S-1/A 1 a2077690zs-1a.txt S-1/A AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 21, 2002 REGISTRATION NO. 333-83638 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------------- AMENDMENT NO. 4 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 -------------------------- EON LABS, INC. (Exact name of registrant as specified in its charter) DELAWARE 2834 13-3653818 (State or other jurisdiction (Primary Standard (I.R.S. Employer of Industrial Identification No.) incorporation or organization) Classification Code Number) 227-15 NORTH CONDUIT AVENUE LAURELTON, NEW YORK 11413 (718) 276-8600 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) BERNHARD HAMPL, PH.D. PRESIDENT AND CHIEF EXECUTIVE OFFICER EON LABS, INC. 227-15 NORTH CONDUIT AVENUE LAURELTON, NEW YORK 11413 (718) 276-8600 (Name, address, including zip code, and telephone number, including area code, of agent for service) -------------------------- COPIES TO: STEVEN A. SEIDMAN, ESQ. ALLISON R. SCHNEIROV, ESQ. Willkie Farr & Gallagher Skadden, Arps, Slate, Meagher & Flom LLP 787 Seventh Avenue Four Times Square New York, New York 10019 New York, New York 10036 (212) 728-8000 (212) 735-3000 -------------------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE. -------------------------- If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended, check the following box. / / If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering. / / If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. / / THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities, and we are not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. SUBJECT TO COMPLETION, DATED MAY 21, 2002 9,800,000 Shares [LOGO] EON LABS, INC. Common Stock ----------- Prior to this offering, there has been no public market for our common stock. The initial public offering price of the common stock is expected to be between $14.00 and $16.00 per share. We have applied to list our common stock on The Nasdaq Stock Market's National Market under the symbol "ELAB." We are selling 9,380,540 shares of common stock and the selling stockholders are selling 419,460 shares of common stock. We will not receive any proceeds from the sale of stock by the selling stockholders. We have granted the underwriters an option to purchase a maximum of 1,470,000 additional shares to cover over-allotments, if any. Investing in our common stock involves risks. See "Risk Factors" on page 8.

Proceeds to Underwriting the Price to Discounts and Proceeds to Selling Public Commissions Eon Labs, Inc. Stockholders ----------------- ----------------- ----------------- ----------------- Per Share................................. $ $ $ $ Total..................................... $ $ $ $

Delivery of the shares of common stock will be made on or about , 2002. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. Credit Suisse First Boston Goldman, Sachs & Co. Banc of America Securities LLC CIBC World Markets The date of this prospectus is , 2002. INSIDE FRONT COVER [Photographs of products, exterior of Wilson, North Carolina facility and a number of our employees.] -------------- TABLE OF CONTENTS

PAGE -------- PROSPECTUS SUMMARY.................... 1 RISK FACTORS.......................... 8 SPECIAL NOTE REGARDING FORWARD- LOOKING STATEMENTS.................. 20 INDUSTRY AND MARKET DATA.............. 20 USE OF PROCEEDS....................... 20 DIVIDEND POLICY....................... 21 CAPITALIZATION........................ 22 DILUTION.............................. 23 SELECTED CONSOLIDATED FINANCIAL INFORMATION......................... 24 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS....................... 28 BUSINESS.............................. 38 MANAGEMENT............................ 53

PAGE -------- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................ 62 PRINCIPAL AND SELLING STOCKHOLDERS.... 64 DESCRIPTION OF CAPITAL STOCK, CERTIFICATE OF INCORPORATION AND BYLAWS.............................. 66 SHARES ELIGIBLE FOR FUTURE SALE....... 70 CERTAIN FEDERAL INCOME AND ESTATE TAX CONSIDERATIONS FOR NON-U.S. HOLDERS OF COMMON STOCK..................... 72 UNDERWRITING.......................... 75 NOTICE TO CANADIAN RESIDENTS.......... 78 LEGAL MATTERS......................... 79 EXPERTS............................... 79 WHERE YOU CAN FIND MORE INFORMATION... 79 INDEX TO FINANCIAL STATEMENTS......... F-1

YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE ON THE DATE OF THIS DOCUMENT. DEALER PROSPECTUS DELIVERY OBLIGATION UNTIL , 2002 (25 DAYS AFTER THE COMMENCEMENT OF THE OFFERING), ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALER'S OBLIGATIONS TO DELIVER A PROSPECTUS WHEN ACTING AS AN UNDERWRITER AND WITH RESPECT TO UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. PROSPECTUS SUMMARY EON LABS, INC. We are a generic pharmaceutical company engaged in developing, licensing, manufacturing, selling and distributing a broad range of prescription pharmaceutical products. We are an industry leader in obtaining abbreviated new drug application, or ANDA, approvals from the U.S. Food and Drug Administration, or FDA, for new generic pharmaceutical products. As of March 31, 2002, we marketed over 90 generic pharmaceutical products. Our experienced management team utilizes an integrated approach to select and develop generic pharmaceutical products in both niche and high volume markets in order to be the first generic alternative to market and to obtain favorable market share. We focus on drugs in a broad range of solid oral dosage forms, utilizing both immediate and sustained release delivery. We are also currently developing several generic transdermal patch products with our partner, Hexal AG. We do not depend on any single drug or therapeutic category for a majority of our sales. From January 1, 1996 through March 31, 2002, we received 47 ANDA approvals from the FDA. In each of 2000 and 2001, we were among the top five companies with the most ANDA approvals in the U.S. As of March 31, 2002, we had 13 ANDAs pending at the FDA. Nine of those pending ANDAs were for drugs that have developmental, manufacturing, technological or patent related challenges. In December 2000, we expanded our manufacturing capacity by purchasing a new manufacturing facility in Wilson, North Carolina to accommodate our growing pipeline of products. THE GENERIC PHARMACEUTICAL INDUSTRY The generic pharmaceutical industry has grown dramatically in recent years. We believe that several factors will cause the generic pharmaceutical industry to continue to grow in future years, including: the aging of the U.S. population; efforts by state governments, employers, third party payors and consumers to control health care costs; increased acceptance of generic products by physicians, pharmacists and consumers; and the increasing number of pharmaceutical products whose patents have expired or will expire and are or will be subject to competition from generic equivalents. According to data supplied by IMS Health, an independent provider of pharmaceutical market information, approximately $37.8 billion in current U.S. brand-name drug sales are expected to go off patent from January 1, 2002 through December 31, 2006. An average of 50 compounds are expected to lose patent protection or market exclusivity each year over the next five years. Forty-five of the compounds expected to lose patent protection or market exclusivity over the next five years are blockbuster drugs, which are drugs with annual sales in the United States of over $500 million. 1 OUR STRATEGY Our management team believes that our success derives from our ability to select attractive product candidates and to efficiently execute our product launch strategy, minimizing the time it takes from the selection to the marketing of our products. Our strategy has the following key elements: - CONTINUE TO BE FIRST TO MARKET WITH GENERIC ALTERNATIVES. Generic alternatives that are first to market have a higher likelihood of achieving favorable market share and enhancing profitability. We seek to ship a new product to our customers promptly upon the expiration of the patent or the exclusivity period for the brand-name reference drug. - DEVELOP GENERIC PHARMACEUTICAL PRODUCTS THAT HAVE HIGH BARRIERS TO ENTRY. We focus on drugs that have developmental, manufacturing, technological or patent related challenges, including difficult to source raw materials. - MAINTAIN A STEADY STREAM OF A BROAD RANGE OF HIGH QUALITY GENERIC PRODUCTS. We focus on developing and commercializing a steady stream of new generic products in multiple therapeutic categories, including blockbuster drugs which our customers necessarily purchase in large quantities. - GROW OUR BUSINESS THROUGH EXISTING AND NEW STRATEGIC ALLIANCES AND ACQUISITIONS. In addition to growing our business internally, we seek to grow our business through the development of strategic relationships with other generic pharmaceutical companies and through strategic acquisitions of pharmaceutical products and companies. - SUSTAIN OUR EXCELLENT FDA COMPLIANCE RECORD. We are proactive in maintaining strong relationships with the FDA, and we believe our track record of compliance with FDA standards and regulations has been an important factor in obtaining timely ANDA approvals. OUR COMPETITIVE STRENGTHS We believe that we have established a position as a market leader among generic pharmaceutical companies by capitalizing on the following core strengths: - STRONG, EXPERIENCED MANAGEMENT TEAM. Our seasoned management team has enabled us to generate consistent financial growth and accelerate product development timelines. As a result of the timely execution of our business strategy during 2000 and 2001, we were able to bring 11 products to market on the first day that generic competition commenced or immediately thereafter. - EXCELLENT DEVELOPMENT PRODUCTIVITY. Our experience in identifying and securing difficult to obtain raw materials and streamlining our product development process allowed us to be among the top five companies with the most ANDA approvals received in the U.S. during 2000 and 2001. - STRATEGIC PARTNERSHIP WITH HEXAL AG. Our strategic partnership with Hexal AG, the second largest generic pharmaceutical company in Germany, has enhanced our internal product development and our ability to license sophisticated technology. - MODERN, FLEXIBLE MANUFACTURING CAPABILITIES. We utilize manufacturing technologies for all major solid oral dosage forms and currently maintain an outstanding FDA compliance record. In December 2000, we expanded our manufacturing capacity by purchasing a new manufacturing facility in Wilson, North Carolina. We believe our logistical expertise and our manufacturing capabilities enable us to compete effectively in the solid oral dosage generic market. CORPORATE INFORMATION We were incorporated in Delaware in 1992. Our principal executive offices are located at 227-15 North Conduit Avenue, Laurelton, New York 11413, and our telephone number is (718) 276-8600. Our website is located at www.eonlabs.com. The information on our website is not intended to be part of this prospectus. This prospectus contains references to our trademark EON LABS(-Registered Trademark-). All other trademarks or tradenames referred to in this prospectus are the property of their respective owners. 2 THE OFFERING Common stock offered By us................................... 9,380,540 shares By the selling stockholders............. 419,460 shares Common stock outstanding after this offering................................ 42,739,629 shares (1) Over-allotment option..................... 1,470,000 shares Use of proceeds........................... We intend to use the proceeds of this offering to repay approximately $66.9 million of outstanding indebtedness, which includes accrued interest through March 31, 2002, to Hexal AG and the balance for general corporate purposes, including to fund working capital, increased research and development to expand our product offerings and the potential acquisition of product lines or companies. See "Use of Proceeds." Proposed Nasdaq National Market symbol.... "ELAB" ------------------------ (1) The number of shares of common stock outstanding after this offering is based on shares outstanding as of March 31, 2002. This number of shares includes 30,000,000 shares of common stock to be issued upon conversion of all of our outstanding preferred stock upon the closing of this offering, 1,680,528 shares of common stock to be issued upon exercise of outstanding warrants upon the closing of this offering at an exercise price of $0.01 per share, and 1,678,561 shares of common stock to be issued upon capitalization of approximately $25.2 million of our indebtedness, which includes accrued interest through March 31, 2002, to Hexal AG, as if the capitalization occurred on March 31, 2002, but does not include: - 1,951,350 shares of common stock issuable upon the exercise of outstanding stock options as of March 31, 2002 at a weighted average exercise price of $1.16 per share; and - 1,048,650 shares of common stock reserved and available for future issuance under our equity incentive plan as of March 31, 2002. Except as otherwise noted, all information in this prospectus: - assumes an initial public offering price of $15 per share, the midpoint of the range set forth on the cover page of this prospectus; - assumes no exercise of the underwriters' over-allotment option; - reflects the 30 for 1 stock split that will occur prior to the closing of this offering; and - assumes the filing of our restated certificate of incorporation which will occur simultaneously with the closing of this offering. 3 REORGANIZATION Santo Holding (Deutschland) GmbH, or Santo, a company organized in Germany, owns 100% of the outstanding capital stock of Hexal Pharmaceuticals, Inc., or HPI, a Delaware corporation. Santo is under common control with our partner, Hexal AG, the second largest generic pharmaceutical company in Germany. In September 1995, HPI acquired 50% of our outstanding capital stock. In December 2000, HPI indirectly acquired the remaining 50% of our outstanding capital stock through its acquisition of 100% of the outstanding capital stock of Eon Holdings, Inc., or EHI, for an aggregate purchase price of $110.0 million, consisting of a non-interest bearing note in the principal amount of $50.0 million and $60.0 million in cash, plus the issuance of warrants to purchase in the aggregate five percent of our common stock on a fully diluted basis, as determined at the time of exercise. Prior to the closing of this offering, EHI will be merged into HPI which will subsequently be merged into Eon Labs. As a result, we will become a direct, majority-owned subsidiary of Santo. When it is consummated, this reorganization will be accounted for as a merger of entities under common control, and the accounts of the companies will be combined in a manner similar to a pooling of interests effective January 1, 2000. The following are diagrams of our corporate structure (based on our outstanding capital stock) prior to and subsequent to the reorganization mergers:

PRE-REORGANIZATION POST-REORGANIZATION ------------------ ------------------- [LOGO] [LOGO]

Following consummation of the reorganization mergers but prior to this offering, we will owe approximately $92 million of indebtedness, including accrued interest through March 31, 2002, to Hexal AG. Immediately following the closing of this offering, approximately $25.2 million of our indebtedness, including accrued interest through March 31, 2002, to Hexal AG will be converted to equity, resulting in the issuance of 1,678,561 shares of our common stock to Hexal AG. This issuance will result in Hexal AG owning approximately 3.9% of our outstanding capital stock and Santo owning approximately 70.2% of our outstanding capital stock immediately following the closing of this offering. A portion of the proceeds of this offering will be used to repay approximately $66.9 million of indebtedness, which includes accrued interest through March 31, 2002, to Hexal AG. HPI held certain research and development contracts which were unrelated to its business. The research and development contracts resulted in costs to HPI of $1.3 million, $1.6 million and $0.5 million in 2000, 2001 and the three months ended March 31, 2002, respectively. Effective March 1, 2002, HPI transferred the two research and development contracts to Biosan, an entity affiliated with Santo but unrelated to us, in order to remove the contractual obligations from HPI's and, following the reorganizational mergers, our business. 4 SUMMARY CONSOLIDATED FINANCIAL DATA The summary data presented below under the captions "Consolidated Statement of Income Data" and "Consolidated Balance Sheet Data" for, and as of the end of, each of the years in the three-year period ended December 31, 2001, are derived from our consolidated financial statements, which have been audited by PricewaterhouseCoopers LLP, our independent certified public accountants. These audited consolidated financial statements as of December 31, 2000 and 2001 and for each of the years in the three-year period ended December 31, 2001, and report thereon, are included elsewhere in this prospectus. The financial data as of March 31, 2002 and for the three months ended March 31, 2001 and 2002 are derived from our unaudited condensed consolidated financial statements appearing elsewhere in this prospectus. The unaudited condensed consolidated financial statements include all adjustments, consisting of normal recurring accruals, which we consider necessary for a fair presentation of our financial position and results of operations for these periods. When you read this summary historical financial data, it is important that you read it along with our historical financial statements and related notes as well as the section titled "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this prospectus. Our historical results are not necessarily indicative of our future results. Prior to the closing of this offering, a reorganization will occur in which EHI will be merged into HPI, which will subsequently be merged into Eon Labs. This reorganization will be accounted for as a merger of entities under common control and the accounts of the companies will be combined in a manner similar to a pooling of interests effective January 1, 2000. As presented below and used in this prospectus, the term "predecessor company" refers to Eon Labs and its operations for periods prior to January 1, 2000 and does not reflect the reorganization. The term "successor company" is used to describe Eon Labs and its operations for periods after January 1, 2000 and reflects the reorganization. See "Prospectus Summary--Reorganization."

YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31, ------------------------------------------------------- ---------------------------------------- (PREDECESSOR COMPANY) (SUCCESSOR COMPANY) PRO FORMA(1) (SUCCESSOR COMPANY) PRO FORMA(1) ------------ ------------------------- ------------ ------------------------- ------------ 1999 2000 2001 2001 2001 2002 2002 ------------ ----------- ----------- ------------ ----------- ----------- ------------ (IN THOUSANDS, EXCEPT FOR PER SHARE DATA) CONSOLIDATED STATEMENT OF INCOME DATA: Net sales................ $ 77,981 $ 119,693 $ 165,443 $ 165,443 $ 39,096 $ 48,198 $ 48,198 Cost of sales............ 39,576 56,559 73,312 73,312 18,388 24,985 24,985 ----------- ----------- ----------- ----------- ----------- ----------- ----------- Gross profit......... 38,405 63,134 92,131 92,131 20,708 23,213 23,213 Operating expenses Selling, general and administrative Amortization of 1,780 goodwill and other intangibles(2)..... -- 639 7,120 7,120 940 940 Deferred stock 3,279 appreciation rights compensation....... 1,626 6,197 9,837 9,837 -- -- Other selling, 6,417 general and administrative..... 18,640 20,890 25,322 25,322 6,153 6,153 Research and 2,103 development expenses............. 10,889 14,936 12,224 10,670 3,281 2,756 ----------- ----------- ----------- ----------- ----------- ----------- ----------- Total operating 13,579 expenses......... 31,155 42,662 54,503 52,949 10,374 9,849 ----------- ----------- ----------- ----------- ----------- ----------- ----------- Operating income... 7,250 20,472 37,628 39,182 7,129 12,839 13,364 ----------- ----------- ----------- ----------- ----------- ----------- ----------- Other income and expense Interest income........ 950 1,311 462 462 136 40 40 Interest expense....... (60) (1,892) (9,318) (2,765) (2,377) (2,113) (645)

5

YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31, ------------------------------------------------------- ---------------------------------------- (PREDECESSOR COMPANY) (SUCCESSOR COMPANY) PRO FORMA(1) (SUCCESSOR COMPANY) PRO FORMA(1) ------------ ------------------------- ------------ ------------------------- ------------ 1999 2000 2001 2001 2001 2002 2002 ------------ ----------- ----------- ------------ ----------- ----------- ------------ (IN THOUSANDS, EXCEPT FOR PER SHARE DATA) Other income 1 (expense), net....... (2) 398 44 44 -- -- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Total other income (2,240) (expense)........ 888 (183) (8,812) (2,259) (2,073) (605) ----------- ----------- ----------- ----------- ----------- ----------- ----------- Income before income 4,889 taxes.................. 8,138 20,289 28,816 36,923 10,766 12,759 Provision for income 2,209 taxes.................. 3,127 9,300 13,025 16,348 4,420 5,237 ----------- ----------- ----------- ----------- ----------- ----------- ----------- Net income........... $ 5,011 $ 10,989 $ 15,791 $ 20,575 $ 2,680 $ 6,346 $ 7,522 =========== =========== =========== =========== =========== =========== =========== Per Share Data: Basic.................. $ -- $ -- $ -- $ -- $ -- Diluted................ $ 0.17 $ 0.36 $ 0.49 $ 0.08 $ 0.19 Pro forma basic........ $ 0.57 $ 0.21 Pro forma diluted...... $ 0.54 $ 0.19 Weighted average common shares outstanding Basic.................. Diluted................ 30,000,000 30,120,000 32,130,729 31,680,528 33,481,322 Pro forma basic........ 36,007,600 36,141,333 Pro forma diluted...... 38,138,329 39,622,665 OTHER DATA: EBITDA(3).............. $ 8,806 $ 23,164 $ 48,167 $ 49,721 $ 9,531 $ 14,741 $ 15,266 Adjusted EBITDA(4)..... $ 10,432 $ 30,678 $ 59,558 $ 59,558 $ 13,284 $ 15,266 $ 15,266 Net cash provided by (used in) Operating $ 7,312 activities......... $ 5,676 $ 14,077 $ 30,032 $ (611) Investing $ (654) activities......... $ (1,599) $ (87,704) $ (4,275) $ (1,798) Financing $ (6,850) activities......... $ (302) $ 58,910 $ (14,511) $ (4,466)

AT MARCH 31, 2002 ---------------------- AS ACTUAL ADJUSTED(5) -------- ----------- CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents................................... $ 10,749 $ 72,666 Working capital............................................. 37,544 99,461 Total assets................................................ 226,104 288,021 Total long-term debt, including current portion............. 106,020 13,901 Total stockholders' equity.................................. 53,627 207,664

------------------------ (1) Pro Forma Consolidated Statement of Income Data for the year ended December 31, 2001 and the three months ended March 31, 2002, respectively reflects: (i) the elimination of $1.6 million and $0.5 million of HPI research and development expenses due to the transfer of certain research and development contracts unrelated to our business; (ii) the elimination of interest charges of $6.5 million and $1.5 million due to the application of a portion of the proceeds of this offering to retire $60.0 million of interest bearing debt due to Hexal AG and the capitalization of approximately $24.5 million and $25.2 million of remaining debt due to Hexal AG; and (iii) the increase in income tax expense of $3.3 million and $0.8 million due to the reduction of expenses noted above. Pro forma earnings per share include the effect of the above pro forma income adjustments and reflect, for the year ended December 31, 2001 and the three months ended March 31, 2002, respectively, 6,007,600 shares and 6,141,333 shares deemed issued for the repayment of debt for pro forma basic weighted shares outstanding and the dilutive effect of options and warrants of 2,130,729 shares and 3,481,332 shares for pro forma diluted weighted shares outstanding. 6 (2) The goodwill and other intangibles arose as a result of the acquisition by HPI of the remaining 50% of Eon Labs in December 2000. (3) We define EBITDA as income before interest expense (income), income taxes, depreciation and amortization. EBITDA is not a measure of financial performance under generally accepted accounting principles. Items excluded from EBITDA are significant components in understanding and assessing financial performance. EBITDA is a measure commonly used by financial analysts and investors to evaluate the financial results of companies in our industry, and we believe it therefore provides useful information to investors. EBITDA should not be considered in isolation or as an alternative to net income, cash flows generated by operating, investing or financing activities, or other financial statement data determined in accordance with generally accepted accounting principles presented in the consolidated financial statements as indicators of financial performance or liquidity. Because EBITDA is not a measurement determined in accordance with generally accepted accounting principles and is susceptible to varying calculations, EBITDA as presented may not be comparable to similarly titled measures of other companies. (4) Adjusted EBITDA represents EBITDA adjusted to exclude: (i) deferred compensation expense related to our stock appreciation rights plan, or SAR Plan, which was converted in September 2001 to a Stock Option Plan; and (ii) research and development expenses incurred by HPI of $1.3 million, $1.6 million and $0.5 million in 2000, 2001 and the three months ended March 31, 2002, respectively, which will be transferred to an unrelated entity. Adjusted EBITDA should not be considered in isolation or as an alternative to net income, cash flows generated by operating, investing or financing activities, or other financial statement data determined in accordance with generally accepted accounting principles as indicators of financial performance or liquidity. Because Adjusted EBITDA is not a measurement determined in accordance with generally accepted accounting principles, Adjusted EBITDA as presented may not be comparable to similarly titled measures of other companies. (5) This column includes the net proceeds of approximately $128.9 million utilized to pay approximately $66.9 million of indebtedness, which includes accrued interest through March 31, 2002, to Hexal AG and the conversion to equity of approximately $25.2 million of additional indebtedness to Hexal AG, with the remainder applied to working capital. 7 RISK FACTORS YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS AND ALL OTHER INFORMATION CONTAINED IN THIS PROSPECTUS BEFORE PURCHASING OUR COMMON STOCK. INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK AND YOU MAY LOSE PART OR ALL OF YOUR INVESTMENT IN THESE SHARES. PLEASE READ "SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS." OUR REVENUES AND PROFITS FROM ANY PARTICULAR GENERIC PHARMACEUTICAL DECLINE AS OUR COMPETITORS INTRODUCE THEIR OWN GENERIC EQUIVALENTS. Selling prices of generic drugs typically decline, sometimes dramatically, as additional companies receive approvals for a given product and competition intensifies. To the extent that we succeed in being first to market with a generic version of a significant product, our sales and profitability can be substantially increased in the period following the introduction of such product and prior to additional competitors' introduction of an equivalent product. For example, being first to market with a number of products, including, among others, Fluvoxamine Maleate and Oxaprozin, has enabled us to gain and maintain favorable market share for those products. Despite maintaining our favorable market share, the profitability of Fluvoxamine Maleate and Oxaprozin declined as competitors entered the market, causing average selling prices to decline. Our ability to sustain our sales and profitability on those and other products over time is dependent on both the number of new competitors for such products and the timing of their approvals. Our overall profitability depends on our ability to continuously introduce new products as to which we can be first to market or otherwise can gain significant market share. OUR SUCCESS DEPENDS ON OUR ABILITY TO SUCCESSFULLY DEVELOP AND COMMERCIALIZE ADDITIONAL PHARMACEUTICAL PRODUCTS. Our future results of operations depend to a significant degree upon our ability to successfully commercialize additional generic pharmaceutical products in a timely manner. We focus on developing and commercializing a steady stream of new generic products in multiple therapeutic categories in order to broaden our product line. Our customers prefer to purchase products from generic manufacturers that offer a wide product selection. If we are unable to offer our customers numerous products that respond to their market-driven need for a variety of generic alternatives, our revenues and profitability may be negatively impacted. We are currently involved in the development of more than 45 pharmaceutical products, including 13 new generic product ANDAs pending approval at the FDA as of March 31, 2002, and an additional four tentative approvals. Tentative approvals may be issued when the FDA concludes that all substantive ANDA requirements have been satisfied, but final ANDA approval cannot be granted if a patent covering the product for which approval is sought has not yet expired or if an exclusivity period has been granted to another competitor. If we are unable to introduce these products in development, then our future operating results will suffer. We must develop, test and manufacture generic products as well as prove that our generic products are the bioequivalent of their branded counterparts. All of our products must meet regulatory standards and receive regulatory approvals. The development and commercialization process is both time consuming and costly and involves a high degree of business risk. Our products currently under development, if and when fully developed and tested, may not perform as we expect, necessary regulatory approvals may not be obtained in a timely manner, if at all, and such products may not be able to be successfully and profitably produced and marketed. Delays in any part of the process or our inability to obtain regulatory approval of our products could adversely affect our operating results by restricting our introduction of new products. The continuous introduction of new generic products is critical to our business. 8 GENERIC PHARMACEUTICALS ARE SOLD TO A LIMITED NUMBER OF CUSTOMERS, THE LOSS OF WHOSE BUSINESS COULD MATERIALLY AFFECT OUR SALES. We sell our products directly to national pharmacy chains, mail order customers, mass merchandisers and managed care providers and through drug wholesalers and distributors who, in turn, supply our products to pharmacies, mail order customers, mass-merchandisers, hospitals and governmental agencies. Due to the ongoing consolidation of drug wholesalers and distributors and the growth of national pharmacy chains, there exists an increasingly limited number of customers that comprise a significant share of the market. Sales to our top three customers represented approximately 35.4% of our net sales in 2001. If we were to lose the business of any of these customers, or if any were to experience difficulty in paying us on a timely basis, there could be a material adverse effect on our net sales, profitability and cash flows. The network through which we sell our products is continuing to undergo significant consolidation, marked by mergers and acquisitions among drug wholesalers and distributors, the growth of national pharmacy chains and the increasing importance of mail order businesses. As a result, a small number of drug wholesalers, distributors and national pharmacy chains control a significant share of the market, and the number of independent drug stores and small drug store chains has decreased. We expect that recent and future consolidation of drug wholesalers and retailers and the steady market share gain by mail order businesses will increase pricing and other competitive pressures on us and could have a material adverse effect on sales of our products. THE GENERIC PHARMACEUTICAL INDUSTRY IN WHICH WE OPERATE IS COMPETITIVE, AND WE ARE PARTICULARLY SUBJECT TO THE RISKS OF SUCH COMPETITION. The generic pharmaceutical industry in which we operate is competitive in part because the products that are sold do not benefit from patent protection. The competition which we encounter has an effect on our product prices, market share, revenues and profitability. We may not be able to differentiate our products from those of our competitors, successfully develop or introduce new products that are less costly or offer better performance than those of our competitors or offer purchasers of our products payment and other commercial terms as favorable as those offered by our competitors. Because certain of our competitors have substantially greater financial, production, research and development resources and substantially greater name recognition than we have, we are particularly subject to the risks inherent in competing with them. Our primary competitors include Alpharma, Inc., Geneva Pharmaceuticals, Inc., IVAX Corporation, Mylan Laboratories Inc., Teva Pharmaceuticals Industries Limited and Watson Pharmaceuticals, Inc. Several of our products, such as Fluoxetine, face competition from a significant number of generic pharmaceutical companies. We also compete with: - the original manufacturers of the brand-name equivalents of our generic products, as is the case with Cyclosporine, USP (Modified); and - manufacturers of new drugs that may compete with our generic products, such as Oxaprozin and Nabumetone, where we compete with newly developed cox-2 inhibitors. Depending upon how we respond to this competition, its effect may be materially adverse to us. IN SOME CIRCUMSTANCES, WE GRANT CREDITS AGAINST PAST SALES OF OUR PRODUCTS. THIS MAY RESULT IN REDUCED REVENUES AND PROFITABILITY. In accordance with industry practice, following a reduction of our prices as a result of competition, we grant our customers a "shelf stock credit" equal to the decrease in unit price for the product 9 multiplied by the number of units of the product a customer has in inventory at the time the price is lowered. If new or existing competitors significantly lower the prices of any of our products, we would have to provide significant credits that could reduce our sales and gross margin. In the event that we grant substantial credits in the future, the credits might result in a material loss of revenues or profitability. If we choose not to meet the lower price and not give a shelf stock credit, our customers may not sell the units of our product in their inventory and will return those units to us. WE ARE DEPENDENT ON OUR SENIOR MANAGEMENT TEAM FOR OUR CONTINUED GROWTH AND DEVELOPMENT. LOSS OF ANY MEMBERS OF SUCH TEAM COULD HAVE A MATERIAL ADVERSE EFFECT ON US. We are highly dependent on our senior management team, who have many years of experience in the generic pharmaceutical industry and a strong track record of working cooperatively with our suppliers, our customers and the FDA. We have employment agreements with substantially all of the members of our senior management team that include non-competition and non-solicitation provisions, but we do not maintain key man life insurance policies on any of them. The loss of any members of our senior management team or our inability to attract, retain and motivate sufficient numbers of qualified management personnel could have a material adverse effect on us. If any members of our senior management team resign their positions or otherwise are unable to serve, our management expertise and ability to develop and market a steady stream of a broad range of high quality generic pharmaceutical products could be weakened. SANTO WILL CONTINUE TO CONTROL US FOLLOWING THIS OFFERING. Immediately following the closing of this offering and the subsequent capitalization of debt to Hexal AG, Santo will own approximately 70.2% of our outstanding common stock and Thomas Strungmann, Ph.D., the Chairman of our Board of Directors and the Co-Chief Executive Officer and Co-President of Hexal AG, together with his interests in Santo and Hexal AG, will beneficially own approximately 74.1% of our outstanding common stock. As a result, Santo and Dr. Strungmann will be able to control the outcome of stockholder votes, including votes concerning the election of the majority of directors, the adoption or amendment of provisions in our certificate of incorporation or bylaws, the approval of mergers, decisions affecting our capital structure and other significant corporate transactions. The interests of Santo and Dr. Strungmann may conflict with your interests. Their control could also have the effect of deterring hostile takeovers, delaying or preventing changes in control or changes in management or limiting the ability of our stockholders to approve transactions that they may deem to be in their best interests. OUR STOCK PRICE MAY BE VOLATILE AND YOUR INVESTMENT IN OUR COMMON STOCK COULD SUFFER A DECLINE IN VALUE. There is currently no public market for our common stock. An active trading market for our common stock may not develop. You may be unable to resell the common stock you buy at or above the initial public offering price. We will establish the initial public offering price through our negotiations with the representatives of the underwriters. You should not view the price they and we establish as any indication of the price that will prevail in the trading market. Our quarterly operating results have varied in the past and may continue to do so. Some specific factors that may have a significant effect on our operating results and common stock market price include: - new product introductions; - changes in the degree of competition for our products; 10 - regulatory issues, including, but not limited to, receipt of ANDA approvals from the FDA, compliance with FDA or other agency regulations or the lack or failure of either of the foregoing; - the inability to acquire sufficient supplies of raw materials; - litigation and/or threats of litigation; - changes in our growth rates or our competitors' growth rates; - legislative and FDA actions with respect to the government regulation of pharmaceutical products; - public concern as to the safety of our products; - changes in health care policy in the United States; - conditions in the financial markets in general or changes in general economic conditions; - our inability to raise additional capital; - conditions of other generic pharmaceutical companies or the generic pharmaceutical industry generally; and - changes in stock market analyst recommendations regarding our common stock, other comparable companies or the generic pharmaceutical industry generally. SOME OF OUR GENERIC PHARMACEUTICAL PRODUCTS FACE COMPETITION FROM BRAND-NAME MANUFACTURERS THAT SELL THEIR OWN GENERIC PRODUCTS OR SUCCESSFULLY PROTECT THEIR BRAND-NAME PRODUCTS IN OTHER WAYS. Competition in the generic pharmaceutical market continues to intensify as the pharmaceutical industry adjusts to increased pressures to contain health care costs. Brand-name manufacturers continue to sell their products into the generic market directly by acquiring or forming strategic alliances with generic pharmaceutical companies. No regulatory approvals are required for a brand-name manufacturer to sell directly or through a third party to the generic market. Brand-name manufacturers do not face significant barriers to entry into such markets. For example, upon expiration of the patent for Daypro, Pharmacia began to sell Oxaprozin, the generic version of Daypro, in the market and is currently one of our competitors for Oxaprozin. In addition, such companies continually seek new ways to defeat generic competition, such as filing new patents on drugs whose original patent protection is about to expire, developing and marketing other dosage forms including patented controlled-release products or developing and marketing as over-the-counter products those branded products which are about to lose exclusivity and face generic competition. For example, GlaxoSmithKline PLC developed and marketed a sustained release version of Wellbutrin when the patent for immediate release Wellbutrin was nearing expiration. PATENT LITIGATION IS COMMON, CAN BE EXPENSIVE, MAY DELAY OR PREVENT ENTRY OF OUR PRODUCTS INTO THE MARKET, AND, IN SOME CASES, MAY RESULT IN DAMAGES. Litigation concerning patents, other forms of intellectual property and proprietary technologies is becoming more widespread and can be protracted and expensive and can distract management and other key personnel from performing their business duties for us. Companies that seek to market generic versions of brand-name products can be sued for infringing patents that purportedly cover such products and/or methods of using such products if the proposed marketing is to occur before such patents expire. More specifically, when we file an ANDA with the FDA for approval of a generic drug, we may certify that any patent listed by the FDA as covering the brand-name product and/or a method of using that product will expire, in which case the ANDA will 11 not become effective until the expiration of such patent(s). On the other hand, we may certify that any patent listed as covering the brand-name product and/or a method of using that product is invalid, is unenforceable, or will not be infringed by the manufacture, sale or use of the generic drug for which the ANDA is filed. In that case, we are required to notify the patent holder and NDA holder that such patent is not infringed, is unenforceable, or is invalid. The patent holder has forty-five (45) days from receipt of the notice in which to sue for patent infringement to obtain injunctive relief and, in some instances, to seek attorneys' fees. In the event litigation is commenced by the patent holder or NDA holder, final approval of the ANDA is delayed by 30 months or the date of a court decision of patent invalidity or non-infringement, whichever is earlier. The litigation may be costly and time consuming, and these costs may be more easily borne by our competitors than by us. The outcome of litigation is inherently uncertain. Litigation could result in removal from the market, or a substantial delay in, or prevention of, the introduction of the product that is the subject of our ANDA, any of which could have a material adverse effect on our business, financial condition, cash flows, or results of operations. As of April 30, 2002 we were involved in patent litigation in connection with our Paragraph IV certifications for the following six products: - Bupropion Hydrochloride ER--the generic equivalent of GlaxoSmithKline PLC's Wellbutrin Hydrochloride SR; - Gabapentin--the generic equivalent of Pfizer Inc.'s Neurontin; - Itraconazole--the generic equivalent of Janssen Pharmaceutica, Inc.'s Sporanox; - Mirtazapine--the generic equivalent of Organon Inc.'s Remeron; - Nabumetone--the generic equivalent of GlaxoSmithKline PLC's Relafen; and - Omeprazole--the generic equivalent of AstraZeneca PLC's Prilosec. We are unable to predict the outcome of any of these cases. If we are not successful in challenging or cannot prove non-infringement of the patents with respect to a brand-name product (and/or its use), we will not be able to market our generic alternative until the expiration of the applicable patent, which is often not for a number of years. In addition to the ANDA patent litigations, we are a defendant in two patent litigations involving our generic Cyclosporine product. On August 30, 2000, Novartis Pharmaceuticals Corporation filed a complaint in the United States District Court for the District of Delaware alleging among other things that by selling a generic Cyclosporine product we have been and are infringing its patent. Novartis is seeking injunctive relief to prevent our alleged acts of infringement, as well as damages, including lost profits, costs and expenses, reasonable attorneys' fees and treble damages for willful infringement. Our potential liability and expenses in this matter are not covered by insurance. We believe that we have meritorious defenses to Novartis' claims and we are vigorously defending ourselves. An adverse outcome in this litigation could result in our being unable to market Cyclosporine, which could materially harm our profits and cash flows and could result in our paying damages, costs, expenses and fees that could have a material adverse impact on our financial performance. On January 26, 2001, Apotex Inc., a Canadian generic pharmaceutical company, filed a complaint in the United States District Court for the Eastern District of New York alleging, among other things, that we have been and are infringing its patent related to Cyclosporine. Apotex is seeking injunctive relief to prevent our alleged acts of infringement, as well as damages, including a reasonable royalty, costs, expenses, reasonable attorneys' fees and treble damages for willful infringement. No trial date has been set for this matter. Our potential liability and expenses in this matter are not covered by insurance. We believe that we have meritorious defenses to Apotex' claims and we are vigorously 12 defending ourselves. An adverse outcome in this litigation could result in our being unable to market Cyclosporine, which could materially harm our profits and cash flows and could result in our paying damages, costs, expenses and fees that could have a material adverse impact on our financial performance. WE ARE CURRENTLY A DEFENDANT IN A NUMBER OF MULTI-DEFENDANT LAWSUITS INVOLVING THE MANUFACTURE AND SALE OF PHENTERMINE HCL AND WE HAVE EXHAUSTED OUR INSURANCE COVERAGE FOR THOSE LAWSUITS. From May 1997 to April 30, 2002, we have been named a party in approximately 6,325 lawsuits in connection with our manufacture of Phentermine HCl of which fewer than 300 remained open as of April 30, 2002. The actions generally have been brought in various state and federal jurisdictions by individuals in their own right or on behalf of putative classes of persons who claim to have suffered injury or claim that they may suffer injury in the future due to the use of a combination of the two prescription diet drugs, fenfluramine and phentermine, a combination popularly known as "fen-phen." Fenfluramine, which we have never manufactured for sale or sold, was voluntarily withdrawn from the market in 1997. These lawsuits typically allege that the short- and long-term use of fenfluramine in combination with phentermine causes, among other things, primary pulmonary hypertension, valvular heart disease and/or neurological dysfunction. Some lawsuits allege emotional distress caused by the purported increased risk of injury in the future. Plaintiffs typically seek relief in the form of monetary damages (including economic losses, medical care and monitoring expenses, loss of earnings and earnings capacity, other compensatory damages and punitive damages), generally in unspecified amounts, on behalf of the individual or the class. Some actions seeking class certification ask for certain types of purportedly equitable relief, including, but not limited to, declaratory judgments and the establishment of a research program or medical surveillance fund. As of April 30, 2002, there has been no finding of liability against us and no settlement by us in any combination-related phentermine or non-combination phentermine lawsuit. There has been no scientific testimony accepted by any court that establishes a connection between the use of phentermine and the allegations made by plaintiffs in these lawsuits. The ultimate outcome of these lawsuits cannot be determined at this time. In the second quarter of 2000, we exhausted our product liability insurance covering all combination-related phentermine lawsuits and any non-combination phentermine lawsuits resulting from claims regarding the ingestion of phentermine prior to June 1998. Since then, we have been funding our defense of all combination-related phentermine lawsuits and any non-combination lawsuits resulting from claims regarding the ingestion of phentermine prior to June 1998. We will continue to be responsible for the costs of defense as well as all damages that may be awarded against us resulting from combination-related phentermine claims brought against us and any non-combination claims relating to the ingestion of phentermine prior to June 1998. In addition, we are responsible for the costs of defense as well as all damages that may be awarded against several of our customers resulting from combination-related phentermine claims brought against them, including six customers that distributed phentermine manufactured by us with whom we have entered into indemnification agreements. The cost of our defense and the defense of several of our customers and the amount of damages, if any, is not determinable at this time. See "Business--Legal Proceedings." WE FACE THE RISK OF PRODUCT LIABILITY CLAIMS, FOR WHICH WE MAY BE INADEQUATELY INSURED. Manufacturing, selling and testing pharmaceutical products involve a risk of product liability. Even unsuccessful product liability claims could require us to spend money on litigation, divert management's time, damage our reputation and impair the marketability of our products. We previously manufactured two low volume prescription pharmaceutical products that contained the ingredient phenylpropanolamine, or PPA, that were discontinued in 1999 and 2000, respectively. We were defendants in certain individual PPA-related lawsuits, all of which allege the plaintiffs suffered bodily and/or economic injury as a result of the ingestion of products containing PPA. These suits have 13 all been dismissed without prejudice. From time to time in the future, we may be subject to further litigation resulting from our manufacture and sales of products containing PPA and we intend to vigorously defend any allegations that are raised in future litigation. We currently maintain $80 million in the aggregate of claims-made product liability/completed operations insurance, a maximum of $55 million of which is available for any phentermine-related claims (retroactive to June 1998), excluding fenfluramine and dexfenfluramine combination (fen-phen) claims, and a maximum of $75 million of which is available for any PPA claims. However, such insurance may not be adequate to remove the risk from some or all product liability claims and is subject to the limitations described in the terms of the policies. We may not be able to obtain product liability insurance in the future with adequate coverage limits at commercially reasonable prices. WE MAY BE UNABLE TO UTILIZE OUR FULL MANUFACTURING CAPACITY AND GROW OUR BUSINESS IF WE ARE NOT ABLE TO TRANSFER A SUFFICIENT AMOUNT OF OUR MANUFACTURING OPERATIONS TO OUR NEW FACILITY IN WILSON, NORTH CAROLINA. In December 2000, we expanded our manufacturing capacity by purchasing a new manufacturing facility in Wilson, North Carolina to accommodate our growing pipeline of products. Our ability to grow our business depends in part on our ability to transfer the manufacturing process for some of our products from our Laurelton, New York facility to the new Wilson facility, which requires FDA approval. In January 2002, the FDA performed a pre-approval/cGMP inspection of our Wilson facility. No Form 483 (inspectional observations) was issued at the end of the inspection. As of April 30, 2002, the FDA had approved the manufacturing of eight of our products at our Wilson facility and had not declined to approve any of our applications for site transfer to our Wilson facility. If the FDA declines to approve the manufacturing of any products at the Wilson facility in the future, we may not be able to transfer the manufacturing of those products to that facility. The cost of transferring the manufacturing of certain products to the Wilson facility may be cost-prohibitive or may materially harm our profits and cash flows. If we are unable to transfer the manufacturing process for a number of our products to the Wilson facility in order to utilize our expanded capacity, we may have insufficient manufacturing capacity to meet the demands of our customers and grow our business. NEW DEVELOPMENTS BY OTHER PHARMACEUTICAL MANUFACTURERS COULD MAKE OUR PRODUCTS OR TECHNOLOGIES NON-COMPETITIVE OR OBSOLETE. The markets in which we compete and intend to compete are undergoing, and are expected to continue to undergo, rapid and significant technological change. We expect competition to intensify as technological advances are made, including the introduction of biotechnology products. New developments by others may render our products or technologies non-competitive or obsolete. IF WE ARE UNABLE TO OBTAIN SUFFICIENT ACTIVE PHARMACEUTICAL INGREDIENTS (APIS) FROM KEY SUPPLIERS THAT IN SOME CASES MAY BE THE ONLY SOURCE OF FINISHED PRODUCTS OR RAW MATERIALS, THEN OUR ABILITY TO DELIVER OUR PRODUCTS TO MARKET MAY BE IMPEDED. The active compounds for our products, also called active pharmaceutical ingredients or APIs, are purchased from specialized manufacturers throughout the world and are essential to our business and its success. Some of the APIs used in our products, especially our niche market products, including Cyclosporine, USP (Modified), Cholestyramine, USP, Phentermine and Reserpine, USP, are available only from one or a limited number of sources. Those APIs are either difficult to produce or are needed in such limited quantities that additional suppliers are typically not available. For high volume products, including blockbuster drugs, there are generally several API suppliers available. However, even when more than one supplier for a product exists, we may elect to list, and in some cases have listed, only one supplier in our ANDAs for such product. We attempt to qualify alternative suppliers after we have introduced a high volume product into the market and have reached an economy of 14 scale, but we may be unable to do so. In the event an existing supplier should lose its regulatory status as an acceptable source, we would attempt to locate a qualified alternative; however, we may be unable to obtain the required components or products on a timely basis or at commercially reasonable prices and any change in a supplier not previously approved in our ANDA must then be submitted through a formal approval process with the FDA. In addition, because regulatory authorities must generally approve raw material sources for pharmaceutical products, changes in raw material suppliers may result in production delays, higher raw material costs and loss of sales and customers. From time to time, certain of our outside suppliers have experienced regulatory or supply-related difficulties that have inhibited their ability to deliver products to us. To the extent such difficulties cannot be resolved within a reasonable time and at a reasonable cost, the resulting delay could have a material adverse effect on our business. IF INDEPENDENT THIRD PARTIES DO NOT ACCEPT OUR PRODUCTS, WE MAY BE UNABLE TO MARKET THEM SUCCESSFULLY. Our ability to market generic pharmaceutical products successfully depends, in part, on the acceptance of the products by independent third parties including pharmacies, government formularies and other retailers, as well as patients. We manufacture a number of highly effective prescription drugs which are mainly used by patients who have severe health conditions. Although the brand-name products generally have been marketed safely for many years prior to our introduction of a generic alternative, there is a possibility that one of our generic products could produce an unanticipated clinical side effect which could result in an adverse effect on our ability to achieve acceptance by managed care providers, pharmacies and other retailers, customers and patients. If these independent third parties do not accept our products, it could have a material adverse effect on our revenues and profitability. WE ARE SUBJECT TO GOVERNMENT REGULATION THAT INCREASES OUR COSTS AND, IF WE ARE UNABLE TO OBTAIN REGULATORY APPROVALS, IT COULD PREVENT US FROM MARKETING OR SELLING OUR PRODUCTS. We are subject to extensive pharmaceutical industry regulation. We cannot predict the extent to which we may be affected by legislative and other regulatory developments concerning our products. We are dependent on obtaining timely regulatory approvals before marketing most of our products. Any manufacturer failing to comply with FDA or other applicable regulatory agency requirements may be unable to obtain approvals for the introduction of new products and, even after approval, initial product shipments may be delayed. The FDA also has the authority to revoke drug approvals previously granted and remove from the market previously approved drug products containing ingredients no longer approved by the FDA. Our major facilities and products are periodically inspected by the FDA, which has extensive enforcement powers over the activities of pharmaceutical manufacturers, including the power to seize, force to recall and prohibit the sale or import of non-complying products, and halt operations of and criminally prosecute non-complying manufacturers. Although we devote significant time, effort and expense to addressing the extensive government regulations applicable to our business and obtaining regulatory approvals, we remain subject to the risk of being unable to obtain necessary approvals on a timely basis, if at all. Delays in receiving regulatory approvals could adversely affect our ability to market our products. 15 PROPOSED FDA REGULATIONS AND RECENT FDA GUIDELINES AND RULES GRANTING PEDIATRIC EXTENSIONS MAY IMPAIR OUR ABILITY TO UTILIZE FULLY THE 180-DAY GENERIC MARKETING EXCLUSIVITY PERIOD FOR PATENT CHALLENGES, SUBSTANTIALLY DIMINISHING THE VALUE OF A FAVORABLE RULING. One of the key motivations for challenging patents is the reward of a 180-day period of market exclusivity. Under the Hatch-Waxman Act, the developer of a bioequivalent drug which is the first to have its ANDA accepted for filing by the FDA, and whose filing includes a certification that the patent is invalid, unenforceable and/or not infringed (a so-called "Paragraph IV certification") may be eligible to receive a 180-day period of generic market exclusivity. This period of market exclusivity provides the patent challenger with the opportunity to earn a return on the risks taken and its legal and development costs and to build its market share before competitors can enter the market. In August 1999, the FDA issued a notice of proposed rulemaking in which it proposed new regulations for implementing the 180-day generic market exclusivity provision. Additionally, the FDA announced an interim modification to its generic drug exclusivity policies in a March 2000 Industry Guidance. In general, the proposed rule and FDA Industry Guidance would make a generic manufacturer's ability to obtain and benefit from the market exclusivity provisions of the Hatch-Waxman Act more uncertain. If adopted and upheld, the proposed rule could impair our ability to obtain and utilize market exclusivity in patent challenge cases. In 1997, Congress enacted a new provision designed to reward brand-name manufacturers for conducting research to measure the safety of their products in children. If a brand-name manufacturer has a patent or regulatory exclusivity protecting a product, it is eligible to receive an additional six months of market exclusivity following the expiration of the patent or regulatory exclusivity if it conducts clinical testing of the product on children. This is known as "pediatric exclusivity." Thus, where pediatric exclusivity is granted to a brand-name manufacturer by the FDA, the commencement of generic competition could possibly be delayed by six months. IF BRAND-NAME MANUFACTURERS' LEGISLATIVE AND REGULATORY EFFORTS TO LIMIT THE USE OF GENERICS ARE SUCCESSFUL, THEN OUR SALES OF PRODUCTS SUBJECT TO THESE EFFORTS MAY SUFFER. Many brand-name manufacturers have increasingly used state and federal legislative and regulatory means to delay generic competition. These efforts have included: - pursuing new patents for existing products which may be granted just before the expiration of one patent which could extend patent protection for a number of years or otherwise delay the launch of generics; - submitting Citizen Petitions to request the Commissioner of Food and Drugs to take administrative action with respect to an ANDA approval; - seeking changes to the United States Pharmacopeia, an industry recognized compendia of drug standards; and - attaching special patent extension amendments to non-related federal legislation. In addition, some brand-name manufacturers have engaged in state-by-state initiatives to enact legislation that restricts the substitution of some brand-name drugs with generic drugs. If these efforts to delay generic competition are successful, we may be unable to sell our products that are subject to these efforts, which could have a material adverse effect on our sales and profitability. 16 REFORMS IN THE HEALTH CARE INDUSTRY AND THE UNCERTAINTY ASSOCIATED WITH PHARMACEUTICAL PRICING, REIMBURSEMENT AND RELATED MATTERS COULD ADVERSELY AFFECT THE MARKETING, PRICING AND DEMAND FOR OUR PRODUCTS. Increasing expenditures for health care have been the subject of considerable public attention. Both private and governmental entities are seeking ways to reduce or contain health care costs. Numerous proposals that would effect changes in the health care system have been introduced or proposed in Congress and in some state legislatures. We cannot predict the nature of the measures that may be adopted or their impact on the marketing, pricing and demand for our products. Our ability to market our products depends, in part, on reimbursement levels for them and related treatment established by health care providers (including government authorities), private health insurers and other organizations, including health maintenance organizations and managed care organizations. Reimbursement may not be available for some of our products and, even if granted, may not be maintained. Limits placed on reimbursement could make it more difficult for people to buy our products and reduce, or possibly eliminate, the demand for our products. In the event that governmental authorities enact additional legislation or adopt regulations which affect third party coverage and reimbursement, demand for our products may be reduced with a consequent adverse effect, which may be material, on our sales and profitability. THE MANUFACTURE AND STORAGE OF PHARMACEUTICAL AND CHEMICAL PRODUCTS IS SUBJECT TO ENVIRONMENTAL REGULATION AND RISK. Because of the chemical ingredients of pharmaceutical products and the nature of their manufacturing process, the pharmaceutical industry is subject to extensive environmental regulation and the risk of incurring liability for damages or the costs of remedying environmental problems. If we fail to comply with environmental regulations, to use, discharge or dispose of hazardous materials appropriately or otherwise to comply with the conditions attached to our operating licenses, the licenses could be revoked and we could be subject to criminal sanctions and/or substantial liability or could be required to suspend or modify our manufacturing operations. Environmental laws and regulations can require us to undertake or pay for investigation, clean-up and monitoring of environmental contamination identified at properties that we currently own or operate or that we formerly owned or operated. Further, they can require us to undertake or pay for such actions at offsite locations where we may have sent hazardous substances for disposal. These obligations are often imposed without regard to fault. We believe that our operations comply in all material respects with applicable laws and regulations concerning the environment. We may be required, however, to increase expenditures to comply with increasingly stringent requirements or to address contamination attributable to our business or properties. THE FEDERAL ANTITRUST AUTHORITIES, INCLUDING THE FEDERAL TRADE COMMISSION, OR FTC, HAVE INDICATED THAT, IN CONJUNCTION WITH AN INQUIRY INTO ALLEGED ANTI-COMPETITIVE PRACTICES IN THE ENTIRE PHARMACEUTICAL INDUSTRY, THEY INTEND TO INVESTIGATE PRACTICES RELATING TO PATENT CHALLENGES AND SETTLEMENTS. The FTC has indicated that the study will enable the Commission to provide a more complete picture of how generic drug competition has developed under the Hatch-Waxman Act. The FTC has already investigated several cases in which manufacturers of brand-name drug products and potential generic competitors have allegedly entered into anticompetitive agreements to delay generic entry, and has taken enforcement action against some alleged anticompetitive agreements. The FTC has indicated that its broader study is designed to shed light on matters such as whether the agreements the FTC has found are isolated instances and whether particular provisions of the Hatch-Waxman Act have operated appropriately to balance the legitimate interests of pharmaceutical companies in protection of their 17 intellectual property and the legitimate interests of generic companies in providing competition. The FTC has indicated it intends to issue special orders to approximately 100 pharmaceutical companies. We received our special order dated April 20, 2001. We and any other companies receiving such requests have 60 days to respond to the special orders. We responded to their request on June 26, 2001 and filed supplementary responses on July 13, 2001 and August 17, 2001. The FTC has stated that it then plans to compile the requested information to provide a factual description of how the 180-day marketing exclusivity and 30-month stay provisions of the Hatch-Waxman Act have influenced the development of generic drug competition. It is possible that the FTC may make recommendations to the FDA or others, may adopt procedural notification devices, or may bring enforcement actions as to specific agreements it concludes are anticompetitive. Given the early stage of the inquiry, we cannot conclude whether and how this inquiry will affect our long-range business. Any limitations on the 180-day exclusivity provisions may decrease our opportunities for generic exclusivity in the future. IF A SIGNIFICANT NUMBER OF SHARES OF OUR COMMON STOCK ARE SOLD INTO THE MARKET FOLLOWING THIS OFFERING, THE MARKET PRICE OF OUR COMMON STOCK COULD SIGNIFICANTLY DECLINE, EVEN IF OUR BUSINESS IS DOING WELL. Once a trading market develops for our common stock, our employees, officers and directors may exercise their stock options in order to sell the stock underlying their options in the market. Sales of a substantial number of shares of our common stock in the public market after this offering could depress the market price of our common stock and impair our ability to raise capital through the sale of additional equity securities. Of the 42,739,629 shares of common stock that will be outstanding after this offering, the 9,800,000 shares to be sold in this offering by us and the selling stockholders will be fully tradeable without restriction, unless purchased by our affiliates. All of the remaining 32,939,629 shares will be subject to lock-up agreements under which the holders of such shares have agreed that they will not, directly or indirectly sell any of these restricted shares, or exercise any of their options for 180 days after the date of this prospectus. Upon expiration of that 180 day period, those restricted shares may only be sold in compliance with the volume and other requirements of Rule 144 under the Securities Act of 1933, as amended, or the Securities Act. For a more detailed description, see "Shares Eligible for Future Sale" and "Underwriting." PROVISIONS OF OUR CHARTER DOCUMENTS AND DELAWARE LAW COULD DISCOURAGE A TAKEOVER YOU MAY CONSIDER FAVORABLE OR PREVENT THE REMOVAL OF OUR CURRENT BOARD OF DIRECTORS AND MANAGEMENT. Some provisions of our certificate of incorporation and bylaws may discourage, delay or prevent a merger or acquisition that you may consider favorable or prevent the removal of our current board of directors and management. These provisions: - authorize the issuance of "blank check" preferred stock; - provide for a classified board of directors with staggered, three-year terms; - prohibit cumulative voting in the election of directors; - prohibit our stockholders from acting by written consent from and after the date that Santo and its affiliates own fewer than 40% of the outstanding shares of our common stock; - limit the persons who may call special meetings of stockholders; and - establish advance notice requirements for nominations for election to the board of directors or for proposing matters to be approved by stockholders at stockholder meetings. Our certificate of incorporation prohibits the amendment of many of these provisions in our certificate of incorporation by our stockholders unless the amendment is approved by the holders of at least 66 2/3% of our shares of common stock. 18 Delaware law may discourage, delay or prevent someone from acquiring or merging with us. Section 203 of the Delaware General Corporation Law prohibits a publicly held Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years following the date the person became an interested stockholder, unless: - the board of directors approved the transaction in which the stockholder became an interested stockholder prior to the date the interested stockholder attained that status; - upon consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding shares owned by persons who are directors and also officers; or - on or subsequent to that date, the business combination is approved by the board of directors and authorized at an annual or special meeting of stockholders by the holders of at least two-thirds of the outstanding voting stock that is not owned by the interested stockholder. Generally, a business combination includes a merger, asset or stock sale, or other transaction resulting in a financial benefit to the interested stockholder. Generally, an interested stockholder is a person who, together with affiliates and associates, owns or, within three years prior to the determination of interested stockholder status, did own, 15% or more of a corporation's voting stock. 19 SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This prospectus contains forward-looking statements, principally in the sections entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business." Generally, you can identify these statements because they use words like "anticipates," "believes," "expects," "future," "intends," "plans," and similar terms. These statements are only our current expectations. Although we do not make forward-looking statements unless we believe we have a reasonable basis for doing so, we cannot guarantee their accuracy, and actual results may differ materially from those we anticipated due to a number of uncertainties, many of which are unforeseen, including, among others, the risks we face as described on the previous pages and elsewhere in this prospectus. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this prospectus. We believe it is important to communicate our expectations to our investors. There may be events in the future, however, that we are unable to predict accurately or over which we have no control. The risk factors listed on the previous pages, as well as any cautionary language in this prospectus, provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements. Before you invest in our common stock, you should be aware that the occurrence of the events described in the previous risk factors and elsewhere in this prospectus could negatively impact our business, operating results, financial condition and stock price. INDUSTRY AND MARKET DATA In this prospectus we rely on and refer to information and statistics regarding the generic pharmaceutical industry and the sectors in which we compete. We obtained this information and statistics from various third party sources and our own internal estimates. We believe these third party sources and estimates are reliable, but we have not independently verified them. USE OF PROCEEDS We estimate that the net proceeds to us from the sale of the 9,380,540 shares of common stock that we are offering will be approximately $128.9 million, after deducting the underwriting discount and estimated offering expenses and assuming an initial public offering price of $15 per share, the midpoint of the range set forth on the cover page of this prospectus. We anticipate using the net proceeds of this offering to repay approximately $66.9 million of outstanding indebtedness to Hexal AG and the balance for general corporate purposes, including to fund working capital, increased research and development to expand our product offerings and the potential acquisition of product lines or companies. We have no present understandings, commitments or agreements with respect to any acquisitions. The amount and timing of our actual expenditures will depend upon numerous factors, including the status of our product development efforts, the amount of proceeds actually raised in this offering and the amount of cash generated by our operations. Other than the repayment of indebtedness to Hexal AG, we have not determined the amounts we plan to spend on any of the areas listed above or the timing of these expenditures. We are conducting this offering at this time to improve our access to capital and to provide us with greater flexibility in pursuing our strategic objectives. The outstanding indebtedness to Hexal AG to be repaid with a portion of the proceeds of this offering is equal to approximately $66.9 million. The repayment of such amount represents payment in full of all principal and accrued interest through March 31, 2002 outstanding under a Loan Agreement, dated November 27, 2000, between Hexal AG and HPI, an entity which will be merged into us prior to 20 this offering. The loan has an interest rate of 8.75% and becomes due and payable following termination of the loan agreement. Pending the uses described above, we intend to invest the net proceeds of this offering in short-term, investment-grade, interest-bearing securities. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources" for additional information regarding our sources and uses of capital. We will not receive any proceeds from the sale of our common stock by the selling stockholders. DIVIDEND POLICY We currently intend to retain all future earnings for the operation and expansion of our business. We do not anticipate declaring or paying cash dividends on our common stock in the foreseeable future. Any payment of cash dividends on our common stock will be at the discretion of our board of directors and will depend upon our results of operations, earnings, capital requirements, contractual restrictions and other factors deemed relevant by our board. 21 CAPITALIZATION The outstanding share information in the table below is based on shares outstanding as of March 31, 2002. After giving effect to the 30 for 1 stock split of our preferred stock and non-voting common stock that will occur prior to the closing of this offering, the number of pro forma shares includes 30,000,000 shares of common stock to be issued upon conversion of all of our outstanding preferred stock upon the closing of this offering and 1,680,528 shares of common stock to be issued upon exercise of outstanding warrants upon the closing of this offering at an exercise price of $0.01 per share, but does not include: - 1,951,350 shares of common stock issuable upon the exercise of outstanding stock options as of March 31, 2002, at a weighted average exercise price of $1.16 per share; - 1,048,650 shares of common stock reserved and available for future issuance under our equity incentive plans as of March 31, 2002; and - 9,380,540 shares of common stock being sold by us in this offering. You should read this table in conjunction with our consolidated financial statements and notes contained elsewhere in this prospectus. See "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Use of Proceeds," "Description of Capital Stock" and the notes to our consolidated financial statements included elsewhere in this prospectus for additional information.

AS OF MARCH 31, 2002 (UNAUDITED) ---------------------------------------- PRO FORMA ACTUAL PRO FORMA(1) AS ADJUSTED(2) -------- ------------ -------------- (IN THOUSANDS) Long-term debt, including current portion................... $106,020 $106,020 $ 13,901 -------- -------- -------- Stockholders' equity: Preferred stock, $.01 par value, 30,000,000 convertible shares authorized, issued and outstanding actual; 5,000,000 shares authorized pro forma and pro forma as adjusted; no shares issued and outstanding pro forma or pro forma as adjusted..................................... 300 -- -- Common stock, $.01 par value, 60,000,000 shares authorized; no shares issued and outstanding actual; 70,000,000 shares authorized pro forma and pro forma as adjusted; 31,680,528 shares issued and outstanding pro forma; 42,739,629 shares issued and outstanding pro forma as adjusted............................................... -- 317 427 Non-voting common stock, $.01 par value, 3,000,000 shares authorized; no shares issued and outstanding actual; no shares authorized pro forma and pro forma as adjusted..... -- -- -- Additional paid-in capital.................................. 26,101 26,084 180,011 Retained earnings........................................... 28,722 28,722 28,722 -------- -------- -------- 55,123 55,123 209,160 Other....................................................... (1,496) (1,496) (1,496) -------- -------- -------- Total stockholders' equity................................ 53,627 53,627 207,664 -------- -------- -------- Total capitalization...................................... $159,647 $159,647 $221,565 ======== ======== ========

-------------------------- (1) In the pro forma column, we have made adjustments to give effect to (a) the conversion of all of our outstanding preferred stock into our common stock upon the closing of this offering, as if the conversion occurred on March 31, 2002 and (b) the exercise of all of our outstanding warrants for our common stock upon the closing of this offering, as if the exercise occurred on March 31, 2002. (2) In the pro forma as adjusted column, we have made adjustments to give effect to (a) the adjustments set forth above, (b) our receipt of the estimated net proceeds from the sale of 9,380,540 shares of common stock we are offering for sale under this prospectus at an assumed initial public offering price of $15 per share, (c) the application of these proceeds as set forth under the caption "Use of Proceeds" including the paydown of approximately $66.9 million of indebtedness, which includes accrued interest through March 31, 2002, to Hexal AG and (d) 1,678,561 shares of common stock to be issued upon capitalization of approximately $25.2 million of our indebtedness to Hexal AG, as if the capitalization occurred on March 31, 2002. 22 DILUTION Our net tangible book value (deficit) as of March 31, 2002 was $(0.9) million, or $(0.03) per share. Net tangible book value per share of common stock represents the amount of our total tangible assets less total liabilities, divided by the number of shares of common stock outstanding as of March 31, 2002 (assuming the conversion to equity of approximately $25.2 million of our indebtedness and the exercise of warrants). Net tangible book value dilution per share represents the difference between the amount per share paid by new investors who purchase shares in this offering and the pro forma net tangible book value per share of common stock immediately after completion of this offering. After giving effect to the sale of 9,800,000 shares of common stock in this offering at an assumed initial public offering price of $15 per share (including 419,460 shares being sold by the selling stockholders), the issuance of 1,678,561 shares of common stock upon capitalization of approximately $25.2 million of our indebtedness to Hexal AG, the exercise of warrants to purchase 1,680,528 shares and the deduction of estimated underwriting discounts and commissions and offering expenses payable by us, our pro forma net tangible book value at March 31, 2002 would have been $128.0 million, or $2.99 per share. This represents an immediate increase in net tangible book value of $3.02 per share to existing stockholders, and an immediate dilution in net tangible book value of $12.01 per share to new investors in this offering, as illustrated in the following table: Assumed initial public offering price per share............. $15.00 Net tangible book value (deficit) per share at March 31, 2002.................................................... $ (.03) ------ Increase per share attributable to new investors.......... 3.02 Pro forma net tangible book value per share after this offering.................................................. 2.99 ------ Net tangible book value dilution per share to new investors (1)....................................................... $12.01 ====== ------------------------ (1) If the underwriters' over-allotment option is exercised in full, dilution per share to new investors will be $11.65. The following table summarizes as of March 31, 2002, on a pro forma basis to reflect the same adjustments described above, the number of shares of common stock purchased from us, the total consideration paid and the average price per share paid by: - the existing holders of common stock, and - the new investors in this offering. The calculations are based upon total consideration given by new and existing stockholders, before any deduction of estimated underwriting discounts and commissions and offering expenses.

SHARES OUTSTANDING TOTAL CONSIDERATION AVERAGE ----------------------- ------------------------- PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ------------ -------- -------------- -------- --------- Existing stockholders................. 32,939,629 77.1% $ 25,178,000 14.6% $ 0.76 New investors......................... 9,800,000 22.9% $ 147,000,000 85.4% $ 15.00 ------------ ------ -------------- ----- Total........................... 42,739,629 100.0% $ 172,178,000 100.0% $ 4.03 ============ ------ -------------- -----

The foregoing discussion and tables assume no exercise of outstanding stock options. As of March 31, 2002, there were options outstanding to purchase a total of 1,951,350 shares of common stock at a weighted average exercise price of $1.16 per share and 1,048,650 shares of common stock reserved for future issuance under our equity incentive plans. To the extent any of these stock options are exercised, there will be further dilution to new investors. 23 SELECTED CONSOLIDATED FINANCIAL INFORMATION The selected data presented on pages 25 through 27 under the captions "Consolidated Statement of Income Data" and "Consolidated Balance Sheet Data" for, and as of the end of, each of the years in the five-year period ended December 31, 2001, are derived from our consolidated financial statements, which have been audited by PricewaterhouseCoopers LLP, our independent certified public accountants. The audited consolidated financial statements as of December 31, 2000 and 2001 and for each of the years in the three-year period ended December 31, 2001, and report thereon, are included elsewhere in this prospectus. The financial data as of March 31, 2002 and for the three months ended March 31, 2001 and 2002 are derived from our unaudited condensed consolidated financial statements appearing elsewhere in this prospectus. The unaudited condensed consolidated financial statements include all adjustments, consisting of normal recurring accruals, which we consider necessary for a fair presentation of our financial position and results of operations for these periods. When you read this selected historical financial data, it is important that you read it along with our historical financial statements and related notes as well as the section titled "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this prospectus. Our historical results are not necessarily indicative of our future results. Prior to the closing of this offering, a reorganization will occur in which EHI will be merged into HPI, which will subsequently be merged into Eon Labs. This reorganization will be accounted for as a merger of entities under common control and the accounts of the companies will be combined in a manner similar to a pooling of interests effective January 1, 2000. As presented below and used in this prospectus, the term "predecessor company" refers to Eon Labs and its operations for periods prior to January 1, 2000, and does not reflect the reorganization. The term "successor company" is used to describe Eon Labs and its operations for periods after January 1, 2000 and reflects the reorganization. See "Certain Relationships and Related Transactions--Reorganization." 24 SELECTED CONSOLIDATED FINANCIAL INFORMATION

YEAR ENDED DECEMBER 31, -------------------------------------------------------------------------------- PRO (PREDECESSOR COMPANY) (SUCCESSOR COMPANY) FORMA(1) ------------------------------------ ------------------------ ----------- 1997 1998 1999 2000 2001 2001 ---------- ---------- ---------- ---------- ----------- ----------- (IN THOUSANDS, EXCEPT FOR PER SHARE DATA) CONSOLIDATED STATEMENT OF INCOME DATA: Net sales...................... $ 49,740 $ 55,787 $ 77,981 $ 119,693 $ 165,443 $ 165,443 Cost of sales.................. 26,038 27,782 39,576 56,559 73,312 73,312 ---------- ---------- ---------- ---------- ----------- ---------- Gross profit............... 23,702 28,005 38,405 63,134 92,131 92,131 ---------- ---------- ---------- ---------- ----------- ---------- Operating expenses Selling, general and administrative Amortization of goodwill and other intangibles(2)........... -- -- -- 639 7,120 7,120 Deferred stock appreciation rights compensation...... 444 1,479 1,626 6,197 9,837 9,837 Other selling, general and administrative........... 6,444 8,774 18,640 20,890 25,322 25,322 Research and development expenses................... 3,808 8,755 10,889 14,936 12,224 10,670 ---------- ---------- ---------- ---------- ----------- ---------- Total operating expenses... 10,696 19,008 31,155 42,662 54,503 52,949 ---------- ---------- ---------- ---------- ----------- ---------- Operating income........... 13,006 8,997 7,250 20,472 37,628 39,182 ---------- ---------- ---------- ---------- ----------- ---------- Other income and expense Interest income.............. 424 849 950 1,311 462 462 Interest expense............. (112) (88) (60) (1,892) (9,318) (2,765) Other income (expense), net........................ 66 (28) (2) 398 44 44 ---------- ---------- ---------- ---------- ----------- ---------- Total other income (expense)................ 378 733 888 (183) (8,812) (2,259) ---------- ---------- ---------- ---------- ----------- ---------- Income before income taxes..... 13,384 9,730 8,138 20,289 28,816 36,923 Provision for income taxes..... 1,392 4,058 3,127 9,300 13,025 16,348 ---------- ---------- ---------- ---------- ----------- ---------- Net income................. $ 11,992 $ 5,672 $ 5,011 $ 10,989 $ 15,791 $ 20,575 ========== ========== ========== ========== =========== ========== PER SHARE DATA: Basic........................ $ -- $ -- $ -- $ -- $ -- Diluted...................... $ 0.40 $ 0.19 $ 0.17 $ 0.36 $ 0.49 Pro forma basic.............. $ 0.57 Pro forma diluted............ $ 0.54 Weighted average common shares outstanding Basic........................ Diluted...................... 30,000,000 30,000,000 30,000,000 30,120,000 32,130,729 Pro forma basic.............. 36,007,600 Pro forma diluted............ 38,138,329 OTHER DATA: EBITDA(3).................... $ 14,455 10,476 8,806 23,164 48,167 49,721 Adjusted EBITDA(4)........... $ 14,899 11,955 10,432 30,678 59,558 59,558 Net cash provided by (used in) Operating activities....... $ 10,857 $ 5,418 $ 5,676 $ 14,077 $ 30,032 Investing activities....... $ (1,326) $ (2,287) $ (1,599) $ (87,704) $ (4,275) Financing activities....... $ (247) $ (273) $ (302) $ 58,910 $ (14,511)

See notes to selected consolidated financial information on page 27. 25 SELECTED CONSOLIDATED FINANCIAL INFORMATION

THREE MONTHS ENDED MARCH 31, --------------------------------------- (SUCCESSOR COMPANY) PRO FORMA(1) ------------------------ ------------ 2001 2002 2002 ---------- ----------- ------------ (IN THOUSANDS, EXCEPT FOR PER SHARE DATA) CONSOLIDATED STATEMENT OF INCOME DATA: Net sales................................................... $ 39,096 $ 48,198 $ 48,198 Cost of sales............................................... 18,388 24,985 24,985 ---------- ----------- ---------- Gross profit............................................ 20,708 23,213 23,213 ---------- ----------- ---------- Operating expenses Selling, general and administrative Amortization of goodwill and other intangibles(2)....... 1,780 940 940 Deferred stock appreciation rights compensation......... 3,279 -- -- Other selling, general and administrative............... 6,417 6,153 6,153 Research and development expenses......................... 2,103 3,281 2,756 ---------- ----------- ---------- Total operating expenses................................ 13,579 10,374 9,849 ---------- ----------- ---------- Operating income........................................ 7,129 12,839 13,364 ---------- ----------- ---------- Other income and expense Interest income........................................... 136 40 40 Interest expense.......................................... (2,377) (2,113) (645) Other income (expense), net............................... 1 -- -- ---------- ----------- ---------- Total other income (expense)............................ (2,240) (2,073) (605) ---------- ----------- ---------- Income before income taxes.................................. 4,889 10,766 12,759 Provision for income taxes.................................. 2,209 4,420 5,237 ---------- ----------- ---------- Net income.............................................. $ 2,680 $ 6,346 $ 7,522 ========== =========== ========== PER SHARE DATA: Basic..................................................... $ -- $ -- Diluted................................................... $ 0.08 $ 0.19 Pro forma basic........................................... $ 0.21 Pro forma diluted......................................... $ 0.19 Weighted average common shares outstanding Basic..................................................... Diluted................................................... 31,680,528 33,481,322 Pro forma basic........................................... 36,141,333 Pro forma diluted......................................... 39,622,665 OTHER DATA: EBITDA(3)................................................. $ 9,531 $ 14,741 $ 15,266 Adjusted EBITDA(4)........................................ $ 13,284 $ 15,266 $ 15,266 Net cash provided by (used in) Operating activities.................................... $ 7,312 $ (611) Investing activities.................................... $ (654) $ (1,798) Financing activities.................................... $ (6,850) $ (4,466)

AT DECEMBER 31, -------------------------------------------------------------- PREDECESSOR COMPANY SUCCESSOR COMPANY ------------------------------------ ----------------------- MARCH 31, AS 1997 1998 1999 2000 2001 2002 ADJUSTED(5) ---------- ---------- ---------- ---------- ---------- ---------- ------------ (IN THOUSANDS) CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents............ $ 14,462 $ 17,320 $ 21,095 $ 6,378 $ 17,624 $ 10,749 $ 72,666 Working capital.......... 25,610 30,965 37,060 15,025 29,096 37,544 99,461 Total assets............. 42,227 49,565 58,401 196,903 219,402 226,104 288,021 Total long-term debt including current portion................ 908 635 333 123,110 116,867 106,020 13,901 Total stockholders' equity................. 32,659 38,331 43,342 11,895 46,991 53,627 207,664 See notes to selected consolidated financial information on page 27. 26 ------------------------ (1) Pro Forma Consolidated Statement of Income Data for the year ended December 31, 2001 and the three months ended March 31, 2002, respectively reflects: (i) the elimination of $1.6 million and $0.5 million of HPI research and development expenses due to the transfer of certain research and development contracts unrelated to our business; (ii) the elimination of interest charges of $6.5 million and $1.5 million due to the application of a portion of the proceeds of this offering to retire $60 million of interest bearing debt due to Hexal AG and the capitalization of approximately $24.5 million and $25.2 million of remaining debt due to Hexal AG; and (iii) the increase in income tax expense of $3.3 million and $0.8 million due to the reduction of expenses noted above. Pro forma earnings per share include the effect of the above pro forma income adjustments and reflect, for the year ended December 31, 2001 and the three months ended March 31, 2002, respectively, 6,007,600 shares and 6,141,333 shares deemed issued for the repayment of debt for pro forma basic weighted shares outstanding and the dilutive effect of options and warrants of 2,130,729 shares and 3,481,332 shares for pro forma diluted weighted shares outstanding. (2) The goodwill and other intangibles arose as a result of the acquisition by HPI of the remaining 50% of Eon Labs in December 2000. (3) We define EBITDA as income before interest expense (income), income taxes, depreciation and amortization. EBITDA is not a measure of financial performance under generally accepted accounting principles. Items excluded from EBITDA are significant components in understanding and assessing financial performance. EBITDA is a measure commonly used by financial analysts and investors to evaluate the financial results of companies in our industry, and we believe it therefore provides useful information to investors. EBITDA should not be considered in isolation or as an alternative to net income, cash flows generated by operating, investing or financing activities, or other financial statement data determined in accordance with generally accepted accounting principles presented in the consolidated financial statements as indicators of financial performance or liquidity. Because EBITDA is not a measurement determined in accordance with generally accepted accounting principles and is susceptible to varying calculations, EBITDA as presented may not be comparable to similarly titled measures of other companies. (4) Adjusted EBITDA represents EBITDA adjusted to exclude: (i) deferred compensation expense related to our SAR Plan which was converted in September 2001 to a Stock Option Plan; and (ii) research and development expenses incurred by HPI of $1.3 million, $1.6 million and $0.5 million in 2000, 2001 and the three months ended March 31, 2002, respectively, which will be transferred to an unrelated entity. Adjusted EBITDA should not be considered in isolation or as an alternative to net income, cash flows generated by operating, investing or financing activities, or other financial statement data determined in accordance with generally accepted accounting principles as indicators of financial performance or liquidity. Because Adjusted EBITDA is not a measurement determined in accordance with generally accepted accounting principles, Adjusted EBITDA as presented may not be comparable to similarly titled measures of other companies. (5) This column includes the net proceeds of $128.9 million, utilized to pay approximately $66.9 million of indebtedness, which includes accrued interest through March 31, 2002, to Hexal AG and the conversion to equity of approximately $25.2 million of additional indebtedness to Hexal AG, with the remainder applied to working capital. 27 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS YOU SHOULD CAREFULLY READ THE FOLLOWING DISCUSSION AND ANALYSIS OF OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS AND THE FINANCIAL CONDITION IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL STATEMENTS AND THE RELATED NOTES APPEARING ELSEWHERE IN THIS PROSPECTUS. OVERVIEW We are a generic pharmaceutical company engaged in developing, licensing, manufacturing, selling and distributing a broad range of prescription pharmaceutical products primarily in the United States. We are an industry leader in obtaining ANDA approvals from the FDA for new generic pharmaceutical products. As of March 31, 2002, we marketed over 90 generic pharmaceutical products. Our experienced management team utilizes an integrated approach to select and develop generic pharmaceutical products in both niche and high volume markets in order to be the first generic alternative to market and to obtain favorable market share. We focus on drugs in a broad range of solid oral dosage forms, utilizing both immediate and sustained release delivery, in tablet, multiple layer tablet, film-coated tablet and capsule forms. We are also currently developing several generic transdermal patch products with our partner, Hexal AG. We do not depend on any single drug or therapeutic category for a majority of our sales. From January 1, 1996 through March 31, 2002, we received 51 ANDA approvals from the FDA, including tentative approvals. In 2000 and 2001, we received 24 ANDA approvals, including five tentative approvals. In each of 2000 and 2001, we were among the top five companies with the most ANDA approvals received in the U.S. As of March 31, 2002, we had 13 ANDAs pending at the FDA, and an additional four tentative approvals. Nine of those pending ANDAs were for high barrier to entry products. According to industry data supplied by Scott-Levin, an independent subscription-based provider of pharmaceutical market research data, the brand-name equivalents of the products covered by these 13 pending ANDAs had annual U.S. sales of approximately $8.2 billion in 2001. In December 2000, we expanded our manufacturing capacity by purchasing a new manufacturing facility in Wilson, North Carolina to accommodate our growing pipeline of products. Although generic pharmaceuticals must meet the same quality standards as branded pharmaceuticals, they are sold at prices that are typically 20% to 80% below those of their branded counterparts. This discount tends to increase, and margins consequently decrease, as the number of generic competitors rises for a given branded product. Because of this pricing dynamic, companies that are the first to market a generic pharmaceutical tend to earn higher margins than companies that subsequently enter the market for that product. Furthermore, the developer of a generic product that is the first to have its ANDA accepted for filing by the FDA and whose filing includes a Paragraph IV certification that the patent on the brand-name drug is invalid, unenforceable and/or not infringed may be eligible to receive a 180-day period of generic market exclusivity. During that 180-day period, the exclusive generic product would tend to earn higher margins on a higher volume of sales than in a market in which other generic competition was also present. We have not received a 180-day period of generic market exclusivity for any of our products. In January 2001, we filed an ANDA for Itraconazole which included a Paragraph IV certification that the patent covering Janssen Pharmaceutica, Inc.'s Sporanox was invalid. We believe we were the first entity to file a Paragraph IV certification for Itraconazole. Products that are difficult to develop, require difficult to source raw materials or represent smaller therapeutic niche markets generally result in fewer companies marketing those products and may also offer margins that are higher than those where barriers to entry do not exist. See "Government Regulation--Patent Challenge Process." 28 REORGANIZATION Santo Holding (Deutschland) GmbH, or Santo, a company organized in Germany, owns 100% of the outstanding capital stock of Hexal Pharmaceuticals, Inc., or HPI, a Delaware corporation. Santo is under common control with our partner, Hexal AG, the second largest generic pharmaceutical company in Germany. In September 1995, HPI acquired 50% of our outstanding capital stock. In December 2000, HPI indirectly acquired the remaining 50% of our outstanding capital stock through its acquisition of 100% of the outstanding capital stock of Eon Holdings, Inc., or EHI, for an aggregate purchase price of $110.0 million, which included a non-interest bearing note in the principal amount of $50.0 million and $60.0 million in cash, plus the issuance of warrants to purchase in the aggregate five percent of our common stock on a fully diluted basis, as determined at the time of exercise. Prior to the closing of this offering, a reorganization will occur in which EHI will be merged into HPI, which will subsequently be merged into Eon Labs. As a result, we will become a direct, majority owned subsidiary of Santo. This reorganization will be accounted for as a merger of entities under common control and the accounts of the companies will be combined in a manner similar to a pooling of interests effective January 1, 2000. As presented below and used in this prospectus, the term "predecessor company" refers to Eon Labs and its operations for periods prior to January 1, 2000, and does not reflect the reorganization. The term "successor company" is used to describe Eon Labs and its operations for periods after January 1, 2000 and reflects the reorganization. See "Certain Relationships and Related Transactions--Reorganization." RESULTS OF OPERATIONS The following table sets forth selected items from our consolidated statement of income:

THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, -------------------------------------- ---------------------- SUCCESSOR COMPANY ---------------------- 2001 -------- PREDECESSOR SUCCESSOR COMPANY COMPANY ---------------------- ---------- 1999 2000 2001 2002 ---------- -------- -------- --------

(IN THOUSANDS) Consolidated Statement of Income Data: Net sales........................................ $77,981 $119,693 $165,443 $ 39,096 $ 48,198 Cost of sales.................................... 39,576 56,559 73,312 18,388 24,985 ------- -------- -------- -------- -------- Gross profit................................... 38,405 63,134 92,131 20,708 23,213 Operating expenses Selling, general and administrative Amortization of goodwill and other intangibles................................ -- 639 7,120 1,780 940 Deferred stock appreciation rights compensation............................... 1,626 6,197 9,837 3,279 -- Other selling, general and administrative.... 18,640 20,890 25,322 6,417 6,153 Research and development expenses.............. 10,889 14,936 12,224 2,103 3,281 ------- -------- -------- -------- -------- Total operating expenses................... 31,155 42,662 54,503 13,579 10,374 ------- -------- -------- -------- -------- Operating income............................... 7,250 20,472 37,628 7,129 12,839 ------- -------- -------- -------- -------- Other income and expense Interest income................................ 950 1,311 462 136 40 Interest expense............................... (60) (1,892) (9,318) (2,377) (2,113) Other income (expense), net.................... (2) 398 44 1 -- ------- -------- -------- -------- -------- Total other income (expense)............... 888 (183) (8,812) (2,240) (2,073) ------- -------- -------- -------- -------- Income before income taxes....................... 8,138 20,289 28,816 4,889 10,766 Provision for income taxes....................... 3,127 9,300 13,025 2,209 4,420 ------- -------- -------- -------- -------- Net income..................................... $ 5,011 $ 10,989 $ 15,791 $ 2,680 $ 6,346 ======= ======== ======== ======== ======== EBITDA(1)...................................... $ 8,806 $ 23,164 $ 48,167 $ 9,531 $ 14,741