<PAGE> 1
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
<TABLE>
<S> <C>
/ / Preliminary Proxy Statement / / Confidential, for Use of the Commission
/X/ Definitive Proxy Statement Only (as permitted by Rule 14a-6(e)(2))
/X/ Definitive Additional Materials
/ / Soliciting Material Pursuant to sec. 240.14a-11(c) or sec. 240.14a-12
</TABLE>
Circa Pharmaceuticals, Inc.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
Circa Pharmaceuticals, Inc.
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
/ / $125 per Exchange Act Rules 0-11(c)(1)(ii), or 14a-6(i)(1), or 14a-6(i)(2)
or Item 22(a)(2) of Schedule 14A.
/ / $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
Common Stock, $0.01 par value
----------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
21,770,812 shares Circa Pharmaceuticals, Inc. Common Stock
----------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
$23.75
----------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
$517,057,000
----------------------------------------------------------------------
(5) Total fee paid:
$103,411.36
----------------------------------------------------------------------
/X/ Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
----------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
----------------------------------------------------------------------
(3) Filing Party:
----------------------------------------------------------------------
(4) Date Filed:
----------------------------------------------------------------------
<PAGE> 2
[LOGO]
------------------------------------------------
CIRCA PHARMACEUTICALS, INC.
------------------------------------------------
33 RALPH AVENUE P.O. BOX 30 COPIAGUE, NEW YORK 11726-0030
(516) 842-8383 FAX (516) 842-8630
June 14, 1995
To the Stockholders of Circa Pharmaceuticals, Inc.:
It is our pleasure to invite you to attend a Special Meeting of
Stockholders (the "Meeting") of Circa Pharmaceuticals, Inc. ("Circa"). The
Meeting will be held at 9:00 a.m. local time, on July 17, 1995 at Circa's
facilities at 26 Bethpage Road, Copiague, New York 11726.
At this important Meeting, you will be asked to consider and vote upon a
proposal to approve and adopt the Agreement and Plan of Merger (the "Merger
Agreement" and the "Merger") pursuant to which Circa would be merged with a
wholly-owned subsidiary of Watson Pharmaceuticals, Inc. ("Watson") established
solely for purposes of the Merger. If the Merger Agreement is approved and the
Merger consummated, holders of the Common Stock of Circa will receive for each
share of Circa Common Stock owned as of the effective time of the Merger, 0.86
of a share of Watson Common Stock, subject to certain adjustments. Details of
the proposed transaction are set forth in the accompanying Joint Proxy
Statement/Prospectus, which you should read carefully.
Your Board of Directors believes that the Merger is fair to and in the best
interests of Circa stockholders. The Board has unanimously approved the Merger
Agreement and the Merger and recommends that all Circa stockholders vote for its
approval. Furthermore, Bear, Stearns & Co. Inc. and Wertheim Schroder & Co.
Incorporated, Circa's financial advisors, have rendered opinions to your Board
of Directors to the effect that, as of the date of such opinions, the Merger or
the Exchange Ratio are fair, from a financial point of view, to Circa's
stockholders. The full text of such opinions are attached to the accompanying
Joint Proxy Statement/ Prospectus as appendices and should be read carefully by
stockholders.
All stockholders are invited to attend the Meeting in person. The
affirmative vote of the holders of not less than two-thirds of the outstanding
shares of Circa Common Stock will be necessary for approval and adoption of the
Merger Agreement. It is important to understand that if you do not vote, your
shares will, in effect, be counted as being voted against the Merger.
IN ORDER THAT YOUR SHARES MAY BE REPRESENTED AT THE MEETING, YOU ARE URGED
TO PROMPTLY COMPLETE, SIGN, DATE AND RETURN THE ACCOMPANYING PROXY IN THE
ENCLOSED ENVELOPE, WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING. IF YOU ATTEND
THE MEETING IN PERSON YOU MAY, IF YOU WISH, VOTE PERSONALLY ON ALL MATTERS
BROUGHT BEFORE THE MEETING EVEN IF YOU HAVE PREVIOUSLY RETURNED YOUR PROXY.
Please do not send in your stock certificates with your Proxy. If the
stockholders of Circa and Watson each approve the Merger Agreement and the
Merger is consummated, you will receive a letter of transmittal with
instructions for the surrender and exchange of your shares.
Sincerely,
/s/ MELVIN SHAROKY
Melvin Sharoky, M.D.
President and Chief Executive Officer
YOUR VOTE IS IMPORTANT
PLEASE SIGN, DATE AND RETURN YOUR PROXY
<PAGE> 3
CIRCA PHARMACEUTICALS, INC.
33 RALPH AVENUE
P.O. BOX 30
COPIAGUE, NEW YORK 11726-0030
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD JULY 17, 1995
To our Stockholders:
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders of Circa
Pharmaceuticals, Inc. ("Circa") will be held at Circa's facilities at 26
Bethpage Road, Copiague, New York 11726, on July 17, 1995 at 9:00 a.m. for the
following purposes:
1. To consider and vote upon a proposal to approve and adopt the
Agreement and Plan of Merger, dated as of March 29, 1995 (the "Merger
Agreement"), among Circa, Watson Pharmaceuticals, Inc., a Nevada
corporation ("Watson"), and Gum Acquisition Corp., a Nevada corporation and
a wholly-owned subsidiary of Watson ("Watson Sub"), pursuant to which (i)
Watson Sub will be merged with and into Circa (the "Merger") and Circa will
become a wholly-owned subsidiary of Watson and (ii) each share of common
stock, par value $.01 per share, of Circa ("Circa Common Stock")
outstanding immediately prior to the effective time of the Merger will be
converted into 0.86 of a share of common stock, par value $0.0033 per
share, of Watson (the "Watson Common Stock"), subject to certain
adjustments (as described under "The Merger Agreement -- Termination" in
the accompanying Joint Proxy Statement/Prospectus). A copy of the Merger
Agreement is attached as Appendix A to such Joint Proxy
Statement/Prospectus.
2. To transact such other business as may properly come before the
Special Meeting or any adjournments or postponements thereof.
Stockholders of record at the close of business on June 12, 1995, are
entitled to notice of, and to vote at, the Special Meeting or any adjournments
or postponements thereof.
Circa stockholders are entitled to dissenters' rights in connection with
the Merger provided that they comply with Section 623 of the New York Business
Corporation Law (a copy of which is attached as Appendix E to the Joint Proxy
Statement/Prospectus).
Whether or not you plan to attend the Special Meeting, you are requested to
complete, sign, date and return the accompanying Proxy card in the envelope
which is enclosed for your convenience. No postage is required for mailing in
the United States.
By Order of the Board of Directors
/s/ GWEN GERRICK
Gwen Gerrick
Secretary
Copiague, New York
June 14, 1995
BECAUSE THE AFFIRMATIVE VOTE OF AT LEAST TWO-THIRDS OF THE OUTSTANDING
SHARES OF CIRCA COMMON STOCK IS REQUIRED TO APPROVE AND ADOPT THE MERGER
AGREEMENT, WE URGE YOU TO SIGN AND RETURN THE ENCLOSED PROXY AS PROMPTLY AS
POSSIBLE, WHETHER OR NOT YOU INTEND TO ATTEND THE SPECIAL MEETING IN PERSON. THE
PROXY MAY BE REVOKED AT ANY TIME PRIOR TO ITS EXERCISE IN THE MANNER DESCRIBED
IN THE ATTACHED JOINT PROXY STATEMENT/PROSPECTUS. ANY STOCKHOLDER PRESENT AT THE
SPECIAL MEETING, INCLUDING ANY ADJOURNMENTS OR POSTPONEMENTS THEREOF, MAY REVOKE
HIS OR HER PROXY AND VOTE IN PERSON ON EACH MATTER BROUGHT BEFORE THE SPECIAL
MEETING.
<PAGE> 4
JOINT PROXY STATEMENT
WATSON PHARMACEUTICALS, INC. CIRCA PHARMACEUTICALS, INC.
------------------------
PROSPECTUS
WATSON PHARMACEUTICALS, INC.
COMMON STOCK, PAR VALUE $0.0033 PER SHARE
------------------------
GENERAL INFORMATION
This Joint Proxy Statement/Prospectus (the "Proxy Statement/Prospectus") is
furnished in connection with the solicitation of proxies by the Boards of
Directors of Watson Pharmaceuticals, Inc., a Nevada corporation ("Watson"), and
Circa Pharmaceuticals, Inc., a New York corporation ("Circa"), for use in
connection with the 1995 Annual Meeting of stockholders of Watson (the "Watson
Meeting") and a Special Meeting of Stockholders of Circa (the "Circa Meeting"),
which are to be held on July 17, 1995 at 9:00 a.m. local time, or any
adjournments or postponements thereof. At such Meetings, among other things, the
stockholders of each of Watson and Circa will consider and vote upon a proposal
to approve and adopt the Agreement and Plan of Merger dated as of March 29, 1995
(the "Merger Agreement"), among Watson, Gum Acquisition Corp., a Nevada
corporation and a wholly-owned subsidiary of Watson ("Watson Sub"), and Circa,
pursuant to which Watson Sub would be merged with and into Circa (the "Merger").
As a result of the Merger, which is expected to be effective July 17, 1995,
Circa will become a wholly-owned subsidiary of Watson and, as consideration for
the Merger, each of the then outstanding shares of Common Stock, $0.01 par
value, of Circa (the "Circa Common Stock") would be converted into the right to
receive 0.86 of a share of Common Stock, $0.0033 par value, of Watson (the
"Watson Common Stock"), subject to certain adjustments. The Watson stockholders
will also be asked at the Watson Meeting to approve amendments to the Articles
of Incorporation of Watson implementing a staggered Board of Directors and
increasing the number of authorized shares of Watson Common Stock, to elect
directors, to approve a new stock option plan and an amendment to an existing
plan, and to ratify the selection of Watson's independent accountants for the
1995 fiscal year (these additional matters collectively referred to herein as
the "Corporate Matters").
Watson has filed a Registration Statement on Form S-4 (the "Registration
Statement") with the Securities and Exchange Commission (the "Commission")
covering the issuance of up to 18,728,746 shares of Watson Common Stock pursuant
to the Merger. This Proxy Statement/Prospectus also constitutes the Prospectus
of Watson with respect to the shares of Watson Common Stock to be issued
pursuant to the Merger.
FOR CERTAIN FACTORS WHICH SHOULD BE CONSIDERED IN EVALUATING THE MERGER,
SEE "INVESTMENT CONSIDERATIONS."
This Proxy Statement/Prospectus, the form of Proxy and Watson's Annual
Report to Stockholders for the fiscal year ended December 31, 1994 are first
being mailed to Watson's stockholders on or about June 16, 1995. This Proxy
Statement/Prospectus, form of Proxy and Circa's 1994 Annual Report are first
being mailed to Circa's stockholders on or about June 16, 1995.
------------------------
THE SECURITIES TO BE ISSUED IN THE MERGER HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROXY STATEMENT/PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
THE DATE OF THIS JOINT PROXY STATEMENT AND PROSPECTUS IS JUNE 14, 1995.
<PAGE> 5
AVAILABLE INFORMATION
Watson and Circa are each subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith file reports, proxy statements and certain other
information with the Commission. Such reports, proxy statements and other
information are available for inspection and copying at the public reference
facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W.,
Judiciary Plaza, Washington, D.C. 20549, and at the regional offices of the
Commission located at 7 World Trade Center, New York, New York 10048, and 500
West Madison Street, Suite 1400, Chicago, Illinois 60601. Copies of such
materials can also be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Judicial Plaza, Washington, D.C. 20549 at
prescribed rates. The shares of Watson Common Stock are listed on the NASDAQ
National Market System ("NASDAQ/NMS") and, as such, the periodic reports, proxy
statements and other information filed by Watson should be available for
inspection at the offices of the National Association of Securities Dealers,
Inc., 1935 K Street, N.W., Washington, DC 20006. The shares of Circa Common
Stock are listed on the American Stock Exchange ("AMEX") and, as such, the
periodic reports, proxy statements and other information filed by Circa with the
Commission should be available for inspection at the office of the American
Stock Exchange, 86 Trinity Place, New York, New York 10006.
Watson has filed the Registration Statement with the Commission under the
Securities Act of 1933, as amended (the "Securities Act"), with respect to the
shares of Watson Common Stock to be issued in connection with the Merger. This
Proxy Statement/Prospectus also constitutes the Prospectus of Watson filed as
part of the Registration Statement. This Proxy Statement/Prospectus does not
contain all of the information set forth in the Registration Statement, certain
parts of which are omitted in accordance with the rules and regulations of the
Commission. Any statements contained herein or in any document incorporated by
reference herein concerning the provisions of any contract or other document are
not necessarily complete, and in each instance reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement or other document, each such statement being qualified in its entirety
by such reference. The Registration Statement (and exhibits thereto) should be
available for inspection at the offices of the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549, and copies thereof may be obtained from the
Commission at prescribed rates. The Registration Statement and any amendments
thereto, including exhibits filed as a part thereof, are available for
inspection and copying as set forth above.
DOCUMENTS INCORPORATED BY REFERENCE
THIS PROXY STATEMENT/PROSPECTUS INCORPORATES BY REFERENCE DOCUMENTS
RELATING TO WATSON AND CIRCA WHICH ARE NOT PRESENTED HEREIN OR DELIVERED
HEREWITH. DOCUMENTS RELATING TO WATSON (OTHER THAN EXHIBITS TO SUCH DOCUMENTS
UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY REFERENCE) ARE AVAILABLE
TO ANY PERSON, INCLUDING ANY BENEFICIAL OWNER, TO WHOM THIS PROXY
STATEMENT/PROSPECTUS IS DELIVERED, ON WRITTEN OR ORAL REQUEST, WITHOUT CHARGE,
FROM WATSON, 311 BONNIE CIRCLE, CORONA, CALIFORNIA 91720, ATTENTION: AGNES Y.
KUNG, SECRETARY, TELEPHONE: (909) 270-1400. DOCUMENTS RELATING TO CIRCA (OTHER
THAN EXHIBITS TO SUCH DOCUMENTS UNLESS SUCH EXHIBITS ARE SPECIFICALLY
INCORPORATED BY REFERENCE) ARE AVAILABLE TO ANY PERSON, INCLUDING ANY BENEFICIAL
OWNER, TO WHOM THIS PROXY STATEMENT/PROSPECTUS IS DELIVERED, ON WRITTEN OR ORAL
REQUEST, WITHOUT CHARGE, FROM CIRCA PHARMACEUTICALS, INC., 33 RALPH AVENUE, P.O.
BOX 30, COPIAGUE, NEW YORK 11726-0030, ATTENTION: GWEN GERRICK, SECRETARY,
TELEPHONE: (516) 842-8383. IN ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS,
ANY SUCH REQUEST SHOULD BE MADE BY JULY 1, 1995. COPIES OF DOCUMENTS SO
REQUESTED WILL BE SENT BY FIRST CLASS MAIL, POSTAGE PAID WITHIN ONE BUSINESS DAY
OF THE RECEIPT OF SUCH REQUEST.
The following Watson documents are incorporated by reference herein:
1. Annual Report on Form 10-K for the year ended December 31, 1994, as
amended.
2. Quarterly Report on Form 10-Q for the interim period ended March
31, 1995.
3. Current Report on Form 8-K dated March 31, 1995.
ii
<PAGE> 6
4. The description of the Watson Common Stock contained in its
Registration Statement on Form 8-A dated April 3, 1992.
The following Circa documents are incorporated by reference herein:
1. Annual Report on Form 10-K for the year ended December 31, 1994, as
amended.
2. Quarterly Report on Form 10-Q for the interim period ended March
31, 1995, as amended.
3. Current Reports on Form 8-K dated March 30, 1995 and April 11,
1995.
4. The description of the Circa Common Stock contained in its
Registration Statement on Form 8-A dated April 22, 1982.
All documents filed by Watson or Circa with the Commission pursuant to
Sections 13(a), 13(c), 14 and 15(d) of the Exchange Act after the date hereof
and prior to the date of the Watson Meeting and the Circa Meeting shall be
deemed to be incorporated by reference herein and shall be a part hereof from
the date of filing of such documents. Any statement contained in a document
incorporated by reference herein or contained in this Proxy Statement/Prospectus
shall be deemed to be modified or superseded for purposes hereof to the extent
that a statement contained herein (or in any other subsequently filed document
which also is incorporated by reference herein) modifies or supersedes such
statement. Any statement so modified or superseded shall not be deemed to
constitute a part hereof except as so modified or superseded.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS OR INCORPORATED
BY REFERENCE HEREIN, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION
SHOULD NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS PROXY
STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF
AN OFFER TO PURCHASE, THE SECURITIES OFFERED BY THIS PROXY STATEMENT/PROSPECTUS,
OR THE SOLICITATION OF A PROXY FROM ANY PERSON, IN ANY JURISDICTION IN WHICH IT
IS UNLAWFUL TO MAKE SUCH OFFER, SOLICITATION OF AN OFFER OR PROXY SOLICITATION.
NEITHER THE DELIVERY OF THIS PROXY STATEMENT/PROSPECTUS NOR ANY DISTRIBUTION OF
THE SECURITIES MADE UNDER THIS PROXY STATEMENT/PROSPECTUS SHALL, UNDER ANY
CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF WATSON OR CIRCA SINCE THE DATE OF THIS PROXY STATEMENT/PROSPECTUS OR
THAT THE INFORMATION CONTAINED HEREIN OR THE DOCUMENTS INCORPORATED BY REFERENCE
HEREIN ARE CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
iii
<PAGE> 7
TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C>
GENERAL INFORMATION................................................................... i
AVAILABLE INFORMATION................................................................. ii
DOCUMENTS INCORPORATED BY REFERENCE................................................... ii
SUMMARY............................................................................... 1
Watson.............................................................................. 1
Circa............................................................................... 2
Annual and Special Meetings of Stockholders......................................... 3
The Merger.......................................................................... 3
Votes Required...................................................................... 8
Voting of Proxies................................................................... 9
Revocability of Proxies............................................................. 9
Record Date; Shares Entitled to Vote; Quorum........................................ 10
Solicitation of Proxies............................................................. 10
Selected Historical Consolidated Financial Data..................................... 11
Unaudited Pro Forma Combined Summary Financial Information.......................... 13
Comparative Per Share Data.......................................................... 14
Comparative Market Data............................................................. 15
Investment Considerations........................................................... 15
Recent Developments................................................................. 15
INVESTMENT CONSIDERATIONS............................................................. 16
No Control over Circa Joint Ventures................................................ 16
Dependence upon New Product Introductions........................................... 16
Competition......................................................................... 16
Certain Circa Legal Matters......................................................... 16
Government Regulation............................................................... 17
Integration of the Businesses....................................................... 17
Dependence on Key Personnel......................................................... 17
Severance Payments.................................................................. 18
Product Development................................................................. 18
Patents and Proprietary Rights...................................................... 18
Dependence on Certain Customers, Products and Suppliers............................. 19
Product Liability and Insurance..................................................... 19
Certain Anti-takeover Provisions.................................................... 19
Potential Volatility of Stock Price and Absence of Dividends........................ 19
Fluctuations in Quarterly Operating Results......................................... 20
Loss of Exclusive Rights to Market Certain Circa Products........................... 20
THE MEETINGS.......................................................................... 20
Matters to Be Considered at the Meetings............................................ 20
THE MERGER............................................................................ 21
General............................................................................. 21
Background of the Merger............................................................ 21
Reasons for the Merger.............................................................. 23
Opinion of Watson's Financial Advisor............................................... 24
Opinions of Circa's Financial Advisors.............................................. 28
Analysis of Circa................................................................... 31
Analysis of Watson.................................................................. 33
Selected Transaction Analysis....................................................... 34
Analysis of the Merger.............................................................. 35
Recommendations by the Boards of Directors.......................................... 36
Interests of Certain Persons in the Merger.......................................... 38
Accounting Treatment................................................................ 40
Certain Federal Income and New York State Tax Consequences.......................... 41
Regulatory Approval................................................................. 42
Resale Restrictions................................................................. 42
</TABLE>
iv
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<TABLE>
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<S> <C>
Agreements to Vote in Favor of Merger............................................... 42
Litigation Relating to the Merger................................................... 43
THE MERGER AGREEMENT.................................................................. 43
The Merger.......................................................................... 43
Exchange Procedures; Fractional Shares.............................................. 44
Representations and Warranties...................................................... 45
Certain Covenants................................................................... 46
No Solicitation of Alternative Transactions......................................... 47
Benefit Plans....................................................................... 47
Governance.......................................................................... 48
Indemnification and Insurance....................................................... 48
Conditions.......................................................................... 49
Termination......................................................................... 49
Termination Payments................................................................ 51
Expenses............................................................................ 51
Amendment and Waiver................................................................ 52
Circa Rights Agreement.............................................................. 52
NASD Listing........................................................................ 52
DISSENTERS' RIGHTS.................................................................... 52
Circa Stockholders.................................................................. 52
Watson Stockholders................................................................. 55
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION.......................... 56
Notes to Unaudited Pro Forma Condensed Combined Financial Information............... 62
COMPARATIVE RIGHTS OF STOCKHOLDERS.................................................... 63
Liability of Directors.............................................................. 63
Indemnification..................................................................... 63
Derivative Actions.................................................................. 64
Distributions and Redemptions....................................................... 64
Stockholder Inspection of Books and Records......................................... 64
Dissenters' Rights.................................................................. 64
Quorum for Stockholder Meetings..................................................... 65
Stockholder Voting Requirements; Action by Consent.................................. 65
Board Vacancies..................................................................... 66
Removal of Directors................................................................ 66
Amendments to Charter............................................................... 66
Classified Board of Directors....................................................... 66
Business Combinations............................................................... 67
Advance Notice of Director Nominations and Stockholder Proposals.................... 68
Loans to Directors and Officers..................................................... 68
HOLDINGS OF WATSON STOCKHOLDERS, DIRECTORS AND EXECUTIVE OFFICERS..................... 69
Director, Officer and Principal Stockholder Security Ownership Reporting............ 71
HOLDINGS OF CIRCA STOCKHOLDERS, DIRECTORS AND EXECUTIVE OFFICERS...................... 72
WATSON'S PROPOSAL TO AMEND THE ARTICLES OF INCORPORATION TO APPROVE A STAGGERED
BOARD............................................................................... 74
Reasons for Amendment............................................................... 74
Vote Required....................................................................... 75
WATSON'S PROPOSAL TO AMEND THE ARTICLES OF INCORPORATION TO INCREASE THE NUMBER OF
AUTHORIZED SHARES OF COMMON STOCK................................................... 75
Reasons for Amendment............................................................... 75
Vote Required....................................................................... 76
ELECTION OF WATSON DIRECTORS.......................................................... 76
Committees; Board Meetings.......................................................... 78
Directors' Compensation............................................................. 79
WATSON'S EXECUTIVE COMPENSATION....................................................... 80
Employment Agreements............................................................... 80
Options............................................................................. 82
</TABLE>
v
<PAGE> 9
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<S> <C>
</TABLE>
<TABLE>
<S> <C>
Option Exercises and Fiscal Year-End Values......................................... 82
REPORT OF WATSON'S COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION................... 82
STOCK PRICE PERFORMANCE GRAPH......................................................... 85
WATSON'S STOCK OPTION PLANS........................................................... 86
Federal Income Tax Consequences..................................................... 87
WATSON'S PROPOSAL TO APPROVE WATSON'S 1995 NON-EMPLOYEE DIRECTORS' STOCK OPTION
PLAN................................................................................ 89
Introduction........................................................................ 89
Principal Provisions of the Directors' Plan......................................... 89
New Plan Benefits................................................................... 90
Duration, Amendment and Termination of the Plan..................................... 90
Vote Required....................................................................... 90
WATSON'S PROPOSAL TO AMEND WATSON'S 1991 STOCK OPTION PLAN............................ 91
Reasons for the Amendment........................................................... 91
Text of Proposed Amendment.......................................................... 91
Effect of the Amendment............................................................. 92
Vote Required....................................................................... 92
WATSON'S PROPOSAL TO RATIFY SELECTION OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS........................................................ 92
Vote Required....................................................................... 92
DESCRIPTION OF WATSON COMMON STOCK.................................................... 92
Authorized Capital Stock............................................................ 92
Common Stock........................................................................ 92
Preferred Stock..................................................................... 93
Anti-Takeover Provisions............................................................ 93
Transfer Agent and Registrar........................................................ 94
LEGAL MATTERS......................................................................... 94
EXPERTS............................................................................... 94
STOCKHOLDER PROPOSALS................................................................. 95
APPENDIX A -- Agreement and Plan of Merger............................................ A-1
APPENDIX B -- Opinion of Donaldson, Lufkin & Jenrette Securities Corporation.......... B-1
APPENDIX C -- Opinion of Bear, Stearns & Co. Inc...................................... C-1
APPENDIX D -- Opinion of Wertheim Schroder & Co. Incorporated......................... D-1
APPENDIX E -- Section 623 of the New York Business Corporation Law.................... E-1
APPENDIX F -- Watson's 1995 Non-Employee Directors' Stock Option Plan................. F-1
APPENDIX G -- Additional Information Concerning Watson and Circa...................... G-1
</TABLE>
vi
<PAGE> 10
SUMMARY
The following summary of certain information contained elsewhere in this
Proxy Statement/Prospectus does not purport to be complete and is qualified in
its entirety by reference to the full text of such information, including the
Appendices attached hereto. Stockholders are urged to read carefully the entire
Proxy Statement/Prospectus and the Appendices hereto. As used in this Proxy
Statement/Prospectus, "Watson" refers to Watson Pharmaceuticals, Inc. and
"Circa" refers to Circa Pharmaceuticals, Inc., and, unless the context otherwise
requires, their respective subsidiaries. The information contained in this Proxy
Statement/ Prospectus with respect to Watson and its affiliates has been
supplied by Watson, and the information with respect to Circa and its affiliates
has been supplied by Circa. Certain capitalized terms which are used but not
defined in this summary are defined elsewhere in this Proxy
Statement/Prospectus.
WATSON
Watson is engaged in the manufacture and sale of off-patent medications and
the development of advanced drug delivery systems primarily designed to enhance
the therapeutic benefits of pharmaceutical compounds. Watson's objective is to
become a fully integrated pharmaceutical company which (i) develops and markets
off-patent pharmaceuticals and (ii) develops proprietary and off-patent products
employing its drug delivery systems and markets such products worldwide through
pharmaceutical companies or its own marketing efforts. To achieve this
objective, Watson is pursuing a balanced strategy of generating revenue through
its established off-patent pharmaceuticals business and capitalizing on its
proven research and development, manufacturing and regulatory capabilities to
support the development of advanced proprietary products. Watson regularly
reviews potential opportunities to acquire or invest in technologies, products
or product rights. Watson also regularly reviews potential acquisitions,
investments or combinations involving businesses compatible with its existing
business.
Since inception, Watson has derived substantially all of its revenues from
the sale of off-patent pharmaceutical products. Watson currently manufactures
and markets 62 dosage forms and strengths representing 20 ethical drugs under 62
approved Abbreviated New Drug Applications ("ANDAs"). During 1994, Watson
received 3 ANDA approvals representing three ethical drugs which it markets. On
February 27, 1995, Watson received an ANDA approval on Glipizide, an
anti-diabetic product. Also, Watson has 7 ANDAs representing 7 ethical drugs
pending before the United States Food and Drug Administration ("FDA") and has
several ethical drugs under development. Watson intends to continue to develop
off-patent pharmaceutical products based upon market potential, competition,
target indications and other considerations. The number of products under
development may vary from time to time depending on these factors. Watson also
seeks to develop difficult-to-duplicate formulations of both off-patent drugs
and products which employ its drug delivery systems.
Watson develops drug delivery systems for application to pharmaceutical
compounds in order to enhance therapeutic benefits. These proprietary systems
control and improve the absorption of selected drugs in the bloodstream,
improving dose reliability, reducing side effects and increasing patient
convenience and compliance. Watson's drug delivery systems employ various routes
of administration, including transmucosal, oral, transdermal and vaginal. The
opportunity to select from this variety of routes enables Watson to optimize the
combination of dosage form and pharmaceutical compound. Watson currently is
developing several proprietary drug products that utilize its drug delivery
systems, each of which, if and when developed, would require FDA approval of a
New Drug Application ("NDA") prior to marketing.
Watson devotes significant resources to research and development, and
invests significantly in the development of proprietary products. Watson has
entered into certain licensing agreements with pharmaceutical companies under
which Watson typically retains manufacturing rights and receives product
development fees and royalties from future product sales. Licensing agreements
individually and in the aggregate have not generated significant revenue for
Watson, and currently no individual license agreement is material to the
company's operations. Watson is also developing a number of proprietary products
for which it intends to retain all manufacturing and marketing rights.
Watson's principal executive offices are located at 311 Bonnie Circle,
Corona, California 91720, and its telephone number is (909) 270-1400.
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CIRCA
Circa, founded in 1960, is engaged in the development and manufacture of
generic and proprietary drugs, the development of alternative delivery systems
and the distribution of pharmaceutical products. Circa currently manufactures
one generic and several over-the-counter drugs at its Copiague, New York
facility. Circa's efforts in the development of novel delivery systems for drugs
have focused on controlled-release and gum delivery systems. Circa also
distributes a nitroglycerin transdermal system manufactured by Hercon
Laboratories Corporation. Additionally, Circa provides a variety of services for
the pharmaceutical industry through its Pharmaceutical Services Division.
In November 1994, Circa received approval notification from the FDA for its
ANDA for Glipizide. Glipizide is the generic version of Glucotrol(R) and is used
for the treatment of non-insulin-dependent diabetes.
Circa has a 50% interest in Somerset Pharmaceuticals, Inc. ("Somerset"),
which manufactures and markets Eldepryl(R) for the treatment of Parkinson's
disease. In 1994, Somerset provided Circa with $25 million in earnings and $21
million in cash. Exclusivity expires for the Eldepryl(R) tablet in June of 1996;
however, Somerset is committed to the development of other products, including
its development program for an Eldepryl(R) transdermal patch. During 1995, phase
II clinical studies are being conducted on the patch for multiple neurological
disorders. Somerset is also developing ipriflavone, a product for the treatment
of osteoporosis. Ipriflavone is currently marketed in Japan, Italy, Hungary and
Argentina. An Investigational New Drug Application was filed in January 1995 for
this product.
Circa and Rhone-Poulenc Rorer, Inc. ("RPR") were partners in the
development of Dilacor XR(R). Dilacor XR(R) is used for the treatment of
hypertension and angina. Through an amended partnership agreement with RPR,
Circa earns royalties on Dilacor XR(R). Circa's royalty participation in Dilacor
XR(R) increases from 1% in 1994 to 20% in 1995 and 1996, 22% from 1997 to 2000,
and 3% thereafter. At December 31, 1994, Circa had a liability to RPR of $14
million which represented the remainder of Circa's share of development expenses
for Dilacor XR(R). Royalties earned by Circa will first offset amounts owed to
RPR by Circa before providing cash flow to Circa. Effective January 1, 1995,
Circa and RPR agreed that royalty income to Circa would be measured based upon
the market demand for the product, as evidenced by prescriptions written. For
the year ended December 31, 1994, Circa earned royalties of $1.2 million. The
Dilacor XR(R) product lost exclusivity in May of 1995; however, at this time
Circa is not aware of any pending applications with the FDA for a competing
generic substitute for Dilacor XR(R). Through this amended partnership
agreement, Circa and RPR intend to launch a generic Dilacor XR(R) product as the
partners consider appropriate. The profit and losses from the generic product
are to be shared equally by Circa and RPR.
In July 1994, Circa acquired a 7.5% interest in Andrx Corporation
("Andrx"). Circa and Andrx plan to jointly develop, manufacture and market at
least six controlled-release generic pharmaceutical products. Additionally,
Circa licensed two controlled-release generic products from Andrx, which Circa
is currently developing. Circa has additional development agreements with
outside research and development groups to develop controlled-release products.
Circa has progressed in its efforts to develop a gum-delivery technology.
During the past few years, Circa has been working on a number of pharmaceutical
products in utilizing this technology, including over-the-counter and
prescription products. In 1994, Circa filed an application with the FDA for
nicotine gum. Circa will be pursuing registration of this product in other
countries over the next several years. Circa is currently evaluating three
over-the-counter products using the gum-delivery technology and is also
considering strategic partners to help market this product line. Circa has filed
an application to obtain a patent for a process that describes a dissolvable
chewable dosage form, Quick Dissolve Chewables ("QDC"(TM)) and intends to seek
to employ this technology for the delivery of both prescription and
over-the-counter products.
Circa's principal executive offices are located at 33 Ralph Avenue, P.O.
Box 30, Copiague, New York 11726-0030, and its telephone number at that address
is (516) 842-8383.
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ANNUAL AND SPECIAL MEETINGS OF STOCKHOLDERS
This Proxy Statement/Prospectus relates to the Annual Meeting of
Stockholders of Watson (the "Watson Meeting") and a Special Meeting of
Stockholders of Circa (the "Circa Meeting," and collectively with the Watson
Meeting, the "Meetings"). At the Meetings, the stockholders of each of Watson
and Circa will consider and vote upon a proposal to approve and adopt the
Agreement and Plan of Merger dated as of March 29, 1995 (the "Merger Agreement")
among Watson, Gum Acquisition Corp., a wholly-owned subsidiary of Watson
("Watson Sub"), and Circa, pursuant to which Watson Sub would be merged with and
into Circa (the "Merger"). A copy of the Merger Agreement is attached to this
Proxy Statement/Prospectus as Appendix A. Approval and adoption of the Merger
Agreement by the stockholders of Watson will also constitute approval of the
issuance of shares of Common Stock, $0.0033 par value, of Watson ("Watson Common
Stock") in connection with the Merger. In addition, the stockholders of Watson
will consider and vote upon proposals to approve an amendment to the Articles of
Incorporation of Watson (the "Articles") approving the creation of a staggered
board of directors; to approve an amendment to the Articles to increase the
authorized shares of Watson Common Stock; to elect eight directors; to approve
Watson's 1995 Non-Employee Directors' Stock Option Plan; to approve an amendment
to Watson's 1991 Stock Option Plan; and to ratify the selection of Price
Waterhouse LLP as Watson's independent accountants for the fiscal year ending
December 31, 1995 (collectively, the "Corporate Matters").
The Watson Meeting will be held on Monday, July 17, 1995, at 9:00 a.m.
local time, at 311 Bonnie Circle, Corona, California 91720. The record date for
stockholders of Watson entitled to notice of and to vote at the Watson Meeting
is as of the close of business on May 19, 1995. Voting rights for Watson are
vested in the holders of the Watson Common Stock, with each share of Watson
Common Stock entitled to one vote on each matter coming before the stockholders.
As of May 19, 1995, there were approximately 17,289,786 shares of Watson Common
Stock outstanding and approximately 251 holders of record.
The Circa Meeting will be held on Monday, July 17, 1995, at 9:00 a.m. local
time, at 26 Bethpage Road, Copiague, New York 11726. The record date for
stockholders of Circa entitled to notice of and to vote at the Circa Meeting is
as of the close of business on June 12, 1995. Voting rights for Circa are vested
in the holders of the Common Stock, $.01 par value, of Circa ("Circa Common
Stock"), with each share of Circa Common Stock entitled to one vote on each
matter coming before the stockholders. As of June 12, 1995, there were
21,777,612 shares of Circa Common Stock outstanding and approximately 1,897
holders of record.
THE MERGER
Conversion of Securities. Upon consummation of the transactions
contemplated by the Merger Agreement, (a) Watson Sub will be merged with and
into Circa, with Circa surviving the Merger; (b) Circa will become a
wholly-owned subsidiary of Watson; (c) each issued and outstanding share of
Circa Common Stock, together with the associated Rights (the "Circa Rights")
issued pursuant to the terms of that certain Stockholder Protection Agreement
dated as of November 1, 1991 between Circa and American Stock Transfer & Trust
Company, as Rights Agent, as amended, other than shares as to which dissenters'
rights are properly exercised, will be converted into the right to receive 0.86
of a share of Watson Common Stock (the "Exchange Ratio"), subject to certain
adjustments; (d) the outstanding shares of Watson Common Stock shall not be
affected by the Merger; and (e) all shares of Circa Common Stock held by Circa
in treasury or owned by Watson or any of its subsidiaries shall be cancelled and
cease to exist. Fractional shares of Watson Common Stock will not be issued in
connection with the Merger. A holder otherwise entitled to a fractional share
will be paid cash in lieu of such fractional share. For a description of the
Watson Common Stock, see "Description of Watson Common Stock." For a summary of
the principal differences between the rights of holders of Circa Common Stock
and Watson Common Stock, see "Comparative Rights of Stockholders."
Ownership of Watson after the Merger. Immediately following the Merger, (i)
the former holders of Circa Common Stock will collectively hold approximately
52% of the issued and outstanding shares of Watson Common Stock; and (ii) the
persons who held Watson Common Stock immediately prior to the Merger will hold
collectively approximately 48% of the issued and outstanding shares of Watson
Common Stock.
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Recommendations of the Boards of Directors. THE BOARD OF DIRECTORS OF
WATSON HAS APPROVED THE MERGER AGREEMENT AND RECOMMENDS A VOTE FOR APPROVAL AND
ADOPTION OF THE MERGER AGREEMENT BY THE WATSON STOCKHOLDERS. The Board of
Directors of Watson believes that the terms of the Merger are fair to and in the
best interests of Watson and its stockholders.
THE BOARD OF DIRECTORS OF CIRCA HAS UNANIMOUSLY APPROVED THE MERGER
AGREEMENT AND RECOMMENDS A VOTE FOR APPROVAL AND ADOPTION OF THE MERGER
AGREEMENT BY CIRCA'S STOCKHOLDERS. The Board of Directors of Circa believes that
the terms of the Merger are fair to and in the best interests of Circa and its
stockholders.
For a discussion of the factors considered by the respective Boards of
Directors in reaching these decisions, see "The Merger -- Reasons for the
Merger; -- Recommendations by the Boards of Directors."
Fairness Opinions of Financial Advisors. On June 13, 1995, Donaldson,
Lufkin & Jenrette Securities Corporation ("DLJ") delivered a written opinion
(the "DLJ Opinion") to Watson, updating its written opinion dated March 29,
1995, to the effect that, based upon various considerations and assumptions, as
of June 13, 1995, the Exchange Ratio was fair to the stockholders of Watson from
a financial point of view.
On March 29, 1995, Bear, Stearns & Co. Inc. ("Bear Stearns") delivered its
written opinion to the Board of Directors of Circa to the effect that, based
upon various considerations and assumptions, as of such date, the Merger was
fair, from a financial point of view, to the stockholders of Circa. Bear Stearns
delivered an updated written opinion to the Board of Directors of Circa to the
same effect dated the date of this Proxy Statement/ Prospectus.
On March 29, 1995, Wertheim Schroder & Co. Incorporated ("Wertheim
Schroder") delivered its written opinion to the Board of Directors of Circa to
the effect that, based on various considerations and assumptions, the Exchange
Ratio was fair to the public holders of Circa Common Stock from a financial
point of view. Wertheim Schroder delivered an updated written opinion to the
Board of Directors of Circa to the same effect dated the date of this Proxy
Statement/Prospectus.
Copies of the full text of the written opinions of DLJ, Bear Stearns and
Wertheim Schroder, which set forth the assumptions made, procedures followed,
matters considered and limits of their respective reviews, are attached to this
Proxy Statement/Prospectus as Appendices B, C and D, respectively, and should be
read carefully in their entirety. See "The Merger -- Opinion of Watson's
Financial Advisor; -- Opinions of Circa's Financial Advisors."
Effective Time of the Merger. The Merger will become effective upon the
filing of Certificates of Merger with the Secretary of State of the States of
Nevada and New York (the "Effective Time"), which certificates will be filed as
promptly as practicable after the requisite stockholder approvals have been
obtained and all other conditions to the Merger have been satisfied or waived.
Subject to the satisfaction or waiver of the other conditions to the obligations
of Watson, Watson Sub and Circa to consummate the Merger, it is presently
expected that the Merger will be consummated on July 17, 1995 or as soon
thereafter as such other conditions are satisfied. See "The Merger
Agreement -- The Merger."
Exchange of Circa Stock Certificates. Upon consummation of the Merger, each
holder of a certificate or certificates representing shares of Circa Common
Stock ("Certificates") outstanding immediately prior to the Merger will, upon
the surrender thereof (duly endorsed, if required) to an exchange agent
designated by Watson (the "Exchange Agent"), be entitled to receive a
certificate or certificates representing the number of whole shares of Watson
Common Stock into which such shares of Circa Common Stock will have been
automatically converted as a result of the Merger, together with cash in lieu of
any fractional share to which such Circa stockholder may be entitled to receive.
After the consummation of the Merger, the Exchange Agent will mail a letter of
transmittal with instructions to all holders of record of Circa Common Stock as
of the Effective Time for use in surrendering their Certificates in exchange for
certificates representing shares of Watson Common Stock. CERTIFICATES SHOULD NOT
BE SURRENDERED UNTIL THE LETTER OF TRANSMITTAL AND INSTRUCTIONS ARE RECEIVED.
See "The Merger Agreement -- Exchange Procedures; Fractional Shares."
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Fractional Shares. Fractional shares of Watson Common Stock will not be
issued in connection with the Merger. Instead, the Exchange Agent will sell on
NASDAQ/NMS the excess of (i) the number of full shares of Watson Common Stock
delivered to the Exchange Agent by Watson pursuant to the Merger Agreement over
(ii) the aggregate number of full shares of Watson Common Stock to be delivered
to holders of Circa Common Stock. Each holder of Circa Common Stock will be
entitled to a portion of the proceeds of such sale or sales equal to the
aggregate amount of such proceeds multiplied by a fraction, the numerator of
which is the amount of the fractional share interest to which such holder of
Circa Common Stock is entitled and the denominator of which is the aggregate
amount of fractional share interests which all holders of Circa Common Stock are
entitled to receive. See "The Merger Agreement -- Exchange Procedures;
Fractional Shares".
Dissenters' Rights. Holders of Watson Common Stock are not entitled to
dissenters' rights in connection with the Merger. Holders of outstanding shares
of Circa Common Stock are entitled to relief as dissenting stockholders under
Section 910 of the New York Business Corporation Law (the "NYBCL") and may, by
complying with Section 623 of the NYBCL, exercise such dissenters' rights.
Failure on the part of a holder of Circa Common Stock to comply precisely with
the requirements of Section 623 of the NYBCL, a copy of which is attached hereto
as Appendix E, will result in the loss of such holder's dissenters' rights. See
"Dissenters' Rights."
BECAUSE A PROXY CARD WHICH DOES NOT CONTAIN VOTING INSTRUCTIONS WILL,
UNLESS REVOKED, BE VOTED FOR ADOPTION OF THE MERGER AGREEMENT, A CIRCA
STOCKHOLDER WHO WISHES TO EXERCISE HIS DISSENTERS' RIGHTS MUST EITHER REFRAIN
FROM SIGNING AND RETURNING HIS PROXY CARD OR, IF HE SIGNS AND RETURNS HIS PROXY
CARD, VOTE AGAINST OR ABSTAIN FROM VOTING ON THE ADOPTION OF THE MERGER
AGREEMENT.
A CIRCA STOCKHOLDER WHO WISHES TO PERFECT HIS RIGHTS AS A DISSENTING
STOCKHOLDER IN THE EVENT THE MERGER AGREEMENT IS ADOPTED MUST FILE WITH CIRCA,
BEFORE THE TAKING OF THE VOTE ON THE MERGER AGREEMENT AT THE CIRCA MEETING, A
WRITTEN OBJECTION TO THE MERGER. IN ADDITION, A CIRCA STOCKHOLDER WHO WISHES TO
PERFECT SUCH RIGHTS MUST SUBMIT THE CERTIFICATES REPRESENTING HIS SHARES TO
CIRCA OR CIRCA'S TRANSFER AGENT FOR NOTATION THEREON THAT A NOTICE OF ELECTION
TO DISSENT HAS BEEN FILED; SUCH CERTIFICATES TO BE THEREUPON RETURNED TO THE
STOCKHOLDER. FAILURE TO SUBMIT SUCH CERTIFICATES FOR SUCH NOTATION WITHIN ONE
MONTH AFTER THE FILING OF THE NOTICE OF ELECTION TO DISSENT MAY CAUSE THE HOLDER
TO LOSE HIS DISSENTERS' RIGHTS.
Interests of Certain Persons in the Merger. In considering the
recommendations of the Boards of Directors of Watson and Circa with respect to
the Merger Agreement and the transactions contemplated thereby, stockholders
should be aware that certain members of the management of Watson and Circa and
the Boards of Directors of Watson and Circa have certain interests in the Merger
that are in addition to the interests of stockholders of Watson and Circa
generally (including, without limitation, Watson's guaranty of the payment
obligations under certain employment agreements between Circa and certain
executive officers of Circa, Watson's agreement to provide certain severance
benefits, the issuance of additional options to purchase shares of Watson Common
Stock to certain officers of Watson, the issuance of additional options to
purchase shares of Watson Common Stock to certain executive officers of Circa,
the acceleration of vesting of certain outstanding options to purchase shares of
Circa Common Stock, Watson's agreement to indemnify past and present officers
and directors of Circa for a period of six years and, subject to certain
limitations, to use its best efforts to continue providing directors' and
officers' liability insurance for not less than two years after the Effective
Time). Watson has agreed in the Merger Agreement to assume all outstanding
options granted under Circa's stock option plans. See "The Merger -- Interests
of Certain Persons in the Merger" and "The Merger Agreement -- Benefit
Plans; -- Indemnification and Insurance."
Governance. Following the consummation of the Merger, (a) the Chairman of
the Board of Circa will be Dr. Allen Chao and the President and Chief Executive
Officer of Circa will be Dr. Melvin Sharoky; (b) the
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Chairman of the Board of Watson will be Dr. Alec Keith, the Chief Executive
Officer of Watson will be Dr. Allen Chao and the President of Watson will be Dr.
Melvin Sharoky; (c) the Board of Directors of Circa will consist of Dr. Alec
Keith (the current Chairman of the Board of Watson), Dr. Allen Chao (the current
President and Chief Executive Officer of Watson) and Dr. Melvin Sharoky (the
current President and Chief Executive Officer of Circa); and (d) the Board of
Directors of Watson will consist of nine members, eight of whom will be elected
at the Watson Meeting. Subject to the adoption of the amendment to the Articles
authorizing a staggered Board of Directors, these eight members will be divided
into three classes and will be comprised of five current directors of Watson
(Dr. Alec Keith, Dr. Allen Chao, Albert F. Hummel (the current Executive Vice
President and Director of Acquisitions of Affordable Residential Communities),
Michel J. Feldman (a partner of D'Ancona & Pflaum, Watson's legal counsel) and
Ronald Taylor (the current Chairman and Chief Executive Officer of Pyxis
Corporation)) and the following three individuals designated by Circa: Dr.
Melvin Sharoky, Thomas P. Rice (the current Executive Vice President and Chief
Operating Officer of Circa) and Michael Fedida (a current Circa Board member and
a registered pharmacist). The proposed amendment to the Articles to create a
staggered Board of Directors authorizes a board of directors comprised of nine
members. The Watson stockholders will not have the ability to nominate any
additional directors to fill the vacancy remaining after the eight directors
have been elected and such vacancy will be filled by the majority vote of the
Watson directors in office immediately after the Effective Date. If the Merger
is consummated, the nominee for such vacancy will be selected by Dr. Sharoky and
Messrs. Rice and Fedida, subject to approval by the Watson Board. See "The
Merger Agreement -- Governance."
Conditions to the Merger. The obligations of Watson, Watson Sub and Circa
to consummate the Merger are subject to the satisfaction of certain conditions,
including, among others, (a) obtaining requisite stockholder approvals; (b) the
expiration or termination of the waiting period applicable to the consummation
of the Merger under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended (the "HSR Act"); (c) the absence of any injunction prohibiting the
consummation of the Merger or materially changing the terms or conditions of the
Merger; (d) this Proxy Statement/Prospectus being declared effective by the
Commission; (e) the receipt of accountants' letters with respect to
qualification of the Merger as a pooling of interests and customary "cold
comfort" matters; (f) the Watson Common Stock to be issued in connection with
the Merger being authorized for trading on the NASDAQ/NMS; (g) the holders of
not more than 10% of the outstanding Circa Common Stock having perfected
dissenters' rights under applicable law; (h) each party having performed all of
its agreements contained in the Merger Agreement in all material respects; (i)
the representations and warranties of each party to the Merger Agreement being
true and correct at closing except where the failure to be true and correct
would not have a material adverse effect on the business, results of operations
or financial condition of either party and its respective subsidiaries, taken as
a whole (a "Material Adverse Effect"); and (j) the receipt of certain legal
opinions with respect to the tax consequences of the Merger. See "The
Merger -- Certain Federal Income Tax Consequences; -- Accounting Treatment; --
Conditions."
Regulatory Approval. Under the HSR Act, the Merger cannot be consummated
until notifications and certain information have been furnished to the Federal
Trade Commission (the "FTC") and the Antitrust Division of the Department of
Justice (the "Antitrust Division") and specified waiting periods have been
satisfied. Watson and Circa each filed notification and report forms under the
HSR Act with the FTC and the Antitrust Division on May 4, 1995. The waiting
period under the HSR Act expired by early termination on May 23, 1995. See "The
Merger -- Regulatory Approval."
Certain Federal Income Tax Consequences. The obligations of Watson Sub,
Watson and Circa to consummate the Merger are conditioned on the receipt of
opinions of their respective counsel, D'Ancona & Pflaum and Schulte Roth &
Zabel, to the effect that the Merger will be treated for Federal income tax
purposes as a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "Code"). If so treated, no gain
or loss will be recognized by Circa stockholders upon the receipt of Watson
Common Stock in exchange for Circa Common Stock except with respect to cash
received in lieu of a fractional interest in Watson Common Stock and no gain or
loss will be recognized by Watson or Circa. See "The Merger -- Certain Federal
Income Tax Consequences" and "The Merger Agreement -- Condi-
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tions." Circa's stockholders should carefully read the discussion under such
sections and should consult with their own tax advisers.
Accounting Treatment. It is the intention of Watson and Circa that the
Merger will qualify as a "pooling of interests" for accounting and financial
reporting purposes. Consummation of the Merger is conditioned upon the receipt
of an opinion from Watson's independent accountants stating that the business
combination to be effected by the Merger would properly be accounted for as a
"pooling of interests" in accordance with generally accepted accounting
principles and all published rules, regulations and policies of the Commission.
See "The Merger -- Accounting Treatment."
Resale Restrictions. All shares of Watson Common Stock received by Circa
stockholders in the Merger have been registered under the Securities Act and
will be freely transferable, except that shares of Watson Common Stock received
by persons who are deemed to be "affiliates" (as such term is defined under the
Securities Act) of Circa at the time of the Circa Meeting may be resold by them
only in certain permitted circumstances. See "The Merger -- Resale
Restrictions."
Right of Circa to Terminate Merger. If on the thirteenth business day prior
to the Meetings (the "Determination Date"), the Average Closing Price (as
defined in the Merger Agreement) of Watson Common Stock is less than $25.00,
Circa may terminate the Merger Agreement and the Merger unless Watson has
elected to increase the Exchange Ratio such that, as consideration for the
consummation of the Merger, Circa stockholders will receive shares of Watson
Common Stock with a market value (based upon the Average Closing Price) equal to
$21.50 per share. See "The Merger Agreement -- Termination."
Termination. In addition to Circa's right to terminate the Merger Agreement
and the Merger as described above, the Merger Agreement may be terminated and
the Merger may be abandoned at any time prior to the Effective Time, before or
after the approval by the stockholders of Circa and Watson, respectively, in a
number of circumstances, which include, among others:
(a) by the mutual consent of Circa and Watson;
(b) by action of the Board of Directors of either Circa or Watson if
(i) the Merger shall not have been consummated by December 1, 1995; (ii)
the adoption of the Merger Agreement and the approval of the transactions
contemplated thereby shall not have been obtained at a stockholders'
meeting of Watson or Circa duly convened for such purpose (or any
adjournment thereof); or (iii) a court of competent jurisdiction or a
governmental, regulatory or administrative agency or commission shall have
issued an order, decree or ruling or taken any other action against the
transactions; or
(c) by action of the Board of Directors of either Circa or Watson, if
(i) such company receives an Alternative Proposal (as defined in the Merger
Agreement) and its Board of Directors determines, in good faith, and
pursuant to the exercise of its fiduciary duties to its stockholders, to
accept or recommend such Alternative Proposal; (ii) the Board of Directors
determines in good faith and pursuant to the exercise of its fiduciary
duties to withdraw its recommendation of the Merger Agreement and/or the
Merger; (iii) the Board of Directors of the other company shall have (A)
recommended an Alternative Proposal to its stockholders; or (B) withdrawn
or modified in a manner materially adverse to the other party its approval
or recommendation of the Merger; (iv) there has been a breach by the other
party of any representation or warranty contained in the Merger Agreement
which would have a Material Adverse Effect on the other party; (v) there
has been a material breach of any of the material covenants or agreements
set forth in the Merger Agreement by the other party, which breach is not
curable or, if curable, is not cured within 30 days after written notice of
such breach is given; or (vi) any person, after the date hereof, shall
become the beneficial owner (directly or indirectly) of 20% or more of the
outstanding shares of the other party's stock or any person shall have
commenced a bona fide tender offer or exchange offer to acquire at least
20% of the then outstanding shares of the other party's stock.
The preceding is a short summary of the termination provisions in the
Merger Agreement. See "The Merger Agreement -- No Solicitation of Alternative
Transactions; -- Termination."
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Termination Fee. If (a) any person makes an Alternative Proposal for Circa
and its Board of Directors determines to accept or recommend that Circa's
stockholders accept, such Alternative Proposal, or if Circa's Board of Directors
withdraws or materially modifies its recommendation of the Merger Agreement
and/or the Merger through the exercise of its fiduciary duty to its
stockholders; and (b) the Merger Agreement is consequently terminated by either
party (other than by Circa upon the breach by Watson of the Merger Agreement),
Circa is required to pay Watson a fee of $15,000,000 plus Watson's expenses
incurred in connection with the Merger (including attorneys' fees). If Circa
fails to make such payment and Watson receives a final non-appealable judgment
against Circa, Circa shall be required to pay Watson for its costs(including
attorneys' fees) in connection with such suit, and to pay interest on the amount
of the fee at a rate of 12% per annum.
If (a) any person makes an Alternative Proposal for Watson and its Board of
Directors determines to accept or recommend that Watson's stockholders accept,
such Alternative Proposal or if Watson's Board of Directors withdraws or
materially modifies its recommendation of the Merger Agreement and/or the Merger
through the exercise of its fiduciary duty to its stockholders; and (b) the
Merger Agreement is consequently terminated by either party (other than (i) by
Watson upon the breach by Circa of the Merger Agreement; or (ii) by Circa if
termination is due to an Alternative Proposal for Watson and such Alternative
Proposal is not conditioned on the termination of the Merger Agreement), Watson
is required to pay Circa a fee of $15,000,000 plus Circa's expenses incurred in
connection with the Merger (including attorneys' fees). If Watson fails to make
such payment and Circa receives a final non-appealable judgment against Watson,
Watson shall be required to pay Circa for its costs (including attorneys' fees)
in connection with such suit, and to pay interest on the amount of the fee at a
rate of 12% per annum.
VOTES REQUIRED
Watson. The affirmative vote of a majority of the outstanding shares of
Watson Common Stock entitled to vote at the Watson Meeting will be necessary for
approval and adoption of the Merger Agreement and the proposed amendments to the
Watson Articles of Incorporation. The affirmative vote of a plurality of the
shares of Watson Common Stock represented at the Watson Meeting, in person or by
proxy, will be necessary for the election of directors. The affirmative vote of
a majority of the shares of Watson Common Stock represented at the Watson
Meeting in person or by proxy, and entitled to vote, will be necessary for the
approval of each of the remaining Corporate Matters. Each share of Watson Common
Stock is entitled to one vote.
At May 19, 1995, Watson's directors and executive officers were deemed to
be beneficial owners of 5,031,724 shares of Watson Common Stock (excluding
641,586 shares which may be acquired upon exercise of options and other rights
which are exercisable within 60 days of May 19, 1995), or approximately 29.1% of
the then outstanding shares of Watson Common Stock. The directors and executive
officers of Watson have indicated that they intend to vote their shares for
approval and adoption of the Merger Agreement and for approval and adoption of
each of the Corporate Matters. On March 29, 1995, each of Dr. Allen Chao, Agnes
Y. Kung (Dr. Chao's sister) and John Chao (Dr. Chao's father) entered into
separate Voting Agreements with Circa which provided, among other things, that
if a stockholder vote to approve the Merger and/or the Merger Agreement was
held, such stockholders would vote the shares of Watson Common Stock owned by
them, or over which they have the power to vote, in favor of the Merger. As of
May 19, 1995, such stockholders owned or had the power to vote approximately
3,108,446 shares of Watson Common Stock representing 18.0% of the total
outstanding shares of Watson Common Stock (excluding 375,795 shares which may be
acquired upon exercise of options and other rights which are exercisable within
60 days of May 19, 1995).
SINCE THE VOTE OF WATSON STOCKHOLDERS REQUIRED IN ORDER TO ADOPT THE MERGER
AGREEMENT AND TO APPROVE THE AMENDMENTS TO THE ARTICLES OF INCORPORATION OF
WATSON IS BASED UPON THE NUMBER OF OUTSTANDING SHARES OF WATSON COMMON STOCK,
AND NOT ONLY THOSE SHARES WHICH ARE ACTUALLY VOTED, THE FAILURE BY A WATSON
STOCKHOLDER (OR A BROKER WITH DISCRETIONARY AUTHORITY TO VOTE SHARES) TO SUBMIT
A PROXY CARD (OR VOTE IN PERSON AT THE WATSON MEETING) WILL HAVE THE SAME EFFECT
AS A "NO" VOTE WITH RESPECT TO THE ADOPTION OF THE MERGER AGREEMENT AND SUCH
AMENDMENTS.
8
<PAGE> 18
Circa. The affirmative vote of the holders of two-thirds of the outstanding
shares of Circa Common Stock is required to approve and adopt the Merger
Agreement. Each share of Circa Common Stock is entitled to one vote.
At June 12, 1995, Circa's directors and executive officers were deemed to
be beneficial owners of 783,451 shares of Circa Common Stock (excluding 191,500
shares which may be acquired upon exercise of options or other rights which are
exercisable within 60 days of June 12, 1995), or approximately 3.6% of the then
outstanding shares of Circa Common Stock. The directors and executive officers
of Circa have indicated that they intend to vote their shares for approval and
adoption of the Merger Agreement.
SINCE THE VOTE OF CIRCA STOCKHOLDERS REQUIRED IN ORDER TO ADOPT THE MERGER
AGREEMENT IS BASED UPON THE NUMBER OF OUTSTANDING SHARES OF CIRCA COMMON STOCK,
AND NOT ONLY THOSE SHARES WHICH ARE ACTUALLY VOTED, THE FAILURE BY A CIRCA
STOCKHOLDER (OR A BROKER WITH DISCRETIONARY AUTHORITY TO VOTE SHARES) TO SUBMIT
A PROXY CARD (OR VOTE IN PERSON AT THE CIRCA MEETING) WILL HAVE THE SAME EFFECT
AS A "NO" VOTE WITH RESPECT TO THE ADOPTION OF THE MERGER AGREEMENT.
VOTING OF PROXIES
Shares of Watson Common Stock or Circa Common Stock represented by properly
executed proxies received at or prior to the Meetings will be voted at the
appropriate Meeting in the manner specified by the holders of such shares.
Properly executed proxies which do not contain voting instructions will be voted
FOR approval and adoption of the Merger Agreement and, in the case of Watson's
proposals, FOR each of the Corporate Matters.
The Articles or Certificate of Incorporation, Bylaws and applicable state
corporate statutes of Watson and Circa do not address the treatment and effect
of abstentions and broker non-votes. The election inspectors will treat
abstentions as shares that are present and entitled to vote for purposes of
determining the presence of a quorum but as not voted for purposes of
determining the approval of any matters submitted to the stockholders for a
vote. If a broker indicates on the proxy that it does not have discretionary
authority as to certain shares to vote on a particular matter, those shares will
not be considered as present and entitled to vote with respect to that matter.
If any other matters are properly presented at either the Watson Meeting or
the Circa Meeting for consideration, the person or persons named in the relevant
form of proxy enclosed herewith and acting thereunder will have discretion to
vote on such matters in accordance with their best judgment, unless the proxy
indicates otherwise. Neither Watson nor Circa has any knowledge of any matters
to be presented at the Watson Meeting or the Circa Meeting, as the case may be,
other than those matters referred to and described herein.
If fewer shares of Watson Common Stock or Circa Common Stock are voted in
favor of the adoption of the Merger Agreement than the number required for
adoption, it is expected that the Watson Meeting or the Circa Meeting, as the
case may be, will be adjourned or postponed in order to allow additional time
for obtaining additional proxies or votes. At any subsequent reconvening of the
Watson Meeting or the Circa Meeting, as the case may be, all proxies obtained
prior to such adjournment or postponement will be voted in such manner as such
proxies would have been voted at the original convening of the Watson Meeting or
the Circa Meeting (except for any proxies which previously shall have been
effectively revoked or withdrawn), notwithstanding that they may have been
effectively voted on the same or any other matter at a previous meeting.
REVOCABILITY OF PROXIES
The grant of a proxy on the Watson or Circa form of proxy does not preclude
a stockholder from voting in person or otherwise revoking a proxy. Attendance at
the relevant Meeting will not in and of itself constitute revocation of a proxy.
A stockholder may revoke a proxy at any time prior to its exercise by delivering
to Agnes Y. Kung, Secretary of Watson, 311 Bonnie Circle, Corona, California
91720 (in the case of a Watson stockholder) or Gwen Gerrick, Secretary of Circa,
33 Ralph Avenue, Copiague, New York 11726-0030 (in
9
<PAGE> 19
the case of a Circa stockholder) a duly executed revocation or a proxy bearing a
later date or by notifying either company at the respective Meeting before any
vote is taken or by voting in person at the Meeting.
RECORD DATE; SHARES ENTITLED TO VOTE; QUORUM
Watson. Only holders of record of Watson Common Stock at the close of
business on May 19, 1995 will be entitled to receive notice of and to vote at
the Watson Meeting. At May 19, 1995, Watson had outstanding 17,289,786 shares of
Watson Common Stock. A majority of the outstanding shares of Watson Common Stock
must be represented in person or by proxy at the Watson Meeting in order for a
quorum to be present at the Watson Meeting.
Circa. Only holders of record of Circa Common Stock at the close of
business on June 12, 1995 will be entitled to receive notice of and to vote at
the Circa Meeting. At June 12, 1995, Circa had outstanding 21,777,612 shares of
Circa Common Stock. A majority of the outstanding shares of Circa Common Stock
must be represented in person or by proxy at the Circa Meeting in order for a
quorum to be present at the Circa Meeting.
SOLICITATION OF PROXIES
Each of Watson and Circa will bear the cost of the solicitation of proxies
from its own stockholders, except that Watson and Circa will share equally the
cost of printing and mailing this Proxy Statement/Prospectus. In addition to
solicitation by mail, the directors, officers and employees of each company and
their respective subsidiaries may solicit proxies from stockholders of such
company by telephone or telegram or in person. Such persons will not be
additionally compensated, but will be reimbursed for reasonable out-of-pocket
expenses incurred in connection with such solicitation. Arrangements will also
be made with brokerage firms, nominees, fiduciaries and other custodians for the
forwarding of solicitation materials to the beneficial owners of shares held of
record by such persons, and Watson and Circa will reimburse such persons for
their reasonable out-of-pocket expenses in connection therewith.
D.F. King & Co., Inc. ("D.F. King") will assist in the solicitation of
proxies for Watson and Circa for a joint fee of $9,500, plus reimbursement of
reasonable out-of-pocket expenses. Approximately 25 employees of D.F. King will
be engaged in the solicitation of proxies for both companies.
10
<PAGE> 20
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
Set forth below are selected historical consolidated financial data of
Watson and Circa which are based upon the historical consolidated financial
statements of Watson and Circa. The following data are qualified in their
entirety by and should be read in conjunction with the respective consolidated
financial statements incorporated by reference in this Proxy
Statement/Prospectus.
The unaudited data as of March 31, 1995 and for the three months ended
March 31, 1994 and 1995, for each of Watson and Circa reflect, in the opinion of
management of Watson and Circa, respectively, all adjustments necessary for a
fair presentation of such data and are not necessarily indicative of the results
which may be expected for any other interim period or for the year ending
December 31, 1995.
WATSON PHARMACEUTICALS, INC.
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31,
(UNAUDITED) YEARS ENDED DECEMBER 31,(1)
CONSOLIDATED STATEMENT ----------------- -----------------------------------------------
OF INCOME DATA: 1995 1994 1994 1993 1992 1991 1990
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues........................ $26,206 $19,319 $87,057 $67,547 $34,684 $29,480 $23,371
Net income...................... 5,890 4,092 18,686 12,222 3,595 1,573 1,218
Earnings per common and common
equivalent share(2)........... 0.33 0.23 1.05 0.74 0.26 0.12 0.09
Weighted average number of
common and common equivalent
shares outstanding............ 18,035 17,773 17,831 16,544 13,887 13,386 13,085
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,(1)
MARCH 31, 1995 ---------------------------------------------------------
CONSOLIDATED BALANCE SHEET DATA: (UNAUDITED) 1994 1993 1992 1991 1990
-------------- -------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Current assets................... $ 98,865 $ 87,068 $ 78,714 $15,983 $12,459 $10,756
Working capital.................. 82,353 75,036 68,644 8,540 7,258 6,691
Total assets..................... 143,973 130,271 104,781 31,214 23,905 18,852
Long-term debt and capitalized
lease obligations(3)........... 4,902 5,058 2,143 3,991 2,736 3,029
Total stockholders' equity....... 120,201 110,969 91,250 19,759 15,968 11,758
</TABLE>
- ---------------
(1) Watson acquired Zetachron Incorporated in October 1991 in a transaction
accounted for as a pooling of interests. Accordingly, the financial data
presented include the accounts of Zetachron for all periods presented.
(2) Computed on the basis described for earnings per common and common
equivalent share in Note 1 of Notes to Consolidated Financial Statements
included in Watson's Form 10-K for 1994, as amended, which is incorporated
by reference herein.
(3) See Note 4 of Notes to Consolidated Financial Statements included in
Watson's Form 10-K for 1994, as amended, which is incorporated by reference
herein.
11
<PAGE> 21
CIRCA PHARMACEUTICALS, INC.
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31,
(UNAUDITED) YEARS ENDED DECEMBER 31,
CONSOLIDATED STATEMENT OF ----------------- -------------------------------------------------
OPERATIONS DATA: 1995 1994 1994 1993 1992 1991 1990
------- ------- ------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues...................... $ 7,917 $ 1,234 $ 7,801 $ 3,291 $ 89 $ 1,322 $ 15,568
Net income (loss)............. 7,066 3,874 17,259 8,395 (9,685) (56,777) (27,424)
Earnings (loss) per common and
common equivalent
share(1).................... 0.32 0.18 0.79 0.38 (0.44) (2.62) (1.28)
Weighted average number of
common and common equivalent
shares outstanding.......... 21,744 21,711 21,726 22,047 22,152 21,686 21,444
Cash dividends per share(2)... .04
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, 1995 ----------------------------------------------------------
CONSOLIDATED BALANCE SHEET DATA: (UNAUDITED) 1994 1993 1992 1991 1990
--------------- -------- -------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Current assets................... $ 61,420 $ 57,656 $ 47,829 $41,135 $28,528 $ 94,188
Working capital.................. 55,689 51,437 34,817 22,994 16,360 65,153
Total assets..................... 108,083 103,857 102,409 99,302 98,333 151,944
Deferred partnership liability... 8,833 14,033 15,242 7,598
Total stockholders' equity....... 92,144 82,001 64,031 58,113 65,458 121,305
</TABLE>
- ---------------
(1) Earnings (loss) per share is computed based on the weighted average number
of shares outstanding.
(2) Circa has not declared a dividend since 1990.
12
<PAGE> 22
UNAUDITED PRO FORMA COMBINED SUMMARY FINANCIAL INFORMATION
The unaudited pro forma combined summary financial information of Watson
and Circa set forth below gives effect to the Merger under the pooling of
interests accounting method reflecting the Exchange Ratio. Such pro forma
information assumes the Merger had been effective at January 1 of each period
presented for the statement of operations information and on March 31, 1995, and
December 31, 1994, 1993 and 1992 for the balance sheet information. The pro
forma information is presented for illustrative purposes only and is not
necessarily indicative of the operating results or financial position that would
have occurred if the Merger had been consummated, nor is it necessarily
indicative of the future operating results or financial position of the combined
companies. The unaudited pro forma combined summary financial information should
be read in conjunction with the "Unaudited Pro Forma Condensed Combined
Financial Information," including the notes thereto.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
----------------- ------------------------------
1995 1994 1994 1993 1992
------- ------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS INFORMATION:
Revenues...................................... $34,123 $20,553 $94,858 $70,838 $34,773
Net income (loss)............................. 12,390 8,116 36,545 50,417 (6,090)
Earnings (loss) per common and common
equivalent share(1)......................... 0.34 0.23 1.00 1.42 (0.18)
Weighted average number of common and common
equivalent shares outstanding............... 36,735 36,444 36,515 35,504 32,938
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
MARCH 31, 1995 1994 1993 1992
-------------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
BALANCE SHEET INFORMATION:
Current assets.............................. $187,666 $172,912 $126,543 $ 57,118
Working capital............................. 165,423 154,661 103,461 31,534
Total assets................................ 279,437 262,316 235,672 130,516
Long-term debt and capitalized lease
obligations............................... 4,902 5,058 2,143 3,991
Deferred partnership liability.............. 8,833 14,033 15,242 7,598
Total stockholders' equity.................. 242,084 223,370 185,081 77,872
</TABLE>
- ---------------
(1) See footnote 3 on page 62.
13
<PAGE> 23
COMPARATIVE PER SHARE DATA
Set forth below are earnings (loss) per common share and common share
equivalent and unaudited book value per common share and common share equivalent
of Watson and Circa on both historical and unaudited pro forma combined bases.
In addition, the following information sets forth the earnings (loss) and book
value for Circa on an unaudited per share equivalent pro forma basis. Pro forma
combined earnings per share is derived from the pro forma combined information
presented elsewhere herein, which gives effect to the Merger under the pooling
of interests accounting method as if the Merger had occurred on January 1 of
each period presented and combines the results of Watson and Circa for each of
the periods presented. The per share equivalent pro forma combined data for
Circa is calculated by multiplying the pro forma per share amounts for Watson by
the Exchange Ratio of 0.86. Book value per share for the pro forma combined
presentation is based upon outstanding common shares, adjusted to include the
shares of Watson Common Stock to be issued in the Merger and assumes that the
Merger had been effective at the end of the period presented. The information
set forth below should be read in conjunction with the respective consolidated
financial statements of Watson and Circa incorporated by reference in this Proxy
Statement/Prospectus and the "Unaudited Pro Forma Condensed Combined Financial
Information," in each case including the notes thereto. The Pro Forma
information presented herein is for illustrative purposes only.
<TABLE>
<CAPTION>
THREE MONTHS YEARS ENDED DECEMBER 31,
ENDED --------------------------
MARCH 31, 1995 1994 1993 1992
-------------- ----- ----- ------
<S> <C> <C> <C> <C>
Watson -- Historical:
Earnings............................................ $ 0.33 $1.05 $0.74 $ 0.26
Book value.......................................... 6.96 6.50 5.41 1.52
Circa -- Historical:
Earnings (loss)..................................... 0.32 0.79 0.38 (0.44)
Book value.......................................... 4.24 3.77 2.95 2.62
Watson-Circa -- Pro Forma Combined:
Earnings (loss)..................................... 0.34 1.00 1.42 (0.18)
Book value.......................................... 6.73 6.24 5.21 2.43
Equivalent Pro Forma Combined for Circa
Common Stock:
Earnings (loss)..................................... 0.29 0.86 1.22 (0.15)
Book value.......................................... 5.79 5.37 4.48 2.09
</TABLE>
14
<PAGE> 24
COMPARATIVE MARKET DATA
The Watson Common Stock has been primarily traded on NASDAQ/NMS (symbol
"WATS") since February 17, 1993. Prior to that date, the Watson Common Stock was
not publicly traded. The Circa Common Stock has been primarily traded on AMEX
(symbol "RXC") since 1981. The table below sets forth, for the calendar quarters
indicated, the high and low closing sales prices per share reported on
NASDAQ/NMS for the Watson Common Stock, and the high and low sales prices per
share reported on AMEX for the Circa Common Stock. The information with respect
to NASDAQ/NMS quotations was obtained from the National Association of
Securities Dealers, Inc. and reflects interdealer prices, without retail markup,
markdown or commissions and may not represent actual transactions.
<TABLE>
<CAPTION>
WATSON CIRCA
COMMON STOCK COMMON STOCK
------------------- -------------------
HIGH LOW HIGH LOW
------- ------- ------- -------
<S> <C> <C> <C> <C>
1993:
First Quarter(1).................................. $17.750 $12.250 $ 9.000 $ 5.750
Second Quarter.................................... 21.500 14.250 7.875 4.125
Third Quarter..................................... 29.750 20.750 8.875 5.875
Fourth Quarter.................................... 37.500 24.250 13.625 8.250
1994:
First Quarter..................................... $28.000 $15.250 $15.125 $ 8.625
Second Quarter.................................... 19.250 13.000 12.125 8.750
Third Quarter..................................... 25.375 16.250 15.375 9.125
Fourth Quarter.................................... 28.750 23.500 18.125 14.125
1995:
First Quarter..................................... $33.000 $21.000 $26.125 $15.625
Second Quarter (through June 12, 1995)............ 38.750 29.000 30.875 22.125
</TABLE>
- ---------------
(1) For Watson Common Stock, beginning February 17, 1993.
The closing prices per share of Watson Common Stock and Circa Common Stock
on March 29, 1995, the last trading day preceding public announcement of the
proposed Merger, were $32.50 and $17.75, respectively. Based on such closing
price of Watson Common Stock, the market value of 0.86 of a share of Watson
Common Stock was $27.95. On June 12, 1995, the closing price per share of Watson
Common Stock was $38.75 and the closing price per share of Circa Common Stock
was $30.75. Based on such closing price of Watson Common Stock, the market value
of 0.86 of a share of Watson Common Stock was $33.325.
Because the Exchange Ratio is fixed (except under certain circumstances)
and because the market price of Watson Common Stock is subject to fluctuation,
the market value of the shares of Watson Common Stock that holders of Circa
Common Stock will receive in the Merger may increase or decrease prior to and
following the Merger. STOCKHOLDERS ARE URGED TO OBTAIN CURRENT MARKET QUOTATIONS
FOR THE WATSON COMMON STOCK AND THE CIRCA COMMON STOCK.
Watson has not paid any cash dividends on the Watson Common Stock and has
no present intention of paying cash dividends in the foreseeable future. Circa
has not paid a cash dividend on the Circa Common Stock since 1990.
INVESTMENT CONSIDERATIONS
See "Investment Considerations" with respect to factors which should be
considered in evaluating the Merger.
RECENT DEVELOPMENTS
Since the announcement of the Merger Agreement, four purported class
actions have been commenced in the Supreme Courts of the State of New York. Each
complaint alleges, among other things, that actions of certain named defendants
in connection with the Merger Agreement constituted breaches of fiduciary
duties. Circa and Watson believe that the allegations in the complaints are
without merit and intend to defend such actions vigorously. See "The
Merger -- Litigation Relating to the Merger."
15
<PAGE> 25
INVESTMENT CONSIDERATIONS
The following factors should be considered carefully by the stockholders of
Watson and Circa in connection with voting upon the Merger.
NO CONTROL OVER CIRCA JOINT VENTURES
Substantially all of Circa's net income is derived from joint ventures and
a royalty arrangement. In addition, Circa's efforts in developing
controlled-release technology is also primarily conducted through joint
ventures. These arrangements involve various partners and Circa does not control
the joint ventures or the commercial exploitation of the licensed products, and
there can be no assurances that such joint ventures will be profitable. In
addition, certain of these arrangements may require a determination be made as
to the competitive effect of the products under development by such joint
ventures with products under development or marketed by Watson. Watson and Circa
do not believe that any such determination would have a material adverse effect
on the combined company.
DEPENDENCE UPON NEW PRODUCT INTRODUCTIONS
Watson's and Circa's future results of operations will depend, to a
significant extent, upon their ability to successfully commercialize new
off-patent and proprietary pharmaceutical products in a timely manner. Newly
introduced off-patent products with limited or no off-patent competition are
typically sold at higher selling prices, often resulting in increased gross
profit margins. As competition from other manufacturers intensifies, selling
prices typically decline. New products must be developed, tested and
manufactured and, in addition, must meet regulatory standards and receive
requisite regulatory approvals. The development and commercialization process is
time consuming and costly. Delays in any part of the process or the inability of
Watson and Circa to obtain regulatory approval for their products could
adversely affect the combined company's quarterly and annual operating results.
Moreover, there can be no assurance that any of Watson's or Circa's products, if
and when developed and approved, can be successfully commercialized.
COMPETITION
Both Watson and Circa experience substantial competition in connection with
the manufacture and sale of off-patent pharmaceutical products and drug delivery
systems. Both companies compete with off-patent drug manufacturers, brand-name
pharmaceutical companies that manufacture off-patent drugs, the original
manufacturers of brand-name drugs that continue to be produced after patent
expirations and manufacturers of new drugs that may compete with Watson's or
Circa's off-patent drugs. Many competitors have been in business for a longer
period of time than either Watson or Circa, have a greater number of products on
the market and have greater financial and other resources. Because selling
prices of off-patent drug products typically decline as competition intensifies,
the maintenance of profitable operations will be dependent, in part, on both
companies' ability to maintain efficient production capabilities and to develop
and introduce new products in a timely manner.
Watson's and Circa's primary competitors in the business of developing and
applying drug delivery systems include pharmaceutical companies which have
substantially greater financial, technological, marketing, personnel and
research and development resources than either Watson or Circa. Both Watson's
and Circa's products will compete not only with products employing advanced drug
delivery systems but also with products in traditional dosage forms. New drugs
or future developments in alternative drug delivery technologies may provide
therapeutic or cost advantages to competing products. There can be no assurance
that developments by others will not render Watson's or Circa's products or
technologies noncompetitive or obsolete.
CERTAIN CIRCA LEGAL MATTERS
Prior to March 1993, when its name became Circa Pharmaceuticals, Inc.,
Circa was known as Bolar Pharmaceutical Co., Inc. ("Bolar"). During the period
1989-1994, Circa (Bolar) was a party to numerous actions and proceedings arising
out of events which occurred prior to January 1990 in connection with
16
<PAGE> 26
improperly securing FDA approval to manufacture and sell certain of its
products, and in connection with the manufacture and sale of those products. All
of those actions and proceedings have been resolved, with one exception which
Circa does not expect will have a material impact on its financial position. It
is not possible to predict whether this prior history will have any material
adverse impact on market perceptions of Circa or the combined company. In
addition, see Appendix G for a description of an open inquiry by the Department
of Justice regarding possible violations of the False Claims Act in respect of
drugs sold by Circa (Bolar) prior to 1990 and paid for, directly or indirectly,
by the Federal Government, the resolution of which inquiry Circa does not
believe will be materially adverse to Circa's financial position.
GOVERNMENT REGULATION
All pharmaceutical manufacturers, including Watson and Circa, are subject
to extensive regulation by the FDA and other federal and state agencies.
Moreover, Watson and Circa are subject to the periodic inspection of their
facilities and operations and the testing of their products by the FDA. The FDA
has extensive enforcement powers over pharmaceutical manufacturers, including
the power to withhold approvals of new products, to force the voluntary recall
of products to delay or prevent product sales and to halt operations. Further,
after an ANDA or NDA has been approved, current FDA procedures may delay initial
product shipment. Any manufacturer failing to comply with FDA requirements may
be unable to obtain approvals for the introduction of new products. Watson and
Circa are dependent on receiving FDA approvals prior to marketing and shipping
their respective products. There can be no assurance, however, that the FDA will
approve products either pending before the FDA or under development, or that the
rate, timing and cost of FDA approvals will not adversely affect Watson's or
Circa's product introduction plans or results of operations. In recent years,
the FDA's approval process of ANDA off-patent products has become more rigorous,
time consuming and costly, and neither Watson nor Circa can predict the extent
to which they may be affected by legislative and regulatory developments
concerning their respective products, operations or the healthcare field
generally. The Uruguay Round Agreements Act ("URAA"), which became effective
June 8, 1994, lengthens the term of existing and future patents by changing the
patent term from 17 years, based on the date of patent grant, to 20 years, based
on the date of patent application. These URAA changes could postpone approval
eligibility of some ANDAs. Regulatory compliance issues or regulatory changes
affecting Watson's or Circa's operations or the approval or shipment of products
could have a material adverse effect upon both the companies' businesses. In
addition, political pressure to contain healthcare costs at the federal and
state levels is increasing. There may be future legislative or executive
programs to reform the healthcare system, to increase access to healthcare for
the presently uninsured, to control the continued escalation of healthcare
expenditures or to use healthcare reimbursement policy to help control the
federal deficit. Regulatory compliance issues or regulatory changes affecting
Watson's or Circa's operations or the approval or shipment of products could
have a material adverse effect upon Watson's or Circa's businesses.
INTEGRATION OF THE BUSINESSES
The Merger involves the integration of two companies that have previously
operated independently. There can be no assurance that Watson and Circa will not
encounter difficulties in integrating the operations of the two companies or
that the benefits expected from such integration will be realized. Any delays or
unexpected costs incurred in connection with such integration could have a
material adverse effect on the combined companies' business, operating results
or financial condition. Furthermore, there can be no assurance that the
operations, managements and personnel of the two companies will be compatible or
that Watson or Circa will not experience the loss of key personnel.
DEPENDENCE ON KEY PERSONNEL
The success of Watson's and Circa's present and future operations will
depend, to a great extent, upon the experience, abilities and continued services
of certain executive officers, including Allen Chao, Ph.D., Alec D. Keith, Ph.D.
and Melvin Sharoky, M.D. The loss of the services of any of these officers could
have a material adverse effect on the combined company. The success of the
combined company also depends upon its ability to attract and retain other
highly qualified scientific, managerial and manufacturing personnel. However,
when
17
<PAGE> 27
two companies merge, there is a risk of departure of employees due to factors
relating to the combination process, and such departures may occur at the
combined company. Competition for such personnel is intense. In this respect,
Watson and Circa compete with numerous pharmaceutical and healthcare companies,
as well as universities and nonprofit research organizations. There can be no
assurance that the combined company will continue to attract and retain
qualified personnel.
SEVERANCE PAYMENTS
Circa has employment agreements with two of its executive officers (Dr.
Sharoky and Mr. Rice) which provide, among other things, for a severance payment
upon termination of their employment with Circa under certain circumstances
following a change of control. Upon consummation of the Merger, Watson will
assume all obligations under these agreements. Watson currently intends to
continue to employ each of these individuals and has been informed by Circa that
such individuals intend to continue their employment relationship with Watson.
However, if any of these individuals terminate their employment after the Merger
is consummated, and it is determined that such termination was for "good reason"
(as defined in such employment agreements), Watson would be required to pay such
severance payment to the terminating employee.
PRODUCT DEVELOPMENT
Although Watson and Circa intend to maintain extensive product development
activities, income from such efforts will not be realized until the products
have been approved by the FDA and successfully marketed. No assurance can be
given that any product development expenditures will ever result in revenue.
Further, in connection with their proprietary drug delivery systems, Watson and
Circa will depend on certain pharmaceutical company partners to fund a portion
of the costs of product development, testing, regulatory approval and marketing.
Such partners may abandon a product at any time, and there can be no assurances
that Watson or Circa could replace such collaborative arrangements or
successfully develop, test and market such products on their own.
PATENTS AND PROPRIETARY RIGHTS
Watson's and Circa's success with their proprietary products will depend in
part on their ability to obtain patent protection for their products and
preserve their trade secrets. Watson has 15 U.S. patents issued or allowed,
three U.S. patents pending and numerous foreign patents and patents pending. As
of May 19, 1995, Circa had one U.S. patent pending. No assurance can be given,
however, that Watson's patent applications will be approved or that any patents
will provide competitive advantages for its products or will not be challenged
or circumvented by competitors. Recent changes to the patent law resulting from
passage of the URAA will lengthen the term of some granted patent terms. Patents
that may be issued based upon pending applications will have a patent term that
is the longer of 17 years from patent grant or 20 years from patent
applications. Watson and Circa also rely on trade secrets and proprietary
know-how which they seek to protect, in part, through confidentiality agreements
with their respective partners, customers, employees and consultants. There can
be no assurance that these agreements will not be breached, that Watson or Circa
will have adequate remedies for any breach, or that Watson's or Circa's trade
secrets will not otherwise become known or be independently developed by
competitors.
Watson or Circa may be required or may desire to obtain licenses from
others to develop, manufacture and market commercially viable products. There
can be no assurance that such licenses will be obtainable on commercially
reasonable terms, if at all, or that any licensed patents or proprietary rights
will be valid and enforceable. Although neither Watson nor Circa is aware of any
claim of patent infringement, the companies' ability to commercialize their
products will depend on their not infringing the patents of others. Litigation
concerning patents and proprietary technologies can be protracted and expensive.
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DEPENDENCE ON CERTAIN CUSTOMERS, PRODUCTS AND SUPPLIERS
During 1994, sales of off-patent products to Rugby Laboratories, Inc. (a
subsidiary of Marion Merrell Dow, Inc.) and Warner Chilcott Laboratories (a
division of Warner-Lambert Company) accounted for 11% and 14%, respectively, of
Watson's total revenues. In addition, three products in the hydrocodone
bitartrate/acetaminophen product group sold by Watson accounted for
approximately 27%, 18% and 12%, respectively, of Watson's total revenues in
1994. In 1994, the loxapine succinate product group accounted for 12% of
Watson's total revenues. In 1994, Schein Pharmaceuticals, Inc., Rugby
Laboratories, Inc. and Goldline Laboratories, Inc. accounted for 23%, 19% and
11%, respectively, of Circa's sales. Royalties on sales of Dilacor XR(R) are
expected to represent a material percentage of Circa's revenues in 1995, and
Circa's equity in the earnings of Somerset of approximately $25 million in 1994
were generated from the sale of one product, Eldepryl(R). The loss of any of
these customers, or the introduction by other companies of additional
competitive products, could have a material adverse effect on the business of
the combined company. See "Watson -- Marketing and Distribution" and
"Circa -- Markets and Distribution" in Appendix G hereto.
Some materials used in Watson's or Circa's products are currently available
only from sole suppliers. In addition, sources for materials for Watson's or
Circa's products must be approved by the FDA and, in many instances, only one
source has been approved for certain materials in Watson's or Circa's products.
Any interruption of materials from sole source suppliers or delays in FDA
approval of new suppliers could have a material adverse effect on Watson's or
Circa's business.
PRODUCT LIABILITY AND INSURANCE
The design, development and manufacture of Watson's and Circa's products
involve an inherent risk of product liability claims and associated adverse
publicity. Insurance coverage is expensive, difficult to obtain and may not be
available in the future on acceptable terms or at all. Although Watson and Circa
currently maintain liability insurance for all of their products, there can be
no assurance that the coverage limits of Watson's or Circa's insurance policies
will be adequate. A claim brought against Watson or Circa, whether fully covered
by insurance or not, could have a material adverse effect upon the combined
company.
CERTAIN ANTI-TAKEOVER PROVISIONS
The combined company may be subject to the provisions of Nevada's
anti-takeover laws. The Nevada Combination with Interested Stockholders Statute
prevents an "interested stockholder" and an applicable Nevada corporation from
entering into a "combination" unless certain conditions are met. The Nevada
Control Share Acquisition Statute prohibits an acquiror, under certain
circumstances, from voting shares of a target corporation's stock after crossing
certain threshold ownership percentages unless the acquiror obtains the approval
of the target corporation's stockholders. Such provisions may make an
unsolicited acquisition of control of Watson more difficult or expensive. In
addition, provisions of Watson's Articles permitting the issuance of preferred
stock by the Board and the proposed creation of a staggered board of directors
may also make an unsolicited acquisition of control more difficult or expensive.
See "Description of Watson Common Stock -- Anti-Takeover
Provisions; -- Preferred Stock" and "Watson's Proposal to Amend the Articles of
Incorporation to Approve a Staggered Board."
POTENTIAL VOLATILITY OF STOCK PRICE AND ABSENCE OF DIVIDENDS
The market prices for securities of companies engaged primarily in
pharmaceutical development have been volatile and the market price of the Watson
Common Stock may be volatile. The fluctuations in Watson's operating results,
the announcement of technological innovations or new commercial products by
Watson or its competitors, governmental regulation, regulatory approvals,
developments relating to patents or proprietary rights, publicity regarding
actual or potential clinical results with respect to products under development
by Watson or others, political developments or proposed legislation in the
healthcare industry, and other investment considerations, may have a significant
impact on the market price of the Watson Common Stock. Watson has not paid any
cash dividends since its inception and Circa has not paid any such dividends
since 1990. After the Merger, Watson does not anticipate paying cash dividends
in the foreseeable future.
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FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
Watson's and Circa's results of operations have fluctuated on a quarterly
basis in the past, and may continue to fluctuate. Watson and Circa believe such
fluctuations are primarily due to new product introductions and a variety of
additional facts including, without limitation, purchasing practices of Watson's
and Circa's customers and changes in the degree of competition for Watson's and
Circa's products.
LOSS OF EXCLUSIVE RIGHTS TO MARKET CERTAIN CIRCA PRODUCTS
Exclusivity expires for Somerset's Eldepryl(R) tablet in June of 1996. In
1994, Somerset's sales of Eldepryl(R) contributed $25 million in earnings and
$21 million in cash to Circa. However, Somerset is committed to the development
of other products and is developing an Eldepryl(R) transdermal patch. For the
year ended December 31, 1994, Circa earned royalties of $1.2 million on Dilacor
XR(R). The Dilacor XR(R) product lost exclusivity in May of 1995. However, at
this time, Circa is not aware of any pending applications with the FDA for a
competing generic substitute for Dilacor XR(R). The loss of exclusivity with
respect to these products could have a material adverse effect on the financial
condition of the combined company.
THE MEETINGS
MATTERS TO BE CONSIDERED AT THE MEETINGS
Watson. At the Watson Meeting, holders of Watson Common Stock will consider
and vote upon a proposal to approve and adopt the Merger Agreement and the
transactions contemplated thereby. In addition, holders of Watson Common Stock
will consider and vote upon proposals to approve an amendment to the Articles to
create a staggered board of directors; to approve an amendment to the Articles
to increase the number of authorized shares of Watson Common Stock; to elect
eight directors; to approve Watson's 1995 Non-Employee Directors' Stock Option
Plan; to approve an amendment to Watson's 1991 Stock Option Plan; and to ratify
the selection of Price Waterhouse LLP as Watson's independent accountants for
the fiscal year ending December 31, 1995 (collectively, the "Corporate
Matters"). Approval of the Corporate Matters is not a condition to, or required
for, consummation of the Merger. A TOTAL OF ELEVEN NOMINEES FOR ELECTION AS
DIRECTORS WILL BE PRESENTED AT THE WATSON MEETING. OF THIS NUMBER, FIVE
DIRECTORS, WHO ARE CURRENTLY DIRECTORS OF WATSON -- DR. ALEC D. KEITH, DR. ALLEN
CHAO, ALBERT F. HUMMEL, MICHEL J. FELDMAN AND RONALD R. TAYLOR -- WILL, IF
ELECTED, SERVE AS DIRECTORS OF WATSON REGARDLESS OF WHETHER THE MERGER IS
CONSUMMATED. OF THE REMAINING SIX NOMINEES, THREE CURRENT DIRECTORS OF
CIRCA -- DR. MELVIN SHAROKY, THOMAS P. RICE AND MICHAEL FEDIDA -- IF ELECTED,
WILL SERVE IN THE EVENT THE MERGER IS CONSUMMATED, AND THREE CURRENT DIRECTORS
OF WATSON -- DR. HENRY R. BESCH, DR. WAN-LIN KIANG AND AGNES Y. KUNG -- IF
ELECTED, WILL SERVE ONLY IN THE EVENT THE MERGER IS NOT CONSUMMATED. The
proposed amendment to the Articles to create a staggered Board of Directors
authorizes a board of directors comprised of nine members. The Watson
stockholders will not have the ability to nominate any additional directors to
fill the vacancy remaining after the eight directors have been elected and such
vacancy will be filled by the majority vote of the Watson directors in office
immediately after the Effective Date. If the Merger is consummated, the nominee
for such vacancy will be selected by Dr. Sharoky and Messrs. Rice and Fedida,
subject to approval by the Watson Board. The Merger Agreement and each of the
Corporate Matters will be voted upon separately. Watson stockholders will also
consider and vote upon such other matters as may properly be brought before the
Watson Meeting or any adjournments or postponements thereof.
THE WATSON BOARD OF DIRECTORS HAS APPROVED THE MERGER AGREEMENT AND EACH OF
THE CORPORATE MATTERS AND RECOMMENDS THAT WATSON STOCKHOLDERS VOTE FOR THE
APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND EACH OF THE CORPORATE MATTERS.
Circa. At the Circa Meeting, which will be held prior to the Watson
Meeting, holders of Circa Common Stock will consider and vote upon a proposal to
approve and adopt the Merger Agreement and such other matters as may properly be
brought before the meeting or any adjournments or postponements thereof.
THE CIRCA BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT
AND RECOMMENDS THAT CIRCA STOCKHOLDERS VOTE FOR APPROVAL AND ADOPTION OF THE
MERGER AGREEMENT.
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THE MERGER
GENERAL
The Merger Agreement provides for a business combination between Watson and
Circa in which a wholly-owned subsidiary of Watson will be merged with and into
Circa and the holders of Circa Common Stock will be issued shares of Watson
Common Stock (plus cash in lieu of any fractional shares) in a transaction
intended to qualify as a pooling of interests for accounting purposes and as a
tax-free reorganization for federal income tax purposes. The discussion in this
Proxy Statement/Prospectus of the Merger and the description of the Merger's
principal terms are subject to and qualified in their entirety by reference to
the Merger Agreement, a copy of which is attached to this Proxy
Statement/Prospectus as Appendix A and which is incorporated herein by
reference.
BACKGROUND OF THE MERGER
In connection with the continuing efforts of Watson and Circa to position
each company for the future, management of each of Watson and Circa from time to
time engage in discussions with third parties relating to possible joint
ventures, strategic business alliances and business combinations. The boards of
directors of each of Watson and Circa recognize that the increased costs of
healthcare and the potential reform of the nation's healthcare system have
resulted in many changes to pharmaceutical companies, including the acquisitions
of generic pharmaceutical companies, consolidation among brand pharmaceutical
companies, the acquisitions of pharmacy benefit management companies by brand
pharmaceutical companies, and the introduction of generic pharmaceuticals
directly by the brand pharmaceutical companies. The boards of directors of
Watson and Circa were concerned that the financial condition of each corporation
could be jeopardized as a result of increased competition, resulting in lower
margins, and that, with this competition, Watson and Circa might be less able to
develop and market new generic and proprietary products more rapidly than their
competitors, resulting in a smaller market share and lower profitability. As a
result, the boards of directors of Watson and Circa recognized that, to increase
stockholder value in the long term, it would be beneficial for their respective
companies to pursue a business combination in order to more effectively compete
in the changing healthcare market. Except for the merger between Watson and
Zetachron Incorporated, which occurred in 1991, and the proposed Merger between
Circa and Watson, no other agreement relating to a merger transaction has been
reached by Circa or Watson with any other third party as a result of any of
these discussions or explorations.
In September 1994, Dr. Allen Chao, President and Chief Executive Officer of
Watson, and Dr. Melvin Sharoky, President and Chief Executive Officer of Circa,
made presentations for their respective companies at the Bear Stearns Health
Care Conference in New York.
In late November, 1994, Dr. Chao telephoned Dr. Sharoky to explore the
possibility of a business relationship, including joint product development,
between Circa and Watson. On or about November 21, 1994, Circa and Watson
executed a Non-Disclosure Agreement and began exchanging confidential
information. On December 1, 1994, Dr. Chao, Dr. Sharoky and Mr. Thomas P. Rice,
Executive Vice President and Chief Operating Officer of Circa, met at Circa's
corporate headquarters in Copiague, New York. During this time, Dr. Chao and Dr.
Sharoky exchanged ideas in reference to strategic plans for the future.
Dr. Sharoky visited Watson's facilities in Corona, California on January 12
and 13, 1995. At these meetings, Dr. Sharoky and Dr. Chao continued discussions
concerning potential areas of mutual interest between Circa and Watson and Dr.
Sharoky toured Watson's facilities.
On January 23, 1995, Dr. Chao met with Dr. Sharoky and Mr. Rice in
Copiague, New York. At this meeting, the financial backgrounds of both companies
were discussed, as well as mutual business opportunities. Following the
discussions between Dr. Chao and Dr. Sharoky, the Board of Directors of Watson
was advised of the possibility of a merger between Watson and Circa at its
February 6, 1995 meeting.
On February 8, 1995, certain Watson senior executives and certain senior
members of Watson's Board of Directors met with certain senior executives of
Circa at Watson's facility in Corona, California. Following the reciprocal
disclosure of certain due diligence materials, including certain financial
information of each
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company, the parties began to discuss the general terms of a proposed merger.
Without reaching any agreement, the parties discussed, among other items,
possible merger exchange ratios, the structure for the merger, representation on
the Watson Board of Directors, preliminary due diligence procedures and timing,
and other general terms that a merger agreement between the parties might
include. After the meeting, Watson agreed to direct its attorneys to begin
drafting a merger agreement and other related documentation, and Dr. Sharoky
agreed to present the proposed merger to Circa's Board of Directors at a meeting
to be held on or about February 14, 1995.
Promptly after the February 8, 1995 meeting, Watson decided to engage DLJ
to render financial advice to Watson in connection with the potential merger
between Circa and Watson.
On February 10, 1995, the Circa Board of Directors convened via a
teleconference call. The Board was advised of the possibility of a merger
between Watson and Circa and preliminarily discussed the transaction. It was
decided that the concept of a merger would be discussed in greater detail at the
February 14, 1995 Board meeting. At that meeting, Dr. Sharoky advised the Board
that Circa had been approached by Watson concerning a possible business
combination, and that management had pursued these discussions on a preliminary
basis. At this meeting, Dr. Sharoky reviewed management's preliminarily
favorable assessment of Watson's business, financial condition and prospects,
and the strategic advantages that might arise from a potential business
combination. Dr. Sharoky reviewed the status of the discussions to date. Prior
to the February 14, 1995 meeting and throughout the negotiation process, members
of Circa's Board of Directors were kept advised on an informal basis of the
status of the discussions with Watson. After discussion, Circa's Board of
Directors authorized management to continue negotiations with Watson regarding a
possible business combination and to formally engage Bear Stearns and Wertheim
Schroder as Circa's financial advisors.
Promptly following the February 14, 1995 meeting of Circa's Board of
Directors, DLJ, Bear Stearns and Wertheim Schroder commenced their due diligence
and financial analyses of Circa and Watson. In addition, Circa and Watson
executed another Non-Disclosure Agreement to apply more specifically to the
disclosures to be made in connection with the proposed merger. During the next
several weeks, Circa and Watson continued to exchange financial and other
information. Members of senior management of each company, as well as their
respective financial advisors and attorneys, reviewed and discussed the
exchanged information.
Over the course of these discussions, Dr. Chao and Dr. Sharoky, with their
respective financial advisors, discussed various factors that might be taken
into account in determining an exchange ratio, as well as a number of other
issues relating to the proposed merger. Circa's Board of Directors also convened
several times during March 1995 to consider the proposed merger, the terms
thereof and the status of the negotiations. On March 21, 1995, the parties
commenced detailed negotiations regarding the terms of the proposed merger.
These negotiations involved, at various times, senior management of Circa and
Watson and their respective financial advisors and attorneys.
On March 27, 1995, a draft of the merger agreement, together with a summary
of the material terms of such agreement and certain other material was
distributed to the members of the boards of directors of Watson and Circa.
On March 28 and 29, 1995, the Board of Directors of Watson met to discuss
the proposed merger. The discussions included the strategic alternatives
available to Watson including continuing to conduct its business as an
independent company, and the proposed exchange ratio as well as the other
provisions contained in the Merger Agreement. At such meeting, members of
Watson's senior management, together with its legal and financial advisors,
reviewed, among other things, the background of the proposed Merger, the
strategic rationale, potential risks and benefits of the Merger, financial and
valuation analyses of the transaction and the terms of the Merger Agreement. In
addition, at the March 29, 1995 meeting, DLJ delivered its written opinion to
Watson's Board of Directors that, based on various considerations and
assumptions, the Exchange Ratio was fair to the Watson stockholders from a
financial point of view. At the conclusion of the meeting, the Board of
Directors of Watson approved the Merger and authorized the execution of the
Merger Agreement.
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As a condition to Circa entering into the Merger Agreement, each of Dr.
Chao, John Chao and Agnes Kung entered into agreements which provided, among
other things, that if a stockholder vote was held to approve the Merger, and/or
the Merger Agreement, such stockholders would vote all Watson Common Stock which
they owned, or had the power to vote, in favor of the Merger. None of such
persons received any consideration for entering into such voting agreements. See
"The Merger Agreement -- Agreements to Vote in Favor of the Merger."
On March 28 and 29, 1995, the Board of Directors of Circa met to discuss
the proposed merger and certain other matters. At the March 28, 1995 meeting,
Bear Stearns presented an analysis of the terms of the possible merger and of
Watson's and Circa's respective financial conditions, business prospects and
stock market trading histories. At such meeting, members of Circa's senior
management, together with its legal and financial advisors, reviewed, among
other things, the background of the proposed merger, the strategic rationale,
potential risks and benefits of, the merger, financial and valuation analyses of
the transaction and the terms of the proposed merger agreement. At the March 29,
1995 meeting, Wertheim Schroder presented its analysis of the terms of the
merger and of Watson's and Circa's respective financial conditions, business
prospects and stock market trading histories and Wertheim Schroder delivered its
written opinion to Circa's Board of Directors that, based on various
considerations and assumptions, the Exchange Ratio was fair to Circa's public
stockholders from a financial point of view. On March 29, 1995, Bear Stearns
delivered its written opinion to Circa's Board of Directors to the effect that,
as of such date, the Merger was fair, from a financial point of view, to the
stockholders of Circa. At the conclusion of the meeting, the Board of Directors
of Circa unanimously approved the Merger and authorized the execution of the
Merger Agreement.
On the evening of March 29, 1995, Watson and Circa entered into the Merger
Agreement and on March 30, 1995 made a public announcement with respect thereto.
On June 12, 1995, the Board of Directors of Watson held a telephonic
meeting at which they discussed the proposed Merger, reviewed developments with
respect to both companies since March 29, 1995 and reaffirmed its approval of
the Merger.
REASONS FOR THE MERGER
The Boards of Directors of Watson and Circa each believe that the Merger
will result in a combined company with an enhanced financial position, stronger
product pipeline and deeper organizational and other resources. The following
specific reasons are believed by the companies to support the Merger:
1. Complementary product development programs. The companies have
complementary programs in the proprietary product area. Watson has expertise in
injection molding technology within the drug delivery area and Circa's expertise
is in gum technology. The combined companies' research efforts in these
technologies as well as controlled-release and transdermal technologies are
expected to generate a variety of products which will be evaluated for their
pharmaceutical potential in several important therapeutic areas.
2. Broader Sources of Income. The Boards of Directors of both companies
believe the Merger will strengthen the companies' product pipeline in the
proprietary and generic areas. In addition to proprietary and generic product
income, the combined companies are expected to generate income from joint
ventures, royalty arrangements and over-the-counter pharmaceutical products. By
combining the resources of the two companies, the combined companies may, in the
long-term, be able to achieve diversification of income sources. Although there
can be no assurances that any of the products currently in preclinical
development or clinical trials will ever be approved for marketing, the number
and diversity of such products mitigates the risk of nonapproval for the
combined companies compared to the risk which currently exists for each of
Watson and Circa alone.
3. Stronger financial position and cash resources. The combined companies
would have had cash and marketable securities of $121.05 million as of March 31,
1995 (including marketable securities of $37.8 million), as compared to Watson's
cash and marketable securities of $65.24 million and Circa's cash and marketable
securities of $55.81 million as of the same date. The Boards of Directors of
Watson and Circa
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believe that the combined cash and marketable securities position after the
Merger will allow Watson to further develop certain products, to invest in new
technologies or products and to acquire other companies.
4. Enhanced manufacturing capability. The Merger will expand the combined
companies' manufacturing capacity and capabilities. Circa currently has excess
production, research and distribution facilities, which could be advantageous to
the combined company.
5. Talented management team. The Boards of Directors of Watson and Circa
believe the combined companies will have a strong, talented management team
combining key managers at Watson with key Circa managers, all of whom are
expected to continue with the combined companies.
6. Market Price. The market prices of Circa Common Stock and Watson Common
Stock may be improved and volatility decreased. See "Summary -- Comparative
Market Data."
OPINION OF WATSON'S FINANCIAL ADVISOR
As part of its role as financial advisor to Watson, DLJ was asked by Watson
to render an opinion to the Board of Directors of Watson as to the fairness to
Watson's stockholders, from a financial point of view, of the Exchange Ratio to
be offered by Watson pursuant to the terms of the Merger Agreement. DLJ
delivered to the Board of Directors of Watson the DLJ Opinion that, based upon
the matters set forth in the opinion, on June 13, 1995, the Exchange Ratio to be
offered by Watson pursuant to the terms of the Merger Agreement was fair to
Watson's stockholders from a financial point of view. The DLJ Opinion does not
constitute a recommendation to any holder of Watson Common Stock as to how to
vote on the Merger.
THE FULL TEXT OF THE DLJ OPINION IS ATTACHED HERETO AS APPENDIX B.
STOCKHOLDERS ARE URGED TO READ THE DLJ OPINION IN ITS ENTIRETY FOR THE
ASSUMPTIONS MADE, THE MATTERS CONSIDERED AND THE LIMITS OF THE REVIEW OF DLJ.
THE SUMMARY OF THE DLJ OPINION SET FORTH HEREIN IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE FULL TEXT OF SUCH OPINION.
DLJ did not, and was not requested by the Board of Directors of Watson to,
make any recommendation as to the form or amount of consideration to be paid by
Watson pursuant to the Merger Agreement, which issues were resolved in arm's
length negotiations between Watson and Circa in which DLJ assisted Watson. The
DLJ Opinion does not constitute an opinion as to the prices at which Watson's
Common Stock will actually trade at any time. No restrictions or limitations
were imposed by the Board of Directors of Watson upon DLJ with respect to the
investigations made or the procedures followed by DLJ in rendering the DLJ
Opinion.
In arriving at the DLJ Opinion, DLJ reviewed the Merger Agreement, the
schedule and exhibits thereto, and certain related documents. DLJ also reviewed
financial and other information that was publicly available or furnished to it
by Watson and Circa, including information provided during discussions with
their respective managements. Included in the information provided during
discussions with the respective managements were certain financial projections
of each of Watson and Circa prepared by the management of Watson and Circa,
respectively (although, as set forth below, DLJ placed relatively less weight on
the projections of both Watson and Circa for years after 1996 due to the
inherent difficulty of projecting the long-term operating results of the
companies). In addition, DLJ compared certain financial and securities data of
Watson and Circa with various other companies whose securities are traded in
public markets, reviewed the historical stock prices and trading volumes of the
Watson Common Stock and the Circa Common Stock, reviewed prices and premiums
paid in other business combinations and conducted such other financial studies,
analyses and investigations as DLJ deemed appropriate for purposes of the DLJ
Opinion. DLJ also reviewed the pro forma combined financial information for
Watson and Circa and the business prospects of each.
The DLJ Opinion updates an opinion previously delivered by DLJ to the Board
of Directors of Watson that, based upon the matters set forth in such opinion,
on March 29, 1995, the Exchange Ratio to be offered by Watson pursuant to the
terms of the Merger Agreement was fair to Watson's stockholders from a financial
point of view. In particular, in connection with rendering the DLJ Opinion, DLJ
reviewed with the respective managements of Watson and Circa certain revisions
and modifications to the financial projections for each
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company which had been made by the respective managements to reflect changing
business conditions since the date of DLJ's earlier opinion, including the
amendment of the partnership agreement between Circa and RPR (See
"Summary -- Circa") and changes in the competitive environment for both
companies. Based on the use of such updated projections, the numerical
calculations in the "Relative Contribution Analysis" and the "Discounted Cash
Flow Analysis" with respect to certain years varied somewhat from the
calculations underlying DLJ's initial opinion.
In rendering the DLJ Opinion, DLJ relied upon and assumed the accuracy,
completeness and fairness of all of the financial and other information that was
available to it from public sources, that was provided to it by Watson and Circa
or their respective representatives, or that was otherwise reviewed by DLJ. DLJ
also assumed that the financial projections supplied to it were reasonably
prepared on the basis reflecting the best currently available estimates and
judgments of the managements of Watson and Circa as to the future operating and
financial performance of Watson and Circa. DLJ was not asked to assume, and did
not assume, any responsibility for making any independent evaluation of the
assets or liabilities of Circa or for making any independent verification of any
information reviewed by it, and DLJ did not independently verify any of such
information.
The DLJ Opinion is necessarily based on economic, market, financial and
other conditions as they existed on, and on the information made available to it
as of, the date of the DLJ Opinion. Although subsequent developments may affect
the DLJ Opinion, DLJ does not have any obligation to update, revise or reaffirm
its opinion beyond that provided on the date hereof.
The following is a summary of certain factors considered and principal
financial analyses performed by DLJ and reviewed with Watson's Board of
Directors at its meeting on June 12, 1995 and does not purport to be a complete
description of the analyses performed by DLJ. DLJ performed certain procedures,
including each of the financial analyses described below, and reviewed with the
managements of Watson and Circa the current and projected financial results of
such companies (including the underlying assumptions relating thereto) as
prepared by the companies.
Relative Contribution Analysis. DLJ reviewed the contribution of earnings
before taxes ("EBT") and net income of each of Watson and Circa for fiscal years
1993 and 1994 and projections for fiscal years 1995, 1996 and 1997. Assuming
that the projections of each of Watson and Circa are achieved and combined, the
analysis indicated that after giving effect to the Merger, Watson would
contribute approximately 70.5%, 63.3%, 52.4%, 50.1% and 49.7% and Circa would
contribute approximately 29.5%, 36.7%, 47.6%, 49.9% and 50.3% of EBT for fiscal
years 1993, 1994, 1995, 1996 and 1997, respectively. After giving effect to the
Merger, Watson would contribute approximately 59.3%, 52.0%, 42.6%, 43.5% and
47.4% and Circa would contribute approximately 40.7%, 48.0%, 57.4%, 56.5% and
52.6% of the net income for fiscal years 1993, 1994, 1995, 1996 and 1997,
respectively. However, in rendering the DLJ Opinion, DLJ placed relatively less
weight on the projections of both Watson and Circa for years after 1996 due to
the inherent difficulty of projecting the long-term operating results of the
companies.
Analysis of Certain Other Publicly-Traded Companies. To provide contextual
data and comparative market information, DLJ compared selected historical share
price, earnings, and operational and financial ratios for Watson and Circa to
the corresponding data and ratios of certain pharmaceutical companies whose
securities are publicly traded. In conducting its analyses, DLJ compared Watson
and Circa to a total of seven selected publicly-traded companies. The companies
considered included Watson and Circa; A.L. Pharma, Inc.; Biocraft Laboratories,
Inc.; IVAX Corporation; Purepac, Inc.; Barr Laboratories, Inc.; Duramed
Pharmaceuticals, Inc.; and Pharmaceutical Resources, Inc. Although DLJ used
these companies for comparison purposes, none of such companies, excluding
Watson and Circa, respectively, is directly comparable to Watson or Circa.
Accordingly, an analysis of the results described below is not mathematical;
rather it involves complex considerations and judgments concerning differences
in financial and operating characteristics and other factors that could affect
the public trading prices of Watson's Common Stock after the Merger. DLJ
examined the ratios of current stock prices to latest 12-month earnings per
share ("EPS") and current and following fiscal year estimated EPS (as estimated
by Institutional Brokerage Estimate Systems Inc.) for these seven other
companies and compared such ratios with those of Watson and Circa. At
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June 9, 1995, the ratios of stock price to latest 12-month EPS, current year
estimated EPS and following year EPS averaged (excluding the high and low) 30.4
times, 32.2 times and 16.8 times, respectively, for the seven selected publicly
traded companies described above and prior to the announcement of the Merger on
March 29, 1995 were (i) 30.7 times, 25.4 times and 20.3 times, respectively, for
Watson and (ii) 22.8 times, 13.8 times and 18.0 times, respectively, for Circa.
Transaction Analysis. DLJ reviewed publicly available information for nine
transactions involving the combination or acquisition of pharmaceutical
companies. The transactions selected were not intended to represent the complete
list of generic drug and pharmaceutical company transactions which have
occurred; rather they included only transactions involving combinations or
acquisitions of companies with operating characteristics, size or financial
performance characteristics believed to be comparable to such characteristics of
Watson and Circa. The transactions considered included combinations between
Copley Pharmaceuticals, Inc. and Hoechst Celanese Corporation; Zenith
Laboratories, Inc. and IVAX Corporation; Wellcome PLC and Glaxo Holdings P.L.C.;
American Cyanamid Company and American Home Products Corporation; Syntex
Corporation and Roche Holding AG; Genentech, Inc. and Roche Holding AG; Chiron
Corporation and Ciba-Geigy AG; Marion Merrell Dow, Inc. and Hoechst AG; and The
Boots Company PLC and BASF AG. Of these nine transactions, the combinations of
Copley Pharmaceuticals, Inc. and Hoechst Celanese Corporation and of Zenith
Laboratories, Inc. and IVAX Corporation were separately analyzed as generic
pharmaceutical transactions. Although these various merger and acquisition
transactions were used for comparison purposes, none of such transactions is
directly comparable to the Merger. Accordingly, an analysis of the results
described below is not mathematical; rather it involves complex considerations
and judgments concerning differences in financial and operating characteristics
and other factors that could affect the public trading prices of Watson's Common
Stock after the Merger.
For the selected transactions, DLJ reviewed the financial terms and
premiums paid in such transactions in terms of the equity purchase price of such
transactions as a multiple of net income for the latest reported twelve months
prior to the announcement of such transaction and as a multiple of book value
and calculated the premium paid to the market price of the target's stock one
day, one week and one month prior to the announcement date of the subject
transaction.
The average ratio of the equity purchase price to net income was 28.8 times
net income for the nine pharmaceutical company transactions and 39.5 times for
the two generic pharmaceutical company transactions as compared to 35.1 times
net income for Circa based on Watson's stock price at the time of the
announcement of the Merger without giving effect to any operating synergies or
other cost savings which may be achieved by combining the operations of Watson
and Circa. The average ratio of the equity purchase price to book value for the
selected transactions was 5.8 times for the nine pharmaceutical company
transactions and 9.0 times for the two generic pharmaceutical company
transactions as compared to 7.5 times book value for Circa, also without giving
effect to operating synergies or other cost savings which may be achieved by
combining the operations of Watson and Circa.
DLJ analyzed the implied premium of Watson's average closing price times
the Exchange Ratio over Circa's average closing price for the 30-day and 90-day
periods prior to the announcement of the Merger. This analysis showed implied
premiums of 41.4% and 33.2% over the closing price of Circa's Common Stock for
the 30-day and 90-day periods, respectively. In addition, DLJ calculated the
implied premium of Watson's stock price at March 20, 1995 times the Exchange
Ratio over Circa's stock price 30 days prior to be 63.2%.
These premiums were compared to premiums paid in the nine pharmaceutical
company transactions which averaged 55.5% over the target's closing stock price
30 days prior to the announcement.
In addition, DLJ compared the premiums to those paid in recent stock-swap
transactions and recent general transactions in the range of $250 million to $1
billion. The stock-swap transactions averaged a premium of 54.6% over the
target's closing stock price 30 days prior to the announcement. The general
merger and acquisition transactions averaged a premium of 41.2% over the
target's closing stock price 30 days prior to the announcements.
Discounted Cash Flow Analysis. DLJ performed a discounted cash flow
analysis of Circa. In conducting its analysis, DLJ relied on certain
assumptions, financial projections and other information provided by the
managements of Watson and Circa. Using discount rates ranging from 10% to 14%
per annum, DLJ
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calculated the present value of the projected Free Cash Flows (as defined below)
for each of the twelve-month periods ending December 31, 1995 through 1998 and
the present value of the terminal value (the "Terminal Value") of Circa at
December 31, 1998. As used in DLJ's analysis, "Free Cash Flow" means, for each
fiscal year, earnings before interest, taxes, depreciation and amortization,
less estimated taxes, less capital expenditures. The Terminal Value was computed
by applying multiples of between 10 times and 13 times the forecasted EBITDA of
Circa for the twelve-month period ended December 31, 1998. To calculate the
aggregate net present value of the equity of Circa, DLJ subtracted total debt
minus cash and cash equivalents of Circa from the sum of the present value of
the projected Free Cash Flows and the present value of the Terminal Value. Based
on this analysis and the assumptions set forth above, DLJ calculated the equity
value per share of Circa Common Stock to be between $31.47 and $42.09. However,
in rendering the DLJ Opinion, DLJ placed relatively less weight on discounted
cash flow analysis due to the inherent difficulty of projecting the long-term
operating results of Circa.
The various ranges of multiples, discount rates and growth rates used in
the analyses described above were chosen to reflect the growth prospects and
relative risks of Watson and Circa and were selected by DLJ based on its review
(including discussions with the managements of Watson and Circa) of the results
and prospects of Watson and Circa and DLJ's expertise in securities valuation
generally.
The summary set forth above does not purport to be a complete description
of the analyses performed by DLJ. The preparation of a fairness opinion involves
various determinations as to the most appropriate and relevant methods of
financial analysis and the application of these methods to the particular
circumstances and, therefore, such an opinion in not readily susceptible to
summary description. Accordingly, notwithstanding the separate factors
summarized above, DLJ believes that its analyses must be considered as a whole
and that selecting portions of its analysis and the factors considered by it,
without considering all analyses and factors, could create an incomplete view of
the evaluation process underlying its opinions. In performing its analyses, DLJ
made numerous assumptions with respect to industry performance, business and
economic conditions and other matters. The analyses performed by DLJ are not
necessarily indicative of actual values or future results, which may be
significantly more or less favorable than suggested by such analyses.
The Board of Directors of Watson selected DLJ as its financial advisor
because DLJ is a nationally recognized investment banking firm and the
principals of DLJ have substantial experience in transactions similar to the
Merger and are familiar with Watson and its business and the industry in which
it operates. As part of its investment banking business, DLJ is regularly
engaged in the valuation of businesses and securities in connection with
mergers, acquisitions, underwritings, sales and distributions of listed and
unlisted securities, private placements and valuations for estate, corporate and
other purposes.
Pursuant to the terms of an engagement letter dated March 23, 1995, Watson
has paid DLJ $850,000 for acting as financial advisor in connection with the
Merger, including the rendering of its initial opinion and has agreed to pay DLJ
an additional $50,000 for delivery of the DLJ Opinion, dated as of June 13,
1995. In addition, Watson has agreed to pay DLJ an additional fee of $1,300,000
if the Merger is consummated. Watson has also agreed to reimburse DLJ promptly
for all reasonable expenses (including the reasonable fees and expenses of
counsel) incurred by DLJ in connection with its engagement, and to indemnify DLJ
and certain related persons against certain liabilities in connection with its
engagement, including liabilities under the Federal securities laws. The terms
of the fee arrangement with DLJ, which DLJ and Watson believe are customary in
transactions of this nature, were negotiated at arm's length between Watson and
DLJ, and the Board of Directors of Watson was made aware of such arrangement,
including the fact that a significant portion of the aggregate fee payable to
DLJ is contingent upon consummation of the Merger. DLJ served as a managing
underwriter for Watson's offerings of Common Stock in February 1993 and in
November 1993 for which DLJ was paid usual and customary compensation.
In the ordinary course of business, DLJ actively trades the debt and equity
securities of Watson and Circa for its own account and for the accounts of its
customers and, accordingly, may at any time hold a long or short position in
such securities.
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OPINIONS OF CIRCA'S FINANCIAL ADVISORS
Opinion of Bear, Stearns & Co. Inc.
Circa retained Bear Stearns on February 16, 1995, to act as its financial
advisor and to render its fairness opinion to Circa's Board of Directors as to
the fairness of the Merger, from a financial point of view, to the stockholders
of Circa.
Bear Stearns delivered its written opinion, dated March 29, 1995, to the
Board of Directors of Circa to the effect that, as of such date, the Merger was
fair, from a financial point of view, to the stockholders of Circa. Bear Stearns
also has delivered an updated written opinion, dated the date of this Proxy
Statement/Prospectus, to Circa's Board of Directors to the effect that, as of
such date, the Merger was fair, from a financial point of view, to the
stockholders of Circa. No restrictions were imposed by Circa's Board of
Directors upon Bear Stearns with respect to the investigations made or
procedures followed by Bear Stearns in rendering its opinions.
The full text of Bear Stearns' fairness opinion, dated the date of this
Proxy Statement/Prospectus, which sets forth certain assumptions made, certain
procedures followed and certain matters considered by Bear Stearns, is attached
as Appendix C to this Proxy Statement/Prospectus. As set forth therein, Bear
Stearns relied upon and assumed the accuracy and completeness of the financial
and other information provided to it by Circa and Watson. With respect to
Circa's and Watson's projected financial results, Bear Stearns assumed that the
projections were reasonably prepared on bases reflecting the best currently
available estimates and judgments of the managements of Circa and Watson as to
the expected future performance of Circa and Watson, respectively. Bear Stearns
did not perform any independent verification of the information or projections
provided to it and Bear Stearns relied upon the assurances of the managements of
Circa and Watson that they are unaware of any facts that would make the
information or projections provided to Bear Stearns incomplete or misleading. In
arriving at its opinion, Bear Stearns did not perform or obtain any independent
appraisal of the assets of Circa or Watson. Bear Stearns' opinion is necessarily
based on economic, market and other conditions, and the information made
available to it as of the date of its opinion. Bear Stearns further assumed that
the Merger would be accounted for in accordance with the pooling of interests
method of accounting under the requirements of APB No. 16. Bear Stearns' opinion
addresses only the fairness of the Merger from a financial point of view and
does not constitute a recommendation to any stockholder of Circa as to how such
stockholder should vote on the Merger Agreement. The exchange ratio in the
Merger was determined through arm's-length negotiations between Circa and
Watson.
The summary of the opinion of Bear Stearns set forth in this Proxy
Statement/Prospectus is qualified in its entirety by reference to the full text
of such opinion. CIRCA STOCKHOLDERS ARE URGED TO, AND SHOULD, READ THIS OPINION
CAREFULLY IN ITS ENTIRETY IN CONJUNCTION WITH THIS PROXY STATEMENT/PROSPECTUS
FOR ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITS OF THE REVIEW BY BEAR
STEARNS.
In rendering its updated fairness opinion, Bear Stearns, among other
things: (i) reviewed the Proxy Statement/Prospectus in substantially final form,
(ii) reviewed Circa's Annual Reports to Stockholders and its Annual Reports on
Form 10-K for the fiscal years ended December 31, 1991 through 1994, and its
Quarterly Report on Form 10-Q for the period ended March 31, 1995, (iii)
reviewed Watson's Annual Reports to Stockholders and its Annual Reports on Form
10-K for the fiscal years ended December 31, 1993 and 1994, and its Quarterly
Report on Form 10-Q for the period ended March 31, 1995, (iv) reviewed certain
operating and financial information, including projections, provided to Bear
Stearns by the managements of Circa and Watson relating to their respective
business prospects, (v) met with certain members of Circa's and Watson's senior
managements to discuss their respective operations, historical financial
statements and future prospects, and their views of the benefits and other
implications of the Merger, (vi) reviewed the historical stock prices and
trading volumes of Circa Common Stock and Watson Common Stock, (vii) reviewed
publicly available financial data and stock market performance data of companies
which Bear Stearns deemed generally comparable to Circa and Watson, (viii)
reviewed the terms of recent combinations of companies which Bear Stearns deemed
generally comparable to Circa and Watson, and (ix) conducted such other studies,
analyses, inquiries and investigations as Bear Stearns deemed appropriate.
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The following is a brief summary of certain of the financial analyses used
by Bear Stearns in connection with providing its opinion to the Board of
Directors of Circa.
Contribution Analysis. Bear Stearns analyzed the pro forma contribution of
each of Watson and Circa to the combined company, if the Merger were to be
consummated, and reviewed certain historical and estimated future operating and
financial information including, among other things, the revenues, operating
cash flow, operating income and net income of Watson and Circa, and the pro
forma revenues, operating cash flow, operating income and net income (with and
without the income statement benefit of Circa's net operating loss carryforward)
of the combined company resulting from the Merger based on internal financial
analyses and projections for Watson and Circa prepared by their respective
managements. In performing the contribution analysis, Bear Stearns adjusted
Circa's revenues, operating cash flow and operating income to reflect Circa's
50% economic interest in Somerset Pharmaceuticals, Inc. Bear Stearns did not
adjust Circa's net income as it already reflects Circa's economic interest in
Somerset. The contribution analysis did not take into account any potential
synergies or cost savings that might be realized after the Merger. Such analysis
indicated that, based on respective management's projections, for 1995, 1996 and
1997, Circa's relative contribution to the financial results of the combined
company would be (i) 48.7%, 46.4% and 40.9%, respectively, of revenues, (ii)
54.2%, 51.9% and 42.9%, respectively, of operating cash flow, (iii) 55.7%, 52.8%
and 43.7%, respectively, of operating income, (iv) 62.2%, 60.9% and 46.5%,
respectively, of net income with the income statement benefit of Circa's net
operating loss carryforward and (v) 57.3%, 54.3% and 45.0%, respectively, of net
income without the income statement benefit of Circa's net operating loss
carryforward. Bear Stearns noted that the approximately 51.5% of the pro forma
fully diluted number of shares for the combined company to be owned by former
Circa stockholders after the Merger is less than Circa's relative earnings
contributions in 1995 and 1996 but is significantly greater than its relative
earnings contribution in 1997. Bear Stearns also performed a sensitivity
analysis that analyzed Circa's relative contribution to the combined company's
1997 net income under a range of different earnings assumptions for the two
companies. Bear Stearns concluded that Circa's relative contribution to 1997 net
income was likely to compare favorably to its stockholders' 51.5% ownership
percentage in the combined company even if Watson did not achieve the level of
net income projected by management. Bear Stearns further noted that the
contribution analysis does not consider the different valuation multiples, such
as the price-earnings multiples, that the market ascribes to merging companies
both on a current basis and on a historical basis.
Pro Forma Combination Analysis. Bear Stearns analyzed earnings per share
estimates for 1995, 1996 and 1997 both for Circa and, on a pro forma basis, for
the combined company after the Merger. These analyses were based upon
projections provided by the senior managements of Circa and Watson. Such
analysis did not take into account any potential synergies or cost savings that
might be realized after the Merger. Based on managements' projections, and after
taking into account the Exchange Ratio, such analysis showed accretion
(dilution) in Circa's fully diluted earnings per share resulting from the Merger
of (19.0%), (18.0%) and 5.4% for 1995, 1996 and 1997, respectively. When
earnings per share for both Circa and the combined company is calculated without
reflecting the income statement benefit of Circa's net operating loss
carryforward, such analysis showed accretion (dilution) in Circa's fully diluted
earnings per share resulting from the Merger of (11.5%), (8.3%) and 9.6% for
1995, 1996 and 1997, respectively. Bear Stearns also analyzed earnings per share
estimates for 1995, 1996 and 1997 for both Watson and, on a pro forma basis, for
the combined company after the Merger. Based on managements' projections, such
analysis showed accretion (dilution) in Watson's fully diluted earnings per
share resulting from the Merger of 28.3%, 26.0% and (7.2%) for 1995, 1996 and
1997, respectively. When earnings per share for both Watson and the combined
company is calculated without reflecting the income statement benefit of Circa's
net operating loss carryforward, such analysis showed accretion (dilution) in
Watson's fully diluted earnings per share resulting from the Merger of 13.3%,
7.4% and (9.2%) for 1995, 1996 and 1997, respectively. Bear Stearns further
noted that the combination analysis does not consider the different valuation
multiples, such as the price-earnings multiples, that the market ascribes to
merging companies both on a current basis and on a historical basis.
Historic Stock Trading Analysis. Bear Stearns reviewed the historical
public trading prices of Circa Common Stock and Watson Common Stock from April
22, 1993 (the date that all FDA regulatory restrictions on Circa were lifted) to
March 24, 1995. Bear Stearns also reviewed both the historical ratio of the
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public trading price per share of Circa Common Stock to the public trading price
per share of Watson Common Stock on a daily basis from April 22, 1993 to March
24, 1995 as well as the daily average public trading prices of Circa Common
Stock and Watson Common Stock over periods ranging from the 5 to the 180 days
immediately preceding March 24, 1995. Such analysis indicated that the ratio of
the public trading price per share of Circa Common Stock to the public trading
price per share of Watson Common Stock averaged 0.63 for the 180 days preceding
March 24, 1995 and 0.57 for the 5 days preceding March 24, 1995. From the week
ended January 20, 1995 to the week ended March 24, 1995, the ratio of the
closing price of Circa Common Stock at the end of each week to the closing price
of Watson Common Stock at the end of each week ranged from 0.57 to 0.70. From
April 22, 1993 to March 24, 1995, the ratio of the daily closing price of Circa
Common Stock to the daily closing price of Watson Common Stock ranged from 0.22
to 0.83. Bear Stearns compared such ratios to the Exchange Ratio of 0.86 and
noted that during such period, the price of Circa Common Stock never traded at
the level equating to a 0.86 ratio.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. Selecting
portions of the analyses or of the summary set forth above, without considering
the analysis as a whole, could create an incomplete view of the processes
underlying Bear Stearns' opinion. In arriving at its opinion, Bear Stearns
considered the results of all such analyses. The analyses were prepared solely
for purposes of providing its opinion as to the fairness of the Merger, from a
financial point of view, to the stockholders of Circa. Analyses based upon
forecasts of future results are not necessarily indicative of actual future
results, which may be significantly more or less favorable than suggested by
such analyses. As described above, Bear Stearns' opinion and presentation to the
Circa Board was one of many factors taken into consideration by the Circa Board
in making its determination to approve the Merger Agreement. The foregoing
summary does not purport to be a complete description of the analysis performed
by Bear Stearns.
Bear Stearns is an internationally recognized investment banking firm and
is continually engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions and other purposes. Bear Stearns
lead-managed Watson's initial public offering during February 1993 and also
lead-managed Watson's second public Common Stock offering during November 1993.
In the ordinary course of its business, Bear Stearns may actively trade the
equity securities of Circa and Watson for its own account and for the accounts
of customers and, accordingly, may, at any time, hold a long or short position
in such securities.
Pursuant to a letter agreement, dated as of February 16, 1995, Circa agreed
to pay Bear Stearns a retainer fee of $100,000, $700,000 for rendering its
opinion in connection with the Merger, and upon consummation of the Merger, an
additional fee of $2,800,000 for its financial advisory work. Circa has also
agreed to reimburse Bear Stearns for its reasonable out-of-pocket expenses,
including the reasonable fees and disbursements of counsel, and to indemnify
Bear Stearns and certain related persons against certain liabilities in
connection with the engagement of Bear Stearns, including certain liabilities
under the federal securities laws.
Opinion of Wertheim Schroder & Co. Incorporated.
Wertheim Schroder has delivered to Circa's Board of Directors its opinion,
as investment bankers, that as of March 29, 1995, the Exchange Ratio is fair to
the public stockholders of Circa from a financial point of view. Wertheim
Schroder has delivered an updated opinion, dated the date of this Proxy
Statement/ Prospectus, to Circa's Board of Directors that, as of such date, the
Exchange Ratio was fair to the public stockholders of Circa from a financial
point of view. Such opinion is subject to certain limitations and is based on
certain assumptions stated therein, and the summary of such opinion set forth
below is qualified in its entirety by reference to the full text of such opinion
which is attached as Appendix D to this Proxy Statement/Prospectus. HOLDERS OF
CIRCA COMMON STOCK ARE URGED TO READ WERTHEIM SCHRODER'S OPINION IN ITS
ENTIRETY.
Wertheim Schroder's opinion relates solely to the fairness of the Exchange
Ratio to the public stockholders of Circa from a financial point of view and is
not an opinion as to the structure, terms or effect of any other aspect of the
Merger. Such opinion does not constitute a recommendation to the holders of
Circa
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Common Stock as to how any such holder should vote on the Merger. In rendering
its opinion, Wertheim Schroder was not engaged to act as an agent or fiduciary
of Circa's public stockholders or any other third party.
In connection with its opinion, Wertheim Schroder, among other things, (i)
reviewed the Annual Reports on Form 10-K filed with the Commission for the
fiscal year ended December 31, 1993 by Circa and Watson; (ii) reviewed the
Quarterly Reports on Form 10-Q for the fiscal quarters ended September 30, 1994,
June 30, 1994, and March 31, 1994, filed with the Commission by Circa and
Watson; (iii) reviewed preliminary drafts of the Annual Reports on Form 10-K for
the fiscal year ended December 31, 1994 of Circa and Watson; (iv) reviewed
certain internal financial statements and financial operating data concerning
Circa and Watson prepared by the respective managements of Circa and Watson; (v)
discussed the past and current operations, the financial condition and future
prospects of Circa and Watson with the respective managements of Circa and
Watson; (vi) reviewed and discussed with the managements of Circa and Watson
certain financial information, including financial forecasts, relating to the
business, financial condition, earnings, assets and prospects of Circa and
Watson prior to the Merger, and Watson following the Merger, prepared by the
respective managements of Circa and Watson; (vii) analyzed the pro forma impact
of the Merger on Watson's capitalization and projected earnings; (viii) reviewed
the reported prices and trading activity of Circa's Common Stock and Watson's
Common Stock; (ix) compared the results of operations of Circa and Watson with
those of certain companies which Wertheim Schroder deemed to be reasonably
comparable to Circa and Watson, respectively; (x) reviewed the financial terms,
to the extent publicly available, of certain comparable transactions; (xi)
participated in discussions and negotiations among representatives of Circa and
Watson; (xii) reviewed a draft of the Merger Agreement; and (xiii) performed
such other analyses and reviewed and analyzed such other information as Wertheim
Schroder deemed appropriate. In connection with updating its opinion, Wertheim
Schroder, among other things, also reviewed the Annual Reports on Form 10-K for
the fiscal years ended December 31, 1994 of Circa and Watson and the Quarterly
Reports on Form 10-Q for the fiscal quarter ended March 31, 1995 of Circa and
Watson, in each case as filed with the Commission, an executed copy of the
Merger Agreement and this Proxy Statement/Prospectus in substantially the form
sent to the shareholders of Circa and reviewed and discussed with the
managements of Circa and Watson certain updated financial information, including
updated financial forecasts, relating to Circa and Watson.
In rendering its opinion, Wertheim Schroder assumed and relied upon,
without independent verification, the accuracy and completeness of all
information supplied or otherwise made available to it by Circa and Watson or
obtained by it from other sources, and upon the assurances of Circa's and
Watson's management that they were unaware of any information or facts that
would make the information provided to Wertheim Schroder incomplete or
misleading. Wertheim Schroder did not undertake an independent appraisal of the
assets or liabilities (contingent or otherwise) of Circa or Watson and was not
furnished with any such appraisals. Wertheim Schroder also assumed that the
financial forecasts furnished by Circa and Watson were reasonably prepared and
reflected the best currently available estimates and judgment of the senior
management of Circa or Watson, as the case may be, as to the expected future
financial performance of Circa and Watson prior to the Merger, and Watson
following the Merger. Wertheim Schroder was not asked to and did not contact
entities with which Circa has material business relationships and relied solely
upon information provided by Circa concerning such relationships. Wertheim
Schroder's opinion was necessarily based upon economic, market and other
conditions as they existed on, and the information made available to it as of,
the date of its opinion, and Wertheim Schroder has disclaimed any undertaking or
obligation to advise any person of any change in any fact or matter affecting
its opinion.
The following is a brief summary of certain financial analyses performed by
Wertheim Schroder in connection with the preparation of its initial opinion
which were reviewed with Circa's Board of Directors:
ANALYSIS OF CIRCA
Circa vs. Generic Comparables: Using publicly available information,
Wertheim Schroder compared selected historical and projected financial and
operating data, and selected stock market data, of Circa to the corresponding
data of the following publicly traded generic drug companies which Wertheim
Schroder considered comparable to Circa (collectively, the "Comparable Generic
Companies"): A.L. Pharma, Inc., Barr Laboratories, Inc., Biocraft Laboratories,
Inc., Copley Pharmaceuticals, Inc., IVAX Corporation,
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Marsam Pharmaceutical, Inc., Mylan Laboratories Inc., Pharmaceutical Resources,
Inc. and Purepac, Inc. For purposes of comparison, Wertheim Schroder adjusted
certain of Circa's operating results to include Circa's 50% economic interest in
Somerset Pharmaceuticals, Inc. (Such results, as so adjusted, are hereinafter
referred to as "adjusted".) In addition, for certain purposes, Wertheim Schroder
analyzed Circa's operating results on a fully-taxed basis in order to adjust for
the effects of Circa's existing net operating loss carryforwards.
In comparing Circa's recent operating performance to the recent operating
performance of the Comparable Generic Companies, Wertheim Schroder noted, among
other things, that: (i) Circa's growth rate in adjusted revenues for the three
years ended December 31, 1994 was 275.7% compared with an average growth rate in
revenues over such period of 30.8% for the Comparable Generic Companies; (ii)
Circa's adjusted earnings before interest, taxes, depreciation and amortization
("EBITDA") as a percentage of adjusted revenues ("EBITDA Margin") for the last
twelve months ("LTM") ended December 31, 1994 was 31.5% compared with an average
EBITDA Margin over such period of 16.8% for the Comparable Generic Companies;
(iii) Circa's LTM adjusted earnings before interest and taxes ("EBIT") as a
percentage of adjusted revenues ("EBIT Margin") was 28.7% compared with an
average EBIT Margin over such period of 13.7% for the Comparable Generic
Companies; (iv) Circa's LTM net income as a percentage of adjusted revenues
("Net Income Margin") was 16.8% compared to an average Net Income Margin over
such period of 10.2% for the Comparable Generic Companies; and (v) Circa's LTM
return on equity was 14.4% compared to an average return on equity over such
period of 9.0% for the Comparable Generic Companies.
Wertheim Schroder performed a market analysis of Circa and the Comparable
Generic Companies using closing market prices as of March 27, 1995. In
connection with such analysis, Wertheim Schroder noted, among other things, that
(i) Circa's market price to LTM earnings per share multiple was 33.2x compared
to an average market price to LTM earnings per share multiple of 34.6x for the
Comparable Generic Companies; (ii) Circa's market price to analyst projected
1995 earnings per share (based on consensus analysts estimates) multiple was
11.3x compared to an average analyst projected 1995 earnings per share multiple
of 30.8x for the Comparable Generic Companies; (iii) Circa's market
capitalization to book value multiple was 4.8x compared to an average market
capitalization to book value multiple of 3.6x for the Comparable Generic
Companies; (iv) Circa's market value plus total debt minus total cash
("Enterprise Value") to revenues multiple was 4.9x compared to an average
Enterprise Value to revenues multiple of 2.9x for the Comparable Generic
Companies; (v) Circa's Enterprise Value to adjusted EBIT multiple was 17.1x
compared to an average Enterprise Value to EBIT multiple of 26.1x for the
Comparable Generic Companies; and (vi) Circa's Enterprise Value to adjusted
EBITDA multiple was 15.6x compared to an average Enterprise Value to EBITDA
multiple of 14.2x for the Comparable Generic Companies.
Circa vs. Pharmaceutical Comparables: Using currently available
information, Wertheim Schroder also compared selected historical and projected
financial and operating data, and selected stock market data, of Circa with the
corresponding data of the following publicly traded pharmaceutical drug
companies which Wertheim Schroder considered comparable to Circa (collectively,
the "Comparable Pharmaceutical Companies"): Glaxo plc; Eli Lilly & Company;
Merck & Company, Inc.; Rhone-Poulenc Rorer, Inc.; Schering-Plough Corp.; Upjohn
Company; and Zeneca Group plc.
In comparing Circa's recent operating performance to the recent operating
performance of the Comparable Pharmaceutical Companies, Wertheim Schroder noted,
among other things, that: (i) Circa's LTM adjusted EBITDA Margin was 31.5%
compared with an average EBITDA Margin over such period of 26.9% for the
Comparable Pharmaceutical Companies; (ii) Circa's LTM adjusted EBIT Margin was
28.7% compared with an average EBIT Margin over such period of 24.1% for the
Comparable Pharmaceutical Companies; (iii) Circa's LTM Net Income Margin was
16.8% compared to an average Net Income Margin over such period of 17.6% for the
Comparable Pharmaceutical Companies; and (iv) Circa's LTM return on equity was
14.4% compared to an average return on equity over such period of 30.7% for the
Comparable Pharmaceutical Companies.
Wertheim Schroder performed a market analysis of Circa and the Comparable
Pharmaceutical Companies using closing market prices as of March 27, 1995. In
connection with such analysis, Wertheim
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Schroder noted, among other things, that (i) Circa's market price to LTM
earnings per share multiple was 33.2x compared to an average market price to LTM
earnings per share multiple of 15.9x for the Comparable Pharmaceutical
Companies; (ii) Circa's market price to analyst projected 1995 earnings per
share (based on consensus analyst estimates) multiple was 11.3x compared to an
average analyst projected 1995 earnings per share multiple of 15.1x for the
Comparable Pharmaceutical Companies; (iii) Circa's market capitalization to book
value multiple was 4.8x compared to an average market capitalization to book
value multiple of 4.8x for the Comparable Pharmaceutical Companies; (iv) Circa's
Enterprise Value to adjusted revenues multiple was 4.9x compared to an average
Enterprise Value to revenues multiple of 3.0x for the Comparable Pharmaceutical
Companies; (v) Circa's Enterprise Value to adjusted EBIT multiple was 17.1x
compared to an average Enterprise Value to EBIT multiple of 12.6x for the
Comparable Pharmaceutical Companies; and (vi) Circa's Enterprise Value to
adjusted EBITDA multiple was 15.6x compared to an average Enterprise Value to
EBITDA multiple of 11.4x for the Comparable Pharmaceutical Companies.
Circa Discounted Cash Flow Analysis: Wertheim Schroder performed a
discounted cash flow analysis of Circa based on the Circa financial forecast for
the fiscal years ending 1995 to 1998 prepared and provided by the management of
Circa (the "Circa Financial Forecast"). A discounted cash flow analysis is a
traditional valuation methodology used to derive a valuation of a corporate
entity by capitalizing the estimated future earnings and calculating the
estimated future free cash flows of such corporate entity and discounting such
aggregated results back to the present.
Wertheim Schroder analyzed the Circa Financial Forecast and discounted the
stream of free cash flows provided in such forecast back to January 1, 1995. To
estimate the residual value of Circa at the end of the Circa Financial Forecast
period, Wertheim Schroder applied terminal multiples ranging from 7.0x to 13.0x
to Circa's projected fiscal 1998 adjusted EBIT and discounted such value
estimates back to January 1, 1995 using discount rates ranging from 12.5% to
25.0%. Wertheim Schroder then summed the present values of the free cash flows
and the present values of the residual values to derive a range of implied
equity values for Circa of $425.2 million to $957.9 million (after adjustments
for total debt, cash and equivalents, certain investments owned by Circa and
cash proceeds from the exercise of stock options). These values represent $18.77
to $42.28 per share of Circa Common Stock on a fully-diluted basis.
ANALYSIS OF WATSON
Watson vs. Generic Comparables: Using publicly available information,
Wertheim Schroder compared selected historical and projected financial and
operating data, and selected stock market data, of Watson with the corresponding
data of the Comparable Generic Companies which Wertheim Schroder considered
comparable to Watson.
In comparing Watson's recent operating performance to the recent operating
performance of the Comparable Generic Companies, Wertheim Schroder noted, among
other things, that (i) Watson's growth rate in revenues for the last three years
ended December 31, 1994 was 43.5% compared with an average growth rate in
revenues over such period of 30.8% for the Comparable Generic Companies; (ii)
Watson's LTM EBITDA Margin was 36.6% compared with an average EBITDA Margin over
such period of 16.8% for the Comparable Generic Companies; (iii) Watson's LTM
EBIT Margin was 33.2% compared with an average EBIT Margin over such period of
13.7% for the Comparable Generic Companies; (iv) Watson's LTM Net Income Margin
was 21.5% compared to an average Net Income Margin over such period of 10.2% for
the Comparable Generic Companies; and (v) Watson's LTM return on equity was
16.8% compared to an average return on equity over such period of 9.0% for the
Comparable Generic Companies.
Wertheim Schroder performed a market analysis of Watson and the Comparable
Generic Companies using closing market prices as of March 27, 1995. In
connection with such analysis, Wertheim Schroder noted, among other things, that
(i) Watson's market price to LTM earnings per share multiple was 30.8x compared
to an average market price to LTM earnings per share multiple of 34.6x for the
Comparable Generic Companies; (ii) Watson's market price to analyst projected
1995 earnings per share (based on consensus analyst estimates) multiple was
25.0x compared to an average analyst projected 1995 earnings per share multiple
of 30.8x for the Comparable Generic Companies; (iii) Watson's market
capitalization to book value
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multiple was 5.0x compared to an average market capitalization to book value
multiple of 3.6x for the Comparable Generic Companies; (iv) Watson's Enterprise
Value to revenues multiple was 5.8x compared to an average Enterprise Value to
revenues multiple of 2.9x for the Comparable Generic Companies; (v) Watson's
Enterprise Value to EBIT multiple was 17.6x compared to an average Enterprise
Value to EBIT multiple of 26.1x for the Comparable Generic Companies; and (vi)
Watson's Enterprise Value to EBITDA multiple was 15.9x compared to an average
Enterprise Value to EBITDA multiple of 14.2x for the Comparable Generic
Companies.
Watson Discounted Cash Flow Analysis: Wertheim Schroder performed a
discounted cash flow analysis of Watson based on the financial forecast for the
fiscal years ending 1995 to 1997 prepared and provided by the management of
Watson (the "Watson Financial Forecast").
Wertheim Schroder analyzed the Watson Financial Forecast and discounted the
stream of free cash flows provided in such forecast back to January 1, 1995. To
estimate the residual value of Watson at the end of the Watson Financial
Forecast period, Wertheim Schroder applied terminal multiples ranging from 9.0x
to 15.0x to Watson's projected fiscal 1997 EBIT and discounted such value
estimates back to January 1, 1995 using discount rates ranging from 12.5% to
22.5%. Wertheim Schroder then summed the present values of the free cash flows
and the present values of the residual values to derive a range of implied
equity values for Watson of $531.1 million to $1.0 billion (after adjustments
for total debt, cash and equivalents and cash proceeds from exercise of stock
options). These values represent $29.02 to $57.08 per share of Watson Common
Stock on a fully-diluted basis.
SELECTED TRANSACTION ANALYSIS
Wertheim Schroder analyzed certain publicly available information relating
to numerous selected transactions in the pharmaceutical industry since 1990.
Although these transactions were reviewed for comparison purposes, none of such
transactions is directly comparable to the Merger. Among the transactions
analyzed by Wertheim Schroder were: Zenith Laboratories/IVAX Corporation;
Hi-Tech Pharmacal/Circa (announced, but not closed); Copley Pharmaceuticals
Inc./Hoechst Celanese Corp.; Wellcome plc/Glaxo plc; American Cyanamid
Company/American Home Products Corporation; Syntex Corporation/Roche Holding
Ltd.; Pharmaceutical Resources, Inc./Clal Pharmaceutical Industries Ltd.; McGaw
Inc./IVAX Corporation; Medco Containment Services, Inc./Merck & Co. Inc.; Gynex
Pharmaceuticals Inc./Bio-Technology General Corp.; Cumberland-Swan Inc./Perrigo
Company; Dow B. Hickman, Inc./Mylan Laboratories Inc.; and Harris
Pharmaceuticals Ltd./IVAX Corporation.
Wertheim Schroder computed the equity cost (offer per share multiplied by
total common shares outstanding (the "Equity Cost")) in each of the selected
transactions analyzed and divided such amount by the acquired company's LTM net
income immediately prior to the acquisition which resulted in a range of
purchase price multiples. Wertheim Schroder also computed the adjusted purchase
price (the Equity Cost plus latest reported total debt, capitalized leases,
preferred stock and minority interests minus total cash and cash equivalents,
adjusted for outstanding options (the "Adjusted Purchase Price")) paid in each
of the selected transactions analyzed and divided such amount by the acquired
company's LTM adjusted revenue, EBITDA, and EBIT immediately prior to the
acquisition which resulted in other ranges of purchase price multiples. Using
such information and Circa's LTM operating results, Wertheim Schroder compared
the implied purchase price multiples of the Watson Offer (as defined below) to
the purchase price multiple ranges calculated as aforesaid. The "Watson Offer"
is defined as the Equity Cost for Circa which results from multiplying (i) the
Exchange Ratio, (ii) Watson's market price on March 27, 1995 and (iii) total
fully-diluted common shares outstanding for Circa. Such analysis illustrated:
(i) the implied Adjusted Purchase Price to LTM adjusted revenue multiple of the
Watson Offer is 8.08x compared with a multiple range of 0.59x to 13.44x for the
selected transactions analyzed; (ii) the implied Adjusted Purchase Price to LTM
adjusted EBITDA multiple of the Watson Offer is 25.64x compared with a multiple
range of 6.40x to 37.45x for the selected transactions analyzed; (iii) the
implied adjusted Purchase Price to LTM adjusted EBIT multiple of the Watson
Offer is 28.20x compared with a multiple range of 9.82x to 40.78x for the
selected transactions analyzed; and (iv) the implied Equity Cost to LTM net
income multiple of the Watson Offer is 53.34x compared with a multiple range of
10.30x to 71.38x for the selected transactions analyzed.
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Wertheim Schroder also analyzed the premium paid over the stock price of
the acquired company in selected merger transactions since 1992 one day, one
week and four weeks prior to the announcement of the transaction. This analysis
demonstrated that, on average, the acquired company received a 37.2%, 40.8% and
47.2% premium over its stock price one day, one week and four weeks,
respectively, prior to announcement of a transaction. The analysis also
demonstrated that in stock-for-stock transactions, on average, the acquired
company received a 32.5%, 35.1% and 38.0% premium over its stock price one day,
one week and four weeks, respectively, prior to announcement of a transaction.
Wertheim Schroder then compared these results with the premiums over Circa's
stock price implied by the Watson Offer. The Watson Offer implies premiums of
57.4%, 62.0% and 63.1% over Circa's stock price one day, one week and four
weeks, respectively, prior to March 27, 1995.
ANALYSIS OF THE MERGER
Historical Exchange Ratio Analysis: Wertheim Schroder derived and analyzed
the 10-day, 30-day, 60-day, 180-day and 365-day moving average exchange ratios
of Circa Common Stock and Watson Common Stock for the periods prior to March 27,
1995. The moving average exchange ratios of Circa Common Stock and Watson Common
Stock were 0.57:1, 0.59:1, 0.62:1, 0.63:1 and 0.61:1, respectively, over the
10-days, 30-days, 60-days, 180-days and 365-days. The Exchange Ratio of 0.86:1
represents a premium of 50.0%, 45.2%, 38.6%, 36.8% and 40.5%, respectively, over
the 10-day, 30-day, 60-day, 180-day and 365-day moving average exchange ratios
of Circa Common Stock and Watson Common Stock for the periods prior to March 27,
1995.
Pro Forma Company vs. Generic Comparables: Wertheim Schroder's analysis of
the combined company on a pro forma basis was based upon Circa and Watson's
financial forecasts. In order to measure the combined company's pro forma
operating performance with that of the Comparable Generic Companies, Wertheim
Schroder considered, among other things, that: (i) the combined company's pro
forma LTM adjusted EBITDA Margin would have been 34.4% compared with an average
EBITDA Margin over such period of 16.8% for the Comparable Generic Companies;
(ii) the combined company's pro forma LTM adjusted EBIT Margin would have been
31.2% compared with an average EBIT Margin over such period of 13.7% for the
Comparable Generic Companies; (iii) the combined company's pro forma LTM Net
Income Margin would have been 19.4% compared to an average Net Income Margin
over such period of 10.2% for the Comparable Generic Companies; and (iv) the
combined company's pro forma LTM return on equity would have been 15.8% compared
to an average return on equity over such period of 9.0% for the Comparable
Generic Companies. Such analysis did not reflect any potential synergies or
combination benefits resulting from the Merger.
Contribution Analysis: Wertheim Schroder analyzed the pro forma
contribution of each of Circa and Watson to the combined company if the Merger
were to be consummated. Such analysis showed that for the twelve month period
ended December 31, 1994, Circa and Watson would account for 44.6% and 55.4%,
respectively, of the combined company's pro forma adjusted revenues, 41.0% and
59.0%, respectively, of the combined company's pro forma adjusted EBIT, 38.7%
and 61.3%, respectively, of the combined company's pro forma net income, and
42.5% and 57.5%, respectively, of the combined company's pro forma book value.
Accretion/Dilution Analysis: Wertheim Schroder analyzed certain pro forma
effects of the Merger on the earnings and capitalization of the combined
company. Portions of this analysis were based upon certain forecasts provided by
Circa and Watson's senior management regarding the future financial performance
of the respective companies. This analysis indicated that, for the year ended
December 31, 1994, on a pro forma basis, Circa shareholders would have
experienced an earnings per share accretion of 32.3% and a book value per share
accretion of 46.0%. This analysis also indicated that, for the year ended
December 31, 1995, on a pro forma basis, Circa shareholders would experience
projected earnings per share dilution of 18.0%, assuming usage of Circa's
existing net operating loss carryforward (10.1% earnings per share dilution
assuming such loss carryforwards are not utilized) and projected book value per
share accretion of 9.7%. Such analysis did not reflect any potential synergies
or combination benefits resulting from the Merger.
The foregoing summary does not purport to be a complete description of
Wertheim Schroder's analyses or of the presentation by Wertheim Schroder to
Circa's Board. Wertheim Schroder did not attribute any
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particular weight to any analysis or factor considered by it, but rather made
qualitative judgments as to the significance and relevance of each analysis or
factor. Accordingly, Wertheim Schroder believes that its analyses must be
considered as a whole and that selecting portions of its analyses or of the
factors considered, without considering all analyses and factors, could create
an incomplete view of the processes underlying the preparation of its opinion.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. In
performing its analyses, Wertheim Schroder made numerous assumptions with
respect to general business and economic conditions and other matters, many of
which are beyond the control of Circa or Watson. The analyses performed by
Wertheim Schroder are not necessarily indicative of actual values or actual
future results, which may be significantly more or less favorable than suggested
by such analyses. Additionally, analyses relating to the values of businesses do
not purport to be appraisals or to reflect the prices at which a business may
actually be sold or at which a company's securities may trade at any time.
Wertheim Schroder is a nationally recognized investment banking firm
engaged, among other things, in the valuation of businesses and their securities
in connection with mergers and acquisitions, negotiated underwritings, secondary
distributions of listed and unlisted securities, private placements and
valuations for estate, corporate and other purposes. Wertheim Schroder has, in
the past, provided investment banking services to Circa and has received
customary fees for rendering such services. Kenneth Siegel, a Managing Director
of Wertheim Schroder, is a director of Circa.
Pursuant to an engagement letter, dated March 22, 1995, Circa (i) upon
signing of the letter, paid to Wertheim Schroder an initial cash fee of
$100,000, (ii) paid to Wertheim Schroder a fee in respect of its opinion of
$550,000 (which fee was payable without regard to the conclusions reached in the
opinion), $300,000 of which was paid at the time the Board of Directors
instructed Wertheim Schroder to prepare its opinion and $250,000 of which was
paid at the time Wertheim Schroder informed the Board of Directors that it was
ready to deliver its opinion, and (iii) has agreed to pay to Wertheim Schroder a
fee of $250,000 upon consummation of the Merger. The Company has also agreed to
reimburse Wertheim Schroder for its reasonable out-of-pocket expenses and to
indemnify Wertheim Schroder, its officers, directors, controlling persons,
employees and agents, against certain liabilities, including liabilities under
the federal securities laws, relating to, arising out of, or in connection with,
the matters contemplated by the engagement letter.
Wertheim Schroder, in the normal course of business, trades in the
securities of Circa and Watson for its own account and for the account of its
customers, and it expects to continue trading in such securities in the future.
Accordingly, Wertheim Schroder may from time to time hold a long or short
position in Circa's or Watson's securities.
RECOMMENDATIONS BY THE BOARDS OF DIRECTORS
Circa. The Board of Directors of Circa believes that the Merger is fair to
and in the best interests of Circa and its stockholders and recommends that the
Circa stockholders vote for approval of the Merger Agreement and the
transactions contemplated thereby. In reaching its determination, the Circa
Board of Directors consulted with Circa management, as well as its legal counsel
and its financial advisors, and, in addition to the anticipated benefits
described above, considered a number of factors, including, without limitation,
the following:
(i) Circa's strategic alternatives, including remaining a separate
company in light of consolidation in the healthcare industry in general and
of generic pharmaceutical companies in particular. Circa's Board of
Directors believes that the Merger will create a significantly stronger
pharmaceutical business than the two companies have operating independently
and would enable Circa's stockholders to continue to share in the profits
from Circa's current and future activities while reducing the risks to
which Circa would be subject as a stand-alone company.
(ii) Information concerning the financial performance, condition and
business operations of Watson and Circa. See the separate historical
financial statements and the unaudited pro forma condensed combined
financial data of Watson and Circa that are included elsewhere in this
Proxy Statement/Prospectus or incorporated in this Proxy
Statement/Prospectus by reference.
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(iii) The presentations of Bear Stearns and Wertheim Schroder
delivered to Circa's Board of Directors at its meetings on March 28-29,
1995, and the opinions of Bear Stearns and Wertheim Schroder to the effect
that, as of March 29, 1995, the Merger or the Exchange Ratio in the Merger,
as the case may be, was fair, from a financial point of view, to the
holders of Circa Common Stock. Bear Stearns and Wertheim Schroder have each
since delivered an updated written opinion, dated as of the date of this
Proxy Statement/Prospectus, to the effect that the Merger or the Exchange
Ratio is fair, from a financial point of view, to Circa's stockholders. See
"The Merger -- Opinions of Circa's Financial Advisors."
(iv) The Exchange Ratio and recent trading prices, volatility and
other trading information for Watson Common Stock and Circa Common Stock.
Circa's Board of Directors concluded that the Merger would provide Circa
stockholders with an opportunity both to receive a premium over the recent
trading price range for Circa Common Stock and, because of the greater
trading volume and number of shares of Watson Common Stock traded after the
Merger, to receive shares for which there is a larger trading market. The
Exchange Ratio represented a premium of approximately 57.5% over the
closing sales price of $17.75 per share of Circa Common Stock on March 29,
1995, the last trading day prior to the announcement of the Merger, based
upon 0.86 times the closing sales price per share of Watson Common Stock
($32.50) on such date.
(v) Beneficial owners of approximately 17% of the outstanding shares
of Watson Common Stock agreed to vote such shares in favor of the Merger.
(vi) The fact that the Merger will afford Circa's stockholders the
opportunity to receive Watson Common Stock in a non-taxable transaction for
Federal income tax purposes.
(vii) The opportunity for Circa's stockholders to continue to share in
the potential for long term gains from their investment in Circa through
their ownership of Watson Common Stock following the Merger.
(viii) The terms and conditions of the Merger, the Merger Agreement
and related matters, including the fact that Dr. Sharoky and Mr. Rice will
receive options to purchase shares of Watson Common Stock.
(ix) The terms of the Merger Agreement that permit Circa to terminate
the Merger Agreement in the event that the average trading price of Watson
Common Stock during a specified measurement period declines below $25.00
per share, unless Watson has previously elected to increase the Exchange
Ratio so that the consideration to be received by Circa's stockholders does
not fall below $21.50 per share.
(x) The fact that the Merger will be accounted for as a pooling of
interests.
(xi) The likelihood that the Merger will be consummated.
In view of the wide variety of factors considered in connection with its
evaluation of the proposed Merger, the Circa Board of Directors did not find it
practicable to, and did not, quantify or otherwise attempt to assign relative
weights to the specific factors considered in reaching its determination.
THE BOARD OF DIRECTORS OF CIRCA RECOMMENDS THAT CIRCA STOCKHOLDERS VOTE TO
APPROVE AND ADOPT THE MERGER AGREEMENT.
Watson. The Watson Board of Directors believes that the terms of the Merger
Agreement are fair to and in the best interests of Watson and its stockholders.
Accordingly, Watson's Board of Directors has approved the Merger Agreement and
recommends approval thereof by the stockholders of Watson. In reaching its
determination, the Watson Board of Directors consulted with Watson management,
as well as its financial and legal advisors, and, in addition to the anticipated
benefits described above, considered a number of factors, including, without
limitation, the following:
(i) Watson's strategic alternatives, including remaining a separate
company in light of consolidation in the healthcare industry in general and
with the generic pharmaceutical companies in particular. Watson's Board of
Directors believes that a combined Watson and Circa would create a
significantly
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stronger pharmaceutical business than the two companies presently have
operating independently, and would reduce the risk to which Watson would be
subject as a stand-alone company.
(ii) Circa currently receives significant cash flow from its 50%
ownership of Somerset Pharmaceuticals, Inc. (of which Mylan Laboratories,
Inc. is the other 50% owner), and its royalties received from RPR relating
to the sale of Dilacor XR(R). Such cash flow will help fund future product
developments and other strategic acquisitions and may provide enhanced
earnings in the year of the Merger and thereafter.
(iii) The terms and conditions of the Merger Agreement, including the
amount and form of the consideration, the parties' representations and
warranties, covenants and agreements and the conditions to their respective
obligations set forth in the Merger Agreement, including, without
limitation, the condition that Watson stockholders approve the issuance of
the Watson Common Stock to be issued in the Merger. Accordingly, the Board
believed that, in the absence of unforeseen circumstances, there is a
substantial likelihood that the transaction will be completed. See "The
Merger Agreement."
(iv) The opinion of DLJ that, based upon the matters set forth
therein, the Exchange Ratio is fair, from a financial point of view, to
Watson's stockholders. See "The Merger -- Opinion of Watson's Financial
Advisor."
The Board of Directors of Watson believes that the Merger represents a
significant step towards achieving its objective of becoming a diversified,
multinational health-care company and strengthening the long-term value of
Watson for its stockholders.
In view of the variety of factors considered by Watson's Board of Directors
in connection with its evaluation of the Merger, the Board did not find it
practicable to, and did not, quantify or otherwise assign relative weights to
such factors. Based on the factors described above, Watson's Board of Directors
determined that the Merger is fair to and in the best interests of Watson and
its stockholders and approved the Merger Agreement and the Merger.
THE BOARD OF DIRECTORS OF WATSON RECOMMENDS THAT WATSON STOCKHOLDERS VOTE
FOR APPROVAL OF THE MERGER AGREEMENT.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendations of the Boards of Directors of Watson and
Circa with respect to the Merger Agreement and the transactions contemplated
thereby, stockholders should be aware that certain members of the management of
Watson and Circa and the Boards of Directors of Watson and Circa have certain
interests in the Merger that are in addition to the interests of stockholders of
Watson and Circa generally.
Stock Option Plans. As provided in the Merger Agreement, by virtue of the
Merger, all options (the "Circa Options") outstanding at the Effective Time
under any Circa stock option or purchase plan (collectively, the "Circa Stock
Option Plans"), whether or not then exercisable, will be assumed by Watson and
converted into and become a right to purchase Watson Common Stock. Each Circa
Option assumed by Watson will be exercisable upon the same terms and conditions
as under the applicable Circa Stock Option Plans and applicable option
agreements issued thereunder, except that (i) each Circa Option will be
exercisable for the number of shares of Watson Common Stock equal to the
product, rounded to the nearest whole share, of (A) the number of shares of
Circa Common Stock subject to the original Circa Option immediately prior to the
Effective Time, times (B) the Exchange Ratio and (ii) the per share exercise
price for each such Circa Option will be equal to (A) the per share exercise
price for the share of Circa Common Stock subject to such Circa Option
immediately prior to the Effective Time divided by (B) the Exchange Ratio,
rounded upward to the nearest full cent. Under the existing terms of one of the
Circa Stock Option Plans, the Merger may cause the acceleration of vesting of
Circa Options held by certain employees based on their length of employment. As
of June 12, 1995, there were 875,450 Circa Options outstanding at a weighted
average price of $12.70 per share (at exercise prices ranging from $2.50 to
$17.75 per share). Assuming the Merger is consummated on July 17, 1995,
approximately 267,000 of the outstanding Circa Options will vest upon
consummation of the Merger, including 100,000 options held by Dr. Melvin
Sharoky. Approval of the
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Merger Agreement by the stockholders of Watson will constitute stockholder
approval of the assumption by Watson of the rights and obligations of Circa
under the Circa Stock Option Plans. See "The Merger Agreement -- The Merger."
Restricted Stock. Pursuant to the Merger Agreement, Watson has agreed that
all shares of Circa Common Stock which are restricted (by virtue of being
subject to forfeiture in certain circumstances) will upon their conversion to
Watson Common Stock be subject to the same terms and conditions to which such
shares are currently subject, provided that all references to Circa in any
agreement relating to such stock will be deemed references to Watson. See
"Holdings of Circa Stockholders, Directors and Executive Officers."
Severance and Separation Agreements. In connection with the Merger
Agreement, Watson has agreed that if, at any time during the one-year period
after the Effective Time, it terminates any of seven specified employees of
Circa without cause, (a) Watson would pay such terminated employee nine months,
or in one case twelve months, of their base salary in one lump sum as severance;
and (b) such terminated employee's Circa Options would immediately vest. The
seven employees covered by such arrangements are Angelo C. Malahias, Circa's
Vice President and Chief Financial Officer, Gwen Gerrick, Circa's Corporate
Secretary, John Botek, Circa's Vice President-Operations and Administration, Ed
Haley, Circa's Vice President-Sales and Marketing, Steve Martinez, a Vice
President and General Manager of Circa, Jim Miller, Circa's Vice
President-Pharmaceutical Services, and Finn Andreasen, Circa's Director of Plant
Engineering. Additionally, Watson has agreed to continue the medical coverage of
four specified former employees of Circa for a specified period of time.
Stock Options Under Certain Employment Agreements. Dr. Allen Chao, Dr. Alec
D. Keith, Dr. David C. Hsia, Watson's Senior Vice President, Scientific Affairs,
and Chato Abad, Watson's Vice President, Corporate Controller and Principal
Accounting Officer, have each entered into employment agreements with Watson
effective as of May 29, 1995. These employment agreements provide that upon
consummation of the Merger, (i) Dr. Chao will be entitled to receive options to
purchase 200,000 shares of Watson Common Stock under Watson's 1991 Stock Option
Plan, 50,000 of which are to be granted in 1995, 100,000 in 1996, and 50,000 in
1997; and (ii) Dr. Keith, Dr. Hsia and Ms. Abad will each be entitled to receive
options to purchase 75,000 shares of Watson Common Stock under the 1991 Stock
Option Plan. The employment agreements provide, however, that if the Merger does
not become effective for any reason, the foregoing grants shall be null and
void. See "Watson's Executive Compensation -- Employment Agreements."
Severance Benefits under Certain Employment Agreements. Dr. Melvin Sharoky,
Thomas P. Rice and Nicholas A. LaBella, Jr., Circa's Vice President and Director
of Research and Development, have each entered into employment agreements with
Circa. The employment agreements of Dr. Sharoky and Mr. Rice provide, in part,
that if their employment is terminated "without cause" after a change of control
or if they terminate their employment for "good reason" after a change of
control, they will be entitled to receive certain severance benefits. In the
case of Dr. Sharoky, these benefits include a payment of 2.99 times the sum of
Dr. Sharoky's base compensation and incentive compensation. In the case of Mr.
Rice, these benefits include a payment of 2.99 times his "base amount" (as
defined in Section 280G of the Code). Additionally, their employment agreements
provide that if their employment is terminated "without cause" or if they
terminate their employment for "good reason", their outstanding restricted stock
immediately vests. The employment agreement of Mr. LaBella provides, in part,
for the immediate vesting of outstanding restricted stock upon a change of
control. Watson currently intends to continue to employ Dr. Sharoky, Mr. Rice
and Mr. LaBella, and has been informed by Circa that such individuals intend to
continue their employment relationship with Watson. Accordingly, Watson does not
anticipate that any severance benefits will be payable to them in the immediate
future.
Additional Compensation. Watson believes that the continued success of the
combined companies is partially dependent on the retention of certain key
personnel of Circa. In order to retain the services of Dr. Sharoky and Mr. Rice
upon the consummation of the Merger, Watson has agreed to (a) guaranty the
payment obligations under the employment agreements entered into by Circa with
each of Dr. Sharoky and Mr. Rice; and (b) grant Dr. Sharoky options to purchase
300,000 shares of Watson Common Stock with an exercise price equal to the fair
market value of the Watson Common Stock on the date of the Merger, which
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vest over three years at 100,000 per year; and (c) grant Mr. Rice options to
purchase 100,000 shares of Watson Common Stock with an exercise price equal to
the fair market value of the Watson Common Stock on the date of the Merger,
which vest over five years at 20,000 per year.
Indemnification and Insurance. For a period of six years following the
Effective Time, Watson has agreed to indemnify and advance expenses to each
person who was at March 29, 1995, or has been at any time prior to March 29,
1995, an officer, director, employee, trustee or agent of Circa (or any
subsidiary or division thereof) (the "Indemnified Parties"), to the fullest
extent permitted under applicable law, against all losses, claims, damages,
liabilities, costs or expenses (including attorneys' fees), judgments, fines,
penalties and amounts paid in settlement in connection with any claim, action,
suit, proceeding or investigation arising out of or pertaining to acts or
omissions, or alleged acts or omissions, by them in their capacities as such,
whether commenced, asserted or claimed before or after the Effective Time and
including, without limitation, liabilities arising under the Securities Act, the
Exchange Act and state corporation laws in connection with the Merger. In
addition, Watson has agreed to cause Circa to keep in effect provisions in its
Certificate of Incorporation and Bylaws providing for exculpation of director
and officer liability and its indemnification of the Indemnified Parties to the
fullest extent permitted under applicable law, which provisions shall not be
amended except as required by applicable law or except to make changes permitted
by law that would enlarge the Indemnified Parties' right of indemnification. For
a period of two years after the Effective Time, Watson agreed to maintain in
effect policies of directors' and officers' liability insurance that are
substantially similar to the policies presently maintained by Circa; provided
that Watson shall not be required to pay an annual premium for such insurance in
excess of 150% of the last annual premium paid prior to March 30, 1995, but in
such case shall purchase as much coverage as possible for such amount. Watson
shall pay all reasonable fees and expenses, including attorneys' fees, that may
be incurred by any of the aforementioned parties in enforcing the indemnity and
other obligations referred to above, if, prior to the payment of such expenses,
Watson has received an undertaking from the Indemnified Party to promptly return
any amounts paid by Watson or its subsidiaries in the event that it shall
ultimately have been determined that the Indemnified Party is not entitled to be
indemnified under applicable law. The rights of each such person shall be in
addition to any other rights such person may have under the Certificate of
Incorporation or Bylaws of Circa or under applicable law. See "The Merger
Agreement -- Indemnification and Insurance."
Board of Directors and Officers of Watson and the Surviving
Corporation. Subject to consummation of the Merger, Watson has agreed to cause
the directors comprising the full Board of Directors of Watson at the Effective
Time to consist of five current directors of Watson (Dr. Allen Chao, Dr. Alec
Keith, Albert F. Hummel, Michel J. Feldman and Ronald Taylor) and four
individuals designated by Circa. Three Circa nominees, Dr. Melvin Sharoky,
Thomas P. Rice and Michael Fedida, will be presented for election at the Watson
Meeting. The proposed amendment to the Articles to create a staggered board
authorizes a board of directors comprised of nine members. The Watson
stockholders will not have the ability to nominate any additional directors to
fill the vacancy remaining after the eight directors have been elected and such
vacancy will be filled by the majority vote of the directors, in office
immediately after the Effective Date. If the Merger is consummated, the nominee
for such vacancy will be selected by Dr. Sharoky and Messrs. Rice and Fedida,
and approved by the Watson Board. Additionally, at the Effective Time, the Board
of Directors of Watson will take all action necessary to elect Dr. Sharoky to
the office of President of Watson. See "The Merger Agreement -- Governance."
At the Effective Time, the Board of Directors of Circa shall consist of Dr.
Alec Keith, Dr. Allen Chao and Dr. Melvin Sharoky. Dr. Chao will serve as the
Chairman of the Board of Circa and Dr. Sharoky shall be elected the President
and Chief Executive Officer of Circa.
ACCOUNTING TREATMENT
Watson and Circa believe that the Merger will qualify as a pooling of
interests for accounting and financial reporting purposes, and have been so
advised by Price Waterhouse LLP. Under this method of accounting, the assets and
liabilities of Watson and Circa will be combined based on the respective
carrying values of the accounts in the historical financial statements of each
entity. Results of operations of the combined company will include income and
loss of Watson and Circa for the entire fiscal period in which the
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combination occurs and the historical results of operations of the separate
companies for fiscal years prior to the Merger will be combined and reported as
the results of operations of the combined company.
Consummation of the Merger is conditioned upon the receipt by each of
Watson and Circa of a letter from Price Waterhouse LLP, Watson's independent
public accountants, stating that, in its opinion, the Merger will qualify as a
pooling of interests for accounting purposes. See "The Merger Agreement --
Conditions" and "Unaudited Pro Forma Condensed Combined Financial Information."
Certain events, including certain transactions with respect to Circa Common
Stock or Watson Common Stock by affiliates of Circa or Watson, respectively, may
prevent the Merger from qualifying as a pooling of interests for accounting and
financial reporting purposes. See "The Merger -- Resale Restrictions."
CERTAIN FEDERAL INCOME AND NEW YORK STATE TAX CONSEQUENCES
The respective obligations of Watson and Circa to consummate the Merger are
conditioned on the receipt of opinions of their respective special counsel,
D'Ancona & Pflaum and Schulte Roth & Zabel, to the effect that the Merger will
be treated for Federal income tax purposes as a reorganization within the
meaning of Section 368(a) of the Code. See "The Merger Agreement -- Conditions."
If so treated, except as provided below, no gain or loss will be recognized to
Circa stockholders upon the receipt of Watson Common Stock in exchange for Circa
Common Stock. Circa stockholders will have a tax basis for the shares of Watson
Common Stock received in the Merger equal to the tax basis for the shares of
Circa Common Stock surrendered in exchange therefor, excluding any basis
allocated to fractional shares for which cash is received. If the shares of
Circa Common Stock are held as capital assets, the holding period of the shares
of Watson Common Stock received will include the period during which the shares
of Circa Common Stock were held. Furthermore, if the Merger is treated as a
reorganization, the Merger will result in no gain or loss to Watson on the
exchange of shares of Circa Common Stock for Watson Common Stock.
The Internal Revenue Service has announced a ruling policy of treating cash
paid in lieu of fractional share interests arising in corporate reorganizations
as having been received by the stockholders in payment for the fractional share
interests if the cash distribution is undertaken solely for the purpose of
saving the corporation the expense and inconvenience of issuing and transferring
fractional shares and is not a separately bargained for consideration. The
Internal Revenue Service has stated further that the purpose of the transaction
giving rise to the fractional share interests, the maximum amount of cash that
may be received by any one stockholder and the percentage of the total
consideration that will be cash are among the factors that will be considered in
this connection. If so treated in the present case, gains and losses realized by
Circa stockholders with respect to the receipt of cash in lieu of fractional
shares will be capital gain or loss, provided that the shares surrendered are
held as capital assets. Such capital gain or loss will be long-term capital gain
or loss if the shares of Circa Common Stock were held for more than one year at
the Effective Time. To determine the amount of gain or loss, a portion of the
basis in the Circa Common Stock will be allocated to the fractional shares and
the amount of gain or loss will be the difference between the amount of cash
received and the amount of such basis.
Circa and certain subsidiaries reported net operating loss carryforwards of
approximately $77 million as of the end of 1994. It is anticipated that the use
of Circa's net operating loss carryforwards will be subject to an annual
limitation due to a more than fifty percent ownership change (as defined in
Section 382 of the Code) of Circa, as a result of the Merger together with other
transactions during the three years prior to the Effective Time. This annual
limitation will equal the value of Circa's stock immediately before the Merger,
multiplied by an applicable long-term tax exempt rate defined in Section 382.
If, as anticipated, Circa stockholders own more than fifty percent of the stock
of Watson immediately after the Merger, Circa's net operating loss carryforwards
(as limited by Section 382) will be available to offset future income of Circa
and of Watson and its subsidiaries.
Because Circa owns real property in New York State, the New York State Real
Property Gains Tax and New York State Real Estate Transfer Tax may apply to the
exchange of Circa Common Stock for Watson Common Stock pursuant to the Merger.
Although the Circa stockholders will be primarily responsible for paying such
taxes, if applicable, Circa will file all necessary tax returns and any such
taxes will be paid by Circa on behalf of the Circa stockholders.
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The foregoing discussion is intended only as a summary of selected federal
income tax and New York State tax consequences of the Merger under current law
and does not purport to be a complete analysis or description of all potential
tax effects of the Merger. The summary does not address all of the tax
consequences that may be important to stockholders subject to special tax
treatment, such as insurance companies, corporations subject to the alternative
minimum tax, banks, dealers in securities, tax-exempt organizations or foreign
persons, or to stockholders who acquired their shares of Circa Common Stock as
compensation. No information is provided herein with respect to the tax
consequences, if any, of the Merger under applicable foreign, state, local, and
other tax laws, other than the discussion of certain New York State taxes above.
The discussion is based on the current provisions of the Code, final and
proposed Treasury regulations thereunder and current administrative rulings and
court decisions. All of the foregoing are subject to change and any such change
could affect the accuracy of this discussion. Circa stockholders are urged to
consult their own tax advisors as to the specific tax consequences to them of
the Merger.
REGULATORY APPROVAL
Under the HSR Act, and the rules promulgated thereunder by the FTC, the
Merger cannot be consummated until notifications have been given and certain
information has been furnished to the FTC and the Antitrust Division and
specified waiting period requirements have been satisfied. Watson and Circa each
filed notification and report forms under the HSR Act with the FTC and the
Antitrust Division on May 4, 1995. The waiting period under the HSR Act expired
by early termination on May 23, 1995. At any time before or after the Effective
Time, even if the HSR Act waiting period has expired, the Antitrust Division,
the FTC or any state could take action under the antitrust laws as it deems
necessary or desirable. Such action could include seeking to enjoin the
consummation of the Merger or seeking divestiture of Circa or businesses or
products of Watson or Circa by Watson. Private parties may also seek to take
legal action under the antitrust laws under certain circumstances.
RESALE RESTRICTIONS
All shares of Watson Common Stock received by Circa stockholders in the
Merger will be registered under the Securities Act and will be freely
transferable, except that shares of Watson Common Stock received by persons who
are deemed to be "affiliates" (as such term is defined under the Securities Act)
of Circa at the time of the Circa Meeting may be resold by them only in
transactions permitted by the resale provisions of Rule 145 promulgated under
the Securities Act (or Rule 144 in the case of such persons who become
affiliates of Watson) or as otherwise permitted under the Securities Act.
Persons who may be deemed to be affiliates of Circa or Watson generally include
individuals or entities that control, are controlled by, or are under common
control with, such party, and may include certain officers and directors of such
party as well as principal stockholders of such party. The Merger Agreement
requires Circa to cause each of its affiliates to execute a written agreement to
the effect that such person will not offer to sell, transfer or otherwise
dispose of any of the shares of Watson Common Stock issued to such person in or
pursuant to the Merger unless (a) such sale, transfer or other disposition has
been registered under the Securities Act, (b) such sale, transfer or other
disposition is made in conformity with Rule 145 under the Securities Act or (c)
in the opinion of counsel or pursuant to a "no-action" letter obtained from the
Commission by such person, such sale, transfer or other disposition is exempt
from registration under the Securities Act. In order to qualify for pooling of
interests treatment, an affiliate of either Watson or Circa may not sell
(subject to certain de minimis exceptions), or in any other way reduce said
affiliate's risk relative to, the shares of Watson Common Stock until after such
time as Watson publishes results covering at least 30 days of combined
operations of Watson and Circa. Circa and Watson have each agreed that their
respective affiliates will not engage in any such transactions. See "The
Merger -- Accounting Treatment" and "The Merger Agreement -- Certain Covenants."
AGREEMENTS TO VOTE IN FAVOR OF MERGER
On March 29, 1995, each of Dr. Chao, John Chao and Agnes Kung entered into
Voting Agreements with Circa which provided, among other things, that if a
stockholder vote was taken to approve the Merger and/or the Merger Agreement,
such stockholder would vote all of the shares of Watson Common Stock owned by
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them, or which such person had the power to vote, in favor of the Merger. As of
May 19, 1995, such persons owned or had the power to vote, in the aggregate,
approximately 18% of the outstanding shares of Watson Common Stock.
LITIGATION RELATING TO THE MERGER
Four purported class actions, Robbins v. Circa Pharmaceuticals, Inc. et
al., Zimmerman v. Circa Pharmaceuticals, Inc. et al., Ballas v. Melvin Sharoky,
et al., and Schrank v. Circa Pharmaceuticals, Inc., et al. have been commenced
in Supreme Court of the State of New York, in the Counties of Suffolk, Suffolk,
Kings and Suffolk, respectively. Each action purports to be brought on behalf of
stockholders of Circa, and names as defendants Circa, its directors, and (in
three cases) Lawrence Raisfeld, a former Circa director. In addition to the
persons described above, the Robbins, Zimmerman and Schrank complaints also name
Watson as a defendant. Each of the complaints alleges, among other things, that
actions of the individual defendants in connection with the Merger Agreement
constituted a breach of their fiduciary duties, and the Robbins, Zimmerman and
Schrank complaints allege that Watson aided and abetted the individual
defendants in those alleged breaches. Each of the complaints seeks, among other
things, compensatory damages, an injunction against consummation of the Merger
Agreement, and other equitable relief.
Circa and Watson believe that these actions are without merit and intend to
defend them vigorously.
THE MERGER AGREEMENT
The following is a brief summary of certain provisions of the Merger
Agreement not summarized elsewhere herein. A copy of the Merger Agreement is
attached as Appendix A to this Proxy Statement/Prospectus and is incorporated
herein by reference. This summary is qualified in its entirety by reference to
the full text of the Merger Agreement.
THE MERGER
Pursuant to the Merger Agreement, subject to the terms and conditions
thereof, at the Effective Time, Watson Sub will be merged with and into Circa,
with Circa being the surviving corporation in the Merger. Immediately after the
Merger, Circa shall become the wholly-owned subsidiary of Watson. The Merger
will have the effects specified in the laws of the State of New York and the
laws of the State of Nevada.
Upon the satisfaction or waiver of all conditions to the Merger, and
provided that the Merger Agreement has not been terminated or abandoned, Watson
and Circa will cause Certificates of Merger to be executed, acknowledged and
filed with the Secretary of State of the States of New York and Nevada. The time
at which the Merger becomes effective is referred to as the Effective Time. From
and after the Effective Time, the surviving corporation of the Merger (Circa)
shall possess all the rights, privileges, powers and franchises and be subject
to all of the restrictions, disabilities, liabilities and duties of Circa and
Watson Sub, all as provided by applicable law.
As a result of the Merger and without any action on the part of the holders
thereof, each share of Circa Common Stock issued and outstanding immediately
prior to the Effective Time, other than shares as to which dissenters' rights
are properly exercised, will be converted into the right to receive 0.86 of a
share of Watson Common Stock, subject to certain adjustments, and will cease to
be outstanding and will be cancelled and retired. Each holder of a Certificate
representing any such shares of Circa Common Stock and the associated Circa
Right will thereafter cease to have any rights with respect to such shares of
Circa Common Stock and the associated Circa Right, except the right to receive,
without interest, shares of Watson Common Stock and cash for fractional
interests of Watson Common Stock (as described below in "-- Exchange Procedures;
Fractional Shares") upon the surrender of such Certificate. Each share of Circa
Common Stock held in Circa's treasury or owned by Watson or any of its
subsidiaries at the Effective Time will cease to be outstanding and will be
cancelled and retired without payment of any consideration therefor.
Immediately following the Merger, (a) the former holders of Circa Common
Stock will collectively hold approximately 52% of the issued and outstanding
shares of Watson Common Stock; and (b) the persons who
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held Watson Common Stock immediately prior to the Merger will hold collectively
approximately 48% of the issued and outstanding Watson Common Stock.
At the Effective Time, all options then outstanding under the Circa Stock
Option Plans will remain outstanding and will be assumed by Watson. Each such
Circa Option will be exercisable upon the same terms and conditions as under the
applicable Circa Stock Option Plan and the applicable option agreement issued
thereunder, except that (a) each such Circa Option will be exercisable for that
whole number of shares of Watson Common Stock (to the nearest whole share) into
which the number of shares of Circa Common Stock under the unexercised portion
of such option would be converted at the Effective Time and (b) the exercise
price per share of Watson Common Stock will be an amount equal to the exercise
price per share subject to such Circa Option prior to the Effective Time divided
by the Exchange Ratio (rounded upward to the nearest full cent). Approval of the
Merger Agreement by the stockholders of Watson will constitute stockholder
approval of the assumption by Watson of the rights and obligations of Circa
under the Circa Stock Option Plans and of the amendment of such plans to provide
for, among other things, the conversion at the Effective Time of each
outstanding stock option into an option to purchase shares of Watson Common
Stock at the Exchange Ratio. See "The Merger -- Interests of Certain Persons in
the Merger."
EXCHANGE PROCEDURES; FRACTIONAL SHARES
Promptly after the Effective Time, the Exchange Agent will mail to each
person who was, at the Effective Time, a holder of record of shares of Circa
Common Stock, a letter of transmittal to be used by such holder in forwarding
such holder's Certificates and instructions for effecting the surrender of the
Certificates in exchange for certificates representing shares of Watson Common
Stock. Upon surrender to the Exchange Agent of a Certificate for cancellation,
together with such letter of transmittal, the holder of such Certificate will be
entitled to receive a certificate representing that number of whole shares of
Watson Common Stock, cash in lieu of any fractional shares (as described below)
and unpaid dividends and distributions, if any, which such holder has the right
to receive in respect of the Certificate surrendered, and the Certificate so
surrendered will be cancelled. CIRCA STOCKHOLDERS SHOULD NOT SEND IN THEIR
CERTIFICATES UNTIL THEY RECEIVE A LETTER OF TRANSMITTAL.
No fractional shares of Watson Common Stock will be issued and any holder
of shares of Circa Common Stock entitled under the Merger Agreement to receive a
fractional share will be entitled to receive only a cash payment in lieu
thereof. Following the Effective Time, the Exchange Agent shall determine the
excess of the number of full shares of Watson Common Stock delivered to the
Exchange Agent over the aggregate number of full shares of Watson Common Stock
to be distributed to holders of Circa Common Stock (the "Excess Shares"). As
soon as practicable after the Effective Time, the Exchange Agent shall sell the
Excess Shares at the prevailing market prices on the NASDAQ/NMS through one or
more member firms of the National Association of Securities Dealers, Inc. Watson
shall pay all commissions, transfer taxes and other out-of-pocket transaction
costs of the Exchange Agent incurred in connection with such sale of Excess
Shares. The Exchange Agent shall determine the portion of the cash proceeds from
the sale of the Excess Shares that each Circa stockholder is entitled to receive
by multiplying the aggregate net amount of such proceeds by a fraction, the
numerator of which is the amount of the fractional share interest to which such
holder of Circa Common Stock is entitled to receive, and the denominator of
which is the aggregate amount of fractional share interests to which all holders
of Certificates representing Circa Common Stock are entitled to receive. As soon
as practicable, the Exchange Agent shall distribute the amount of cash that each
Circa stockholder is entitled to receive from the sale of the Excess Shares.
No dividends on shares of Watson Common Stock will be paid with respect to
any shares of Circa Common Stock or other securities represented by a
Certificate until such Certificate is surrendered for exchange as provided in
the Merger Agreement. Subject to the effect of applicable laws, following
surrender of any such Certificate, there shall be paid to the holder of
certificates representing shares of Watson Common Stock issued in exchange
therefor, (i) at the time of such surrender, the amount of any dividends or
other distributions with a record date after the Effective Time theretofore
payable with respect to such shares of Watson Common Stock and not paid, less
the amount of any withholding taxes which may be required thereon, and (ii) at
the appropriate payment date, cash in lieu of fractional shares as described
above and the
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amount of dividends or other distributions with a record date after the
Effective Time but prior to surrender thereof and a payment date subsequent to
surrender thereof payable with respect to such whole shares of Watson Common
Stock, in each case, less the amount of any withholding taxes which may be
required thereon.
Any portion of the monies from which cash payments in lieu of fractional
interests in shares of Watson Common Stock will be made (including the proceeds
of any investments thereof) and any shares of Watson Common Stock that are
unclaimed by the former stockholders of Circa one year after the Effective Time
will be delivered to Watson. Any former stockholders of Circa who have not
theretofore complied with the exchange procedures in the Merger Agreement may
thereafter look to Watson for payment of their shares of Watson Common Stock,
cash in lieu of fractional shares, and any unpaid dividends and distributions on
shares of Watson Common Stock, deliverable in respect of each share of Circa
Common Stock such stockholder holds. Notwithstanding the foregoing, neither
Circa, Watson, Watson Sub, the Exchange Agent nor any other person will be
liable to any former holder of shares of Circa Common Stock for any amount
properly delivered to a public official pursuant to applicable abandoned
property, escheat or similar laws.
No interest will be paid or accrued on cash in lieu of fractional shares
and unpaid dividends and distributions, if any, which will be paid upon
surrender of Certificates.
At or after the Effective Time, there will be no transfers on the transfer
books of Circa of shares of Circa Common Stock which were outstanding
immediately prior to the Effective Time. In the event of a transfer of ownership
of Circa Common Stock which is not registered in the transfer records of Circa,
a certificate representing the proper number of shares of Watson Common Stock,
together with a check for the cash to be paid in lieu of fractional shares, if
any, and unpaid dividends and distributions, if any, may be issued to such a
transferee if the Certificate representing such Circa Common Stock is presented
to the Exchange Agent, accompanied by all documents required to evidence and
effect such transfer and to evidence that any applicable stock transfer taxes
have been paid.
In the event that any Certificate has been lost, stolen or destroyed, upon
the making of an affidavit of that fact by the person claiming such Certificate
to be lost, stolen or destroyed and, if required by the surviving corporation in
the Merger (Circa), the posting by such person of a bond in such reasonable
amount as the surviving corporation may direct as indemnity against any claim
that may be made against it with respect to such Certificate, the Exchange Agent
will issue in exchange for such lost, stolen or destroyed Certificate the shares
of Watson Common Stock, cash in lieu of fractional shares and any unpaid
dividends and distributions on shares of Watson Common Stock, as described
above.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various representations and warranties made
by each of Watson and Circa relating to, among other things: (a) existence, good
standing and corporate authority; (b) the authorization, execution, delivery and
enforceability of the Merger Agreement; (c) compliance with applicable laws; (d)
compliance with certain FDA and U.S. Drug Enforcement Administration rules and
regulations; (e) the capital structure of Circa and Watson; (f) subsidiaries of
Circa and Watson; (g) investment interests of Circa and Watson; (h) the absence
of conflicts under charters or bylaws and of violations of any instruments or
law, and required consents or approvals; (i) conduct of business in compliance
with laws and binding agreements; (j) certain documents filed by each of Circa
and Watson with the Commission and the accuracy of information contained
therein; (k) the information contained in this Proxy Statement/Prospectus; (l)
litigation and product liability; (m) absence of changes or material adverse
effects since December 31, 1994; (n) trademarks and patents; (o) properties; (p)
material contracts; (q) taxes; (r) retirement and other employee benefit plans
of Circa and Watson; (s) labor matters; (t) environmental matters; (u) absence
of indemnifiable claims with respect to officers, directors and employees; (v)
brokers' and finders' fees with respect to the Merger; (w) receipt of fairness
opinions; (x) ownership of the capital stock of the other company; (y)
qualification for "pooling of interests" accounting treatment; and (z)
applicability of anti-takeover statutes to the Merger. Watson has also made
representations regarding the validity of the Watson Common Stock to be issued
in the Merger and the absence of convertible securities.
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CERTAIN COVENANTS
Each of Circa and Watson has agreed (and has agreed to "cause" its
"subsidiaries" (as such terms are defined in the Merger Agreement)), among other
things, prior to the consummation of the Merger, unless the other party agrees
in writing or as otherwise required or permitted by the Merger Agreement, (i) to
conduct its operations according to its usual, regular and ordinary course in
substantially the same manner as theretofore conducted; (ii) to use its
reasonable efforts to preserve intact its business organization and goodwill,
keep available the services of its officers and employees and maintain
satisfactory business relationships; (iii) not to amend its certificate of
incorporation or bylaws, except as contemplated hereby; (iv) promptly to notify
the other party of any material emergency or other material change in its
business, any material litigation or material governmental complaints,
investigations or hearings (or communications indicating that the same may be
contemplated), or the breach in any material respect of any representation or
warranty contained in the Merger Agreement; (v) promptly to deliver to the other
party true and correct copies of any document filed with the Commission after
March 29, 1995; (vi) except pursuant to the exercise of certain options,
warrants, conversion rights and other contractual rights, not to issue any
shares of capital stock, effect any stock split or otherwise change its
capitalization as it existed on March 29, 1995; (vii) not to grant, confer or
award any option, warrant, conversion right or other right not existing on March
29, 1995 to acquire shares of its capital stock, other than employee stock
options, stock benefits and stock purchases under any existing stock option,
stock benefit or stock purchase plan, provided that the aggregate amount of
employee stock options issued shall not exceed 150,000; (viii) not to increase
any compensation or enter into or amend any employment agreement with any of its
present or future officers or directors, except for normal increases consistent
with past practice and the payment of cash bonuses to officers pursuant to and
consistent with existing plans or programs; (ix) not to grant any severance or
termination package to any employee or consultant other than consistent with
past practices; (x) not to adopt any new employee benefit plan or amend any
existing employee benefit plan in any material respect; (xi) not to declare or
pay any dividend to its stockholders or make any other payment on its capital
stock; (xii) not to directly or indirectly redeem, purchase or otherwise acquire
any shares of its capital stock or capital stock of any of its subsidiaries, or
make any commitment for such action; (xiii) not to enter into (or agree to enter
into) any material transaction outside the ordinary course of business; (xiv)
not to incur any indebtedness for borrowed money or guarantee any such
indebtedness or issue or sell any debt securities or warrants or rights to
acquire any debt securities of others other than in the ordinary course of its
business consistent with past practices, but in no event in an amount exceeding
$100,000 individually or $500,000 in the aggregate (other than normal
expenditures for the purchase of raw materials or other supplies); (xv) not to
make any loans, advances or capital contributions to, or investments in, any
other Person, except in the ordinary course of business consistent with past
practices; (xvi) not to make or commit to make any capital expenditures in
excess of $100,000 individually or $500,000 in the aggregate other than
expenditures included in such entity's current capital expenditure budget
disclosed to the other party or consistent with past practice; (xvii) not to
apply any of its assets to the direct or indirect payment, discharge,
satisfaction or reduction of any amount payable directly or indirectly to or for
the benefit of any of its affiliates or any of its subsidiaries or enter into
any transaction with any of its affiliates or any of its subsidiaries; (xviii)
not to alter the manner of keeping its books, accounts or record, or change in
any manner the accounting practices therein reflected; (xix) not to grant or
make any mortgage or pledge or subject itself or any of its material properties
or assets to any lien, charge or encumbrance of any kind, except lines for taxes
not currently due; and (xx) to maintain insurance on its tangible assets and its
businesses in such amounts and against such risks and losses as are currently in
effect.
Circa and Watson have agreed that, during the period from March 29, 1995
until the Effective Time, neither Circa nor Watson will knowingly take or
knowingly fail to take any action which would jeopardize the treatment of the
Merger as a "pooling of interests" for accounting purposes or as a
"reorganization" within the meaning of Section 368(a) of the Code.
Both Circa and Watson have agreed to cooperate in the prompt preparation
and filing of certain documents under federal and state securities and other
applicable laws and with applicable government entities and to perform such
further acts and execute such documents as may be reasonably required to effect
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the Merger. Circa has agreed to obtain and deliver to Watson certain letters
from "affiliates," as defined under Rule 145 under the Securities Act or by
applicable accounting rules.
NO SOLICITATION OF ALTERNATIVE TRANSACTIONS
Each of Watson and Circa has agreed that neither it nor any of its
subsidiaries shall, and it shall direct and cause its officers, directors,
employees, agents and representatives not to, initiate, solicit or encourage,
directly or indirectly, any inquiries or the making or implementation of any
proposal or offer (including, without limitation, any proposal or offer to its
stockholders) with respect to a merger, acquisition, consolidation or similar
transaction involving, or any purchase of all or any significant portion of the
assets or any equity securities of, Watson or Circa, as the case may be, or any
of its respective subsidiaries (any such proposal or offer being hereinafter
referred to as an "Alternative Proposal"), or engage in any negotiations
concerning, or provide any confidential information or data to, or have any
discussions with, any person relating to an Alternative Proposal, or otherwise
facilitate any effort or attempt to make or implement an Alternative Proposal.
Each of Watson and Circa has also agreed that it will immediately cease and
cause to be terminated any existing activities, discussions or negotiations with
any parties conducted prior to the date of the Merger Agreement with respect to
any of the foregoing, and it will take the necessary steps to inform the
appropriate individuals or entities of these obligations. Each of Watson and
Circa has also agreed that it will notify the other party immediately if any
such inquiries or proposals are received by, any such information is requested
from, or any such negotiations or discussions are sought to be initiated or
continued with it. However, the Board of Directors of Watson or Circa, as the
case may be, may (a) furnish information to, or enter into discussions or
negotiations with, any person or entity that makes an unsolicited bona fide
proposal to acquire Circa or Watson, as the case may be, pursuant to a merger,
consolidation, share exchange, purchase of a substantial portion of assets,
business combination or other similar transactions, if, and only to the extent
that, (i) the Board of Directors of Circa or Watson, as the case may be,
determines in good faith that such action is required for the Board of Directors
to comply with its fiduciary duties to stockholders imposed by law, (ii) prior
to furnishing such information to, or entering into discussions or negotiations
with, the other person or entity, Watson or Circa, as the case may be, provides
written notice to the other to the effect that it is furnishing information to,
or entering into discussions or negotiations with, such person or entity, and
(iii) subject to any confidentiality agreement with the other person or entity
(which Circa or Watson, as the case may be, determined in good faith was
required to be executed in order for the Board of Directors to comply with its
fiduciary duties to stockholders imposed by law), Circa or Watson, as the case
may be, keeps the other informed of the status (but not the terms) of any such
discussions or negotiations and (b) to the extent applicable, comply with Rule
14e-2 promulgated under the Exchange Act with regard to the Alternative
Proposal. The Merger Agreement does not permit Circa to enter into any agreement
with respect to an Alternative Proposal during the term of the Merger Agreement.
BENEFIT PLANS
Watson has agreed that, as soon as practicable after the Effective Time,
but in any event no later than January 1, 1996, Watson will provide benefits to
the employees of Circa and its subsidiaries which are substantially similar to
the benefits provided to similarly situated employees of Watson and its
subsidiaries (the date on which such benefits are provided to Circa employees is
referred to as the "Benefit Plan Transaction Date"). Prior to the Benefit Plan
Transaction Date, Watson shall cause the surviving corporation (Circa) to assume
all of Circa's benefit plans and provide to Circa's employees substantially the
same benefits that they were receiving prior to the Effective Date. Watson has
agreed to waive any pre-existing conditions and actively-at-work exclusions and
to take into account expenses incurred prior to the Effective Time for purposes
of satisfying deductible, coinsurance and maximum out-of-pocket provisions of
Watson benefit plans providing medical or dental welfare benefits. In addition,
Watson has agreed to grant all Circa employees credit for all service with Circa
and its predecessors for all purposes under its benefit plans.
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GOVERNANCE
If the Merger is consummated, Watson has agreed to cause the election of
four Circa nominees to its Board of Directors. In such event, and subject to
approval by the stockholders of Watson of the amendment to the Articles to
create a staggered Board of Directors, Watson has agreed to cause the directors
comprising the full Board of Directors of Watson to consist of nine members
divided into three classes comprised of five current directors of Watson (Dr.
Alec Keith, Dr. Allen Chao, Albert F. Hummel, Michel J. Feldman and Ronald
Taylor) and four individuals designated by Circa. Three Circa nominees, Dr.
Melvin Sharoky, Thomas P. Rice and Michael Fedida, will be presented for
election at the Watson Meeting. If, prior to the Effective Time, any of such
persons shall decline or be unable to serve as a director, Watson or Circa, as
appropriate, shall designate another person to serve in such person's stead,
which person must be reasonably acceptable to the other party. The Watson
stockholders will not have the ability to nominate any additional directors to
fill the remaining vacancy after the election of the foregoing eight nominees.
Such vacancy will be filled by the majority vote of the Watson directors in
office immediately after the Effective Date. If the Merger is consummated, the
nominee for such vacancy will be selected by Dr. Sharoky and Messrs. Rice and
Fedida subject to approval by the Watson Board. See "Watson's Proposal to Amend
the Articles of Incorporation to Approve a Staggered Board" and "Election of
Watson Directors."
Subject to the approval of the Merger by the stockholders of Circa and
Watson, Watson's Board of Directors is obligated to take all action necessary to
cause Dr. Melvin Sharoky to be elected as the President of Watson at the
Effective Time. At the Effective Time, Dr. Allen Chao shall continue to be Chief
Executive Officer of Watson and Dr. Alec Keith shall continue to be Chairman of
the Board of Watson. Other senior management positions of Watson after the
Merger are expected to be held by persons currently employed at either Watson or
Circa.
Following the consummation of the Merger, (a) the Board of Directors of the
surviving corporation (Circa) shall consist of Dr. Alec Keith, Dr. Allen Chao
and Dr. Melvin Sharoky; and (b) the Chairman of the Board of the surviving
corporation shall be Dr. Allen Chao and the President and Chief Executive
Officer of the surviving corporation shall be Dr. Melvin Sharoky.
INDEMNIFICATION AND INSURANCE
For a period of six years following the Effective Time, Watson has agreed
to indemnify and advance expenses to each person who was on March 29, 1995, or
has been at any time prior to March 29, 1995, an officer, director, employee,
trustee or agent of Circa (or any subsidiary thereof) (the "Indemnified
Parties"), to the fullest extent permitted under applicable law, against all
losses, claims, damages, liabilities, costs or expenses (including attorneys'
fees), judgments, fines, penalties and amounts paid in settlement in connection
with any claim, action, suit, proceeding or investigation arising out of or
pertaining to acts or omissions, or alleged acts or omissions, by them in their
capacities as such, whether commenced, asserted or claimed before or after the
Effective Time and including, without limitation, liabilities arising under the
Securities Act, the Exchange Act and state corporation laws in connection with
the Merger. In addition, Watson has agreed to cause the surviving corporation
(Circa) to keep in effect provisions in its Certificate of Incorporation and
Bylaws providing for exculpation of director and officer liability and its
indemnification of the Indemnified Parties to the fullest extent permitted under
applicable law, which provisions shall not be amended except as required by
applicable law or except to make changes permitted by law that would enlarge the
Indemnified Parties' right of indemnification.
For a period of two years after the Effective Time, Watson has agreed to
maintain in effect policies of directors' and officers' liability insurance that
are substantially similar to the policies presently maintained by Circa;
provided that Watson shall not be required to pay an annual premium for such
insurance in excess of 150% of the last annual premium paid by Circa prior to
March 29, 1995, but in such case shall purchase as much coverage as possible for
such amount.
Watson shall pay all reasonable fees and expenses, including attorneys'
fees, that may be incurred by any of the aforementioned parties in enforcing the
indemnity and other obligations referred to above, if, prior to the payment of
such expenses, Watson has received an undertaking from the Indemnified Party to
promptly return
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any amounts paid by Watson or its subsidiaries in the event that it shall
ultimately have been determined that the Indemnified Party is not entitled to be
indemnified under applicable law. The rights of each such person shall be in
addition to any other rights such person may have under the Certificate of
Incorporation or Bylaws of Circa or under applicable law.
CONDITIONS
The respective obligations of Circa and Watson to consummate the Merger are
subject to the fulfillment of each of the following conditions, among others:
(a) the Merger Agreement and the transactions contemplated thereby shall have
been approved in the manner required by law or by applicable regulations of any
stock exchange or other regulatory body, as the case may be, by the holders of
the issued and outstanding shares of capital stock of Circa and Watson entitled
to vote thereon; (b) the waiting period applicable to the consummation of the
Merger under the HSR Act shall have expired or been terminated; (c) no
injunction or other order or decree by any federal or state court which prevents
the consummation of the Merger or materially changes the terms or conditions of
the Merger Agreement shall have been issued and remain in effect; (d) the
Registration Statement of which this Proxy Statement/Prospectus is a part shall
have become effective under the Securities Act and no stop order suspending the
effectiveness of the Registration Statement shall have been issued or
contemplated, and all necessary approvals under state securities laws relating
to the issuance or trading of the Watson Common Stock to be issued to Circa
stockholders in connection with the Merger shall have been received with respect
thereto; (e) all consents, authorizations, orders and approvals of (or filings
or registrations with) any governmental commission, board or other regulatory
body required in connection with the execution, delivery and performance of the
Merger Agreement shall have been obtained or made (except where the failure to
obtain or make any such consent, authorization, order, approval, filing or
registration would not have a Material Adverse Effect on Watson or Circa
following the Effective Time); (f) Circa and Watson shall have received an
opinion from Watson's independent public accountants concerning the
qualification of the Merger for "pooling of interests" accounting treatment; (g)
the Watson Common Stock to be issued to Circa stockholders in connection with
the Merger shall have been authorized for trading on the NASDAQ/NMS; and (h) the
holders of not more than ten percent (10%) of the outstanding Circa Common Stock
shall have perfected dissenters' rights under applicable law.
The obligations of each of Circa and Watson to effect the Merger are also
subject to the satisfaction or waiver by the other party prior to the Effective
Time of the following conditions, among others: (a) the other party shall have
performed, in all material respects, all obligations required to be performed by
it under the Merger Agreement prior to the Closing Date; (b) the representations
and warranties of the other party and its subsidiaries set forth in the Merger
Agreement shall be true as of the Effective Time unless the failure of such
representation and warranty to be so true and correct would not have a Material
Adverse Effect on such party; (c) each party shall have received from the other
party certified copies of the resolutions of its Board of Directors approving
and adopting the Merger Agreement and the transactions contemplated thereby; (d)
each party shall have received the opinion of its tax counsel that the Merger
will be treated for federal income tax purposes as a reorganization within the
meaning of Section 368(a) of the Code, and that Circa and Watson will each be a
party to that reorganization within the meaning of Section 368(b) of the Code;
(e) Circa and Watson shall have each received a "comfort" letter from the other
party's independent accountants covering matters customarily included in such
comfort letters relating to transactions similar to the Merger; and (f) each
party shall have received the updated fairness opinions from its investment
bankers dated the date of this Proxy Statement/Prospectus, to the effect that
the Merger or the Exchange Ratio, as the case may be, is fair to its
stockholders from a financial point of view.
TERMINATION
If on the thirteenth business day prior to the Meetings (the "Determination
Date"), the Average Closing Price of Watson Common Stock is less than $25.00,
Circa may terminate the Merger Agreement and the Merger unless Watson has
elected to increase the Exchange Ratio such that, as consideration for the
consummation of the Merger, Circa stockholders will receive shares of Watson
Common Stock with a market
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value (based upon the Average Closing Price) equal to $21.50 per share. Watson
must make this election by delivering written notice to Circa of its desire to
increase the Exchange Ratio within two business days after the Determination
Date. For purposes of the Merger Agreement, the "Average Closing Price" of a
share of Watson Common Stock will be the average of the per share daily closing
price of Watson Common Stock as quoted on the NASDAQ/NMS (and as reported by The
Wall Street Journal or, if not reported thereby, another authoritative source)
during the twenty (20) consecutive trading days ending on the Determination
Date.
Upon Watson's exercise of such option, in compliance with applicable law,
(a) Circa and Watson agreed to mail to their respective stockholders notice of
the adjusted Exchange Ratio; and (b) Watson agreed to amend this Proxy/Statement
Prospectus to reflect the adjusted Exchange Ratio and the notice delivered to
Watson's and Circa's stockholders.
The Merger Agreement may also be terminated and the Merger may be abandoned
at any time prior to the Effective Time, before or after the approval by the
stockholders of Circa and Watson, respectively, in a number of circumstances,
which include, among others:
(a) by the mutual consent of Circa and Watson;
(b) by action of the Board of Directors of either Circa or Watson if
(i) the Merger shall not have been consummated by December 1, 1995;
provided that the right to terminate the Merger Agreement will not be
available to any party whose failure to fulfill any obligation under the
Merger Agreement has been the cause of, or resulted in, the failure of the
Merger to occur on or before such date; (ii) the adoption of the Merger
Agreement and the approval of the transactions contemplated thereby by
Circa's stockholders shall not have been obtained at a stockholders'
meeting duly convened for such purpose (or any adjournment thereof);
provided, that Circa shall not have the right to terminate the Merger
Agreement if Circa caused (directly or indirectly) or aided in the failure
to obtain such approval; (iii) the adoption of the Merger Agreement and the
approval of the transactions contemplated thereby by Watson's stockholders
shall not have been obtained at a stockholders' meeting duly convened for
such purpose (or any adjournment thereof); provided, that Watson shall not
have the right to terminate the Merger Agreement if Watson caused (directly
or indirectly) or aided in the failure to obtain such approval; (iv) a
court of competent jurisdiction or a governmental, regulatory or
administrative agency or commission shall have issued an order, decree or
ruling or taken any other action either (A) permanently restraining,
enjoining or otherwise prohibiting the transactions contemplated by the
Merger Agreement; or (B) compelling Watson, Watson Sub or the surviving
corporation (Circa) to dispose of or hold separate all or a material
portion of the respective businesses or assets of Watson and Circa, and
such order, decree, ruling or other action shall have become final and
non-appealable (provided, that the party seeking to terminate the Merger
Agreement shall have used all reasonable efforts to remove such injunction,
order or decree);
(c) by action of the Board of Directors of Circa, if (i) Circa
receives an Alternative Proposal and the Board of Directors of Circa
determines in good faith and pursuant to the exercise of its fiduciary
duties to its stockholders, to accept, recommend or resolves to accept or
recommend to its stockholders such Alternative Proposal; (ii) the Board of
Directors of Circa determines in good faith and pursuant to the exercise of
its fiduciary duties to withdraw its recommendation of the Merger Agreement
and/or the Merger; (iii) the Board of Directors of Watson shall have (A)
recommended an Alternative Proposal to its stockholders; or (B) withdrawn
or modified in a manner materially adverse to Circa its approval or
recommendation of the Merger (other than upon a material breach by Circa of
its representations or warranties contained in the Merger Agreement or
Circa's failure to fulfill any of its material agreements contained in the
Merger Agreement in any material respect); (iv) there has been a breach by
Watson or Watson Sub of any representation or warranty contained in the
Merger Agreement which would have a Material Adverse Effect on Watson; (v)
there has been a material breach of any of the material covenants or
agreements set forth in the Merger Agreement on the part of Watson, which
breach is not curable or, if curable, is not cured within 30 days after
written notice of such breach is given by Circa to Watson; or (vi) any
person, after the date hereof, shall become the beneficial owner (directly
or
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indirectly) of twenty percent (20%) of more of the outstanding shares of
Watson Common Stock or any Person (other than Circa or its Subsidiaries)
shall have commenced a bona fide tender offer or exchange offer to acquire
at least twenty percent (20%) of the then outstanding shares of Watson
Common Stock; or
(d) by action of the Board of Directors of Watson, if (i) Watson
receives an Alternative Proposal and the Board of Directors of Watson
determines in good faith and pursuant to the exercise of its fiduciary
duties to its stockholders, to accept, recommend or resolves to accept or
recommend to its stockholders such Alternative Proposal; (ii) the Board of
Directors of Watson determines in good faith and pursuant to the exercise
of its fiduciary duties, to withdraw its recommendation of the Merger
Agreement and/or the Merger; (iii) the Board of Directors of Circa shall
have (A) recommended an Alternative Proposal to its stockholders; or (B)
withdrawn or modified in a manner materially adverse to Watson its approval
or recommendation of the Merger (other than upon a material breach by
Watson of its representations or warranties contained in the Merger
Agreement or Watson's failure to fulfill any of its material agreements
contained in the Merger Agreement in any material respect); (iv) there has
been a breach by Circa of any representation or warranty contained in the
Merger Agreement which would have a Material Adverse Effect on Circa; (v)
there has been a material breach of any of the material covenants or
agreements set forth in the Merger Agreement on the part of Circa, which
breach is not curable or, if curable, is not cured within 30 days after
written notice of such breach is given by Watson to Circa; or (vi) any
person, after the date hereof, shall become the beneficial owner (directly
or indirectly) of twenty percent (20%) of more of the outstanding shares of
Circa Common Stock or any Person (other than Watson or its Subsidiaries)
shall have commenced a bona fide tender offer or exchange offer to acquire
at least twenty percent (20%) of the then outstanding shares of Circa
Common Stock.
TERMINATION PAYMENTS
If (a) any person makes an Alternative Proposal for Circa and its Board of
Directors determines to accept or to recommend that Circa's stockholders accept,
such Alternative Proposal, or if Circa's Board of Directors withdraws or
materially modifies its recommendation of the Merger Agreement and/or the Merger
through the exercise of its fiduciary duty to its stockholders; and (b) the
Merger Agreement is consequently terminated by either party (other than by Circa
upon the breach by Watson of the Merger Agreement), Circa is required to pay
Watson a fee of $15,000,000 plus Watson's expenses incurred in connection with
the Merger (including attorneys' fees). If Circa fails to make such payment and
Watson receives a final non-appealable judgment against Circa, Circa shall be
required to pay Watson for its costs (including attorneys' fees) in connection
with such suit, and to pay interest on the amount of the fee at a rate of 12%
per annum.
If (a) any person makes an Alternative Proposal for Watson and its Board of
Directors determines to accept or to recommend that Watson's stockholders
accept, such Alternative Proposal, or if Watson's Board of Directors withdraws
or materially modifies its recommendation of the Merger Agreement and/or the
Merger through the exercise of its fiduciary duty to its stockholders; and (b)
the Merger Agreement is consequently terminated by either party (other than (i)
by Watson upon the breach by Circa of the Merger Agreement; or (ii) by Circa if
termination is due to an Alternative Proposal for Watson and such Alternative
Proposal is not conditioned on the termination of the Merger Agreement), Watson
is required to pay Circa a fee of $15,000,000 plus Circa's expenses incurred in
connection with the Merger. If Watson fails to make such payment and Circa
receives a final non-appealable judgment against Watson, Watson shall be
required to pay Circa for its costs (including attorneys' fees) in connection
with such suit, and to pay interest on the amount of the fee at a rate of 12%
per annum.
EXPENSES
Whether or not the Merger is consummated, all costs and expenses incurred
in connection with the Merger Agreement and the transactions contemplated
thereby shall be paid by the party incurring such expenses, except as otherwise
provided in the Merger Agreement. The Merger Agreement provides that the
following expenses will be shared equally by Watson and Circa: (a) the filing
fee in connection with the HSR Act filing, (b) the filing fee in connection with
the filing of this Proxy Statement/Prospectus with the
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Commission, (c) the filing fees in connection with "blue sky" compliance; and
(d) the expenses incurred in connection with printing and mailing this Proxy
Statement/Prospectus.
If Watson or Circa terminate the Merger Agreement due to the other party's
material breach of a representation or warranty or the other party's failure to
materially perform a material agreement contained in the Merger Agreement, the
breaching party will be required to reimburse the non-breaching party for all of
such non-breaching party's fees and expenses incurred in connection with the
Merger and/or the Merger Agreement (including attorneys' fees).
AMENDMENT AND WAIVER
The parties may modify or amend the Merger Agreement by written agreement
at any time prior to the Effective Time, to the extent permitted by applicable
law. The conditions to each party's obligation to consummate the Merger may be
waived by such party in whole or in part to the extent permitted by applicable
law.
CIRCA RIGHTS AGREEMENT
Circa agreed to take all necessary action prior to the Effective Time to
cause the dilution provisions of its Stockholder Protection Rights Agreement
(the "Circa Rights Agreement") dated as of November 1, 1991 to be inapplicable
to the Merger, without any payment to holders of rights issued pursuant to such
Circa Rights Agreement. On April 4, 1995, Circa amended the Circa Rights
Agreement to provide that neither Watson nor Watson Sub shall be deemed to be an
Acquiring Person (as such term is defined in the Circa Rights Agreement) by
virtue of the execution, delivery and performance of the Merger Agreement. Upon
consummation of the Merger Agreement, all of the rights issued under the Circa
Rights Agreement shall be transferred to Watson Sub and thereafter shall be
cancelled.
NASD LISTING
Watson agreed to use all reasonable efforts to cause the shares of Watson
Common Stock to be issued in the Merger to be approved for listing on the
NASDAQ/NMS prior to the Effective Time.
DISSENTERS' RIGHTS
CIRCA STOCKHOLDERS
Holders of shares of Circa Common Stock are entitled to relief as
dissenting stockholders under Section 910 of the NYBCL. A holder of shares of
Circa Common Stock will only be entitled to dissenters' rights if he complies
with Section 623 of the NYBCL. Dissenters' rights will not be available unless
and until the Merger (or a similar business combination) is consummated. The
following is a summary of the method of compliance with Section 623 of the
NYBCL. Such summary does not purport to be complete and is qualified in its
entirety by reference to the text of Section 623 of the NYBCL which is attached
to this Proxy Statement/Prospectus as Appendix E.
A CIRCA STOCKHOLDER WHO WISHES TO PERFECT HIS RIGHTS AS A DISSENTING
STOCKHOLDER IN THE EVENT THE MERGER AGREEMENT IS ADOPTED MUST:
(A) NOT VOTE FOR NOR CONSENT IN WRITING TO THE ADOPTION OF THE MERGER
AGREEMENT; AND
(B) FILE WITH CIRCA, BEFORE THE TAKING OF THE VOTE ON THE MERGER
AGREEMENT AT THE CIRCA MEETING, A WRITTEN OBJECTION TO THE MERGER. SUCH
WRITTEN OBJECTION MUST INCLUDE A NOTICE OF HIS ELECTION TO DISSENT, HIS
NAME AND RESIDENCE ADDRESS, THE NUMBER OF SHARES AS TO WHICH HE DISSENTS,
AND A DEMAND FOR PAYMENT OF THE FAIR VALUE OF HIS SHARES OF CIRCA COMMON
STOCK IF THE MERGER AGREEMENT IS APPROVED.
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Any written demand for payment pursuant to clause (B) of the immediately
preceding paragraph should be mailed or delivered to Circa Pharmaceuticals,
Inc., 33 Ralph Avenue, Copiague, New York, 11726-0030, Attention: Gwen Gerrick,
Secretary. Because the written demand must be delivered to Circa before the
Circa stockholders vote on the Merger Agreement, it is recommended, although not
required, that a stockholder using the mails should use certified or registered
mail, return receipt requested, to confirm that he has made a timely delivery.
Within 10 days after the Circa Meeting, Circa will, by registered mail,
give notice that the Merger Agreement was adopted (if applicable) to each of the
stockholders of Circa who has delivered a written objection of the Merger to
Circa and who did not vote for or consent in writing to the Merger. The notice
will be sent by registered mail, return receipt requested, addressed to the
Circa stockholder at his address as it appears on the records of Circa.
A Circa stockholder shall have the right to dissent as to all shares that
he beneficially owns and may not dissent as to less than all of his shares as to
which he has a right to dissent. A nominee or fiduciary of a beneficial owner of
shares may not dissent on behalf of any beneficial owner as to less than all of
the shares of such owner as to which such nominee or fiduciary has a right to
dissent. Upon consummation of the Merger, dissenting stockholders will cease to
have any of the rights as a stockholder of Circa except the right to be paid the
fair value for their shares of Circa Common Stock and any other rights they may
have under Section 623 of the NYBCL.
A notice of election to dissent may be withdrawn by a Circa stockholder at
any time prior to his acceptance in writing of an offer made by Circa in
accordance with Section 623 of the NYBCL, but in no event later than 60 days
from the date of the consummation of the Merger, except that if Circa (as
described below) fails to make a timely offer, the time for withdrawal of a
notice of election shall be extended until 60 days from the date an offer is
made. Thereafter, withdrawal of a notice of election by a Circa stockholder
requires the written consent of Circa. In order to be effective, any withdrawal
of a notice of election by a Circa stockholder must be accompanied by the return
to Circa of any advance payment made to such stockholder pursuant to Section 623
of the NYBCL. If a notice of election is withdrawn by a Circa stockholder, or if
the Merger is rescinded, or if a court determines that such stockholder is not
entitled to receive payment for his shares of Circa Common Stock, or if such
stockholder otherwise loses his dissenters' rights, the Circa stockholder will
not have the right to receive payment for his shares, but he will be reinstated
to all his rights as a Circa stockholder as of the consummation of the Merger.
No payment shall be made to a dissenting stockholder at a time when Circa
is insolvent or when such payment would make it insolvent. Within 30 days of
notice of insolvency, the dissenting stockholder by written notice to Circa
shall have the option to (i) withdraw the notice or (ii) retain the status as a
claimant against Circa. If the dissenting stockholder does not exercise said
option, Circa shall exercise the option by written notice to the stockholder
within 20 days after the expiration of the 30-day period.
At the time a Circa stockholder files a notice of election to dissent with
Circa or within one month thereafter, the holder of shares of Circa Common Stock
represented by Certificates must submit such Certificates to Circa, or to
Circa's transfer agent, who shall note conspicuously thereon that a notice of
election to dissent has been filed. Once duly noted, Circa or its transfer
agent, as the case may be, shall return the Certificates to the Circa
stockholder. ANY HOLDER OF SHARES OF CIRCA COMMON STOCK REPRESENTED BY
CERTIFICATES WHO FAILS TO SUBMIT HIS CERTIFICATES FOR SUCH NOTATION SHALL, AT
THE OPTION OF CIRCA, EXERCISED BY WRITTEN NOTICE TO THE STOCKHOLDER WITHIN 45
DAYS FROM THE DATE OF FILING OF SUCH NOTICE OF ELECTION TO DISSENT, LOSE HIS
DISSENTERS' RIGHTS UNLESS A COURT, FOR GOOD CAUSE SHOWN, OTHERWISE DIRECTS.
Within 15 days after the expiration of the period within which Circa
stockholders may file their notices of election to dissent, or within 15 days
after the consummation of the Merger, whichever is later (but in no event later
than 90 days from the date of the Circa Meeting), Circa will make a written
offer by registered mail to each Circa stockholder who had filed such notice of
election, to purchase such Circa stockholder's shares of Circa Common Stock at a
price which Circa considers to be such share's fair value. Such offer shall
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be accompanied by a statement setting forth the aggregate number of shares of
Circa Common Stock with respect to which notices of election to dissent have
been received and the aggregate number of holders of such shares. If the Merger
has been consummated, such offer shall be accompanied by (a) advance payment to
each Circa stockholder who has submitted the Certificates representing his
shares of Circa Common Stock to Circa of an amount equal to 80% of the amount of
the offer made by Circa for such shares or (b) as to each Circa stockholder who
had not yet submitted his Certificates to Circa, a statement that advance
payment to him of an amount equal to 80% of the amount of such offer will be
made by Circa promptly upon submission of his Certificates. If the Merger has
not been consummated at the time of the offer, such advance payment or statement
as to advance payment shall be sent to each stockholder entitled thereto
forthwith upon consummation of the Merger.
If within thirty days after making the offer, Circa and any dissenting
stockholder agree upon the price to be paid for said dissenting shares, payment
therefor shall be made within sixty days of the offer or the consummation of the
Merger, whichever is later, upon surrender of the dissenting stockholder's
certificates.
If Circa fails to make such offer within the 15-day period specified above,
or if Circa makes the offer within such period but any dissenting stockholder or
stockholders fail to agree with Circa within the next 30 days upon the price to
be paid for their shares:
(a) Circa shall, within the 20-day period after the expiration of the
applicable two periods specified above, institute a special proceeding in
the New York Supreme Court in the judicial district in which Circa's office
is located to determine the rights of Circa's dissenting stockholders and
to fix the fair value of their shares.
(b) If Circa fails to institute such proceeding within such 20-day
period, any dissenting stockholder of Circa may institute such proceeding
for the same purposes not later than 30 days after the expiration of the
20-day period referred to in subparagraph (a) above. If the proceeding is
not instituted by any dissenting stockholder within such 30-day period, all
dissenters' rights will be lost unless the supreme court, for good cause
shown, otherwise decides.
(c) All dissenting stockholders, except those who have agreed with
Circa upon the price to be paid for their shares, will be made parties to
the proceeding.
(d) The court will, without a jury and without referral to an
appraiser or referee, determine whether each dissenting stockholder, as to
whom Circa requests the court to make such determination, is entitled to
receive payment for his shares of Circa Common Stock. If Circa does not
request such determination or if the court finds that a dissenting
stockholder is entitled to payment for his shares of Circa Common Stock,
the court will fix the fair value of such shares, which, for such purposes,
shall be the fair value as of the close of business on the day prior to the
Circa Meeting. In fixing the value of the shares, the court shall consider
the nature of the transaction giving rise to the Circa stockholder's right
to receive payment for his shares and its effects on Circa and its
stockholders, the concepts and methods then customary in the relevant
securities and financial markets for determining fair value of shares of a
corporation engaging in a similar transaction under comparable
circumstances, and all other relevant factors. The court may fix the value
of the shares as higher or lower than the value of the consideration
offered in the Merger. The final order of the court shall be entered
against Circa in favor of each dissenting stockholder who is a party to the
proceeding and who is entitled to the value of his shares. The final order
shall include interest at a rate determined by the court and payable from
the date the Merger was consummated until the payment date, unless the
court finds that the refusal of any stockholder to accept the offer of
payment was arbitrary, vexatious, or otherwise not in good faith.
(e) Each party to the proceeding shall bear its own costs and
expenses, including the fees and expenses of its counsel and any experts
employed. The court may, however, in its discretion, apportion and assess
all or any part of the costs, expenses, and fees incurred by Circa against
any or all of the dissenting stockholders who are parties to the
proceeding, including those who withdraw their notices of election to
dissent, if the court finds that the dissenting stockholders' refusal to
accept Circa's offer is arbitrary, vexatious, or otherwise not in good
faith. Likewise, the court may apportion and assess all or
54
<PAGE> 64
any of the costs, expenses, and fees incurred by any or all of the
dissenting stockholders who are parties to the proceeding against Circa, if
the court finds (i) that the fair value of the shares of Circa Common
Stock, as determined, materially exceeds the amount which Circa offered to
pay; (ii) that no offer or required advance payment was made by Circa;
(iii) that the refusal of any stockholder to accept the offer was in good
faith; or (iv) that the action of Circa in complying with its obligations
under Section 623 of the NYBCL was arbitrary, vexatious, or otherwise not
in good faith.
(f) Within 60 days after final determination of the proceeding, Circa
will pay to each dissenting stockholder the amount found to be due him,
upon surrender of the Certificates for any such shares represented by
Certificates.
The perfection by a sufficient number of Circa stockholders of their rights
as dissenting stockholders could impair the ability of the Merger to qualify as
a pooling of interests for accounting and financial reporting purposes and to
qualify as a tax-free reorganization. If the number of shares for which
dissenters' rights are perfected (expressed in terms of equivalent shares of
Watson Common Stock based upon the Exchange Ratio), when added to (i) the number
of shares of Circa Common Stock purchased by Circa during the two year period
prior to the Effective Date of the Merger and not reissued by Circa prior to the
Effective Time (expressed in terms of equivalent shares of Watson Common Stock
based upon the Exchange Ratio), (ii) the number of shares of Watson Common Stock
purchased by Watson during the two year period prior to the Effective Date of
the Merger, and not reissued by Watson prior to the Effective Time, and (iii)
the fractional shares of Watson Common Stock issued in lieu of which cash is
paid in the Merger, exceeds 10% of the number of shares of Watson Common Stock
issued in the Merger, the qualification of the Merger for pooling of interests
accounting treatment may be adversely affected. Additionally, both Circa and
Watson can terminate the Merger if holders of over 10% of the outstanding shares
of Circa Common Stock exercise their dissenters' rights. The qualification of
the Merger for pooling of interests accounting and as a tax-free reorganization
are conditions of the respective obligations of Circa and Watson to effect the
Merger. See "The Merger Agreement -- Conditions."
BECAUSE A PROXY CARD WHICH DOES NOT CONTAIN VOTING INSTRUCTIONS WILL,
UNLESS REVOKED, BE VOTED FOR ADOPTION OF THE MERGER AGREEMENT, A CIRCA
STOCKHOLDER WHO WISHES TO EXERCISE HIS DISSENTERS' RIGHTS MUST EITHER NOT SIGN
AND RETURN HIS PROXY CARD, OR, IF HE SIGNS AND RETURNS HIS PROXY CARD, VOTE
AGAINST OR ABSTAIN FROM VOTING ON THE ADOPTION OF THE MERGER AGREEMENT.
WATSON STOCKHOLDERS
Holders of shares of Watson Common Stock are not entitled to dissenters'
rights by virtue of the Merger.
55
<PAGE> 65
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The following unaudited pro forma condensed combined financial information
are derived from and should be read in conjunction with the audited consolidated
financial statements, including the notes thereto, of Watson that are contained
in Watson's Annual Report on Form 10-K for the fiscal year ended December 31,
1994 and Quarterly Report on Form 10-Q for the quarterly period ended March 31,
1995, and of Circa that are contained in Circa's Annual Report on Form 10-K for
the fiscal year ended December 31, 1994 and Quarterly Report on Form 10-Q for
the quarterly period ended March 31, 1995, all of which are incorporated by
reference in this Proxy Statement/Prospectus. The pro forma information is
presented for illustrative purposes only and is not necessarily indicative of
the operating results or financial position that would have occurred if the
Merger had been consummated in accordance with the assumptions set forth below,
nor is it necessarily indicative of future operating results or financial
position.
The unaudited pro forma condensed combined balance sheet of Watson-Circa at
March 31, 1995, set forth below gives effect to the Merger under the pooling of
interests accounting method as if the Merger had occurred on March 31, 1995.
UNAUDITED PRO FORMA CONDENSED COMBINED
BALANCE SHEET
MARCH 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO
FORMA
WATSON CIRCA COMBINED
-------- -------- --------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................ $ 60,174 $ 23,070 $ 83,244
Marketable securities.................................... 5,066 32,738 37,804
Accounts receivable, net................................. 13,577 2,080 15,657
Inventories.............................................. 16,916 1,409 18,325
Other current assets..................................... 3,132 2,123 32,636
-------- -------- --------
Total current assets............................. 98,865 61,420 187,666
Property, plant and equipment, net......................... 43,220 13,253 56,473
Investments in joint ventures.............................. 31,531 31,531
Other assets............................................... 1,888 1,879 3,767
-------- -------- --------
Total assets..................................... $143,973 $108,083 $279,437
======== ======== ========
CURRENT LIABILITIES:
Accounts payable and accrued expenses.................... $ 13,983 $ 5,731 $ 19,714
Current installments of long-term debt................... 701 701
Income taxes payable..................................... 1,828 1,828
-------- -------- --------
Total current liabilities........................ 16,512 5,731 22,243
Deferred partnership liability............................. 8,833 8,833
Long-term debt............................................. 4,902 4,902
Other liabilities.......................................... 2,358 1,375 1,375
-------- -------- --------
Total liabilities................................ 23,772 15,939 37,353
-------- -------- --------
STOCKHOLDERS' EQUITY:
Common stock............................................. 57 221 278
Additional paid-in-capital............................... 75,565 59,686 135,251
Retained earnings........................................ 44,565 32,812 107,116
Unrealized holding gain.................................. 14 1,842 1,856
Unearned compensation -- stock awards.................... (2,417) (2,417)
-------- -------- --------
Total stockholders' equity....................... 120,201 92,144 242,084
-------- -------- --------
Total liabilities and stockholders' equity....... $143,973 $108,083 $279,437
======== ======== ========
</TABLE>
See accompanying notes to the unaudited pro forma condensed combined financial
information.
56
<PAGE> 66
UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
WATSON CIRCA COMBINED
------- ------ ---------
<S> <C> <C> <C>
Revenues...................................................... $26,206 $7,917 $34,123
Cost of revenues.............................................. 12,493 2,233 14,726
------- ------ ---------
Gross profit................................................ 13,713 5,684 19,397
Costs and expenses:
Research and development.................................... 2,874 1,896 4,770
Selling, general and administrative......................... 1,681 2,517 4,198
------- ------ ---------
Total operating expenses...................................... 4,555 4,413 8,968
------- ------ ---------
Operating income............................................ 9,158 1,271 10,429
------- ------ ---------
Equity in earnings of joint ventures.......................... 5,211 5,211
Investment and other income................................... 678 684 1,362
Interest and other expense.................................... (269) (5) (274)
------- ------ ---------
409 5,890 6,299
------- ------ ---------
Income before provision for income taxes...................... 9,567 7,161 16,728
Provision for income taxes.................................... 3,677 95 4,338
------- ------ ---------
Net income.................................................... $ 5,890 $7,066 $12,390
======= ====== ========
Per share data:
Earnings per common and common equivalent share............... $ .33 $ .32 $ .34
======= ====== ========
Weighted average number of common and common equivalent shares
outstanding................................................. 18,035 21,744 36,735
======= ====== ========
</TABLE>
See accompanying notes to the unaudited pro forma condensed combined financial
information.
57
<PAGE> 67
UNAUDITED PRO FORMA CONDENSED COMBINED
BALANCE SHEET
DECEMBER 31, 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO
FORMA
WATSON CIRCA COMBINED
-------- -------- --------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................ $ 51,498 $ 19,667 $ 71,165
Marketable securities.................................... 4,998 30,534 35,531
Accounts receivable, net................................. 12,498 3,630 16,128
Inventories.............................................. 14,663 1,697 16,361
Other current assets..................................... 3,411 2,128 33,727
-------- -------- --------
Total current assets............................. 87,068 57,656 172,912
Property, plant and equipment, net......................... 41,627 12,488 54,115
Investments in joint ventures.............................. 31,824 31,824
Other assets............................................... 1,576 1,889 3,465
-------- -------- --------
Total assets..................................... $130,271 $103,857 $262,316
======== ======== ========
CURRENT LIABILITIES:
Accounts payable and accrued expenses.................... $ 11,314 $ 6,219 $ 17,533
Current installments of long-term debt................... 718 718
-------- -------- --------
Total current liabilities........................ 12,032 6,219 18,251
Deferred partnership liability............................. 14,033 14,033
Long-term debt............................................. 5,058 5,058
Other liabilities.......................................... 2,212 1,604 1,604
-------- -------- --------
Total liabilities................................ 19,302 21,856 38,946
-------- -------- --------
STOCKHOLDERS' EQUITY:
Common stock............................................. 56 221 277
Additional paid-in-capital............................... 72,299 59,657 131,956
Retained earnings........................................ 38,675 25,746 94,821
Unrealized holding loss.................................. (61) (809) (870)
Unearned compensation -- stock awards.................... (2,814) (2,814)
-------- -------- --------
Total stockholders' equity....................... 110,969 82,001 223,370
-------- -------- --------
Total liabilities and stockholders' equity....... $130,271 $103,857 $262,316
======== ======== ========
</TABLE>
See accompanying notes to the unaudited pro forma condensed combined financial
information.
58
<PAGE> 68
The unaudited pro forma condensed combined statements of operations set
forth below combine the results of Watson and Circa for each of the three years
ended December 31, 1994, 1993 and 1992. These statements give effect to the
Merger under the pooling of interests accounting method as if the Merger had
occurred on January 1 of each period.
UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1992
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
WATSON CIRCA COMBINED
------- -------- ---------
<S> <C> <C> <C>
Revenues.................................................... $34,684 $ 89 $ 34,773
Cost of revenues............................................ 19,361 3,930 23,291
------- -------- ---------
Gross profit (loss)....................................... 15,323 (3,841) 11,482
Costs and expenses:
Research and development.................................. 5,355 2,861 8,216
Selling, general and administrative....................... 3,559 11,385 14,944
------- -------- ---------
Total operating expenses.................................... 8,914 14,246 23,160
------- -------- ---------
Operating income (loss)................................... 6,409 (18,087) (11,678)
------- -------- ---------
Equity in earnings of joint ventures........................ 20,711 20,711
Investment and other income................................. 11 4,069 4,080
Partnership loss............................................ (15,598) (15,598)
Interest and other expense.................................. (429) (780) (1,209)
------- -------- ---------
(418) 8,402 7,984
------- -------- ---------
Income (loss) before provision for income taxes............. 5,991 (9,685) (3,694)
Provision for income taxes.................................. 2,396 2,396
------- -------- ---------
Net income (loss)........................................... $ 3,595 $ (9,685) $ (6,090)
======= ======== ========
Per share data:
Earnings (loss) per common and common equivalent share...... $ 0.26 $ (0.44) $ (0.18)
======= ======== ========
Weighted average number of common and common equivalent
shares outstanding........................................ 13,887 22,152 32,938
======= ======== ========
</TABLE>
See accompanying notes to the unaudited pro forma condensed combined financial
information.
59
<PAGE> 69
UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1993
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
WATSON CIRCA COMBINED
------- -------- ---------
<S> <C> <C> <C>
Revenues.................................................... $67,547 $ 3,291 $70,838
Cost of revenues............................................ 32,677 6,530 39,207
------- -------- ---------
Gross profit (loss)....................................... 34,870 (3,239) 31,631
Costs and expenses:
Research and development.................................. 10,102 4,983 15,085
Selling, general and administrative....................... 5,087 10,595 15,682
------- -------- ---------
Total operating expenses.................................... 15,189 15,578 30,767
------- -------- ---------
Operating income (loss)................................... 19,681 (18,817) 864
------- -------- ---------
Equity in earnings of joint ventures........................ 24,688 24,688
Provision for legal settlements............................. (6,297) (6,297)
Investment and other income................................. 777 18,535 19,312
Partnership loss............................................ (7,644) (7,644)
Interest and other expense.................................. (363) (2,070) (2,433)
------- -------- ---------
414 27,212 27,626
------- -------- ---------
Income before provision for income taxes.................... 20,095 8,395 28,490
Provision (benefit) for income taxes........................ 7,873 (21,927)
------- -------- ---------
Net income.................................................. $12,222 $ 8,395 $50,417
======= ======== ========
Per share data:
Earnings per common and common equivalent share............. $ 0.74 $ 0.38 $ 1.42
======= ======== ========
Weighted average number of common and common equivalent
shares outstanding........................................ 16,544 22,047 35,504
======= ======== ========
</TABLE>
See accompanying notes to the unaudited pro forma condensed combined financial
information.
60
<PAGE> 70
UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1994
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
WATSON CIRCA COMBINED
------- -------- ---------
<S> <C> <C> <C>
Revenues.................................................... $87,057 $ 7,801 $94,858
Cost of revenues............................................ 41,388 7,584 48,972
------- -------- ---------
Gross profit.............................................. 45,669 217 45,886
Costs and expenses:
Research and development.................................. 11,090 7,890 18,980
Selling, general and administrative....................... 5,689 7,653 13,342
------- -------- ---------
Total operating expenses.................................... 16,779 15,543 32,322
------- -------- ---------
Operating income (loss)................................... 28,890 (15,326) 13,564
------- -------- ---------
Equity in earnings of joint ventures........................ 24,968 24,968
Gain from legal settlements................................. 2,299 2,299
Investment and other income................................. 1,629 6,143 7,772
Interest and other expense.................................. (515) (715) (1,230)
------- -------- ---------
1,114 32,695 33,809
------- -------- ---------
Income before provision for income taxes.................... 30,004 17,369 47,373
Provision for income taxes.................................. 11,318 110 10,828
------- -------- ---------
Net income.................................................. $18,686 $ 17,259 $36,545
======= ======== ========
Per share data:
Earnings per common and common equivalent share............. $ 1.05 $ 0.79 $ 1.00
======= ======== ========
Weighted average number of common and common equivalent
shares outstanding........................................ 17,831 21,726 36,515
======= ======== ========
</TABLE>
See accompanying notes to the unaudited pro forma condensed combined financial
information.
61
<PAGE> 71
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
(1) Historical Presentation. The fiscal years of Watson and Circa end on
December 31 and, as such, the historical audited consolidated statements of
operations have been reported on such fiscal year bases. No adjustments have
been made to the Unaudited Pro Forma Condensed Combined Financial Statements for
differences in the application of generally accepted accounting principles
between Watson and Circa, as the impact of such adjustments would not be
material. The unaudited pro forma condensed combined financial information gives
effect to the Merger under the pooling of interests accounting method as if the
Merger had occurred at the beginning of each period presented for statements of
operations and prior to the date of each balance sheet presented.
Certain amounts in the consolidated historical financial statements of
Circa and Watson have been reclassified to conform with the Unaudited Pro Forma
Condensed Combined Financial Statement presentation.
No adjustments are necessary to eliminate intercompany transactions and
balances in the Unaudited Pro Forma Condensed Combining Financial Statements as
there were no intercompany transactions or balances.
(2) Exchange Ratio. The Merger Agreement provides that, subject to certain
adjustments, Watson will exchange 0.86 of a share of Watson Common Stock for
each share of Circa Common Stock outstanding immediately prior to the Merger.
Such Exchange Ratio was used in compiling the accompanying Unaudited Pro Forma
Condensed Combined Financial Statements.
Pro forma combined earnings (loss) per share amounts, as presented in the
accompanying Unaudited Pro Forma Condensed Combined Statements of Operations,
are based upon the combined weighted average number of shares outstanding of
Watson Common Stock and Circa Common Stock for each period presented. Historical
weighted average shares of Circa Common Stock used in the calculation of
combined weighted average shares outstanding for each period have been adjusted
to reflect the Exchange Ratio.
(3) Unaudited Pro Forma Condensed Combined Adjustments. The unaudited pro
forma information presented in the accompanying pro forma condensed combined
balance sheets and statements of operations reflect the reduction in the
valuation allowance relating to Circa's net deferred tax asset balance at each
balance sheet date beginning with December 31, 1993. In determining that the
deferred tax asset was fully realizable by the combined company, management of
Watson, based in part on information furnished by Circa, considered the prior
operating results of each company and the future plans and expectations of the
combined company.
(4) Nonrecurring Costs and Expenses. The accompanying Unaudited Pro Forma
Condensed Combined Financial Statements exclude any nonrecurring costs and
expenses associated with consummating the Merger and integrating the operations
of the businesses of Watson and Circa. The costs of merging the operations of
Watson and Circa are expected to result in a one-time charge to Watson's
earnings. The actual amount and the exact timing of this charge cannot presently
be determined unless and until the Merger is consummated, although the aggregate
costs currently are estimated to be in the range of $12-$16 million. This charge
will include, among other things, costs associated with investment banking fees,
legal, accounting, printer and other costs with respect to the Merger.
62
<PAGE> 72
COMPARATIVE RIGHTS OF STOCKHOLDERS
Watson is a Nevada corporation and the rights of its stockholders are
governed by the Nevada General Corporation Law (the "NRS") and the Articles of
Incorporation and Bylaws of Watson. Circa is a New York corporation and the
rights of its stockholders are governed by the NYBCL and the Certificate of
Incorporation and Bylaws of Circa. If the Merger is consummated, former Circa
stockholders will become stockholders of Watson. The rights of such former Circa
stockholders as Watson stockholders will be governed by the NRS and the Articles
of Incorporation and Bylaws of Watson. The following is a summary of the
material differences between (i) the NRS and the Articles of Incorporation, as
amended, and Bylaws of Watson and (ii) the NYBCL and the Certificate of
Incorporation, as amended and restated, and Bylaws of Circa, which may
significantly affect the rights of Circa stockholders.
LIABILITY OF DIRECTORS
The NRS allows a corporation to provide in its articles of incorporation
that a director or officer will not be personally liable for monetary damages to
the corporation or its stockholders for breach of fiduciary duty as a director
or officer, except that such provision must not eliminate or limit the liability
of a director or officer for (i) acts or omissions which involve intentional
misconduct, fraud or a knowing violation of law; or (ii) the payment of
distributions in violation of Section 78.300 of the NRS. Watson's Articles of
Incorporation contain such a provision.
The NYBCL allows a corporation to provide in its certificate of
incorporation that a director will not be personally liable to the corporation
or its stockholders for damages for any breach of duty in such capacity, except
that such provision may not eliminate or limit (i) the liability of any director
if a judgment or other adjudication adverse to him establishes that his acts or
omissions were in bad faith or involved fraud, intentional misconduct or a
knowing violation of law or that he personally gained in fact a financial profit
or advantage to which he was not legally entitled or that his acts violated
Section 719 of the NYBCL; or (ii) the liability of any director for any act or
omission prior to the adoption of a limitation provision in the Circa
Certificate of Incorporation. Circa's Certificate of Incorporation contains such
a provision.
INDEMNIFICATION
Under the NRS and the NYBCL, a corporation may generally indemnify its
officers, directors, employees and agents against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement of any proceedings (other
than derivative actions), if they acted in good faith and in a manner they
reasonably believed to be in or not opposed to the best interests of the
corporation and, with respect to any criminal action or proceeding, had no
reasonable cause to believe their conduct was unlawful. A similar standard is
applicable in derivative actions, except that indemnification may be made only
for (1) expenses (including attorneys' fees) and certain amounts paid in
settlement, and (2) in the event the person seeking indemnification has been
adjudicated liable, amounts deemed proper, fair and reasonable by the
appropriate court upon application thereto. The NRS and the NYBCL both provide
that to the extent that such persons have been successful in defense of any
proceeding, they must be indemnified by the corporation against expenses. If a
corporation does not so indemnify such persons, they may seek, and a court may
order, indemnification under certain circumstances even if the board of
directors or stockholders of the corporation have determined that the persons
are not entitled to indemnification.
In addition, under both acts, expenses incurred by an officer or director
in connection with a proceeding may be paid by the corporation in advance of the
final disposition, upon receipt of an undertaking by such director or officer to
repay such amount if he is ultimately found not to be entitled to
indemnification by the corporation.
The Bylaws of Watson and Circa's Certificate of Incorporation provide that
directors and officers and former directors and officers will be indemnified as
set forth above.
63
<PAGE> 73
DERIVATIVE ACTIONS
Under the Nevada Rules of Civil Procedure (the "Nevada Rules") and the
NYBCL, a person may not bring a derivative action unless the person was a
stockholder of the corporation at the time of the challenged transaction or
unless the person acquired the shares by operation of law from a person who was
a stockholder at such time. The Nevada Rules and the NYBCL also provide that a
complaint in a derivative proceeding must be verified and must allege with
particularity the efforts, if any, made by the plaintiff to obtain the desired
action, and the reasons for his failure to obtain the action he desires or for
not making the effort. The Nevada Rules also provide that a derivative action
may not be maintained if it appears that the plaintiff does not fairly and
adequately represent the interests of stockholders. Both the NRS and the NYBCL
also provide that an action shall not be dismissed or compromised without the
approval of the court having jurisdiction of the action.
DISTRIBUTIONS AND REDEMPTIONS
A Nevada corporation may make distributions to its stockholders as long as,
after giving effect to such distribution (1) the corporation would be able to
pay its debts as they become due in the usual course of business and (2) the
corporation's total assets would not be less than the sum of its total
liabilities plus (unless the articles of incorporation permit otherwise, which
Watson's Articles of Incorporation do not) the amount that would be needed if
the corporation were to be dissolved at the time of the distribution to satisfy
the preferential rights upon dissolution of stockholders whose preferential
rights are superior to those receiving the distribution. A New York corporation
may declare, pay or make dividends and other distributions to its stockholders
except when currently the corporation is insolvent or would thereby be made
insolvent, or when the declaration, payment or distribution would be contrary to
any restrictions in its certificate of incorporation. In addition, the NYBCL
provides that dividends may generally be declared and paid and other
distributions made out of surplus only, so that the net assets of the
corporation remaining after such payment shall at least equal the amount of its
stated capital. Under both the NRS and NYBCL, a corporation's redemption of its
own capital stock is subject to the same restrictions as apply to a
distribution.
STOCKHOLDER INSPECTION OF BOOKS AND RECORDS
Under the NRS, a stockholder of record for at least six months immediately
preceding his demand, or any person holding at least 5% of all outstanding
shares, or authorized in writing by at least 5% of all outstanding shares, is
entitled to inspect a list of the names of the corporation's stockholders during
usual business hours, if the stockholder gives at least five business days'
prior written notice to the corporation. The NRS also provides that a
corporation may deny any demand for inspection if the stockholder refuses to
furnish the corporation with an affidavit that such inspection is not desired
for a purpose which is in the interest of a business or object other than the
business of the corporation and that such stockholder has not previously sold or
offered for sale any list of stockholders of the corporation or any other
corporation.
The NYBCL permits any stockholder of record for at least six months
immediately preceding the demand, or any person holding, or authorized in
writing by holders of at least 5% of the outstanding shares of any class or
series, to make copies of and examine during usual business hours the minutes of
stockholder proceedings and the record of stockholders where they are kept, for
any proper purpose and upon at least five days' prior written demand.
Furthermore, any court may, upon proof of a proper purpose, compel the
production for examination by a stockholder of the account books and records,
minutes and record of stockholders. The court may prescribe limitations or
conditions upon the inspection, or award any other or further relief the court
deems just and proper.
DISSENTERS' RIGHTS
A stockholder of a Nevada corporation, with certain exceptions, has the
right to dissent from, and to obtain payment of the fair value of his shares in
the event of (1) consummation of a plan of merger to which the corporation is a
party, (2) consummation of a plan of exchange to which the corporation is a
party as the corporation whose shares will be acquired, if the stockholder is
entitled to vote on the plan, and, (3) any
64
<PAGE> 74
corporate action taken pursuant to a vote of the stockholders to the extent that
the articles of incorporation, bylaws or a resolution of the board of directors
provides that voting or non-voting stockholders are entitled to dissent and
obtain payment for their shares. The NRS provides that unless a corporation's
articles of incorporation provide otherwise, which Watson's Articles of
Incorporation do not, a stockholder does not have dissenters' rights with
respect to a plan of merger or share exchange if the shares held by the
stockholder are either listed on a national securities exchange, designated as a
national market system security on an interdealer quotation system by the
National Association of Securities Dealers, Inc., or held of record by 2,000 or
more stockholders. A stockholder of record of a Nevada corporation may assert
dissenter's rights as to less than all of the shares registered in his name only
if he dissents with respect to all shares beneficially owned by any one person
and notifies the corporation in writing of the name and address of each person
on whose behalf he asserts dissenter's rights. In such event, the stockholder's
rights shall be determined as if the shares as to which he dissents and his
other shares were registered in the names of different stockholders.
Under New York law, holders of shares have the right, in certain
circumstances, to dissent from certain mergers, consolidations, sales and other
dispositions of assets requiring shareholder approval and share exchanges by
demanding payment in cash for their shares equal to the fair value (excluding
any appreciation or depreciation as a consequence or in expectation of the
transaction) of such shares as described under "Dissenters' Rights."
QUORUM FOR STOCKHOLDER MEETINGS
Under both the NRS and the NYBCL, unless otherwise provided in a
corporation's articles or certificate of incorporation or bylaws, a majority of
shares entitled to vote on a matter constitutes a quorum at a meeting of
stockholders. The NRS and the NYBCL provide that the articles of incorporation
or bylaws may provide for a greater or lesser quorum requirement, except that in
New York, the quorum may not be less than one-third of the shares entitled to
vote. The Watson and Circa Bylaws each provide that the presence in person or by
proxy of a majority of the shares entitled to vote shall constitute a quorum.
STOCKHOLDER VOTING REQUIREMENTS; ACTION BY CONSENT
Under both the NRS and NYBCL, directors are generally elected by a
plurality of the votes cast by the stockholders entitled to vote at a
stockholders' meeting at which a quorum is present. With respect to matters
other than the election of directors, unless a greater number of affirmative
votes is required by the statute or the corporation's articles or certificate of
incorporation, if a quorum exists, action on any matter is generally approved by
the stockholders if the votes cast by the holders of the shares represented at
the meeting and entitled to vote on the matter favoring the action exceed the
votes cast opposing the action. In the case of a merger of a Nevada corporation,
the affirmative vote of the holders of a majority of the issued and outstanding
shares entitled to vote is required under the NRS. However, a merger or
consolidation of a New York corporation must be approved at a meeting of
stockholders by the affirmative vote of two-thirds of the issued and outstanding
shares entitled to vote thereon.
Neither Watson's Articles of Incorporation or Bylaws nor Circa's
Certificate of Incorporation or Bylaws include a provision requiring a greater
vote on any matter than required by the NRS or the NYBCL.
In accordance with the NRS, Watson's Bylaws permit stockholder action to be
taken without a meeting by written consents signed by the holders of at least a
majority of the voting power, except that if a different proportion of voting
power is required for such an action at a meeting, then that proportion of
written consent is required.
Under New York law, any stockholder action required or permitted to be
taken by stockholder vote may be taken without a meeting with the unanimous
written consent of stockholders. The certificate of incorporation may provide,
to the extent not inconsistent with New York law, that such stockholder action
may be taken upon the written consent of less than all outstanding shares.
Circa's Certificate of Incorporation does not provide for written consent by
less than all the outstanding shares.
65
<PAGE> 75
BOARD VACANCIES
The NRS provides that a vacancy on the board of directors may generally be
filled by the affirmative vote of a majority of the remaining directors, though
less than a quorum of the board of directors, unless the articles of
incorporation provide otherwise. Watson's Articles of Incorporation do not alter
this provision.
Under the NYBCL, unless otherwise provided in the certificate of
incorporation or in a bylaw adopted by the stockholders, any vacancy occurring
on the board may be filled only by vote of the stockholders. Circa's Certificate
of Incorporation and Bylaws do not alter the NYBCL provisions regarding board
vacancies.
REMOVAL OF DIRECTORS
The NRS provides that any director may be removed from office by the vote
of stockholders holding not less than two-thirds of the issued and outstanding
stock entitled to vote. Stockholders may remove one or more directors with or
without cause unless the articles or certificate of incorporation provide that
directors may be removed only for cause. Watson's Articles of Incorporation
includes a provision allowing the removal of directors only for cause. Under the
NYBCL, a director may be removed without cause by stockholder vote only if the
certificate of incorporation or the bylaws so provide. The certificate of
incorporation or the bylaws may provide for such removal by action of the board,
except in the case of any director elected by cumulative voting, or by the
holders of the shares of any class or series, or holders of bonds, voting as a
class, when so entitled by the provisions of the certificate of incorporation.
Circa's Certificate of Incorporation and Bylaws do not provide for removal
without cause. The NYBCL also provides that directors may be removed for cause
by the stockholders and, if the corporation's certificate of incorporation and
bylaws so provide, by action of the board. The Circa Bylaws grant such right to
directors.
AMENDMENTS TO CHARTER
An amendment to a Nevada corporation's articles of incorporation or a New
York corporation's certificate of incorporation must be approved by the
corporation's stockholders, except that certain immaterial amendments specified
in the NYBCL may be made by the board of directors. Under the NRS, unless a
Nevada corporation's articles of incorporation or its board of directors require
a greater vote, an amendment to a Nevada corporation's articles of incorporation
must generally be approved by a majority of the votes entitled to be cast on the
amendment. Watson's Articles of Incorporation do not include any provision
requiring greater than a majority of votes to amend its articles of
incorporation. The NYBCL similarly provides that a vote to amend the
corporation's certificate of incorporation requires the approval of majority of
the issued and outstanding shares entitled to vote at a meeting.
CLASSIFIED BOARD OF DIRECTORS
The NRS provides that a corporation's board of directors may be divided
into various classes with staggered terms of office. The Watson Bylaws provides
that the Watson Board may be divided into three classes of directors, as nearly
equal in number as reasonably possible. One class of directors may be elected
each year for a three-year term. At the Watson Meeting, the stockholders will
vote upon proposals to create a staggered Board of Directors and to elect three
classes of directors. See "Watson's Proposal to Amend the Articles of
Incorporation to Approve a Staggered Board" and "Election of Watson Directors."
Classification of directors will have the effect of making it more
difficult for stockholders to change the composition of the Watson Board. At
least two annual meetings of stockholders, instead of one, will generally be
required to effect a change in the majority of the Watson Board. Such a delay
may help ensure that Watson's directors, if confronted by a holder attempting to
force a proxy contest, a tender offer or exchange offer or other extraordinary
corporate transaction, would have sufficient time to review the proposal as well
as any available alternatives to the proposal and to act in what they believe to
be the best interests of the stockholders.
The classification provisions could also have the effect of discouraging a
third party from initiating a proxy contest, making a tender offer or otherwise
attempting to obtain control of Watson, even though such a
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<PAGE> 76
transaction could be beneficial to Watson and its stockholders. The
classification of the Watson Board might also increase the likelihood that
incumbent directors will retain their positions.
Under New York law, the board of directors may be divided into either two,
three or four classes. The Circa Bylaws and Certificate of Incorporation provide
that the Circa board may be divided into two classes (Class I and Class II),
each class being as nearly equal in number as possible.
BUSINESS COMBINATIONS
Under New York law, no person may make a tender offer unless a registration
statement containing the information required by Article 16 of the Security
Takeover Disclosure Act is filed with the New York attorney general at his New
York City office and delivered to the target company at its principal executive
offices. In addition, such Act regulates takeover bids not subject to the
requirements of Section 14(d) of the Exchange Act and sets forth, among other
things, the period of time within which shares may be deposited and withdrawn
pursuant to a takeover bid, the requirement that shares be purchased on a pro
rata basis and the requirement that when an offeror increases the consideration
offered in a takeover bid, the offeror must pay such increased consideration
with respect to all shares accepted.
New York law provides that, in addition to any requirements contained in
the certificate of incorporation or bylaws of a resident domestic corporation,
no such corporation may engage in any business combination with any "interested
shareholder" of such corporation (defined as a holder of twenty percent (20%) or
more of the corporation's voting stock) for a period of five years unless such
business combination is approved by the board of directors prior to the date on
which the interested shareholder becomes a twenty percent (20%) holder. In
addition to the restrictions stated in the preceding sentence, no such
corporation may engage in a business combination with an interested shareholder
other than one in which: (i) such business combination is approved by the
affirmative vote of the holders of a majority of the voting stock not
beneficially owned by that interested shareholder at a meeting called for such
purpose; or (ii) the aggregate amount of cash and the market value, as of the
consummation date, of consideration to be received per share by holders of
outstanding shares of common stock in the business combination is at least equal
to a certain "fair price" as determined by various criteria set forth in the
statute, subject to certain exceptions.
Nevada law prevents an "interested stockholder" and a Nevada corporation
from entering into a "combination", unless certain conditions are met. A
combination means any merger or consolidation with an "interested stockholder,"
or any sale, lease, exchange, mortgage, pledge, transfer or other disposition,
in one transaction or a series of transactions with an "interested stockholder"
having: (i) an aggregate market value equal to 5% or more of the aggregate
market value of the assets of a corporation; (ii) an aggregate market value
equal to 5% or more of the aggregate market value of all outstanding shares of a
corporation; or (iii) representing 10% or more of the earning power or net
income of the corporation. An "interested stockholder" means a person or entity
holding the beneficial ownership of 10% or more of the voting shares of a
corporation, or an affiliate or associate thereof. A corporation may not engage
in a "combination" within three years after the interested stockholder acquires
his shares unless the combination or purchase is approved by the board of
directors before the interested stockholder acquired such shares. If approval is
not obtained, after the expiration of the three-year period, the business
combination may be consummated with the approval of the board of directors or a
majority of the voting power held by disinterested stockholders, or if the
consideration to be paid by the interested stockholder is at least equal to the
greater of (i) the highest price per share paid by the interested stockholder
within the three years immediately preceding the date of the announcement of the
combination or in the transaction in which he became an interested stockholder,
whichever is higher, (ii) the market value per common share on the date of
announcement of the combination or the date the interested stockholder acquired
the shares, whichever is higher, or (iii) if higher for the holders of preferred
stock, the highest liquidation value of the preferred stock. Nevada law does not
require a tender offeror to file a registration statement or information
statement with the state of Nevada.
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<PAGE> 77
ADVANCE NOTICE OF DIRECTOR NOMINATIONS AND STOCKHOLDER PROPOSALS
Nevada law does not provide procedures for the nomination for election of
directors by stockholders or the submission of other stockholder proposals at an
annual or special meeting of stockholders. Watson's Bylaws provide that for
business to be properly brought before an annual meeting by a stockholder, the
stockholder must deliver written notice (containing such information prescribed
in the Bylaws) to, or mail such written notice so that it is received by, the
secretary of Watson not less than 120 days nor more than 150 days prior to the
first anniversary of Watson's proxy statement for the previous year's annual
meeting. Watson's Bylaws also provide that a special meeting of stockholders may
be called by stockholders holding shares which are entitled to cast not less
than ten percent of the votes at a meeting. Nevada law requires that a notice of
stockholders meeting be delivered to stockholders not less than ten days nor
more than 60 days before the meeting. The notice must state the purpose of the
meeting.
Circa's Bylaws provide that nominations for election of directors or other
stockholder proposals to be effected at any annual or special meeting of
stockholders may be made by any stockholder entitled to vote at such meeting if
written notice of such nomination or other business (containing the information
specified on such Bylaws) is delivered to the Secretary of Circa not less than
45 days nor more that 75 days prior to the date of such stockholders' meeting.
In the event that less than 60 days' notice or prior public disclosure of the
date of such annual or special meeting is given or made to stockholders, notice
by the stockholder to be timely must be so received not later than the close of
business on the tenth day following the day on which such notice of the date of
such annual or special meeting was mailed or such public disclosure was made,
whichever first occurs.
LOANS TO DIRECTORS AND OFFICERS
Under New York law, a corporation may make a loan or guaranty to directors
only if such loan or guaranty is approved by a vote of such corporation's
stockholders.
Under Nevada law, a corporation may make a loan or guaranty to directors or
officers if (i) the financial interest is known or disclosed to the board of
directors or committee and noted in the minutes, and the board or committee
authorizes the transaction in good faith by a majority vote sufficient for the
purpose without counting the vote of the interested director; (ii) the financial
interest is known or disclosed to the stockholders, and the stockholders
authorize the transaction by a vote of stockholders holding a majority of the
voting power; or (iii) the transaction is fair to the corporation at the time it
is authorized or approved.
The foregoing summary does not purport to be a complete statement of the
rights of holders of Circa Common Stock and Watson Common Stock under, and is
qualified in its entirety by reference to, New York law and Nevada law,
respectively, and the Certificate of Incorporation and Bylaws of Circa and the
Articles of Incorporation and Bylaws of Watson.
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<PAGE> 78
HOLDINGS OF WATSON STOCKHOLDERS, DIRECTORS
AND EXECUTIVE OFFICERS
The following table sets forth, as of May 19, 1995, the name, address
(where required) and holdings of each person (including any "group" as defined
in Section 13(d)(3) of the Exchange Act) known by Watson to be the beneficial
owner of more than five percent of the outstanding shares of Watson Common
Stock, and the amount of Watson Common Stock beneficially owned by each of the
directors and named executive officers of and by all directors and named
executive officers of Watson as a group. For each such Watson beneficial owner,
the percent of Watson Common Stock before the Merger, and the pro forma percent
of Watson Common Stock after the Merger, also is indicated.
<TABLE>
<CAPTION>
PERCENT PRO FORMA
OF WATSON PERCENT OF
COMMON STOCK WATSON
AMOUNT AND NATURE OF BEFORE COMMON STOCK
NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP(1) MERGER AFTER MERGER(2)
- ------------------------------- ------------------------ ------------ ----------------
<S> <C> <C> <C>
Allen Chao..................... 1,979,395 shares(3)(4) 11.2% 5.4%
311 Bonnie Circle
Corona, CA 91720
Phylis Y. and David C. Hsia.... 1,263,863 shares(3)(7) 7.3% 3.5%
311 Bonnie Circle
Corona, CA 91720
Agnes Y. Kung.................. 1,284,946 shares(3)(6)(13) 7.4% 3.6%
7662 Woodwind Drive
Huntington Beach, CA 92647
Richard Y. Chao................ 1,282,445 shares(3)(5) 7.4% 3.6%
7662 Woodwind Drive
Huntington Beach, CA 92647
First Interstate Bancorp....... 1,045,800 shares(8) 6.0% 2.9%
633 West 5th Street
Los Angeles, CA 90071
George B. Bjurman &
Associates................... 926,321 shares(9) 5.4% 2.6%
10100 Santa Monica Boulevard
Suite 1200
Los Angeles, CA 90067
Alec D. Keith.................. 639,000 shares(10) 3.7% 1.8%
Wan-Lin Kiang.................. 0 shares(15) * *
John Chao...................... 219,900 shares(3)(12)(15) 1.3% *
Albert F. Hummel............... 270,506 shares(11)(15) 1.6% *
Michel J. Feldman.............. 15,500 shares(13)(15) * *
Henry R. Besch................. 200 shares(14)(15) * *
Ronald R. Taylor............... 0 shares(15) * *
All current directors and
executive
officers of the company
(10 persons)................. 5,673,310 shares(4)-(7),
(10)-(15), (16) 31.6% 15.5%
</TABLE>
- ---------------
* Represents less than 1%
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<PAGE> 79
NOTES:
(1) Unless otherwise indicated in the footnotes to this table and pursuant to
applicable community property laws, Watson believes the persons named in
this table have sole voting and investment power with respect to all shares
of Watson Common Stock reflected in this table.
(2) Assumes 18,728,746 shares of Watson Common Stock will be issued to Circa
stockholders in the Merger, based on a 0.86 Exchange Ratio.
(3) Allen Chao, Phylis Y. Hsia, Agnes Y. Kung and Richard Y. Chao are siblings
and John Chao is their father. David C. Hsia is married to Phylis Y. Hsia.
(4) Includes 357,795 shares of Watson Common Stock subject to outstanding
options, 805,113 shares of Watson Common Stock held by Allen Chao
Interests, Ltd., a partnership in which Dr. Chao is a controlling partner,
490,323 shares of Watson Common Stock held by MAL Investment Company, a
corporation of which Dr. Chao is a controlling shareholder, and 326,164
shares of Watson Common Stock held by the Allen Chao and Lee Hwa Chao
Family Trust.
(5) Includes 6,000 shares of Watson Common Stock subject to outstanding
options, 6,000 shares of Watson Common Stock held by Richard Y. Chao as
custodian for his son, 636,348 shares of Watson Common Stock held by
Richard Y. Chao Interests, Ltd., a partnership in which Richard Y. Chao is
a controlling partner and 394,444 shares of Watson Common Stock held by R&S
Investment Company, a corporation of which Richard Y. Chao is a controlling
shareholder, and 239,653 shares of Watson Common Stock held by Richard Y.
Chao, individually.
(6) Includes 6,000 shares of Watson Common Stock subject to outstanding
options, 649,397 shares of Watson Common Stock held by Kung Interests,
Ltd., a partnership in which Ms. Kung is a controlling partner, 396,000
shares of Watson Common Stock in CAB Investment Company, a corporation of
which Ms. Kung is a controlling shareholder and 233,549 shares of Watson
Common Stock held in the Jen Kai Kung and Agnes Y. Kung Family Trust.
(7) Includes 769,141 shares of Watson Common Stock held by Phylis Y. Hsia,
255,794 shares of Watson Common Stock held by David C. Hsia, 121,428 shares
of Watson Common Stock held by Mrs. Hsia as custodian for the children of
Dr. and Mrs. Hsia, 67,500 shares of Watson Common Stock subject to
outstanding options held by Dr. Hsia and 50,000 shares of Watson Common
Stock held by David and Phylis Hsia Charitable Remainder Trust. Excludes
87,750 shares of Watson Common Stock held in irrevocable trusts for the
benefit of Dr. and Mrs. Hsia's children over which Dr. and Mrs. Hsia have
no voting or investment power.
(8) Based upon a Form 13G Report filed with the Commission on February 10,
1995.
(9) Based upon a Form 13G Report filed with the Commission on February 15,
1995.
(10) Includes 130,000 shares of Watson Common Stock subject to outstanding
options. Mr. Hummel has an option to purchase 132,000 of these shares of
Watson Common Stock from Dr. Keith.
(11) Includes 60,291 shares of Watson Common Stock subject to outstanding
options, and options to purchase 132,000 and 66,000 shares of Watson Common
Stock from Dr. Keith and Dr. Wallace C. Snipes (a former officer of
Watson), respectively.
(12) Includes 12,000 shares of Watson Common Stock subject to outstanding
options.
(13) Includes 8,000 shares of Watson Common Stock subject to outstanding
options, 1,500 shares of Watson Common Stock owned by Ercelle Feldman, the
wife of Michel J. Feldman, for which Mr. Feldman disclaims beneficial
ownership, and an aggregate of 6,000 shares of Watson Common stock owned by
Mr. Feldman as trustee for two of his sons, for which he disclaims
beneficial ownership.
(14) All shares of Watson Common Stock are jointly owned with Dr. Besch's wife.
(15) Excludes 5,000 option shares granted February 6, 1995 from the 1995
Non-Employee Directors' Stock Option Plan which is subject to stockholder
approval at the meeting. Option shares will be exercisable upon stockholder
approval.
(16) Excludes 767,894 shares of Watson Common Stock to be deemed beneficially
held by Dr. Sharoky and Messrs. Fedida and Rice, who will become directors
of Watson if the Merger is consummated. See "Holdings of Circa
Stockholders, Directors and Executive Officers."
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<PAGE> 80
DIRECTOR, OFFICER AND PRINCIPAL STOCKHOLDER SECURITY OWNERSHIP REPORTING
Section 16(a) of the Exchange Act requires Watson's directors and executive
officers, and persons who own more than 10% of a registered class of Watson's
equity securities, to file with the Commission reports of ownership and changes
in ownership of common stock and other equity securities of Watson. Officers,
directors and greater-than-10% stockholders are required by Commission
regulation to furnish Watson with copies of all Section 16(a) forms they file.
Based solely on review of the copies of such reports furnished to Watson or
written representations that no other reports were required, Watson believes
that, during the 1994 fiscal year, all filing requirements applicable to its
officers, directors and greater-than-10% beneficial owners were complied with
except that: Mr. Taylor inadvertently filed his Form 3 Initial Statement of
Beneficial Ownership of Securities after the ten-day period for filing had
expired; Mr. Wallace Snipes, the former Vice President of Research,
inadvertently included the sale of 16,000 shares of Watson Common Stock by an
unrelated party in his Form 4 Statement of Changes in Beneficial Ownership for
the month of August, 1994, which error was corrected by an amended Form 4;
Wan-Lin Kiang inadvertently filed a Form 4 Statement of Changes in Beneficial
Ownership reflecting the sale of 20,000 shares of Watson Common Stock held in
the name of his wife after the applicable filing period; and Ms. Kung
inadvertently failed to include 500 shares of Watson Common Stock that were
gifted and sold by Ms. Kung as custodian for Stephanie Chao in her Form 4
Statement of Changes in Beneficial Ownership for the month of December, 1994;
which omission was corrected by an amended Form 4.
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<PAGE> 81
HOLDINGS OF CIRCA STOCKHOLDERS, DIRECTORS
AND EXECUTIVE OFFICERS
The following table sets forth, as of June 12, 1995, the name, address and
holdings of each person (including any "group" as defined in Section 13(d)(3) of
the Exchange Act) known by Circa to be the beneficial owner of more than five
percent of outstanding shares of the Circa Common Stock, and the amount of Circa
Common Stock beneficially owned by each of the directors and the executive
officers of Circa earning greater than $100,000 in the 1994 fiscal year, and by
all directors and executive officers as a group. Additionally, for each such
Circa beneficial owner, the pro forma percent of Watson Common Stock to be held
after the Merger is indicated.
<TABLE>
<CAPTION>
PRO FORMA
PERCENT PERCENT OF
OF CIRCA WATSON
AMOUNT AND NATURE OF COMMON STOCK COMMON STOCK
NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP(1) BEFORE MERGER(2) AFTER MERGER(3)
- ---------------------------------- ----------------------- ----------------- ----------------
<S> <C> <C> <C>
FMR Corp.......................... 1,442,100(4) 6.6% 3.4%
Melvin Sharoky, M.D.**............ 632,900(5)(15) 2.9% 1.7%
Thomas P. Rice**.................. 125,000(6)(15) * *
Michael Fedida**.................. 35,000(7)(15) * *
Stanley Grey**.................... 30,500(8) * *
Bruce Hausman**................... 35,000(9) * *
Kenneth Siegel**.................. 7,500(10) * *
Nicholas A. LaBella, Jr........... 80,751(11) * *
Stuart Deitel(12)................. 0 * *
John Botek........................ 10,000(13) * *
All directors and executive
officers
as a group (14 persons)......... 974,951(14) 4.4% 2.8%
</TABLE>
- ---------------
* Represents less than 1%
** Denotes director of Circa.
(1) Unless otherwise noted, Circa believes that the beneficial owners listed
have sole voting and investment power over the shares listed.
(2) Percentage based upon 21,777,612 outstanding shares of Circa Common Stock
plus, for those persons who hold options for Circa Common Stock which are
either currently exercisable or exercisable within 60 days, the number of
shares of Circa Common Stock issuable upon exercise of such options.
(3) Assumes 18,728,746 shares of Watson Common Stock will be issued to Circa
stockholders in the Merger, based on a 0.86 Exchange Ratio.
(4) Shares of Circa Common Stock beneficially owned by FMR Corp. are listed
according to a report on Schedule 13G dated February 13, 1995. Based upon
information set forth in such report on Schedule 13G filed by FMR Corp.,
Fidelity Management & Research Company ("Fidelity"), a wholly-owned
subsidiary of FMR Corp., is the beneficial owner of 1,442,100 shares of
Circa Common Stock as a result of acting as investment advisor to several
investment companies. Mr. Edward C. Johnson 3rd (Chairman of FMR Corp.),
FMR Corp., through its control of Fidelity, and the aforementioned
investment companies each has sole dispositive power over such shares. The
power to vote such shares resides with FMR's Board of Trustees.
(5) Includes 300,000 shares of Circa Common Stock held by Dr. Sharoky which are
subject to forfeiture under certain circumstances pursuant to the terms of
Dr. Sharoky's employment agreement. Dr. Sharoky has sole voting power but
no dispositive power as to such shares. Also includes an aggregate of
12,786 shares of Circa Common Stock held by Dr. Sharoky, as custodian for
his three children. Excludes options for an aggregate of 100,000 shares of
Circa Common Stock which are not currently exercisable. However, such
options will vest upon consummation of the Merger and, therefore, they are
included in the calculation of Pro Forma Percent of Watson Common Stock
After Merger. Pro Forma
72
<PAGE> 82
Percent of Watson Common Stock After Merger excludes options for an
aggregate of 300,000 shares of Watson Common Stock to be issued to Dr.
Sharoky upon the consummation of the Merger. See "The Merger -- Interest of
Certain Persons in the Merger -- Additional Compensation."
(6) Includes 100,000 shares of Circa Common Stock held by Mr. Rice which are
subject to forfeiture under certain circumstances pursuant to the terms of
Mr. Rice's employment agreement. Mr. Rice has sole voting power but no
dispositive power with respect to such shares. Excludes options for 50,000
shares of Circa Common Stock which are not currently exercisable. Includes
options for 25,000 shares of Circa Common Stock which are exercisable
within 60 days. Pro Forma Percent of Watson Common Stock After Merger
excludes options for an aggregate of 100,000 shares of Watson Common Stock
to be issued to Mr. Rice upon the consummation of the Merger. See "The
Merger -- Interest of Certain Persons in the Merger -- Additional
Compensation."
(7) Includes options for 35,000 shares of Circa Common Stock which are
currently exercisable or exercisable within 60 days.
(8) Includes options for 30,000 shares of Circa Common Stock which are
currently exercisable or exercisable within 60 days.
(9) Includes options for 32,500 shares of Circa Common Stock which are
currently exercisable or exercisable within 60 days.
(10) Includes options for 7,500 shares of Circa Common Stock which are currently
exercisable or exercisable within 60 days.
(11) Includes 12,500 shares of Circa Common Stock held by Mr. LaBella which are
subject to forfeiture under certain circumstances pursuant to Mr. LaBella's
employment agreement. Mr. LaBella has sole voting power and no dispositive
power as to such shares. Includes options for 33,200 shares of Circa Common
Stock which are currently exercisable. Excludes options for 67,000 shares
of Circa Common Stock which are not currently exercisable. However, such
options will vest upon consummation of the Merger and, therefore, they are
included in the calculation of Pro Forma Percent of Watson Common Stock
After Merger.
(12) Mr. Deitel ceased being an officer of Circa in March of 1995.
(13) Includes options for 10,000 shares of Circa Common Stock which are
currently exercisable or exercisable within 60 days. Excludes options for
35,000 shares of Circa Common Stock which are not currently exercisable.
However, options for 5,000 shares of Circa Common Stock will vest upon
consummation of the Merger and, therefore, they are included in the
calculation of Pro Forma Percent of Watson Common Stock After Merger.
(14) Includes 191,500 shares of Circa Common Stock issuable in the aggregate
upon exercise of outstanding options granted to such persons, in each case
which are currently exercisable or exercisable within 60 days. Excludes
336,000 shares of Circa Common Stock issuable upon exercise of stock
options issued under the Stock Option Plans which are not currently
exercisable. However, 198,000 of such options will vest upon consummation
of the Merger and, therefore, they are included in the calculation of Pro
Forma Percent of Watson Common Stock After Merger.
(15) Dr. Sharoky, Mr. Rice and Mr. Fedida are also nominees as Watson directors
in the event the Merger is consummated. See "Election of Watson Directors."
The address of each of the directors and executive officers named in the
table above is c/o Circa Pharmaceuticals, Inc. 33 Ralph Avenue, P. O. Box 30,
Copiague, New York 11726-0030. The address for FMR Corp. is 82 Devonshire
Street, Boston, Massachusetts 02109.
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<PAGE> 83
WATSON'S PROPOSAL TO AMEND THE ARTICLES OF INCORPORATION
TO APPROVE A STAGGERED BOARD
On February 6, 1995, the Board of Directors of Watson approved an amendment
to the Bylaws of Watson to provide for three classes of directors. On May 1,
1995, Watson's Board of Directors repealed such amendment to the Bylaws.
Instead, Management of Watson proposes to amend the Articles to include a
similar provision to the provision previously included in the Bylaws. Pursuant
to this amendment, the directors will be divided into Class I, Class II and
Class III directors. Each class will consist, as nearly as may be possible, of
one-third of the total number of directors constituting the entire Board of
Directors. The term of office of the Class I directors to be elected at the
Watson Meeting will expire at the 1996 Annual Meeting. The term of office of the
Class II directors shall expire one year thereafter. The term of office of the
Class III directors will expire two years thereafter. At each succeeding Annual
Meeting of Watson, the directors elected will be chosen for a full term of three
years to succeed those whose terms expire.
If the proposed amendment is approved, the first two sentences of Article
VI of the Articles will be deleted and replaced with the following:
"The members of the governing board shall be called directors of the
Corporation. The number of directors of the Corporation shall be nine (9).
The directors shall be divided into three classes designated as Class I,
Class II and Class III, respectively. Each class shall consist, as nearly
as may be possible, of one-third of the total number of directors
constituting the entire board of directors. At the annual meeting of
stockholders of the Corporation to be held in the year 1995, the
Corporation shall designate the slate of directors to be elected by the
stockholders as Class I, Class II and Class III directors, except that for
such 1995 annual meeting only eight (8) directors shall be elected by the
stockholders and the ninth director position (a Class I position) shall be
vacant. The initial term of office of the Class I directors shall expire at
the annual meeting of the stockholders held in the year 1996. The initial
term of office of the Class II directors shall expire at the annual meeting
of stockholders held in the year 1997. The initial term of office of the
Class III directors shall expire at the annual meeting of stockholders held
in the year 1998. At each annual meeting of the stockholders after the
annual meeting held in the year 1995, successors to the class of directors
whose term expires at the annual meeting shall be elected for a three-year
term. If the number of directors is changed, any increase or decrease shall
be apportioned among the classes so as to maintain the number of directors
in each class as nearly as possible, but in no case shall a decrease in the
number of directors shorten the term of any incumbent director. A director
shall hold office until the annual meeting for the year in which his term
expires and until his successor shall be elected and qualified, subject,
however, to prior death, resignation, retirement, disqualification or
removal from office. The annual meeting of stockholders shall be held each
year on a date and at a time designated by the Board of Directors of the
Corporation.
Subject to the rights, if any, of holders of any series of Preferred
Stock then outstanding, any vacancy on the Board of Directors that results
from an increase in the number of directors or by reason of the vacancy
following the annual meeting of the stockholders held in the year 1995 may
be filled by a majority of the Board of Directors then in office, provided
that a quorum is present, and any other vacancy occurring in the Board of
Directors may be filled by a majority of the directors then in office, even
if less than a quorum. Any directors elected to fill a vacancy resulting
from an increase in such class shall hold office for a term that shall
coincide with the remaining term of that class. Any director elected to
fill a vacancy not resulting from an increase in the number of directors
shall have the same remaining term as that of his predecessor."
REASONS FOR AMENDMENT
The Board of Directors of Watson has determined that rather than
instituting a staggered election of Directors by amendment to the Bylaws, Watson
stockholders should vote upon the proposal. The Board of Directors of Watson
recommends the proposal as, among other things, a means of assuring the
continuity and stability of Watson's business strategies and policies. With a
system of staggered voting, it will not be possible for all the directors to be
changed at one election, thus ensuring that at any time a majority of the Watson
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Board of Directors will have previously served in that position. In addition,
the Board of Directors believes that a staggered election of Directors will
enhance the Directors' ability to maximize the stockholder value in the event of
any unfriendly or unsolicited proposal to take over or to restructure Watson.
The staggered system would provide time for the Watson Board of Directors to
negotiate with the sponsor and to consider alternative proposals. The existence
of a staggered Board of Directors could have the effect of discouraging a third
party from initiating a proxy contest, making a tender offer or otherwise
attempting to obtain control of Watson even though such a transaction could be
beneficial to Watson and its stockholders. See "Comparative Rights of
Stockholders -- Classified Board of Directors".
VOTE REQUIRED
The affirmative vote of a majority of the outstanding shares of Watson
Common Stock entitled to vote at the Watson Meeting is required for approval of
the proposed amendment to the Watson Articles to approve a staggered board of
directors.
WATSON'S BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF THE AMENDMENT
OF WATSON'S ARTICLES OF INCORPORATION TO CREATE A STAGGERED BOARD.
WATSON'S PROPOSAL TO AMEND THE ARTICLES OF INCORPORATION
TO INCREASE THE NUMBER OF AUTHORIZED
SHARES OF COMMON STOCK
REASONS FOR AMENDMENT
The Watson Articles currently authorize 50,000,000 shares of Watson Common
Stock. On May 19, 1995, there were approximately 17,289,786 shares of Watson
Common Stock outstanding, and another 1,615,661 shares of Watson Common Stock
reserved for issuance pursuant to exercise of outstanding stock options. The
terms of the Merger Agreement provide for the issuance of additional shares of
Watson Common Stock to the holders of Circa Common Stock and Circa Options. The
Board of Directors believes it to be advisable to increase the number of
authorized shares of Watson Common Stock to 100,000,000 in order to provide
future flexibility. The additional authorized shares of Watson Common Stock
would be capable of being issued for any proper corporate purpose by the Watson
Board of Directors at any time without further corporate approval. Other than in
connection with the Merger and commitments under existing stock options, Watson
has no present agreements or commitments to issue any additional shares. The
Watson Board of Directors believes it is desirable to give Watson this
flexibility in considering such matters as stock dividends, raising additional
capital, acquisitions and other corporate purposes.
Holders of Watson Common Stock are not entitled to preemptive rights, and
to the extent that any additional shares of Watson Common Stock or securities
convertible into Watson Common Stock may be issued on other than a pro rata
basis to current stockholders, the present ownership portion of current
stockholders may be diluted. Depending upon the circumstances in which
additional shares of Watson Common Stock are issued, the overall effects of such
issuance may be to render more difficult or to discourage a merger, tender
offer, proxy contest or the assumption of control by a holder of a large block
of Watson Common Stock and the removal of incumbent management. Management of
Watson is not aware of any possible takeover attempts at this time.
The proposed amendment would amend Article V of the Articles to read as
follows:
"ARTICLE V
The Corporation is authorized to issue a total of One Hundred and Two
Million Five Hundred Thousand (102,500,000) shares of stock, One Hundred Million
(100,000,000) shares of which shall be classified as common stock, $0.0033 par
value per share, and Two Million Five Hundred Thousand (2,500,000) shares of
which shall be classified as preferred stock, no par value per share. The
holders of both classes of stock shall not be entitled to exercise cumulative
voting or preemptive rights.
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The voting powers, designations, preferences, limitations, restrictions,
relative rights and distinguishing designation in respect of the shares of the
preferred stock shall be as stated in the resolution or resolutions providing
for the issuance of such preferred stock adopted or to be adopted by the Board
of Directors of the Corporation pursuant to the authority hereby expressly
vested in the Board of Directors of the Corporation by these Articles of
Incorporation."
VOTE REQUIRED
The affirmative vote of a majority of the outstanding shares of Watson
Common Stock entitled to vote at the Watson Meeting is required for approval of
the proposed amendment.
WATSON'S BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF THE AMENDMENT
OF THE ARTICLES OF INCORPORATION TO INCREASE THE NUMBER OF AUTHORIZED SHARES OF
WATSON COMMON STOCK TO 100,000,000 SHARES.
ELECTION OF WATSON DIRECTORS
Eight directors are to be elected by a plurality of the stockholder votes
cast at the Watson Meeting, to serve until the expiration of their term and
until their successors are elected and qualify. These eight directors will be
elected from eleven potential nominees, depending upon whether or not the Merger
is consummated. FIVE OF THE NOMINEES -- DR. ALEC D. KEITH, DR. ALLEN CHAO,
ALBERT F. HUMMEL, MICHEL J. FELDMAN AND RONALD R. TAYLOR, IF ELECTED, WILL SERVE
AS DIRECTORS REGARDLESS OF WHETHER THE MERGER IS CONSUMMATED. OF THE REMAINING
SIX NOMINEES, THREE CURRENT DIRECTORS OF CIRCA -- DR. MELVIN SHAROKY, THOMAS P.
RICE AND MICHAEL FEDIDA -- IF ELECTED, WILL SERVE IN THE EVENT THE MERGER IS
CONSUMMATED AND THREE CURRENT DIRECTORS OF WATSON -- DR. HENRY R. BESCH, DR.
WAN-LIN KIANG AND AGNES Y. KUNG, IF ELECTED, WILL SERVE ONLY IN THE EVENT THE
MERGER IS NOT CONSUMMATED. The proposed amendment to the Articles to create a
staggered Board of Directors authorizes a board of nine members. The Watson
stockholders will not have the ability to nominate any additional directors to
fill the vacancy remaining after the eight directors have been elected and such
vacancy will be filled by the majority vote of the Watson directors in office
immediately after the Effective Date. If the Merger is consummated, the nominee
for such vacancy will be selected by Dr. Sharoky and Messrs. Rice and Fedida,
subject to approval by the Watson Board. In the event the proposal to create a
staggered Board of Directors is not approved, the elected directors will serve
until the next Annual Meeting of Stockholders or until their successors have
been elected. If the proposal to create a staggered Board of Directors is
approved, the class of directors in which each director shall serve, if elected,
shall be as follows:
<TABLE>
<CAPTION>
IF THE MERGER AGREEMENT IS APPROVED IF THE MERGER AGREEMENT IS NOT APPROVED
BY BOTH CIRCA AND WATSON STOCKHOLDERS BY BOTH CIRCA AND WATSON STOCKHOLDERS
- --------------------------------------------- ---------------------------------------------
<S> <C>
CLASS I -- CLASS I --
(To serve until the 1996 Annual Meeting)*: (To serve until the 1996 Annual Meeting)*:
Michael Fedida Henry R. Besch, Ph.D.
Albert F. Hummel Albert F. Hummel
CLASS II -- CLASS II --
(To serve until the 1997 Annual Meeting): (To serve until the 1997 Annual Meeting):
Alec D. Keith, Ph.D. Wan-Lin Kiang, Ph.D.
Ronald R. Taylor Agnes Y. Kung
Thomas P. Rice Ronald R. Taylor
CLASS III -- CLASS III --
(To serve until the 1998 Annual Meeting): (To serve until the 1998 Annual Meeting):
Melvin Sharoky, M.D. Allen Chao, Ph.D.
Allen Chao, Ph.D. Michel J. Feldman
Michel J. Feldman Alec D. Keith, Ph.D.
</TABLE>
- ---------------
* The director to be elected after the Watson Meeting will serve as a Class I
Director.
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The following biographical information about each of the nominees includes
age as of May 19, 1995, present position, if any, with Watson or Circa, period
served as a director and other business experience during the past five years.
ALEC D. KEITH, PH.D. WATSON DIRECTOR SINCE 1991
Alec D. Keith, 62, Chairman of the Board of Directors of Watson since
October 1991, is a co-founder of Zetachron, Incorporated ("Zetachron"), a
subsidiary of Watson since 1991, and has held senior executive positions at
Zetachron since 1983. He is also Adjunct Professor of Biophysics at
Pennsylvania State University. From 1978 through 1982 he was Vice President
of Research and Development at Key Pharmaceuticals, Inc. Dr. Keith has
authored many scientific publications, has edited two books, and holds
numerous domestic and foreign pharmaceutical patents. He received a Ph.D.
in genetics from the University of Oregon in 1966.
ALLEN CHAO, PH.D. WATSON DIRECTOR SINCE 1983
Allen Chao, 49, President and Chief Executive Officer of Watson since
August 1983, is a co-founder of Watson and has been a director of Watson
since inception. He served as Director of Pharmaceutical Technology and
Packaging Development at Searle Laboratories, Inc. from September 1979 to
August 1983, where he had overall responsibility for new product
implementation and new pharmaceutical technology development. He received a
Ph.D. in industrial and physical pharmacy from Purdue University in 1973.
AGNES Y. KUNG WATSON DIRECTOR SINCE 1984
Agnes Y. Kung, 51, has served as Secretary of Watson since August 1983, and
has been a director of Watson since December 1984. She is a Certified
Public Accountant with an accounting practice in Southern California, and
is a member of the American Institute of Certified Public Accountants and
the California Society of Certified Public Accountants. Ms. Kung is Allen
Chao's sister.
MICHEL J. FELDMAN WATSON DIRECTOR SINCE 1984
Michel J. Feldman, 52, a director of Watson and its Assistant Secretary
since 1984, has been a partner in the law firm of D'Ancona & Pflaum,
Chicago, Illinois, since June 1991, and is counsel to Watson. He was
formerly a partner in the law firm of Keck, Mahin & Cate, Chicago,
Illinois, from 1983 to 1991. Mr. Feldman received a J.D. from Northwestern
University Law School in 1968 and is a Certified Public Accountant.
ALBERT F. HUMMEL WATSON DIRECTOR SINCE 1986
Albert F. Hummel, 50, a director of Watson since March 1986, except for a
period from July 1991 to October 1991, is a partner of Affordable
Residential Communities, a property management firm. Formerly, he was Chief
Financial Officer of Watson from October 1991 to December 1994.
HENRY R. BESCH, PH.D. WATSON DIRECTOR SINCE 1992
Henry R. Besch, 52, a director of Watson since February 1992, is a
Professor of Pharmacology and Chairman of the Department of Pharmacology
and Toxicology at Indiana University. He is a consultant for Integrated
Biotechnology Corporation, a biotechnology company dealing with
agricultural needs. Dr. Besch received a Ph.D. from The Ohio State
University College of Medicine in 1967 and has authored papers on basic
cell science and cardiovascular pharmacology.
WAN-LIN KIANG, PH.D. WATSON DIRECTOR SINCE 1992
Wan-Lin Kiang, 57, a director of Watson since February 1992, is the
managing director of China Infrastructure Investments, a venture capital
organization. Until October 1992, Dr. Kiang was the
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<PAGE> 87
President of China Development Corporation, a venture capital organization
responsible for establishing many industrial firms and international
relationships in Taiwan, Chairman of China Securities Investment Trust
Corporation, Chairman of the Republic of China Venture Capital Association,
Chairman of China Venture Management Corporation, and Professor of
Management at National Cheng Chi University.
RONALD R. TAYLOR WATSON DIRECTOR SINCE 1994
Ronald R. Taylor, 47, a director of Watson since November 1994, is a
founder and Chairman of Pyxis Corporation, a San Diego-based company
engaged in the development and marketing of systems to help hospitals and
other healthcare providers efficiently manage drugs and supplies.
MELVIN SHAROKY, M.D. CIRCA DIRECTOR SINCE 1992
Dr. Sharoky, 44, Circa's President and Chief Executive Officer since
February 1, 1993, joined Circa in June 1988 as Medical Director. In April,
1991, he became Circa's Senior Vice President and Director of Research and
Development. From August of 1992 through January 31, 1993, Dr. Sharoky
served as Circa's Executive Vice President and Director of Research and
Development. Prior to joining Circa, Dr. Sharoky was Senior Vice President
of Contract Development for Pharmakinetics Laboratories, Inc., a drug
research and testing organization from February 6, 1986 through June of
1988. He currently serves on the Boards of Directors of Circa and Somerset
Pharmaceuticals, Inc.
THOMAS P. RICE CIRCA DIRECTOR SINCE 1993
Mr. Rice, 45, joined Circa in July 1993 as Executive Vice President and
Chief Operating and Financial Officer. In January 1995, he became Circa's
Executive Vice President and Chief Operating Officer. In May 1990, Mr. Rice
founded Competitive Advantage in Baltimore, Maryland, a management
consulting firm which provided financial and marketing advice to
international and local business. Mr. Rice managed Competitive Advantage
until he joined Circa in July 1993. Prior to 1990, Rice served as Vice
President and Chief Financial Officer for Pharmakinetics Laboratories, Inc.
He currently serves on the Boards of Directors of Circa and Somerset
Pharmaceuticals, Inc.
MICHAEL FEDIDA CIRCA DIRECTOR SINCE 1988
During the last five years, Mr. Fedida, 48, a registered pharmacist, has
served as an officer and director of several retail pharmacies wholly or
partially owned by him. In addition, Mr. Fedida has acted as a consultant,
without remuneration, to Circa in regard to certain marketing concepts.
The Board of Directors of Watson knows of no reason why any of the
foregoing nominees will be unavailable to serve, but, in the event of any such
unavailability, the proxies received will be voted for such substitute nominees
as the Board of Directors of Watson or Circa may recommend, as appropriate.
COMMITTEES; BOARD MEETINGS
Watson has an Audit Committee, composed of Ms. Kung, Mr. Feldman and Dr.
Kiang. During the fiscal year ended December 31, 1994, the Audit Committee met
twice for the purposes of (i) reviewing the arrangements and scope of the audit;
(ii) discussing matters of concern to the Audit Committee with regard to
Watson's financial statements or other results of the audit; and (iii) reviewing
Watson's internal accounting procedures and controls and the activities and
recommendations of Watson's independent accountants.
Watson has a Compensation Committee composed of Drs. Besch and Kiang. Mr.
Feldman resigned as a member of the Compensation Committee, effective February
28, 1994, in order to ensure compliance with the performance-based compensation
exception to the new $1,000,000 deduction limit on executive compensation. The
Compensation Committee met by telephone twice and by unanimous consent six times
during the fiscal year ended December 31, 1994. The function of the Compensation
Committee is to review and approve
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recommendations concerning (i) the compensation of the Chairman of the Board and
the President and Chief Executive Officer of Watson and (ii) the grant of stock
options under Watson's 1991 Stock Option Plan.
If the new directors are elected pursuant to Merger proposal, Watson's
directors will appoint a replacement for Dr. Kiang on the Audit Committee and
Drs. Kiang and Besch on the Compensation Committee.
Watson does not have a Nominating Committee. Nominations of directors by
stockholders must be in writing and delivered to the Secretary of Watson no more
than 90 days and no less than 60 days prior to the Annual Meeting and otherwise
in accordance with the By-Laws.
The Board of Directors of Watson held four meetings during the fiscal year
ended December 31, 1994, and each director attended at least 75% of all Board
and applicable committee meetings.
DIRECTORS' COMPENSATION
All directors of Watson who are not full-time employees of the company
receive a director's fee of $20,000 per year, paid in quarterly installments,
for serving as a director of Watson. D'Ancona & Pflaum receives Michel J.
Feldman's director's fee. Beginning February 6, 1995, non-employee directors
shall also be paid $500 for each committee meeting of less than one-half day,
and $1,000 for each committee meeting of more than one-half day. All directors
are reimbursed for expenses incurred in connection with attending board and
committee meetings.
For information with respect to Watson's 1995 Non-Employee Directors' Stock
Option Plan being submitted for approval of the stockholders of Watson see
"Watson's Proposal to Approve Watson's 1995 Non-Employee Directors' Stock Option
Plan."
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WATSON'S EXECUTIVE COMPENSATION
The following table summarizes the compensation paid or accrued to Dr.
Allen Chao, Watson's President and Chief Executive Officer, for services
rendered for the three years ended December 31, 1994 and to each of the other
executive officers of Watson whose total annual salaries and bonuses exceeded
$100,000 during any such periods.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM
-------------------- COMPENSATION
NAME AND PRINCIPAL SALARY BONUS AWARDS ALL OTHER
POSITION YEAR ($)(1) ($)(2) OPTIONS(#) COMPENSATION($)(3)
- ------------------------------------ ---- -------- -------- ------------ ------------------
<S> <C> <C> <C> <C> <C>
Allen Chao, Ph.D.................... 1994 $260,608 $137,500 50,000 $ 4,529
President and Chief 1993 $195,268 $125,000 50,000 $16,851
Executive Officer 1992 $148,583 0 75,000 $36,761
Alec D. Keith, Ph.D................. 1994 $160,866 $ 52,800 35,000 $ 4,616
Chairman of the Board 1993 $138,286 $ 53,333 50,000 $ 1,246
1992 $115,848 0 75,000 $ 692
David C. Hsia, Ph.D................. 1994 $126,218 $ 19,566 0 $ 3,741
Senior Vice President, 1993 $118,501 $ 18,750 0 $ 8,880
Scientific Affairs 1992 $113,879 0 30,000 $ 8,232
Albert F. Hummel(4)................. 1994 $117,346 $ 23,690 0 $21,728
Former Chief Financial Officer 1993 $106,838 $ 23,690 0 $21,807
</TABLE>
- ---------------
(1) Dr. Chao's annual base salary was increased to $275,000 and $300,000 on July
1, 1994 and January 1, 1995, respectively.
(2) Pursuant to bonus formulas established by Watson's Compensation Committee,
Dr. Chao and Dr. Keith received the maximum annual bonus as based upon net
after-tax income earned by Watson.
(3) Represents the following amounts in 1994: Watson's 401(k) contributions of
$4,529, $4,616, $3,741 and $3,485 made on behalf of Drs. Chao, Keith, Hsia
and Mr. Hummel, respectively. Mr. Hummel also received $3,846 for moving
expenses and $14,397 for accrued vacation benefits. In 1993, includes
accrued vacation benefits of $13,703 and $6,977 to Drs. Chao and Hsia. In
1993, Watson's 401(k) contribution of $3,148, $1,246, $1,903 and $1,615 were
made to Drs. Chao, Keith and Hsia, and Mr. Hummel, respectively. Mr. Hummel
received $20,192 for moving expenses. In 1992, includes accrued vacation
benefits of $34,000 and $6,500 paid to Drs. Chao and Hsia, respectively, and
Watson's 401(k) contributions of $2,761 and $1,732, respectively, made to
such persons. Watson's contribution of $692 was made to Dr. Keith under the
Zetachron Savings Plan.
(4) Mr. Hummel resigned as Chief Financial Officer of Watson effective December
31, 1994.
EMPLOYMENT AGREEMENTS
Effective May 29, 1995, Watson entered into employment agreements with each
of Dr. Allen Chao, Dr. Alec D. Keith and Dr. David C. Hsia (the "Senior
Executives"), which will terminate on May 31, 2000. These agreements provide
that, among other things, (i) Dr. Chao, Dr. Keith, and Dr. Hsia will receive
minimum annual salaries of $300,000, $175,000, and $145,000 per year,
respectively; (ii) Watson cannot terminate the Senior Executives' employment
except by reason of death, disability or for cause; (iii) in the event of
termination on account of retirement or disability, Watson will continue the
Senior Executives' major medical coverage; and (iv) in the event of termination
without cause or for good reason (as described in the employment agreements)
subsequent to a change in control, the Senior Executives are entitled to
receive, among other things, certain severance benefits, including an amount
equal to 2.99 times their base salary and incentive compensation. In addition,
upon consummation of the Merger, (x) Dr. Chao will be entitled to receive
options to purchase 200,000 shares of Watson Common Stock under Watson's 1991
Stock Option Plan (the "1991 Plan"), 50,000 of which are to be granted in 1995,
100,000 in 1996, and 50,000 in 1997; and
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(y) Dr. Keith and Dr. Hsia will each be entitled to receive options to purchase
75,000 shares of Watson Common Stock under the 1991 Plan. Such options to be
granted to Drs. Chao, Keith and Hsia will vest over a five-year period following
each grant date.
Upon consummation of the Merger, the surviving corporation (Circa) will
assume employment agreements between Circa and each of Dr. Melvin Sharoky,
Thomas Rice and Nicholas A. LaBella, Jr. (the "Circa Executives"). Watson has
agreed to assume the obligations under the employment agreements between Circa
and Dr. Sharoky and Mr. Rice, as to be amended by agreements with Watson.
Pursuant to the terms of the employment agreements between Circa and each of the
Circa Executives, among other things: (i) Dr. Sharoky's agreement will terminate
on January 31, 1997, Mr. Rice's agreement will terminate on June 30, 1998, and
Mr. LaBella's agreement will terminate on April 25, 1996;(ii) Dr. Sharoky, Mr.
Rice, and Mr. LaBella will receive minimum annual salaries of $300,000,
$200,000, and $125,000 per year, respectively; (iii) Dr. Sharoky, Mr. Rice and
Mr. LaBella will hold, upon consummation of the Merger, restricted Circa Common
Stock (which will be converted into restricted Watson Common Stock) in the
amount of 300,000, 75,000 and 12,500 shares, respectively; and (iv) Dr. Sharoky
and Mr. Rice are entitled to certain severance benefits described under "The
Merger -- Interests of Certain Persons in the Merger." The employment agreement
of Mr. LaBella provides, in part, for the immediate vesting of outstanding
restricted stock upon a change of control. In addition to the restricted stock
granted to the Circa Executives under the employment agreements, upon
consummation of the Merger, Dr. Sharoky and Mr. Rice shall receive 300,000 and
100,000 options to purchase shares of Watson Common Stock, respectively. Dr.
Sharoky's options will vest over a three-year period and Mr. Rice's options will
vest over a five-year period.
Effective May 29, 1995, Watson entered into an employment agreement with
Chato Abad which provides for Ms. Abad's employment-at-will. The agreement also
provides, among other things, that should Ms. Abad's employment be terminated by
Watson for reasons other than death, disability or for cause, she is entitled to
her salary for a period of 52 weeks. In the event of Ms. Abad's termination
without cause or for good reason subsequent to a change in control, she will be
entitled to a lump sum payment equal to nine months pay. Upon consummation of
the Merger, Ms. Abad will also be entitled to receive a grant of 75,000 options
to purchase shares of Watson Common Stock under the 1991 Plan, which options
will vest over a five-year period.
Effective May 29, 1995, Watson Laboratories, Inc., a wholly-owned
subsidiary of Watson, entered into employment agreements with Maria Chow, Ronald
Anderson, Elsa Gomez, Thomas Ho and Neil Sherman (the "Lab Executives"). The Lab
Executives' employment agreements are identical to the agreement entered into by
Watson with Chato Abad, except that the terms of the payments upon termination
and the number of stock options granted may vary among the Lab Executives. The
total number of options to purchase shares of Watson Common Stock to be granted
to Lab Executives upon consummation of the Merger is 145,000.
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OPTIONS
The following table sets forth certain information concerning individual
grants of stock options made during the year ended December 31, 1994, to each
named executive officer of Watson, under Watson's 1991 Stock Option Plan.
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS(1)
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
NUMBER OF VALUE AT ASSUMED
SHARES % OF TOTAL ANNUAL RATES OF STOCK
UNDERLYING OPTIONS PRICE APPRECIATION
OPTIONS GRANTED TO EXERCISE OR FOR OPTION TERM (2)
GRANTED EMPLOYEES IN BASE PRICE EXPIRATION ---------------------
NAME (#) FISCAL YEAR PER SHARE ($) DATE 5%($) 10%($)
- --------------------------- ---------- ------------ ------------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Allen Chao, Ph.D........... 25,000 11.74% $20.00 5/02/04 $202,461 $618,551
25,000 11.74% $25.00 5/02/04 $ 77,461 $493,551
Alec D. Keith, Ph.D........ 17,500 8.22% $28.00 12/14/04 $251,147 $690,153
17,500 8.22% $33.00 12/14/04 $163,647 $602,653
</TABLE>
- ---------------
(1) These non-qualified options are immediately exercisable upon the date of
grant. The exercise prices of $20.00, $25.00, $28.00 and $33.00 were 15.9%,
44.9%, 7.7% and 26.9%, respectively, above the fair market value of the
Watson Common Stock as of their May 2, 1994 and December 14, 1994 grant
dates. The higher exercise prices were established as an incentive to
encourage stock growth, as determined by Watson's Compensation Committee.
(2) The assumed annual rates of stock price appreciation of 5% and 10% are set
by Commission rules and are not intended as a forecast of possible future
appreciation in stock prices.
OPTION EXERCISES AND FISCAL YEAR-END VALUES
The following table sets forth certain information with respect to each
named executive officer of Watson concerning the exercise of options during the
fiscal year ended December 31, 1994, as well as any unexercised options held as
of the end of such fiscal year.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SHARES
SHARES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
ACQUIRED ON OPTIONS AT FY-END (#) IN-THE-
EXERCISE VALUE EXERCISABLE/ MONEY OPTIONS AT FY-END($)
NAME (#) REALIZED ($) UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ----------------------------- ----------- ------------ ---------------------- --------------------------
<S> <C> <C> <C> <C>
Allen Chao, Ph.D............. 41,207 $662,609 286,795/176,998 $4,389,660/$3,729,328
Alec D. Keith, Ph.D.......... 80,000/ 45,000 $ 689,250/$ 776,250
David C. Hsia, Ph.D.......... 57,000/ 48,000 $1,206,450/$ 976,800
Albert F. Hummel............. 109,203/ 66,065 $1,828,310/$1,117,099
</TABLE>
REPORT OF WATSON'S COMPENSATION COMMITTEE
ON EXECUTIVE COMPENSATION
This Report of the Compensation Committee of Watson (the "Compensation
Committee" or the "Committee") shall not be deemed incorporated by reference by
any general statement incorporating this Proxy Statement/Prospectus into any
filing under the Securities Act or under the Exchange Act, except to the extent
that Watson specifically incorporates the information contained herein by
reference, and shall not otherwise be deemed filed under those Acts.
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<PAGE> 92
The Compensation Committee is responsible for determining the compensation
arrangements for the Chief Executive Officer of Watson. It also administers the
1985 Stock Incentive Plan, the 1991 Stock Option Plan, and (pending stockholder
approval) the 1995 Non-Employee Directors' Stock Option Plan.
COMPENSATION PHILOSOPHY
Watson does business in a highly competitive and dynamic industry. Watson's
continued success in such environment depends, in large part, on its ability to
attract and retain talented senior executives. Watson must also provide these
executives with long- and short-term incentives to maximize corporate
performance, and reward successful efforts to do so. As a result, the
Committee's compensation arrangements are designed to:
1. Provide a competitive level of compensation to attract and retain
talented management;
2. Reward management for corporate performance by linking a
substantial portion of total compensation to the achievement of measurable
performance objectives; and
3. Align the interests of management with the stockholders in order to
maximize stockholder value.
The Committee's goal is to provide a competitive compensation package based
on a review of publicly available information about the compensation paid to
similarly situated executives of selected pharmaceutical companies (the "Peer
Group"). The Committee believes that a substantial portion of compensation
should be tied to the attainment of short- and long-term objectives.
To achieve these compensation objectives, the Committee has developed
compensation packages consisting of base salary, a contingent bonus arrangement
tied to after-tax earnings or other goals, and awards of stock options.
BASE COMPENSATION
In 1994, the Committee conducted a review of the executive compensation of
members of the Peer Group. The review did not include all such companies because
the most recent data for some of the companies was not available at the time the
review was conducted. The Committee reviewed the salary data for the average and
median levels of compensation. The Committee found that the compensation of
Watson's senior executives was substantially below the average and the median
compensation levels of the group reviewed. However, the Committee did not rely
exclusively on statistical compilations. Certain members of the group reviewed
were considered to be very similar to Watson in terms of market capitalization,
length of time as a publicly held company, number of employees and overall
prospects for short- and long-term growth. These group members' cash
compensation levels were significantly greater than Watson's previous levels,
and, consequently, their reported compensation was given substantially more
weight in setting base compensation.
Based on its compensation review and the Committee's compensation
philosophy, the Committee determined that Allen Chao's base compensation should
be increased to $275,000 beginning on July 1, 1994 and $300,000 beginning on
January 1, 1995. This amount is slightly below the mean and median compensation
for the relevant group reviewed in the Peer Group.
BONUS
The analysis discussed above was also used to assist the Committee in
setting short-term incentive compensation. The Committee determined that for
1994, the combination of base compensation and bonus, if earned, should place
the senior executives slightly below the median total cash compensation of the
group reviewed.
The Committee believed that Dr. Chao's 1994 bonus should be tied to
Watson's earnings projections for 1994. Prior to 1994, Watson developed earnings
projections that were substantially above the earnings for the previous year.
The projections were then revised upward at the beginning of the fiscal year.
The Committee determined that if actual earnings did not meet the first
projection, no bonus should be payable. However, if after-tax earnings equalled
or exceeded the second projection, a full bonus should be payable. If earnings
fell
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<PAGE> 93
between the projected earnings targets, a pro-rated bonus would be payable.
Because Watson's earnings for 1994 exceeded the revised projections, a full
bonus was paid to Dr. Chao.
STOCK OPTIONS
The Committee believes that stock options provide a valuable tool for
aligning the interests of management with stockholders and focusing management's
attention on the long-term growth of Watson. The Committee expects to continue
granting options. When granting options to senior management, the Committee also
intends to continue using premium options, under which the exercise price is
established at a premium to the market value on the date of grant. The Committee
believes that premium options (i) provide a better incentive for management to
add value to Watson through new ideas, and (ii) reward the executives less for
past ideas that are in the process of being implemented.
The determination of the amount of shares of Watson Common Stock granted
under an option reflects a balancing of the dilutive effect of options and the
need to provide the executive with a significant incentive to maximize long-term
growth in share value. For 1994, options for 50,000 shares of Watson Common
Stock were granted to Dr. Chao. The options were immediately exercisable. Of
these option shares, 25,000 were exercisable at $20.00 per share (which was 25%
above the fair market value of the Watson Common Stock on the date of grant),
and 25,000 shares were exercisable at $25.00 per share (which was 50% above the
fair market value of the stock on the date of the grant). As of December 31,
1994, the closing price of Watson's Common Stock as quoted on NASDAQ/NMS was
$26.25.
POLICY ON DEDUCTIBILITY OF COMPENSATION
The Internal Revenue Code provides a $1,000,000 deduction limit on
compensation paid to the reporting executives of publicly held corporations. An
exception to the limit applies to certain types of performance-based awards,
which may include stock options. Watson amended the 1991 Stock Option Plan to
comply with the performance-based compensation requirements.
The Committee's policy is to qualify bonus and option grants for the
performance-based compensation exception to the $1,000,000 deduction limitation
whenever possible.
CONCLUSION
The Committee will continue to establish base compensation at levels that
are competitive with selected members of the Peer Group. The Committee intends
for performance-related compensation to constitute a substantial portion of
overall compensation, and for compensation to be linked to the achievement of
Watson's short- and long-term goals as established by Watson. The Committee
intends to create incentives at the levels necessary to achieve above-average
performance within Watson's industry.
Wan-lin Kiang, Ph.D.
Henry R. Besch, Ph.D.
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<PAGE> 94
STOCK PRICE PERFORMANCE GRAPH
The following performance graph compares the percentage change in the
cumulative total stockholder return on Watson Common Stock during the period
from Watson's initial public offering on February 17, 1993 through December 31,
1994 with the cumulative total return on (i) a group consisting of Watson's peer
corporations on a line-of-business basis (the "Peer Group") and (ii) the NASDAQ
Composite Index (Total Return). The comparison assumes $100 was invested on
February 17, 1993 in Watson Common Stock, the Peer Group (allocated equally
among each of the Peer Group issuers) and the NASDAQ Composite Index, and
assumes reinvestment of dividends, if any. The Peer Group consists of Alza
Corporation; A.L. Pharma, Inc.; Barr Laboratories, Inc.; Biocraft Laboratories,
Inc.; Copley Pharmaceuticals, Inc.; Cygnus Therapeutic Systems, Inc.; Elan
Corporation, p.1.c.; Forest Laboratories, Inc.; Halsey Drug Co. Inc.; Ivax
Corp.; K-V Pharmaceutical Company; Marsam Pharmaceuticals Inc.; Mylan
Laboratories Inc.; Noven Pharmaceuticals Inc.; Pharmaceutical Resources, Inc.;
Purepac Inc.; Royce Laboratories Inc.; Taro Pharmaceuticals Industries Ltd.;
Teva Pharmaceutical Industries Ltd.; and Zenith Laboratories, Inc.
COMPARISON OF FIVE* YEAR CUMULATIVE TOTAL RETURN AMONG WATSON PHARMACEUTICALS,
INC.,
PEER GROUP AND NASDAQ COMPOSITE INDEX (TOTAL RETURN)
<TABLE>
<CAPTION>
NASDAQ
WATSON COMPOSITE
MEASUREMENT PERIOD PHARMACEUTI- INDEX (TOTAL
(FISCAL YEAR COVERED) CALS, INC. PEER GROUP RETURN)
<S> <C> <C> <C>
2/17/93 100.00 100.00 100.00
12/31/93 210.42 123.20 117.80
12/31/94 218.75 98.41 114.03
</TABLE>
- ---------------
* Prior to February 17, 1993, Watson Common Stock was not publicly traded.
Comparative data is provided only for the period from that date through
December 31, 1994.
85
<PAGE> 95
WATSON'S STOCK OPTION PLANS
1985 PLAN. On August 9, 1985, Watson adopted the Watson Laboratories, Inc.
1985 Stock Incentive Plan (the "1985 Plan") under which 75,000 shares of Watson
Common Stock were initially reserved for issuance. The 1985 Plan was amended in
April 1988, July 1991 and February 1992 to increase the number of shares
reserved for issuance to 558,967. The February 1992 amendment also prohibited
the grant of additional options and transferred the 1985 Plan's administrative
functions from a single administrator to the Compensation Committee of the Board
of Directors of Watson. The 1985 Plan will terminate August 9, 1995, but may be
amended or modified, subject to certain restrictions, by the Board prior to
termination.
All options granted under the 1985 Plan were intended to qualify as
incentive stock options ("ISOs") under Section 422 of the Code. All officers and
key employees of Watson were eligible to participate under the 1985 Plan. The
exercise price of all options granted under the 1985 Plan equaled at least the
fair market value of Watson Common Stock on the date of grant. The exercise
price of incentive options granted to persons who at the time of grant possessed
more than 10% of the total voting power of all classes of stock was at least
110% of the fair market value of Watson Common Stock on the date of grant.
Shares covered by currently outstanding options under the 1985 Plan typically
are exercisable at a rate of 20% per year over a five-year period following the
date of grant and typically expire six years from the date of grant.
At May 19, 1995, Watson had outstanding qualified stock options under the
1985 Plan for an aggregate of 372,967 shares of Watson Common Stock at an
average exercise price of $3.88 per share. On May 19, 1995, the fair market
value of the Watson Common Stock was $33.25 per share, the last reported sale
price quoted on NASDAQ/NMS. All options granted under the 1985 Plan will expire
by September 10, 1997, unless exercised prior to that date.
1991 PLAN. In October 1991, Watson adopted the Watson Pharmaceuticals, Inc.
1991 Stock Option Plan (the "1991 Plan"), under which 1,500,000 shares of Watson
Common Stock were initially reserved for issuance. In February 1992, Watson
reserved an additional 500,000 shares for issuance under the 1991 Plan. In May
1994, the 1991 Plan was amended to limit the number of option shares granted in
a fiscal year to each executive officer whose compensation is required to be
reported in Watson's annual proxy statement (an "Executive Officer") to not
exceed 100,000 shares for the first fiscal year during which he or she becomes
an Executive Officer and to not exceed 50,000 shares for any subsequent fiscal
year during which he or she serves as an Executive Officer. This amendment also
extended participation in the 1991 Plan to all employees. In September 1994, the
1991 Plan was amended to clarify the length of time during which an option
remains exercisable following termination of employment. The 1991 Plan permits
the grant of ISOs and non-qualified stock options. The 1991 Plan will terminate
in October 2001. Officers, employees, non-employee directors and advisors are
eligible to participate under the 1991 Plan. On May 1, 1995, subject to the
approval of the stockholders of Watson, the Board of Directors of Watson
approved the proposed amendment to the 1991 Plan described in "Watson's Proposal
to Amend Watson's 1991 Stock Option Plan."
The 1991 Plan is administered by the Compensation Committee of the Board of
Directors of Watson, which has the authority to select the persons to whom
grants are to be made, to designate the number of shares to be covered by each
option, to determine whether such option is an incentive stock option or a non-
qualified stock option, to establish vesting schedules, to determine the type of
consideration to be paid to Watson upon exercise and to specify other terms of
the options. The maximum term of options granted under the 1991 Plan is ten
years.
The exercise price of all options must equal at least the fair market value
of the Watson Common Stock on the date of grant. The exercise price of incentive
options granted to any person who at the time of grant owns stock possessing
more than 10% of the total combined voting power of all classes of stock must be
at least 110% of the fair market value of such stock on the date of grant.
Shares covered by currently outstanding options under the 1991 Plan typically
are exercisable at a rate of 20% per year over a five-year period following the
date of grant. In the event of a change of control of Watson, as defined in the
1991 Plan, all outstanding options will become immediately exercisable and the
1991 Plan will terminate unless the 1991 Plan and outstanding options are
assumed or replaced by the successor corporation.
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<PAGE> 96
At May 19, 1995, Watson had outstanding qualified stock options under the
1991 Plan for an aggregate of 962,868 shares of Watson Common Stock at an
average exercise price of $16.05 per share. Upon consummation of the Merger
options to purchase 100,000 and 300,000 shares of Watson Common Stock will be
granted to Mr. Rice and Dr. Sharoky, respectively. On May 19, 1995, the fair
market value of Watson Common Stock was $33.25 per share, the last reported sale
price quoted on the NASDAQ/NMS. All options granted under the 1991 Plan will
expire by April 17, 2005, unless exercised prior to that date.
The following table sets forth the number of stock options granted under
the 1985 and 1991 Plans as of May 19, 1995 (excluding cancelled and expired
options).
<TABLE>
<CAPTION>
1985 PLAN 1991 PLAN
NUMBER OF NUMBER OF
NAME OPTIONS OPTIONS
---- --------- ---------
<S> <C> <C>
Allen Chao, Ph.D. ................................. 153,967 225,000
Alec D. Keith, Ph.D. .............................. 160,000
David C. Hsia, Ph.D................................ 97,500 30,000
Albert F. Hummel................................... 175,268
Executive Group.................................... 251,467 590,268
Non-Executive Director Group.......................
Non-Executive Officer Employee Group............... 307,500 862,003
</TABLE>
1995 Non-Employee Directors' Plan. On February 6, 1995 Watson granted
35,000 nonstatutory options under the 1995 Non-Employee Directors' Stock Option
Plan (the "Directors' Plan") at an exercise price of $25.50 per share, the fair
market value of Watson Common Stock on the grant date. Non-employee directors
receiving 5,000 option shares individually include Agnes Y. Kung, John Chao,
Michel J. Feldman, Albert F. Hummel, Henry R. Besch, Wan-Lin Kiang and Ronald R.
Taylor. This Plan is subject to approval by the stockholders of Watson at the
Watson Meeting and option shares granted as described above are exercisable six
months after the date of grant, subject to stockholder approval.
Additional Options. In addition to the options granted under the 1985, 1991
and 1995 Plans, on July 22, 1991, Watson issued a total of 330,125 nonstatutory
options at an average exercise price of $3.67 per share. Allen Chao received an
option for 206,033 shares at an exercise price of $3.67 per share. John Chao,
Richard Y. Chao, Agnes Y. Kung and Michel J. Feldman each received an option for
30,000 shares at an exercise price of $3.67 per share. Such options are
exercisable at the rate of 20% per year over the five-year period following the
date of grant. As of March 7, 1995, options covering 85,299 shares had been
exercised.
FEDERAL INCOME TAX CONSEQUENCES
Incentive Stock Options. The following general rules are applicable for
federal income tax purposes under existing law to employees who receive and
exercise incentive stock options ("ISO" or "ISOs") granted under the 1985 Stock
Incentive Plan, or the 1991 Stock Option Plan (collectively, the "Stock Option
Plans"):
1. Generally, no taxable income results to the optionee upon the
grant of an ISO or upon the issuance of shares to him or her upon exercise
of the ISO.
2. No tax deduction is allowed to Watson upon either grant or exercise
of an ISO under the Stock Option Plans.
3. If shares acquired upon exercise of an ISO are not disposed of (i)
within two years following the date the option was granted and (ii) within
one year following the date the shares are transferred to the optionee
pursuant to the ISO exercise, the difference between the amount realized on
any subsequent disposition of the shares and the exercise price will
generally be treated as long-term capital gain or loss to the optionee.
4. If shares acquired upon exercise of an ISO are disposed of before
the expiration of either of the requisite holding periods (a "Disqualifying
Disposition"), then in most cases the lesser of (i) any excess of the fair
market value of the shares at the time of exercise of the ISO over the
exercise price or (ii) the
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<PAGE> 97
actual gain on disposition, will be treated as compensation to the optionee
and will be taxed as ordinary income in the year of such disposition.
5. In any year that an optionee recognizes compensation income on a
Disqualifying Disposition of stock acquired by exercising an ISO, Watson
will generally be entitled to a corresponding deduction for income tax
purposes.
6. Any excess of the amount realized by the optionee as the result of
a Disqualifying Disposition over the sum of (i) the exercise price and (ii)
the amount of ordinary income recognized under the above rules will
generally be treated as either long-term or short-term capital gain,
depending upon the time elapsed between receipt and disposition of the
shares disposed of.
7. The bargain element at the time of exercise of an ISO, i.e., the
amount by which the fair market value of the Watson Common Stock acquired
upon exercise of the ISO exceeds the exercise price, may be taxable to the
optionee under the "alternative minimum tax" provisions of the Code.
Non-Qualified Stock Options. The following general rules are applicable to
holders of NSOs and to Watson for Federal income tax purposes under existing law
under the Stock Option Plans, including the 1995 Non-Employee Directors' Stock
Option Plan:
1. The optionee generally does not realize any taxable income upon
the grant of a NSO, and Watson is not allowed a business expense deduction
by reason of such grant.
2. The optionee will recognize ordinary compensation income at the
time of exercise of the option in an amount equal to the excess, if any, of
the fair market value of the shares on the date of exercise over the
exercise price. Watson may be required to withhold tax on this amount.
3. When the optionee sells the shares, he or she will generally
recognize a capital gain or loss in an amount equal to the difference
between the amount realized upon the sale of the shares and his or her
basis in the shares (generally, the exercise price plus the amount subject
to tax as compensation income). If the optionee holds the shares for longer
than one year, this gain or loss will be a long-term capital gain or loss.
4. In general, Watson will be entitled to a tax deduction when
compensation is recognized by the optionee.
The foregoing described tax consequences are based on current laws,
regulations and interpretations thereof, all of which are subject to change. In
addition, the foregoing discussion is limited to Federal income taxes and does
not attempt to describe state and local tax effects which may accrue to
participants or Watson.
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<PAGE> 98
WATSON'S PROPOSAL TO APPROVE WATSON'S 1995 NON-EMPLOYEE
DIRECTORS' STOCK OPTION PLAN
INTRODUCTION
On February 6, 1995, the Board of Directors of Watson adopted the 1995
Non-Employee Directors' Stock Option Plan (the "Directors' Plan"), and has
directed that it be submitted to its stockholders for approval at the Watson
Meeting. The primary purposes of the Directors' Plan are to attract and retain
well-qualified outside directors, and to more closely align such directors'
interests with those of Watson's stockholders.
Although stockholder approval of the Directors' Plan is not required for
its adoption, approval is being sought in order that awards of Watson Common
Stock to directors pursuant to the Directors' Plan will be exempt from Section
16(b) of the Exchange Act. Generally, Section 16(b) provides that any profit
realized by directors from any combination of a purchase and a sale of Watson
Common Stock within a six-month period inures to and is recoverable by Watson.
Exemption from the application of Section 16(b) is conditioned upon obtaining
the approval of the Directors' Plan by the stockholders of Watson, in addition
to certain other conditions that Watson believes it has satisfied. If the
Directors' Plan is not approved by the stockholders, it will not be implemented.
The following is a summary of certain features of the Directors' Plan, subject
in all respects, however, to the full text of the Directors' Plan, which is set
forth in the attached Appendix F.
PRINCIPAL PROVISIONS OF THE DIRECTORS' PLAN
If approved by the Watson stockholders, the Directors' Plan will be
effective as of February 6, 1995. All directors of Watson who are not full-time
employees of Watson, of which there are presently seven, are eligible to
participate in the Directors' Plan. Up to 500,000 shares of Watson Common Stock
may be issued under the Directors' Plan from authorized shares of Watson. The
Directors' Plan will be administered by the Compensation Committee. The
Committee shall appropriately adjust the number of shares for which awards may
be granted pursuant to the Directors' Plan in the event of reorganization,
recapitalization, stock split, reverse stock split, stock dividend, exchange or
combination of shares, merger, consolidation, rights offering or any change in
capitalization.
Under the Directors' Plan, each person who was a non-employee director on
the effective date of the Directors' Plan will receive nonstatutory options to
purchase 5,000 shares of Watson Common Stock at a purchase price equal to 100%
of the fair market value of Watson Common Stock on the date of the option grant
(the "Original Grants"). Original Grants were conditionally granted to each of
Watson's current non-employee directors, Dr. Wan-lin Kiang, Dr. Henry R. Besch,
Michel J. Feldman, Albert F. Hummel, Agnes Y. Kung, John Chao, and Ronald R.
Taylor, on February 6, 1995. The Original Grants are exercisable six months
after the date of the grants at a price of $25.50 per share, which was the
closing price of the Watson Common Stock on the NASDAQ/NMS on February 6, 1995,
the date of the grants. If the Merger Agreement is approved by the stockholders
of Watson and Circa, certain Circa directors who will serve as directors of
Watson will be eligible to receive awards under the Directors' Plan.
On the day following the Watson Meeting, and on the day following each
annual stockholders' meeting thereafter, each non-employee director elected or
re-elected at such meeting shall receive nonstatutory options to purchase 5,000
shares of Watson Common Stock multiplied by the number of years for which such
director was elected or re-elected (the "Reoccurring Grants"). The purchase
price shall be equal to 100% of the fair market value of Watson Common Stock on
the date of the option grant. Reoccurring Grants shall become exercisable at a
rate of 5,000 shares after the completion of each full year of the director's
elected term.
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<PAGE> 99
NEW PLAN BENEFITS
As required by the proxy rules promulgated by the Commission regarding
compensation plans subject to stockholder action, the following table sets forth
the number of stock option grants issued or issuable to (i) all named executive
officers; (ii) all current executive officers as a group; (iii) all current
directors who are not executive officers, as a group (assuming the current
directors are re-elected at the annual meeting); and (iv) all employees,
including all current officers who are not executive officers, as a group, if
the Directors' Plan is approved by the stockholders of Watson.
<TABLE>
<CAPTION>
NUMBER OF FORMULA
NAME AND POSITION AWARD OPTIONS
----------------- -----------------
<S> <C>
Allen Chao, Ph.D. .......................................... -0-
President and Chief Executive Officer
Alec D. Keith, Ph.D. ....................................... -0-
Chairman of the Board
David C. Hsia, Ph.D. ....................................... -0-
Senior Vice President, Scientific Affairs
Albert F. Hummel(1),........................................ 5,000
Former Chief Financial Officer
Executive Group............................................. -0-
Non-Executive Director Group................................ 30,000
Non-Executive Officer Employer Group........................ -0-
</TABLE>
- ---------------
(1) Mr. Hummel resigned as Watson's Chief Financial Officer on December 31, 1994
and became eligible for a formula option grant upon director approval of the
Directors' Plan in February, 1995.
For additional information with respect to the compensation of directors
and their ownership of Watson's Stock, see "Election of Watson
Directors -- Directors' Compensation" and "Holdings of Watson Stockholders,
Directors and Executive Officers."
DURATION, AMENDMENT AND TERMINATION OF THE PLAN
The Directors' Plan will remain in effect until February 5, 2005, unless
sooner terminated by the Board of Directors of Watson. The Board of Directors of
Watson may at any time amend, rescind or terminate the Directors' Plan as it
shall deem advisable; provided, however, that: (i) no changes may be made in
options previously granted under the Directors' Plan that would impair
participants' rights without their consent; (ii) no amendment to the Directors'
Plan may be made without approval of Watson's stockholders if the effect of the
amendment would be to increase the number of shares reserved for issuance under
the Directors' Plan, change their requirements for eligibility, or materially
modify the method for determining the number of shares awarded under the
Directors' Plan; and (iii) no amendment may be made to the Directors' Plan
within six months of a prior amendment, except as required for compliance with
the Code, as amended, the Employee Retirement Income Security Act of 1974, as
amended, or the rules thereunder.
VOTE REQUIRED
The affirmative vote of a majority of the outstanding shares of Watson
Common Stock present or represented and entitled to vote at the Watson Meeting
is required for approval of the Directors' Plan.
WATSON'S BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF WATSON'S 1995
NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN.
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<PAGE> 100
WATSON'S PROPOSAL TO AMEND WATSON'S 1991 STOCK OPTION PLAN
The Board of Directors of Watson recommends that the stockholders approve a
proposal to amend Watson's 1991 Stock Option Plan (the "1991 Plan"). This
amendment would limit the number of option shares that may be granted in a
fiscal year to each executive officer whose compensation is required to be
reported in Watson's annual proxy statement (an "Executive Officer") to 300,000
shares in the first fiscal year during which he or she becomes an Executive
Officer, and to 100,000 shares in any subsequent fiscal year during which he or
she serves as an Executive Officer. The plan currently limits the number of
options that may be granted to Executive Officers to 100,000 shares and 50,000
shares for the first and subsequent years, respectively. In addition, the
proposed amendment would increase the number of shares that can be issued under
the Plan.
REASONS FOR THE AMENDMENT
Section 162(m) of the Code, which first became effective in taxable years
after December 31, 1993, limits the deductible compensation paid to the
reporting executives of publicly held corporations to $1,000,000. Any taxable
compensation that is recognized by an Executive Officer upon (i) the exercise of
a nonstatutory stock option, or (ii) the disposition of stock acquired under an
incentive stock option prior to the first anniversary of the exercise or the
second anniversary of the option grant date, is subject to the limit. However,
the limit will not apply if the options are granted under a stockholder approved
plan document that specifies the maximum number of option shares that can be
granted to an Executive Officer during the corporation's fiscal year, provided
that each option grant is determined by a director's committee that is comprised
solely of "outside directors."
Because the amount of compensation that would be subject to the deduction
limit depends in part on the fair market value of Watson's Common Stock at an
indeterminable future date, Watson cannot be certain that any one executive's
compensation will never exceed $1,000,000 in a given year. Accordingly, in order
to protect Watson's deduction for all executive compensation that is otherwise
deductible, Watson has previously amended the 1991 Plan to specify the number of
option shares that may be granted to an Executive Officer during a fiscal year.
That prior amendment limited option grants to 100,000 shares per Executive
Officer for the first year in which an individual's compensation is required to
be disclosed in Watson's annual proxy statement. Options for subsequent years
were limited to 50,000 shares.
Watson now believes that a higher limit is necessary in the first year to
enable it to attract and retain new executive talent, as well as to more closely
align the interests of new executives with the interests of Watson's
stockholders. As a result, the proposed amendment would increase the limit on
the number of option grants that can be issued to an Executive Officer during
the first fiscal year that his or her compensation is required to be disclosed
in Watson's annual proxy statement from 100,000 shares to 300,000 shares. The
limit on option grants to current Executive Officers would increase from 50,000
shares to 100,000 shares per year. In order to facilitate this change, the
number of shares of stock that can be issued under the Plan would be increased
from 2,000,000 to 3,700,000.
TEXT OF PROPOSED AMENDMENT
"1. The phrase '3,700,000 (determined as of May 1, 1995)' is substituted
for the number 500,000 where it appears in Paragraph 2 of the Plan.
2. The following new paragraph is substituted for Paragraph 2 of the Plan:
'Eligibility. The employees eligible to be considered for the grant of
ISOs hereunder are all employees regularly employed by the Company or its
subsidiaries. All such employees and all nonemployee directors or advisors
of or consultants to the Company or its subsidiaries shall also be eligible
to receive Nonstatutory Options hereunder. However, no member of the
Committee may receive options.
The number of Option shares granted in a fiscal year to each executive
officer whose compensation is subject to reporting on the Company's annual
proxy statement (an 'Executive Officer') shall not exceed
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300,000 shares for the first fiscal year during which he or she becomes an
Executive Officer and shall not exceed 100,000 shares for any subsequent
fiscal year during which he or she serves as an Executive Officer.' "
EFFECT OF THE PROPOSED AMENDMENT
The amendment, if approved by the stockholders, would allow Watson to
retain a full compensation deduction with respect to future option grants, and
would make it easier for Watson to attract and retain new executive talent. It
would also provide new Executive Officers with an immediate incentive to
maximize stockholder wealth.
VOTE REQUIRED
The affirmative vote of a majority of the outstanding shares of Watson
Common Stock present or represented and entitled to vote at the Watson Meeting
is required for approval of the amendment.
WATSON'S BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF THE AMENDMENT
TO WATSON'S 1991 STOCK OPTION PLAN.
WATSON'S PROPOSAL TO RATIFY SELECTION OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
The firm of Price Waterhouse LLP has audited the books and records of
Watson since its inception and the Board of Directors of Watson desires to
continue the services of this firm for the current fiscal year ending December
31, 1995. Accordingly, the Board of Directors of Watson will recommend at the
Watson Meeting that the stockholders ratify the appointment of Price Waterhouse
LLP to audit the accounts of Watson for the current fiscal year. Representatives
of that firm are expected to be present at the Watson Meeting with the
opportunity to make a statement if they desire to do so and are expected to be
available to respond to appropriate questions.
VOTE REQUIRED
The affirmative vote of a majority of the outstanding shares of Watson
Common Stock present or represented and entitled to vote at the Watson Meeting
is required for approval of the proposal to ratify selection of Price Waterhouse
LLP as Watson's independent accountants for the 1995 fiscal year.
WATSON'S BOARD OF DIRECTORS RECOMMENDS A VOTE FOR RATIFICATION OF THE
SELECTION OF PRICE WATERHOUSE LLP.
DESCRIPTION OF WATSON COMMON STOCK
AUTHORIZED CAPITAL STOCK
The authorized capital stock of Watson consists of 50,000,000 shares of
Watson Common Stock, par value $0.0033 per share and 2,500,000 shares of
Preferred Stock, no par value. As of May 19, 1995, there were 17,289,786 shares
of Watson Common Stock issued and outstanding held by 251 stockholders of
record. Subject to approval of Watson's stockholders at the Watson Meeting, the
authorized capital stock of Watson will be increased to 100,000,000 shares of
Watson Common Stock and 2,500,000 shares of preferred stock, no par value.
COMMON STOCK
The holders of Watson Common Stock are entitled to one vote for each share
held of record on all matters on which stockholders are entitled or permitted to
vote. Such holders may not cumulate votes in the election of directors. The
holders of Watson Common Stock are entitled to receive such dividends as may
lawfully be declared by the Board of Directors of Watson out of funds legally
available therefore and to share
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pro rata in any other distribution to the holders of Watson Common Stock. (See
"Comparative Market Data" with respect to Watson having no present intentions of
paying dividends in the foreseeable future.) The holders of Watson Common Stock
are entitled to share ratably in Watson's assets remaining after payment of
liabilities and the rights of any preferred stockholders in the event of any
liquidation, dissolution or winding up of the affairs of Watson. The holders of
Watson Common Stock have no preemptive rights. There are no conversion rights,
redemption or sinking fund provisions or fixed dividend rights with respect to
the Watson Common Stock. All outstanding shares of Watson Common Stock are fully
paid and non-assessable, and the shares of Watson Common Stock to be issued
pursuant to the Merger Agreement will be fully paid and non-assessable.
PREFERRED STOCK
The Board of Directors of Watson has the authority to issue preferred stock
in one or more series and to fix the rights, preferences, privileges and
restrictions thereof, including dividend rights, dividend rates, conversion
rights, voting rights, terms of redemption, redemption prices, liquidation
preferences and the number of shares constituting any series or the designation
of such series, without further vote or action by the stockholders. The issuance
of preferred stock may have the effect of delaying, deferring or preventing a
change in control of Watson without further action by the stockholders and may
adversely affect the voting and other rights of the holders of Watson Common
Stock. At present, Watson has no plans to issue any of the preferred stock.
ANTI-TAKEOVER PROVISIONS
Watson may be subject to the provisions of Nevada's anti-takeover laws
known respectively as the "Combination with Interested Stockholders Statute" and
the "Control Share Acquisition Statute".
The Combination with Interested Stockholders Statute prevents "interested
stockholders" and an applicable Nevada corporation from entering into a
"combination" unless certain conditions are met. A combination means any merger
or consolidation with an "interested stockholder", or any sale, lease, exchange,
mortgage, pledge, transfer or other disposition, in one transaction or a series
of transactions with an "interested stockholder" having: (i) an aggregate market
value equal to 5% or more of the aggregate market value of the assets of a
corporation; (ii) an aggregate market value equal to 5% or more of the aggregate
market value of all outstanding shares of a corporation; or (iii) representing
10% or more of the earning power or net income of the corporation. An
"interested stockholder" means the beneficial owner of 10% or more of the voting
shares of a corporation, or an affiliate or associate thereof. A corporation may
not engage in a "combination" within three years after the interested
stockholder acquires his shares unless the combination or purchase is approved
by the board of directors before the interested stockholder acquired such
shares. If approval is not obtained, after the expiration of the three-year
period, the business combination may be consummated with the approval of the
board of directors or a majority of the voting power held by disinterested
stockholders, or if the consideration to be paid by the interested stockholder
is at least equal to the highest of: (i) the highest price per share paid by the
interested stockholder within the three years immediately preceding the date of
the announcement of the combination or in the transaction in which he became an
interested stockholder, whichever is higher, (ii) the market value per common
share on the date of announcement of the combination or the date the interested
stockholder acquired the shares, whichever is higher, or (iii) if higher for the
holders of preferred stock, the highest liquidation value of the preferred
stock.
The Control Share Acquisition Statute prohibits an acquiror, under certain
circumstances, from voting shares of a target corporation's stock after crossing
certain threshold ownership percentages, unless the acquiror obtains the
approval of the target corporation's stockholders. The Control Share Acquisition
Statute specifies three thresholds; one-fifth or more but less than one-third,
one-third or more but less than a majority and a majority or more, of the voting
power of the corporation in the election of directors. Once an acquiror crosses
one of the above thresholds, those shares acquired in such offer or acquisition
and those shares acquired within the preceding ninety days become Control Shares
and such Control Shares are deprived of the right to vote until disinterested
stockholders restore the right. The Control Shares Acquisition Statute also
provides that in the event Control Shares are accorded full voting rights and
the acquiring person has acquired
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a majority or more of all voting power, all other stockholders who do not vote
in favor of authorizing voting rights to the Control Shares are entitled to
demand payment for the fair value of their shares. The board of directors is to
notify the stockholders within twenty days after such an event has occurred that
they have the right to receive the fair value of their shares in accordance with
statutory procedures established generally for dissenters' rights. The Control
Share Acquisition Statute currently does not apply to Watson because it does not
have 100 or more stockholders who are residents of the state of Nevada.
The Board of Directors of Watson has no present intention to adopt a
stockholder protection plan, though the Board may consider the future adoption
of such a plan at a future meeting of the Board of Directors.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for Watson Common Stock is Chemical Trust
Company of California.
LEGAL MATTERS
The validity of the issuance of the shares of Watson Common Stock being
offered hereby will be passed upon for Watson by D'Ancona & Pflaum, Chicago,
Illinois. As of the date of this Proxy Statement/Prospectus Michel Feldman, a
partner of D'Ancona & Pflaum and a director of Watson, beneficially owned 15,500
shares of Watson Common Stock and had the right to acquire 12,000 shares of
Watson Common Stock pursuant to outstanding options (and will have the right to
acquire an additional 5,000 shares of Watson Common Stock if the Directors' Plan
is approved by the Watson stockholders), and other partners beneficially owned
approximately 2,000 shares of Watson Common Stock. The Federal income tax
consequences in connection with the Merger will be passed upon for Watson by
D'Ancona & Pflaum. The Federal income tax consequences in connection with the
Merger will be passed upon for Circa by Schulte Roth & Zabel, New York, New
York.
EXPERTS
The consolidated balance sheets of Watson as of December 31, 1994 and 1993
and the consolidated statements of income, stockholders equity and cash flows
for each of the three years in the period ended December 31, 1994 incorporated
by reference in this Proxy Statement/Prospectus, have been so incorporated
herein in reliance on the report of Price Waterhouse LLP, independent
accountants, given on the authority of said firm as experts in accounting and
auditing.
The consolidated balance sheets of Circa as of December 31, 1994 and 1993
and the consolidated statements of operations, retained earnings, and cash flows
for each of the three years in the period ended December 31, 1994, incorporated
by reference in this Proxy Statement/Prospectus, have been incorporated herein
in reliance on the report of Coopers & Lybrand L.L.P., independent accountants,
given on the authority of that firm as experts in accounting and auditing.
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STOCKHOLDER PROPOSALS
Any proposals that stockholders of Watson desire to have presented at the
1996 Annual Meeting of Stockholders must have been received by Watson at its
principal executive offices by February 17, 1996.
If the Merger is not consummated, or is not consummated within the time
period currently contemplated, stockholder proposals intended to be presented at
the 1995 Annual Meeting of Circa must have been submitted to Circa at its
principal executive offices by September 1, 1995 in order to be considered for
inclusion in the proxy materials for such meeting.
By Order of the Board
of Directors of Circa Pharmaceuticals,
Inc.
/s/ DR. MELVIN SHAROKY
Dr. Melvin Sharoky
President and Chief Executive Officer
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APPENDIX A
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AGREEMENT AND PLAN OF MERGER
AMONG
WATSON PHARMACEUTICALS, INC.,
GUM ACQUISITION CORP.
AND
CIRCA PHARMACEUTICALS, INC.
DATED AS OF MARCH 29, 1995
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<PAGE> 106
TABLE OF CONTENTS
<TABLE>
<CAPTION>
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<S> <C> <C>
ARTICLE I -- THE MERGER................................................................ A-1
SECTION 1.1 The Merger............................................................ A-1
SECTION 1.2 Closing............................................................... A-1
SECTION 1.3 Effective Time........................................................ A-1
SECTION 1.4 Conversion of Shares.................................................. A-2
SECTION 1.5 Stock Options; Restricted Stock....................................... A-3
SECTION 1.6 Exchange of Certificates Representing CIRCA Common Stock.............. A-3
SECTION 1.7 Adjustment of Exchange Ratio.......................................... A-5
SECTION 1.8 Dissenting Shares..................................................... A-5
</TABLE>
<TABLE>
<S> <C> <C>
ARTICLE II -- CERTAIN MATTERS RELATING TO THE
SURVIVING CORPORATION................................................ A-6
SECTION 2.1 Certificate of Incorporation of the Surviving Corporation............. A-6
SECTION 2.2 By-Laws of the Surviving Corporation.................................. A-6
SECTION 2.3 Directors of the Surviving Corporation................................ A-6
SECTION 2.4 Officers of the Surviving Corporation................................. A-6
ARTICLE III -- REPRESENTATIONS AND WARRANTIES OF WATSON AND
MERGER SUB.......................................................... A-6
SECTION 3.1 Existence, Good Standing, Corporate Authority......................... A-6
SECTION 3.2 Authorization, Validity and Effect of Agreements...................... A-6
SECTION 3.3 Compliance with Laws -- General....................................... A-7
SECTION 3.4 Compliance with Laws -- FDA/DEA....................................... A-7
SECTION 3.5 Capitalization........................................................ A-8
SECTION 3.6 Subsidiaries.......................................................... A-8
SECTION 3.7 Other Interests....................................................... A-9
SECTION 3.8 No Violation.......................................................... A-9
SECTION 3.9 Conduct of Business................................................... A-10
SECTION 3.10 SEC Documents......................................................... A-10
SECTION 3.11 Disclosure Documents.................................................. A-10
SECTION 3.12 Litigation............................................................ A-11
SECTION 3.13 Products Liability.................................................... A-11
SECTION 3.14 Absence of Certain Changes............................................ A-11
SECTION 3.15 Trademarks and Patents................................................ A-11
SECTION 3.16 Properties............................................................ A-11
SECTION 3.17 Material Contracts.................................................... A-12
SECTION 3.18 Taxes................................................................. A-12
SECTION 3.19 Employee Benefit Plans................................................ A-12
SECTION 3.20 Labor Matters......................................................... A-13
SECTION 3.21 Environmental Matters................................................. A-14
SECTION 3.22 Absence of Indemnifiable Claims, etc.................................. A-14
SECTION 3.23 No Brokers............................................................ A-14
</TABLE>
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<TABLE>
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<S> <C> <C>
SECTION 3.24 Opinion of Financial Advisor.......................................... A-14
SECTION 3.25 CIRCA Stock Ownership................................................. A-14
SECTION 3.26 Watson Common Stock................................................... A-14
SECTION 3.27 Convertible Securities................................................ A-14
SECTION 3.28 Pooling of Interests, Tax Reorganization.............................. A-14
SECTION 3.29 Takeover Statutes..................................................... A-15
ARTICLE IV -- REPRESENTATIONS AND WARRANTIES OF CIRCA.................................. A-15
SECTION 4.1 Existence, Good Standing, Corporate Authority......................... A-15
SECTION 4.2 Authorization, Validity and Effect of Agreements...................... A-15
SECTION 4.3 Compliance with Laws -- General....................................... A-15
SECTION 4.4 Compliance with Laws -- FDA/DEA....................................... A-16
SECTION 4.5 Capitalization........................................................ A-17
SECTION 4.6 Subsidiaries.......................................................... A-17
SECTION 4.7 Other Interests....................................................... A-17
SECTION 4.8 No Violation.......................................................... A-17
SECTION 4.9 Conduct of Business................................................... A-18
SECTION 4.10 SEC Documents......................................................... A-18
SECTION 4.11 Information Supplied.................................................. A-18
SECTION 4.12 Litigation............................................................ A-19
SECTION 4.13 Products Liability.................................................... A-19
SECTION 4.14 Absence of Certain Changes............................................ A-19
SECTION 4.15 Trademarks and Patents................................................ A-19
SECTION 4.16 Properties............................................................ A-20
SECTION 4.17 Material Contracts.................................................... A-20
SECTION 4.18 Taxes................................................................. A-20
SECTION 4.19 Employee Benefit Plans................................................ A-20
SECTION 4.20 Labor Matters......................................................... A-21
SECTION 4.21 Environmental Matters................................................. A-21
SECTION 4.22 Takeover Statutes..................................................... A-21
SECTION 4.23 Absence of Indemnifiable Claims, etc.................................. A-22
SECTION 4.24 No Brokers............................................................ A-22
SECTION 4.25 Opinion of Financial Advisors......................................... A-22
SECTION 4.26 Watson Stock Ownership................................................ A-22
SECTION 4.27 Pooling of Interests, Tax Reorganization.............................. A-22
ARTICLE V -- COVENANTS................................................................. A-22
SECTION 5.1 Alternative Proposals................................................. A-22
SECTION 5.2 Interim Operations.................................................... A-23
SECTION 5.3 Meetings of Stockholders.............................................. A-24
SECTION 5.4 Filings; Other Action................................................. A-25
SECTION 5.5 Inspection of Records................................................. A-25
SECTION 5.6 Publicity............................................................. A-26
</TABLE>
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<TABLE>
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<S> <C> <C>
SECTION 5.7 Registration Statement................................................ A-26
SECTION 5.8 Further Action........................................................ A-26
SECTION 5.9 Affiliate Letters..................................................... A-26
SECTION 5.10 Expenses.............................................................. A-26
SECTION 5.11 Insurance; Indemnity.................................................. A-27
SECTION 5.12 Restructuring of Merger............................................... A-27
SECTION 5.13 Rights Agreement...................................................... A-28
SECTION 5.14 Governance............................................................ A-28
SECTION 5.15 Pooling; Reorganization............................................... A-28
SECTION 5.16 Employee Benefit Plans................................................ A-28
SECTION 5.17 NASD Listing.......................................................... A-28
SECTION 5.18 Assumption of Agreements, etc......................................... A-29
SECTION 5.19 Cause................................................................. A-29
ARTICLE VI -- CONDITIONS............................................................... A-29
SECTION 6.1 Conditions to Each Party's Obligation to Effect the Merger............ A-29
SECTION 6.2 Conditions to Obligation of CIRCA to Effect the Merger................ A-30
SECTION 6.3 Conditions to Obligation of Watson and Merger Sub to Effect the
Merger................................................................ A-30
ARTICLE VII -- TERMINATION............................................................. A-31
SECTION 7.1 Termination by Mutual Consent......................................... A-31
SECTION 7.2 Termination by Either Watson or CIRCA................................. A-31
SECTION 7.3 Termination by CIRCA.................................................. A-31
SECTION 7.4 Termination by Watson................................................. A-32
SECTION 7.5 Effect of Termination and Abandonment................................. A-32
SECTION 7.6 Extension; Waiver..................................................... A-33
ARTICLE VIII -- GENERAL PROVISIONS..................................................... A-33
SECTION 8.1 Nonsurvival of Representations, Warranties and Agreements............. A-33
SECTION 8.2 Notices............................................................... A-34
SECTION 8.3 Assignment, Binding Effect............................................ A-34
SECTION 8.4 Entire Agreement...................................................... A-34
SECTION 8.5 Amendment............................................................. A-34
SECTION 8.6 Governing Law......................................................... A-34
SECTION 8.7 Counterparts.......................................................... A-34
SECTION 8.8 Headings.............................................................. A-35
SECTION 8.9 Interpretation........................................................ A-35
SECTION 8.10 Waivers............................................................... A-35
SECTION 8.11 Incorporation of Exhibits............................................. A-35
SECTION 8.12 Severability.......................................................... A-35
SECTION 8.13 Enforcement of Agreement.............................................. A-35
</TABLE>
Exhibit A Affiliate Letter (not included herein)
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AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER is dated as of March 29, 1995 (the
"Agreement") among Watson Pharmaceuticals, Inc., a Nevada corporation
("Watson"), Gum Acquisition Corp., a Nevada corporation and the wholly-owned
subsidiary of Watson ("Merger Sub"), and Circa Pharmaceuticals, Inc., a New York
corporation ("CIRCA").
WHEREAS, the Board of Directors of each of Watson and CIRCA have determined
that a business combination between Watson and CIRCA is in the best interests of
their respective companies and stockholders and presents an opportunity for
their respective companies to achieve long-term strategic and financial
benefits, and, accordingly, have approved and adopted this Agreement and the
transactions contemplated hereby and recommend approval thereof by their
respective stockholders; and
WHEREAS, the respective Boards of Directors of Watson and CIRCA have
determined that the merger provided for herein is fair to their respective
stockholders; and
WHEREAS, it is the intention of the parties to this Agreement that for
federal income tax purposes, the merger provided for herein shall qualify as a
"reorganization" within the meaning of Section 368 of the Internal Revenue Code
of 1986, as amended (the "Code"); and
WHEREAS, for accounting purposes, it is intended that the Merger shall be
accounted for as a "pooling of interests;" and
WHEREAS, Watson has delivered to CIRCA voting agreements executed by the
holders of more than 17% of Watson's outstanding voting stock;
NOW, THEREFORE, in consideration of the premises and of the
representations, warranties, covenants and agreements set forth herein, the
parties hereto hereby agree as follows:
ARTICLE I
THE MERGER
SECTION 1.1 The Merger. Upon the terms and subject to the conditions of
this Agreement, at the Effective Time (as defined in Section 1.3 of this
Agreement), Merger Sub shall be merged with and into CIRCA in accordance with
the laws of the States of Nevada and New York and the terms of this Agreement
(the "Merger"), whereupon the separate corporate existence of Merger Sub shall
cease, and CIRCA shall be the surviving corporation of the Merger (sometimes
referred to herein as the "Surviving Corporation").
SECTION 1.2 Closing. Subject to the terms and conditions of this
Agreement, the closing of the Merger (the "Closing") shall take place (a) at the
offices of D'Ancona & Pflaum, 30 North LaSalle Street, Suite 2900, Chicago,
Illinois 60602 at 10:00 a.m. on the second business day after all the conditions
set forth in Article VI of this Agreement (other than those that are waived by
the party or parties for whose benefit such conditions exist) are satisfied; or
(b) at such other place, time, and/or date as the parties hereto may otherwise
agree. The date upon which the Closing shall occur is referred to herein as the
"Closing Date."
SECTION 1.3 Effective Time. As soon as practical after all the conditions
to the Merger set forth in Article VI of this Agreement have been fulfilled or
waived and this Agreement shall not have been terminated as provided in Article
VII hereof, the parties hereto shall cause certificates of merger to be properly
executed and filed in accordance with the laws of the States of Nevada and New
York and the terms of this Agreement. The parties hereto shall also take such
further actions as may be required under the laws of the States of Nevada and
New York in connection with the consummation of the Merger. The Merger shall
become effective at such time as the certificates of merger are duly filed with
the Secretary of State of the States of Nevada and New York or at such later
time as is specified in the certificates of merger (the "Effective Time"). From
and after the Effective Time, the Surviving Corporation shall possess all the
rights, privileges, powers and franchises and be subject to all of the
restrictions, disabilities, liabilities and duties of CIRCA and Merger Sub, all
as provided under applicable law.
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SECTION 1.4 Conversion of Shares.
(a) At the Effective Time: (i) each share of Common Stock, par value $.01
per share, of Merger Sub outstanding immediately prior to the Effective Time
shall be converted into and exchanged for one share of Common Stock, par value
$.01 per share, of the Surviving Corporation; and (ii) each share of Common
Stock, par value $0.01 per share (the "CIRCA Common Stock"), of CIRCA
outstanding immediately prior to the Effective Time plus the associated rights
described in Section 5.13 hereof (the "CIRCA Rights"), by virtue of the Merger
and without any action on the part of the holder thereof, except as otherwise
provided in Sections 1.4(c) or 1.8 hereof, shall be converted into the right to
receive 0.86 of a share of Common Stock, par value $0.0033 per share (the
"Watson Common Stock"), of Watson (such ratio, as adjusted as contemplated
pursuant to Section 1.7 and 7.3(g), being referred to herein as the "Exchange
Ratio"). The Exchange Ratio shall be rounded to the nearest ten-thousandth of a
share. To the extent such plan is adopted on or prior to the Effective Time,
each share of Watson Common Stock issued to holders of CIRCA Common Stock in the
Merger shall be issued together with one associated stock purchase right (a
"Right") in accordance with a Rights Agreement to be entered into by Watson.
References herein to the shares of Watson Common Stock issuable in the Merger
shall be deemed to include the associated Rights, if so issued; and references
herein to shares of CIRCA Common Stock to be cancelled pursuant to the Merger
shall be deemed to include the associated CIRCA Rights.
(b) As a result of the Merger and without any action on the part of the
holder thereof, at the Effective Time, all shares of CIRCA Common Stock shall
cease to be outstanding and shall be cancelled and retired and shall cease to
exist, and each holder of shares of CIRCA Common Stock shall thereafter cease to
have any rights with respect to such shares of CIRCA Common Stock, except for
the right to receive (except as otherwise provided in Section 1.8 hereof),
without interest, the Watson Common Stock and cash for fractional shares of
Watson Common Stock in accordance with Section 1.6 of this Agreement upon the
surrender of a certificate (each, a "Certificate") representing such shares of
CIRCA Common Stock in accordance with the provisions of this Article I.
(c) Each share of CIRCA Common Stock held by CIRCA as treasury stock or
owned by Watson or any Subsidiary (as defined in Section 1.4(d) of this
Agreement) of Watson immediately prior to the Effective Time shall be canceled,
and no payment shall be made with respect thereto.
(d) For purposes of this Agreement, (i) the term "Average Closing Price"
shall mean the average of the per share daily closing price of Watson Common
Stock as quoted on the NASDAQ National Market System ("NASDAQ") (and as reported
by The Wall Street Journal or, if not reported thereby, by another authoritative
source) during the twenty (20) consecutive trading days ending on the
Determination Date (as defined in Section 7.3); (ii) the word "Subsidiary" when
used with respect to any Person means any corporation or other organization,
whether incorporated or unincorporated, of which (A) at least 15% of the
securities or other interests having by their terms ordinary voting power to
elect a majority of the board of directors or others performing similar
functions with respect to such corporation or other organization is directly or
indirectly owned or controlled by such Person or by any one or more of its
Subsidiaries or (B) such Person or any other Subsidiary of such Person is a
general partner, it being understood that representations and warranties of a
Person concerning any former Subsidiary of such Person shall be deemed to relate
only to the periods during which such former Subsidiary was a Subsidiary of such
Person, provided, however, that "Subsidiary" shall not include any non-wholly
owned entity of such Person if (a) such Person has, in the aggregate, invested
or committed to invest less than $1,000,000 and (b) such entity generated less
than $10,000,000 of net revenues in such entity's last fiscal year; (iii) the
word "Person" means an individual, a corporation, a partnership, an association,
a trust or any other entity or organization, including a government or political
subdivision or any agency or instrumentality thereof, or any affiliate (as that
term is defined in the Securities Exchange Act of 1934, as amended, and the
rules and regulations promulgated thereunder (the "Exchange Act")) of any of the
foregoing; (iv) the term "executive officers of Watson" (and similar
formulations) shall mean those persons identified as such in the Watson
Disclosure Letter (as hereinafter defined); and (v) the term "executive officers
of CIRCA" (and similar formulations) shall mean those persons identified as such
in the CIRCA Disclosure Letter (as hereinafter defined).
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SECTION 1.5 Stock Options; Restricted Stock.
(a) All options (individually, a "CIRCA Option" and collectively, the
"CIRCA Options") outstanding at the Effective Time under any CIRCA Stock Option
Plan or Purchase Plan (the "CIRCA Stock Option Plans") shall remain outstanding
following the Effective Time. At the Effective Time, such CIRCA Options shall,
by virtue of the Merger and without any further action on the part of CIRCA or
the holder of such CIRCA Options, be assumed by Watson in such manner that
Watson (a) is a corporation (or a parent or a subsidiary corporation of such
corporation) "assuming a stock option in a transaction to which Section 424(a)
applied" within the meaning of Section 424 of the Code; or (b) to the extent
that Section 424 of the Code does not apply to any such CIRCA Options, would be
such a corporation (or a parent or a subsidiary corporation of such corporation)
were Section 424 applicable to such option. At the Effective Time, (i) all
references in the CIRCA Stock Option Plans to CIRCA shall be deemed to refer to
Watson and (ii) Watson shall issue to each holder of a CIRCA Option a document
evidencing the assumption of such option by Watson in accordance herewith. Each
CIRCA Option assumed by Watson (as assumed, the "Watson Options") shall be
exercisable upon the same terms and conditions including, without limitation,
vesting (other than those options the vesting of which is accelerated by virtue
of the Merger, as described in the CIRCA Disclosure Letter), as under the
applicable CIRCA Stock Option Plan and the applicable option agreement issued
thereunder, except that (x) each such CIRCA Option shall be exercisable for that
whole number of shares of Watson Common Stock (to the nearest whole share) into
which the number of shares of CIRCA Common Stock subject to such CIRCA Option
immediately prior to the Effective Time would be converted under Section 1.4 of
this Agreement; and (y) the option price per share of Watson Common Stock shall
be an amount equal to the option price per share of CIRCA Common Stock subject
to such CIRCA Option in effect immediately prior to the Effective Time divided
by the Exchange Ratio (the option price per share, as so determined, being
rounded upward to the nearest full cent). The date of grant of each Watson
Option shall be the date on which the corresponding CIRCA Option was granted. No
payment shall be made for fractional interests. From and after the date of this
Agreement, except as provided in Section 5.2(vi) of this Agreement, no
additional options shall be granted by CIRCA or its Subsidiaries under the CIRCA
Stock Option Plans or otherwise. Watson shall take all corporate actions
necessary to reserve for issuance such number of shares of Watson Common Stock
as will be necessary to satisfy exercises in full of all CIRCA Options after the
Effective Time.
(b) All shares of restricted CIRCA Common Stock issued as described in a
schedule to the CIRCA Disclosure Letter shall, upon their conversion to Watson
Common Stock pursuant to Section 1.4(a), be subject to the same terms and
conditions (including, without limitation, vesting) to which such shares are
currently subject, provided that all references to CIRCA in any agreement
relating to such stock shall be deemed references to Watson.
SECTION 1.6 Exchange of Certificates Representing CIRCA Common Stock.
(a) As of the Effective Time, Watson shall deposit, or shall cause to be
deposited, with an exchange agent selected by Watson, which shall be Watson's
Transfer Agent or such other party reasonably satisfactory to CIRCA (the
"Exchange Agent"), for the benefit of the holders of shares of CIRCA Common
Stock, for exchange in accordance with this Section 1.6, certificates
representing the shares of Watson Common Stock (such certificates for shares of
Watson Common Stock, together with any dividends or distributions with respect
thereto (relating to record dates for such dividends or distributions after the
Effective Time), being hereinafter referred to as the "Exchange Fund") to be
issued pursuant to Section 1.4 and paid pursuant to this Section 1.6 in exchange
for outstanding shares of CIRCA Common Stock. The Exchange Agent shall, pursuant
to irrevocable instructions, deliver the Watson Common Stock contemplated to be
issued pursuant hereto out of the Exchange Fund. Except as contemplated by
Section 1.6(e) hereof, the Exchange Fund shall not be used for any other
purpose.
(b) Promptly after the Effective Time, Watson shall cause the Exchange
Agent to mail to each holder of record of shares of CIRCA Common Stock
immediately prior to the Effective Time (i) a letter of transmittal which shall
specify that delivery shall be effected, and risk of loss and title to such
shares of CIRCA Common Stock shall pass, only upon delivery of the Certificates
representing such shares to the Exchange Agent and
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which shall be in customary form, and (ii) instructions for use in effecting the
surrender of such Certificates in exchange for certificates representing shares
of Watson Common Stock and cash in lieu of fractional shares. Upon surrender of
a Certificate for cancellation to the Exchange Agent, together with such letter
of transmittal, duly executed and completed in accordance with the instructions
thereto, the holder of the Certificate shall be entitled to receive in exchange
therefor (i) a certificate representing that number of whole shares of Watson
Common Stock which such holder has the right to receive in respect of the shares
of CIRCA Common Stock formerly represented by such Certificate (after taking
into account all shares of CIRCA Common Stock then held by such holder); and
(ii) a check representing the amount of cash in lieu of fractional shares, if
any, and unpaid dividends and distributions after giving effect to any required
withholding tax, if any, which such holder has the right to receive in respect
of the Certificate surrendered pursuant to the provisions of this Section 1.6,
and the shares represented by the Certificate so surrendered shall forthwith be
cancelled. No interest will be paid or accrued on the cash in lieu of fractional
shares and unpaid dividends and distributions, if any, payable to holders of
shares of CIRCA Common Stock. In the event of a transfer of ownership of CIRCA
Common Stock which is not registered in the transfer records of CIRCA, a
certificate representing the proper number of shares of Watson Common Stock,
together with a check for the cash to be paid in lieu of fractional shares, if
any, and unpaid dividends and distributions, if any, may be issued to such a
transferee if the Certificate representing such CIRCA Common Stock is presented
to the Exchange Agent, accompanied by all documents required to evidence and
effect such transfer and to evidence that any applicable stock transfer taxes
have been paid.
(c) Notwithstanding anything to the contrary contained herein, no dividends
or other distributions declared after the Effective Time on Watson Common Stock
shall be paid with respect to any shares of CIRCA Common Stock represented by a
Certificate until such Certificate is surrendered for exchange as provided
herein. Subject to the effect of applicable laws, following surrender of any
such Certificate, there shall be paid to the holder of the certificates
representing whole shares of Watson Common Stock issued in exchange therefor,
without interest, (i) at the time of such surrender, the amount of dividends or
other distributions with a record date after the Effective Time theretofore
payable with respect to such whole shares of Watson Common Stock and not paid,
less the amount of any withholding taxes which may be required thereon; and (ii)
at the appropriate payment date, the amount of dividends or other distributions
with a record date after the Effective Time but prior to surrender and a payment
date subsequent to surrender payable with respect to such whole shares of Watson
Common Stock, less the amount of any withholding taxes which may be required
thereon.
(d) At or after the Effective Time, there shall be no transfers on the
stock transfer books of CIRCA of the shares of CIRCA Common Stock which were
outstanding immediately prior to the Effective Time. If, after the Effective
Time, Certificates are presented to the Surviving Corporation, they shall be
cancelled and exchanged for certificates for shares of Watson Common Stock and
cash in lieu of fractional shares, if any, deliverable in respect thereof
pursuant to this Agreement in accordance with the procedures set forth in this
Section 1.6. Certificates surrendered for exchange by any person constituting an
"affiliate" of CIRCA for purposes of Rule 145(c) under the Securities Act of
1933, as amended (the "Securities Act"), shall not be exchanged until Watson has
received a written agreement from such person as provided in Section 5.9.
(e) (i) No fractional shares of Watson Common Stock shall be issued
pursuant hereto. In lieu of the issuance of any fractional share of Watson
Common Stock pursuant to Section 1.4(b), cash adjustments will be paid as set
forth herein.
(ii) As promptly as practicable following the Effective Time, the Exchange
Agent shall determine the excess of (x) the number of full shares of Watson
Common Stock delivered to the Exchange Agent by Watson pursuant to Section
1.6(a) over (y) the aggregate number of full shares of Watson Common Stock to be
distributed to holders of CIRCA Common Stock pursuant to Section 1.6(b) (such
excess being herein called the "Excess Shares"). As soon after the Effective
Time as practicable, the Exchange Agent, as agent for such holders of CIRCA
Common Stock, shall sell the Excess Shares at then prevailing prices on the
NASDAQ, all in the manner provided in paragraph (iii) of this Section.
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(iii) The sale of the Excess Shares by the Exchange Agent shall be executed
on the NASDAQ through one or more member firms of the National Association of
Securities Dealers, Inc. (the "NASD") and shall be executed in round lots to the
extent practicable. Until the net proceeds of such sale or sales have been
distributed to such holders of CIRCA Common Stock, the Exchange Agent will hold
such proceeds in trust for such holders of CIRCA Common Stock (the "Trust").
Watson shall pay all commissions, transfer taxes and other out-of-pocket
transaction costs of the Exchange Agent incurred in connection with such sale of
Excess Shares. In addition, Watson shall pay the Exchange Agent's compensation
and expenses in connection with such sales. The Exchange Agent shall determine
the portion of the Trust to which each holder of CIRCA Common Stock shall be
entitled, if any, by multiplying the amount of the aggregate net proceeds
comprising the Trust by a fraction the numerator of which is the amount of the
fractional share interest to which such holder of CIRCA Common Stock is entitled
(after taking into account all shares of CIRCA Common Stock then held by such
holder) and the denominator of which is the aggregate amount of fractional share
interests to which all holders of Certificates representing CIRCA Common Stock
are entitled.
(iv) As soon as practicable after the determination of the amount of cash,
if any, to be paid to holders of CIRCA Common Stock with respect to any
fractional share interests, the Exchange Agent shall promptly pay such amounts
to such holders of CIRCA Common Stock subject to and in accordance with the
terms of Section 1.6(f).
(f) Any portion of the Exchange Fund (including the proceeds of any
investments thereof and any shares of Watson Common Stock) that remains
unclaimed by the former stockholders of CIRCA one year after the Effective Time
shall be delivered to Watson. Any former stockholders of CIRCA who have not
theretofore complied with this Section 1.6 shall thereafter look only to Watson
for payment of their shares of Watson Common Stock, cash in lieu of fractional
shares and unpaid dividends and distributions on the Watson Common Stock
deliverable in respect of each share of CIRCA Common Stock such stockholder
holds as determined pursuant to this Agreement, in each case, without any
interest thereon.
(g) None of Watson, Merger Sub, CIRCA, the Surviving Corporation, the
Exchange Agent or any other person shall be liable to any former holder of
shares of CIRCA Common Stock for any amount properly delivered to a public
official pursuant to applicable abandoned property, escheat or similar laws.
(h) In the event any Certificate shall have been lost, stolen or destroyed,
upon the making of an affidavit of that fact by the person claiming such
Certificate to be lost, stolen or destroyed and, if required by the Surviving
Corporation, the posting by such person of a bond in such reasonable amount as
the Surviving Corporation may direct as indemnity against any claim that may be
made against it with respect to such Certificate, the Exchange Agent will issue
in exchange for such lost, stolen or destroyed Certificate, the shares of Watson
Common Stock and cash in lieu of fractional shares, and unpaid dividends and
distributions on shares of Watson Common Stock as provided in this Section 1.6,
deliverable in respect thereof pursuant to this Agreement.
(i) All shares of Watson Common Stock issued upon conversion of the shares
of CIRCA Common Stock in accordance with the terms hereof (including any cash
paid pursuant hereto) shall be deemed to have been issued in full satisfaction
of all rights pertaining to such shares of CIRCA Common Stock.
SECTION 1.7 Adjustment of Exchange Ratio. In the event that, subsequent to
the date of this Agreement but prior to the Effective Time, the outstanding
shares of Watson Common Stock or CIRCA Common Stock, respectively, shall have
been changed into a different number of shares or a different class as a result
of a stock split, reverse stock split, stock dividend, subdivision,
reclassification, split, combination, exchange, recapitalization or other
similar transaction, the Exchange Ratio shall be appropriately adjusted.
SECTION 1.8 Dissenting Shares. Notwithstanding anything to the contrary
contained in this Agreement, in the event appraisal rights are available to
CIRCA's stockholders pursuant to applicable law, any shares of CIRCA Common
Stock held by a person who objects to the Merger and who complies with all of
the provisions of applicable law concerning the rights of such person to dissent
from the Merger and to require appraisal of such person's shares of CIRCA Common
Stock ("CIRCA Dissenting Shares") shall not be converted into shares of Watson
Common Stock pursuant to Section 1.4 of this Agreement but shall become
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the right to receive such consideration as may be determined to be due to the
holder of such CIRCA Dissenting Shares pursuant to applicable law; provided
however, that any CIRCA Dissenting Shares held by a person at the Effective Time
who shall, after the Effective Time, withdraw the demand for appraisal or lose
the right to appraisal, in either case pursuant to applicable law, shall be
deemed to have converted, as of the Effective Time, his or her shares of CIRCA
Common Stock into shares of Watson Common Stock pursuant to Section 1.4 of this
Agreement.
ARTICLE II
CERTAIN MATTERS RELATING TO THE SURVIVING CORPORATION
SECTION 2.1 Certificate of Incorporation of the Surviving Corporation. The
certificate of incorporation of the Surviving Corporation immediately after the
Effective Time shall be in a form to be agreed to by Watson and CIRCA prior to
the Effective Time.
SECTION 2.2 By-Laws of the Surviving Corporation. The By-Laws of the
Surviving Corporation immediately after the Effective Time shall be in a form to
be agreed to by Watson and CIRCA prior to the Effective Time.
SECTION 2.3 Directors of the Surviving Corporation. The directors of the
Surviving Corporation immediately after the Effective Time shall consist of the
persons set forth in the Watson Disclosure Letter, to hold office until their
successors are duly appointed or elected in accordance with applicable law.
SECTION 2.4 Officers of the Surviving Corporation. The officers of the
Surviving Corporation immediately after the Effective Time shall consist of the
persons set forth in the Watson Disclosure Letter, who shall hold the offices
listed opposite their respective names until their successors are duly appointed
or elected in accordance with applicable law.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF WATSON AND MERGER SUB
Except as set forth in the disclosure letter delivered by Watson to CIRCA
(the "Watson Disclosure Letter"), Watson and Merger Sub represent and warrant to
CIRCA (with such representations and warranties with respect to non-wholly owned
Subsidiaries being made as to the knowledge of Watson's executive officers
(which shall include knowledge of documents in such persons' possession) as of
the date hereof and at the Effective Time) as follows:
SECTION 3.1 Existence, Good Standing, Corporate Authority. Watson and each
of its Subsidiaries are corporations or partnerships duly organized, validly
existing and in good standing under the laws of their respective jurisdiction of
incorporation. Each of Watson and each of its Subsidiaries is duly licensed or
qualified to do business as a foreign corporation or partnership and is in good
standing under the laws of any other state of the United States in which the
character of the properties owned or leased by it or in which the transaction of
its respective business makes such qualification necessary, except where the
failure to be so qualified or to be in good standing would not have a material
adverse effect on the business, results of operations or financial condition of
Watson and its Subsidiaries taken as a whole (a "Watson Material Adverse
Effect"). Watson and each of its Subsidiaries have all requisite corporate power
and authority to own, operate and lease their respective properties. The copies
of Watson's and each of its Subsidiaries' Certificates of Incorporation and
Bylaws previously delivered or made available to CIRCA are true and correct.
SECTION 3.2 Authorization, Validity and Effect of Agreements. Each of
Watson and Merger Sub has the requisite corporate power and authority to execute
and deliver this Agreement and all agreements and documents to be executed and
delivered in connection herewith. Subject only to the approval and adoption of
this Agreement and the transactions contemplated hereby by the holders of a
majority of the outstanding shares of Watson Common Stock, the execution and
delivery of this Agreement (and the agreements contemplated hereby) and the
consummation by Watson and Merger Sub of the transactions contemplated
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hereby has been duly authorized by all requisite corporate action. This
Agreement constitutes, and all agreements and documents to be executed and
delivered in connection herewith (when executed and delivered pursuant hereto
for value received) will constitute, the valid and legally binding obligations
of Watson and Merger Sub, enforceable against Watson and Merger Sub in
accordance with their respective terms, subject to applicable bankruptcy,
insolvency, moratorium or other similar laws relating to creditors' rights and
general principles of equity.
SECTION 3.3 Compliance with Laws -- General.
(a) Watson and each of its Subsidiaries hold all permits, licenses,
variances, exemptions, orders and approvals of any court, arbitral, tribunal,
administrative agency or commission or other governmental or other regulatory
authority or agency ("Governmental Entities") necessary for the lawful conduct
of their respective businesses (the "Permits"), except for immaterial failures
that have no impact on operations.
(b) Watson and each of its Subsidiaries are in substantial compliance with
the terms of its Permits, except for immaterial failures to comply that have no
impact on operations.
(c) Watson and each of its Subsidiaries are in substantial compliance with
all laws, ordinances or regulations of all Governmental Entities, including, but
not limited to, those related to occupational health and safety, controlled
substances or employment and employment practices, except for immaterial
failures to comply that have no impact on operations.
(d) As of the date of this Agreement, no investigation, review, inquiry or
proceeding by any Governmental Entity with respect to Watson or any of its
Subsidiaries is pending or, to the best knowledge of the executive officers of
Watson, threatened.
(e) Neither Watson nor any of its Subsidiaries currently is subject to any
agreement, contract or decree with any Governmental Entities arising out of any
current or previously existing violations.
SECTION 3.4 Compliance with Laws -- FDA/DEA.
(a) As to each drug of Watson or any Watson Subsidiary for which an
abbreviated application has been approved by the Food and Drug Administration
(the "FDA"), which drugs are described in the Watson Disclosure Letter, Watson
and its Subsidiaries are in substantial compliance with 21 U.S.C. sec.sec. 355
or 357, 21 C.F.R. Parts 314 or 430 et. seq., respectively, and all terms and
conditions of the abbreviated application.
(b) As to each biologic product of Watson or any Watson Subsidiary for
which an establishment license application ("ELA") and/or product license
application ("PLA") has been filed, which products are described in the Watson
Disclosure Letter, Watson and its Subsidiaries are in substantial compliance
with 42 U.S.C. sec. 262, 21 C.F.R. Part 601 et. seq., and all terms and
conditions of the ELA and/or PLA.
(c) Watson and its subsidiaries are in substantial compliance with all
applicable registration and listing requirements set forth in 21 U.S.C. sec. 360
and 21 C.F.R. Part 207. To the extent required, Watson and its Subsidiaries have
obtained licenses from the U.S. Drug Enforcement Administration (the "DEA") and
are in substantial compliance with all such licenses and all applicable
regulations promulgated by the DEA.
(d) Since May 1, 1993, all manufacturing operations of Watson and its
Subsidiaries have been conducted in substantial compliance with the good
manufacturing practice regulations set forth in 21 C.F.R. Parts 210 and 211.
(e) Neither Watson nor any officer, employee, or agent of Watson or any of
its Subsidiaries has made an untrue statement of a material fact or fraudulent
statement to the FDA or the DEA, failed to disclose a material fact required to
be disclosed to the FDA or the DEA, or committed an act, made a statement, or
failed to make a statement, in any case, that could reasonably be expected to
provide a basis for the FDA to invoke (after the date hereof) its policy
respecting "Fraud, Untrue Statements of Material Facts, Bribery, and Illegal
Gratuities", set forth in 56 Fed. Reg 46191 (September 10, 1991) and the FDA has
not taken any such action since May 1, 1993.
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(f) Watson has made available to CIRCA copies of any and all reports of
inspection observations, establishment inspection reports, warning letters and
any other documents received from the FDA or the DEA within the last three years
that indicate or suggest lack of compliance with the FDA or the DEA regulatory
requirements by Watson or any of its Subsidiaries.
(g) Since May 1, 1993, neither Watson nor any of its Subsidiaries has
received any written notice that the FDA or the DEA has commenced, or threatened
to initiate, any action to withdraw its approval or request the recall of any
product of Watson or any of its Subsidiaries, or commenced or threatened to
initiate, any action to enjoin production at any facility of Watson or any of
its Subsidiaries.
(h) As to each article of drug, cosmetics and vitamin manufactured and/or
distributed by Watson or any of its Subsidiaries, which products are described
in the Watson Disclosure Letter, such article is not adulterated or misbranded
within the meaning of the FDCA, 21 U.S.C. sec.sec. 301c et. seq.
(i) As to each drug referred to in (a), Watson and its officers, employees,
agents, Subsidiaries and affiliates have included in the application for such
drug, where required, the certification described in 21 U.S.C. sec. 335a(k)(l)
and the list described in 21 U.S.C. sec. 335a(k)(2), and such certification and
such list was in each case true and accurate when made and remained true and
accurate thereafter.
(j) Since May 1, 1993, neither Watson, nor its officers, employees, agents,
Subsidiaries, or affiliates, has been convicted of any crime or engaged in any
conduct for which debarment is mandated by 21 U.S.C. sec. 335a(a) or authorized
by 21 U.S.C. sec. 335a(b).
(k) As to each abbreviated application submitted to, but not approved by,
the FDA, and not withdrawn by Watson or any of its Subsidiaries as of the date
of this Agreement, Watson and its Subsidiaries have complied in all material
respects with the requirements of 21 U.S.C. sec.sec. 355 and 357 and 21 C.F.R.
Parts 312, 314 and 430 et. seq. and has provided, or will provide, all
additional information and taken, or will take, all additional action requested
by the FDA in connection with the abbreviated application.
SECTION 3.5 Capitalization. The authorized capital stock of Watson
consists of 50,000,000 shares of Watson Common Stock and 2,500,000 shares of
preferred stock, no par value per share (the "Watson Preferred Stock"). As of
March 24, 1995, there were 17,270,786 shares of Watson Common Stock and no
shares of Watson Preferred Stock, issued and outstanding. Since such date, no
additional shares of capital stock of Watson have been issued, except pursuant
to the exercise of options outstanding under Watson's stock option and employee
stock purchase plans (the "Watson Stock Option Plans"). Watson has no
outstanding bonds, debentures, notes or other obligations the holders of which
have the right to vote (or which are convertible into or exercisable for
securities having the right to vote) with the stockholders of Watson on any
matter. All issued and outstanding shares of Watson Common Stock are duly
authorized, validly issued, fully paid, nonassessable and free of preemptive
rights. Except as contemplated by this Agreement and except pursuant to the
Watson Stock Option Plans, there are not at the date of this Agreement any
existing options, warrants, calls, subscriptions, convertible securities, or
other rights, agreements or commitments which obligate Watson or any of its
Subsidiaries to issue, transfer, redeem or sell any shares of capital stock of
Watson or any of its Subsidiaries.
SECTION 3.6 Subsidiaries.
(a) Watson owns directly or indirectly each of the outstanding shares of
capital stock (or other ownership interests having by their terms ordinary
voting power to elect a majority of directors or others performing similar
functions with respect to such Watson Subsidiary) of each of Watson's
Subsidiaries indicated on the Watson Disclosure Letter as being owned by Watson.
Each of the outstanding shares of capital stock owned by Watson of each of
Watson's Subsidiaries is duly authorized, validly issued, fully paid and
nonassessable, and is owned, directly or indirectly, by Watson free and clear of
all liens, pledges, security interests, claims or other encumbrances other than
liens imposed by local law which are not material. The executive officers of
Watson have no knowledge of any matter which will materially effect the revenue
stream that Watson currently receives from its Subsidiaries. The following
information for each Subsidiary of Watson is listed in the Watson Disclosure
Letter, if applicable: (i) its name and jurisdiction of incorporation or
organization; (ii) the location of its chief executive office; (iii) a summary
of its lines of business and
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products; (iv) its authorized capital stock or share capital; and (v) the number
of issued and outstanding shares of capital stock or share capital.
(b) The authorized capital stock of Merger Sub consists of 1,000 shares of
Common Stock, par value $.01 per share, all of which shares are issued and
outstanding and owned by Watson free and clear of all liens, pledges, security
interests, claims or other encumbrances other than liens imposed by local law
which are not material. All such shares of Merger Sub are duly authorized,
validly issued, fully paid, and nonassessable. Notwithstanding anything to the
contrary contained herein, Watson may, in its sole discretion, increase the
number of shares of authorized Common Stock of Merger Sub and the number of
shares of Common Stock of Merger Sub issued and outstanding owned by Watson.
Merger Sub has not engaged in any activities other than in connection with the
transactions contemplated by this Agreement.
(c) Merger Sub was formed solely for the purpose of engaging in the
transactions contemplated by this Agreement.
(d) As of the Effective Time, all of the outstanding capital stock of
Merger Sub will be owned directly by Watson. There are no options, warrants or
other rights (including registration rights), agreements, arrangements or
commitments to which Merger Sub is a party of any character relating to the
issued or unissued capital stock of, or other equity interests in, Merger Sub or
obligating Merger Sub to grant, issue or sell any shares of the capital stock
of, or other equity interests in, Merger Sub, by sale, lease, license or
otherwise, other than in connection with Watson's acquisition of stock of Merger
Sub. There are no obligations, contingent or otherwise, of Merger Sub to
repurchase, redeem or otherwise acquire any shares of the capital stock of
Merger Sub.
(e) Except for obligations or liabilities incurred in connection with its
incorporation or organization and the transactions contemplated by this
Agreement, Merger Sub has not and will not have incurred, directly or
indirectly, through any subsidiary or affiliate, any obligations or liabilities
or engaged in any business activities of any type or kind whatsoever or entered
into any agreements or arrangements with any person.
SECTION 3.7 Other Interests. Except for interests in the Watson
Subsidiaries and the interests disclosed on the Watson Disclosure Letter,
neither Watson nor any Watson Subsidiary owns directly or indirectly any
interest or investment (whether equity or debt) in any corporation, partnership,
joint venture, business, trust or entity (other than investments in short-term
investment securities and corporate, marketable securities, partnership,
development, cooperative marketing and similar undertakings and arrangements
entered into in the ordinary course of business and other investments the
aggregate market value of which is less than $250,000). The executive officers
of Watson have no knowledge of any matter which will materially effect the
revenue stream that Watson currently receives from the interests listed on the
Watson Disclosure Letter.
SECTION 3.8 No Violation. Neither the execution and delivery by Watson and
Merger Sub of this Agreement, nor the consummation by Watson and Merger Sub of
the transactions contemplated hereby in accordance with the terms hereof, will
(a) conflict with or result in a breach of any provisions of the Certificate of
Incorporation or Bylaws of Watson or any of its Subsidiaries; (b) result in a
breach or violation of, a default under, or the triggering of any payment or
other material obligations pursuant to, or accelerate vesting under, any of the
Watson Stock Option Plans, or any grant or award made under any of the
foregoing; (c) violate, conflict with, result in a breach of any provision of,
constitute a default (or an event which, with notice or lapse of time or both,
would constitute a default) under, result in the termination, or in a right of
termination or cancellation of, accelerate the performance required by, result
in the triggering of any payment or other material obligations pursuant to,
result in the creation of any lien, security interest, charge or encumbrance
upon any of the material properties of Watson or its Subsidiaries under, or
result in being declared void, voidable, or without further binding effect, any
of the terms, conditions or provisions of any note, bond, mortgage, indenture,
deed of trust or any material license, franchise, permit, lease, contract,
agreement or other instrument, commitment or obligation to which Watson or any
of its Subsidiaries is a party, or by which Watson or any of its Subsidiaries or
any of their respective properties is bound or affected, except for any of the
foregoing matters which would not have a Watson Material Adverse Effect; (d)
contravene or conflict with or constitute a violation of any provision of any
law, regulation, judgement,
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injunction, order or decree binding upon or applicable to Watson or any of its
Subsidiaries which would have a Watson Material Adverse Effect; or (e) other
than the filings provided for in Section 1.3, filings under applicable federal,
state and local regulatory filings, filings required under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976 (the "HSR Act"), the Exchange Act, the
Securities Act, the American Stock Exchange, the NASD, or applicable state
securities and "Blue Sky" laws or filings in connection with the maintenance of
qualification to do business in other jurisdictions (collectively, the
"Regulatory Filings"), require any material consent, approval or authorization
of, or declaration, of or registration with, any domestic governmental or
regulatory authority, the failure to obtain or make which would have a Watson
Material Adverse Effect.
SECTION 3.9 Conduct of Business. The business of Watson and each of its
Subsidiaries is not being conducted in default or violation of any term,
condition or provision of (a) its respective Certificate of Incorporation or
By-Laws or similar organizational documents; (b) any note, bond, mortgage,
indenture, contract, agreement, lease or other instrument or agreement of any
kind to which Watson or any of its Subsidiaries is now a party or by which
Watson or any of its Subsidiaries or any of their respective properties or
assets may be bound; or (c) any federal, state, local or foreign statute, law,
ordinance, rule, regulation or approval applicable to Watson or any of its
Subsidiaries, except, with respect to the foregoing clauses (b) and (c),
defaults or violations that would not have a Watson Material Adverse Effect.
SECTION 3.10 SEC Documents. Watson has delivered or made available to
CIRCA each registration statement, report, proxy statement or information
statement (as defined in Regulation 14C under the Exchange Act) prepared by it
since January 1, 1993, which reports constitute (as of the date hereof) all of
the documents required to be filed by Watson with the Securities and Exchange
Commission ("SEC") since such date, each in the form (including exhibits and any
amendments thereto) filed with the SEC (collectively, the "Watson Reports"). As
of their respective dates, the Watson Reports and any Watson Reports filed after
the date hereof and prior to the Effective Time (a) complied or will comply on
or before the Effective Date as to form in all material respects with the
applicable requirements of the Securities Act, the Exchange Act, and the rules
and regulations thereunder; and (b) did not or will not when filed contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements made therein, in the light
of the circumstances under which they were made, not misleading. Each of the
consolidated balance sheets of Watson included in or incorporated by reference
into the Watson Reports (including the related notes and schedules) fairly
present or will fairly present (when filed) the consolidated financial position
of Watson and the Watson Subsidiaries as of its date, and each of the
consolidated statements of income, retained earnings and cash flows of Watson
included in or incorporated by reference into the Watson Reports (including any
related notes and schedules) fairly present or will fairly present (when filed)
the results of operations, retained earnings or cash flows, as the case may be,
of Watson and the Watson Subsidiaries for the periods set forth therein
(subject, in the case of unaudited statements, to normal year-end audit
adjustments which would not be material in amount or effect), in each case in
accordance with generally accepted accounting principles consistently applied
during the periods involved, except as may be noted therein. Neither Watson nor
any of the Watson Subsidiaries has any liabilities or obligations of any nature
(whether accrued, absolute, contingent or otherwise) that would be required to
be reflected on, or reserved against in, a balance sheet of Watson or in the
notes thereto, prepared in accordance with generally accepted accounting
principles consistently applied, except liabilities arising in the ordinary
course of business since December 31, 1994 and liabilities reflected in the
consolidated balance sheet of Watson and its Subsidiaries at December 31, 1994
(and the notes thereto).
SECTION 3.11 Disclosure Documents. The Joint Proxy Statement Prospectus to
be delivered to the stockholders of each of Watson and CIRCA in connection with
the approval of the transactions contemplated by this Agreement, or any
amendment or supplement thereto (the "Proxy Statement"), at the time of mailing
thereof and at the time of the respective meetings of stockholders of CIRCA and
Watson, or, in the case of the Form S-4 (as defined in Section 5.7 of this
Agreement) and each amendment or supplement thereto, at the time it is filed or
becomes effective when filed with the SEC, will not include an untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading; provided, however,
that the
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foregoing shall not apply to the extent that any such untrue statement of a
material fact or omission to state a material fact was made by Watson in
reliance upon and in conformity with written information concerning CIRCA
furnished in writing to Watson by CIRCA specifically for use in the Proxy
Statement.
SECTION 3.12 Litigation. Except as set forth in the Watson Disclosure
Letter, there are no actions, suits or proceedings pending against Watson or the
Watson Subsidiaries or, to the knowledge of the executive officers of Watson,
threatened against Watson or the Watson Subsidiaries, at law or in equity, or
before or by any federal or state commission, board, bureau, agency or
instrumentality, none of which, individually or in the aggregate, if decided
adversely to Watson or such Watson Subsidiaries is reasonably likely to have a
Watson Material Adverse Effect.
SECTION 3.13 Products Liability. There is no notice or claim involving any
product manufactured, produced, distributed or sold by or on behalf of Watson or
any of its Subsidiaries resulting from an alleged defect in design, manufacture,
materials or workmanship, or any alleged failure to warn, or from any breach of
implied warranties or representations, which is likely to have a Watson Material
Adverse Effect.
SECTION 3.14 Absence of Certain Changes. Since December 31, 1994, Watson
has conducted its business only in the ordinary course of such business, and
there has not been (a) any Watson Material Adverse Effect; (b) any declaration,
setting aside or payment of any dividend or other distribution with respect to
its capital stock; or (c) any material change in its accounting principles,
practices or methods, except any such change after the date of this Agreement
required by generally accepted accounting principles.
SECTION 3.15 Trademarks and Patents.
(a) A list of all of Watson's and its Subsidiaries' material computer
software, software programs, patents, patent applications, trademarks, trademark
applications, trade secrets, formulations, service marks, trade names,
copyrights, inventions, drawings, designs, customer lists, proprietary know-how
or information or other rights with respect thereto (collectively, the
"Proprietary Rights") are listed in the Watson Disclosure Letter.
(b) Watson owns or possesses adequate licenses or other rights to use any
and all of its Proprietary Rights used in or required for its business as
currently conducted free and clear of any liens, claims or encumbrances, except
where the failure to possess such Proprietary Rights would not have a Watson
Material Adverse Effect.
(c) To the knowledge of Watson's executive officers, there are no claims,
disputes, actions, proceedings, suits or appeals pending or threatened against
Watson or any of its Subsidiaries relating to any of its Proprietary Rights
which, if adversely determined to Watson or any of its Subsidiaries, could
reasonably be expected to result in a loss of any of its Proprietary Rights or
any other loss that could reasonably be expected to have a Watson Material
Adverse Effect.
(d) To the knowledge of the executive officers of Watson, none of its or
its Subsidiaries' Proprietary Rights infringes on the proprietary rights of any
third party nor is the Proprietary Rights of any third party infringing on the
Proprietary Rights of Watson or its Subsidiaries, where such infringement could
reasonably be expected to result in a loss of any of Watson's or its
Subsidiaries' Proprietary Rights or any other loss that could reasonably be
expected to have a Watson Material Adverse Effect.
(e) Each of Watson and its Subsidiaries has not disclosed any of its
material trade secrets to any Person without obtaining an agreement obligating
the recipient to maintain the confidentiality thereof and Watson and its
Subsidiaries have taken reasonable security measures to protect the
confidentiality and value of its trade secrets.
(f) Each of Watson and its Subsidiaries has not disposed of or granted any
license to use any of its Proprietary Rights, nor has either Watson or any of
its Subsidiaries granted any options to purchase or obtain a license to, or any
other lien, claim or encumbrance on, any of its Proprietary Rights.
SECTION 3.16 Properties. Watson and its Subsidiaries have good and valid
title (good and insurable title in the case of owned real property) to all of
their assets and properties reflected on the consolidated balance sheet of
Watson and its Subsidiaries at December 31, 1994 included in the Form 10-K of
Watson for
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the year ended December 31, 1994 or thereafter acquired, free and clear of any
lien, claim or other encumbrance, except for assets and properties disposed of,
or subject to purchase or sales orders, in the ordinary course of business since
such date. Watson has not received notice that any of its assets or properties
is in violation in any material respect of any existing law or any building,
zoning, health, safety or other ordinance, code or regulation, except for
violations that would not have a Watson Material Adverse Effect. The plant,
facilities and equipment of Watson and its Subsidiaries necessary to the
operations of their businesses are in operating condition and repair sufficient
for the operation of the business as presently conducted. All material leases of
real or personal property to which Watson or any of its Subsidiaries is a party
are valid and subsisting leases, and, except as terminated in the ordinary
course of business, upon consummation of the transactions contemplated hereby,
shall continue to entitle Watson or such Subsidiary to the use and possession of
the real or personal property purported to be covered thereby for the terms
specified in such leases and for the purposes for which such real or personal
property is now used.
SECTION 3.17 Material Contracts. Neither Watson nor any of its
Subsidiaries is a party to or bound by, and neither they nor their properties
are subject to (a) any loan agreements, guaranties or other evidence of
indebtedness having in each case a total liability in excess of $250,000; (b)
any distributorship, non-employee commission or marketing agent, representative
or franchise agreement providing for the marketing and/or sale of the products
or services of Watson or any of its Subsidiaries; (c) any agreement relating to
the ownership or control of any interest in a partnership, corporation, limited
liability company, joint venture or other entity or similar arrangement; (d) any
employment contracts or consulting arrangements entered into by Watson or its
Subsidiaries or agreements or arrangements with respect to severance or similar
matters; (e) any agreement or arrangement restricting in any manner (i) Watson's
or any of its Subsidiaries' right to compete with any other person or entity;
(ii) Watson's or any of its Subsidiaries' right to sell to or purchase from any
other person or entity; (iii) the right of any other party to compete with
Watson or any of its Subsidiaries; or (iv) the ability of such person or entity
to employ any of Watson's or its Subsidiaries' employees; (f) any secrecy or
confidentiality agreement; (g) any contract, agreement or arrangement containing
change of control provisions; (h) any agreement or arrangement between Watson or
any of its Subsidiaries and any of its officers, directors or other Affiliates
(as defined in Section 5.9); (i) any contract, agreement or arrangement
requiring a payment in excess of $250,000 in any twelve month period; or (j) any
contract, agreement or arrangement required to be disclosed in a Form 10-K or
10-Q under the Exchange Act which is not disclosed in the Watson Reports
(collectively, the "Watson Contracts"). All the Watson Contracts are valid,
subsisting, in full force and effect, and binding upon Watson or its
Subsidiaries in accordance with their terms, and, to the best knowledge of the
executive officers of Watson, binding upon the other parties thereto in
accordance with their terms. Watson is not (with or without notice or lapse of
time or both) in default under any Watson Contract nor, to the best knowledge of
the executive officers of Watson, is any other party to any such contract or
other agreement (with or without notice or lapse of time or both) in default
thereunder, except for any defaults that would not have a Watson Material
Adverse Effect. The executive officers of Watson are not aware of any matter
that would materially effect the revenue stream, if any, that Watson currently
receives under any Watson Contract.
SECTION 3.18 Taxes. Watson and each of its Subsidiaries (a) have timely
filed all material federal, state and foreign tax returns required to be filed
by any of them for tax years ended prior to the date of this Agreement or
requests for extensions have been timely filed and any such request shall have
been granted and not expired, and all such returns are complete and accurate in
all material respects; (b) have paid or accrued all taxes shown to be due and
payable on such returns; (c) have properly accrued all such taxes for such
periods subsequent to the periods covered by such returns; and (d) have "open"
years for federal income tax returns only as set forth in the Watson Disclosure
Letter.
SECTION 3.19 Employee Benefit Plans. All employee benefit plans and other
benefit arrangements covering employees of Watson and the Watson Subsidiaries
(the "Watson Benefit Plans") and all employee agreements providing compensation,
severance or other benefits to any employee or former employee of Watson or any
of the Watson Subsidiaries are set forth in the Watson Disclosure Letter. True
and complete copies of all Watson Benefit Plans, including any related trust or
funding vehicles, policies or contracts, have been made available to CIRCA. To
the extent applicable, the Watson Benefit Plans comply, in all material
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respects, with the requirements of the Employee Retirement Income Security Act
of 1974, as amended ("ERISA") and the Code, and any Watson Benefit Plan intended
to be qualified under Section 401(a) of the Code has been determined by the
Internal Revenue Service (the "IRS") to be so qualified and has been timely
amended and filed with the IRS with respect to changes required by the Tax
Reform Act of 1986 and subsequent legislation. Neither Watson nor any ERISA
Affiliate of Watson (during the period of its affiliated status and prior
thereto, to its knowledge) maintains, contributes to or has in the past
maintained or contributed to any benefit plan which is covered by Title IV of
ERISA or Section 412 of the Code. Watson or any Watson Benefit Plan have not
incurred any liability or penalty under, and the executive officers of Watson do
not know of any instance that Watson or any Watson Benefit Plan may incur any
liability or penalty under, Section 4975 of the Code or Section 502(i) of ERISA.
Each Watson Benefit Plan has been maintained and administered in all material
respects in compliance with its terms and with ERISA and the Code to the extent
applicable thereto. To the knowledge of the executive officers of Watson, there
are no pending or anticipated material claims against or otherwise involving any
of the Watson Benefit Plans and no suit, action or other litigation (excluding
claims for benefits incurred in the ordinary course of Watson Benefit Plan
activities) has been brought against or with respect to any such Watson Benefit
Plan, except for any of the foregoing which would not have a Watson Material
Adverse Effect. All contributions required to be made as of the date hereof to
the Watson Benefit Plans have been made or provided for. Since September 25,
1980, neither Watson nor any ERISA Affiliate of Watson (during the period of its
affiliated status and prior thereto, to its knowledge) has contributed to, or
been required to contribute to, any "multiemployer plan" (as defined in Sections
3(37) and 4001(a)(3) of ERISA). Watson does not maintain or contribute to any
plan or arrangement which provides or has any liability to provide life
insurance or medical or other employee welfare benefits to any employee or
former employee upon his retirement or termination of employment, and Watson has
never represented, promised or contracted (whether in oral or written form) to
any employee or former employee that such benefits would be provided. The
execution of, and performance of the transactions contemplated in, this
Agreement will not (either alone or upon the occurrence of any additional or
subsequent events) constitute an event under any benefit plan, policy,
arrangement or agreement or any trust or loan that will or may result in any
payment (whether of severance pay or otherwise), acceleration, forgiveness of
indebtedness, vesting, distribution, increase in benefits or obligation to fund
benefits with respect to any employee. No Watson Benefit Plan which is an
"employee pension plan" within the meaning of Section 3(3) of ERISA has been
completely or partially terminated. None of the Watson Benefit Plans has any
material unfunded liabilities which are not reflected in the Watson Reports.
For purposes of this Agreement "ERISA Affiliate" means any business or
entity which is a member of the same "controlled group of corporations," under
"common control" or an "affiliated service group" with an entity within the
meanings of Sections 414(b), (c) or (m) of the Code, or required to be
aggregated with the entity under Section 414(o) of the Code, or is under "common
control" with the entity, within the meaning of Section 4001(a)(14) of ERISA, or
any regulations promulgated or proposed under any of the foregoing Sections.
SECTION 3.20 Labor Matters. Neither Watson nor any of its Subsidiaries is
a party to, or bound by, any collective bargaining agreement, contract or other
agreement or understanding with a labor union or labor organization. There is no
unfair labor practice or labor arbitration proceeding pending or, to the
knowledge of the executive officers of Watson, threatened against Watson or its
Subsidiaries relating to their business, except for any such proceeding which
would not have a Watson Material Adverse Effect. To the knowledge of the
executive officers of Watson, there are no organizational efforts with respect
to the formation of a collective bargaining unit presently being made or
threatened involving employees of Watson or any of its Subsidiaries. There is no
labor strike, dispute, slowdown or work stoppage pending or threatened against
Watson or any of its Subsidiaries nor have they experienced any of the same
during the last three years. All employees of Watson or any of its Subsidiaries
are employed at will. A list of Watson's employees who earned in excess of
$100,000 during calendar year 1994 or who Watson reasonably expects will earn in
excess of such amount during calendar year 1995, together with such employee's
current job title and salary history during the last three years, is described
in the Watson Disclosure Letter.
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SECTION 3.21. Environmental Matters. There are no Environmental
Liabilities of Watson that, individually or in the aggregate, have had or would
reasonably be expected to have a Watson Material Adverse Effect. As used in this
Agreement, "Environmental Laws" means any and all federal, state, local and
foreign statutes, laws, judicial decisions, regulations, ordinances, rules,
judgments, orders, decrees, codes, plans, injunctions, permits, concessions,
grants, franchises, licenses, agreements and governmental restrictions, whether
now or hereafter in effect, relating to human health, the environment or to
emissions, discharges or releases of pollutants, contaminants, Hazardous
Substances or wastes into the environment, including without limitation, ambient
air, surface water, ground water or land, or otherwise relating to the
manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling of pollutants, contaminants, Hazardous Substances or
wastes or the clean-up or other remediation thereof. "Environmental Liabilities"
with respect to any Person means any and all liabilities of or relating to such
Person or any of its Subsidiaries (including any entity which is, in whole or in
part, a predecessor of such Person or any of its Subsidiaries), whether vested
or unvested, contingent or fixed, actual or potential, known or unknown, which
(a) arise under or relate to matters covered by Environmental Laws; and (b)
relate to actions occurring or conditions existing on or prior to the Closing
Date. "Hazardous Substances" means any toxic, radioactive, caustic or otherwise
hazardous substance, including petroleum, its derivatives, by-products and other
hydrocarbons, or any substance having any constituent elements displaying any of
the foregoing characteristics, including, without limitation, any substance
regulated under Environmental Laws.
SECTION 3.22. Absence of Indemnifiable Claims, etc. There are no losses,
claims, damages, costs, expenses, liabilities or judgements which would entitle
any director, officer or employee of Watson or any of its Subsidiaries to
indemnification by Watson under applicable law, the articles of incorporation or
bylaws of Watson or any of its Subsidiaries or any insurance policy maintained
by Watson or any of its Subsidiaries.
SECTION 3.23 No Brokers. Watson has not entered into any contract,
arrangement or understanding with any person or firm which may result in the
obligation of CIRCA or Watson to pay any finder's fee, brokerage or agent's
commissions or other like payments in connection with the negotiations leading
to this Agreement or the consummation of the transactions contemplated hereby,
except that Watson has retained DLJ as its financial advisor, the arrangements
with which have been disclosed in writing to CIRCA prior to the date hereof.
Other than the foregoing arrangements, Watson is not aware of any claim for
payment of any finder's fees, brokerage or agent's commission or other like
payments in connection with the negotiations leading to this Agreement or the
consummation of the transaction contemplated hereby.
SECTION 3.24 Opinion of Financial Advisor. Watson has received the opinion
of Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"), to the effect
that, as of the date hereof, the number of shares of Watson Common Stock to be
issued by Watson in the Merger in exchange for each share of CIRCA Common Stock
is fair to Watson's stockholders from a financial point of view.
SECTION 3.25 CIRCA Stock Ownership. Neither Watson nor any of its
Subsidiaries owns any shares of CIRCA Common Stock or other securities
convertible into shares of CIRCA Common Stock.
SECTION 3.26 Watson Common Stock. The issuance and delivery by Watson of
shares of Watson Common Stock in connection with the Merger and this Agreement
have been duly and validly authorized by all necessary corporate action on the
part of Watson. The shares of Watson Common Stock to be issued in connection
with the Merger and this Agreement, when issued in accordance with the terms of
this Agreement, will be validly issued, fully paid and nonassessable and not
subject to preemptive rights of any sort and will, when issued, be registered
under the Securities Act, the Exchange Act and registered or exempt from
registration under applicable "blue sky laws".
SECTION 3.27 Convertible Securities. Watson has no outstanding options,
warrants or other securities exercisable for, or convertible into, shares of
Watson Common Stock, the terms of which would require any anti-dilution
adjustments by reason of the consummation of the transactions contemplated
hereby.
SECTION 3.28 Pooling of Interests, Tax Reorganization. To the knowledge of
the executive officers of Watson, neither Watson nor any of its Affiliates has
taken or failed to take any action which would prevent the accounting for the
Merger as a pooling of interests in accordance with Accounting Principles Board
Opinion
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No. 16, the interpretative releases issued pursuant thereto, and the
pronouncements of the SEC. Neither Watson nor any of its Affiliates has taken or
failed to take any action which would prevent the Merger from constituting a
reorganization within the meaning of section 368(a) of the Code.
SECTION 3.29 Takeover Statutes. No "fair price", "moratorium", "control
share acquisition" or other similar antitakeover statute or regulation enacted
under state or federal laws in the United States (each a "Takeover Statute"),
applicable to Watson or any of its Subsidiaries is applicable to the Merger or
the other transactions contemplated hereby.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF CIRCA
Except as set forth in the disclosure letter delivered by CIRCA to Watson
(the "CIRCA Disclosure Letter"), CIRCA represents and warrants to Watson (with
such representations and warranties with respect to non-wholly owned
Subsidiaries being made as to the knowledge of CIRCA's executive officers (which
shall include knowledge of documents in such persons' possession) as of the date
hereof and at the Effective Time) as follows:
SECTION 4.1 Existence, Good Standing, Corporate Authority. CIRCA and each
of its Subsidiaries are corporations or partnerships duly organized, validly
existing and in good standing under the laws of their respective jurisdiction of
incorporation. Each of CIRCA and each of its Subsidiaries is duly licensed or
qualified to do business as a foreign corporation or partnership and is in good
standing under the laws of any other state of the United States in which the
character of the properties owned or leased by it or in which the transaction of
its respective business makes such qualification necessary, except where the
failure to be so qualified or to be in good standing would not have a material
adverse effect on the business, results of operations or financial condition of
CIRCA and its Subsidiaries taken as a whole (a "CIRCA Material Adverse Effect").
CIRCA and each of its Subsidiaries have all requisite corporate power and
authority to own, operate and lease their respective properties. The copies of
CIRCA's and each of its Subsidiaries' Certificates of Incorporation and Bylaws
previously delivered or made available to Watson are true and correct.
SECTION 4.2 Authorization, Validity and Effect of Agreements. CIRCA has
the requisite corporate power and authority to execute and deliver this
Agreement and all agreements and documents to be executed and delivered in
connection herewith. Subject only to the approval and adoption of this Agreement
and the transactions contemplated hereby by the holders of two-thirds of the
outstanding shares of CIRCA Common Stock, the execution and delivery of this
Agreement (and the agreements contemplated hereby) and the consummation by CIRCA
of the transactions contemplated hereby has been duly authorized by all
requisite corporate action. This Agreement constitutes, and all agreements and
documents to be executed and delivered in connection herewith (when executed and
delivered pursuant hereto for value received) will constitute, the valid and
legally binding obligations of CIRCA, enforceable against CIRCA in accordance
with their respective terms, subject to applicable bankruptcy, insolvency,
moratorium or other similar laws relating to creditors' rights and general
principles of equity.
SECTION 4.3 Compliance with Laws -- General.
(a) CIRCA and each of its Subsidiaries hold all Permits of all Governmental
Entities necessary for the lawful conduct of their respective businesses, except
for immaterial failures that have no impact on operations.
(b) CIRCA and each of its Subsidiaries are in substantial compliance with
the terms of the Permits, except for immaterial failures to comply that have no
impact on operations.
(c) CIRCA and each of its Subsidiaries are in substantial compliance with
all laws, ordinances or regulations of all Governmental Entities, including, but
not limited to, those related to occupational health and safety, controlled
substances or employment and employment practices, except for immaterial
failures to comply that have no impact on operations.
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(d) As of the date of this Agreement, no investigation, review, inquiry or
proceeding by any Governmental Entity with respect to CIRCA or any of its
Subsidiaries is pending or, to the best knowledge of the executive officers of
CIRCA, threatened.
(e) Neither CIRCA nor any of its Subsidiaries currently is subject to any
agreement, contract or decree with any Governmental Entities arising out of any
current or previously existing violations.
SECTION 4.4 Compliance with Laws -- FDA/DEA.
(a) As to each drug of CIRCA or any CIRCA Subsidiary for which an
abbreviated application has been approved by the FDA, which drugs are described
in the CIRCA Disclosure Letter, CIRCA and its Subsidiaries are in substantial
compliance with 21 U.S.C. sec.sec. 355 or 357, 21 C.F.R. Parts 314 or 430 et.
seq., respectively, and all terms and conditions of the abbreviated application.
(b) As to each biologic product of CIRCA or any CIRCA Subsidiary for which
an ELA and/or PLA has been filed, which products are described in the CIRCA
Disclosure Letter, CIRCA and its Subsidiaries are in substantial compliance with
42 U.S.C. sec. 262, 21 C.F.R. Part 601 et. seq., and all terms and conditions of
the ELA and/or PLA.
(c) CIRCA and its Subsidiaries are in substantial compliance with all
applicable registration and listing requirements set forth in 21 U.S.C. sec. 360
and 21 C.F.R. Part 207. To the extent required, CIRCA and its Subsidiaries have
obtained licenses from the DEA and are in substantial compliance with all such
licenses and all applicable regulations promulgated by the DEA.
(d) Since May 1, 1993, all manufacturing operations of CIRCA and its
Subsidiaries have been conducted in substantial compliance with the good
manufacturing practice regulations set forth in 21 C.F.R. Parts 210 and 211.
(e) Neither CIRCA nor any officer, employee, or agent of CIRCA or any of
its Subsidiaries has made an untrue statement of a material fact or fraudulent
statement to the FDA or the DEA, failed to disclose a material fact required to
be disclosed to the FDA or the DEA, or committed an act, made a statement, or
failed to make a statement, in any case, that could reasonably be expected to
provide a basis for the FDA to invoke (after the date hereof) its policy
respecting "Fraud, Untrue Statements of Material Facts, Bribery, and Illegal
Gratuities", set forth in 56 Fed. Reg 46191 (September 10, 1991) and the FDA has
not taken any such action since May 1, 1993.
(f) CIRCA has made available to Watson copies of any and all reports of
inspection observations, establishment inspection reports, warning letters and
any other documents received from the FDA or the DEA within the last three years
that indicate or suggest lack of compliance with the FDA or the DEA regulatory
requirements by CIRCA or any of its Subsidiaries.
(g) Since May 1, 1993, neither CIRCA nor any of its Subsidiaries has
received any written notice that the FDA or the DEA has commenced, or threatened
to initiate, any action to withdraw its approval or request the recall of any
product of CIRCA or any of its Subsidiaries, or commenced or threatened to
initiate, any action to enjoin production at any facility of CIRCA or any of its
Subsidiaries.
(h) As to each article of drug, cosmetics and vitamin manufactured and/or
distributed by CIRCA or any of its Subsidiaries, which products are described in
the CIRCA Disclosure Letter, such article is not adulterated or misbranded
within the meaning of the FDCA, 21 U.S.C. sec.sec. 301c et. seq.
(i) As to each drug referred to in (a), CIRCA and its officers, employees,
agents, Subsidiaries and affiliates have included in the application for such
drug, where required, the certification described in 21 U.S.C. sec. 335a(k)(l)
and the list described in 21 U.S.C. sec. 335a(k)(2), and such certification and
such list was in each case true and accurate when made and remained true and
accurate thereafter.
(j) Since May 1, 1993, neither CIRCA, nor its officers, employees, agents,
Subsidiaries, or affiliates, has been convicted of any crime or engaged in any
conduct for which debarment is mandated by 21 U.S.C. sec. 335a(a) or authorized
by 21 U.S.C. sec. 335a(b).
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(k) As to each abbreviated application submitted to, but not approved by,
the FDA, and not withdrawn by CIRCA or any of its Subsidiaries as of the date of
this Agreement, CIRCA and its Subsidiaries have complied in all material
respects with the requirements of 21 U.S.C. sec.sec. 355 and 357 and 21 C.F.R.
Parts 312, 314 and 430 et. seq. and has provided, or will provide, all
additional information and taken, or will take, all additional action requested
by the FDA in connection with the abbreviated application.
SECTION 4.5 Capitalization. The authorized capital stock of CIRCA consists
of 70,000,000 shares of CIRCA Common Stock and 10,000,000 shares of CIRCA
Preferred Stock. As of March 23, 1995, there were (a) 21,745,912 shares of CIRCA
Common Stock issued and outstanding; (b) no shares of CIRCA Preferred Stock
issued and outstanding; and (c) 909,750 shares of CIRCA Common Stock reserved
for issuance upon the exercise of all outstanding CIRCA Options. The CIRCA
Disclosure Letter identifies, as of the date thereof, the option holder, the
number of shares subject to each option, the exercise price, the vesting
schedule and the expiration date of each outstanding CIRCA Option. Since March
23, 1995, no additional shares of capital stock of CIRCA have been issued,
except pursuant to the exercise of options outstanding under the CIRCA Stock
Option Plans or the exercise of warrants to purchase shares of CIRCA Common
Stock outstanding on March 23, 1995. CIRCA has no outstanding bonds, debentures,
notes or other obligations the holders of which have the right to vote (or which
are convertible into or exercisable for securities having the right to vote)
with the stockholders of CIRCA on any matter. All issued and outstanding shares
of CIRCA Common Stock are duly authorized, validly issued, fully paid,
nonassessable and free of preemptive rights. Except as otherwise disclosed in
the CIRCA Disclosure Letter and other than pursuant to the rights agreement
described in Section 5.13 hereof, there are not at the date of this Agreement
any existing options, warrants, calls, subscriptions, convertible securities, or
other rights, agreements or commitments which obligate CIRCA or any of its
Subsidiaries to issue, transfer, redeem or sell any shares of capital stock of
CIRCA or any of its Subsidiaries.
SECTION 4.6 Subsidiaries. CIRCA owns directly or indirectly each of the
outstanding shares of capital stock (or other ownership interests having by
their terms ordinary voting power to elect a majority of directors or others
performing similar functions with respect to such CIRCA Subsidiary) of each of
CIRCA's Subsidiaries indicated in the CIRCA Disclosure Letter as being owned by
CIRCA. Each of the outstanding shares of capital stock owned by CIRCA of each of
CIRCA's Subsidiaries is duly authorized, validly issued, fully paid and
nonassessable, and is owned, directly or indirectly, by CIRCA free and clear of
all liens, pledges, security interests, claims or other encumbrances other than
liens imposed by local law which are not material. The executive officers of
CIRCA have no knowledge of any matter which will materially effect the revenue
stream that CIRCA currently receives from its Subsidiaries. The following
information for each Subsidiary of CIRCA is listed in the CIRCA Disclosure
Letter, if applicable: (a) its name and jurisdiction of incorporation or
organization; (b) the location of its chief executive office; (c) a summary of
its lines of business and products; (d) its authorized capital stock or share
capital; and (e) the number of issued and outstanding shares of capital stock or
share capital.
SECTION 4.7 Other Interests. Except for interests in the CIRCA
Subsidiaries and the interests disclosed on the CIRCA Disclosure Letter, neither
CIRCA nor any CIRCA Subsidiary owns directly or indirectly any interest or
investment (whether equity or debt) in any corporation, partnership, joint
venture, business, trust or entity (other than investments in short-term
investment securities and corporate, marketable securities, partnership,
development, cooperative marketing and similar undertakings and arrangements
entered into in the ordinary course of business and other investments the
aggregate market value of which is less than $250,000). The executive officers
of CIRCA have no knowledge of any matter which will materially effect the
revenue stream that CIRCA currently receives from the interests listed on the
CIRCA Disclosure Letter.
SECTION 4.8 No Violation. Neither the execution and delivery by CIRCA of
this Agreement, nor the consummation by CIRCA of the transactions contemplated
hereby in accordance with the terms hereof, will (a) conflict with or result in
a breach of any provisions of the Certificate of Incorporation or Bylaws of
CIRCA or any of its Subsidiaries; (b) result in a breach or violation of, a
default under, or the triggering of any payment or other material obligations
pursuant to, or accelerate vesting under, any of the CIRCA Stock Option Plans,
or any grant or award made under any of the foregoing; (c) violate, conflict
with, result in a
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breach of any provision of, constitute a default (or an event which, with notice
or lapse of time or both, would constitute a default) under, result in the
termination, or in a right of termination or cancellation of, accelerate the
performance required by, result in the triggering of any payment or other
material obligations pursuant to, result in the creation of any lien, security
interest, charge or encumbrance upon any of the material properties of CIRCA or
its Subsidiaries under, or result in being declared void, voidable, or without
further binding effect, any of the terms, conditions or provisions of any note,
bond, mortgage, indenture, deed of trust or any material license, franchise,
permit, lease, contract, agreement or other instrument, commitment or obligation
to which CIRCA or any of its Subsidiaries is a party, or by which CIRCA or any
of its Subsidiaries or any of their respective properties is bound or affected,
except for any of the foregoing matters which would not have a CIRCA Material
Adverse Effect; (d) contravene or conflict with or constitute a violation of any
provision of any law, regulation, judgement, injunction, order or decree binding
upon or applicable to CIRCA or any of its Subsidiaries which would have a CIRCA
Material Adverse Effect; or (e) other than the Regulatory Filings, require any
material consent, approval or authorization of, or declaration, of or
registration with, any domestic governmental or regulatory authority, the
failure to obtain or make which would have a CIRCA Material Adverse Effect.
SECTION 4.9 Conduct of Business. The business of CIRCA and each of its
Subsidiaries is not being conducted in default or violation of any term,
condition or provision of (a) its respective Certificate of Incorporation or
By-Laws or similar organizational documents; (b) any note, bond, mortgage,
indenture, contract, agreement, lease or other instrument or agreement of any
kind to which CIRCA or any of its Subsidiaries is now a party or by which CIRCA
or any of its Subsidiaries or any of their respective properties or assets may
be bound; or (c) any federal, state, local or foreign statute, law, ordinance,
rule, regulation or approval applicable to CIRCA or any of its Subsidiaries,
except, with respect to the foregoing clauses (b) and (c), defaults or
violations that would not have a CIRCA Material Adverse Effect.
SECTION 4.10 SEC Documents. CIRCA has delivered or made available to
Watson each registration statement, report, proxy statement or information
statement (as defined in Regulation 14C under the Exchange Act) prepared by it
since January 1, 1993, which reports constitute (as of the date hereof) all of
the documents required to be filed by CIRCA with the SEC since such date, each
in the form (including exhibits and any amendments thereto) filed with the SEC
(collectively, the "CIRCA Reports"). As of their respective dates, the CIRCA
Reports, as amended and supplemented, and any CIRCA Reports filed after the date
hereof and prior to the Effective Time, (a) complied or will comply on or before
the Effective Date as to form in all material respects with the applicable
requirements of the Securities Act, the Exchange Act, and the rules and
regulations thereunder; and (b) did not or will not when filed contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements made therein, in the light
of the circumstances under which they were made, not misleading. Each of the
consolidated balance sheets of CIRCA included in or incorporated by reference
into the CIRCA Reports (including the related notes and schedules) fairly
present or will fairly present (when filed) the consolidated financial position
of CIRCA and the CIRCA Subsidiaries as of its date, and each of the consolidated
statements of income, retained earnings and cash flows of CIRCA included in or
incorporated by reference into the CIRCA Reports (including any related notes
and schedules) fairly present or will fairly present (when filed) the results of
operations, retained earnings or cash flows, as the case may be, of CIRCA and
the CIRCA Subsidiaries for the periods set forth therein (subject, in the case
of unaudited statements, to normal year-end audit adjustments which would not be
material in amount or effect), in each case in accordance with generally
accepted accounting principles consistently applied during the periods involved,
except as may be noted therein. Neither CIRCA nor any of the CIRCA Subsidiaries
has any liabilities or obligations of any nature (whether accrued, absolute,
contingent or otherwise) that would be required to be reflected on, or reserved
against in, a balance sheet of CIRCA or in the notes thereto, prepared in
accordance with generally accepted accounting principles consistently applied,
except liabilities arising in the ordinary course of business since December 31,
1994 and liabilities reflected in the consolidated balance sheet of CIRCA and
the CIRCA Subsidiaries at December 31, 1994 (and the notes thereto).
SECTION 4.11 Information Supplied. The information supplied or to be
supplied in writing by CIRCA, or any of its officers, directors,
representatives, agents or employees, specifically for inclusion or
incorporation
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by reference in (a) the Proxy Statement will not, at the time the Proxy
Statement is first mailed to the stockholders of CIRCA and Watson, at the time
such stockholders vote on adoption of this Agreement, contain any untrue
statement of a material fact or omit to state any material fact necessary in
order to make the statements made therein, in light of the circumstances under
which they were made, not misleading and (b) the Form S-4, together with all
amendments and supplements thereto, will not, at the time the Form S-4 is filed
or becomes effective under the Securities Act and at the Effective Time, contain
any untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements made therein, in light of the
circumstances under which they were made, not misleading.
SECTION 4.12 Litigation. Except as set forth in the CIRCA Disclosure
Letter, there are no actions, suits or proceedings pending against CIRCA or the
CIRCA Subsidiaries or, to the knowledge of the executive officers of CIRCA,
threatened against CIRCA or the CIRCA Subsidiaries, at law or in equity, or
before or by any federal or state commission, board, bureau, agency or
instrumentality, none of which, individually or in the aggregate, if decided
adversely to CIRCA or such CIRCA Subsidiaries is reasonably likely to have a
CIRCA Material Adverse Effect.
SECTION 4.13 Products Liability. There is no notice or claim involving any
product manufactured, produced, distributed or sold by or on behalf of CIRCA or
any of its Subsidiaries resulting from an alleged defect in design, manufacture,
materials or workmanship, or any alleged failure to warn, or from any breach of
implied warranties or representations, which is likely to have a CIRCA Material
Adverse Effect.
SECTION 4.14 Absence of Certain Changes. Since December 31, 1994, CIRCA
has conducted its business only in the ordinary course of such business, and
there has not been (a) any CIRCA Material Adverse Effect; (b) any declaration,
setting aside or payment of any dividend or other distribution with respect to
its capital stock; or (c) any material change in its accounting principles,
practices or methods, except any such change after the date of this Agreement
required by generally accepted accounting principles.
SECTION 4.15 Trademarks and Patents.
(a) A list of all of CIRCA's and its Subsidiaries' Proprietary Rights are
listed in the CIRCA Disclosure Letter.
(b) CIRCA owns or possesses adequate licenses or other rights to use any
and all of its Proprietary Rights used in or required for its business as
currently conducted free and clear of any liens, claims or encumbrances, except
where the failure to possess such Proprietary Rights would not have a CIRCA
Material Adverse Effect.
(c) To the knowledge of the executive officers of CIRCA, there are no
claims, disputes, actions, proceedings, suits or appeals pending or threatened
against CIRCA or any of its Subsidiaries relating to any of its Proprietary
Rights which, if adversely determined to CIRCA or any of its Subsidiaries, could
reasonably be expected to result in a loss, of any of its Proprietary Rights or
any other loss that could reasonably be expected to have a CIRCA Material
Adverse Effect.
(d) To the knowledge of the executive officers of CIRCA, none of its or its
Subsidiaries' Proprietary Rights infringes on the proprietary rights of any
third party nor is the Proprietary Rights of any third party infringing on the
Proprietary Rights of CIRCA or its Subsidiaries, where such infringement could
reasonably be expected to result in a loss of any of CIRCA's or its
Subsidiaries' Proprietary Rights or any other loss that could reasonably be
expected to have a CIRCA Material Adverse Effect.
(e) Each of CIRCA and its Subsidiaries has not disclosed any of its
material trade secrets to any Person without obtaining an agreement obligating
the recipient to maintain the confidentiality thereof and CIRCA and its
Subsidiaries have taken reasonable security measures to protect the
confidentiality and value of its trade secrets.
(f) Each of CIRCA and its Subsidiaries has not disposed of or granted any
license to use any of its Proprietary Rights, nor has either CIRCA or any of its
Subsidiaries granted any options to purchase or obtain a license to, or any
other lien, claim or encumbrance on, any of its Proprietary Rights.
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SECTION 4.16 Properties. CIRCA and its Subsidiaries have good and valid
title (good and insurable title in the case of owned real property) to all of
their assets and properties reflected on the consolidated balance sheet of CIRCA
and its Subsidiaries at December 31, 1994 included in the Form 10-K of CIRCA for
the year ended December 31, 1994 or thereafter acquired, free and clear of any
lien, claim or other encumbrance, except for assets and properties disposed of,
or subject to purchase or sales orders, in the ordinary course of business since
such date. CIRCA has not received notice that any of its assets or properties is
in violation in any material respect of any existing law or any building,
zoning, health, safety or other ordinance, code or regulation, except for
violations that would not have a CIRCA Material Adverse Effect. The plant,
facilities and equipment of CIRCA and its Subsidiaries necessary to the
operations of their businesses are in operating condition and repair sufficient
for the operation of the business as presently conducted. All material leases of
real or personal property to which CIRCA or any of its Subsidiaries is a party
are valid and subsisting leases, and, except as terminated in the ordinary
course of business, upon consummation of the transactions contemplated hereby,
shall continue to entitle CIRCA or such Subsidiary to the use and possession of
the real or personal property purported to be covered thereby for the terms
specified in such leases and for the purposes for which such real or personal
property is now used.
SECTION 4.17 Material Contracts. Neither CIRCA nor any of its Subsidiaries
is a party to or bound by, and neither they nor their properties are subject to
(a) any loan agreements, guaranties or other evidence of indebtedness having in
each case a total liability in excess of $250,000; (b) any distributorship, non-
employee commission or marketing agent, representative or franchise agreement
providing for the marketing and/or sale of the products or services of CIRCA or
any of its Subsidiaries; (c) any agreement relating to the ownership or control
of any interest in a partnership, corporation, limited liability company, joint
venture or other entity or similar arrangement; (d) any employment contracts or
consulting arrangements entered into by CIRCA or its Subsidiaries or agreements
or arrangements with respect to severance or similar matters; (e) any agreement
or arrangement restricting in any manner (i) CIRCA's or any of its Subsidiaries'
right to compete with any other person or entity; (ii) CIRCA's or any of its
Subsidiaries' right to sell to or purchase from any other person or entity;
(iii) the right of any other party to compete with CIRCA or any of its
Subsidiaries; or (iv) the ability of such person or entity to employ any of
CIRCA's or its Subsidiaries' employees; (f) any secrecy or confidentiality
agreement; (g) any contract, agreement or arrangement containing change of
control provisions; (h) any agreement or arrangement between CIRCA or any of its
Subsidiaries and any of its officers, directors or other Affiliates; (i) any
contract, agreement or arrangement requiring a payment in excess of $250,000 in
any twelve month period; or (j) any contract, agreement or arrangement required
to be disclosed in a Form 10-K or 10-Q under the Exchange Act which is not
disclosed in the CIRCA Reports (collectively, the "CIRCA Contracts"). All the
CIRCA Contracts are valid, subsisting, in full force and effect, and binding
upon CIRCA or its Subsidiaries in accordance with their terms, and, to the best
knowledge of the executive officers of CIRCA, binding upon the other parties
thereto in accordance with their terms. CIRCA is not (with or without notice or
lapse of time or both) in default under any CIRCA Contract nor, to the best
knowledge of the executive officers of CIRCA, is any other party to any such
contract or other agreement (with or without notice or lapse of time or both) in
default thereunder, except for any defaults that would not have a CIRCA Material
Adverse Effect. The executive officers of CIRCA are not aware of any matter that
would materially effect the revenue stream, if any, that CIRCA currently
receives under any CIRCA Contract.
SECTION 4.18 Taxes. CIRCA and each of its Subsidiaries (a) have timely
filed all material federal, state and foreign tax returns required to be filed
by any of them for tax years ended prior to the date of this Agreement or
requests for extensions have been timely filed and any such request shall have
been granted and not expired, and all such returns are complete and accurate in
all material respects; (b) have paid or accrued all taxes shown to be due and
payable on such returns; (c) have properly accrued all such taxes for such
periods subsequent to the periods covered by such returns; and (d) have "open"
years for federal income tax returns only as set forth in the CIRCA Disclosure
Letter.
SECTION 4.19 Employee Benefit Plans. All employee benefit plans and other
benefit arrangements covering employees of CIRCA and the CIRCA Subsidiaries (the
"CIRCA Benefit Plans") and all employee agreements providing compensation,
severance or other benefits to any employee or former employee of
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CIRCA or any of the CIRCA Subsidiaries are set forth in the CIRCA Disclosure
Letter. True and complete copies of all CIRCA Benefit Plans, including any
related trust or funding vehicles, policies or contracts, have been made
available to Watson. To the extent applicable, the CIRCA Benefit Plans comply,
in all material respects, with the requirements of ERISA and the Code, and any
CIRCA Benefit Plan intended to be qualified under Section 401(a) of the Code has
been determined by the IRS to be so qualified and has been timely amended and
filed with the IRS with respect to changes required by the Tax Reform Act of
1986 and subsequent legislation. Neither CIRCA nor any ERISA Affiliate of CIRCA
(during the period of its affiliated status and prior thereto, to its knowledge)
maintains, contributes to or has in the past maintained or contributed to any
benefit plan which is covered by Title IV of ERISA or Section 412 of the Code.
CIRCA or any CIRCA Benefit Plan have not incurred any liability or penalty
under, and the executive officers of CIRCA do not know of any instance that
CIRCA or any CIRCA Benefit Plan may incur any liability or penalty under,
Section 4975 of the Code or Section 502(i) of ERISA. Each CIRCA Benefit Plan has
been maintained and administered in all material respects in compliance with its
terms and with ERISA and the Code to the extent applicable thereto. To the
knowledge of the executive officers of CIRCA, there are no pending or
anticipated material claims against or otherwise involving any of the CIRCA
Benefit Plans and no suit, action or other litigation (excluding claims for
benefits incurred in the ordinary course of CIRCA Benefit Plan activities) has
been brought against or with respect to any such CIRCA Benefit Plan, except for
any of the foregoing which would not have a CIRCA Material Adverse Effect. All
contributions required to be made as of the date hereof to the CIRCA Benefit
Plans have been made or provided for. Since September 25, 1980, neither CIRCA
nor any ERISA Affiliate of CIRCA (during the period of its affiliated status and
prior thereto, to its knowledge) has contributed to, or been required to
contribute to, any "multiemployer plan" (as defined in Sections 3(37) and
4001(a)(3) of ERISA). CIRCA does not maintain or contribute to any plan or
arrangement which provides or has any liability to provide life insurance or
medical or other employee welfare benefits to any employee or former employee
upon his retirement or termination of employment, and CIRCA has never
represented, promised or contracted (whether in oral or written form) to any
employee or former employee that such benefits would be provided. The execution
of, and performance of the transactions contemplated in, this Agreement will not
(either alone or upon the occurrence of any additional or subsequent events)
constitute an event under any benefit plan, policy, arrangement or agreement or
any trust or loan that will or may result in any payment (whether of severance
pay or otherwise), acceleration, forgiveness of indebtedness, vesting,
distribution, increase in benefits or obligation to fund benefits with respect
to any employee. No CIRCA Benefit Plan which is an "employee pension plan"
within the meaning of Section 3(3) of ERISA has been completely or partially
terminated. None of the CIRCA Benefit Plans has any material unfunded
liabilities which are not reflected in the CIRCA Reports.
SECTION 4.20 Labor Matters. Neither CIRCA nor any of its Subsidiaries is a
party to, or bound by, any collective bargaining agreement, contract or other
agreement or understanding with a labor union or labor organization. There is no
unfair labor practice or labor arbitration proceeding pending or, to the
knowledge of the executive officers of CIRCA, threatened against CIRCA or its
Subsidiaries relating to their business, except for any such proceeding which
would not have a CIRCA Material Adverse Effect. To the knowledge of the
executive officers of CIRCA, there are no organizational efforts with respect to
the formation of a collective bargaining unit presently being made or threatened
involving employees of CIRCA or any of its Subsidiaries. There is no labor
strike, dispute, slowdown or work stoppage pending or threatened against CIRCA
or any of its Subsidiaries nor have they experienced any of the same during the
last three years. All employees of CIRCA or any of its Subsidiaries are employed
at will. A list of CIRCA's employees who earned in excess of $100,000 during
calendar year 1994 or who CIRCA reasonably expects will earn in excess of such
amount during calendar year 1995, together with such employee's current job
title and salary history during the last three years, is described in the CIRCA
Disclosure Letter.
SECTION 4.21 Environmental Matters. There are no Environmental Liabilities
of CIRCA that, individually or in the aggregate, have had or would reasonably be
expected to have a CIRCA Material Adverse Effect.
SECTION 4.22 Takeover Statutes. No Takeover Statute applicable to CIRCA or
any of its Subsidiaries is applicable to the Merger or the other transactions
contemplated hereby.
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SECTION 4.23 Absence of Indemnifiable Claims, etc. There are no losses,
claims, damages, costs, expenses, liabilities or judgements which would entitle
any director, officer or employee of CIRCA or any of its Subsidiaries to
indemnification by CIRCA under applicable law, the articles of incorporation or
bylaws of CIRCA or any of its Subsidiaries or any insurance policy maintained by
CIRCA or any of its Subsidiaries.
SECTION 4.24 No Brokers. CIRCA has not entered into any contract,
arrangement or understanding with any person or firm which may result in the
obligation of CIRCA or Watson to pay any finder's fee, brokerage or agent's
commissions or other like payments in connection with the negotiations leading
to this Agreement or the consummation of the transactions contemplated hereby,
except that CIRCA has retained Bear Stearns & Co. Inc. ("Bear Stearns") and
Wertheim Schroder & Co. Incorporated ("Wertheim Schroder") as its financial
advisors, the arrangements with which have been disclosed in writing to Watson
prior to the date hereof. Other than the foregoing arrangements, CIRCA is not
aware of any claim for payment of any finder's fees, brokerage or agent's
commission or other like payments in connection with the negotiations leading to
this Agreement or the consummation of the transaction contemplated hereby.
SECTION 4.25 Opinion of Financial Advisors. CIRCA has received the
opinions of Bear Stearns and Wertheim Schroder to the effect that, as of the
date hereof, the Merger or the Exchange Ratio, as the case may be, is fair to
the holders of CIRCA Common Stock from a financial point of view.
SECTION 4.26 Watson Stock Ownership. Neither CIRCA nor any of its
Subsidiaries owns any shares of Watson Common Stock or other securities
convertible into Watson Common Stock.
SECTION 4.27 Pooling of Interests, Tax Reorganization. To the knowledge of
the executive officers of CIRCA, neither CIRCA nor any of its Affiliates has
taken or failed to take any action which would prevent the accounting for the
Merger as a pooling of interests in accordance with Accounting Principles Board
Opinion No. 16, the interpretative releases issued pursuant thereto, and the
pronouncements of the SEC. Neither CIRCA nor any of its Affiliates has not taken
or failed to take any action which would prevent the Merger from constituting a
reorganization within the meaning of section 368(a) of the Code.
ARTICLE V
COVENANTS
SECTION 5.1 Alternative Proposals. Prior to the Effective Time, Watson and
CIRCA each agree (a) that neither it nor any of its Subsidiaries shall, and it
shall direct and cause its officers, directors, employees, agents and
representatives (including, without limitation, any investment banker, attorney
or accountant retained by it or any of its Subsidiaries) not to, initiate,
solicit or encourage, directly or indirectly, any inquiries or the making or
implementation of any proposal or offer (including, without limitation, any
proposal or offer to its stockholders) with respect to a merger, acquisition,
consolidation or similar transaction involving, or any purchase of all or any
significant portion of the assets or any equity securities of, Watson or CIRCA,
as the case may be, or any of its respective Subsidiaries (any such proposal or
offer being hereinafter referred to as an "Alternative Proposal") or engage in
any negotiations concerning, or provide any confidential information or data to,
or have any discussions with, any person relating to an Alternative Proposal, or
otherwise facilitate any effort or attempt to make or implement an Alternative
Proposal; (b) that it will immediately cease and cause to be terminated any
existing activities, discussions or negotiations with any parties conducted
heretofore with respect to any of the foregoing, and it will take the necessary
steps to inform the individuals or entities referred to above of the obligations
undertaken in this Section 5.1; and (c) that it will notify the other
immediately if any such inquiries or proposals are received by, any such
information is requested from, or any such negotiations or discussions are
sought to be initiated or continued with, it; provided, however, that nothing
contained in this Section 5.1 shall prohibit the Board of Directors of CIRCA or
Watson, as the case may be, from (A) furnishing information to or entering into
discussions or negotiations with, any person or entity that makes an unsolicited
bona fide proposal to acquire CIRCA or Watson, as the case may be, pursuant to a
merger, consolidation, share exchange, purchase of a substantial portion of
assets, business combination or other similar transaction, if, and only to the
extent that, (i) the Board of Directors of CIRCA or Watson, as the case may be,
determines in good faith that such action is required for the Board of
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Directors to comply with its fiduciary duties to stockholders imposed by law;
(ii) prior to furnishing such information to, or entering into discussions or
negotiations with, such person or entity, CIRCA or Watson, as the case may be,
provides written notice to the other to the effect that it is furnishing
information to, or entering into discussions or negotiations with, such person
or entity; and (iii) subject to any confidentiality agreement with such person
or entity (which CIRCA or Watson, as the case may be, determined in good faith
was required to be executed in order for its Board of Directors to comply with
its fiduciary duties to stockholders imposed by law), CIRCA or Watson, as the
case may be, keeps the other informed of the status of any such discussions or
negotiations; and (B) to the extent applicable, complying with Rule 14e-2
promulgated under the Exchange Act with regard to an Alternative Proposal.
Nothing in this Section 5.1 shall (x) permit CIRCA or Watson to terminate this
Agreement (except as specifically provided in Article 7 hereof); (y) permit
CIRCA to enter into any agreement with respect to an Alternative Proposal during
the term of this Agreement (it being agreed that during the term of this
Agreement, CIRCA shall not enter into any agreement with any person that
provides for, or in any way facilitates, an Alternative Proposal (other than a
confidentiality agreement in customary form)); or (z) affect any other
obligation of CIRCA or Watson under this Agreement.
SECTION 5.2 Interim Operations. Prior to the Effective Time, except as set
forth in the respective Disclosure Letters or as contemplated by any other
provision of this Agreement, unless the other party has consented in writing
thereto, each of CIRCA and Watson:
(i) Shall, and shall cause each of its Subsidiaries to, conduct its
operations according to their usual, regular and ordinary course in
substantially the same manner as heretofore conducted;
(ii) Shall use its reasonable efforts, and shall cause each of its
Subsidiaries to use its reasonable efforts, to preserve intact their
business organizations and goodwill, keep available the services of their
respective officers and employees and maintain satisfactory relationships
with those persons having business relationships with them;
(iii) Shall not amend its Certificate of Incorporation or Bylaws or
comparable governing instruments, except as provided in Section 5.3;
(iv) Shall promptly notify the other of any material emergency or
other material change in its condition (financial or otherwise), business,
properties, assets, liabilities, prospects or the normal course of its
business or of its properties, any material litigation or material
governmental complaints, investigations or hearings (or communications
indicating that the same may be contemplated), or the breach of any
representation or warranty contained herein;
(v) Shall promptly deliver to the other true and correct copies of any
report, statement or schedule filed with the SEC subsequent to the date of
this Agreement;
(vi) Shall not (A) except pursuant to the exercise of options,
warrants, conversion rights and other contractual rights existing on the
date hereof and disclosed pursuant to this Agreement, issue any shares of
its capital stock, effect any stock split or otherwise change its
capitalization as it existed on the date hereof; (B) grant, confer or award
any option, warrant, conversion right or other right not existing on the
date hereof to acquire any shares of its capital stock, other than employee
stock options, stock benefits and stock purchases under any stock option,
stock benefit or stock purchase plan existing on the date hereof, provided
that the aggregate amount of employee stock options granted pursuant to
such employee stock option plans shall not exceed 150,000 in the aggregate;
(C) increase any compensation or enter into or amend any employment
agreement with any of its present or future officers, directors or
employees, except for normal increases consistent with past practice and
the payment of cash bonuses to officers pursuant to and consistent with
existing plans or programs; (D) grant any severance or termination package
to any employee or consultant other than consistent with past practice; or
(E) adopt any new employee benefit plan (including any stock option, stock
benefit or stock purchase plan) or amend any existing employee benefit plan
in any material respect, except for changes which are less favorable to
participants in such plans;
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(vii) Shall not (A) declare, set aside or pay any dividend or make any
other distribution or payment with respect to any shares of its capital
stock or other ownership interests; or (B) directly or indirectly, redeem,
purchase or otherwise acquire any shares of its capital stock of its
capital stock of any capital stock of its Subsidiaries, or make any
commitment for any such action;
(viii) Shall not, and shall cause its Subsidiaries to not, enter into
any material transaction, or agree to enter into any material transaction,
outside the ordinary course of business, including, without limitation, any
transaction involving a merger, consolidation, joint venture, partial or
complete liquidation or dissolution, reorganization, recapitalization,
restructuring or a purchase, sale, lease or other disposition of a
substantial portion of assets or capital stock;
(ix) Shall not, and shall cause its Subsidiaries to not, incur any
indebtedness for borrowed money or guarantee any such indebtedness or issue
or sell any debt securities or warrants or rights to acquire any debt
securities of others other than in the ordinary course of its business
consistent with past practices, but in no event in an amount exceeding
$100,000 individually or $500,000 in the aggregate (other than normal
expenditures for the purchase of raw materials or other supplies);
(x) Shall not, and shall cause its Subsidiaries to not, make any
loans, advances or capital contributions to, or investments in, any other
Person, except in the ordinary course of business consistent with past
practices;
(xi) Shall not, and shall cause its Subsidiaries to not, make or
commit to made any capital expenditures in excess of $100,000 individually
or $500,000 in the aggregate other than expenditures included in any such
entity's current capital expenditure budget disclosed to the other party
hereto or consistent with past practice;
(xii) Shall not, and shall cause its Subsidiaries to not, apply any of
its assets to the direct or indirect payment, discharge, satisfaction or
reduction of any amount payable directly or indirectly to or for the
benefit of any affiliate of such party or any of its Subsidiaries or enter
into any transaction with any affiliate of such party or any of its
Subsidiaries;
(xiii) Shall not, and shall cause its Subsidiaries to not, alter the
manner of keeping its books, accounts or record, or change in any manner
the accounting practices therein reflected;
(xiv) Shall not, and shall cause its Subsidiaries to not, grant or
make any mortgage or pledge or subject itself or any of its material
properties or assets to any lien, charge or encumbrance of any kind, except
lines for taxes not currently due; and
(xv) Shall maintain, and shall cause its Subsidiaries to maintain,
insurance on its tangible assets and its businesses in such amounts and
against such risks and losses as are currently in effect.
SECTION 5.3 Meetings of Stockholders. Each of Watson and CIRCA will take
all action necessary in accordance with applicable law and their respective
Certificates of Incorporation and Bylaws to convene a meeting of their
respective stockholders as promptly as practicable to consider and vote upon (a)
in the case of Watson, (i) the approval of the Merger, this Agreement and the
transactions contemplated hereby (to the extent required by applicable law) and
the issuance of the shares of Watson Common Stock pursuant to the Merger
contemplated hereby; and (ii) the approval of an amendment to Watson's
Certificate of Incorporation to (A) increase the maximum number of authorized
shares of Watson Common Stock and (B) create three classes of directors
consisting of three persons in each class; and (b) in the case of CIRCA, the
approval of the Merger, this Agreement and the transactions contemplated hereby.
Each such meeting shall be held on the same day. The Board of Directors of each
of Watson and CIRCA shall recommend such approval and Watson and CIRCA shall
each take all lawful action to solicit such approval, including, without
limitation, timely mailing the Proxy Statement to their respective stockholders;
provided, however, that such recommendation or solicitation is subject to any
action (including any withdrawal or change of its recommendation) taken by, or
upon authority of, the Board of Directors of Watson or CIRCA, as the case may
be, in the exercise of its good faith judgment as to its fiduciary duties to its
stockholders imposed by law. It shall be a condition to the mailing of the Proxy
Statement that (x) Watson shall have received a "comfort" letter from Coopers &
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Lybrand, independent public accountants for CIRCA, dated the date of the Proxy
Statement, with respect to the financial statements of CIRCA included in the
Proxy Statement, substantially in the form described in Section 6.3(e) and CIRCA
shall use its reasonable best efforts to obtain such letter; and (y) CIRCA shall
have received a "comfort" letter from Price Waterhouse, independent public
accountants for Watson, dated the date of the Proxy Statement, with respect to
the financial statements of Watson included in the Proxy Statement,
substantially in the form described in Section 6.2(e) and Watson shall use its
reasonable best efforts to obtain such letter.
SECTION 5.4 Filings; Other Action.
(a) Subject to the terms and conditions herein provided, CIRCA and Watson
shall: (a) promptly make their respective filings and thereafter make any other
required submissions under the HSR Act with respect to the Merger; (b) use all
reasonable efforts to cooperate with one another in (i) determining which
filings are required to be made prior to the Effective Time with, and which
consents, approvals, permits or authorizations are required to be obtained prior
to the Effective Time from, governmental or regulatory authorities of the United
States, the several states and foreign jurisdictions in connection with the
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby; and (ii) timely making all such filings and
timely seeking all such consents, approvals, permits or authorizations; and (c)
use all reasonable efforts to take, or cause to be taken, all other action and
do, or cause to be done, all other things necessary, proper or appropriate to
consummate and make effective the transactions contemplated by this Agreement.
If, at any time after the Effective Time, any further reasonable action is
necessary or desirable to carry out the purpose of this Agreement, the proper
officers and directors of Watson and CIRCA shall take all such necessary action.
(b) (i) CIRCA and Watson shall give any notices to third parties, and use
all reasonable efforts to obtain any third party consents, (A) necessary, proper
or advisable to consummate the transactions contemplated in this Agreement or
(B) disclosed or required to be disclosed in the Watson Disclosure Letter or the
CIRCA Disclosure Letter, as the case may be.
(ii) In the event that either party shall fail to obtain any third party
consent described in subsection (b)(i) above, such party shall use all
reasonable efforts, and shall take any such actions reasonably requested by the
other party hereto, to minimize any adverse effect upon CIRCA and Watson, their
respective Subsidiaries, and their respective businesses resulting, or which
could reasonably be expected to result after the Effective Time, from the
failure to obtain such consent.
(c) From the date of this Agreement until the Effective Time, Watson and
CIRCA shall each promptly notify the other in writing of any pending or, to its
knowledge, threatened action, proceeding or investigation by any governmental
entity or any other person (i) challenging or seeking material damages in
connection with the Merger or (ii) seeking to restrain or prohibit the
consummation of the Merger, which in either case is reasonably likely to have a
Watson Material Adverse Effect or a CIRCA Material Adverse Effect.
(d) From and after the date of this Agreement until the Effective Time,
each party hereto shall promptly notify the other of (i) the occurrence, or
non-occurrence, of any event the occurrence, or non-occurrence, of which would
be likely to cause any condition to the obligations of any party to effect the
Merger and the other transactions contemplated by this Agreement not to be
satisfied, or (ii) the failure of Watson or CIRCA, as the case may be, to comply
with or satisfy any covenant, condition or agreement to be complied with or
satisfied by it pursuant to this Agreement which would be likely to result in
any condition to the obligations of any party to effect the Merger and the other
transactions contemplated by this Agreement not to be satisfied; provided,
however, that the delivery of any notice pursuant hereto shall not cure any
breach of any representation or warranty requiring disclosure of such matter
prior to the date of this Agreement or otherwise limit or affect the remedies
available hereunder to the party receiving such notice.
SECTION 5.5 Inspection of Records. From the date hereof to the Effective
Time, each of CIRCA and Watson shall (a) allow all designated officers,
attorneys, accountants and other representatives of the other reasonable access
at all reasonable times to the offices, records and files, correspondence,
audits and properties, as well as to all information relating to commitments,
contracts, titles and financial position, or
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otherwise pertaining to the business and affairs, of CIRCA and Watson and their
respective Subsidiaries, as the case may be; (b) furnish to the other, the
other's counsel, financial advisors, auditors and other authorized
representatives such financial and operating data and other information as such
persons may reasonably request; and (c) instruct the employees, counsel and
financial advisors of CIRCA or Watson, as the case may be, to cooperate with the
other in the other's investigation of the business of it and its Subsidiaries.
All information disclosed by a party hereto to the other party hereto and their
respective representatives shall be subject to the terms of that certain
Non-Disclosure Agreement (the "Confidentiality Agreement") dated as of February
16, 1995 between Watson and CIRCA. Notwithstanding the foregoing, Watson shall
not have access to the proprietary scientific data of the Subsidiary of CIRCA
listed in Section 5.5 of the CIRCA Disclosure Letter.
SECTION 5.6 Publicity. Neither party hereto shall make any press release
or public announcement with respect to this Agreement, the Merger or the
transaction contemplated hereby without the prior written consent of the other
party hereto (which consent shall not be unreasonably withheld); provided,
however, that each party hereto may make any disclosure or announcement which
such party, in the opinion of its legal counsel, is obligated to make pursuant
to applicable law or regulation of any national securities exchange, in which
case, the party desiring to make the disclosure shall consult with the other
party hereto prior to making such disclosure or announcement.
SECTION 5.7 Registration Statement. Watson and CIRCA shall cooperate and
promptly prepare and Watson shall file with the SEC as soon as practicable a
Registration Statement on Form S-4 (the "Form S-4") under the Securities Act,
with respect to the Watson Common Stock issuable in the Merger, a portion of
which Registration Statement shall also serve as the Proxy Statement. The
respective parties will cause the Proxy Statement and the Form S-4 to comply as
to form in all material respects with the applicable provisions of the
Securities Act, the Exchange Act and the rules and regulations promulgated
thereunder. Watson shall use all reasonable efforts, and CIRCA will cooperate
with Watson, to have the Form S-4 declared effective by the SEC as promptly as
practicable. Watson shall use its best efforts to obtain, prior to the effective
date of the Form S-4, all necessary state securities law or "Blue Sky" permits
or approvals required to carry out the transactions contemplated by this
Agreement and will pay all expenses incident thereto. No amendment or supplement
to the Proxy Statement will be made by Watson or CIRCA without the approval of
the other party. Watson will advise CIRCA, promptly after it receives notice
thereof, of the time when the Form S-4 has become effective or any supplement or
amendment has been filed, the issuance of any stop order, the suspension of the
qualification of the Watson Common Stock issuable in connection with the Merger
for offering or sale in any jurisdiction, or any request by the SEC for
amendment of the Proxy Statement or the Form S-4 or comments thereon and
responses thereto or requests by the SEC for additional information.
SECTION 5.8 Further Action. Each party hereto shall, subject to the
fulfillment at or before the Effective Time of each of the conditions of
performance set forth herein or the waiver thereof, perform such further acts
and execute such documents as may be reasonably required to effect the Merger.
SECTION 5.9 Affiliate Letters. At least 30 days prior to the Closing Date,
CIRCA shall deliver to Watson a list of names and addresses of those persons who
were, in CIRCA's reasonable judgment, at the record date for its stockholders'
meeting to approve the Merger, "affiliates" (each such person, an "Affiliate")
of CIRCA within the meaning of Rule 145 of the rules and regulations promulgated
under the Securities Act. CIRCA shall provide Watson such information and
documents as Watson shall reasonably request for purposes of reviewing such
list. CIRCA shall deliver or cause to be delivered to Watson, prior to the
Closing Date, from each of the Affiliates of CIRCA identified in the foregoing
list, an Affiliate Letter in the form attached hereto as Exhibit A. Watson shall
be entitled to place legends as specified in such Affiliate Letters on the
certificates evidencing any Watson Common Stock to be received by such
Affiliates pursuant to the terms of this Agreement, and to issue appropriate
stop transfer instructions to the transfer agent for the Watson Common Stock,
consistent with the terms of such Affiliate Letters.
SECTION 5.10 Expenses. Whether or not the Merger is consummated, all costs
and expenses incurred in connection with this Agreement and the transactions
contemplated hereby shall be paid by the party
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incurring such expenses except as expressly provided herein and except that (a)
the filing fee in connection with the HSR Act filing; (b) the filing fee in
connection with the filing of the Form S-4 or Proxy Statement with the SEC; (c)
the filing fees in connection with "blue sky" compliance; and (d) the expenses
incurred in connection with preparing, printing and mailing the Form S-4 and the
Proxy Statement, shall be shared equally by CIRCA and Watson.
SECTION 5.11 Insurance; Indemnity. (a) From the Effective Time through the
six year anniversary of the Effective Time, Watson shall indemnify, defend and
hold harmless, to the fullest extent permitted under applicable law, each person
who is now, or has been at any time prior to the date hereof, an officer,
director, employee, trustee or agent of CIRCA (or any Subsidiary or division
thereof), including, without limitation, each person controlling any of the
foregoing persons (individually, an "Indemnified Party" and collectively, the
"Indemnified Parties"), against all losses, claims, damages, liabilities, costs
or expenses (including attorneys' fees), judgments, fines, penalties and amounts
paid in settlement in connection with any claim, action, suit, proceeding or
investigation arising out of or pertaining to acts or omissions, or alleged acts
or omissions, by them in their capacities as such, whether commenced, asserted
or claimed before or after the Effective Time and including, without limitation,
liabilities arising under the Securities Act, the Exchange Act and state
corporation laws in connection with the Merger. In the event of any such claim,
action, suit, proceeding or investigation (an "Action"), (i) Watson shall pay
the reasonable fees and expenses of counsel selected by the Indemnified Party,
which counsel shall be reasonably acceptable to Watson, in advance of the final
disposition of any such Action to the full extent permitted by applicable law;
provided, however, that Watson shall have no obligation under this clause (i)
unless Watson has received an undertaking from the Indemnified Party to promptly
return any amounts paid by Watson or its Subsidiaries in the event that it shall
ultimately have been determined by a court of competent jurisdiction not subject
to further appeal that the Indemnified Party is not entitled to be indemnified
under applicable law; and (ii) Watson and the Surviving Corporation will
cooperate in the defense of any such matter; provided, however, that Watson
shall not be liable for any settlement effected without its written consent
(which consent shall not be unreasonably withheld) and provided, further, that
Watson shall not be obligated pursuant to this Section to pay the fees and
disbursements of more than one counsel for all Indemnified Parties in any single
Action except to the extent that, in the opinion of counsel for the Indemnified
Parties, two or more of such Indemnified Parties have conflicting interests in
the outcome of such action. All rights to indemnification in respect of any
Action made or asserted prior to the sixth anniversary of the Effective Time
shall continue until final disposition of such Action.
(b) Watson shall cause the Surviving Corporation to keep in effect
provisions in its Certificate of Incorporation and Bylaws providing for
exculpation of director and officer liability and its indemnification of the
Indemnified Parties to the fullest extent permitted under applicable law, which
provisions shall not be amended except as required by applicable law or except
to make changes permitted by law that would enlarge the Indemnified Parties'
right of indemnification.
(c) Without in any way limiting any of Watson's other obligations under
this Section 5.11 or any other rights to indemnity available, Watson shall use
its best efforts to cause to be maintained in effect for not less than two years
after the Effective Time, the current policies of directors' and officers'
liability insurance and fiduciary liability insurance maintained by CIRCA with
respect to matters occurring prior to the Effective Time; provided, however,
that (i) Watson may substitute therefor policies of substantially the same
coverage containing terms and conditions which are substantially the same for
the Indemnified Parties to the extent reasonably available and (ii) Watson shall
not be required to pay an annual premium for such insurance in excess of 150% of
the last annual premium paid prior to the date hereof, but in such case shall
purchase as much coverage as possible for such amount.
SECTION 5.12 Restructuring of Merger. Upon the mutual agreement of Watson
and CIRCA, the Merger shall be restructured in the form of a forward subsidiary
merger of CIRCA into Merger Sub, with Merger Sub being the surviving
corporation, or as a merger of CIRCA into Watson, with Watson being the
surviving corporation. In such event, this Agreement shall be deemed
appropriately modified to reflect such form of merger and CIRCA and Watson may
each update their respective Disclosure Letters to reflect any breach of a
representation or warranty resulting from such restructuring.
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SECTION 5.13 Rights Agreement. CIRCA shall take all necessary action prior
to the Effective Time to cause the dilution provisions of that certain
Stockholder Protection Rights Agreement dated as of November 1, 1991, between
CIRCA and American Stock Transfer & Trust Company, as Rights Agent, to be
inapplicable to the Merger, without any payment to holders of rights issued
pursuant to such Rights Agreement.
SECTION 5.14 Governance. (a) Watson shall take such action as may be
necessary (including, to the extent necessary, obtaining resignations of its
directors) so that the persons listed on Schedule 5.14 of the Watson Disclosure
Letter constitute the entire board of directors of Watson at the Effective Time,
with terms expiring as stated on such Schedule. If, prior to the Effective Time,
any of such persons shall decline or be unable to serve, a replacement shall be
designated in accordance with such Schedule.
(b) Dr. Allen Chao shall continue to be Chief Executive Officer of Watson
at the Effective Time and Dr. Alec Keith shall continue to be Chairman of Watson
at the Effective Time. The Board of Directors of Watson shall take all necessary
action to cause Dr. Mel Sharoky to be elected as President of Watson at the
Effective Time.
SECTION 5.15 Pooling; Reorganization. From and after the date hereof and
until the Effective Time, neither Watson nor CIRCA nor any of their respective
Subsidiaries or other affiliates shall (a) knowingly take any action, or
knowingly fail to take any action, that would jeopardize the treatment of the
Merger as a "pooling of interests" for accounting purposes; (b) knowingly take
any action, or knowingly fail to take any action, that would jeopardize
qualification of the Merger as a reorganization within the meaning of Section
368(a) of the Code; or (c) enter into any contract, agreement, commitment or
arrangement with respect to either of the foregoing. Following the Effective
Time, Watson shall use its best efforts to conduct its business in a manner that
would not jeopardize the characterization of the Merger as a "pooling of
interests" for accounting purposes and as a reorganization within the meaning of
Section 368(a) of the Code.
SECTION 5.16 Employee Benefit Plans. As soon as practicable after the
Closing Date but in no event later than January 1, 1996, Watson shall provide
benefits to employees of CIRCA and its Subsidiaries which are substantially
similar to the benefits provided to similarly situated employees of Watson and
its Subsidiaries. The date(s) on which employees of CIRCA and its Subsidiaries
are provided benefits pursuant to the preceding sentence shall be referred to as
the "Benefit Plan Transition Dates." Subject to the requirements of applicable
law, after the Closing Date, Watson shall cause the Surviving Corporation to
maintain the CIRCA Benefit Plans in substantially the same form as in effect on
the date of this Agreement until the applicable Benefit Plan Transition Date.
Subject to the requirements of applicable law, after the Effective Time, Watson
shall provide benefits to employees of CIRCA and its Subsidiaries which are
substantially similar to the benefits provided to similarly situated employees
of Watson and its Subsidiaries. With respect to the Watson Benefit Plans, Watson
shall grant all employees of CIRCA and its Subsidiaries who become participants
in such plans after the applicable Benefit Plan Transition Date credit for all
services with CIRCA and its Subsidiaries and their respective predecessors prior
to the applicable Benefit Plan Transition Date for all purposes for which such
service was recognized by CIRCA. To the extent the Watson Benefit Plans provide
medical or dental welfare benefits after the applicable Benefit Plan Transition
Date, Watson shall cause all pre-existing condition exclusions and actively at
work requirements to be waived and Watson shall provide that any expenses
incurred on or before the applicable Benefit Plan Transition Date shall be taken
into account under the Watson Benefit Plans for purposes of satisfying the
applicable deductible, coinsurance and maximum out-of-pocket provisions for such
employees and their covered dependents. On and after the Closing Date, Watson
shall cause the medical or dental welfare benefit plans covering employees of
CIRCA and its Subsidiaries to provide continuation coverage (within the meaning
of Section 4980B of the Code) to employees of CIRCA and its Subsidiaries who
terminated employment prior to Closing and their dependents.
SECTION 5.17 NASD Listing. Watson shall use all reasonable efforts to
cause the shares of Watson Common Stock to be issued in the Merger to be
approved for listing on the NASDAQ prior to the Effective Time. Watson shall not
take any action which would result in the failure to maintain the trading of
Watson Common Stock on the NASDAQ.
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SECTION 5.18 Assumption of Agreements, etc. Watson shall execute such
instruments as may be required to assume the obligations of CIRCA pursuant to
the agreements listed in Schedule 5.18 of the CIRCA Disclosure Schedule and to
effectuate the issuance of options and other arrangements as set forth on such
Schedule, which instruments shall be in form and substance reasonably
satisfactory to CIRCA.
SECTION 5.19 Cause. For purposes of this Article V, the term "cause its
Subsidiaries" with respect to any non-wholly owned Subsidiary shall mean that to
the extent that CIRCA or Watson (as the case may be) or any of its officers,
directors or representatives are requested to or otherwise propose to consent to
or approve any action proposed to be taken by such Subsidiary, whether in their
individual capacity or in any other capacity, that neither CIRCA or Watson (as
the case may be) nor its officers, directors or representatives shall give such
consent or approval, or vote in favor of such action, without the approval of
the other party hereto.
ARTICLE VI
CONDITIONS
SECTION 6.1 Conditions to Each Party's Obligation to Effect the
Merger. The respective obligation of each party to effect the Merger shall be
subject to the fulfillment at or prior to the Closing Date of each of the
following conditions:
(a) This Agreement and the transactions contemplated hereby shall have
been approved in the manner required by applicable law or by the applicable
regulations of any stock exchange or other regulatory body, as the case may
be, by the holders of the issued and outstanding shares of capital stock of
CIRCA and Watson, respectively.
(b) The waiting period applicable to the consummation of the Merger
under the HSR Act shall have expired or been terminated.
(c) No preliminary or permanent injunction or other order or decree by
any federal or state court which prevents the consummation of the Merger
shall have been issued and remain in effect or materially changes the terms
or conditions of this Agreement. In the event any such order or injunction
shall have been issued, each party agrees to use its reasonable efforts to
have any such injunction lifted.
(d) The Form S-4 shall have been declared effective by the SEC and
shall be effective at the Effective Time, and no stop order suspending the
effectiveness of the Form S-4 shall have been issued, no action, suit,
proceeding or investigation by the SEC to suspend the effectiveness thereof
shall have been initiated and be continuing, and all necessary approvals
under state securities laws relating to the issuance or trading of the
Watson Common Stock to be issued to CIRCA stockholders in connection with
the Merger shall have been received.
(e) All consents, authorizations, orders and approvals of (or filings
or registrations with) any governmental commission, board or other
regulatory body required in connection with the execution, delivery and
performance of this Agreement shall have been obtained or made, except for
filings in connection with the Merger and any other documents required to
be filed after the Effective Time and except where the failure to have
obtained or made any such consent, authorization, order, approval, filing
or registration would not have a Watson Material Adverse Effect or a CIRCA
Material Adverse Effect, as the case may be, following the Effective Time.
(f) Watson and CIRCA shall each have received from Price Waterhouse an
opinion that the Merger will be treated as a "pooling of interests" under
applicable accounting standards.
(g) The Watson Common Stock to be issued to CIRCA stockholders in
connection with the Merger shall have been authorized for trading on the
NASDAQ, subject only to official notice of issuance.
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(h) In the event dissenters' rights are available to CIRCA
stockholders, the holders of not more than ten percent (10%) of the
outstanding CIRCA Common Stock shall have perfected dissenters' rights
under applicable law.
SECTION 6.2 Conditions to Obligation of CIRCA to Effect the Merger. The
obligation of CIRCA to effect the Merger shall be subject to the fulfillment at
or prior to the Closing Date of the following conditions:
(a) Watson shall have performed, in all material respects, all of its
agreements contained herein that are required to be performed by Watson on
or prior to the Closing Date, and CIRCA shall have received a certificate
of the President or a Vice President of Watson, dated the Closing Date,
certifying to such effect.
(b) The representations and warranties of Watson and Merger Sub
contained in this Agreement and in any document delivered in connection
herewith shall be true and correct as of the Closing, except where the
failure to be so true and correct would not have a Watson Material Adverse
Effect, and CIRCA shall have received a certificate of the President or a
Vice President of Watson, dated the Closing Date, certifying to such
effect.
(c) CIRCA shall have received from Watson certified copies of the
resolutions of Watson's and Merger Sub's Boards of Directors approving and
adopting this Agreement and the transactions contemplated hereby.
(d) CIRCA shall have received the opinion of Schulte Roth & Zabel
special counsel to CIRCA, dated the Closing Date, to the effect that the
Merger will be treated for federal income tax purposes as a reorganization
within the meaning of Section 368(a) of the Code, and that CIRCA and Watson
will each be a party to that reorganization within the meaning of Section
368(b) of the Code.
(e) CIRCA shall have received a "comfort" letter from Coopers &
Lybrand, of the kind contemplated by the Statement of Auditing Standards
with respect to Letters to Underwriters promulgated by the American
Institute of Certified Public Accountants (the "AICPA Statement"), dated
the Closing Date, in form and substance reasonably satisfactory to CIRCA,
in connection with the procedures undertaken by them with respect to the
financial statements of Watson and its Subsidiaries contained in the Form
S-4 and the other matters contemplated by the AICPA Statement and
customarily included in comfort letters relating to transactions similar to
the Merger.
(f) CIRCA shall have received the updated opinions of Bear Stearns and
Wertheim Schroder dated the date of the Proxy Statement, to the effect that
the Merger or the Exchange Ratio, as the case may be, is fair to CIRCA's
shareholders from a financial point of view.
SECTION 6.3 Conditions to Obligation of Watson and Merger Sub to Effect
the Merger. The obligations of Watson and Merger Sub to effect the Merger shall
be subject to the fulfillment at or prior to the Closing Date of the following
conditions:
(a) CIRCA shall have performed, in all material respects, all of its
agreements contained herein that are required to be performed by CIRCA on
or prior to the Closing Date, and Watson shall have received a certificate
of the President or a Vice President of CIRCA, dated the Closing Date,
certifying to such effect.
(b) The representations and warranties of CIRCA contained in this
Agreement and in any document delivered in connection herewith shall be
true and correct as of the Closing, except where the failure to be so true
and correct would not have a CIRCA Material Adverse Effect, and Watson
shall have received a certificate of the President or a Vice President of
CIRCA, dated the Closing Date, certifying to such effect.
(c) Watson shall have received from CIRCA certified copies of the
resolutions of CIRCA's Board of Directors approving and adopting this
Agreement and the transactions contemplated hereby.
(d) Watson shall have received the opinion of D'Ancona & Pflaum,
special counsel to Watson, dated the Closing Date, to the effect that the
Merger will be treated for federal income tax purposes as a
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reorganization within the meaning of Section 368(a) of the Code, and that
CIRCA and Watson will each be a party to that reorganization within the
meaning of Section 368(b) of the Code.
(e) Watson shall have received a "comfort" letter from Price
Waterhouse, of the kind contemplated by the AICPA Statement, dated the
Closing Date, in form and substance reasonably satisfactory to Watson, in
connection with the procedures undertaken by them with respect to the
financial statements and other financial information of CIRCA and its
Subsidiaries contained in the Form S-4 and the other matters contemplated
by the AICPA Statement and customarily included in comfort letters relating
to transactions similar to the Merger.
(f) Watson shall have received the updated opinion of DLJ, dated the
date of the Proxy Statement, to the effect that the number of shares of
Watson Common Stock to be issued by Watson in the Merger in exchange for
each share of CIRCA Common Stock is fair to Watson's stockholders from a
financial point of view.
ARTICLE VII
TERMINATION
SECTION 7.1 Termination by Mutual Consent. This Agreement may be
terminated and the Merger may be abandoned at any time prior to the Effective
Time, before or after the approval of this Agreement by the stockholders of
CIRCA and/or Watson, by the mutual consent of Watson and CIRCA.
SECTION 7.2 Termination by Either Watson or CIRCA. This Agreement may be
terminated and the Merger may be abandoned by action of the Board of Directors
of either Watson or CIRCA if (a) the Merger shall not have been consummated by
December 1, 1995; provided, however, that the right to terminate this Agreement
under this Section 7.2(a) will not be available to any party whose failure to
fulfill any obligation under this Agreement has been the cause of, or resulted
in, the failure of the Merger to occur on or before such date; (b) the approval
of CIRCA's stockholders required by Section 6.1(a) shall not have been obtained
at a meeting duly convened therefor or at any adjournment thereof; provided,
however, that CIRCA shall not have the right to terminate this Agreement under
this Section 7.2(b) if CIRCA caused (directly or indirectly) or aided in the
failure to obtain such approval; (c) the approval of Watson's stockholders
required by Section 6.1(a) shall not have been obtained at a meeting duly
convened therefor or at any adjournment thereof; provided, however, that Watson
shall not have the right to terminate this Agreement under this Section 7.2(c)
if Watson caused (directly or indirectly) or aided in the failure to obtain such
approval; or (d) a court of competent jurisdiction or a governmental, regulatory
or administrative agency or commission shall have issued an order, decree or
ruling or taken any other action either (i) permanently restraining, enjoining
or otherwise prohibiting the transactions contemplated by this Agreement; or
(ii) compelling Watson, Merger Sub or the Surviving Corporation to dispose of or
hold separate all or a material portion of the respective businesses or assets
of Watson and CIRCA, and such order, decree, ruling or other action shall have
become final and non-appealable; provided, that the party seeking to terminate
this Agreement pursuant to this clause (d) shall have used all reasonable
efforts to remove such injunction, order or decree.
SECTION 7.3 Termination by CIRCA. This Agreement may be terminated and the
Merger may be abandoned at any time prior to the Effective Time, before or after
the adoption and approval by the stockholders of CIRCA referred to in Section
6.1(a), by action of the Board of Directors of CIRCA, if (a) CIRCA receives an
Alternative Proposal and the Board of Directors of CIRCA determines in good
faith and pursuant to the exercise of its fiduciary duties to its stockholders,
to accept such Alternative Proposal, and the Board of Directors of CIRCA
recommends or resolves to accept or recommend to CIRCA's stockholders such
Alternative Proposal; (b) the Board of Directors of CIRCA determines in good
faith and pursuant to the exercise of its fiduciary duties, to withdraw its
recommendation of this Agreement and/or the Merger; (c) the Board of Directors
of Watson shall have (i) recommended an Alternative Proposal to Watson
stockholders or (ii) withdrawn or modified in a manner materially adverse to
CIRCA, its approval or recommendation of this Agreement and/or the Merger (other
than upon the happening of an event described in Sections 7.4(d) or 7.4(e)); (d)
there has been a breach by Watson or Merger Sub of any representation or
warranty contained in
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this Agreement which would have a Watson Material Adverse Effect; (e) there has
been a material breach of any of the material covenants or agreements set forth
in this Agreement on the part of Watson, which breach is not curable or, if
curable, is not cured within 30 days after written notice of such breach is
given by CIRCA to Watson; (f) any person, after the date hereof, shall become
the beneficial owner (directly or indirectly) of twenty percent (20%) of more of
the outstanding shares of Watson Common Stock or any person (other than CIRCA or
its Subsidiaries) shall have commenced a bona fide tender offer or exchange to
acquire at least twenty percent (20%) of the then outstanding shares of Watson
Common Stock or (g) on the Determination Date the Average Closing Price is less
than $25.00 and on or before the Response Date, Watson does not deliver to CIRCA
the Adjustment Notice. For purposes of this paragraph, "Determination Date"
shall mean the thirteenth business day prior to the stockholders' meetings
described in Section 5.3; "Response Date" shall mean the second business day
after the Determination Date; and "Adjustment Notice" shall mean written notice
delivered by Watson to CIRCA on or prior to the Response Date stating that
Watson has elected to adjust the Exchange Ratio such that stockholders of CIRCA
will receive, for each share of CIRCA Common Stock held immediately prior to the
Effective Time, that number of shares of Watson Common Stock with an aggregate
value (based on the Average Closing Price) of $21.50.
If Watson timely delivers to CIRCA the Adjustment Notice, as promptly as
practical, and in no event later than the tenth business day prior to the
stockholders' meetings described in Section 5.3, in compliance with applicable
law: (i) CIRCA and Watson agree to mail to their respective stockholders notice
of the adjusted Exchange Ratio (the "Stockholder Notice") and (ii) Watson agrees
to amend the Form S-4 to include the Stockholder Notice. In the event CIRCA or
Watson is required by applicable law to postpone its stockholders' meeting in
connection with this Section, CIRCA or Watson, as the case may be, shall
postpone such meeting for the minimum period required under applicable law. The
calculation of all dollar amounts and other figures pursuant to this Section
shall be appropriately adjusted in the event that after the date of this
Agreement and prior to the date of any such calculation, the outstanding shares
of CIRCA Common Stock or Watson Common Stock shall have been changed into a
different number of shares or a different class by reason of any stock dividend,
subdivision, reclassification, recapitalization, split, combination or exchange
of shares.
SECTION 7.4 Termination by Watson. This Agreement may be terminated and
the Merger may be abandoned at any time prior to the Effective Time, before or
after the approval by the stockholders of Watson referred to in Section 6.1(a),
by action of the Board of Directors of Watson, if (a) Watson receives an
Alternative Proposal and the Board of Directors of Watson determines in good
faith and pursuant to the exercise of its fiduciary duties to its stockholders,
to accept such Alternative Proposal, and the Board of Directors of Watson
recommends or resolves to accept or recommend to Watson's stockholders such
Alternative Proposal; (b) the Board of Directors of Watson determines in good
faith and pursuant to the exercise of its fiduciary duties, to withdraw its
recommendation of this Agreement and/or the Merger; (c) the Board of Directors
of CIRCA shall have (i) recommended an Alternative Proposal to CIRCA
stockholders or (ii) withdrawn or modified in a manner materially adverse to
Watson, its approval or recommendation of this Agreement or the Merger (other
than upon the happening of an event described in Sections 7.3(d) or 7.3(e)); (d)
there has been a breach by CIRCA of any representation or warranty contained in
this Agreement which would have a CIRCA Material Adverse Effect; (e) there has
been a material breach of any of the material covenants or agreements set forth
in this Agreement on the part of CIRCA, which breach is not curable or, if
curable, is not cured within 30 days after written notice of such breach is
given by Watson to CIRCA; or (f) any person, after the date hereof, shall become
the beneficial owner (directly or indirectly) of twenty percent (20%) of more of
the outstanding shares of CIRCA Common Stock or any Person (other than Watson or
its Subsidiaries) shall have commenced a bona fide tender offer or exchange to
acquire at least twenty percent (20%) of the then outstanding shares of CIRCA
Common Stock.
SECTION 7.5 Effect of Termination and Abandonment.
(a) In the event that this Agreement is terminated by CIRCA pursuant to
Section 7.3(a) or 7.3(b) (other than upon the happening of an event described in
Sections 7.3(d) or 7.3(e)) or by Watson pursuant to Section 7.4(c), then CIRCA
shall promptly pay Watson a fee in an amount equal to the sum of (x)
$15,000,000; plus (y) all actual out-of-pocket costs and expenses of Watson and
Merger Sub incurred in
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connection with this Agreement and the consummation and negotiation of the
transactions contemplated hereby, including, without limitation, legal,
professional and service fees and expenses, which amount shall be payable by
wire transfer of same day funds. CIRCA acknowledges that the agreements
contained in this Section 7.5(a) are an integral part of the transactions
contemplated by this Agreement, and that, without these agreements, Watson and
Merger Sub would not enter into this Agreement. Accordingly, if CIRCA fails to
promptly pay the amount due pursuant to this Section 7.5(a), and, in order to
obtain such payment, Watson or Merger Sub commences a suit which results in a
final, non-appealable judgment against CIRCA for the fee set forth in this
Section 7.5(a), CIRCA shall pay to Watson its costs and expenses (including
attorneys' fees) incurred by Watson in connection with such suit, together with
interest on the amount of the fee at the rate of 12% per annum.
(b) In the event that this Agreement is terminated by Watson pursuant to
Section 7.4(a) or 7.4(b) (other than upon the happening of an event described in
Sections 7.4(d) or 7.4(e)) or by CIRCA pursuant to Section 7.3(c) (subject to
the proviso to this sentence), then Watson shall promptly pay CIRCA a fee in an
amount equal to the sum of (x) $15,000,000; plus (y) all actual out-of-pocket
costs and expenses of CIRCA incurred in connection with this Agreement and the
consummation and negotiation of the transactions contemplated hereby, including,
without limitation, legal, professional and service fees and expenses, which
amount shall be payable by wire transfer of same day funds; provided, however,
that no payments shall be made pursuant to this Section 7.5(b) in the case of a
termination by CIRCA with respect to an Alternative Proposal of Watson, the
consummation of which is not conditioned on the termination of this Agreement
(an "Available Transaction"). Watson acknowledges that the agreements contained
in this Section 7.5(b) are an integral part of the transactions contemplated by
this Agreement, and that, without these agreements, CIRCA would not enter into
this Agreement. Accordingly, if Watson fails to promptly pay the amount due
pursuant to this Section 7.5(b), and, in order to obtain such payment, CIRCA
commences a suit which results in a final, non-appealable judgment against
Watson for the fee set forth in this Section 7.5(b), Watson shall pay to CIRCA
its costs and expenses (including attorneys' fees) incurred by CIRCA in
connection with such suit, together with interest on the amount of the fee at
the rate of 12% per annum.
(c) If this Agreement is (i) terminated by CIRCA pursuant to Sections
7.3(d) or 7.3(e); or (ii) by Watson pursuant to Sections, 7.4(d) or 7.4(e), the
non-terminating party shall reimburse the terminating party for all actual
out-of-pocket costs and expenses incurred by such terminating party in
connection with this Agreement and the consummation and negotiation of the
transactions contemplated hereby, including, without limitation, legal,
professional and service fees and expenses, which amount shall be payable by
wire transfer of same day funds.
(d) In the event of termination of this Agreement and the abandonment of
the Merger pursuant to this Article 7, all obligations of the parties hereto
shall terminate, except the obligations of the parties pursuant to this Section
7.5 and the provisions of Sections 5.6, 5.10, 8.3, 8.4, 8.6, 8.8, 8.9, 8.12 and
8.13, which obligations shall survive the termination of this Agreement.
SECTION 7.6 Extension; Waiver. At any time prior to the Effective Time,
any party hereto, by action taken by its Board of Directors, may, to the extent
legally allowed, (a) extend the time for the performance of any of the
obligations or other acts of the other parties hereto; (b) waive any
inaccuracies in the representations and warranties made to such party contained
herein or in any document delivered pursuant hereto; and (c) waive compliance
with any of the agreements or conditions for the benefit of such party contained
herein. Any agreement on the part of a party hereto to any such extension or
waiver shall be valid only if set forth in an instrument in writing signed on
behalf of such party.
ARTICLE VIII
GENERAL PROVISIONS
SECTION 8.1 Nonsurvival of Representations, Warranties and Agreements. All
representations, warranties and agreements in this Agreement or in any
instrument delivered pursuant to this Agreement shall be deemed to the extent
expressly provided herein to be conditions to the Merger and, shall not survive
the
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Merger, provided, however, that the agreements contained in Sections 1.4, 1.5,
1.6, 1.7, 1.8, 5.11, 5.14, 5.15, 5.16, 5.17 and 5.18 and this Article 8 and the
agreements delivered pursuant to this Agreement shall survive the Merger.
SECTION 8.2 Notices. Any notice required to be given hereunder shall be
sufficient if in writing, and sent by facsimile transmission and by courier
service (with proof of service), hand delivery or certified or registered mail
(return receipt requested and first-class postage prepaid), addressed as
follows:
<TABLE>
<S> <C>
If to Watson or Merger Sub: If to CIRCA:
Watson Pharmaceuticals, Inc. CIRCA Pharmaceuticals, Inc.
311 Bonnie Circle 33 Ralph Avenue
Corona, California 91720 Copiague, New York 11726
Fax: (909) 270-1096 Fax: (516) 789-3331
Attn: Dr. Allen Chao Attn: Dr. Melvin Sharoky
With copies to: With copies to:
D'Ancona & Pflaum Schulte Roth & Zabel
30 North LaSalle, Suite 2900 900 Third Avenue
Chicago, Illinois 60602 New York, NY 10022
Fax: (312) 580-0923 Fax (212) 593-5955
Attn: Michel J. Feldman Attn: Marc Weingarten
</TABLE>
or to such other address as any party shall specify by written notice so given,
and such notice shall be deemed to have been delivered as of the date so
telecommunicated, personally delivered or mailed.
SECTION 8.3 Assignment, Binding Effect. Neither this Agreement nor any of
the rights, interests or obligations hereunder shall be assigned by any of the
parties hereto (whether by operation of law or otherwise) without the prior
written consent of the other parties. Subject to the preceding sentence, this
Agreement shall be binding upon and shall inure to the benefit of the parties
hereto and their respective permitted successors and assigns. Notwithstanding
anything contained in this Agreement to the contrary, except for the provisions
of Sections 1.4, 1.5, 1.6, 1.7, 1.8, 2.3, 2.4, 5.11, 5.14, 5.16 and 5.18,
nothing in this Agreement, expressed or implied, is intended to confer on any
person other than the parties hereto or their respective heirs, successors,
executors, administrators and assigns any rights, remedies, obligations or
liabilities under or by reason of this Agreement.
SECTION 8.4 Entire Agreement. This Agreement, the Exhibit, the CIRCA
Disclosure Letter, the Watson Disclosure Letter, the Confidentiality Agreement
and any documents delivered by the parties in connection herewith constitute the
entire agreement among the parties with respect to the subject matter hereof and
supersede all prior agreements and understandings among the parties with respect
thereto. No addition to or modification of any provision of this Agreement shall
be binding upon any party hereto unless made in writing and signed by all
parties hereto.
SECTION 8.5 Amendment. This Agreement may be amended by the parties
hereto, by action taken by their respective Boards of Directors, at any time
before or after approval of matters presented in connection with the Merger by
the stockholders of CIRCA and Watson, but after any such stockholder approval,
no amendment shall be made which by law requires the further approval of
stockholders without obtaining such further approval. This Agreement may not be
amended except by an instrument in writing signed on behalf of each of the
parties hereto.
SECTION 8.6 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York without regard to
its rules of conflict of laws.
SECTION 8.7 Counterparts. This Agreement may be executed by the parties
hereto in separate counterparts, each of which when so executed and delivered
shall be an original, but all such counterparts shall together constitute one
and the same instrument.
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<PAGE> 143
SECTION 8.8 Headings. Headings of the Articles and Sections of this
Agreement are for the convenience of the parties only and shall be given no
substantive or interpretive effect whatsoever.
SECTION 8.9 Interpretation. In this Agreement, unless the context
otherwise requires, words describing the singular number shall include the
plural and vice versa, and words denoting any gender shall include all genders
and words denoting natural persons shall include corporations and partnerships
and vice versa.
SECTION 8.10 Waivers. Except as provided in this Agreement, no action
taken pursuant to this Agreement, including, without limitation, any
investigation by or on behalf of any party, shall be deemed to constitute a
waiver by the party taking such action of compliance with any representations,
warranties, covenants or agreements contained in this Agreement. The waiver by
any party hereto of a breach of any provision hereunder shall not operate or be
construed as a waiver of any prior or subsequent breach of the same or any other
provision hereunder.
SECTION 8.11 Incorporation of Exhibits. The CIRCA Disclosure Letter, the
Watson Disclosure Letter and all Exhibits attached hereto and referred to herein
are hereby incorporated herein and made a part hereof for all purposes as if
fully set forth herein.
SECTION 8.12 Severability. Any term or provision of this Agreement which
is invalid or unenforceable in any jurisdiction shall, as to that jurisdiction,
be ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. If any provision of this
Agreement is so broad as to be unenforceable, the provision shall be interpreted
to be only so broad as is enforceable.
SECTION 8.13 Enforcement of Agreement. The parties hereto agree that
irreparable damage would occur in the event that any of the provisions of this
Agreement was not performed in accordance with its specific terms or was
otherwise breached. It is accordingly agreed that the parties shall be entitled
to seek an injunction or injunctions to prevent breaches of this Agreement and
to enforce specifically the terms and provisions hereof, this being in addition
to any other remedy to which they are entitled at law or in equity.
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<PAGE> 144
IN WITNESS WHEREOF, the parties have executed this Agreement and caused the
same to be duly delivered on their behalf on the day and year first written
above.
WATSON PHARMACEUTICALS, INC.
By: [ALLEN CHAO SIG]
------------------------------
Title: President
ATTEST:
By: [MICHEL J. FELDMAN SIG]
----------------------------------
Michel J. Feldman
Assistant Secretary
GUM ACQUISITION CORP.
By: [ALLEN CHAO SIG]
-----------------------------
Title: President
ATTEST:
By: [MICHEL J. FELDMAN SIG]
----------------------------------
Michel J. Feldman
Assistant Secretary
CIRCA PHARMACEUTICALS, INC.
By: [MELVIN SHAROKY SIG]
-----------------------------
Title: President
ATTEST:
By: [GWEN GERRICK SIG]
----------------------------------
Gwen Gerrick
Secretary
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<PAGE> 145
APPENDIX B
[LOGO]
Donaldson, Lufkin & Jenrette Securities Corporation
2121 Avenue of the Stars, Los Angeles, CA 90067-5014 - (310) 282-6161
June 13, 1995
Board of Directors
Watson Pharmaceuticals, Inc.
311 Bonnie Circle
Corona, CA 91720
Dear Madam and Sirs:
You have requested our opinion as to the fairness from a financial point of
view to the shareholders of Watson Pharmaceuticals, Inc. (the "Company") of the
Exchange Ratio (as defined below) to be offered by the Company pursuant to the
terms of the Agreement and Plan of Merger dated as of March 29, 1995, between
the Company and Circa Pharmaceuticals, Inc. ("Circa") (the "Agreement").
Pursuant to the Agreement, each share of common stock of Circa will be
converted into the right to receive 0.86 shares of common stock, $0.0033 par
value per share of the Company (the "Exchange Ratio").
In arriving at our opinion, we have reviewed the Agreement and certain
related documents. We also have reviewed certain financial and other information
that was publicly available or furnished to us by the Company and Circa
including information provided during discussions with their respective
managements. Included in the information provided during discussions with the
respective managements were certain financial projections of Circa for the
period beginning January 1995 and ending December 1998 prepared by the
management of Circa and certain financial projections of the Company for the
period beginning January 1995 and ending December 1997 prepared by the
management of the Company. In addition, we have compared certain financial and
securities data of the Company and Circa with various other companies whose
securities are traded in public markets, reviewed the historical stock prices
and trading volumes of the common stock of Circa and the Company, reviewed
prices and premiums paid in other business combinations and conducted such other
financial studies, analyses and investigations as we deemed appropriate for
purposes of this opinion.
In rendering our opinion, we have relied upon and assumed the accuracy,
completeness and fairness of all of the financial and other information that was
available to us from public sources, that was provided to us by the Company and
Circa or their respective representatives, or that was otherwise reviewed by us.
With respect to the financial projections supplied to us, we have assumed (with
your consent) that they have been reasonably prepared on the basis reflecting
the best currently available estimates and judgments of the management of the
Company and Circa as to the future operating and financial performance of the
Company and Circa. However, please be advised that in rendering our opinion, we
have given relatively less weight to projections for both the Company and Circa
for years after 1996 due to the inherent difficulty of projecting the long term
operating results of these companies. We have not assumed any responsibility for
making any independent evaluation of Circa's assets or liabilities or for making
any independent verification of any of the information reviewed by us. We have
relied as to all legal matters on advice of counsel to the Company.
Our opinion is necessarily based on economic, market, financial and other
conditions as they exist on, and on the information made available to us as of,
the date of this letter. It should be understood that, although subsequent
developments may affect this opinion, we do not have any obligation to update,
revise or reaffirm this opinion other than the obligations stated in the Letter
Agreement between the Company and Donaldson, Lufkin & Jenrette Securities
Corporation ("DLJ") dated March 23, 1995. We are expressing no opinion herein as
to the price at which the common stock of the Company will actually trade at any
time. Also, our opinion does not constitute a recommendation to any shareholder
as to how such shareholder should vote on the proposed transaction.
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DLJ, as part of its investment banking services, is regularly engaged in
the valuation of businesses and securities in connection with mergers,
acquisitions, underwritings, sales and distributions of listed and unlisted
securities, private placements and valuations for estate, corporate and other
purposes. DLJ has served as a managing underwriter for the Company's offerings
of common stock in February 1993 and in November 1993 for which DLJ was paid
usual and customary compensation.
Please note that DLJ is a full service securities firm engaged in
securities trading and brokerage activities, as well as providing investment
banking and financial advisory services. In the ordinary course of our trading
and brokerage activities, DLJ or its affiliates may at any time hold long or
short positions, and may trade or otherwise effect transactions, for our own
account or the accounts of customers, in debt or equity securities of the
Company or Circa. We recognize our responsibility for compliance with federal
laws in connection with any such activities.
Based upon the foregoing and such other factors as we deem relevant, we are
of the opinion that the Exchange Ratio to be offered by the Company pursuant to
the Agreement is fair to the shareholders of the Company from a financial point
of view.
Very truly yours,
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By: /s/ JAMES T. SINGTON
----------------------------------
James T. Sington
Managing Director
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[LOGO]
BEAR, STEARNS & CO. INC.
APPENDIX C
245 PARK AVENUE
NEW YORK, NEW YORK 10167
(212) 272-2000
ATLANTA - BOSTON
CHICAGO - DALLAS - LOS ANGELES
NEW YORK - SAN FRANCISCO
FRANKFURT - GENEVA - HONG KONG
LONDON - PARIS - TOKYO
June 14, 1995
Board of Directors
Circa Pharmaceuticals, Inc.
33 Ralph Avenue
Copiague, NY 11726
Dear Sirs:
We understand that Circa Pharmaceuticals, Inc. ("Circa") and Watson
Pharmaceuticals, Inc. ("Watson") are considering a transaction in which a
newly-formed wholly-owned subsidiary of Watson would be merged with and into
Circa in a stock-for-stock exchange (the "Merger"). Pursuant to the Merger, each
current share of common stock of Circa would be converted into 0.86 shares of
common stock of Watson. The exchange ratio is subject to potential change based
on the average closing price of Watson common stock during the 20 consecutive
trading days ending on the thirteenth business day prior to the stockholders'
meeting (the "Average Closing Price"). If the Average Closing Price is less than
$25.00, Watson may elect to adjust the exchange ratio such that stockholders of
Circa will receive, for each share of Circa common stock held, that number of
shares of Watson common stock with an aggregate value (based on the Average
Closing Price) of $21.50; otherwise, Circa may elect to terminate the Merger.
You have provided us with the Joint Proxy Statement/Prospectus with respect to
the Merger to be sent to the stockholders of Circa and Watson in substantially
final form (the "Proxy Statement"), which includes the Merger Agreement. We
understand that the Merger will be accounted for as a pooling of interests.
You have asked us to render our opinion as to whether the Merger is fair,
from a financial point of view, to the stockholders of Circa.
In the course of our analyses for rendering this opinion, we have:
1. reviewed the Proxy Statement;
2. reviewed Circa's Annual Reports to Shareholders and its Annual
Reports on Form 10-K for the fiscal years ended December 31, 1991 through
1994, and its Quarterly Report on Form 10-Q for the period ended March 31,
1995;
3. reviewed Watson's Annual Reports to Shareholders and its Annual
Reports on Form 10-K for the fiscal years ended December 31, 1993 and 1994,
and its Quarterly Report on Form 10-Q for the period ended March 31, 1995;
4. reviewed certain operating and financial information, including
projections, provided to us by the managements of Circa and Watson relating
to their respective business prospects;
5. met with certain members of Circa's and Watson's senior managements
to discuss their respective operations, historical financial statements and
future prospects, and their views of the benefits and other implications of
the Merger;
6. reviewed the historical stock prices and trading volumes of Circa
Common Stock and Watson Common Stock;
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7. reviewed publicly available financial data and stock market
performance data of companies which we deemed generally comparable to Circa
and Watson;
8. reviewed the terms of recent combinations of companies which we
deemed generally comparable to Circa and Watson; and
9. conducted such other studies, analyses, inquiries and
investigations as we deemed appropriate.
In the course of our review, we have relied upon and assumed the accuracy
and completeness of the financial and other information provided to us by Circa
and Watson. With respect to Circa's and Watson's projected financial results, we
have assumed that they have been reasonably prepared on bases reflecting the
best currently available estimates and judgments of the managements of Circa and
Watson as to the expected future performance of Circa and Watson, respectively.
We have not assumed any responsibility for independent verification of the
information or projections provided to us and we have further relied upon the
assurances of the managements of Circa and Watson that they are unaware of any
facts that would make the information or projections provided to us incomplete
or misleading. We have considered a variety of factors that could affect the
achievability of the projections and have considered such alternative scenarios
as we deemed appropriate. In arriving at our opinion, we have not performed or
obtained any independent appraisal of the assets of Circa and Watson. Our
opinion is necessarily based on economic, market and other conditions, and the
information made available to us, as of the date hereof.
Based on the foregoing, it is our view that the Merger is fair, from a
financial point of view, to the stockholders of Circa.
We have acted as financial advisor to Circa in connection with the Merger
and will receive a fee for such services, payment of a significant portion of
which is contingent upon the consummation of the Merger.
Very truly yours,
BEAR, STEARNS & CO. INC.
By: [MICHAEL LUCE SIG]
---------------------------------
Managing Director
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<PAGE> 149
APPENDIX D
<TABLE>
<S> <C>
WERTHEIM SCHRODER & CO. EQUITABLE CENTER
INCORPORATED 787 SEVENTH AVENUE
NEW YORK, NY 10019-6016
TELEPHONE 212-492-6000
</TABLE>
June 14, 1995
Board of Directors
Circa Pharmaceuticals, Inc.
33 Ralph Avenue
Copiague, NY 11726
Dear Members of the Board:
We understand that Circa Pharmaceuticals, Inc. (the "Company"), Watson
Pharmaceuticals, Inc. ("Watson") and a wholly-owned subsidiary of Watson
("Merger Subsidiary") have entered into an Agreement and Plan of Merger (the
"Merger Agreement") pursuant to which the Merger Subsidiary will merge with and
into the Company, with the Company as the surviving corporation, and the Company
will become a wholly-owned subsidiary of Watson (the "Merger"). The Merger
Agreement provides, among other things, that each issued and outstanding share
of common stock of the Company, par value $0.01 per share, other than any such
shares held as treasury stock by the Company ("Company Common Stock"), become
and be converted into 0.86 of a share (the "Exchange Ratio") of common stock of
Watson, par value $0.0033 per share ("Watson Common Stock"). If Watson adopts a
rights plan prior to the effective time of the merger, each share of Watson
Common Stock issued to holders of Company Common Stock in the Merger shall be
issued with one associated stock purchase right. The Company can terminate the
Merger Agreement if the average of the per share daily closing prices of Watson
Common Stock as quoted on the National Association of Securities Dealers, Inc.
National Market System during the 20 consecutive trading days ending on the
thirteenth business day prior to the date of the shareholders' meetings to be
held by the Company and Watson to consider the Merger (the "Determination Date")
is less than $25.00, unless on or before the second business day after the
Determination Date, Watson has delivered written notice to the Company that
shareholders of the Company will receive, for each share of Company Common Stock
held immediately prior to the effective time of the Merger, that number of
shares of Watson Common Stock with an aggregate value (determined as of the
Determination Date using the formula set forth above) of $21.50. The Merger is
expected to be considered by the holders of Company Common Stock at a special
shareholders' meeting. The terms of the Merger are more fully set forth in the
Merger Agreement.
You have requested our opinion, as investment bankers, as to the fairness
of the Exchange Ratio to the public shareholders of the Company from a financial
point of view.
In connection with our opinion set forth herein, we have, among other
things:
(i) reviewed the Annual Reports on Form 10-K filed with the Securities
and Exchange Commission (the "Commission") for the fiscal years ended
December 31, 1993 and December 31, 1994 by the Company and Watson;
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<PAGE> 150
WERTHEIM SCHRODER & CO.
INCORPORATED
Circa Pharmaceuticals, Inc.
June 14, 1995
Page 2
(ii) reviewed the Quarterly Reports on Form 10-Q for the fiscal
quarters ended March 31, 1995, September 30, 1994, June 30, 1994, and March
31, 1994, filed with the Commission by the Company and Watson;
(iii) reviewed certain internal financial statements and financial
operating data concerning the Company and Watson prepared by the respective
managements of the Company and Watson;
(iv) discussed the past and current operations, the financial
condition and future prospects of the Company and Watson with the
respective managements of the Company and Watson;
(v) reviewed and discussed with the management of the Company and
Watson certain financial information, including financial forecasts,
relating to the business, financial condition, earnings, assets and
prospects of the Company and Watson prior to the Merger, and Watson
following the Merger, prepared by the respective managements of the Company
and Watson;
(vi) analyzed the pro forma impact of the Merger on Watson's
capitalization and projected earnings;
(vii) reviewed the reported prices and trading activity of the Company
Common Stock and the Watson Common Stock;
(viii) compared the results of operations of the Company and Watson
with those of certain companies which we deemed to be reasonably comparable
to the Company and Watson, respectively;
(ix) reviewed the financial terms, to the extent publicly available,
of certain comparable transactions;
(x) participated in discussions and negotiations among representatives
of the Company and Watson;
(xi) reviewed the executed Merger Agreement, dated March 29, 1995;
(xii) reviewed the Joint Proxy Statement and Prospectus of Circa and
Watson relating to the Merger, in substantially the form to be mailed to
the shareholders of Circa; and
(xiii) performed such other analyses and reviewed and analyzed such
other information as we deemed appropriate.
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WERTHEIM SCHRODER & CO.
INCORPORATED
Circa Pharmaceuticals, Inc.
June 14, 1995
Page 3
In rendering our opinion, we have assumed and relied upon the accuracy and
completeness of all information supplied or otherwise made available to us by
the Company and Watson or obtained by us from other sources, and upon the
assurances of the Company's and Watson's management that they are unaware of any
information or facts that would make the information provided to us incomplete
or misleading. We have not independently verified such information, undertaken
an independent appraisal of the assets or liabilities (contingent or otherwise)
of Watson or the Company or been furnished with any such appraisals. With
respect to financial forecasts furnished to us by the Company and Watson, we
have been advised by the senior management of the Company and Watson, as the
case may be, and we have assumed, that they have been reasonably prepared and
reflect the best currently available estimates and judgment of the senior
management of the Company and Watson, as the case may be, as to the expected
future financial performance of the Company and Watson prior to the Merger, and
Watson following the Merger. At the Company's request, we did not, and were not
asked to, contact several entities with which the Company has material business
relationships. In rendering our opinion, we have relied solely upon information
provided by the Company concerning such relationships.
Our opinion is necessarily based upon economic, market and other conditions
as they exist on, and the information made available to us as of, the date
hereof. We disclaim any undertaking or obligation to advise any person of any
change in any fact or matter affecting the opinion expressed herein which may
come or be brought to our attention after the date hereof.
Wertheim Schroder & Co. Incorporated, as part of its investment banking
business, is continually engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions, negotiated
underwritings, secondary distributions of listed and unlisted securities,
private placements and valuations for estate, corporate and other purposes. We
have acted as financial advisor to the Company in connection with the
transaction described in this letter and will receive a fee for our services
which is contingent upon the consummation of the Merger. We have, in the past,
provided investment banking services to the Company and have received customary
fees for rendering such services. In addition, Kenneth Siegel, a Managing
Director of Wertheim Schroder & Co. Incorporated, is a director of the Company.
The opinion expressed herein does not constitute a recommendation as to any
action the Board of Directors or any shareholder of the Company should take in
connection with the Merger. In rendering this opinion we have not been engaged
to act as an agent or fiduciary of the Company's public shareholders or any
other third party. Such opinion relates solely to the fairness of the Exchange
Ratio to the public shareholders of the Company from a financial point of view.
We express no opinion herein as to the structure, terms or effect of any other
aspect of the Merger.
This letter is for the information of the Board of Directors of the Company
only and is solely for use in its consideration of the fairness of the Exchange
Ratio to the public shareholders of the Company from a financial point of view
and may not be used for any other purpose or referred to without our prior
written consent. Without limiting the foregoing, we consent to the reference to
our opinion in, and the inclusion of our opinion as an exhibit to, the Joint
Proxy Statement and Prospectus, dated the date hereof, of Circa and Watson
relating to the Merger and the Registration Statement of which such joint Proxy
Statement and Prospectus forms a part.
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WERTHEIM SCHRODER & CO.
INCORPORATED
Circa Pharmaceuticals, Inc.
June 14, 1995
Page 4
Based upon and subject to the foregoing, we are of the opinion, as
investment bankers, that the Exchange Ratio is fair to the public shareholders
of the Company from a financial point of view.
Very truly yours,
WERTHEIM SCHRODER & CO.
Incorporated
By: /s/ KENNETH SIEGEL
----------------------
Managing Director
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APPENDIX E
NEW YORK BUSINESS CORPORATION LAW
623 PROCEDURE TO ENFORCE SHAREHOLDER'S RIGHT TO RECEIVE PAYMENT FOR
SHARES. -- (a) A shareholder intending to enforce his right under a section of
this chapter to receive payment for his shares if the proposed corporate action
referred to therein is taken shall file with the corporation, before the meeting
of shareholders at which the action is submitted to a vote, or at such meeting
but before the vote, written objection to the action. The objection shall
include a notice of his election to dissent, his name and residence address, the
number and classes of shares as to which he dissents and a demand for payment of
the fair value of his shares if the action is taken. Such objection is not
required from any shareholder to whom the corporation did not give notice of
such meeting in accordance with this chapter or where the proposed action is
authorized by written consent of shareholders without a meeting.
(b) Within ten days after the shareholders' authorization date, which term
as used in this section means the date on which the shareholders' vote
authorizing such action was taken, or the date on which such consent without a
meeting was obtained from the requisite shareholders, the corporation shall give
written notice of such authorization or consent by registered mail to each
shareholder who filed written objection or from whom written objection was not
required, excepting any shareholder who voted for or consented in writing to the
proposed action and who thereby is deemed to have elected not to enforce his
right to receive payment for his shares.
(c) Within twenty days after the giving of notice to him, any shareholder
from whom written objection was not required and who elects to dissent shall
file with the corporation a written notice of such election, stating his name
and residence address, the number and classes of shares as to which he dissents
and a demand for payment of the fair value of his shares. Any shareholder who
elects to dissent from a merger under section 905 (Merger of subsidiary
corporation) or paragraph (c) of section 907 (Merger or consolidation of
domestic and foreign corporations) or from a share exchange under paragraph (g)
of section 913 (Share exchanges) shall file a written notice of such election to
dissent within twenty days after the giving to him of a copy of the plan of
merger or exchange or an outline of the material features thereof under section
905 or 913.
(d) A shareholder may not dissent as to less than all of the shares, as to
which he has a right to dissent, held by him of record, that he owns
beneficially. A nominee or fiduciary may not dissent on behalf of any beneficial
owner as to less than all of the shares of such owner, as to which such nominee
or fiduciary has a right to dissent, held of record by such nominee or
fiduciary.
(e) Upon consummation of the corporate action, the shareholder shall cease
to have any of the rights of a shareholder except the right to be paid the fair
value of his shares and any other rights under this section. A notice of
election may be withdrawn by the shareholder at any time prior to his acceptance
in writing of an offer made by the corporation, as provided in paragraph (g),
but in no case later than sixty days from the date of consummation of the
corporate action except that if the corporation fails to make a timely offer, as
provided in paragraph (g), the time for withdrawing a notice of election shall
be extended until sixty days from the date an offer is made. Upon expiration of
such time, withdrawal of a notice of election shall require the written consent
of the corporation. In order to be effective, withdrawal of a notice of election
must be accompanied by the return to the corporation of any advance payment made
to the shareholder as provided in paragraph (g). If a notice of election is
withdrawn, or the corporate action is rescinded, or a court shall determine that
the shareholder is not entitled to receive payment for his shares, or the
shareholder shall otherwise lose his dissenter's rights, he shall not have the
right to receive payment for his shares and he shall be reinstated to all his
rights as a shareholder as of the consummation of the corporate action,
including any intervening preemptive rights and the right to payment of any
intervening dividend or other distribution or, if any such rights have expired
or any such dividend or distribution other than in cash has been completed, in
lieu thereof, at the election of the corporation, the fair value thereof in cash
as determined by the board as of the time of such expiration or completion, but
without prejudice otherwise to any corporate proceedings that may have been
taken in the interim.
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(f) At the time of filing the notice of election to dissent or within one
month thereafter the shareholder of shares represented by certificates shall
submit the certificates representing his shares to the corporation, or to its
transfer agent, which shall forthwith note conspicuously thereon that a notice
of election has been filed and shall return the certificates to the shareholder
or other person who submitted them on his behalf. Any shareholder of shares
represented by certificates who fails to submit his certificates for such
notation as herein specified shall, at the option of the corporation exercised
by written notice to him within forty-five days from the date of filing of such
notice of election to dissent, lose his dissenter's rights unless a court, for
good cause shown, shall otherwise direct. Upon transfer of a certificate bearing
such notation, each new certificate issued therefor shall bear a similar
notation together with the name of the original dissenting holder of the shares
and a transferee shall acquire no rights in the corporation except those which
the original dissenting shareholder had at the time of the transfer.
(g) Within fifteen days after the expiration of the period within which
shareholders may file their notices of election to dissent, or within fifteen
days after the proposed corporate action is consummated, whichever is later (but
in no case later than ninety days from the shareholders' authorization date),
the corporation or, in the case of a merger or consolidation, the surviving or
new corporation, shall make a written offer by registered mail to each
shareholder who has filed such notice of election to pay for his shares at a
specified price which the corporation considers to be their fair value. Such
offer shall be accompanied by a statement setting forth the aggregate number of
shares with respect to which notices of election to dissent have been received
and the aggregate number of holders of such shares. If the corporate action has
been consummated, such offer shall also be accompanied by (1) advance payment to
each such shareholder who has submitted the certificates representing his shares
to the corporation, as provided in paragraph (f), of an amount equal to eighty
percent of the amount of such offer, or (2) as to each shareholder who has not
yet submitted his certificates a statement that advance payment to him of an
amount equal to eighty percent of the amount of such offer will be made by the
corporation promptly upon submission of his certificates. If the corporate
action has not been consummated at the time of the making of the offer, such
advance payment or statement as to advance payment shall be sent to each
shareholder entitled thereto forthwith upon consummation of the corporate
action. Every advance payment or statement as to advance payment shall include
advice to the shareholder to the effect that acceptance of such payment does not
constitute a waiver of any dissenters' rights. If the corporate action has not
been consummated upon the expiration of the ninety day period after the
shareholders' authorization date the offer may be conditioned upon the
consummation of such action. Such offer shall be made at the same price per
share to all dissenting shareholders of the same class, or if divided into
series, of the same series and shall be accompanied by a balance sheet of the
corporation whose shares the dissenting shareholder holds as of the latest
available date, which shall not be earlier than twelve months before the making
of such offer, and a profit and loss statement or statements for not less than a
twelve month period ended on the date of such balance sheet or, if the
corporation was not in existence throughout such twelve month period, for the
portion thereof during which it was in existence. Notwithstanding the foregoing,
the corporation shall not be required to furnish a balance sheet or profit and
loss statement or statements to any shareholder to whom such balance sheet or
profit and loss statement or statements were previously furnished, nor if in
connection with obtaining the shareholders' authorization for or consent to the
proposed corporate action the shareholders were furnished with a proxy or
information statement, which included financial statements, pursuant to
Regulation 14A or Regulation 14C of the United States Securities and Exchange
Commission. If within thirty days after the making of such offer, the
corporation making the offer and any shareholder agree upon the price to be paid
for his shares, payment therefor shall be made within sixty days after the
making of such offer or the consummation of the proposed corporate action,
whichever is later, upon the surrender of the certificates for any such shares
represented by certificates.
(h) The following procedure shall apply if the corporation fails to make
such offer within such period of fifteen days, or if it makes the offer and any
dissenting shareholder or shareholders fail to agree with it within the period
of thirty days thereafter upon the price to be paid for their shares:
(1) The corporation shall, within twenty days after the expiration of
whichever is applicable of the two periods last mentioned, institute a
special proceeding in the supreme court in the judicial district in which
the office of the corporation is located to determine the rights of
dissenting shareholders and to fix
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the fair value of their shares. If, in the case of merger or consolidation,
the surviving or new corporation is a foreign corporation without an office
in this state, such proceeding shall be brought in the county where the
office of the domestic corporation, whose shares are to be valued, was
located.
(2) If the corporation fails to institute such proceeding within such
period of twenty days, any dissenting shareholder may institute such
proceeding for the same purpose not later than thirty days after the
expiration of such twenty day period. If such proceeding is not instituted
within such thirty day period, all dissenter's rights shall be lost unless
the supreme court, for good cause shown, shall otherwise direct.
(3) All dissenting shareholders, excepting those who, as provided in
paragraph (g), have agreed with the corporation upon the price to be paid
for their shares, shall be made parties to such proceeding, which shall
have the effect of an action quasi in rem against their shares. The
corporation shall serve a copy of the petition in such proceeding upon each
dissenting shareholder who is a resident of this state in the manner
provided by law for the service of a summons, and upon each nonresident
dissenting shareholder either by registered mail and publication, or in
such other manner as is permitted by law. The jurisdiction of the court
shall be plenary and exclusive.
(4) The court shall determine whether each dissenting shareholder, as
to whom the corporation requests the court to make such determination, is
entitled to receive payment for his shares. If the corporation does not
request any such determination or if the court finds that any dissenting
shareholder is so entitled, it shall proceed to fix the value of the
shares, which, for the purposes of this section, shall be the fair value as
of the close of business on the day prior to the shareholders'
authorization date. In fixing the fair value of the shares, the court shall
consider the nature of the transaction giving rise to the shareholder's
right to receive payment for shares and its effects on the corporation and
its shareholders, the concepts and methods then customary in the relevant
securities and financial markets for determining fair value of shares of a
corporation engaging in a similar transaction under comparable
circumstances and all other relevant factors. The court shall determine the
fair value of the shares without a jury and without referral to an
appraiser or referee. Upon application by the corporation or by any
shareholder who is a party to the proceeding, the court may, in its
discretion, permit pretrial disclosure, including, but not limited to,
disclosure of any expert's reports relating to the fair value of the shares
whether or not intended for use at the trial in the proceeding and
notwithstanding subdivision (d) of section 3101 of the civil practice law
and rules.
(5) The final order in the proceeding shall be entered against the
corporation in favor of each dissenting shareholder who is a party to the
proceeding and is entitled thereto for the value of his shares so
determined.
(6) The final order shall include an allowance for interest at such
rate as the court finds to be equitable, from the date the corporate action
was consummated to the date of payment. In determining the rate of
interest, the court shall consider all relevant factors, including the rate
of interest which the corporation would have had to pay to borrow money
during the pendency of the proceeding. If the court finds that the refusal
of any shareholder to accept the corporate offer of payment for his shares
was arbitrary, vexatious or otherwise not in good faith, no interest shall
be allowed to him.
(7) Each party to such proceeding shall bear its own costs and
expenses, including the fees and expenses of its counsel and of any experts
employed by it. Notwithstanding the foregoing, the court may, in its
discretion, apportion and assess all or any part of the costs, expenses and
fees incurred by the corporation against any or all of the dissenting
shareholders who are parties to the proceeding, including any who have
withdrawn their notices of election as provided in paragraph (e), if the
court finds that their refusal to accept the corporate offer was arbitrary,
vexatious or otherwise not in good faith. The court may, in its discretion,
apportion and assess all or any part of the costs, expenses and fees
incurred by any or all of the dissenting shareholders who are parties to
the proceeding against the corporation if the court finds any of the
following: (A) that the fair value of the shares as determined materially
exceeds the amount which the corporation offered to pay; (B) that no offer
or required advance payment was made by the corporation; (C) that the
corporation failed to institute the special proceeding within the period
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specified therefor; or (D) that the action of the corporation in complying
with its obligations as provided in this section was arbitrary, vexatious
or otherwise not in good faith. In making any determination as provided in
clause (A), the court may consider the dollar amount or the percentage, or
both, by which the fair value of the shares as determined exceeds the
corporate offer.
(8) Within sixty days after final determination of the proceeding, the
corporation shall pay to each dissenting shareholder the amount found to be
due him, upon surrender of the certificates for any such shares represented
by certificates.
(i) Shares acquired by the corporation upon the payment of the agreed value
therefor or of the amount due under the final order, as provided in this
section, shall become treasury shares or be cancelled as provided in section 515
(Reacquired shares), except that, in the case of a merger or consolidation, they
may be held and disposed of as the plan of merger or consolidation may otherwise
provide.
(j) No payment shall be made to a dissenting shareholder under this section
at a time when the corporation is insolvent or when such payment would make it
insolvent. In such event, the dissenting shareholder shall, at his option:
(1) Withdraw his notice of election, which shall in such event be
deemed withdrawn with the written consent of the corporation; or
(2) Retain his status as a claimant against the corporation and, if it
is liquidated, be subordinated to the rights of creditors of the
corporation, but have rights superior to the non-dissenting shareholders,
and if it is not liquidated, retain his right to be paid for his shares,
which right the corporation shall be obliged to satisfy when the
restrictions of this paragraph do not apply.
(3) The dissenting shareholder shall exercise such option under
subparagraph (1) or (2) by written notice filed with the corporation within
thirty days after the corporation has given him written notice that payment
for his shares cannot be made because of the restrictions of this
paragraph. If the dissenting shareholder fails to exercise such option as
provided, the corporation shall exercise the option by written notice given
to him within twenty days after the expiration of such period of thirty
days.
(k) The enforcement by a shareholder of his right to receive payment for
his shares in the manner provided herein shall exclude the enforcement by such
shareholder of any other right to which he might otherwise be entitled by virtue
of share ownership, except as provided in paragraph (e), and except that this
section shall not exclude the right of such shareholder to bring or maintain an
appropriate action to obtain relief on the ground that such corporate action
will be or is unlawful or fraudulent as to him.
(l) Except as otherwise expressly provided in this section, any notice to
be given by a corporation to a shareholder under this section shall be given in
the manner provided in section 605 (Notice of meetings of shareholders).
(m) This section shall not apply to foreign corporations except as provided
in subparagraph (e)(2) of section 907 (Merger or consolidation of domestic and
foreign corporations). (Last amended by Ch. 117, L. '86, eff. 9-1-86.)
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APPENDIX F
WATSON PHARMACEUTICALS, INC.
1995 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN
1. PURPOSE OF THE PLAN. Under this 1995 Non-Employee Directors' Stock
Option Plan (the "Plan") of Watson Pharmaceuticals, Inc. (the "Company"),
options may be granted to eligible non-employee directors to purchase shares of
the Company's capital stock. The Plan is designed to enable the Company and its
subsidiaries to attract, retain, and motivate their non-employee directors by
providing for or increasing the proprietary interest of such individuals in the
Company, and by more closely aligning their interests with those of the
Company's shareholders. The Plan provides for options that do not qualify as
incentive stock options under Section 422 of the Internal Revenue Code of 1986,
as amended (the "Code"). As such, all options granted under the Plan are to be
nonstatutory options.
This Plan governs only those options issued to non-employee directors by
the Company after the Effective Date, and under the automatic grant provisions
of Section 4. Options issued to non-employee directors prior to the Effective
Date shall be governed by the Watson Laboratories, Inc. 1985 Stock Incentive
Plan (the "1985 Plan"), or the Watson Pharmaceuticals, Inc. 1991 Stock Option
Plan (the "1991 Plan"), as the case may be. Options issued by the Company after
the Effective Date and in excess of the automatic grant provisions of Section 4
shall be governed by the 1991 Plan.
2. STOCK SUBJECT TO PLAN. The aggregate number of shares that may be issued
pursuant to options hereunder is 500,000 shares of the Company's common stock,
subject to the adjustments hereinafter provided. Such number of shares shall be
reserved by the Company for options granted under this plan. The shares that may
be issued or delivered under the Plan may be either authorized but unissued
shares or treasury shares or a combination of both types of shares. Shares of
stock subject to the unexercised portions of any options granted under this Plan
that expire or terminate or are cancelled may again be subject to options under
the Plan.
3. ELIGIBILITY. All members of the Company's Board of Directors (the
"Board") who are not full-time employees of the Company or any of its
subsidiaries ("Non-Employee Directors"), shall participate in the Plan.
4. AUTOMATIC GRANTS. Each Non-Employee Director shall receive option grants
at such times and in such amounts as provided below.
a. As of the Effective Date, the Company shall cause to be issued to
each Non-Employee Director options to purchase 5,000 shares of the
Company's common stock.
b. As of the next business day following the close of each annual
meeting of the Company's shareholders that occurs after the Effective Date
and during the term of the Plan, the Company shall cause to be issued to
each person who has been elected or re-elected as a Non-Employee Director
since the last annual meeting options to purchase 5,000 shares of the
Company's common stock, multiplied by the number of years for which such
Non-Employee Director is elected to serve as a member of the Board.
5. OPTION PRICE. The purchase price at which each stock option may be
exercised (the "Option Price") shall be 100% of the fair market value of the
Company's stock on the date of such grant, as determined under Section 11.
6. EXERCISE OF OPTION. The options granted under Section 4.a. shall be
exercisable six months after the Effective Date. The options granted under
Section 4.b. shall be exercisable at a rate of 5,000 shares at the end of each
full year of the Non-Employee Director's term. A full year shall be 365 days. No
option shall be exercisable after the expiration of ten years from the date of
grant. An option, to the extent exercisable at any time, may be exercised in
whole or in part.
7. PAYMENT OF OPTION PRICE. Payment for stock purchased under any exercise
of an option granted under this Plan shall be made in full, in cash,
concurrently with such exercise.
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8. NONTRANSFERABILITY. Any option granted under this Plan shall, by its
terms, be nontransferable by the grantee other than by will or the laws of
descent and distribution, and during the grantee's lifetime shall be exercisable
only by him, his guardian, or his legal representative.
9. TERMINATION OF OPTION. An option shall terminate and shall not be
exercised if the grantee ceases to be a member of the Board. Notwithstanding the
above:
a. If the grantee's directorship is terminated by reason other than
his death or conduct that, in the judgment of the Administrator, involves
dishonesty or action that is detrimental to the best interests of the
Company, he may, at any time prior to the expiration date of the option,
exercise his option, but only to the extent that it was exercisable on the
date that he ceased to be a director; and
b. If the grantee dies prior to the expiration date of the option, his
option may be exercised at any time within 18 months following his death by
the person or persons to whom his rights under the option passed by will or
by the laws of descent or distribution, but only to the extent that it was
exercisable on the date that he ceased to be a director; in no case,
however, shall the 18-month period extend beyond the expiration date of the
option.
10. WRITTEN OPTION AGREEMENT. All options granted pursuant to the Plan
shall be evidenced by written option agreements. Such option agreements shall
comply with and be subject to all of the terms, conditions, and limitations set
forth in this Plan and such further provisions, not inconsistent with this Plan,
as the Administrator shall deem appropriate.
11. DETERMINATION OF FAIR MARKET VALUE. Fair market value of the common
stock shall be determined in good faith by the Administrator. Fair market value
shall be determined without regard to any restriction (other than a restriction
that, by its terms, will never lapse).
12. ADJUSTMENTS. If the outstanding shares of stock of the class then
subject to this Plan are increased or decreased, or are changed into or
exchanged for a different number or kind of shares or securities as a result of
one or more reorganizations, recapitalizations, stock splits, reverse stock
splits, stock dividends or the like, appropriate adjustments shall be made in
the number and/or kind of shares or securities for which options may thereafter
be exercised. The Administrator shall make such adjustments as it may deem fair,
just and equitable to prevent substantial dilution or enlargement of the rights
granted to or available for grantees. No adjustment provided for in this Section
12 shall require the Company to issue or sell a fraction of a share or other
security.
13. ADMINISTRATION. The Plan shall be administered by a person or persons
(the "Administrator") appointed by the Board of Directors of the Company. Any
vacancy occurring in the position of Administrator shall be filled by
appointments by the Board.
The Administrator may interpret the Plan, prescribe, amend and rescind any
rules or regulations necessary or appropriate for the administration of the
Plan, and make any other determination and take any other action as it, in its
sole discretion, deems necessary or advisable, except as otherwise expressly
reserved for the Board of Directors of the Company.
14. RIGHTS AS A SHAREHOLDER. A grantee, or his executor, administrator or
legatee if he be deceased, shall have no rights as a shareholder with respect to
any stock covered by his option until the date of issuance of the stock
certificate to him or such stock after receipt of the consideration in full set
forth in the option agreement, or as may be approved by the Administrator.
Except as provided in Section 12 hereof, no adjustments shall be made for
dividends, whether ordinary or extraordinary, whether in cash, securities, or
other property, for distributions in which the record date is prior to the date
for which the stock certificate is issued.
15. MODIFICATION, EXTENSION AND RENEWAL. The Administrator may modify,
extend or renew options that are outstanding as granted under the Plan if
otherwise consistent herewith. Notwithstanding the foregoing, no modification
shall, without the prior written consent of the grantee, alter, impair or waive
any rights or obligations of any option theretofore granted under the Plan.
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16. INVESTMENT PURPOSES, ETC. Prior to the issuance or delivery of any
options or shares of the common stock under the Plan, the person being granted
or exercising the stock option may be required to (a) represent and warrant that
the shares of the common stock to be acquired upon exercise of the stock option
are being acquired for investment for the account of such person and not with a
view to resale or other distribution thereof; (b) represent and warrant that
such person will not, directly or indirectly, transfer, sell, assign, pledge,
hypothecate or otherwise dispose of any such shares unless the transfer, sale,
assignment, pledge, hypothecation or other disposition of the shares is pursuant
to effective registrations under the Securities Act of 1933 and applicable state
or foreign securities laws or pursuant to appropriate exemptions from any such
registrations; (c) execute such further documents as may be reasonably required
by the Administrator upon exercise of the option or any part thereof, including
but not limited to stock transfer restrictions. The certificate or certificates
representing the shares of the common stock to be issued or delivered upon
exercise of a stock option may bear a legend evidencing the foregoing and other
legends required by any applicable securities laws. Furthermore, nothing herein,
nor any option granted hereunder, shall require the Company or an subsidiary to
issue any stock upon exercise of any option if the issuance would, in the
opinion of counsel for the Company, constitute a violation of the Securities Act
of 1933, as amended, the California or any other state's applicable securities
laws, or any other applicable rule or regulation then in effect.
17. NO RIGHT TO SERVICE. Neither this Plan nor any option granted under
this Plan shall confer upon any grantee any right with respect to continued
service to the Company or any subsidiary, nor shall they alter, modify, limit or
interfere with any right or privilege of the Company or any subsidiary under any
service contract heretofore or hereinafter executed with any grantee, including
the right to terminate any grantee's directorship, at any time for or without
cause.
18. COMPLIANCE WITH OTHER LAWS AND REGULATIONS. The Plan, the options
granted hereunder, and the obligation of the Company to sell and deliver stock
under such options, shall be subject to all applicable federal and state laws,
rules and regulations, and to such approvals by any government or regulatory
authority or investigative agency as may be required. The Company shall not be
required to issue or deliver any certificates for shares of stock prior to (a)
the listing of any such stock to be acquired pursuant to the exercise of any
option on any stock exchange on which the stock may then be listed; and (b) the
compliance with any registration requirements or qualification of such shares
under any federal or state securities laws, or obtaining any ruling or waiver
from any government body that the Company or it subsidiaries shall, in their
sole discretion, determine to be necessary or advisable, or that, in the opinion
of counsel to the Company or its subsidiaries, is otherwise required.
19. CORPORATE REORGANIZATIONS. Upon the dissolution or liquidation of the
Company, or upon a reorganization, merger or consolidation of the Company as a
result of which the outstanding securities of the class subject to options
hereunder are changed into or exchanged for cash or property or securities not
of the Company's issue, or upon a sale of substantially all the property of the
Company to, or the acquisition of stock representing more than eighty percent
(80%) of the voting power of the stock of the Company then outstanding by
another corporation or person, the Plan shall terminate, and all options
theretofore granted hereunder shall terminate, unless provision be made in
writing in connection with such transaction for the continuance of the Plan
and/or for the assumption of options theretofore granted, or the substitution
for such options of options covering the stock of a successor employer
corporation, or a parent or a subsidiary thereof, with appropriate adjustments
as to the number and kind of shares and prices, in which event the Plan and
options theretofore granted shall continue in the manner and under the terms so
provided. If the Plan and unexercised options shall terminate pursuant to the
foregoing sentence, all persons entitled to exercise any unexercised portions of
options then outstanding shall have the right, at such time prior to the
consummation of the transaction causing such termination as the Company shall
designate, to exercise the unexercised portions of their options.
20. WITHHOLDING. If, upon exercise of any option, the grantee fails to
tender payment to the Company for any federal or state income tax withholding,
the Administrator shall withhold from the grantee sufficient shares or
fractional shares having a fair market value (as determined under Section 11)
equal to any amount that the Company is required to withhold under the Code or
State law.
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21. AMENDMENT AND TERMINATION. The Board may alter, amend, suspend or
terminate this Plan, provided that no such action shall deprive a grantee,
without his consent, of any option granted to the grantee pursuant to this Plan
or of any of such grantee's rights under such option. Notwithstanding the above,
however, the Plan shall not be amended more than once every six months, other
than to comport with changes in the Code, the Employee Retirement Income
Security Act of 1974, as amended, or the rules thereunder. Except as herein
provided, no such action of the Board, unless approved by the shareholders of
the Company within twelve months prior to twelve months after such action, may:
a. increase the maximum number of shares for which options granted
under this plan may be exercised;
b. reduce the minimum permissible exercise price;
c. extend the ten-year duration of this Plan set forth herein; or
d. alter the class of directors eligible to receive options under the
Plan.
22. EFFECTIVE DATE AND DURATION. The Plan shall take effect on the date it
is adopted by the Board (the "Effective Date"). Options may not be granted under
this Plan more than ten years after the date of the adoption of the Plan, or of
shareholder approval thereof, whichever is earlier.
23. GOVERNING LAW. All questions arising with respect to the provisions of
the Plan shall be determined by application of the laws of the State of
California, except to the extent that California laws are preempted by any
federal statute, regulation, judgment or court order, including but not limited
to, the Code. This Plan was adopted by the Company in Riverside County,
California, and is performable in that County.
24. HEADINGS. The titles of Sections of the Plan are provided for
convenience only, and are not to be used in the construction or interpretation
of this document.
IN WITNESS WHEREOF, this Plan is executed this 6th day of February, 1995,
to be effective as of the Effective Date.
WATSON PHARMACEUTICALS, INC.,
a Nevada corporation
By:
/s/ ALLEN CHAO
----------------------------------
Allen Chao, President
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APPENDIX G
ADDITIONAL INFORMATION ABOUT WATSON AND CIRCA
WATSON
Watson is engaged in the manufacture and sale of off-patent medications and
the development of advanced drug delivery systems primarily designed to enhance
the therapeutic benefits of pharmaceutical compounds. Watson's objective is to
become a fully integrated pharmaceutical company which (i) develops and markets
off-patent pharmaceuticals and (ii) develops proprietary and off-patent products
employing its drug delivery systems and markets such products worldwide through
pharmaceutical companies or its own marketing efforts. To achieve this
objective, Watson is pursuing a balanced strategy of generating revenue through
its established off-patent pharmaceuticals business and capitalizing on its
proven research and development, manufacturing and regulatory capabilities to
support the development of advanced proprietary products. Watson regularly
reviews potential opportunities to acquire or invest in technologies, products
or product rights. Watson also regularly reviews potential acquisitions,
investments or combinations involving businesses compatible with its existing
business.
Since inception, Watson has derived substantially all of its revenues from
the sale of off-patent pharmaceutical products. Watson currently manufactures
and markets 62 dosage forms and strengths representing 20 ethical drugs under 62
approved Abbreviated New Drug Applications ("ANDAs"). During 1994, Watson
received 3 ANDA approvals representing three ethical drugs which it markets. On
February 27, 1995, Watson received an ANDA approval on Glipizide, an
anti-diabetic product. Also, Watson has 7 ANDAs representing 7 ethical drugs
pending before the United States Food and Drug Administration ("FDA") and has
several ethical drugs under development. Watson intends to continue to develop
off-patent pharmaceutical products based upon market potential, competition,
target indications and other considerations. The number of products under
development may vary from time to time depending on these factors. Watson also
seeks to develop difficult-to-duplicate formulations of both off-patent drugs
and products which employ its drug delivery systems.
Watson develops drug delivery systems for application to pharmaceutical
compounds in order to enhance therapeutic benefits. These proprietary systems
control and improve the absorption of selected drugs in the bloodstream,
improving dose reliability, reducing side effects and increasing patient
convenience and compliance. Watson's drug delivery systems employ various routes
of administration, including transmucosal, oral, transdermal and vaginal. The
opportunity to select from this variety of routes enables Watson to optimize the
combination of dosage form and pharmaceutical compound. Watson currently is
developing several proprietary drug products that utilize its drug delivery
systems, each of which, if and when developed, will require FDA approval of a
New Drug Application ("NDA") prior to marketing.
Watson devotes significant resources to research and development, and
invests significantly in the development of proprietary products. Watson has
entered into certain licensing agreements with pharmaceutical companies under
which Watson typically retains manufacturing rights and receives product
development fees and royalties from future product sales. Licensing agreements
individually and in the aggregate have not generated significant revenue for
Watson, and currently no individual license agreement is material to Watson's
operations. Watson is also developing a number of proprietary products for which
it intends to retain all manufacturing and marketing rights.
PRODUCT DEVELOPMENT STRATEGY
Watson intends to pursue a balanced strategy of developing off-patent and
proprietary products and off-patent products using its patented drug delivery
technologies. Over the next few years, patents on a relatively large number of
branded drugs will expire, thereby providing additional off-patent product
opportunities. Watson is developing a wide variety of off-patent products,
including those with small but specialized or growing markets as well as
products whose brand name equivalents have U.S. sales of over $100 million.
Watson expects to continue to invest in its drug delivery systems in order to
develop proprietary products.
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Off-Patent Pharmaceuticals. Watson has invested significantly in off-patent
product development and is developing a wide variety of products, including
therapeutic equivalents of solid, liquid and sustained release products as well
as off-patent products employing its proprietary delivery systems. Each product
is chosen based on the patent expiration date, market size and potential,
anticipated competition, availability of active ingredients and other
considerations. Watson seeks to be among the first companies to offer such
products. Watson has also focused its development efforts on technically
difficult-to-duplicate products or products that require advanced manufacturing
technology, and Watson believes that such products will experience limited
competition. Of the 62 products currently marketed by Watson, it received the
first ANDA approval for 31 products. As of December 31, 1994, Watson believes it
holds the only ANDA approval for 13 of these products.
Drug Delivery Systems. Watson has established a comprehensive program to
evaluate the application of its drug delivery systems to existing pharmaceutical
compounds to fulfill a wide range of healthcare needs. In selecting products for
use with its drug delivery systems, Watson evaluates the drug and its target
indications, taking into consideration (i) the drug's toxicity and
pharmacokinetics, (ii) regulatory and clinical requirements, (iii) patent
assessment, (iv) limitations of current treatment methods and opportunities for
new indications, (v) the optimal delivery route and system, (vi)
commercialization costs and (vii) market size and potential.
Watson may internally develop these proprietary products through all stages
of development, including final manufacturing and commercialization. Watson may
also choose to enter into collaborative or licensing agreements at any stage.
Most of Watson's existing licensing agreements were completed at early stages of
development; however, Watson intends to seek to maximize profits on licensing
agreements by licensing products at a later stage of development. If Watson
determines to market or distribute proprietary products on its own, it will have
to significantly expand its sales and marketing capabilities.
OFF-PATENT PHARMACEUTICALS
MARKETS
Watson markets a broad range of off-patent prescription drugs. Sales of
off-patent drugs have increased significantly in recent years. Watson believes
that this growth is attributable to a number of factors, including (i)
modification of certain state laws to permit or mandate substitution of
off-patent drugs by pharmacists, (ii) the enactment of abbreviated procedures
for obtaining FDA approval to manufacture off-patent prescription drugs, (iii)
changes in government and third-party payor healthcare reimbursement policies to
encourage cost containment by healthcare providers and consumers, (iv) increased
acceptance of off-patent drugs by physicians, pharmacists and consumers and (v)
the increasing number of formerly patented drugs which have become available to
off-patent competition.
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OFF-PATENT PRODUCTS
The following table lists the off-patent products for which Watson holds
approved ANDAs:
<TABLE>
<CAPTION>
NUMBER OF
DOSAGE
PRODUCT NAME(1) STRENGTHS THERAPEUTIC CATEGORY BRAND NAME
- ----------------------------------- --------- ---------------------- -------------
<S> <C> <C> <C>
CENTRAL NERVOUS SYSTEM
Amoxapine 4 Anti-depressant Asendin(R)
Clorazepate Dipotassium 3 Tranquilizer Tranxene(R)
Lorazepam 3 Tranquilizer Ativan(R)
Loxapine Succinate 4 Tranquilizer Loxitane(R)
Maprotiline Hydrochloride 3 Anti-depressant Ludiomil(R)
Carbidopa-Levodopa 3 Anti-Parkinsons Sinemet(R)
CARDIOVASCULAR
Furosemide 3 Anti-hypertensive Lasix(R)
Guanabenz Acetate 2 Anti-hypertensive Wytensin(R)
Gemfibrozil 1 Cholesterol reduction Lopid(R)
Methyldopa and
Hydrochlorothiazide 4 Anti-hypertensive Aldoril(R)
Metoprolol 2 Anti-hypertensive Lopressor(R)
Propranolol Hydrochloride 6 Anti-hypertensive Inderal(R)
Triamterene and
Hydrochlorothiazide 2 Diuretic Maxzide(R)
Maxzide 25(R)
Verapamil Hydrochloride 3 Anti-hypertensive Calan(R)
Isoptin(R)
ORAL CONTRACEPTIVE
Ethynodiol Diacetate and Ethinyl
Estradiol 4 Oral Contraceptive Demulen(R)
Norethindrone and Ethinyl
Estradiol 8 Oral Contraceptive Modicon(R)
Brevicon(R)
Ortho-Novum(R)
Norinyl(R)
Norethindrone and Mestranol 2 Oral Contraceptive Ortho-Novum(R)
Norinyl(R)
ANALGESIA
Fenoprofen 3 Anti-inflammatory Nalfon(R)
Hydrocodone Bitartrate and
Acetaminophen 4 Analgesic Vicodin(R)
Lortab(R)
Indomethacin 2 Anti-inflammatory Indocin(R)
HORMONE/HORMONE REGULATOR
Estropipate 4 Hormone Replacement Ogen(R)
OTHER
Albuterol Sulfate 3 Asthma Proventil(R)
Ventolin(R)
Cyclobenzaprine Hydrochloride 1 Anti-spasmotic Flexeril(R)
Glipizide 2 Anti-diabetic Glucotrol(R)
Metoclopramide 1 Pro-motility Reglan(R)
Loperamide Hydrochloride 1 Anti-diarrheal Imodium(R) A-D
</TABLE>
- ---------------
(1) Watson is not marketing 19 of the products and dosage strengths for which it
holds approved ANDAs, 7 of which Watson intends to market and ship when it
receives clearance under FDA pre-shipment validation procedures.
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MARKETING AND DISTRIBUTION
Watson markets its off-patent products to drug distributors, pharmaceutical
wholesalers, drug store chains, hospitals, health maintenance organizations and
other drug companies. A majority of Watson's products are sold under private
labels. Watson also sells its products under the "Watson Laboratories" brand
name and intends to increase the percentage of products sold under such brand
name in the future. During 1994, three products in the hydrocodone
bitartrate/acetaminophen product group sold by Watson accounted for 27%, 18% and
12%, respectively, of Watson's total revenues. For the same period, the loxapine
succinate product group accounted for 12% of total revenues. During 1993, three
products in the hydrocodone bitartrate/acetaminophen product group sold by
Watson accounted for 28%, 16% and 9%, respectively, of Watson's total revenues.
For the same period, the loxapine succinate product group accounted for 16% of
total revenues. In 1992, the loxapine succinate and hydrocodone
bitartrate/acetaminophen product groups and amoxapine product groups accounted
for approximately 27% and 23% and 16%, respectively, of revenues. Due to FDA
approval of a competitor for one of Watson's hydrocodone products on June 1,
1995, Watson anticipates increased competition for such product, and
consequently may experience a reduction in future sales of such product.
Watson ships products pursuant to purchase orders and does not have any
supply agreements with its customers. In 1994, sales of off-patent products to
Rugby Laboratories, Inc. (a subsidiary of Marion Merrell Dow Inc.) and Warner
Chilcott Laboratories (a division of Warner-Lambert Company) accounted for 11%
and 14%, respectively, of Watson's total revenues. The loss of any one of these
customers, or the introduction by other companies of additional competitive
products, could have a material adverse effect on Watson. Watson's business does
not experience any significant seasonal variation.
DRUG DELIVERY SYSTEMS AND DEVELOPMENTAL PRODUCTS
Watson has developed a variety of proprietary polymer-based drug delivery
systems for various routes of administration: transmucosal, oral, vaginal and
transdermal. Watson believes that its delivery systems offer distinct advantages
over conventional methods of delivery for selected drugs by improving release
kinetics, dose reliability, side effect profile or patient convenience and
compliance. Moreover, the development of a new product combining an approved
drug and a proprietary drug delivery system generally involves less cost, time,
and risk than discovering and commercializing a new chemical entity. Finally,
developing a new delivery system for a drug product can (i) expand the existing
market for an existing indication for the drug, (ii) differentiate the product
from off-patent and branded competition and (iii) create a new market through a
new indication.
Watson's transmucosal, oral sustained release and vaginal drug delivery
systems use its proprietary injection molding process which produces consistent
product quality across a wide range of dosage forms. This injection molding
technique relies upon the use of patented FDA-approved thermoplastic polymers
and FDA-approved hydrophobic amphiphiles which, when mixed with appropriate
drugs, permit defined adjustment of release rates.
Watson is developing a number of products utilizing its proprietary drug
delivery systems. The following table summarizes the status of certain products
under active development by Watson. These product development activities have
not generated significant revenues for Watson, and there can be no assurances
that any proprietary product, if and when fully developed, will contribute
materially to Watson's revenues in the future.
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<TABLE>
<CAPTION>
LICENSEES/MARKETING
DRUG/DOSAGE FORM POTENTIAL THERAPEUTIC USE RIGHTS STATUS (1)
- ------------------------- ------------------------- ------------------------- ------------
<S> <C> <C> <C>
HORMONE THERAPY
Estradiol/Transdermal Hormone Replacement Phase II
Progesterone/Oral Hormone Replacement U.S. Pharmaceutical Phase II
Company/U.S. and Canada
Progesterone/Vaginal Hormone Replacement U.S. Pharmaceutical Phase II
Company/U.S. and Canada
Estradiol/Vaginal Hormone Replacement Phase II
Testosterone/Transmucosal Hormone Replacement Phase II
OTHER PRODUCTS
Desmopressin/Transmucosal Bladder Control Phase II
Buprenorphine/Buccal Analgesic Development
</TABLE>
- ---------------
(1) The notation Phase II is used to describe the progress of clinical studies.
See "Business -- Regulation."
PERSONNEL
As of December 31, 1994, Watson had 379 full-time employees, including 15
employees who hold Ph.Ds. Of Watson's employees, 68 are engaged in research and
development (including 12 with Ph.D.s), 198 in manufacturing, 82 in quality
assurance and quality control and 31 in administration, marketing, finance and
human resources. No employee is represented by a union and Watson has never
experienced a work stoppage. Watson considers relations with its employees to be
good.
CIRCA
Circa, formerly known as Bolar Pharmaceutical Co., Inc., was organized
under the laws of the State of New York in 1960.
Circa had historically been engaged in developing, manufacturing and
marketing solid dosage generic pharmaceuticals, including prescription and
over-the-counter products. In February 1990, as a result of an investigation by
the FDA, Circa ceased manufacturing and marketing all pharmaceutical products
and was restricted by the FDA from obtaining scientific review of its
applications. In April 1993, following the completion of a comprehensive three
year rehabilitation program, the FDA notified Circa that all regulatory
restrictions were lifted and that it was in compliance with "current Good
Manufacturing Practices" ("cGMP") and able to, once again, operate under the
standard framework of the FDA.
In November 1994, Circa received its first product approval from the FDA
since 1989. This approval confirmed the acknowledgement by the FDA in April 1993
that Circa had been successfully rehabilitated and validated Circa's Copiague,
New York facility as being in compliance with cGMP.
Circa currently manufactures a generic product and several over-the-counter
products at its Copiague, New York facility and is also a distributor of a
nitroglycerin transdermal system manufactured by Hercon Laboratories
Corporation. Additionally, Circa provides services for the pharmaceutical
industry through its Pharmaceutical Services Division.
Circa has a 50% interest in Somerset Pharmaceuticals, Inc. ("Somerset"),
which manufactures and markets Eldepryl(R). Eldepryl(R) is used in the treatment
of Parkinson's disease and had sales of $125 million in 1994. Circa also has an
agreement with Rhone-Poulenc Rorer, Inc. ("RPR") to participate in the net sales
of Dilacor XR(R), which is used in the treatment of hypertension and angina.
PRODUCTS, PRODUCT DEVELOPMENT AND SERVICES
In November 1994, Circa received approval notification from the FDA for its
ANDA for glipizide. Glipizide is the generic version of Glucotrol(R) and is used
for the treatment of non-insulin-dependent diabetes
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(Type II diabetes). Circa's approval in November represented the second approval
for glipizide issued by the FDA for generic manufacturing, and since then the
FDA has approved several other pharmaceutical companies for the manufacture and
distribution of glipizide. There can be no assurance that the sale of glipizide
will contribute materially to Circa future operating results.
During 1994, Circa's research and development program placed greater
emphasis on developing future proprietary and less competitive generic products.
Accordingly, development of several commodity-oriented generic products were
discontinued during 1994. The continued product development efforts have shifted
to more technology driven products, such as controlled-release dosage forms and
gum technology, which are expected to face less competition.
Circa employs approximately 120 persons, of which 50 are engaged in
research and development, including product identification, market research,
product formulation, the development of methods used to analyze various drugs
and regulatory affairs. In addition, Circa utilizes independent laboratories to
conduct tests and clinical studies, primarily in connection with the
establishment of bioequivalence. Circa incurred approximately $8 million on
research and development in 1994, $5 million in 1993 and $3 million in 1992.
Circa is currently developing certain prescription drug products which have not
previously been approved for proposed use in the United States. These drug
products incorporate chemical entities that have been approved by the FDA, but
are not necessarily the bioequivalent of any existing brand-name drug. Current
research and development is being conducted at both Circa's Copiague, New York
facility and at other companies through joint venture agreements.
With respect to any product currently being developed by Circa internally
or with joint venture partners, or any product for which a NDA, IND or patent
application has been filed, there can be no assurance that such applications
shall be approved, or if approved, that such product will contribute materially
to the Circa's future operating results.
In July 1994, Circa acquired a 7.5% equity interest in Andrx Corporation
("Andrx"). Circa and Andrx plan to jointly develop, manufacture and market at
least six controlled-release generic pharmaceutical products. Additionally,
Circa licensed two controlled-release products from Andrx, which Circa is
currently developing. Circa has additional development agreements with outside
research and development groups to develop controlled-release products.
Circa has progressed in its efforts to develop a gum-delivery technology.
During the past few years, Circa has been working on a number of pharmaceutical
products utilizing this technology, including over-the-counter and prescription
products. In 1994, Circa filed an application with the FDA for nicotine gum.
Circa will be pursuing registration of this product in other countries over the
next several years. Circa is currently evaluating three over-the-counter
products using the gum-delivery technology and is also considering strategic
partners to help market this product line. Circa has filed an application to
obtain a patent for a process that describes a dissolvable chewable dosage form,
Quick Dissolve Chewables (QDC(TM)) and intends to employ this technology for the
delivery of both prescription and over-the-counter products.
In 1993, Circa acquired the rights to manufacture and market a product
under a NDA for a widely-used cardiovascular agent. In November 1994, Circa
filed a NDA seeking approval for a new strength and dosage form of this product,
which Circa believes will fill a need for clinicians working in the
cardiovascular field. If approved, this agent is expected to receive three years
of exclusivity, and will be manufactured at the Copiague facility.
Circa has a 50% interest in Somerset, which manufactures and markets
Eldepryl(R) for the treatment of Parkinson's disease. In 1994, Somerset provided
$25 million in earnings and $21 million in cash to Circa. Exclusivity expires
for the Eldepryl(R) tablet in June of 1996; however, Somerset is committed to
the development of other products. Somerset continues with its development
program for the Eldepryl(R) transdermal patch. During 1995, phase II clinical
studies are being conducted on the patch for multiple neurological disorders.
Somerset is also developing ipriflavone, a product for the treatment of
osteoporosis. Ipriflavone is currently marketed in Japan, Italy, Hungary, and
Argentina. An Investigational New Drug Application was filed in January 1995 for
this product. (See "Investments In Joint Ventures" below).
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Circa and Rhone-Poulenc Rorer, Inc. ("RPR") were partners in the
development of Dilacor XR(R). Dilacor XR(R) is used for the treatment of
hypertension and angina. Through an amended partnership agreement with RPR,
Circa earns royalties on Dilacor XR(R). Circa's royalty participation in Dilacor
XR(R) increases from 1% in 1994 to 20% in 1995 and 1996, 22% from 1997 to 2000,
and 3% thereafter. At December 31, 1994, Circa had a liability to RPR of $14
million which represented the remainder of Circa's share of development expenses
for Dilacor XR(R). Royalties earned by Circa will first offset amounts owed to
RPR by Circa before providing cash flow to Circa. Effective January 1, 1995,
Circa and RPR agreed that royalty income to Circa would be measured based upon
the market demand for the product, as evidenced by prescriptions written. For
the year ended December 31, 1994, Circa earned royalties of $1.2 million. The
Dilacor XR(R)product loses exclusivity in May of 1995; however, at this time
Circa is not aware of any pending applications with the FDA for a competing
generic substitute for Dilacor XR(R). Through this amended partnership
agreement, Circa and RPR intend to launch a generic Dilacor XR(R) product as the
partners consider appropriate. The profit and losses from the generic product
are to be shared equally by Circa and RPR.
Circa has an agreement with Hi-Tech Pharmacal to develop ANDAs for five
generic solutions/suspensions; as well as a joint venture agreement with
Generics Group BV for the co-development of several solid-dosage generic
products and an aerosol product. Circa is also working jointly with Packaging
Concepts, Inc. to develop over-the-counter products in aerosol, solution, foam
and powder form. This collaboration has yielded a number of over-the-counter
products, including Miconazole Spray Powder, which is an antifungal used for the
treatment of athletes foot.
Circa continues to manufacture and distribute two solid dosage
over-the-counter products and distributes nitroglycerin transdermal patches
manufactured by Hercon Laboratories Corp.
Circa's manufacturing facilities are currently utilized to service both
Circa and others in the pharmaceutical industry. In an effort to cover the
Circa's overhead, contract manufacturing has been evaluated. This evaluation
determined that pharmaceutical companies are increasingly outsourcing functions.
Circa decided to enter the business of providing services to the pharmaceutical
industry. Circa created the Pharmaceutical Services Division to specialize in
this industry niche. Circa is able to provide small and large-scale contract
manufacturing services to clients worldwide. At the Copiague facility, Circa can
provide analytical, stability and packaging services to customers. Circa can
assist with pharmaceutical development, as well as regulatory and quality
assurance activities. Circa can manufacture product lines using solid-dosage and
gum drug-delivery systems. The solid-dosage products manufactured at Copiague
include tablets, capsules, and sustained-release products. Circa has a 60%
equity interest in a company that owns a facility designed to produce sustained
release products. This facility, located outside of Dayton, Ohio, can provide
microencapsulation capabilities via a coacervation technology; roto-granulations
and drying; and solvent and non-solvent based coatings.
MARKETS AND DISTRIBUTION
Sales of off-patent pharmaceutical products have increased in recent years.
Circa believes that factors contributing to the increase include (i) the passage
of federal regulation which streamlined procedures, lowered costs and
accelerated the approval process for off-patent drugs; (ii) loss of exclusivity
on brand-name drugs with significant sales; (iii) the transition from healthcare
cost reimbursement to managed care programs which emphasize cost control; (iv)
the passage of state legislation that permits or encourages off-patent
substitution by pharmacists; (v) large volume cost conscious drug purchasers;
(vi) increased awareness and acceptance among consumers, physicians and
pharmacists that off-patent drugs are the therapeutic equivalents of brand-name
drugs; and (vii) higher profit margins realized by pharmacists for dispensing
off-patent drugs than are realized on brand-name drugs.
Circa markets its generic products to drug distributors and pharmaceutical
wholesalers. A majority of Circa's products are sold under private labels. In
1994, Circa marketed its products to approximately 50 customers throughout the
United States. In 1994, Schein Pharmaceuticals, Inc., Rugby Laboratories, Inc.,
and Goldline Laboratories, Inc. accounted for 23%, 19% and 11%, respectively, of
Circa's sales. In 1993, one
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customer, Rugby-Darby Group Companies, Inc., accounted for approximately 28% of
Circa's sales. In 1992, Best Generics, Inc. accounted for approximately 18% of
Circa's sales. There are no assurances that any customer will account for more
than 10% of Circa's sales in 1995.
Circa markets its contract manufacturing and other services to
pharmaceutical companies who lack the internal capacity or expertise of a full
services pharmaceutical company. This includes pharmaceutical manufacturers and
research and development operations.
INVESTMENTS IN JOINT VENTURES
In June 1989, Circa acquired a 50% equity interest in Somerset following
their approval from the FDA to market the product Eldepryl. Sales of the
product, which is used in the treatment of Parkinson's disease, commenced in
August 1989. Somerset has the exclusive marketing rights to this product in the
United States and certain other countries. In October 1990, Somerset entered
into an agreement with Sandoz Pharmaceutical Corporation (Sandoz) to co-promote
Eldepryl. Somerset's growth since 1989 has provided increased cash flows to
Circa and has contributed significantly to funding operations during the past
five years. Circa recognized income of $25 million, $24 million and $21 million
from Somerset for the years ended 1994, 1993, and 1992, respectively. Somerset
continues with its development program for the Eldepryl(R) transdermal patch.
During 1995, phase II clinical studies are being conducted on the patch for
multiple neurological disorders. Somerset is also developing ipriflavone, a
product for the treatment of osteoporosis. Ipriflavone is currently marketed in
Japan, Italy, Hungary, and Argentina. An Investigational New Drug Application
was filed in January 1995 for this product. Circa anticipates future benefits
from Somerset's research and development pipeline.
In 1989, Circa and RPR formed a partnership to develop and market a
pharmaceutical product used in the treatment of hypertension and angina. The
partnership agreement was restructured in April 1993 to allow Circa's royalty
participation in Dilacor XR(R) to increase from 1% in 1994, 20% in 1995 and
1996, 22% from 1997 to 2000 and 3% thereafter. Royalties will first offset
Circa's partnership liability before providing cash flow to Circa. At December
31, 1994, the partnership liability was $14 million. For the year ended December
31, 1994, Circa earned royalties of $1.2 million. Prior to the restructured
agreements, Circa's share of the partnership's loss was $7.6 million in 1993 and
$15.6 million in 1992. The Dilacor XR(R) product lost exclusivity in May of
1995; however, at this time Circa is unaware of any pending generic
applications. The partnership agreement also provides for the partnership to
develop a generic Dilacor XR product to be launched when the partners consider
appropriate. The profit and losses from the generic product are to be shared
equally by Circa and RPR.
In July 1994, Circa acquired a 7.5% interest in Andrx for $6 million. Circa
and Andrx also entered into a joint venture ("Ancirc"), to develop six generic
pharmaceuticals for world-wide markets utilizing Andrx's controlled-release
technology. Within Ancirc, Andrx will be responsible for continuing development
of the products and marketing and sales upon approval. Circa will manufacture
the controlled-release products and be responsible for regulatory services.
Andrx and Circa will be responsible for 60% and 40%, respectively, of all future
costs to develop, manufacture and market the products with the same percentages
applicable to the sharing of income from the joint venture.
DEPARTMENT OF JUSTICE INQUIRY
The United States Department of Justice has had a longstanding open inquiry
regarding possible violations by Circa of the False Claims Act in respect of
drugs sold by Circa prior to 1990 and paid for, directly or indirectly, by the
Federal Government. The Government's inquiry relates to allegations that Circa
improperly obtained approval from the FDA to manufacture and sell such drugs,
and that Circa's subsequent manufacture and sale of such drugs violated
applicable FDA regulations. No action has been commenced by the Department of
Justice in connection with this matter, although from time to time it has
requested that Circa agree to extend the applicable statute of limitations,
which Circa has done. In an effort to eliminate any contingent liabilities with
respect to this matter in the context of the proposed Merger, Circa recently
initiated discussions with the Government with respect to the parties'
respective positions and as to possible resolutions.
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Based on the information currently available, including consultation with
outside counsel, Circa does not believe that the resolution of this matter will
be materially adverse to Circa's financial position.
PERSONNEL
As of December 31, 1994, Circa had 120 employees of which 50 were engaged
in research and development, 45 in manufacturing and 25 in administration. No
employee is represented by a union. Circa considers employee relations to be
good.
G-9
<PAGE> 170
CIRCA PHARMACEUTICALS, INC.
SPECIAL MEETING OF STOCKHOLDERS -- JULY 17, 1995
THIS PROXY IS BEING SOLICITED ON BEHALF OF THE
BOARD OF DIRECTORS OF THE COMPANY
The undersigned stockholder of CIRCA PHARMACEUTICALS, INC., a New York
corporation (the "Company"), hereby appoints Dr. Melvin Sharoky and Thomas P.
Rice, and each of them, proxies and attorneys-in-fact of the undersigned, each
with full power of substitution, to attend and act for the undersigned at the
Special Meeting of Stockholders to be held on July 17, 1995 at 9:00 a.m. local
time, at the Company's facilities at 26 Bethpage Road, Copiague, New York and
at any adjournments or postponements thereof, and in connection therewith to
vote and represent all of the shares of Common Stock of said corporation which
the undersigned would be entitled to vote,
Said proxies and attorneys, and each of them, shall have all the powers which
the undersigned would have if voting in person. The undersigned hereby revokes
any other proxies previously given to vote at such meeting and hereby ratifies
and confirms all that said proxies and attorneys, and each of them, may
lawfully do by virtue hereof. Said proxies, without hereby limiting their
general authority, are specifically authorized to vote in accordance with their
best judgment with respect to all matters incident to the conduct of the
Special Meeting and all matters presented at the meeting but which are not
known to the Board of Directors at the time of the solicitation of this proxy.
Each of the above-named proxies present at said meeting, either in person or by
substitute, shall have and exercise all the powers of said proxies hereunder.
This proxy will be voted in accordance with the choices specified by the
undersigned on this proxy. This proxy when properly executed will be voted in
the manner directed herein by the undersigned stockholder. IF NO INSTRUCTIONS
ARE INDICATED HEREIN, THIS PROXY WILL BE TREATED AS A GRANT OF AUTHORITY TO
VOTE FOR THE PROPOSAL ON ANY OTHER MATTERS THAT MAY COME BEFORE THE MEETING, OR
AT ANY POSTPONEMENTS OR ADJOURNMENTS THEREOF, THIS PROXY WILL BE VOTED IN THE
DISCRETION OF THE PERSONS NAMED AS PROXIES.
(CONTINUED AND TO BE SIGNED ON REVERSE SIDE.)
---------------
SEE REVERSE
SIDE
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<PAGE> 171
[X] PLEASE MARK YOUR VOTES
AS THIS EXAMPLE
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE APPROVAL OF THE MERGER.
PROPOSAL TO APPROVE AND ADOPT FOR AGAINST ABSTAIN
AN AGREEMENT AND PLAN OF MERGER,
DATED AS OF MARCH 29, 1995, BY [ ] [ ] [ ]
AND AMONG THE COMPANY, WATSON
PHARMACEUTICALS, INC. AND
GUM ACQUISITION CORP.
The undersigned acknowledges receipt of the copy of the
Notice of Special Meeting and the Proxy Statement/
Prospectus (with all enclosures and attachments) dated
June 14, 1995, relating to the meeting.
Dated ______________________________________________, 1995
__________________________________________________________
Signature
__________________________________________________________
Signature
PLEASE VOTE, SIGN, (This Proxy should be dated, signed by the stockholder(s)
DATE AND PROMPTLY exactly as his or her name(s) appears hereon, and returned
RETURN THIS CARD. promptly in the enclosed envelope. Persons signing in a
fiduciary capacity should so indicate. If shares are held
by joint tenants or as community property, both should
sign.)
