- --------- ------ ---------
24,015 7.8 $1,922.49 15,256 $1,885.59
====== === ========= ====== =========
Transactions under the stock option plans and individual non-qualified
options not under the plans are summarized as follows:
WEIGHTED
AVERAGE
SHARES EXERCISE PRICE
------ --------------
Shares under option at December 29, 1993............. 12,340 $1,838.85
Granted (at $2,000.00 per share)................... 5,094 2,000.00
Exercised.......................................... -- --
Canceled (at $2,000.00 per share).................. (1,078) 2,000.00
------ ---------
Shares under option at December 31, 1994............. 16,356 1,878.21
Granted (at $2,000.00 per share)................... 3,601 2,000.00
Exercised.......................................... -- --
Canceled (at $2,000.00 per share).................. (77) 2,000.00
------ ---------
Shares under option at December 30, 1995............. 19,880 1,900.35
Granted (at $2,000.00 per share)................... 4,887 2,000.00
Exercised.......................................... -- --
Canceled (at $1,000.00 to $2,000.00 per share)..... (752) 1,832.70
------ ---------
Shares under option at December 28, 1996............. 24,015 1,922.49
Granted (at $1,500.00 per share)................... 8,031 1,500.00
Exercised.......................................... -- --
Canceled (at $2,000.00 per share).................. (2,365) 2,000.00
------ ---------
Shares under option at September 27, 1997 (at
$1,000.00 to $2,000.00 per share)................... 29,681 $1,801.95
====== =========
Options exercisable at December
1994............................................... 8,951 $1,955.70
1995............................................... 10,780 $1,926.18
1996............................................... 15,256 $1,885.59
Weighted average fair value of options granted dur-
ing:
1995............................................... $ 915.12
1996............................................... $ 896.67
F-19
SCHEIN PHARMACEUTICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF SEPTEMBER 1997 AND FOR THE NINE-MONTHS ENDED SEPTEMBER 28,
1996 AND SEPTEMBER 27, 1997 IS UNAUDITED)
The Company recorded deferred stock compensation of approximately $2.0
million in 1993, reflecting options granted with exercise prices at less than
fair value. This amount is being amortized over five years.
NOTE 12--SPECIAL COMPENSATION, RESTRUCTURING AND RELOCATION
Special compensation, restructuring and relocation expense in fiscal 1994
consists of the following:
(IN THOUSANDS)
Special compensation--see Note 2............................. $23,582
Excess of fair value of shares exchanged or amounts paid on
exchange of minority interest............................... 5,457
Professional fees for Restructuring.......................... 4,215
Relocation of corporate headquarters......................... 340
-------
$33,594
=======
NOTE 13--INTEREST EXPENSE, NET
Interest expense, net, consists of the following:
YEAR ENDED NINE MONTHS ENDED
-------------------------------------- ---------------------------
DECEMBER 31, DECEMBER 30, DECEMBER 28, SEPTEMBER 28, SEPTEMBER 27,
1994 1995 1996 1996 1997
------------ ------------ ------------ ------------- -------------
(IN THOUSANDS)
Interest expense........ $1,875 $10,150 $23,715 $16,165 $20,536
Interest income......... (382) (145) (430) (84) (80)
------ ------- ------- ------- -------
$1,493 $10,005 $23,285 $16,081 $20,456
====== ======= ======= ======= =======
NOTE 14--RELATED PARTY TRANSACTIONS
In the conduct of its business, the Company sells pharmaceutical products to
Henry Schein for distribution to its customers. Net sales to Henry Schein were
$6.4 million, $5.3 million and $8.6 million in fiscal 1994, 1995 and 1996,
respectively, and $5.5 million and $5.4 million for the nine months ended
September 28, 1996 and September 27, 1997. Included in accounts receivable at
both December 30, 1995, December 28, 1996 and September 27, 1997 are amounts
due from Henry Schein for sale of products of approximately $0.9 million, $0.9
million and $0.8 million, respectively.
In 1994, the Company entered into a 3-year co-promotion agreement with Bayer
Corp. covering a certain product of the Company. Under the terms of the
agreement, in exchange for promotional support, the Company shared with Bayer
Corp. financial results in excess of specified threshold amounts. Included in
selling, general and administrative expenses, the Company recorded selling
expenses under the agreement of approximately $3.0 million in 1996 and $2.9
million for the nine months ended September 27, 1997. There were no selling
expenses under this agreement for 1994 and 1995. Included in Accrued expenses
in the accompanying balance sheet as of December 28, 1996 and September 27,
1997 are approximately $1.3 million and $1.7 million, respectively, of selling
expenses under the agreement.
NOTE 15--SUPPLEMENTAL CASH FLOW INFORMATION
In connection with the Restructuring (see Note 2), there were certain non-
cash transactions. In 1994, non-cash transactions were 1) the issuance of SHI
common stock in exchange for all minority interests in Schein Pharmaceutical's
subsidiaries, the formula value of which approximated $6.2 million, 2) a $1.8
million
F-20
SCHEIN PHARMACEUTICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF SEPTEMBER 1997 AND FOR THE NINE-MONTHS ENDED SEPTEMBER 28,
1996 AND SEPTEMBER 27, 1997 IS UNAUDITED)
distribution to Henry Schein for the excess of the fair value of the common
stock issued in exchange for the minority interest in Schein Pharmaceutical's
subsidiaries over amounts previously recorded, 3) a distribution of $3.1
million to Henry Schein in recognition of the adjusted fair value of the
Company's stock distributed in 1992, and 4) a $5.0 million cancellation of a
preferred stock stockholder loan in connection with the redemption of
preferred stock.
The Company paid taxes of approximately $22.8 million, $8.9 million and $5.8
million for the years ended 1994, 1995 and 1996, respectively. The Company
paid interest of approximately $1.5 million, $8.0 million and $23.2 million
for the years ended 1994, 1995 and 1996, respectively.
In 1994, the Company accrued a $3 million product licensing commitment which
was paid in early 1995. The amount was capitalized under Product Rights,
Licenses and Regulatory Approvals in the accompanying balance sheets.
As discussed in Note 3, the Company acquired all the capital stock of Marsam
for $245 million in 1995. In connection with the acquisition, liabilities were
assumed as follows:
(IN MILLIONS)
Fair value of assets acquired.................................. $ 293
Cash paid for Marsam stock..................................... (245)
-----
Liabilities assumed............................................ $ 48
=====
As discussed in Note 11, the Company accrued approximately $1.0 million as
of December 28, 1996 in connection with the repurchase of 478 Common shares.
NOTE 16--MAJOR PRODUCT AND CUSTOMERS
One product generated 16%, 17% and 19% of net revenues for fiscal 1994, 1995
and 1996, respectively, and 17% and 20% for the nine months ended September
28, 1996 and September 27, 1997, respectively.
Four customers contributed 13%, 12%, 12% and 10%, respectively, of 1994 net
revenues. Three customers generated 13%, 11% and 10%, respectively, of 1995
net revenues, respectively. Three customers contributed 16%, 15% and 11%,
respectively, of 1996 net revenues. Three customers contributed 17%, 16% and
11%, respectively, of revenues for the period ended September 27, 1997. In all
periods, these customers are nationwide wholesalers through which the majority
of the Company's products are distributed to the retail, institutional and
managed care markets.
NOTE 17--SUBSEQUENT EVENTS
In November 1997, the Company entered into a Commitment Letter with an
investment banking firm providing for the issuance and sale of $100 million of
Senior Floating Rate Notes due 2004. Interest on the notes will be due
quarterly at a LIBOR-based rate. The Company expects this offering to be
completed in December 1997, at which time the proceeds will be used to retire
the existing $100 million senior subordinated loan (Note 9).
The Company has filed a registration statement covering an initial public
offering under which it anticipates raising net proceeds of approximately $45
million upon the sale of its common stock. If the offering is consummated, the
net proceeds will be used in whole or in part to pay down the Company's debt.
F-21
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Marsam Pharmaceuticals Inc.
Cherry Hill, New Jersey
We have audited the accompanying consolidated balance sheets of Marsam
Pharmaceuticals Inc. and subsidiary as of December 31, 1994 and 1993, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1994. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Marsam
Pharmaceuticals Inc. and subsidiary as of December 31, 1994 and 1993, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1994, in conformity with
generally accepted accounting principles.
Coopers & Lybrand LLP
2400 Eleven Penn Center
Philadelphia, Pennsylvania
February 24, 1995
F-22
MARSAM PHARMACEUTICALS INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
------------------------
1994 1993
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents.......................... $10,470,300 $ 6,836,700
Investments available-for-sale, at fair market
value............................................. 4,710,000 8,341,900
Accounts receivable, net of reserves of $1,222,400
and $574,600 at December 31, 1994 and 1993........ 6,147,800 6,567,100
Inventory.......................................... 10,830,200 9,602,300
Deferred income taxes.............................. 526,400 --
Other current assets............................... 2,111,800 741,400
----------- -----------
Total current assets............................... 34,796,500 32,089,400
Property and equipment, net of accumulated
depreciation of $7,009,200 and $5,641,300 at
December 31, 1994 and 1993........................ 20,042,100 17,039,100
Deposits for property and equipment................ 250,000 253,600
Deferred income taxes.............................. 253,200 --
Other assets....................................... 1,520,100 --
----------- -----------
Total assets..................................... $56,861,900 $49,382,100
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................... $ 2,012,500 $ 1,095,600
Accrued compensation............................... 346,800 391,300
Accrued liabilities................................ 1,342,500 337,400
Deferred revenue................................... 1,175,000 --
----------- -----------
Total liabilities................................ 4,876,800 1,824,300
=========== ===========
Long-term liabilities:
Deferred compensation.............................. 813,800 533,600
Deferred income taxes.............................. 14,500 155,900
----------- -----------
Total liabilities................................ 5,705,100 2,513,800
=========== ===========
COMMITMENTS AND CONTINGENCIES (NOTE 8)
Stockholders' equity:
Preferred stock, par value $.01 per share;
authorized 1,000,000 shares....................... -- --
Common stock, par value $.01 per share; authorized
30,000,000 shares at December 31, 1993; issued and
outstanding 11,047,562 shares at December 31, 1994
and 11,017,986 shares at December 31, 1993........ 110,500 110,200
Additional paid-in capital......................... 51,739,500 51,093,900
Retained earnings (deficit)........................ (693,200) (4,335,800)
----------- -----------
Total stockholders' equity....................... 51,156,800 46,868,300
----------- -----------
Total liabilities and stockholders' equity..... $56,861,900 $49,382,100
=========== ===========
See accompanying notes to consolidated financial statements.
F-23
MARSAM PHARMACEUTICALS INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31,
------------------------------------
1994 1993 1992
----------- ----------- -----------
Net sales................................ $35,012,800 $23,500,900 $16,722,400
Cost of goods sold....................... 26,127,600 18,059,500 14,895,900
----------- ----------- -----------
Gross profit............................ 8,885,200 5,441,400 1,826,500
----------- ----------- -----------
Operating costs and expenses:
Selling, general and administrative..... 4,741,900 2,486,800 3,004,300
Research and development................ 2,536,500 2,009,100 2,702,300
----------- ----------- -----------
Total operating expenses................ 7,278,400 4,495,900 5,706,600
----------- ----------- -----------
Income (loss) from operations.......... 1,606,800 945,500 (3,880,100)
Other income, net........................ 1,903,000 1,067,400 1,034,700
----------- ----------- -----------
Income (loss) before income taxes...... 3,509,800 2,012,900 (2,845,400)
Provision for income taxes............... (132,800) 40,000 110,000
----------- ----------- -----------
Net income (loss)...................... $ 3,642,600 $ 1,972,900 $(2,955,400)
=========== =========== ===========
Net income (loss) per common and common
equivalent share........................ $ 0.33 $ 0.18 $ (0.27)
=========== =========== ===========
Weighted average common & common
equivalent
shares outstanding...................... 11,163,100 11,168,000 10,948,900
=========== =========== ===========
See accompanying notes to consolidated financial statements.
F-24
MARSAM PHARMACEUTICALS INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK
------------------- ADDITIONAL
NO. OF PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT
---------- -------- ----------- -----------
BALANCES, JANUARY 1, 1992.......... 10,945,136 $109,500 $50,541,900 $(3,353,300)
---------- -------- ----------- -----------
Exercise of stock options.......... 10,275 100 53,800 --
Common stock grant................. 5,500 0 47,400 --
Net loss........................... -- -- -- (2,955,400)
---------- -------- ----------- -----------
BALANCES, DECEMBER 31, 1992........ 10,960,911 109,600 50,643,100 (6,308,700)
Exercise of stock options.......... 57,075 600 450,800 --
Net income......................... -- -- -- 1,972,900
---------- -------- ----------- -----------
BALANCES, DECEMBER 31, 1993........ 11,017,986 110,200 51,093,900 (4,335,800)
Exercise of stock options.......... 23,826 200 586,800 --
Common stock grant................. 5,750 100 58,800 --
Net income......................... -- -- -- 3,642,600
---------- -------- ----------- -----------
BALANCES, DECEMBER 31, 1994........ 11,047,562 $110,500 $51,739,500 $ (693,200)
========== ======== =========== ===========
See accompanying notes to financial statements.
F-25
MARSAM PHARMACEUTICALS INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
--------------------------------------
1994 1993 1992
----------- ----------- ------------
Cash flows from operations:
Net income........................... $ 3,642,600 $ 1,972,900 $ (2,955,400)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization........ 1,367,900 1,137,700 1,085,100
Inventory write-offs................. (113,900) (155,500) 280,500
Increase in accounts receivable
reserves............................ 647,800 574,600 --
Deferred compensation expense........ 280,200 206,300 253,000
Deferred tax provision (benefit)..... (555,900) 24,800 110,000
(Gain) loss on sale of property...... -- 5,300 (4,200)
Common stock grant................... 58,900 -- 47,400
(Increase) decrease in accounts
receivable.......................... (228,500) (5,929,200) 1,629,900
(Increase) in inventory.............. (1,114,000) (2,465,700) (4,913,100)
(Increase) in other assets........... (1,370,400) (311,100) (93,800)
Increase (decrease) in accounts
payable............................. 916,900 (436,300) 324,700
Increase (decrease) in accrued
expenses............................ 505,800 (840,900) 565,000
Increase (decrease) in deferred
revenue............................. 1,175,000 -- (101,800)
----------- ----------- ------------
Net Cash provided by operating ac-
tivities.......................... 5,212,400 (6,217,100) (3,772,700)
----------- ----------- ------------
Investment activities:
Purchase of investments "available-
for-sale"........................... (500,000) (3,628,300) (4,446,800)
Sale of investments "available-for-
sale"............................... 4,131,900 4,233,200 --
Purchase of property and equipment... (3,662,500) (1,151,400) (2,080,800)
Proceeds from sale of property....... -- -- 8,800
Deposits on property and equipment... (250,000) (150,400) (202,400)
Purchase of long-term investments.... (1,520,100) -- --
----------- ----------- ------------
Net Cash used in investment activi-
ties.............................. (1,800,700) (696,900) (6,721,200)
----------- ----------- ------------
Financing activities:
Proceeds from issuance of common
stock............................... 221,900 451,400 53,900
----------- ----------- ------------
Net cash provided by financing
activities.......................... 221,900 451,400 53,900
----------- ----------- ------------
Increase (decrease) in cash and cash
equivalents........................... 3,633,600 (6,462,600) (10,440,000)
Cash and cash equivalents, beginning of
period................................ 6,836,700 13,299,300 23,739,300
----------- ----------- ------------
Cash and cash equivalents, end of
period................................ $10,470,300 $ 6,836,700 $ 13,299,300
=========== =========== ============
See accompanying notes to consolidated financial statements.
F-26
MARSAM PHARMACEUTICALS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS:
The Company was founded in 1985 and is engaged in the business of
developing, manufacturing, marketing and distributing generic injectable
prescription drug products. The Company markets penicillin, cephalosporin and
other injectable products.
The Company, prior to 1993, operated under joint venture agreements with
E.R. Squibb & Sons, Inc. ("Squibb") and Geneva Pharmaceuticals, Inc.
("Geneva"). Both joint ventures required the Company to manufacture its
products and ship them to its joint venture partner, with the partner then
being responsible for marketing and distributing the Company's products. The
joint venture agreement with Squibb (as amended, the "Joint Agreement") was in
place from December 1985 to June 1990, and was replaced with a restructure and
release agreement (the "Restructure Agreement") which required each party to
manufacture for the other certain products through May 1993. The Restructure
Agreement was later extended to December 31, 1994.
The joint venture agreement with Geneva (the "Distribution Agreement") was
executed in June 1990 and was in place until July 1992, at which time the
Company filed a complaint against Geneva asserting certain breaches by Geneva
of its fiduciary duties to the Company and of its contractual obligations
under the Distribution Agreement. The financial statements for 1992 include
approximately $1,100,000 of costs related to the termination of the
Distribution Agreement. In July 1993 the Company and Geneva executed a
settlement agreement (the "Settlement Agreement") which resolved the
outstanding litigation between the two companies. Pursuant to the Settlement
Agreement, Geneva paid the sum of $550,000 to the Company to balance the
accounts between the parties and in full settlement of all claims and
counterclaims. In 1993, as a result of the settlement, the Company reduced
previously accrued liabilities by approximately $600,000.
In 1993 the Company began to develop its own sales and marketing force to
sell its products under the Marsam label and other private labels. The Company
markets these products to pharmaceutical wholesalers and distributors,
hospitals, home infusion companies and other medical providers. In 1994, more
than 75% of revenues were from direct sales of Marsam-label products.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation:
The consolidated financial statements include to accounts of Marsam
Pharmaceuticals Inc. and subsidiary. All intercompany transactions are
eliminated in consolidation investments in corporate joint ventures in which
the Company has a 20 to 50 percent ownership are accounted for by the equity
method. Other investments, less than 20 percent owned, are carried at their
original cost. Equity and cost investments are included in other assets in the
consolidated financial statements.
Revenue Recognition:
Sales to Geneva in 1992 were at a price equal to the estimated production
cost per unit plus 10% for products manufactured by Marsam and the amount per
unit actually paid plus 5% for sourced injectable products ("Transfer Price").
At the time of shipment to Geneva, revenue was recognized at the Transfer
Price less one-half of the applicable 10% or 5% profit. The portion of the
profit which was deferred was recognized as revenue when Geneva shipped the
Products. Net Proceeds were earned when the products were sold by Geneva. Net
Proceeds were to generally represent Geneva's net sales of the Products less
the applicable Transfer Price and certain specific distribution and operating
costs.
Principal Customers:
Sales to Squibb were $8,090,100, $8,126,500, and $7,375,800 for each of the
years ended December 31, 1994, 1993 and 1992, respectively.
F-27
MARSAM PHARMACEUTICALS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Sales to Geneva were $578,700 and $7,297,400 for the years ended December
31, 1993 and 1992, respectively.
Sales of Marsam label products are sold predominately through pharmaceutical
wholesalers to third parties under contract with the Company; thus, no one
customer comprises a significant portion of sales.
Credit Risk:
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash and cash
equivalents, investments, and accounts receivable. The Company invests cash
and cash equivalents in savings and money market accounts of high credit
qualified financial institutions, as well as high credit commercial paper and
time deposits. Investments are placed in investment grade debt. Accounts
receivable are substantially comprised of amounts from sales to relatively few
large contract and wholesale customers. Credit limits, ongoing credit
evaluation and account monitoring procedures are utilized to minimize the risk
of loss. Collateral is generally not required.
Cash Equivalents:
Cash equivalents consist of those securities with maturities of three months
or less when purchased.
Investments:
Effective January 1, 1994, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 115, "Accounting for Certain Investments
in Debt and Equity Securities." There was no cumulative effect of adopting
SFAS 115 as of January 1, 1994, and prior period financial statements have not
been restated. At December 31, 1994 the Company owned current "available-for-
sale" marketable securities which are carried at fair market value on the
balance sheet. Unrealized gains or losses are recorded directly to
stockholders equity, net of applicable income taxes. At December 31, 1994,
there were no unrealized gains or losses related to these securities, as the
cost was equal to fair value on that date.
Prior to 1994, the Company recorded investments in marketable securities at
the lower of cost or fair market value. At December 31, 1993, the Company had
investments with a cost equal to their fair market value.
For the years ending December 31, 1994, 1993, and 1992, the Company realized
interest and dividend income of $732,100, $521,100 and $990,700, respectively,
which is included in other income.
Inventories:
Inventories are stated at the lower of cost or market. Cost is determined by
the first in, first out method.
Property and Equipment:
Property and equipment is stated at cost. Depreciation of property and
equipment is computed using the straight-line method based on the estimated
useful lives of the assets, which range from five to forty years. Amortization
of leasehold improvements is recorded ratably over the remaining lease term or
useful life, if shorter.
Maintenance and repairs are charged to expense as incurred; major renewals
and improvements are capitalized. Gains or losses on the disposition of fixed
assets are reflected in income.
Income Taxes:
The Company records deferred taxes by using the asset and liability method.
Under this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets
F-28
MARSAM PHARMACEUTICALS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
and liabilities and are measured using the enacted tax rates and laws that
will be in effect when the differences are expected to reverse. Valuation
allowances are established when necessary to reduce deferred tax assets to the
amounts expected to be realized. Federal tax credits are recognized as
deferred tax assets.
Net Income (Loss) per Share:
Net income (loss) per share was calculated based upon the weighted average
common and common equivalent shares outstanding. Common share equivalents
included in the calculation represent shares issuable upon assumed exercise of
stock options which would have a dilutive effect in years where there are
earnings. Equivalents had no material effect on the computation in 1994, 1993,
or 1992.
Statements of Cash Flows:
At December 31, 1994, 1993 and 1992, approximately $454,800, $85,900 and
$279,700, respectively of amounts payable relating to the acquisition of
property and equipment were excluded from the statement of cash flows. In 1994
and 1992, the Company paid income taxes of $5,200 and $5,800, respectively.
3. INVENTORY:
At December 31, 1994 and 1993, inventory consisted of the following:
DECEMBER 31
----------------------
1994 1993
----------- ----------
Raw materials (including components)................. $ 5,954,700 $6,294,900
Work-in-process...................................... 95,900 379,700
Finished goods....................................... 4,779,600 2,927,700
----------- ----------
$10,830,200 $9,602,300
=========== ==========
4. PROPERTY AND EQUIPMENT:
At December 31, 1994 and 1993, property and equipment were as follows:
DECEMBER 31,
-----------------------
1994 1993
----------- -----------
Land................................................ $ 548,000 $ 348,000
Building and improvements........................... 10,297,900 6,668,800
Machinery and equipment............................. 9,850,400 7,445,700
Furniture and fixtures.............................. 907,500 818,600
Vehicles............................................ 84,800 84,800
Machinery and equipment and leasehold improvements
under installation................................. 5,362,700 7,314,500
----------- -----------
27,051,300 22,680,400
Less accumulated depreciation and amortization...... 7,009,200 5,641,300
----------- -----------
$20,042,100 $17,039,100
=========== ===========
F-29
MARSAM PHARMACEUTICALS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. INCOME TAXES:
The provision for (benefit from) income taxes for the years ended December
31, 1994, 1993, and 1992 includes to following:
DECEMBER 31,
---------------------------
1994 1993 1992
--------- ------- --------
Current provision:
Federal....................................... $ 423,100 $15,200 $ --
State......................................... -- -- --
Deferred provision (benefit):
Federal....................................... $(514,900) $13,900 $110,000
State......................................... (41,000) 10,900 --
--------- ------- --------
$(132,800) $40,000 $110,000
========= ======= ========
In 1994 and 1993, current federal income tax expense was generated on
alternative minimum taxable income. The current federal income tax provisions
on earnings for 1994 and 1993 were offset by the utilization of federal net
operating loss carryforwards. Utilization of federal net operating loss
carryforwards in 1994, created by tax expense for employee stock options,
resulted in a $365,100 increase to additional paid-in capital. There was no
current federal income tax provision for 1992, due to the loss incurred by the
Company. A deferred federal income tax benefit arose in 1994 due to the
recognition of the Company's deferred tax assets. In the fourth quarter of
1994, a net $300,000 benefit was recognized due to a reduction in the deferred
tax asset valuation allowance. A deferred federal income tax provision arose
in 1993 and 1992 from temporary differences on which net operating loss
carryforwards could not be utilized. At December 31, 1994, the Company had
utilized the balance of its net operating loss carryforwards for federal tax
purposes. At December 31, 1994 the Company had utilized the balance of its
alternative minimum tax net operating loss carryforwards and had available
alternative minimum tax credit carryforwards of $198,600 which do not expire.
The current state income tax provisions for 1994 and 1993 were offset by
utilization of state net operating loss carryforwards. There was no current
state income tax provision for 1992 due to the loss incurred by the Company.
In 1994, a deferred state income tax benefit arose from the recognition of the
Company's deferred tax assets. In 1993, a deferred state income tax provision
arose from temporary differences on which net operating loss carryforwards
could not be utilized. At December 31, 1994, the Company had available state
net operating loss carryforwards of $1,877,600 to offset future state taxable
income. The state net operating loss carryforwards expire 1996 through 1999.
F-30
MARSAM PHARMACEUTICALS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The components of the net deferred income tax asset (liability) at December
31, 1994 and 1993 were as follows:
DECEMBER 31,
-----------------------
1994 1993
---------- -----------
Deferred tax assets:
Net operating loss carryforwards
Federal.......................................... $ -- $ 1,523,900
State............................................ 169,000 391,100
Federal tax credits............................... 936,600 402,100
Accounts receivable, inventory and other
reserves......................................... 624,300 339,400
Deferred revenue.................................. 399,500 --
Other............................................. 462,900 322,100
---------- -----------
2,592,300 2,978,600
Valuation allowance............................... (867,400) (2,630,900)
---------- -----------
Deferred tax assets.............................. 1,724,900 347,700
---------- -----------
Deferred tax liabilities:
Depreciation...................................... 529,400 390,500
Other............................................. 430,400 113,100
---------- -----------
Deferred tax liabilities......................... 959,800 503,600
---------- -----------
Net deferred income tax asset (liability)........ $ 765,100 $ (155,900)
========== ===========
6. SETTLEMENT AGREEMENT WITH GREAT LAKES CHEMICAL CORPORATION:
On July 18, 1994, the Company and Great Lakes Chemical Corporation ("GLCC")
executed a comprehensive settlement agreement which resolved the outstanding
litigation between them concerning the failure of GLCC to supply the Company
certain raw materials in accordance with the agreement between them. Under the
terms of the settlement, GLCC paid $2.35 million to the Company and agreed to
begin supplying the Company with an inhaled anesthetic raw material commencing
upon the availability of production quantities from its existing facility and
continuing for at least five years after completion of a new, larger
production facility. The payment received by the Company on July 19, 1994, is
being ratably recognized as income during the period of July 1, 1994 through
June 30, 1995, the period during which the Company expected to market the
product but will be unable to market because of GLCC'S failure to supply the
raw material. For the year ended December 31, 1994, the Company recognized
$1,175,000, of the $2.35 million received from GLCC, as other income. The
balance of $1,175,000 is included as deferred revenue at December 31, 1994.
If GLCC fails to deliver agreed quantities of product by specified dates, or
if the product does not receive FDA approval by July 15, 1995, the Company is
entitled to be reimbursed for lost profits associated with the inability of
the Company to market the product. Such payments can be received until January
15, 1998.
7. INVESTMENT IN BUSINESS:
On September 23, 1994, the Company purchased, for $1,500,000, a minority
equity interest in Sabratek Corporation ("Sabratek"), a medical device
manufacturer. The Company received one million shares of cumulative
convertible preferred stock of Sabratek in return for its investment. The
Company has committed to an additional investment of $500,000 provided that
Sabratek achieves certain goals. The Company has also received warrants to
purchase an additional 1.5 million shares of Sabratek. The Company accounts
for this investment under the cost method, as the Company has a less than 20%
interest in Sabratek.
F-31
MARSAM PHARMACEUTICALS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. COMMITMENTS AND CONTINGENCIES:
Purchase Commitments:
At December 31, 1994 and 1993, commitments for capital expenditures
approximated $638,000 and $1,592,000, respectively, relating to the purchase
of equipment for the Company's manufacturing facilities.
In January 1994, the Company entered into an agreement to lease warehousing
space on an adjacent property for a 3 year term (67,800 square feet for the
first two years and 109,800 square feet for the final year), expiring February
28, 1997. Future minimum rental payments under the lease are $158,500,
$252,800 and $45,200 in 1995, 1996 and 1997, respectively. The Company has
agreed to purchase this property, which consists of a building of
approximately 109,800 square feet on approximately 8.8 acres of land, in March
1997. The purchase price is $5,319,000 and includes a $250,000 deposit which
was paid during 1994, and two installment payments of $3,000,000 in March 1997
and $2,069,000 in October 1997.
Total rent expense for the years ended December 31, 1994, 1993, and 1992
aggregated $166,700, $78,300 and $70,700.
Product Liability:
The Company has product liability insurance for $5 million per occurrence,
$5 million in the aggregate on a claims made basis. Management is not aware of
any occurrences which could give rise to a product liability claim.
9. CAPITAL TRANSACTIONS:
Stock Option Plan:
On December 6, 1986, the Company adopted a Stock Option Plan (the "1986
Stock Option Plan"), under which an aggregate of 675,000 shares of Common
Stock could have been issued pursuant to nonqualified and incentive stock
options granted to certain officers, employees, directors, consultants and
advisors. Options were granted at an exercise price not less than the fair
market value of the shares on the date of grant. Such options generally became
exercisable in equal installments over a four-year period. Options issued
prior to 1992 expire 5 years from the date of grant. Subsequent options expire
10 years from the date of grant.
On May 26, 1993, the Company adopted a new Stock Option Plan (the "1993
Stock Option Plan"), under which an aggregate of 750,000 shares of Common
Stock may be issued pursuant to nonqualified and incentive stock options
granted to certain officers, employees, directors, consultants and advisors.
All options granted May 26, 1993 and later are from the 1993 Stock Option
Plan. Options under the 1993 Stock Option Plan may be granted at an exercise
price not less than the fair market value of the shares on the date of grant.
Such options generally become exercisable in equal installments over a four-
year period. Options expire 10 years from the date of grant.
F-32
MARSAM PHARMACEUTICALS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A summary of share transactions under the Company's Stock Option Plans
follows:
1993 PLAN 1986 PLAN
--------- ---------
Balances at December 31,
1991 ($4.33-13.75 per
share).................. -- 129,975
Granted ($8.63-14.00 per
share).................. -- 356,250
Exercised ($4.33-10.00
per share)............. -- (10,275)
Canceled ($8.00-14.00
per share)............. -- (8,125)
------- -------
Balances at December 31,
1992 ($4.33-14.00 per
share).................. -- 467,825
Granted ($9.00-22.00 per
share)................. 301,800 102,800
Exercised ($4.33-14.00
per share)............. -- (57,075)
Canceled ($4.33-16.25
per share)............. (3,500) (22,775)
------- -------
Balances at December 31,
1993 ($8.00-22.00 per
share).................. 298,300 490,775
Granted ($11.00-20.25
per share)............. 142,000 --
Exercised ($8.00-14.00
per share)............. -- (23,826)
Canceled ($8.63-19.88
per share)............. (11,700) (4,500)
------- -------
Balances at December 31,
1994 ($8.00-22.00 per
share).................. 428,600 462,449
======= =======
Total options exercisable under both plans at December 31, 1994 were
292,987. The total number of shares available for option under both plans were
321,400, 451,700 and 132,700 as of December 31, 1994, 1993 and 1992,
respectively.
F-33
MARSAM PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
-------------------------
1995 1994
------------ ------------
Net revenues......................................... $ 21,310,900 $ 15,619,000
Cost of goods sold................................... 15,589,100 11,337,900
------------ ------------
Gross profit....................................... 5,721,800 4,281,100
------------ ------------
Operating costs and expenses:
Selling, general and administrative................ 2,789,000 2,266,100
Research and development........................... 1,818,100 1,079,500
------------ ------------
Total operating expenses......................... 4,607,100 3,345,600
------------ ------------
Income from operations........................... 1,114,700 935,500
Other income, net.................................... 1,587,000 304,300
------------ ------------
Income before income taxes....................... 2,701,700 1,239,800
Provision for income taxes....................... 810,400 40,000
------------ ------------
Net income......................................... $ 1,891,300 $ 1,199,800
============ ============
Net income per common & common equivalent share...... $ 0.17 $ 0.11
============ ============
Fully diluted weighted average common & common
equivalent shares outstanding....................... 11,454,800 11,158,200
------------ ------------
See accompanying notes to consolidated financial statements.
F-34
MARSAM PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
JUNE 30, 1995
-------------
ASSETS
Current assets:
Cash and cash equivalents...................................... $ 8,131,600
Investments available-for-sale, at fair market value........... 7,010,000
Accounts receivable, net of reserves of $1,867,400............. 5,958,800
Inventory...................................................... 14,871,300
Deferred income taxes.......................................... 473,800
Other current assets........................................... 2,054,000
-----------
Total current assets......................................... 38,499,500
Property and equipment, net of accumulated depreciation of
$7,857,600.................................................... 20,691,700
Deposits for property and equipment............................ 431,300
Deferred income taxes.......................................... 208,400
Other assets................................................... 1,482,700
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Total assets................................................. $61,313,600
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................... $ 4,501,300
Accrued compensation........................................... 508,700
Accrued liabilities............................................ 1,811,900
Deferred revenue............................................... --
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Total current liabilities.................................... 6,821,900
Long-term liabilities:
Deferred compensation.......................................... 966,600
Deferred income taxes.......................................... 49,400
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Total liabilities............................................ 7,837,900
Commitments and contingencies
Stockholders' equity:
Preferred stock, par value $.01 per share; authorized
1,000,000 shares.............................................. --
Common stock, par value $.01 per share; authorized
30,000,000 shares; issued and outstanding 11,083,487.......... 110,800
Additional paid-in capital..................................... 52,166,800
Retained earnings.............................................. 1,198,100
-----------
Total stockholders' equity..................................... 53,475,700
-----------
Total liabilities and stockholders' equity................... $61,313,600
===========
See accompanying notes to consolidated financial statements.
F-35
MARSAM PHARMACEUTICALS INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
--------------------------
1995 1994
------------ ------------
Cash flows from operations:
Net income....................................... $ 1,891,300 $ 1,199,800
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization.................... 848,400 617,400
Deferred compensation expense.................... 152,800 108,000
Deferred tax provision........................... 132,300 16,000
Decrease in accounts receivable.................. 189,000 1,533,100
(Increase) in inventory.......................... (4,041,100) (738,500)
(Increase) (decrease) in other assets............ 95,200 (807,800)
Increase in accounts payable..................... 2,424,000 2,951,400
Increase in accrued expenses..................... 631,300 181,800
(Decrease) in deferred liabilities............... (1,175,000) --
------------ ------------
Net cash provided by operating activities...... 1,148,200 5,061,200
------------ ------------
Investment activities:
Purchase of investments available-for-sale....... (2,800,000) --
Sale of investments available-for-sale........... 500,000 1,325,400
Purchase of property and equipment............... (1,433,200) (351,500)
Deposits on property and equipment............... (181,300) (1,128,400)
------------ ------------
Net cash used in investment activities......... (3,914,500) (154,500)
------------ ------------
Financing activities:
Proceeds from issuance of common stock........... 427,600 213,200
------------ ------------
Net cash provided by financing activities...... 427,600 213,200
------------ ------------
Increase (decrease) in cash and cash equivalents... (2,338,700) 5,119,900
Cash and cash equivalents, beginning of period..... 10,470,300 6,836,700
------------ ------------
Cash and cash equivalents, end of period........... $ 8,131,600 $ 11,956,600
============ ============
See accompanying notes to consolidated financial statements.
F-36
MARSAM PHARMACEUTICALS INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Marsam
Pharmaceuticals Inc. and Subsidiary have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the applicable regulations of the Securities and Exchange Commission.
Accordingly, the accompanying unaudited consolidated financial statements do
not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting only of normal recurring
accruals) considered necessary for a fair presentation have been included. For
further information, reference is made to the financial statements and
footnotes thereto included herein.
The consolidated financial statements include the accounts of Marsam
Pharmaceuticals Inc. and Subsidiary. All intercompany transactions are
eliminated in consolidation. Investments in corporate joint ventures in which
the Company has a 20 to 50 percent ownership are accounted for by the equity
method. Other investments, less than 20 percent owned, are carried at their
original cost. Equity and cost investments are included in other assets in the
consolidated financial statements.
2. INVENTORY
At June 30, 1995, inventory consisted of the following:
JUNE 30, 1995
-------------
Raw Materials (including components)......................... $ 7,623,200
Work-in-process.............................................. 366,800
Finished goods............................................... 6,881,300
-----------
$14,871,300
===========
3. SETTLEMENT AGREEMENT WITH GREAT LAKES CHEMICAL CORPORATION
On July 18, 1994, the Company and Great Lakes Chemical Corporation (GLCC)
executed a comprehensive settlement agreement which resolved the outstanding
litigation between them concerning the failure of GLCC to supply the Company
certain raw materials. Under the terms of the settlement, GLCC paid $2.35
million to the Company and agreed to begin supplying the Company with the
inhaled anesthetic raw material commencing upon the availability of production
quantities from its existing facility and continuing for at least five years
after completion of a new, larger production facility. The payment, received
by the Company on July 19, 1994, was ratably recognized as income during the
period of July 1, 1994 through June 30, 1995, the period during which the
Company originally expected to launch the product. For the three and six-month
periods ended June 30, 1995, the Company recognized $587,500 and $1,175,000,
respectively, of the $2.35 million received from GLCC, as other income.
If GLCC fails to deliver agreed quantities of product by specified dates the
Company is entitled to be reimbursed for lost profits associated with the
inability of the Company to market the product. Such payments can be received
until January 15, 1998.
4. INCOME TAXES
The provision for income tax expenses is based on an estimated full year
effective income tax rate. The rate reflects the Company's utilization of
certain federal tax credits and its federal and state net operating loss
carryforwards during 1995. The provision for income tax for the same periods
in 1994 was insignificant due to the availability of federal and state net
operating loss carryforwards.
F-37
MARSAM PHARMACEUTICALS INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
5. NET INCOME PER SHARE
Net income per share is based on fully diluted weighted average common and
common equivalent shares outstanding for the three and six-month periods ended
June 30, 1995 and 1994.
F-38
ANNEX A
FORM OF TRANSFEREE LETTER OF REPRESENTATION
Schein Pharmaceutical, Inc.
100 Campus Drive
Florham Park, NJ 07932
Attn: Chief Financial Officer
Ladies and Gentlemen:
This certificate is delivered to request a transfer of $ principal
amount of the Senior Floating Rate Notes Due 2004 (the "Notes") of Schein
Pharmaceutical, Inc. (the "Company").
Upon transfer, the Notes would be registered in the name of the new
beneficial owner as follows:
Name: _________________________________________________________
Address: ______________________________________________________
Taxpayer ID Number: ___________________________________________
The undersigned represents and warrants to you that:
1. We are an institutional "accredited investor" (as defined in Rule
501(a)(1),(2),(3) or (7) under the Securities Act of 1933, as amended (the
"Securities Act")) purchasing for our own account or for the account of such
an institutional "accredited investor" at least $250,000 principal amount of
the Notes, and we are acquiring the Notes not with a view to, or for offer or
sale in connection with, any distribution in violation of the Securities Act.
We have such knowledge and experience in financial and business matters as to
be capable of evaluating the merits and risk of our investment in the Notes
and we invest in or purchase securities similar to the Notes in the normal
course of our business. We and any accounts for which we are acting are each
able to bear the economic risk of our or its investment.
2. We understand that the Notes have not been registered under the
Securities Act and, unless so registered, may not be sold except as permitted
in the following sentence. We agree on our own behalf and on behalf of any
investor account for which we are purchasing Notes to offer, sell or otherwise
transfer such Notes prior to the date which is two years after the later of
the date of original issue and the last date on which the Company or any
affiliate of the Company was the owner of such Notes (or any predecessor
thereto) (the "Resale Restriction Termination Date") only (a) to the Company,
(b) pursuant to a registration statement which has been declared effective
under the Securities Act, (c) in a transaction complying with the requirements
of Rule 144A under the Securities Act, to a person we reasonably believe is a
qualified institutional buyer under Rule 144A (a "QIB") that purchases for its
own account or for the account of a QIB and to whom notice is given that the
transfer is being made in reliance on Rule 144A, (d) pursuant to offers and
sales that occur outside the United States within the meaning of Regulation S
under the Securities Act, (e) to an institutional "accredited investor"
(within the meaning of Rule 501(a)(1),(2),(3), or (7) under the Securities
Act) that is purchasing for its own account or for the account of such an
institutional "accredited investor", in each case in a minimum principal
amount of Notes of $250,000 or (f) pursuant to any other available exemption
from the registration requirements of the Securities Act, subject in each of
the foregoing cases to any requirement of law that the disposition of our
property or the property of such investor account or accounts be at all times
within our or their control and in compliance with any applicable state
securities laws. The foregoing restrictions on resale will not apply
subsequent to the Resale Restriction Termination Date. If any resale or other
transfer of the Notes is proposed to be made pursuant to clause (e) above
prior to the Resale Restriction Termination Date, the transferor shall deliver
a letter from the transferee substantially in the form of this letter to the
Company and the Trustee, which shall provide, among other things, that the
transferee is an institutional "accredited investor" (within the meaning of
Rule 501(a)(1),(2),(3) or (7) under the Securities Act) that is acquiring such
Notes for investment purposes and not for distribution in violation of the
Securities Act. Each purchaser acknowledges that the Company and the Trustee
reserve the right prior to any offer, sale or other transfer prior to the
Resale Termination Date of the Notes pursuant to clause (d),(e) or (f) above
to require the delivery of an opinion of counsel, certifications and/or other
information satisfactory to the Company and the Trustee.
A-1
3. We agree on our own behalf and on behalf of any investor account for
which we are purchasing the Notes that (i) if it is an insurance company, the
funds to be used to purchase the Notes by it constitute (A) assets of an
insurance company general account maintained by it and the acquisition and
holding of each such Note by such account is exempt under United States
Department of Labor Prohibited Transaction Class Exemption ("PTCE") 95-60 or
(B) assets of an insurance company pooled separate account and the acquisition
and holding of each such Note by such account is exempt under PTCE 90-1, and
(ii) no part of the funds to be used to purchase the Notes to be purchased by
it constitute assets of any plan or employee benefit plan such that the use of
such assets constitutes a non-exempt prohibited transaction under the Employee
Retirement Income Security Act of 1974, as amended ("ERISA") or the Internal
Revenue Code of 1986, as amended (the "Code"). The representation is based
upon the purchaser's determination that a statutory or administrative
exemption is applicable or that the Company and its Affiliates are not parties
in interest or disqualified persons with respect to the purchaser or holder
plan or employee benefit plan. As used in this paragraph, the terms "employee
benefit plan" and "party in interest" shall have the meanings assigned to such
terms in Section 3 of ERISA, the term "Affiliate" shall have the meaning
assigned to such term in Section 407(d)(7) of ERISA and the terms
"disqualified person" and "plan" shall have the meanings assigned to such
terms in Section 4975 of the Code.
TRANSFEREE: _________________________
By: _________________________________
Name:
Title:
A-2
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No person has been authorized to give any information or to make any
representations other than those contained in this Offering Memorandum, and,
if given or made, such information or representations must not be relied upon
as having been authorized. This Offering Memorandum does not constitute an
offer to sell or the solicitation of an offer to buy any securities other than
the securities to which it relates or any offer to sell or the solicitation of
an offer to buy such securities in any circumstances in which such offer or
solicitation is unlawful. Neither the delivery of this Offering Memorandum nor
any offer or sale made hereunder shall, under any circumstances, create an
implication that there has been no change in the affairs of the Company since
the date hereof or that the information contained herein is correct as of any
time subsequent to its date.
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TABLE OF CONTENTS
Page
----
Offering Memorandum Summary............................................... 1
Risk Factors.............................................................. 9
The Company............................................................... 18
Use of Proceeds........................................................... 18
Capitalization............................................................ 19
Selected Consolidated Financial Data...................................... 20
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 22
Business.................................................................. 30
Management................................................................ 44
Certain Transactions...................................................... 52
Description of Certain Indebtedness....................................... 57
Description of Notes...................................................... 58
Exchange and Registration Rights Agreement................................ 84
Transfer Restrictions..................................................... 87
Certain Federal Income Tax Consequences................................... 90
Plan of Distribution...................................................... 92
Independent Public Accountants............................................ 94
Legal Matters............................................................. 94
Available Information..................................................... 94
Index to Consolidated Financial Statements................................ F-1
Form of Transferee Letter of Representation............................... A-1
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$100,000,000
[LOGO] SCHEIN PHARMACEUTICAL
SENIOR FLOATING RATE NOTES
DUE 2004
------------------
OFFERING MEMORANDUM
------------------
SOCIETE GENERALE
SecuritiesCorporation
December 19, 1997
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