<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 31, 1997
REGISTRATION NO. 333-16275
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO. 2
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
WATSON PHARMACEUTICALS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEVADA
(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION)
2834
(PRIMARY STANDARD INDUSTRIAL
CLASSIFICATION CODE)
95-3872914
(I.R.S. EMPLOYER
IDENTIFICATION NUMBER)
311 BONNIE CIRCLE
CORONA, CALIFORNIA 91720
(909) 270-1400
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S
PRINCIPAL EXECUTIVE OFFICES)
ALLEN CHAO, PH.D.
CHAIRMAN AND
CHIEF EXECUTIVE OFFICER
311 BONNIE CIRCLE
CORONA, CALIFORNIA 91720
(909) 270-1400
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
WITH COPIES TO
MICHEL J. FELDMAN, ESQ. CATHRYN S. CHINN
ARTHUR DON, ESQ. LAURA A. GORDON
D'ANCONA & PFLAUM VENTURE LAW GROUP,
30 NORTH LASALLE STREET A PROFESSIONAL CORPORATION
CHICAGO, IL 60602 2800 SAND HILL ROAD
MENLO PARK, CA 94025
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE
PUBLIC: AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION
STATEMENT AND THE EFFECTIVE TIME OF THE PROPOSED MERGER (THE "MERGER") OF
OCLASSEN PHARMACEUTICALS, INC. ("OCLASSEN") WITH A SUBSIDIARY OF THE REGISTRANT,
AS DESCRIBED IN THE AGREEMENT AND PLAN OF MERGER, DATED AS OF SEPTEMBER 25,
1996, AS AMENDED EFFECTIVE NOVEMBER 14, 1996 AND AS FURTHER AMENDED EFFECTIVE
DECEMBER 31, 1996, ATTACHED AS APPENDIX A TO THE PROXY STATEMENT/PROSPECTUS
FORMING A PART OF THIS REGISTRATION STATEMENT.
1
<PAGE> 2
If any of the securities being registered on this form are to be offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box.
Based upon the maximum Average Closing Price (as defined herein) for shares of
Watson Common Stock of $35.00 and the minimum Average Closing Price for shares
of Watson Common Stock of $27.00 and the number of shares of Oclassen Common
Stock and Oclassen Preferred Stock and Oclassen Options outstanding on December
31, 1996 and, assuming the conversion of all shares of Oclassen Preferred Stock
into Oclassen Common Stock prior to the Effective Time, (a) the range of shares
of Watson Common Stock that will be issued to Oclassen stockholders in exchange
for each share of Oclassen Common Stock is a minimum of 0.3692 of a share and a
maximum of 0.4785 of a share, or, assuming the full amount of the escrow fund
established under the Merger Agreement is applied to satisfy claims for
indemnification by Watson, 0.3415 of a share and 0.4426 of a share,
respectively, and (b) the minimum and maximum number of shares of Watson Common
Stock that will be issued in the Merger, on a fully-diluted basis, is 3,857,143
shares and 5,000,000 shares, respectively or, assuming the full amount of the
escrow fund is applied to satisfy claims for indemnification by Watson,
3,609,404 and 4,678,860 shares, respectively. See "Summary -- The Merger --
Merger Consideration" in the Proxy Statement/Prospectus included in this
Registration Statement.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
2
<PAGE> 3
OCLASSEN PHARMACEUTICALS, INC.
100 PELICAN WAY
SAN RAFAEL, CALIFORNIA 94901
Dear Stockholder:
You are cordially invited to attend a special meeting of the
stockholders of Oclassen Pharmaceuticals, Inc., a Delaware corporation
("Oclassen"), to be held at 10:00 a.m. local time, on February 26, 1997, at the
Embassy Suites, 101 McInnis Parkway, San Rafael, California (the "Special
Meeting").
At the Special Meeting, you will be asked to consider and vote on a
proposal to approve and adopt the Agreement and Plan of Merger dated as of
September 25, 1996, as amended effective November 14, 1996 and as further
amended effective December 31, 1996 (the "Merger Agreement") by and among
Oclassen, Watson Pharmaceuticals, Inc., a Nevada corporation ("Watson"), and
Opalacq Co., a Delaware corporation and wholly-owned subsidiary of Watson
("Watson Sub"), and to approve the merger (the "Merger") of Watson Sub with and
into Oclassen pursuant to the Merger Agreement. As a result of the Merger,
Oclassen will become a wholly-owned subsidiary of Watson and (a) each
outstanding share of Oclassen Common Stock (assuming the voluntary conversion of
all outstanding Oclassen Preferred Stock into Oclassen Common Stock prior to the
effective time of the Merger) will be converted into and exchanged for a
fraction of a share of Watson Common Stock (the "Exchange Ratio") and (b) each
outstanding option to purchase Oclassen Common Stock (the "Oclassen Options")
will be converted into an option to purchase shares of Watson Common Stock,
appropriately adjusted to reflect the Exchange Ratio. Pursuant to the Merger
Agreement, the holders of Oclassen Common Stock, Oclassen Preferred Stock and
Oclassen Options will receive an aggregate of up to 5,000,000 shares of Watson
Common Stock in the Merger. Based upon the number of outstanding shares of
Watson Common Stock on January 20, 1997 and of Oclassen Common Stock (assuming
the voluntary conversion of all outstanding shares of Oclassen Preferred Stock
into shares of Oclassen Common Stock) on January 20, 1997, and assuming (i) no
dissenting stockholders of Oclassen, (ii) no change in the average trading price
of Watson Common Stock from the closing sale price on January 20, 1997 ($44.75
per share), and (iii) no issuance of shares of Watson Common Stock in connection
with the Royce Merger (see "Information Concerning Watson -- Recent
Developments"). Watson will have approximately 40,173,118 shares of Common Stock
outstanding after the Merger, of which approximately 3,305,451 shares (or
approximately 8.2%) will be issued or issuable to holders of Oclassen Common
Stock, Oclassen Preferred Stock and holders of Oclassen Options in connection
with the Merger. Seven and one-half percent (7.5%) of the shares of Watson
Common Stock issuable in the Merger to holders of Oclassen Common Stock and
Oclassen Preferred Stock will be deposited into an escrow fund to secure certain
indemnification obligations of Oclassen, and approval of the Merger will also
constitute approval of the establishment of the escrow fund.
At the Special Meeting, you will also be asked to consider and vote on
a proposal to approve an amendment to Oclassen's Amended and Restated
Certificate of Incorporation in order to conform the language in Article Fourth,
paragraph (D)5.(b) of such Amended and Restated Certificate of Incorporation
(which addresses the method of valuation of any securities to be delivered to
holders of Oclassen Common Stock and Oclassen Preferred Stock in a merger) to
the method for valuing the Watson Common Stock to be issued in the Merger, as
set forth in the Merger Agreement.
Oclassen's Board of Directors believes that the Merger is fair to and
in the best interests of Oclassen's stockholders. The Board has unanimously
approved the Merger Agreement and the Merger
<PAGE> 4
and recommends that all Oclassen stockholders vote FOR approval and adoption of
the Merger Agreement and approval of the Merger. Furthermore, Lehman Brothers,
Oclassen's financial advisor, has rendered an opinion to the Board of Directors
to the effect that, as of the date of such opinion, the consideration to be
received by the stockholders of Oclassen in the Merger is fair, from a financial
point of view, to such stockholders. The full text of such opinion is attached
to the accompanying Proxy Statement/Prospectus as Appendix D and should be read
carefully by stockholders.
On November 8, 1996, a hearing was held pursuant to Section 25142 of
the California Corporations Code to determine the fairness of the proposed
issuance of Watson Common Stock to the stockholders of Oclassen. By order dated
November 8, 1996, the California Corporations Commissioner determined that the
terms and conditions of the Merger are fair and issued a permit approving the
proposed issuance.
Details of the proposed Merger and other important information
concerning Oclassen and Watson are more fully described in the accompanying
Proxy Statement/Prospectus. Please give this material your careful attention.
The accompanying Proxy Statement/Prospectus complies with the
requirement of Article FOURTH, paragraph (D)5. of the Amended and Restated
Certificate of Incorporation of Oclassen that Oclassen give each holder of
Oclassen Preferred Stock written notice of the impending Merger not later than
20 days prior to the stockholders' meeting called to approve such transaction.
Whether or not you plan to attend the Special Meeting, please complete
and date the accompanying proxy card and return it in the enclosed prepaid
envelope. You may revoke your proxy in the manner described in the accompanying
Proxy Statement/Prospectus at any time before it has been voted at the Special
Meeting. If you attend the Special Meeting, you may vote in person even if you
have previously returned your proxy card. Your prompt cooperation will be
greatly appreciated.
Sincerely,
Glenn A. Oclassen Terry L. Johnson
Chairman of the Board of Directors President and Chief Executive Officer
<PAGE> 5
OCLASSEN PHARMACEUTICALS, INC.
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD FEBRUARY 26, 1997
TO: THE STOCKHOLDERS OF OCLASSEN PHARMACEUTICALS, INC.
NOTICE IS HEREBY GIVEN that a special meeting of the stockholders of
Oclassen Pharmaceuticals, Inc., a Delaware corporation ("Oclassen"), will be
held at 10:00 a.m. local time, on February 26, 1997, at the Embassy Suites, 101
McInnis Parkway, San Rafael, California (the "Special Meeting"), to consider and
vote upon the following proposals:
1. To approve and adopt the Agreement and Plan of Merger dated
September 25, 1996, as amended effective November 14, 1996 and as further
amended effective December 31, 1996 (the "Merger Agreement"), by and among
Oclassen, Watson Pharmaceuticals, Inc., a Nevada corporation ("Watson"), and
Opalacq Co., a Delaware corporation and wholly-owned subsidiary of Watson
("Watson Sub"), and to approve the merger (the "Merger") of Watson Sub with and
into Oclassen pursuant to the Merger Agreement. As a result of the Merger,
Oclassen will become a wholly-owned subsidiary of Watson and (a) each
outstanding share of Oclassen Common Stock (assuming the voluntary conversion of
all outstanding Oclassen Preferred Stock into Oclassen Common Stock prior to the
effective time of the Merger) will be converted into and exchanged for a
fraction of a share of Watson Common Stock (the "Exchange Ratio") and (b) each
outstanding option to purchase Oclassen Common Stock (the "Oclassen Options")
will be converted into an option to purchase shares of Watson Common Stock,
appropriately adjusted to reflect the Exchange Ratio. Pursuant to the Merger
Agreement, the holders of Oclassen Common Stock, Oclassen Preferred Stock and
Oclassen Options will receive an aggregate of up to 5,000,000 shares of Watson
Common Stock in the Merger, on a fully-diluted basis. Based upon the number of
outstanding shares of Watson Common Stock on January 20, 1997 and of Oclassen
Common Stock (assuming the voluntary conversion of all outstanding shares of
Oclassen Preferred Stock into shares of Oclassen Common Stock) on January 20,
1997, and assuming (i) no dissenting stockholders of Oclassen, (ii) no change in
the average trading price of Watson Common Stock from the closing sale price on
January 20, 1997 ($44.75 per share) and (iii) no issuance of shares of Watson
Common Stock in connection with the Royce Merger (see "Information Concerning
Watson -- Recent Developments"), Watson will have approximately 40,173,118
shares of Common Stock outstanding after the Merger, of which approximately
3,305,451 shares (or approximately 8.2%) will be issued or issuable to holders
of Oclassen Common Stock, Oclassen Preferred Stock and holders of Oclassen
Options in connection with the Merger. Seven and one-half percent (7.5%) of the
shares of Watson Common Stock issuable in the Merger to holders of Oclassen
Common Stock and Oclassen Preferred Stock will be deposited into an escrow fund
to secure certain indemnification obligations of Oclassen, and approval of the
Merger will also constitute approval of the establishment of the escrow fund. A
copy of the Merger Agreement is attached as Appendix A to the Proxy
Statement/Prospectus accompanying this Notice.
2. To approve an amendment to Oclassen's Amended and Restated
Certificate of Incorporation in order to conform the language in Article
FOURTH, paragraph (D)5.b of such Amended and Restated
<PAGE> 6
Certificate of Incorporation (which addresses the method of valuation
of any securities to be delivered to holders of Oclassen Common Stock
and Oclassen Preferred Stock in a merger) to the method for valuing the
Watson Common Stock to be issued in the Merger, as set forth in the
Merger Agreement.
3. To transact such other business as may properly come before
the Special Meeting or any postponements or adjournments thereof.
The Board of Directors has fixed the close of business on
January 20, 1997 as the record date for the determination of the holders
of Oclassen Common Stock and Oclassen Preferred Stock entitled to notice of, and
to vote at, the Special Meeting. Accordingly, only stockholders of record at the
close of business on such date are entitled to notice of and to vote at the
Special Meeting and any adjournment or postponement thereof.
Details of the proposed Merger and other important information
concerning Oclassen and Watson are more fully described in the accompanying
Proxy Statement/Prospectus. Please give this material your careful attention.
You may revoke your proxy in the manner described in the accompanying
Proxy Statement/Prospectus at any time before it has been voted at the Special
Meeting. Any stockholder attending the Special Meeting may vote in person, even
if he or she has returned a proxy.
By Order of the Board of Directors
Craig W. Johnson
Secretary
San Rafael, California
February 6, 1997
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, YOU ARE REQUESTED TO SIGN, DATE
AND MAIL PROMPTLY THE ENCLOSED PROXY CARD. A RETURN ENVELOPE WHICH REQUIRES NO
POSTAGE IF MAILED IN THE UNITED STATES IS ENCLOSED FOR THAT PURPOSE. ANY
STOCKHOLDER ATTENDING THE SPECIAL MEETING MAY VOTE IN PERSON, EVEN IF HE OR SHE
HAS RETURNED A PROXY.
<PAGE> 7
PROXY STATEMENT
OCLASSEN PHARMACEUTICALS, INC.
PROSPECTUS
WATSON PHARMACEUTICALS, INC.
COMMON STOCK, PAR VALUE $0.0033 PER SHARE
GENERAL INFORMATION
This Proxy Statement/Prospectus is furnished in connection with the
solicitation of proxies by the Board of Directors of Oclassen Pharmaceuticals,
Inc., a Delaware corporation ("Oclassen"), for use in connection with a special
meeting of the stockholders of Oclassen (the "Special Meeting"), which is to be
held on February 26, 1997 at 10:00 a.m. local time, or any adjournments or
postponements thereof. At the Special Meeting, among other things, the
stockholders of Oclassen will consider and vote upon a proposal to approve and
adopt the Agreement and Plan of Merger dated as of September 25, 1996, as
amended effective November 14, 1996, as further amended effective December 31,
1996 (the "Merger Agreement"), among Watson Pharmaceuticals, Inc., a Nevada
corporation ("Watson"), Opalacq Co., a Delaware corporation and a wholly-owned
subsidiary of Watson ("Watson Sub"), and Oclassen, pursuant to which Watson Sub
would be merged with and into Oclassen (the "Merger"). As a result of the
Merger, which is expected to be effective on or about February 4, 1997, Oclassen
will become a wholly-owned subsidiary of Watson and, as consideration for the
Merger, each outstanding share of Common Stock of Oclassen, par value $0.001 per
share (the "Oclassen Common Stock") and Oclassen Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and
Series E Preferred Stock (the "Oclassen Preferred Stock") will be converted into
shares of Common Stock, $0.0033 par value per share of Watson (the "Watson
Common Stock"). Each share of outstanding capital stock of Watson Sub will be
converted into and will become one share of Common Stock, $0.01 par value per
share, of Oclassen, as the surviving corporation.
The number of shares of Watson Common Stock to be received by the
stockholders of Oclassen will be determined in accordance with the provisions of
the Merger Agreement providing for calculation of the exchange ratio (the
"Exchange Ratio"). The Exchange Ratio is calculated upon the basis of (A)(I)
$135,000,000, less (II) the sum of the Preferred Payout (as defined in the
Merger Agreement) for each series of Oclassen Preferred Stock outstanding at the
Effective Time, multiplied by the number of shares of such series of Oclassen
Preferred Stock and multiplied by the Average Closing Price; divided by (B) the
aggregate number of shares of Watson Common Stock outstanding at the Effective
Time (on a fully-diluted basis); and further divided by (C) the Average Closing
Price. The Exchange Ratio will vary depending upon the Average Closing Price of
Watson Common Stock. The Exchange Ratio is subject to adjustment in the event of
any stock split, stock dividend, reorganization, recapitalization or similar
change with respect to the Watson Common Stock or the Oclassen Common Stock or
Oclassen Preferred Stock occurring prior to the effective time of the Merger
(the "Effective Time"), so that Oclassen stockholders will receive the same
consideration originally contemplated by the terms of the Merger Agreement.
Assuming an Average Closing Price for Watson Common Stock of between $27.00 and
$35.00, the aggregate consideration to be received by Oclassen stockholders will
be $135,000,000. If the Average Closing Price is above or below the collar
range, the aggregate consideration to be received by Oclassen stockholders will
be above or below $135,000,000. Based upon the maximum Average Closing Price for
shares of Watson Common Stock of $35.00 and the minimum Average Closing Price
for shares of Watson Common Stock of $27.00 and the number of shares of Oclassen
Common Stock and Oclassen Preferred Stock and Oclassen Options outstanding on
December 31, 1996, and assuming the conversion of all shares of Oclassen
Preferred Stock into Oclassen Common Stock prior to the Effective Time, (a) the
range of shares of Watson Common Stock that will be issued to Oclassen
stockholders in exchange for each share of Oclassen Common Stock is a minimum of
0.3692 of a share and a maximum of 0.4785 of a share, or, assuming the full
amount of the escrow fund established under the Merger Agreement is applied to
satisfy claims for indemnification by Watson, 0.3415 of a share and 0.4426 of a
share, respectively, and (b) the minimum and maximum number of shares of Watson
Common Stock that will be issued in the Merger, on a fully-diluted basis, is
3,857,143 shares and 5,000,000 shares, respectively or, assuming the full amount
of the escrow fund is applied to satisfy claims for indemnification by Watson,
3,609,404 and 4,678,860 shares, respectively. As of the date of this Proxy
Statement/Prospectus, Oclassen had obtained commitments from all of the holders
of Oclassen Preferred Stock to convert such shares into shares of Oclassen
Common Stock prior to the Effective Time. See "Summary -- The Merger -- Merger
Consideration" for a description of the range of shares to be issued to the
Oclassen stockholders, the applicable Exchange Ratios and the range of implied
values per share of Oclassen Common Stock.
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 5,000,000 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 "RISK FACTORS" BEGINNING ON PAGE 23.
This Proxy Statement/Prospectus and form of Proxy are first being
mailed to Oclassen's stockholders on or about February 6, 1997.
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 PROXY STATEMENT/PROSPECTUS IS FEBRUARY 6, 1997.
<PAGE> 8
AVAILABLE INFORMATION
Watson is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files 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 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, D.C. 20006. In
addition, electronic copies of the Registration Statement and all related
exhibits and schedules may be accessed on the World Wide Web via the
Commission's EDGAR database at its website (http://www.sec.gov/edgarhp.htm).
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 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: JILL KETTINGER, INVESTOR
RELATIONS COORDINATOR, TELEPHONE: (909) 270-1400. IN ORDER TO ENSURE TIMELY
DELIVERY OF THE DOCUMENTS, ANY SUCH REQUEST SHOULD BE MADE BY FEBRUARY 21, 1997.
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, 1995, as amended.
<PAGE> 9
2. Quarterly Reports on Form 10-Q for the quarterly
periods ended March 31, 1996, June 30, 1996 and
September 30, 1996, as amended.
3. Current Reports on Form 8-K dated October 3, 1996
and January 9, 1997.
4. The description of the Watson Common Stock contained
in its Registration Statement on Form 8-A dated April
3, 1992.
All documents filed by Watson 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 Special 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 OCLASSEN 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.
CAUTIONARY STATEMENT
This Proxy Statement/Prospectus contains forward-looking statements
regarding Watson within the meaning of Section 27A of the Securities Act and
Section 21E of the Exchange Act. Watson's actual results could differ materially
from those projected in the forward-looking statements as a result of the risk
factors set forth under "Risk Factors" and elsewhere in this Proxy
Statement/Prospectus. The information in this Proxy Statement/Prospectus should
be carefully considered before consenting to the exchange of Oclassen Common
Stock and Oclassen Preferred Stock for Watson Common Stock in the Merger.
<PAGE> 10
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
SUMMARY .......................................................................................................
Watson ...............................................................................................
Oclassen...............................................................................................
Special Meeting of Stockholders........................................................................
Risk Factors...........................................................................................
The Merger.............................................................................................
Selected Historical Financial Data.....................................................................
Watson/Oclassen Selected Unaudited Pro Forma Condensed Combined Financial Data.........................
Comparative Per Share Data.............................................................................
Comparative Market Data................................................................................
Summary of Comparative Rights of Stockholders..........................................................
RISK FACTORS.....................................................................................................
Integration of the Businesses..........................................................................
Interests of Certain Persons in the Merger.............................................................
Indemnification; Stockholder Agent.....................................................................
No Control Over Oclassen...............................................................................
Comparative Rights of Stockholders.....................................................................
Conditions to the Merger...............................................................................
No Control Over Joint Ventures.........................................................................
Dependence upon New Product Introductions..............................................................
Competition............................................................................................
Government Regulation..................................................................................
Dependence on Key Personnel............................................................................
Future Acquisitions....................................................................................
Potential Volatility of Stock Price and Absence of Dividends...........................................
Fluctuations in Quarterly Operating Results............................................................
Product Development....................................................................................
Patents and Proprietary Rights.........................................................................
Dependence on Certain Products.........................................................................
Uncertainty of Royalty and Joint Venture Income........................................................
Dependence on Certain Suppliers........................................................................
Loss of Exclusive Rights to Market Certain Products....................................................
Product Liability and Insurance........................................................................
Certain Anti-takeover Provisions.......................................................................
THE SPECIAL MEETING..............................................................................................
Date, Time and Place of the Special Meeting............................................................
Purpose of the Special Meeting.........................................................................
Record Date; Voting at the Meeting.....................................................................
Quorum; Abstentions....................................................................................
Vote Required..........................................................................................
Voting; Revocability of Proxies........................................................................
Solicitation of Proxies................................................................................
THE MERGER.......................................................................................................
General ...............................................................................................
Background of the Merger...............................................................................
Watson's Reasons for the Merger; Advantages and Disadvantages of the Merger............................
Oclassen's Reasons for the Merger; Advantages and Disadvantages of the Merger..........................
Opinion of Watson's Financial Advisor..................................................................
Opinion of Oclassen's Financial Advisor................................................................
California Fairness Hearing............................................................................
Recommendation of the Board of Directors of Oclassen...................................................
Approval of the Board of Directors of Watson...........................................................
Interests of Certain Persons in the Merger.............................................................
Accounting Treatment...................................................................................
Federal Income Tax Consequences........................................................................
Regulatory Approval....................................................................................
</TABLE>
<PAGE> 11
<TABLE>
<S> <C>
Resale Restrictions...................................................................................
THE MERGER AGREEMENT............................................................................................
The Merger............................................................................................
Exchange Procedures; Fractional Shares................................................................
Representations and Warranties........................................................................
Alternative Transactions..............................................................................
Certain Covenants.....................................................................................
Expenses..............................................................................................
Benefit Plans.........................................................................................
Bonus and 401(k) Plan.................................................................................
Conditions............................................................................................
Indemnification.......................................................................................
The Stockholder Agent.................................................................................
Termination...........................................................................................
Modification and Waivers..............................................................................
DISSENTERS' RIGHTS..............................................................................................
Oclassen Stockholders.................................................................................
Watson Stockholders...................................................................................
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION....................................................
SUPPLEMENTAL UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION.......................................
INFORMATION REGARDING WATSON ...................................................................................
Recent Developments...................................................................................
INFORMATION REGARDING OCLASSEN..................................................................................
Background............................................................................................
Marketed Products.....................................................................................
Products Under Development............................................................................
Product Development Capability........................................................................
Sales and Marketing...................................................................................
Manufacturing and Raw Materials.......................................................................
Licenses, Patents, Trade Secrets and Non-Patent Exclusivity...........................................
Competition...........................................................................................
Government Regulation.................................................................................
Employees.............................................................................................
Properties............................................................................................
Legal Proceedings.....................................................................................
Directors and Executive Officers of Oclassen..........................................................
Executive Compensation................................................................................
Certain Relationships and Related Transactions........................................................
OCLASSEN SELECTED FINANCIAL DATA................................................................................
OCLASSEN MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..................
General...............................................................................................
Results of Operations.................................................................................
Liquidity and Capital Resources.......................................................................
SECURITY OWNERSHIP OF OCLASSEN AND PRINCIPAL STOCKHOLDERS.......................................................
OCLASSEN'S PROPOSAL TO AMEND ITS AMENDED AND RESTATED CERTIFICATE OF INCORPORATION..............................
COMPARATIVE RIGHTS OF STOCKHOLDERS..............................................................................
Liability of Directors................................................................................
Indemnification.......................................................................................
Derivative Actions....................................................................................
Distributions and Redemptions.........................................................................
Stockholder Inspection of Books and Records...........................................................
Dissenters' Rights....................................................................................
Quorum for Stockholder Meetings.......................................................................
Board Vacancies.......................................................................................
Classified Board of Directors.........................................................................
Number of Directors...................................................................................
Loans to and Guarantees of Obligations of Officers and Employees......................................
Exercise of Directors' and Officers' Powers...........................................................
Cumulative Voting.....................................................................................
Anti-Takeover Provisions..............................................................................
LEGAL MATTERS...................................................................................................
EXPERTS ......................................................................................................
INDEX TO FINANCIAL STATEMENTS...................................................................................
APPENDICES
APPENDIX A - Agreement and Plan of Merger dated as of September 25, 1996, as amended
effective November 14, 1996 and December 31, 1996, among Watson Pharmaceuticals, Inc.,
Opalacq Co. and Oclassen Pharmaceuticals, Inc. ..........................................
APPENDIX B - Certificate of Amendment of Amended and Restated Certificate of Incorporation of
Oclassen Pharmaceuticals, Inc. ..........................................................
APPENDIX C - Fairness Opinion of Furman Selz LLC......................................................
APPENDIX D - Fairness Opinion of Lehman Brothers......................................................
APPENDIX E - Section 262 of the Delaware General Corporation Law......................................
APPENDIX F - Text of Permit issued by the California Corporations Commissioner........................
</TABLE>
<PAGE> 12
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,
unless the context otherwise requires, its subsidiaries, and "Oclassen" refers
to Oclassen Pharmaceuticals, Inc. 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 Oclassen and its affiliates has
been supplied by Oclassen. Certain capitalized terms which are used but not
defined in this Summary are defined elsewhere in this Proxy
Statement/Prospectus.
WATSON
Watson develops, manufactures and markets a comprehensive array of
off-patent pharmaceuticals, and develops proprietary pharmaceutical products.
Watson pursues a balanced strategy of generating revenue through its
long-established off-patent pharmaceuticals business, capitalizing on its proven
capabilities to support the development of off-patent and proprietary products,
and seeking opportunities to acquire businesses, technologies and products to
broaden its technology platform. 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 and
markets such products worldwide through pharmaceutical companies, joint ventures
and its own marketing efforts. To achieve this objective, Watson is pursuing a
balanced strategy of generating revenue through its established off-patent
pharmaceutical business and capitalizing on its proven research and development,
manufacturing and regulatory capabilities to support the development of advanced
proprietary products. Watson targets difficult-to-produce niche pharmaceuticals,
thereby avoiding competition with traditional commodity-oriented off-patent
pharmaceutical companies. Watson also regularly reviews potential opportunities
to acquire or invest in technologies, products or product rights and businesses
compatible with its existing business. See "Information Regarding Watson."
In addition to the Merger, on December 24, 1996, Watson entered into a
definitive Agreement and Plan of Merger with Royce Laboratories, Inc. ("Royce")
(the "Royce Merger Agreement"), pursuant to which Royce will merge (the "Royce
Merger") with and into a subsidiary of Watson created for purposes of the Royce
Merger, with Royce surviving the Royce Merger as a wholly-owned subsidiary of
Watson. It is intended that the Royce Merger will qualify as a pooling of
interests for accounting purposes and a tax free reorganization for federal
income tax purposes. See "Information Regarding Watson -- Recent Developments."
<PAGE> 13
Watson's principal executive offices are located at 311 Bonnie Circle,
Corona, California 91720, and its telephone number is (909) 270-1400.
OCLASSEN
Oclassen develops specialty prescription pharmaceuticals to prevent and
treat skin diseases, and markets these products to dermatologists. Oclassen
in-licenses pharmaceutical products, which have been developed beyond the
initial discovery phase, from United States and foreign pharmaceutical companies
and from universities and research institutions. Oclassen completes product
formulation and any preclinical development, conducts clinical trials and brings
products through the required regulatory approval process and into the market.
Oclassen markets its products through its 60-person nationwide direct sales
force to dermatologists. Oclassen believes that its in-licensing, development
and marketing strategy reduces the time, risks and costs associated with product
development and marketing. See "Information Regarding Oclassen."
Oclassen's principal executive offices are located at 100 Pelican Way,
San Rafael, California 94901, and its telephone number is (415) 258-4500.
SPECIAL MEETING OF STOCKHOLDERS
This Proxy Statement/Prospectus relates to the special meeting of
stockholders of Oclassen (the "Special Meeting"). At the Special Meeting, the
stockholders of Oclassen will consider and vote on a proposal to approve and
adopt the Merger Agreement and to approve the Merger. As a result of the Merger,
Oclassen will become a wholly-owned subsidiary of Watson and (a) each
outstanding share of Oclassen Common Stock (assuming the voluntary conversion of
all outstanding Oclassen Preferred Stock into Oclassen Common Stock prior to the
effective time of the Merger) will be converted into and exchanged for a
fraction of a share of Watson Common Stock (the "Exchange Ratio") and (b) each
outstanding option to purchase Oclassen Common Stock (the "Oclassen Options")
will be converted into an option to purchase shares of Watson Common Stock,
appropriately adjusted to reflect the Exchange Ratio. Pursuant to the Merger
Agreement, the holders of Oclassen Common Stock, Oclassen Preferred Stock and
Oclassen Options will receive an aggregate of up to 5,000,000 shares of Watson
Common Stock in the Merger. Based upon the number of outstanding shares of
Watson Common Stock on January 20, 1997 and of Oclassen Common Stock (assuming
the voluntary conversion of all outstanding shares of Oclassen Preferred Stock
into shares of Oclassen Common Stock) on January 20, 1997, and assuming (i) no
dissenting stockholders of Oclassen, (ii) no change in the average trading price
of Watson Common Stock from the closing sale price on January 20, 1997 ($44.75
per share), and (iii) no issuance of shares of Watson Common Stock in connection
with the Royce Merger, Watson will have approximately 40,173,118 shares of
Watson Common Stock outstanding after the Merger, of which approximately
3,305,451 shares (or approximately 8.2%) will be issued or issuable to holders
of Oclassen Common Stock, Oclassen Preferred Stock and holders of Oclassen
Options in connection with the Merger. Seven and one-half percent (7.5%) of the
shares of Watson Common Stock issuable in the Merger to holders of Oclassen
Common Stock and Oclassen Preferred Stock will be deposited into an escrow fund
to secure certain indemnification obligations of Oclassen, and approval of the
Merger will also constitute approval of the establishment of the escrow fund.
At the Special Meeting, the stockholders of Oclassen will also consider
and vote on a proposal to approve an amendment to Oclassen's Amended and
Restated Certificate of Incorporation in order to conform the language in
Article Fourth, paragraph (D)5.(b) of such Amended and Restated Certificate of
Incorporation (which addresses the method of valuation of any securities to be
delivered to holders of Oclassen Common Stock and Oclassen Preferred Stock in a
merger) to the method for valuing the Watson Common Stock to be issued in the
Merger, as set forth in the Merger Agreement.
The Special Meeting will be held on February 26, 1997 at 10:00 a.m.,
local time, at the Embassy Suites, 101 McInnis Parkway, San Rafael, California.
The Oclassen Board of Directors has fixed the close of business on January 20,
1997 as the record date for determining holders entitled to notice of and to
vote at the Special Meeting (the "Record Date"). As of the Record Date, there
were 1,868,318 shares of Oclassen Common Stock, 500,000 shares of Oclassen
Series A Preferred Stock, 1,423,184 shares of Oclassen Series B Preferred Stock,
1,442,906 shares of Oclassen Series C Preferred Stock, 3,105,888 shares of
Oclassen Series D Preferred Stock and 625,000 shares of Oclassen Series E
Preferred Stock issued and outstanding and held by an aggregate of 257
stockholders of record. Holders of shares of Oclassen Common Stock are entitled
to one vote per share, and holders of shares of Oclassen Preferred Stock are
entitled to one vote per share at the Special Meeting. As of such date,
directors and executive officers of Oclassen and their affiliates may be deemed
to beneficially own 55.3% of the outstanding shares of Oclassen Common Stock and
4.3% of the outstanding shares of Oclassen Preferred Stock. Approval and
adoption of the Merger Agreement and approval of the Merger requires the
affirmative vote of (i) at least a majority of the outstanding shares of
Oclassen Common Stock and Oclassen Preferred Stock voting together, (ii) at
least a majority of the outstanding shares of Oclassen Series B Preferred Stock
voting as a separate class, (iii) at least a majority of the outstanding shares
of Oclassen Series C Preferred Stock voting as a separate class and (iv) at
least a majority of the outstanding shares of Oclassen Series D Preferred Stock
and Oclassen Series E Preferred Stock voting together as a single and separate
class.
<PAGE> 14
RISK FACTORS
The decision by an Oclassen stockholder to approve the Merger
Agreement and the Merger and to become a stockholder of Watson involves a
number of risks including the risk that the combined company may experience
difficulties in integration of the two businesses; that certain persons might
have interests in the Merger that differ from the interests of an Oclassen
stockholder; that the stockholders of Oclassen may be required to provide
certain indemnification to Watson in connection with the Merger; that the
stockholders of Oclassen will effectively relinquish direct control over the
business of Oclassen; that the rights of Oclassen stockholders may differ as
stockholders of a Nevada corporation; that there are certain conditions to the
consummation of the Merger; Watson's lack of control over joint ventures
pursuant to which it derives substantial revenue; Watson's and Oclassen's
dependence upon new product introductions; the level of competition in the
combined companies' industries; the extent of, and changes in, the level of
government regulation; the dependence of the combined companies on certain key
personnel; the possibility of future acquisitions and any problems attendant
thereto; the potential volatility of the price of Watson's Common Stock and the
absence of dividends; the fluctuations in quarterly earnings Watson has
experienced and may continue to experience; the costs associated with product
development and the uncertainty of returns; risks relating to any difficulty in
obtaining patent or other intellectual property protection or the costs
associated therewith; the dependence of the combined companies on certain
customers and products; the uncertainty of royalty and joint venture income;
the dependence of the combined companies on certain suppliers; the loss of
exclusive rights to market certain products; the cost and availability of
product liability insurance and the risks associated with any such liability
action; and the existence of certain anti-takeover provisions under Nevada law.
THE MERGER
Conversion of Securities. Upon consummation of the transactions
contemplated by the Merger Agreement, (a) Watson Sub will be merged with and
into Oclassen, with Oclassen surviving the Merger, (b) Oclassen will become a
wholly-owned subsidiary of Watson, (c) each issued and outstanding share of
Oclassen Common Stock and Oclassen Preferred Stock, other than shares as to
which dissenters' rights are properly exercised, will be converted into shares
of Watson Common Stock, subject to certain adjustments ,(d) the outstanding
shares of Watson Common Stock will not be affected by the Merger and (e) all
shares of Oclassen Common Stock or Oclassen Preferred Stock held by Oclassen in
treasury or owned by Watson or any of its subsidiaries will be canceled 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 summary of the
principal differences between the rights of holders of Oclassen Common Stock and
Oclassen Preferred Stock, and Watson Common Stock, see "-- Summary of
Comparative Rights of Stockholders" and "Comparative Rights of
Stockholders."
Merger Consideration. The number of shares of Watson Common Stock to be
issued by Watson in connection with the Merger will depend upon the average
closing price of the Watson Common Stock over a 10-day period ending two days
prior to the Closing Date (the "Average Closing Price"). The following table
illustrates the number of shares of Watson Common Stock to be issued to Oclassen
stockholders in connection with the Merger, the implied value thereof, the
applicable Exchange Ratio and the implied value per share of Oclassen Common
Stock (on a fully diluted basis, assuming the conversion of all shares of
Oclassen Preferred Stock into Oclassen Common Stock prior to the Effective Time
and assuming an Average Closing Price between $25.00 and $50.00). The following
table also assumes that all shares to be held in escrow pursuant to the
indemnification provisions of the Merger Agreement are subsequently released to
the Oclassen stockholders.
<TABLE>
<CAPTION>
Implied value
Price of Number Implied value per share of
Watson of shares of Watson of Oclassen Exchange Oclassen Common
Common Stock Common Stock issued Common Stock Ratio (a) (b) Stock(b)
- ----------- ------------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
$25.00 5,000,000 $125,000,000 0.4785 $11.96
26.00 5,000,000 130,000,000 0.4785 12.44
27.00 5,000,000 135,000,000 0.4785 12.92
28.00 4,821,429 135,000,000 0.4615 12.92
29.00 4,655,172 135,000,000 0.4455 12.92
30.00 4,500,000 135,000,000 0.4307 12.92
31.00 4,354,839 135,000,000 0.4168 12.92
32.00 4,218,750 135,000,000 0.4038 12.92
33.00 4,090,909 135,000,000 0.3915 12.92
34.00 3,970,588 135,000,000 0.3800 12.92
35.00 3,857,143 135,000,000 0.3692 12.92
36.00 3,857,143 138,857,148 0.3692 13.29
37.00 3,857,143 142,714,291 0.3692 13.66
38.00 3,857,143 146,571,434 0.3692 14.03
39.00 3,857,143 150,428,577 0.3692 14.40
40.00 3,857,143 154,285,720 0.3692 14.77
41.00 3,857,143 158,142,863 0.3692 15.14
42.00 3,857,143 162,000,006 0.3692 15.50
43.00 3,857,143 165,857,149 0.3692 15.87
44.00 3,857,143 169,714,292 0.3692 16.24
45.00 3,857,143 173,571,435 0.3692 16.61
46.00 3,857,143 177,428,578 0.3692 16.98
47.00 3,857,143 181,285,721 0.3692 17.35
48.00 3,857,143 185,142,864 0.3692 17.72
49.00 3,857,143 189,000,007 0.3692 18.09
50.00 3,857,143 192,857,150 0.3692 18.46
</TABLE>
(a) Represents the number of shares of Watson Common Stock to be issued in
exchange for each share of Oclassen Common Stock.
(b) Based upon the total common and common equivalent shares of Oclassen Common
Stock outstanding as of December 31, 1996, assuming conversion of all shares of
Oclassen Preferred Stock into Oclassen Common Stock on a one-for-one basis, and
exercise of all outstanding Oclassen Options, prior to the Effective Time.
As set forth above, the Average Closing Price will be adjusted in the
event of any stock split, stock dividend, reorganization, recapitalization or
similar change with respect to the Watson Common Stock, the Oclassen Common
Stock or the Oclassen Preferred Stock occurring prior to the Effective Time, so
that Oclassen stockholders will receive the same consideration as originally
contemplated by the terms of the Merger Agreement. No such event had occurred
from September 25, 1996 through the date of this Proxy Statement/Prospectus and
none is contemplated. If the Average Closing Price is less than $27.00, the
Average Closing Price will be deemed to be $27.00 for purposes of calculating
the Exchange Ratio. If the Average Closing Price is greater than $35.00, the
Average Closing Price will be deemed to be $35.00 for purposes of calculating
the Exchange Ratio. Neither Watson nor Oclassen has any right to terminate the
Merger Agreement solely by reason of any change in the market price of Watson
Common Stock. Because the actual number of shares of Watson Common Stock to be
received by Oclassen stockholders is based upon a formula to be calculated at a
time after the vote upon the Merger, Oclassen stockholders will not know the
actual number of shares of Watson Common Stock they will receive in the Merger
at the time of the stockholder vote. Current prices for the Watson Common Stock
up to the Effective Time may be obtained free of charge by calling Oclassen's
Investor Relations Department at 1-800-961-6610.
By way of illustration, assuming an Average Closing Price of $35.00,
and assuming the conversion of all shares of Oclassen Preferred Stock
outstanding on December 31, 1996 into Oclassen Common Stock prior to the
Effective Time, the holders of Oclassen Common Stock will be entitled to receive
0.3692 of a share of Watson Common Stock for each share of Oclassen Common Stock
so held, or 3,857,143 shares in the aggregate, assuming no shares to be held in
escrow pursuant to the indemnification provisions of the Merger Agreement are
subsequently released. Because the Average Closing Price will be calculated
immediately prior to the closing, the actual consideration to be paid to the
Oclassen stockholders and the Exchange Ratio may differ from the example above.
During the period from October 1, 1996 to January 14, 1997 the bid price of
a share of Watson Common Stock has been as high as $44.875 and as low as $32.00.
As of February __, 1997, the closing price of a share of Watson Common Stock
was $_______. See "-- Escrow of Shares," and "The Merger Agreement --
Indemnification" and "-- The Stockholder Agent."
Ownership of Watson after the Merger. Based upon the number of
outstanding shares of Watson Common Stock on January 20, 1997 and of Oclassen
Common Stock (assuming the voluntary conversion of all outstanding shares of
Oclassen Preferred Stock into shares of Oclassen Common Stock) on January 20,
1997 and assuming (i) no dissenting stockholders of Oclassen, (ii) no change in
the average trading price of Watson Common Stock from the closing sale price on
January 20, 1997 ($44.75 per share), and (iii) no issuance of shares of Watson
Common Stock in connection with the Royce Merger, immediately following the
Merger, (a) the former holders of Oclassen Common Stock and Oclassen Preferred
Stock will collectively hold approximately 8.2% of the issued and outstanding
shares of Watson Common Stock; and (b) the persons who held Watson Common Stock
immediately prior to the Merger will hold collectively approximately 91.8% of
the issued and outstanding shares of Watson Common Stock.
Reasons for the Merger; Advantages and Disadvantages of the Merger.
The Boards of Directors of both Watson and Oclassen considered a number of
potential advantages and disadvantages of the Merger. Watson's Board of
Directors believes that the material advantages of the Merger to Watson and its
stockholders are the effect on Watson's future estimated earnings per share,
proprietary diversification, the creation of a diversified revenue base, an
expanded product pipeline, the future development of a proprietary dermatology
business, the acquisition of a proprietary product sales force, a talented
management team for the combined company and the terms of the Merger. The
Oclassen Board of Directors believes that the material advantages of the Merger
to Oclassen and its stockholders are a diversified revenue base, an expanded
product pipeline, stronger financial resources and enhanced access to capital,
liquidity of the Oclassen stockholders, a talented management team for the
combined company, enhanced ability to recruit and retain employees and the terms
of the Merger, including the consideration to be received by the Oclassen
stockholders.
Each Board of Directors has recognized that there are potential
disadvantages of the Merger, including potential disruption in the businesses of
Oclassen and Watson following announcement of the Merger and during the
combination of the operations of the two companies, risk of non-consummation of
the Merger, risks of integration following the Merger and the possibility that
the anticipated advantages of the Merger described above may not be realized.
The Watson Board of Directors recognized that disadvantages of the Merger
include the risk of overpayment of consideration otherwise justified based upon
the current level of earnings of Oclassen, the risk that some or all of
Oclassen's products currently in preclinical or clinical trials may not be
approved by the FDA and potential disruption in Watson's business and/or
employee base. The Oclassen Board of Directors also recognized that, as a result
of the Merger, the Oclassen stockholders will lose the exclusive opportunity to
develop and exploit Oclassen's current and potential products and will, as
stockholders of Watson, bear the risks associated with the operation of the
Watson business and the ownership of Watson Common Stock and will experience
dilution. The Oclassen Board of Directors considered the volatility of the
trading price of Watson Common Stock.
Although the Board of Directors of each of Watson and Oclassen
carefully considered the advantages and disadvantages of the Merger described
above, the Boards of Directors did not find it practicable to, and did not,
quantify or otherwise attempt to assign relative weights to the specific
advantages and disadvantages considered. For a more complete discussion of the
reasons for and disadvantages of the Merger, see "The Merger -- Watson's Reasons
for the Merger; Advantages and Disadvantages of the Merger" and "The Merger --
Oclassen's Reasons for the Merger; Advantages and Disadvantages of the Merger."
Approval of the Boards of Directors. THE BOARDS OF DIRECTORS OF
WATSON AND OCLASSEN HAVE UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND THE
MERGER. THE BOARD OF DIRECTORS OF OCLASSEN RECOMMENDS A VOTE FOR APPROVAL AND
ADOPTION OF THE MERGER AGREEMENT AND APPROVAL OF THE MERGER BY OCLASSEN'S
STOCKHOLDERS.
At the time the Merger Agreement was approved, the Board of Directors
of Watson believed that the terms of the Merger were fair to and in the best
interests of Watson and its stockholders. In reaching its determination, the
Board of Directors of Watson considered the Board's belief that the Merger will
create a significantly stronger pharmaceutical business than either of the two
companies experience operating independently and will reduce risks to which
Watson would be subject as a stand-alone company; information concerning the
financial performance, condition and business operations of Watson and Oclassen;
the presentation of Furman Selz LLC ("Furman Selz"), Watson's financial advisor,
made to Watson's Board at its meeting on September 24, 1996 and the opinion of
Furman Selz to the effect that, as of September 20, 1996, the Merger was fair,
from a financial point of view, to the Watson stockholders; the terms and
conditions of the Merger and the Merger Agreement; the fact that the Merger will
be accounted for as a pooling of interests; and the likelihood that the Merger
will be consummated. For a more complete discussion of the factors considered by
the Watson Board of Directors in determining to approve the Merger Agreement and
the Merger, see "The Merger -- Watson's Reasons for the Merger; Advantages and
Disadvantages of the Merger" and "The Merger -- Oclassen's Reasons for the
Merger; Advantages and Disadvantages of the Merger" and "The Merger--Approval of
the Board of Directors of Watson."
At the time the Merger Agreement was approved, the Board of Directors
of Oclassen believed that the terms of the Merger were fair to and in the best
interests of Oclassen and its stockholders. In reaching its determination, the
Board of Directors of Oclassen considered Oclassen's strategic alternatives;
information concerning the financial performance, condition and business
operations of Watson and Oclassen; the fairness opinion delivered by Lehman
Brothers Inc. ("Lehman Brothers"), Oclassen's financial advisor; the existing
trading market for Watson Common Stock and the liquidity provided to Oclassen's
stockholders as a result of the Merger; the fact that the Merger would be a
tax-free transaction accounted for as a pooling of interests; the opportunity
for Oclassen's stockholders to continue to share in the potential for long-term
gains from their investment in Oclassen through their ownership of Watson Common
Stock following the Merger; the terms and conditions of the Merger; the
likelihood that the Merger will be consummated; and the advantages and
disadvantages of the Merger to Oclassen and its stockholders described above.
For a more complete discussion of the factors considered by the Oclassen Board
of Directors in determining to recommend approval and adoption of the Merger
Agreement and approval of the Merger, see "The Merger -- Recommendation of the
Board of Directors of Oclassen."
Opinions of Financial Advisors. On September 24, 1996, Furman Selz
delivered its written opinion (the "Furman Selz Opinion") to the Board of
Directors of Watson to the effect that, as of September 20, 1996 and based upon
and subject to certain considerations and assumptions, the Merger was fair, from
a financial point of view, to Watson.
Lehman Brothers acted as financial advisor to Oclassen in connection
with the Merger and delivered its written opinion, dated September 25, 1996, to
the Oclassen Board to the effect that, as of such date, the consideration to be
offered to the stockholders of Oclassen in the Merger is fair to such
stockholders from a financial point of view. Lehman Brothers' opinion is for the
use and benefit of the Board of Directors of Oclassen and was rendered to the
Oclassen Board in connection with its consideration of the Merger. Lehman
Brothers' opinion is not intended to be and does not constitute a recommendation
to any stockholder of Oclassen as to how such stockholder should vote with
respect to the Merger Agreement. The summary of the opinion of Lehman Brothers
set forth in this Proxy Statement/Prospectus is qualified in its entirety by
reference to the full text of such opinion.
The full text of the written opinions of Furman Selz and Lehman
Brothers are attached as Appendices C and D, respectively, to this Proxy
Statement/Prospectus. Watson's and Oclassen's stockholders may read such
opinions for discussions of the assumptions made, factors considered and
limitations on the reviews undertaken by Furman Selz and Lehman Brothers,
respectively, in rendering their opinions. See "The Merger -- Opinion of
Watson's Financial Advisor," "-- Opinion of Oclassen's Financial Advisor" and
Appendices C and D hereto.
<PAGE> 15
Fairness Hearing under California Law. On November 8, 1996, a hearing
was held pursuant to Section 25142 of the California Corporations Code to
determine the fairness of the proposed issuance of Watson Common Stock to the
stockholders of Oclassen. By order dated November 8, 1996, the California
Corporations Commissioner determined that the terms and conditions of the
Merger are fair and issued a permit approving the proposed issuance. The text
of the permit issued by the California Department of Corporations is
attached hereto as Appendix F. However, this offering of Watson Common Stock is
being made by registration upon the effectiveness of the Registration Statement
and not by means of the Section 3(a)(10) or other exemption under the
Securities Act. See "The Merger--California Fairness Hearing."
Effective Time of the Merger. The Merger will become effective upon
the filing of a Certificate of Merger with the Secretary of State of the State
of Delaware (the "Effective Time"), which certificate will be filed as promptly
as practicable after the requisite stockholder approval has 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 Oclassen to consummate the Merger, it is presently expected that
the Merger will be consummated on February 27, 1997 or as soon thereafter as
such other conditions are satisfied. See "The Merger Agreement--The Merger."
Exchange of Oclassen Stock Certificates. Upon consummation of the
Merger, each holder of a certificate or certificates representing shares of
Oclassen Common Stock or Oclassen Preferred Stock ("Certificates") outstanding
immediately prior to the Merger will, upon the surrender thereof (duly endorsed,
if required) to American Stock Transfer & Trust Company (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 Oclassen Common
Stock and Oclassen Preferred Stock will have been automatically converted as a
result of the Merger, together with cash in lieu of any fractional share to
which such Oclassen stockholder may be entitled to receive. Within five business
days after the consummation of the Merger, the Exchange Agent will mail a letter
of transmittal with instructions to all holders of record of Oclassen Common
Stock and Oclassen Preferred 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."
Fractional Shares. Fractional shares of Watson Common Stock will not
be issued in connection with the Merger. Instead, any holder of shares of
Oclassen Common Stock or Oclassen Preferred Stock entitled under the Merger
Agreement to receive a fractional share of Watson Common Stock will be entitled
to receive a cash payment in lieu thereof. For each fractional share of Watson
Common Stock that would otherwise be issuable, each eligible holder will receive
an amount of cash equal to such fractional proportion of the Average Closing
Price per share of Watson Common Stock. At the Effective Time, Watson will
deposit with the Exchange Agent a sufficient amount of cash to satisfy the
payment of cash in lieu of fractional shares to the Oclassen stockholders. See
"The Merger Agreement--Exchange Procedures; Fractional Shares."
Escrow of Shares. All holders of Oclassen Common Stock and Oclassen
Preferred Stock at the Effective Time (other than holders who perfect
dissenters' rights) will be required to deposit, or cause to be deposited, 7.5%
of the shares of Watson Common Stock otherwise to be issued to such stockholders
in the Merger in an escrow account (the "Escrow"), to be held and distributed in
accordance with the provisions of the Escrow Agreement attached as Exhibit B to
the Merger Agreement. Assuming no change in the closing price of Watson Common
Stock from the closing price of $44.75 on January 20, 1997, and assuming that
an aggregate of 3,857,143 shares of Watson Common Stock are issued in the
Merger, the aggregate value of the Escrow will be equal to $11,086,320, assuming
247,739 shares of Watson Common Stock are deposited in the escrow account. The
former Oclassen stockholders will be entitled to vote the shares of Watson
Common Stock held on their behalf in the escrow account. Under the terms of the
Merger Agreement, the stockholders of Oclassen, jointly and severally, have
agreed to indemnify, save and keep Watson, Watson Sub, Oclassen, each of their
respective subsidiaries and their respective successors and permitted assigns
(each, a "Watson Indemnitee" and, collectively, the "Watson Indemnitees")
harmless against and from all Damages (as defined in the Merger Agreement)
sustained or incurred by any Watson Indemnitee as a result of or arising out of
(a) any inaccuracy in or breach of any representation or warranty made by
Oclassen to Watson in the Merger Agreement or in other related agreements; and
(b) any breach by Oclassen or the Stockholder Agent (as defined below) of, or
failure of Oclassen or the Stockholder Agent to comply with, any of the
covenants or obligations under the Merger Agreement or the related agreements to
be performed by Oclassen or the Stockholder Agent. Because the representations
and warranties made by Oclassen to Watson in the Merger Agreement relate, for
the most part, to the conduct of Oclassen's business prior to the Merger, in the
event that there is any inaccuracy in or breach of any such representation or
warranty and a claim is made by a Watson Indemnitee against the Escrow, the
Oclassen stockholders may have liability arising from the operations of Oclassen
prior to the Merger. No Watson Indemnitee may make a claim for indemnification
against Oclassen or the Oclassen stockholders until the total claims for
indemnification against Oclassen or the Oclassen stockholders exceeds $600,000,
but after the claims exceed such amount such Watson Indemnitee will be entitled
to seek indemnification for all indemnification claims from the first dollar of
damages. However, the Escrow is the exclusive remedy for claims by Watson
Indemnitees, and therefore, the Watson Indemnitees are prohibited from pursuing
any claim for indemnification directly against the Oclassen stockholders. The
Escrow will survive for a period of 12 months after the closing of the Merger.
Upon the expiration of such 12-month period, anything remaining in the Escrow,
after the payment of all amounts owed to any Watson Indemnitee to satisfy claims
for indemnification, will be distributed to the Oclassen stockholders. A
committee consisting of Russell H. Maddox and G. Kirk Raab initially will serve
as the Stockholder Agent and will represent the interests of the Oclassen
stockholders in administering the Escrow. See "The Merger
Agreement--Indemnification" and "--The Stockholder Agent."
Watson's Indemnification Obligations. Watson has agreed to indemnify
each holder of Oclassen Common Stock and Oclassen Preferred Stock for a period
of 12 months following the Merger against damages caused to such party due to a
breach of Watson's representations, warranties and covenants contained in the
Merger Agreement or related agreements. No holder of Oclassen Common Stock or
Oclassen Preferred Stock may make a claim for indemnification against Watson
until the total claims for indemnification against Watson exceed $600,000, but
after the claims exceed such amount, such holders will be entitled to seek
indemnification for all indemnification claims from the first dollar of damages.
Watson's total liability for indemnification pursuant to the terms of the Merger
Agreement is limited to $10,125,000. No Oclassen stockholder can make a claim
for indemnification directly against Watson. All such claims must be brought by
the Stockholder Agent.
Dissenters' Rights. Holders of outstanding shares of Oclassen Common
Stock and Oclassen Preferred Stock are entitled to relief as dissenting
stockholders under Section 262 of the Delaware General Corporation Law (the
"DGCL") and may, by complying with Section 262 of the DGCL, exercise
<PAGE> 16
such dissenters' rights. If the Merger is approved by the required vote of the
Oclassen stockholders and is not abandoned or terminated, any holder of Oclassen
Common Stock or Oclassen Preferred Stock (an "Oclassen Dissenting Stockholder")
may, by complying with the provisions of Section 262 of the DGCL, be entitled to
have his or her shares of Oclassen Common Stock or Oclassen Preferred Stock
appraised by the Delaware Court of Chancery (the "Court") and to receive payment
in the amount of the "fair value" of such shares as of the Effective Time of the
Merger. A stockholder of Oclassen electing to exercise appraisal rights must,
prior to the vote concerning the Merger at the Oclassen Special Meeting, demand
in writing from Oclassen the appraisal of his or her shares of Oclassen Common
Stock or Oclassen Preferred Stock. Accordingly, such written demand must be
received by Oclassen on or prior to February 25, 1997. A holder who elects to
exercise appraisal rights should mail or deliver his or her written demand to
Oclassen Pharmaceuticals, Inc., 100 Pelican Way, San Rafael, California 94901,
Attention: Craig W. Johnson, Secretary. The demand should specify the holder's
name and mailing address, the number of shares of Oclassen Common Stock or
Oclassen Preferred Stock owned and that such holder is demanding appraisal of
his or her shares. A vote against the Merger will not constitute a demand for
appraisal. A stockholder electing to exercise his or her appraisal rights must
do so by a separate written demand as provided in Section 262 of the DGCL. Only
a holder of record of shares of Oclassen Common Stock or Oclassen Preferred
Stock at the Record Date (or his or her duly appointed representative) is
entitled to assert appraisal rights for the shares registered in that holder's
name. Within ten days after the Effective Time of the Merger, Oclassen must
provide notice of the Effective Time of the Merger to all stockholders who have
complied with Section 262 of the DGCL and have not voted for approval of the
Merger.
Within 120 days after the Effective Time of the Merger, any stockholder
who has made a valid written demand and who has not voted for approval of the
Merger may (i) file a petition in the Court demanding a determination of the
fair value of the shares of Oclassen Common Stock and Oclassen Preferred Stock
and (ii) upon written request, receive from Oclassen a statement setting forth
the aggregate number of shares of Oclassen Common Stock and Oclassen Preferred
Stock not voted for approval and adoption of the Merger and with respect to
which demands for appraisal have been received and the aggregate number of
holders of such shares of Oclassen Common Stock and Oclassen Preferred Stock.
Such statement must be mailed within ten days after the written request therefor
has been received by Oclassen.
If a petition for an appraisal is timely filed, after a hearing on
such petition, the Court is required to determine the holders of Oclassen
Dissenting Shares who are entitled to appraisal rights and to determine the
"fair value" thereof exclusive of any element of value arising from the
accomplishment or expectation of the Merger, together with a fair rate of
interest, if any, to be paid upon the value of the Oclassen Dissenting Shares.
Pursuant to Section 262 of the DGCL, any stockholder or the combined company
may file a petition with the Court to initiate the appraisal proceeding. The
value of the stock so determined is binding upon all stockholders entitled to
appraisal.
Any holder of Oclassen Dissenting Shares who has duly demanded an
appraisal under Section 262 of the DGCL will not, after the Effective Time of
the Merger, be entitled to vote the shares subject to such demand for any
purpose or be entitled to the payment of dividends or other distributions on
such Oclassen Dissenting Shares (except dividends or other distributions payable
to stockholders of record as of a date prior to the Effective Time of the
Merger).
A holder will fail to perfect, or will effectively lose, his or her
right to appraisal if (i) he or she fails to make a written demand for appraisal
before the taking of the vote on the Merger, (ii) he or she votes for approval
of the Merger, (iii) if no petition for appraisal is filed within 120 days after
the Effective Time of the Merger or (iv) if the holder delivers to Oclassen a
written withdrawal of such holder's demand for an appraisal, except that any
such attempt to withdraw made more than 60 days after the Effective Time of the
Merger requires the written approval of Oclassen.
Failure on the part of a holder of Oclassen Common Stock or Oclassen
Preferred Stock to comply precisely with the requirements of Section 262 of
the DGCL, 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 APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND
APPROVAL OF THE MERGER, AN OCLASSEN STOCKHOLDER WHO WISHES TO EXERCISE
DISSENTERS' RIGHTS MUST EITHER REFRAIN FROM SIGNING AND RETURNING HIS OR HER
PROXY CARD OR, IF HE OR SHE SIGNS AND RETURNS HIS OR HER PROXY CARD, VOTE
AGAINST OR ABSTAIN FROM VOTING ON THE APPROVAL AND ADOPTION OF THE MERGER
AGREEMENT AND APPROVAL OF THE MERGER.
AN OCLASSEN STOCKHOLDER WHO WISHES TO PERFECT HIS OR HER RIGHTS AS A
DISSENTING STOCKHOLDER IN THE EVENT THE MERGER AGREEMENT IS ADOPTED MUST NOT
VOTE IN FAVOR OF, OR OTHERWISE CONSENT TO, THE MERGER, AND MUST, BEFORE THE
TAKING OF A VOTE ON THE MERGER, DELIVER TO OCLASSEN A WRITTEN DEMAND FOR
APPRAISAL SETTING FORTH INFORMATION WHICH REASONABLY INFORMS OCLASSEN OF THE
IDENTITY OF THE STOCKHOLDER (SUCH AS THE OCLASSEN STOCKHOLDER'S NAME AND ADDRESS
AND THE NUMBER OF SHARES OF OCLASSEN COMMON STOCK OR OCLASSEN PREFERRED STOCK
OWNED) AND A STATEMENT THAT HE OR SHE INTENDS TO DEMAND THE APPRAISAL OF HIS OR
HER SHARES. SUCH DEMAND MUST BE DELIVERED TO OCLASSEN AT ITS PRINCIPAL EXECUTIVE
OFFICES AT 100 PELICAN WAY, SAN RAFAEL, CALIFORNIA 94901, ATTENTION: SECRETARY.
ANY FAILURE TO PROPERLY PERFECT SUCH APPRAISAL RIGHTS MAY CAUSE THE HOLDER TO
LOSE HIS OR HER DISSENTERS' RIGHTS.
It is a condition to the consummation of the Merger that no more than
5% of the Oclassen stockholders exercise such dissenters' rights. See "--
Conditions to the Merger."
Watson will not be required by Nevada law to obtain the consent of its
stockholders in order to consummate the Merger, and the Watson Board has not
called for such a vote. Consequently, holders of shares of Watson Common Stock
will not be entitled to exercise dissenters' rights in connection with the
Merger.
Interests of Certain Persons in the Merger. Each of the directors and
officers of Oclassen are stockholders and/or option holders of Oclassen. As
such, they will receive the same consideration as other stockholders and option
holders of Oclassen in the Merger. However, in considering the recommendation of
the Board of Directors of Oclassen with respect to the Merger, Oclassen
stockholders should be aware that Glenn A. Oclassen, Chairman of the Board of
Directors of Oclassen, Terry L. Johnson, President, Chief Executive Officer and
a director of Oclassen and Anthony A. DiTonno, Vice President, Sales and
Marketing of Oclassen have certain interests in the Merger that are in addition
to the interests of security holders of Oclassen generally. In particular, in
connection with the Merger, each of these executive officers of Oclassen will
enter into an employment agreement with Watson providing for, among other
things, the grant of additional options to purchase shares of Watson Common
Stock and severance payments under certain circumstances. Under the terms of
the employment agreements, Messrs. Oclassen, Johnson and DiTonno will receive
annual base salaries of $235,000, $315,000 and $188,000, respectively, subject
to such adjustments as the Chairman and Chief Executive Officer of Watson (or
the Board of Directors of Oclassen in the case of Messrs. Oclassen and DiTonno)
may, in his or its sole discretion, from time to time determine. In addition,
Mr. Johnson may receive a bonus, the amount of which will be determined at the
end of each calendar year by the Chairman and Chief Executive Officer of Watson
and which shall not exceed 40% of Mr. Johnson's then current annual base salary.
Messrs. Oclassen and DiTonno may receive a bonus, the amount of which will be
determined at the end of each calendar year by the Board of Directors of
Oclassen. Under the terms of the employment agreements, Messrs. Oclassen,
Johnson and DiTonno will be granted options to purchase 30,000, 40,000 and
30,000 shares of Watson Common Stock, respectively, pursuant to Watson's 1991
Stock Option Plan. Such options will have an exercise price equal to the fair
market value of the Watson Common Stock on the date of grant and will vest
ratably over a five-year period. The value of such options will depend upon the
extent to which such options actually vest and the difference between the
exercise price for such options and the market price of the Watson Common Stock
at the time such options are exercised and the shares are sold. In addition,
under the terms of the employment agreements, Watson has agreed that, if Watson
terminates the employment of any of these individuals without cause, Watson
would (i) in the case of Mr. Johnson, continue to pay him his base salary for a
period of nine months after the date of termination and (ii) in the case of
Messrs. Oclassen and DiTonno, continue to pay their base salaries for a period
of one month for each year that such employees were employed by either Watson or
Oclassen. Assuming that such individuals were terminated without cause
immediately after the Merger, Messrs. Oclassen, Johnson and DiTonno would be
entitled to severance payments of $235,000, $236,250 and $125,333, respectively.
Furthermore, if these employment agreements are terminated by Watson for any
reason other than cause, death or disability, or by such employee for good
reason on or prior to December 14, 1999, Watson has agreed to enter into a
consulting agreement with each such individual through December 14, 1999. The
value of such consulting arrangements cannot be quantified as it depends upon
the date of any such termination and the extent of the consulting services
provided. In connection with these employment agreements, each of Messrs.
Oclassen, Johnson and DiTonno has agreed, until the later of (a) the termination
of the consulting arrangement with Watson or (b) nine months after the
termination of employment with Watson, not to compete in the dermatological
business, and not to solicit employees or customers of Oclassen. In addition,
each executive officer of Oclassen will, like other employees of Oclassen, be
eligible to participate in the benefit programs assumed or made available by
Watson following the Merger. See "The Merger--Interests of Certain Persons in
the Merger,""The Merger Agreement--Benefit Plans" and "--Bonus and 401(k) Plan."
Governance. Following the Merger, stockholders of Oclassen will be
stockholders of Watson and will not have any continuing interest directly in
Oclassen. However, as stockholders of Watson, the Oclassen stockholders will
have an indirect interest in Oclassen, which will be a wholly-owned subsidiary
of Watson. Following the consummation of the Merger, (a) the Chairman of the
Board and Chief Executive Officer of Watson will be Dr. Allen Chao, and the
President of Watson will be Dr. Melvin D. Sharoky; (b) the Board of Directors of
Watson will consist of Dr. Allen Chao, Dr. Melvin D. Sharoky, Dr. Alec D. Keith,
Michel J. Feldman, Albert F. Hummel, Michael Fedida and Robert R. Taylor; (c)
the executive officers of Watson will be Dr. Allen Chao, Dr. Melvin D. Sharoky
and Dr. David Hsia, Senior Vice President, Scientific Affairs; (d) the Chairman
of the Board of Oclassen will be Dr. Allen Chao, the Vice-Chairman of the Board
of Oclassen will be Glenn A. Oclassen and the President and Chief Executive
Officer of Oclassen will be Terry L. Johnson; (e) the Board of Directors of
Oclassen will consist of Dr. Allen Chao, Terry L. Johnson, Glenn A. Oclassen,
Ronald R. Taylor and Michel J. Feldman; and (f) the officers of Oclassen will
consist of Glenn A. Oclassen as Vice Chairman of the Board of Directors, Terry
L. Johnson as President and Chief Executive Officer, Anthony A. DiTonno as Vice
President, Sales and Marketing and Frank P. Killey, Ph.D. as Vice President,
Research and Development. No director or officer of Oclassen will become an
officer or member of the Board of Directors of Watson in connection with the
Merger. Upon consummation of the Royce Merger, Patrick J. McEnany will become
the Vice President, Corporate Development, of Watson.
Covenants. Each of Watson and Oclassen has agreed to perform, or to
refrain from, certain actions for the benefit of the other party between
September 25, 1996 and the closing of the Merger. See "The Merger
Agreement--Certain Covenants."
Conditions to the Merger. The obligations of Watson, Watson Sub and
Oclassen to consummate the Merger are subject to the satisfaction of certain
conditions, including, among others, (a) requisite stockholder approval for the
Merger and the amendment to Oclassen's Restated Certificate of Incorporation
having been obtained; (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) the Registration Statement
having been declared effective by the Commission; (e) the receipt of all
material consents to the Merger; (f) the receipt of accountants' letters with
respect to qualification of the
<PAGE> 17
Merger as a pooling of interests; (g) the Amended and Restated Certificate of
Incorporation of Oclassen having been amended in the manner set forth in this
Proxy Statement/Prospectus; (h) the exercise or termination of certain warrants
to purchase Oclassen Series B Preferred Stock having occurred; (i) the Escrow
Agreement attached to the Merger Agreement as Exhibit B having been executed;
(j) the Watson Common Stock to be issued in connection with the Merger having
been authorized for trading on the Nasdaq National Market; (k) certain
employment agreements with officers of Oclassen having been executed; (l) the
holders of not more than five percent of the outstanding aggregate value of
Oclassen Common Stock and Oclassen Preferred Stock (valued based upon the number
of shares of Watson Common Stock such holders would have received upon the
consummation of the Merger) having perfected dissenters' rights under applicable
law; (m) the holders of at least 95% of the aggregate number of shares of
Oclassen Preferred Stock having voluntarily converted their shares of Oclassen
Preferred Stock to Oclassen Common Stock prior to the Effective Time; (n) each
party having performed all of its agreements contained in the Merger Agreement
in all material respects; (o) the non-occurrence of any event that would have or
would be reasonably likely to have a material adverse effect on the financial
condition, business, operations or prospects of Watson or Oclassen; (p) the
representations and warranties of each party to the Merger Agreement being true
and correct at closing in all material respects; and (q) the receipt of certain
legal opinions with respect to the tax consequences of the Merger and other
customary matters. Although neither party expects such waiver to occur, in the
event of any waiver of a material condition to the Merger, including the
conditions identified in (f), (l), (m) and (q) above, the vote of the Oclassen
stockholders will be resolicited. See "The Merger--Federal Income Tax
Consequences," "--Accounting Treatment" and "The Merger Agreement--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 Oclassen each filed notification and report
forms under the HSR Act with the FTC and the Antitrust Division on October 18,
1996. The waiting period under the HSR Act expired by early termination on
October 29, 1996. See "The Merger--Regulatory Approval."
Federal Income Tax Consequences. The obligations of Watson Sub, Watson
and Oclassen to consummate the Merger are conditioned on the receipt of opinions
of their respective counsel, D'Ancona & Pflaum and Venture Law Group, A
Professional Corporation (which opinions have been rendered) 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 should be recognized by
Oclassen stockholders upon the receipt of Watson Common Stock in exchange for
Oclassen Common Stock or Oclassen Preferred Stock except with respect to cash
received in lieu of a fractional interest in Watson Common Stock. See "The
Merger--Federal Income Tax Consequences" and "The Merger Agreement--Conditions."
Oclassen's stockholders should carefully read the discussion under such sections
and should consult with their own tax advisors.
Accounting Treatment. It is the intention of Watson and Oclassen 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
by Watson 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
and the receipt by Oclassen of an opinion from Oclassen's independent public
accountants indicating that Oclassen has not taken any action that would
preclude it from entering into a transaction that would be treated as a pooling
of interests for accounting purposes. See "The Merger--Accounting Treatment."
Resale Restrictions. All shares of Watson Common Stock received by
Oclassen 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
<PAGE> 18
Oclassen at the time of the Special Meeting may be resold by them only in
certain permitted circumstances including pursuant to Rule 145 promulgated
under the Securities Act. See "The Merger--Resale Restrictions." Certain
affiliates of Oclassen and Watson have also entered into agreements restricting
the sale or other disposition of shares of Watson Common Stock owned by them so
as to comply with the requirements of pooling of interests accounting.
Termination. 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 Oclassen in a number of circumstances, which
include, among others:
(a) by the mutual consent of Oclassen and Watson;
(b) by action of the Board of Directors of either Oclassen or
Watson if (i) the Merger will not have been consummated on or prior to
February 28, 1997; (ii) the adoption of the Merger Agreement and the
approval of the transactions contemplated thereby will not have been
obtained at a stockholders' meeting of Oclassen 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 will have issued an order, decree or ruling or taken any
other action either (y) permanently restraining, enjoining or
otherwise prohibiting the transactions contemplated by the Merger
Agreement or (z) compelling Watson, Watson Sub or the Surviving
Corporation to dispose of or hold separate all or a material portion
of the business or assets of Watson or Oclassen and such order,
decree, ruling or other action shall have become final and
non-appealable; or
(c) by action of the Board of Directors of either party if
there has been a material breach by the other party of any
representation, warranty, covenant or agreement contained in the
Merger Agreement, which breach is not curable or, if curable, is not
cured within 30 days after written notice of such breach is given by
one party to the other.
Upon termination of the Merger Agreement, each party's respective
obligations shall terminate, except for each party's obligations to pay its
respective costs and expenses incurred in connection with the contemplated
transaction.
The preceding is a short summary of the termination provisions in the
Merger Agreement. See "The Merger Agreement--Termination."
<PAGE> 19
SELECTED HISTORICAL FINANCIAL DATA
Set forth below are selected historical financial data of Watson and
Oclassen which are based upon the historical financial statements of Watson and
Oclassen. The following data, insofar as it relates to Watson, is qualified in
its entirety by and should be read in conjunction with the consolidated
financial statements and Management's Discussion and Analysis of Financial
Condition and Results of Operations of Watson incorporated by reference in this
Proxy Statement/Prospectus. The following data, insofar as it relates to
Oclassen, for each of the years ending December 31, 1993, 1994 and 1995 and as
of December 31, 1994 and 1995 are derived from audited financial statements and
the notes thereto, as well as the Management's Discussion and Analysis of
Financial Condition and Results of Operations section included elsewhere in this
Proxy Statement/Prospectus. Historical financial data for Oclassen for the years
ended December 31, 1991 and 1992 and as of December 31, 1991, 1992 and 1993 are
derived from audited financial statements not included herein. Historical
financial data of Oclassen for the nine months ended September 30, 1995 and 1996
and as of September 30, 1996 has been derived from and should be read in
conjunction with the unaudited financial statements included elsewhere in this
Proxy Statement/Prospectus. The unaudited data as of September 30, 1996 and for
the nine months ended September 30, 1996 and 1995, for each of Watson and
Oclassen reflect, in the opinion of management of Watson and Oclassen,
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, 1996.
WATSON PHARMACEUTICALS, INC.
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, (1) SEPTEMBER 30,
----------------------------------------------------- ------------------
CONSOLIDATED STATEMENT 1991(2) 1992(3) 1993(4)(5) 1994(4) 1995(4)(6) 1995(4)(6) 1996
OF OPERATIONS DATA: -------- -------- ---------- -------- ----------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 30,802 $ 34,773 $ 70,838 $ 94,858 $152,935 $109,639 $142,017
Net income (loss) (55,204) (6,090) 50,417 36,545 47,890 31,011 53,617
Earnings (loss) per share (1.72) (0.18) 1.42 1.00 1.29 0.84 1.43
Weighted average number of common
and common equivalent shares
outstanding 32,036 32,938 35,504 36,515 37,143 36,987 37,624
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, (1)
------------------------------------------------
CONSOLIDATED BALANCE SHEET DATA: 1991 1992 1993 1994 1995 SEPTEMBER 30, 1996
-------- -------- -------- -------- -------- -------------------
<S> <C> <C> <C> <C> <C> <C>
Current assets $ 40,987 $ 57,118 $155,025 $172,912 $197,634 $256,609
Working capital 23,618 31,534 131,943 154,661 168,812 221,684
Total assets 122,238 130,516 235,672 262,316 322,121 395,194
Long-term debt and deferred
partnership liability 2,736 11,589 17,385 19,091 3,577 3,116
Total stockholders' equity 81,426 77,872 185,081 223,370 289,035 357,153
</TABLE>
(1) Watson merged with Circa Pharmaceuticals, Inc. ("Circa") in July 1995 in a
transaction accounted for as a pooling of interests. Accordingly, the
financial data presented include the accounts of Circa for all periods
presented.
(2) In 1991, Circa was both a defendant and a plaintiff in a variety of legal
proceedings. A provision for legal settlements of $73.4 million was
recorded in 1991 for the costs related to these now-settled legal matters.
(3) In 1992, Circa recorded a loss of $15.6 million for its share of the
operating losses of a partnership formed with Rhone-Poulenc Rorer, Inc.
("RPR") to develop Dilacor XR(R). See Note 6 to Watson's consolidated
financial statements included in the Company's Annual Report on Form 10-K
for 1995.
(4) In 1993, Circa recorded a gain of $14.5 million related to the sale of
approximately 847,000 common shares of Marsam Pharmaceuticals, Inc.
("Marsam"). In 1994 and 1995, Circa disposed of its remaining
investment in Marsam and recorded gains of $3.2 million and $6.2 million,
respectively.
(5) Also in 1993, as a result of Watson's 1995 merger with Circa, an income tax
benefit of $29.8 million was recorded which was the result of the reduction
in the valuation allowance related to net deferred tax assets. These net
deferred tax assets resulted principally from net operating loss
carryforwards and tax credit carryforwards generated by Circa prior to its
merger with Watson. Previously, these net deferred tax assets were fully
reserved by Circa.
(6) The costs associated with the merger of Watson and Circa resulted in a
one-time charge of $13.9 million during the third quarter of 1995.
OCLASSEN PHARMACEUTICALS, INC.
SELECTED HISTORICAL FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------------------- -----------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Total revenue $ 6,075 $18,451 $25,148 $28,557 $29,247 $21,389 $24,325
Net income (loss) (5,312) 10 1,186 1,957 2,627 1,800 2,760
Net income (loss) available to
common stockholders (5,400) (100) 1,077 40 (90) (238) 722
Net income (loss) per common
share:
Primary (4.12) (0.06) 0.63 0.02 (0.05) (0.14) 0.30
Fully diluted(1) (4.12) (0.06) 0.13 0.02 (0.05) (0.14) 0.27
Shares used in per share
calculation:
Primary 1,311 1,622 1,702 1,705 1,719 1,718 2,424
Fully diluted(1) 1,311 1,622 8,787 1,705 1,719 1,718 10,063
</TABLE>
- -----------------
(1) The effects of anti-dilutive securities were excluded from the calculation
of fully-diluted net income (loss) per common share.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------
1991 1992 1993 1994 1995 SEPTEMBER 30, 1996
------- ------- ------- ------- ------- ------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Current assets $ 9,847 $20,452 $24,652 $26,854 $26,836 $29,998
Working capital 8,690 15,728 16,148 18,493 19,234 22,294
Total assets 10,087 21,218 26,050 28,041 30,021 33,010
Mandatorily redeemable
preferred stock(1) 24,327 31,907 32,016 33,933 36,650 38,688
Total stockholders'
equity (deficit) (15,561) (15,558) (14,470) (14,328) (14,270) (13,394)
</TABLE>
- -----------------
(1) See Note 5 to the historical financial statements of Oclassen, included
elsewhere herein, for a discussion of the terms and conditions of the
mandatorily redeemable Preferred Stock.
WATSON/OCLASSEN SELECTED UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA
The unaudited pro forma combined summary financial information of
Watson and Oclassen 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 September 30, 1996
and December 31, 1995, 1994 and 1993 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 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.
WATSON/OCLASSEN
SELECTED UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30, 1996
---------------------------- ------------------
PRO FORMA CONSOLIDATED STATEMENT 1993 1994 1995
OF OPERATIONS DATA: -------- -------- --------
<C> <C> <C> <C>
Revenues $ 95,503 $122,912 $181,971 $166,293
Net income 51,603 38,502 50,517 56,377
Earnings per share 1.32 0.96 1.24 1.36
Weighted average number of common
and common equivalent shares
outstanding 39,231 40,242 40,870 41,351
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
PRO FORMA CONSOLIDATED 1994 1995 SEPTEMBER 30, 1996
BALANCE SHEET DATA: -------- -------- -------------------
<S> <C> <C> <C>
Current assets $199,766 $224,470 $278,607
Working capital 173,154 188,046 235,978
Total assets 290,357 352,142 420,204
Long-term debt and other
long-term liabilities 20,770 4,303 3,128
Total stockholders' equity 242,975 311,415 374,447
</TABLE>
WATSON/OCLASSEN/ROYCE SELECTED UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL DATA
The unaudited pro forma combined summary financial data of Watson, Oclassen and
Royce assumes that Watson's mergers with both Oclassen and Royce are accounted
for under the pooling of interests method of accounting. Such pro forma data
assumes that these transactions had been effective at January 1 of each period
presented for the pro forma statement of operations data and on September 30,
1996 for the pro forma balance sheet data. The pro forma data is presented for
informational purposes only and is not necessarily indicative of the operating
results or financial position that would have occurred if these mergers had
been consummated, nor is it necessarily indicative of the future operating
results or financial position of the combined companies (Watson, Oclassen and
Royce). This pro forma combined data should be read in conjunction with the
Supplemental Unaudited Pro Forma Combined Condensed Financial Data, including
the notes thereto included elsewhere in this Proxy/Prospectus.
WATSON/OCLASSEN/ROYCE
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS DATA
<TABLE>
<CAPTION>
Years Ended December 31, Nine Months
---------------------------------------- ended September 30,
1993 1994 1995 1996
------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues $99,022 $129,103 $192,474 $183,509
Net income 47,670 37,025 48,181 57,591
Earnings per share 1.14 0.87 1.11 1.32
Weighted average number of
common and common equivalent
shares outstanding 41,643 42,654 43,282 43,763
</TABLE>
WATSON/OCLASSEN/ROYCE
PRO FORMA CONDENSED COMBINED BALANCE SHEET DATA
<TABLE>
<CAPTION>
December 31,
------------------- September 30,
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Current assets $206,814 $234,754 $286,277
Working capital 178,479 195,091 240,867
Total assets 298,468 364,235 431,292
Long-term debt and other
long-term liabilities 20,803 4,484 4,181
Total stockholders' equity 249,330 320,088 381,701
</TABLE>
<PAGE> 20
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 Oclassen on both historical and unaudited pro forma combined
bases. In addition, the following information sets forth the earnings and book
value for Oclassen 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
Oclassen for each of the periods presented. The per share equivalent pro forma
combined data for Oclassen is calculated by multiplying the pro forma combined
per share amounts for Watson by the exchange ratio of 0.3692:1.0. 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 consolidated financial statements of Watson incorporated by reference
in this Proxy Statement/Prospectus, the financial statements of Oclassen
included elsewhere 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>
NINE MONTHS
ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
1993 1994 1995 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Watson--Historical:
Earnings $1.42 $1.00 $1.29 $1.43
Book value 5.21 6.24 7.95 9.70
Oclassen--Historical:
Earnings (loss)--Primary 0.63 0.02 (0.05) 0.30
Earnings (loss)--Fully diluted 0.13 0.02 (0.05) 0.27
Negative book value (9.16) (8.93) (8.72) (7.77)
---------------------------------------------------
Watson-Oclassen--Pro Forma Combined:
Earnings 1.32 0.96 1.24 1.36
Book value 5.22 6.22 7.85 9.33
Equivalent Pro Forma Combined for Oclassen:
Earnings 0.49 0.36 0.46 0.50
Book value 1.92 2.30 2.90 3.44
</TABLE>
<PAGE> 21
COMPARATIVE MARKET DATA
The Watson Common Stock has been traded on the Nasdaq National Market
(symbol "WATS") since February 17, 1993. Prior to that date, the Watson Common
Stock was not publicly traded. The Oclassen Common Stock and Oclassen Preferred
Stock have never been publicly traded. The table below sets forth, for the
calendar quarters indicated, the high and low bid prices per share reported on
the Nasdaq National Market for the Watson Common Stock. The following
information 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>
HIGH LOW
---- ---
<S> <C> <C>
1995:
First Quarter $33.000 $20.000
Second Quarter 40.000 28.250
Third Quarter 44.250 32.750
Fourth Quarter 50.000 39.500
1996:
First Quarter $49.250 $37.000
Second Quarter 48.250 36.500
Third Quarter 39.875 26.000
Fourth Quarter 45.500 31.750
1997:
First Quarter (through January 14, 1997) $44.875 $41.25
</TABLE>
The closing price per share of Watson Common Stock on September 25,
1996, the last trading day preceding public announcement of the proposed Merger,
was $33.875. As of February __, 1997, the closing price per share of Watson
Common Stock was $_____. STOCKHOLDERS ARE URGED TO OBTAIN CURRENT MARKET
QUOTATIONS FOR THE WATSON 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.
Oclassen has never declared or paid any cash dividends on its capital
stock. As of December 31, 1996, dividends in the aggregate amount of $7,024,000
had accrued with respect to the outstanding shares of Oclassen's Series B
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and Series E
Preferred Stock. All of such shares of Preferred Stock are expected to be
voluntarily converted, on a one-for-one basis, into shares of Common Stock
immediately prior to the Effective Time, and accrued dividends will not be
payable in connection with such conversion or thereafter. Oclassen currently
intends to retain any earnings for use in its business, and therefore does not
anticipate paying any cash dividends in the foreseeable future. Oclassen's line
of credit prohibits the payment of dividends without the consent of the bank.
SUMMARY OF COMPARATIVE RIGHTS OF STOCKHOLDERS
The following is a summary of the material differences between (i)
Nevada corporate law and the Articles of Incorporation and Bylaws of Watson and
(ii) Delaware corporate law and the Certificate of Incorporation and Bylaws of
Oclassen. For a more detailed discussion of the comparative rights of the
stockholders of Watson and Oclassen see "Comparative Rights of Stockholders."
(1) Cumulative Voting. Pursuant to Oclassen's Bylaws, an Oclassen
stockholder may cast all of the votes such stockholder would
be entitled to cast for the election of directors for a single
director or distribute his or her votes among two or more
directors. Watson's Bylaws proscribe cumulative voting.
(2) Classified Board of Directors. Watson's Bylaws provide that
the Watson Board of Directors 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. Oclassen's Certificate of
Incorporation and Bylaws do not allow for the classification
of Oclassen's Board of Directors and all directors are
elected at the annual meeting of stockholders for a one-year
term.
(3) Number of Directors. Watson's Articles of Incorporation
provide that the number of directors of Watson shall be nine
persons. The Oclassen Bylaws provide that the number of
directors shall be seven persons.
(4) 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.
<PAGE> 22
RISK FACTORS
This Proxy Statement/Prospectus contains forward-looking statements
within the meaning of Section 27A of the Securities Act and Section 21E of the
Exchange Act. Actual results could differ materially from those projected in the
forward-looking statements as a result of the risk factors set forth below and
elsewhere in this Proxy Statement/Prospectus. In addition to the other
information in this Proxy Statement/Prospectus, the following factors should be
carefully considered before consenting to the exchange of Oclassen Common Stock
and Oclassen Preferred Stock for Watson Common Stock in the Merger.
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
Oclassen will not encounter difficulties in integrating the operations of the
two companies. Any delays or unexpected costs incurred in connection with such
integration could have a material adverse effect on the combined company's
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 Oclassen will not experience the loss of
key personnel.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain members of management of Oclassen and the Oclassen Board of
Directors have interests in the Merger that are in addition to the interests of
Oclassen stockholders generally. Specifically, by virtue of the Merger (i) all
options currently outstanding under existing Oclassen stock option plans will be
assumed by Watson and (ii) Glenn A. Oclassen, Terry L. Johnson and Anthony A.
DiTonno will enter into employment agreements with Watson which provide for,
among other things, the grant of additional options to purchase shares of Watson
Common Stock to such individuals and severance payments under certain
circumstances in the event of their termination of employment. See "The Merger
- -- Interests of Certain Persons in the Merger." When it considered whether or
not to recommend approval of the Merger and the Merger Agreement, the Oclassen
Board of Directors was aware of the terms of the employment agreements to be
entered into with these executive officers, two of whom (Messrs. Oclassen and
Johnson) also serve as directors of Oclassen. The Oclassen Board of Directors
believes that retention of key officers and employees of Oclassen after
consummation of the Merger will be an important factor in any future development
of the Oclassen business and considered such employment agreements to be
reasonable in scope and an effective means for retaining these officers after
consummation of the Merger, although there can be no assurances that such
individuals will not, voluntarily or involuntarily, discontinue their employment
by Oclassen after the Merger. The Oclassen Board of Directors unanimously
recommends a vote for the approval of the Merger and the Merger Agreement. The
Board of Directors of Oclassen does not believe that the existence of such
agreements, or the assumption of outstanding Oclassen Options by Watson, creates
a conflict of interest with respect to the vote of Messrs. Oclassen or Johnson,
or any other member of the Oclassen Board of Directors to recommend approval of
the Merger and the Merger Agreement. In addition, Messrs. Oclassen and Johnson
do not believe that the terms of their employment agreements were deciding
factors in their individual decisions to vote to approve the Merger and the
Merger Agreement. Even if the votes of Messrs. Oclassen and Johnson are not
counted, the requisite vote of the Oclassen Board of Directors to approve the
Merger and the Merger Agreement was obtained. The material terms of the
employment agreements are described under the heading "The Merger--Interests of
Certain Persons in the Merger" and should be considered by stockholders of
Oclassen in their determination as to whether or not to vote to approve the
Merger.
INDEMNIFICATION; STOCKHOLDER AGENT
The Merger Agreement provides that 7.5% of the shares of Watson Common
Stock that otherwise would be issued to the stockholders of Oclassen will be
placed into an escrow account to secure the obligation of the Oclassen
stockholders to indemnify Watson against breaches of representations,
warranties, covenants or agreements of Oclassen in connection with the Merger.
Such Escrow will represent the sole obligation of the Oclassen stockholders to
indemnify Watson and will survive for a period of 12 months following the
closing of the Merger. Watson may not sue any Oclassen stockholder directly and
may only make claims for indemnification against the Escrow. See "The Merger
Agreement -- Indemnification." To the extent such escrowed shares are used to
satisfy these obligations, the Oclassen stockholders may receive up to 7.5%
fewer shares of Watson Common Stock than determined based solely upon the
Exchange Ratio. Further, the Oclassen stockholders will be obligated to
indemnify the Stockholder Agent against any loss, liability or expense it incurs
without gross negligence or bad faith on the part of the Stockholder Agent and
arising out of or in connection with the acceptance or administration of the
Stockholder Agent's duties, including the reasonable fees and expenses of any
legal counsel retained by the Stockholder Agent. Such indemnification
obligations, if any, will be payable from the Escrow. Effective upon the
approval of the Merger Agreement by the Oclassen stockholders and the
appointment of the Stockholder Agent, the Oclassen stockholders individually
will have no power or authority to take any actions against Watson or otherwise
pursuant to the Merger Agreement or the Escrow Agreement, and all actions of the
Oclassen stockholders, whether pursuant to the Merger Agreement or the Escrow
Agreement, must be taken solely by the Stockholder Agent. The Oclassen
stockholders have no assurance that the Stockholder Agent will act in good faith
in each of their best interests, nor do the Oclassen stockholders have any
assurance that the Stockholder Agent will elect to sue Watson for
indemnification under the Merger Agreement or adequately pursue any such
remedy.
NO CONTROL OVER OCLASSEN
As a result of the Merger, the stockholders of Oclassen will
effectively relinquish direct control over the business of Oclassen. Oclassen
will become a wholly-owned subsidiary of Watson, and thus, the continuing
interest of the Oclassen stockholders in the business and financial condition of
Oclassen will be an indirect interest, as stockholders of Watson. As Watson
stockholders, Oclassen stockholders will be entitled to vote on all matters
submitted to a vote by the Watson stockholders, together with all other Watson
stockholders. The Oclassen stockholders will lose the right to vote on any
matter relating to the business of Oclassen after the Merger.
COMPARATIVE RIGHTS OF STOCKHOLDERS
As a result of the Merger, the stockholders of Oclassen, a Delaware
corporation, will become stockholders of Watson, a Nevada corporation. While the
corporate law of Delaware is essentially similar to the corporate law of Nevada,
and the Articles of Incorporation and By-Laws of Watson are essentially similar
to the Certificate of Incorporation and Bylaws of Oclassen, certain differences
exist, including with respect to cumulative voting, the classification of the
Board of Directors and anti-takeover provisions which are identified in this
Proxy Statement/Prospectus under "Summary--Comparative Rights of Stockholders"
and "Comparative Rights of Stockholders."
CONDITIONS TO THE MERGER
The Merger Agreement provides certain conditions to the consummation
of the Merger, the non-occurrence of which could mean that the Merger will not
be consummated. Any waiver of a material condition to the Merger, including the
conditions that (i) the Merger qualify for pooling-of-interests treatment for
accounting purposes, (ii) the Merger qualify as a tax-free reorganization under
applicable tax laws, (iii) not more than 5% of the stockholders of Oclassen
exercise their dissenters' rights under Delaware law and (iv) that the holders
of at least 95% of the Oclassen Preferred Stock elect to convert such shares
into Oclassen Common Stock will require a resolicitation of the vote of the
Oclassen stockholders prior to consummation of the Merger.
NO CONTROL OVER JOINT VENTURES
A substantial portion of Watson's net income is derived from joint
ventures and a royalty arrangement. In addition, a substantial portion of
Watson's efforts in developing controlled-release technology is primarily
conducted through joint ventures. These arrangements involve various partners.
Watson does not control the joint ventures or the commercial exploitation of the
licensed products, and there can be no assurance that such joint ventures will
be profitable. In addition, certain of these arrangements have competition
restrictions which may restrict the development or marketing of the products of
either Watson or the joint venture. Although Watson does not believe that any
restrictions currently affect the marketing of any Watson or any joint venture
products, such restrictions could affect future revenues and have a material
adverse effect on the combined company.
DEPENDENCE UPON NEW PRODUCT INTRODUCTIONS
Watson's and Oclassen'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 Oclassen 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 Oclassen's products,
if and when developed and approved, can be successfully commercialized.
COMPETITION
Watson competes, and the combined company will 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 off-patent drugs. Watson's competitors
vary depending upon product categories and, within each product category, upon
dosage strengths. Such competitors include the major brand name and off-patent
manufacturers of pharmaceuticals doing business in the United States. Oclassen
experiences substantial competition in connection with the sale of its
proprietary pharmaceutical products. Many competitors have been in business for
a longer period of time than either Watson or Oclassen, have a greater number of
products on the market and have greater financial and other resources. Because
selling prices of pharmaceutical 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. There can be no
assurance that developments by others will not render Watson's or Oclassen's
products or technologies noncompetitive or obsolete.
<PAGE> 23
GOVERNMENT REGULATION
All pharmaceutical manufacturers, including Watson and Oclassen's
contract manufacturers, are subject to extensive regulation by the federal Food
and Drug Administration ("FDA") and other federal and state agencies. Moreover,
Watson and Oclassen 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 Abbreviated New Drug Application ("ANDA") or New Drug Application
("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 Oclassen
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
Oclassen'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 Oclassen 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 Oclassen's operations or the approval or shipment of
products could have a material adverse effect upon both 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 policies to help control the
federal deficit. Regulatory compliance issues or regulatory changes affecting
Watson's or Oclassen's operations or the approval or shipment of products could
have a material adverse effect upon Watson's or Oclassen's businesses.
DEPENDENCE ON KEY PERSONNEL
The success of Watson's present and future operations will depend, to
a great extent, upon the experience, abilities and continued services of certain
<PAGE> 24
executive officers of Watson, including Allen Chao, Ph.D. In addition, the
success of Oclassen's continuing operations will depend on Oclassen's officers
after the Merger, including Allen Chao, Ph.D., Glenn A. Oclassen, Terry L.
Johnson and Anthony A. DiTonno. Additionally, if the Royce Merger is
consummated, Patrick J. McEnany will be elected as Vice President, Corporate
Development of Watson. The loss of the services of any of these officers could
have a material adverse effect on the combined company. Watson has entered into
employment agreements with the following executive officers: Dr. Allen Chao, Dr.
Melvin Sharoky and Dr. David C. Hsia. Watson does not carry key-man life
insurance on any of its officers. The success of the combined company also
depends upon its ability to attract and retain other highly qualified
scientific, managerial, sales and manufacturing personnel. However, when two
companies merge, there is a risk of departure of employees due to factors
relating to the combination process, and such departures may occur with respect
to the combined company. Competition for such personnel is intense. In this
respect, Watson and Oclassen 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.
FUTURE ACQUISITIONS
Watson is actively reviewing various candidates for potential
acquisitions of technologies, products or product rights and businesses
complementary to Watson's business. While, except for the Merger Agreement and
the Agreement and Plan of Merger between Watson and Royce Laboratories, Inc.
dated as of December 24, 1996 (see "Information Concerning Watson--Recent
Developments"), Watson currently has not entered into any definitive agreements
with respect to any such acquisition, Watson may do so in the future. The impact
of the announcement of such acquisitions on the market price of a company's
stock is often uncertain. Consequently, an announcement of any such acquisition
may have a material adverse effect upon the market price of Watson's Common
Stock. In addition, an acquisition may be disruptive to the management of the
combined company, and there can be no assurance that any such disruption will
not have a material adverse effect on the business or financial condition of the
combined company.
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. Fluctuations in Watson's or Oclassen's
operating results, the announcement of technological innovations or new
commercial products by Watson, Oclassen or their 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, Oclassen 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
inception, and, after the Merger, Watson does not anticipate paying cash
dividends in the foreseeable future.
In addition, at the Effective Time, Watson will deposit into the
Escrow certificates representing 7.5% of the shares of Watson Common Stock that
otherwise would have been issued to the holders of Oclassen Common Stock and
Oclassen Preferred Stock in the Merger to satisfy the indemnification
obligations of the Oclassen stockholders. See "--Indemnification; Stockholder
Agent." The value of such shares will be subject to fluctuations in the
market value of the Watson Common Stock during the term of the Escrow.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
Watson's results of operations have fluctuated on a quarterly basis in
the past, and may continue to fluctuate. Watson believes such fluctuations are
primarily due to new product introductions and a variety of additional facts
including, without limitation, purchasing practices of Watson's customers and
changes in the degree of competition for Watson's products.
PRODUCT DEVELOPMENT
Although Watson and Oclassen 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 its proprietary drug delivery systems,
Watson 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 assurance
that Watson or Oclassen could replace such collaborative arrangements or
successfully develop, test and market such products on their own.
PATENTS AND PROPRIETARY RIGHTS
Watson's and Oclassen'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 issued and pending. No
assurance can be given, however, that Watson's or Oclassen's patent applications
will be approved or that any patents will provide competitive advantages for
their respective products or will not be challenged or circumvented by
competitors.
In connection with Watson's production of off-patent drugs, recent
changes to the patent law resulting from passage of the URAA will lengthen the
term of some granted patents. 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 application. Watson and Oclassen 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 Oclassen will have adequate remedies for any
breach, or that Watson's or Oclassen's trade secrets will not otherwise become
known or be independently developed by competitors.
Watson and Oclassen 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
<PAGE> 25
licenses will be obtainable on commercially reasonable terms, if at all, or that
any licensed patents or proprietary rights will be valid and enforceable. In a
pending case, the United States Supreme Court has agreed to consider a standard
promulgated by the Federal Circuit Court of Appeals for determining patent
infringement. The Supreme Court's ruling could impact the ability of Watson and
Oclassen to enforce their patents and to defend against potential patent
infringement claims by third parties. In Hilton Davis Co. v. Warner-Jenkinson
Co., the Supreme Court will consider whether to adopt a new standard for
determining infringement under the doctrine of equivalents, which may affect the
breadth of protection afforded by a patent. The Supreme Court's decision may
broaden or narrow the breadth of any of Watson's or Oclassen's United States
patents or any United States patents for which Watson or Oclassen have a license
or any third party's patents which potentially may be asserted against Watson or
Oclassen. Although neither Watson nor Oclassen 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. Any such litigation
may have an adverse effect on the combined company's business, financial
condition or results of operations.
DEPENDENCE ON CERTAIN PRODUCTS
During 1995, five products in the hydrocodone bitartrate/acetaminophen
product group sold by Watson accounted for approximately 44% of Watson's total
revenues. In 1994, three products in this product group accounted for
approximately 52% of Watson's total revenues. For the same period, the loxapine
succinate product group accounted for approximately 11% of total revenues. In
1993, loxapine succinate and the three products in the hydrocodone
bitartrate/acetaminophen product groups accounted for approximately 15% and 51%,
respectively, of Watson's total revenues. Due to FDA approval of products that
will compete with Watson's hydrocodone products group, management anticipates
increased price competition with respect to the hydrocodone group, and
consequently, Watson may experience a reduction in future sales of such
products which could have an adverse effect on the financial condition and
results of operations of Watson and the combined company.
Oclassen's product revenues to date have been generated by sales of
Oclassen's first commercial products, principally Condylox(R) and Monodox(R)
Capsules. Oclassen expects that a significant portion of its revenues for the
next few years will be dependent upon sales of its currently marketed products.
Limited or reduced commercial acceptance of these products or reluctance of
physicians to prescribe these products due to adverse side effects, or
otherwise, could have an adverse effect on the combined company's business,
financial condition or results of operations.
UNCERTAINTY OF ROYALTY AND JOINT VENTURE INCOME
Watson's royalty income from Rhone-Poulenc Rorer, Inc.'s ("RPR")
sales of Dilacor XR(R) represented approximately 30.5% of pre-tax income for the
year ended December 31, 1995. Royalties are based on the prescriptions written,
as defined, for the product Dilacor XR(R), which lost patent exclusivity in May
1995. Watson's 50% equity interest in the earnings of Somerset Pharmaceuticals,
Inc. ("Somerset") were generated from the sale of one product, Eldepryl(R).
Watson's share of Somerset's earnings represented approximately 34.1% of pre-tax
income for the year ended December 31, 1995. Exclusivity on Eldepryl(R) expired
in June 1996. See "--Loss of Exclusive Rights to Market Certain Products."
Somerset is developing an Eldepryl(R) transdermal patch for treatment of
Alzheimers Disease and is currently in Phase III clinical trials on this
product. In addition, Somerset is also committed to the development of other
pharmaceutical products. The loss of exclusivity with respect to these products
and/or the introduction by other companies of additional competitive products,
could have a material adverse effect on the financial condition and results of
operations of Watson and the combined company.
DEPENDENCE ON CERTAIN SUPPLIERS
Some materials used in Watson's and Oclassen's products are currently
available only from sole suppliers. In addition, sources for materials for
Watson's and Oclassen'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 Oclassen'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 Oclassen's business.
Oclassen currently does not, and does not intend to, manufacture its
current or potential pharmaceutical products and, therefore, is dependent on
contract manufacturers for the production of such products for commercial
purposes. In the event that Oclassen is unsuccessful in obtaining or retaining
third party manufacturing or Oclassen's manufacturers experience production
difficulties or disruptions, Oclassen may not be able to obtain adequate
supplies of its marketed products in a timely fashion or at acceptable quality
levels or prices. With the exception of Condylox(R) Topical Solution, each of
Oclassen's products are currently manufactured by a single source. Oclassen's
products may only be manufactured at a site approved by the FDA for that
product. Oclassen is pursuing the qualification of second sources for the
manufacture of certain of Oclassen's products. There can be no assurance that
Oclassen will be able to qualify such second sources or enter into agreements
for the manufacture of potential products with manufacturers whose facilities
and procedures comply with regulatory requirements. If any of Oclassen's
existing manufacturing arrangements were terminated or such manufacturers failed
to comply with regulatory requirements or experienced other manufacturing
disruptions, and Oclassen was unable to make alternative arrangements on a
timely or cost-effective basis, the combined company's business, result of
operations and financial condition could be adversely affected.
LOSS OF EXCLUSIVE RIGHTS TO MARKET CERTAIN PRODUCTS
Patent exclusivity expired for Somerset's Eldepryl(R) product in June
1996. In August 1996, three competitors received FDA approval to market a tablet
form of the product which will compete with Somerset's capsule form of
Eldepryl(R). Watson's management anticipates that Watson's Somerset joint
venture earnings will be reduced in 1996 and subsequent years from prior year
levels due to this increased competition and due to Somerset's increased
research and development expenditures. For the year ended December 31, 1995,
Watson earned royalties of $22.2 million on Dilacor XR(R). The Dilacor XR(R)
product lost patent exclusivity in May 1995, and, as a result, heightened
competition and lower profit margins may result. However, to date, no such
competition has entered the market. The loss of patent exclusivity with respect
to these products could have a material adverse effect on the financial
condition and results of operations of Watson.
PRODUCT LIABILITY AND INSURANCE
The design, development and manufacture of Watson's and Oclassen'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. Watson currently
maintains product liability insurance in the amount of $15 million per incident
and $15 million aggregate coverage. Although Watson and Oclassen currently
maintain liability insurance for all of their products, there can be no
assurance that the coverage limits of Watson's or Oclassen's insurance policies
will be adequate. A claim brought against Watson or Oclassen, 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 "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 having or a series of transactions, with an "interested
stockholder": (i) having an aggregate market value equal to 5% or more of the
aggregate market value of the assets of the corporation; (ii) having an
aggregate market value equal to 5% or more of the aggregate market value of all
outstanding shares of the 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
or her shares unless the combination or purchase is approved by 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 or she 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 90 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 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 Watson does not have 100 or
more stockholders who are residents of the state of Nevada. Such provisions may
make an unsolicited acquisition of control of Watson more difficult or
expensive. In addition, provisions of Watson's Articles of Incorporation
permitting the issuance of Preferred Stock by the Board of Directors and the
existence of a staggered board of directors may also make an unsolicited
acquisition of control more difficult or expensive. See "Comparative Rights of
Stockholders--Classified Board of Directors" and "--Anti-Takeover Provisions."
<PAGE> 26
THE SPECIAL MEETING
DATE, TIME AND PLACE OF THE SPECIAL MEETING
The Special Meeting will be held on February 26, 1997 at 10:00
a.m., local time, at the Embassy Suites, 101 McInnis Parkway, San Rafael,
California.
<PAGE> 27
PURPOSE OF THE SPECIAL MEETING
At the Special Meeting, holders of Oclassen Common Stock and Oclassen
Preferred Stock will consider and vote upon proposals (i) to approve and adopt
the Merger Agreement and approve the Merger, including the establishment of the
escrow fund (which will also constitute approval of the Stockholder Agent to act
in accordance with the terms of the Escrow Agreement), (ii) approve an amendment
to Oclassen's Amended and Restated Certificate of Incorporation to conform the
method of valuation of any securities to be delivered to holders of Oclassen
Common Stock and Oclassen Preferred Stock in a merger to the method for valuing
the Watson Common Stock to be issued in the Merger as set forth in the Merger
Agreement, and (iii) to transact such other business as may properly come before
the meeting.
THE OCLASSEN BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR (i)
THE ADOPTION AND APPROVAL OF THE MERGER AGREEMENT AND APPROVAL OF THE MERGER AND
(ii) THE AMENDMENT TO OCLASSEN'S RESTATED CERTIFICATE OF INCORPORATION.
RECORD DATE; VOTING AT THE MEETING
The Oclassen Board of Directors has fixed the close of business on
January 20, 1997 as the record date for determining holders entitled to notice
of and to vote at the Special Meeting (the "Record Date"). As of the Record
Date, there were 1,868,318 shares of Oclassen Common Stock, 500,000 shares of
Oclassen Series A Preferred Stock, 1,423,184 shares of Oclassen Series B
Preferred Stock, 1,442,906 shares of Oclassen Series C Preferred Stock,
3,105,888 shares of Oclassen Series D Preferred Stock and 625,000 shares of
Oclassen Series E Preferred Stock issued and outstanding and held by 257
stockholders of record. Holders of shares of Oclassen Common Stock are entitled
to one vote per share at the Special Meeting. Holders of shares of Oclassen
Preferred Stock are entitled to one vote for each share of Oclassen Common Stock
that would be issued upon conversion of each share of Oclassen Preferred Stock.
Each share of Oclassen Preferred Stock is currently convertible into one share
of Oclassen Common Stock. Accordingly, holders of shares of Oclassen Preferred
Stock are entitled to one vote per share at the Special Meeting.
QUORUM; ABSTENTIONS
The presence in person or by properly executed proxy of holders of a
majority of the outstanding shares of Oclassen Common Stock and the outstanding
shares of Oclassen Preferred Stock (on an as-converted basis) is necessary to
constitute a quorum at the Special Meeting.
Votes cast by proxy or in person at the Special Meeting will be
tabulated by the Inspector of Elections appointed for the meeting. The Inspector
of Elections will also determine whether or not a quorum is present. Abstentions
will be counted for purposes of determining a quorum, but will have the effect
of a vote against approval of (i) the Merger Agreement and the Merger and (ii)
the amendment to Oclassen's Restated Certificate of Incorporation.
VOTE REQUIRED
Under the DGCL and Oclassen's Restated Certificate of Incorporation,
approval of the Merger Agreement and the Merger and approval of the amendment to
Oclassen's Restated Certificate of Incorporation requires the affirmative vote
of the holders of (i) at least a majority of the outstanding shares of Oclassen
Common Stock and Oclassen Preferred Stock voting together, (ii) at least a
majority of the outstanding shares of Oclassen Series B Preferred Stock voting
as a separate class, (iii) at least a majority of the outstanding shares of
Oclassen Series C Preferred Stock voting as a separate class and (iv) at least a
majority of the outstanding shares of Oclassen Series D Preferred Stock and
Oclassen Series E Preferred Stock voting together as a single and separate
class.
VOTING; REVOCABILITY OF PROXIES
All properly executed proxies that are not revoked will be voted at the
Special Meeting in accordance with the instructions contained therein. IF NO
INSTRUCTIONS ARE INDICATED, THE SHARES OF OCLASSEN COMMON STOCK AND OCLASSEN
PREFERRED STOCK REPRESENTED BY SUCH PROXIES WILL BE VOTED IN FAVOR OF (i)
APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND APPROVAL OF THE MERGER AND
(ii) THE AMENDMENT TO OCLASSEN'S RESTATED CERTIFICATE OF INCORPORATION, and as
the proxy holders deem advisable on any other proposals submitted to a vote, in
accordance with the recommendations of the Oclassen Board of Directors. A
stockholder who has executed and returned a proxy may revoke it at any time
before it is voted at the Special Meeting by executing and returning a proxy
bearing a later date, by filing written notice of such revocation with the
Secretary of Oclassen stating that the proxy is revoked, or by attending the
Special Meeting and voting in person (however, mere attendance at the meeting
will not in and of itself have the effect of revoking the proxy).
SOLICITATION OF PROXIES
The costs of soliciting proxies from the holders of Oclassen Common
Stock and Oclassen Preferred Stock will be borne by Oclassen. In addition to
solicitation by mail, the directors, officers and employees of Oclassen may,
without additional compensation, solicit proxies from stockholders by telephone,
facsimile or letter or in person.
THE MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING ARE OF GREAT
IMPORTANCE TO THE STOCKHOLDERS OF OCLASSEN. ACCORDINGLY, STOCKHOLDERS ARE URGED
TO READ AND CAREFULLY CONSIDER THE INFORMATION PRESENTED IN THIS PROXY
STATEMENT/PROSPECTUS, AND TO COMPLETE, DATE, SIGN AND PROMPTLY RETURN THE
ENCLOSED PROXY CARD IN THE ENCLOSED POSTAGE-PAID ENVELOPE.
STOCKHOLDERS SHOULD NOT SEND ANY STOCK CERTIFICATES
WITH THEIR PROXY CARDS
<PAGE> 28
THE MERGER
GENERAL
The Merger Agreement provides for a business combination between Watson
and Oclassen in which a wholly-owned subsidiary of Watson will be merged with
and into Oclassen and the holders of Oclassen Common Stock and Oclassen
Preferred 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 Oclassen to
position each company for the future, management of each of Watson and Oclassen
from time to time engage in discussions with third parties relating to possible
joint ventures, strategic business alliances and business combinations. The
Board of Directors of Oclassen also considered an initial public offering as one
alternative for Oclassen. The Boards of Directors of each of Watson and Oclassen
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 off-patent pharmaceutical companies,
consolidation among brand pharmaceutical companies, consolidation of brand and
off-patent pharmaceutical companies, the acquisitions of pharmacy benefit
management companies by brand pharmaceutical companies, and the introduction of
off-patent pharmaceuticals directly by the brand pharmaceutical companies. The
boards of directors of Watson and Oclassen 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 Oclassen might be less able to develop and market new off-patent 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 Oclassen 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.
In April 1996, Glenn A. Oclassen (the Chairman of the Board of
Directors of Oclassen) visited Watson to meet with Dr. Allen Chao (Watson's
Chairman and Chief Executive Officer). At such meeting, Dr. Chao and Mr.
Oclassen discussed the possibility of a business combination between Oclassen
and Watson.
On May 10, 1996, Watson held a meeting of its Board of Directors at
which Dr. Chao disclosed the possibility of a business combination with
Oclassen. At the meeting, the Watson Board authorized the officers of Watson to
pursue negotiations with Oclassen.
On May 15, 1996, Mr. Oclassen and Terry L. Johnson (the President and
Chief Executive Officer of Oclassen) visited Watson's facilities in Corona,
California and met
<PAGE> 29
with Dr. Chao, Brian Smith (the Vice President, Sales and Marketing, Proprietary
Products, of Watson Laboratories, Inc., a wholly-owned subsidiary of Watson
("Labs")), Chato Abad (Watson's Vice President and Corporate Controller), Dr.
Max Ferm (a consultant to Labs) and Michel J. Feldman (a partner of D'Ancona &
Pflaum, Watson's outside counsel and a director of Watson). The purpose of the
visit was to see Watson's facilities and to make a presentation about Oclassen.
In May 1996, the Watson Board authorized the negotiation of a
potential transaction with Oclassen and the hiring of Furman Selz as Watson's
financial advisor, and the parties held a formal meeting in order to share
information with regard to the respective companies. On May 29, 1996,
representatives of Furman Selz visited the offices of Oclassen for a management
presentation on the business of Oclassen.
On June 5, 1996, Dr. Chao reported to the Watson Board that Furman Selz
had been hired, and the Watson Board authorized submission of a letter
expressing interest in the acquisition of Oclassen in a tax free merger, which
would be accounted for as a pooling of interests. This letter was sent to
Oclassen on June 6, 1996.
In addition to a continuation of discussions during June 1996, on June
28, 1996, Dr. Chao made a presentation to the Oclassen Board at an Oclassen
Board meeting, at which Dr. Chao discussed general terms of a possible business
combination.
On July 2, 1996, a meeting was held at the offices of Venture Law
Group, Oclassen's legal counsel, which was attended by members of management and
counsel of Watson and Oclassen at which the preliminary terms of a transaction
and a tentative timetable were discussed, and the due diligence process was
formally begun. Preliminary issues discussed at this meeting included the price
to be paid to Oclassen stockholders, collars on the purchase price, break-up
fees, the amount and duration of the Escrow, whether there should be termination
rights based on the price of Watson Common Stock, whether the purchase price
would be calculated on a fully-diluted basis to give effect to options assumed
by Watson and at what time should the Average Closing Price be determined. This
meeting was followed by a continuation of the due diligence process during which
Oclassen shared information relating to new product approvals, financial
performance, anticipated research and development expenditures and other
strategic alternatives, including the consummation of an initial public
offering. Watson shared information on its past history and its plan for the
future. A follow-up meeting was held on July 22, 1996 at which the parties
discussed key transaction terms and the merger timetable, including the number
of shares of Watson Common Stock to be issued to the Oclassen stockholders,
whether the purchase price would be based upon a dollar amount or an aggregate
number of shares of Watson Common Stock, the proposed price collars, whether
either party would have the right to terminate the transaction based upon the
price of shares of Watson Common Stock, whether the purchase price would be
calculated on a fully-diluted basis to give effect to Watson's assumption of all
outstanding Oclassen Options, the amount and the survival period of the Escrow
and at what time should the Average Closing Price be determined.
On July 31, 1996, Dr. Chao was authorized by the Watson Board to submit
a revised letter expressing interest in a transaction with Oclassen.
During August and early September 1996, the parties continued to
negotiate the above-described terms of a possible transaction and continued
their respective due diligence efforts. Various letters of proposal circulated
back and forth between Watson, Oclassen and their respective financial advisors,
primarily focusing on the number of shares of Watson Common Stock to be issued
in the merger, the extent of price collars, caps and walk away rights, and the
extent and duration of the Escrow. On August 9, 1996, Dr. Chao attended an
Oclassen Board meeting to review Watson's business strategy and to answer
questions relating to certain recent developments in Watson's business and the
market for Watson Common Stock. On August 26, 1996, Watson submitted a revised
offer focusing on the open issues listed above. On August 27, 1996, Oclassen
made a counteroffer focusing on the proposed value of shares of Watson Common
Stock to be issued, the proposed price collars and the amount and duration of
the Escrow. On August 29, 1996, Watson made another counterproposal focusing
on the same open issues as Oclassen's August 27 offer.
On September 4, 1996, the parties agreed on the following terms: the
value of shares of Watson Common Stock to be issued to the Oclassen
stockholders, the treatment of Oclassen Options, the time at which the Average
Closing Price would be calculated, the price collars, that neither party would
have the right to terminate the transaction based upon the Average Closing
Price of Watson Common Stock and the amount and duration of the Escrow.
Beginning on September 5, 1996, the parties reviewed and negotiated
drafts of the Merger Agreement and certain exhibits thereto, including the terms
of the employment agreements with Mr. Oclassen, Mr. Johnson and Mr. DiTonno. The
main issues in the discussions regarding the Merger Agreement were the extent of
the representations and warranties provided by both Oclassen and Watson, the
ability to terminate the transaction upon a material adverse change of either
party, limitations on each party's indemnification obligations and the ability
of Watson to enter into extraordinary transactions prior to the closing of the
Merger. Over the course of these discussions, Dr. Chao, Mr. Oclassen and Mr.
Johnson, with their respective financial advisors, discussed various factors
relating to the valuation of Oclassen and Watson's share price, as well as the
numerous other issues described above relating to the proposed merger. During
the entire period that the parties were in negotiation, these negotiations
involved, at various times, senior management of Oclassen and Watson and their
respective financial advisors and attorneys.
On September 21, 1996, a draft of the Merger Agreement, together with a
memorandum summarizing the open issues and a Board of Directors package
concerning the transaction, was delivered to each of the directors of Watson and
Oclassen. Over the following three days, the parties continued to finalize the
terms of the Merger Agreement described above and the exhibits, including the
employment agreements, and to update their due diligence.
On September 24, 1996, the Board of Directors of Oclassen met to
discuss the proposed merger. The discussion included the strategic alternatives
available to Oclassen, and the proposed valuation and exchange formula, as well
as the other provisions contained in the Merger Agreement. In evaluating the
strategic alternatives available to Oclassen, the Board of Directors considered
the fact that in late 1995 and mid-1996, Oclassen engaged in discussions with
five companies (other than Watson) to explore an acquisition or combination
transaction. In certain cases, these discussions included various levels of due
diligence investigations. However, none of these discussions resulted in serious
negotiations with respect to an acquisition or combination transaction. At the
time of the September 24, 1996 meeting, no discussions with respect to other
acquisition or combination transactions were ongoing. Prior to agreeing to the
terms of the Merger, the Oclassen Board of Directors and management also
considered the potential for completing an initial public offering of Oclassen's
Common Stock, although investment bankers were not engaged to proceed with such
an offering. Oclassen had previously attempted such an offering on two occasions
(in the second quarter of 1992 and in the first quarter of 1993), but had been
unable to complete such a transaction due to changing market conditions and
market receptiveness for specialty pharmaceutical companies, such as Oclassen,
at such times. Oclassen did not seriously explore an initial public offering
again until the fall of 1996, primarily because Oclassen was involved in certain
product liability litigation and was continuing to in-license and develop
potential products. In exploring the potential for an initial public offering in
the fall of 1996, the Oclassen Board of Directors considered (a) current market
conditions and the possibility that the market would not be receptive to stocks
of specialty pharmaceutical companies at the time an offering could reasonably
be expected to be completed, (b) Oclassen's recent operating results, (c) the
cost of completing such an offering and the ongoing costs associated with being
a public company, (d) previous unsuccessful attempts to complete an initial
public offering of Oclassen's Common Stock and the risk that Oclassen could not
successfully complete such an offering in a timely fashion, at an attractive
price or at all, (e) the relatively limited liquidity to Oclassen's stockholders
that would result from an initial public offering due to contractual lock-ups,
and the anticipated modest level of public float of Oclassen's Common Stock
after such an offering and (f) as a small independent public company, a more
limited ability to raise additional capital than Oclassen would likely have as
part of a larger public company, such as Watson.
At the September 24, 1996 meeting, members of Oclassen's senior
<PAGE> 30
management and its Board of Directors, 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, Lehman Brothers, Oclassen's financial advisor which had been
working with Oclassen to evaluate strategic alternatives since early 1996
pursuant to an engagement letter dated March 8, 1996, and had begun to evaluate
a possible transaction with Watson in May 1996, delivered its oral opinion to
Oclassen's Board of Directors that, based on various considerations and
assumptions, the consideration to be offered to the Oclassen stockholders was
fair to such stockholders from a financial point of view. At the conclusion of
the meeting, the Board of Directors of Oclassen approved the Merger and
authorized the execution of the Merger Agreement. Lehman Brothers delivered its
written opinion on September 25, 1996.
On September 24, 1996, the Board of Directors of Watson met to discuss
the proposed merger. The discussion included the proposed valuation and exchange
formula, as well as the other provisions contained in the Merger Agreement. The
Waston Board from time to time discusses the advantages and disadvantages of
certain strategic alliances, joint ventures and acquisition transactions as
they are presented to the Watson Board by Watson's management. The Watson Board
of Directors did not decide to approve the Merger at the expense of any other
proposed transaction. At such meeting, members of Watson's senior management and
the Board of Directors, 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, Furman Selz delivered its written opinion to Watson's Board to the
effect that, as of September 20, 1996 and based upon and subject to certain
considerations and assumptions, the Merger was fair, from a financial point of
view, to Watson. At the conclusion of the meeting, the Board of Directors of
Watson approved the Merger and authorized the execution of the Merger Agreement.
After the close of business on September 25, 1996, Watson and Oclassen
executed the Merger Agreement and on September 26, 1996, the Merger was publicly
announced.
WATSON'S REASONS FOR THE MERGER; ADVANTAGES AND DISADVANTAGES
OF THE MERGER
The Watson Board of Directors has unanimously approved the Merger and
the adoption of the Merger Agreement. See " -- Approval of the Board of
Directors of Watson." In reaching its decision to approve the Merger and the
adoption of the Merger Agreement, the Watson Board of Directors considered the
following material advantages of the Merger to Watson and its stockholders:
1. Effect on Earnings. The Watson Board of Directors considered the
effects on its future estimated earnings per share due to the acquisition of
Oclassen and whether such acquisition would be accretive or dilutive to its
stockholders. Watson believes that the acquisition of Oclassen will allow Watson
to increase its access to the proprietary pharmaceutical market, enabling Watson
to increase its earnings per share in 1997 and in subsequent years.
2. Proprietary Diversification. Prior to its acquisition of Circa
in 1995, Watson was primarily an off-patent pharmaceutical company. One of
Watson's primary strategies is to develop a proprietary product base to
balance its strength in off-patent pharmaceutical products. The acquisition of
Oclassen, which develops and markets proprietary dermatological products, will
continue Watson's strategy of diversifying its off-patent product base into
the proprietary product market.
3. Diversified Revenue Base. As a result of the Merger, the combined
company will have a broader product portfolio, including products targeted to
different segments of the pharmaceutical market. Accordingly, Watson and its
stockholders may be less dependent on off-patent pharmaceutical products which
generally have smaller margins than proprietary products.
4. Expanded Product Pipeline. Both Watson and Oclassen devote
significant resources to product development and both companies have a number of
products in the development pipeline. Combining the companies and their
development activities through the Merger will result in an enhanced product
pipeline when compared to the product pipeline of each company prior to the
Merger. There can be no assurance that any of the products currently in
preclinical development or clinical trials by Watson or Oclassen will ever be
successfully developed, receive required regulatory approvals or be successfully
marketed. However, by expanding and diversifying the combined company's product
pipeline through the Merger, the failure to successfully develop, receive
required regulatory approvals or successfully market any particular product
under development is likely to have less severe effects on the business,
operations or financial condition of the combined company than such event would
have on the business operations or financial condition of either Watson or
Oclassen alone.
5. Future Development of Proprietary Dermatology Business. The
proprietary dermatology market is highly fragmented with a large number of small
companies. Management of Watson believes that the acquisition of Oclassen will
give Watson a strong management and sales force infrastructure which will serve
as a platform for future potential acquisitions in the proprietary dermatology
market.
6. Acquisition of Sales Force. Prior to its contemplated acquisition of
Oclassen, Watson intended to develop a proprietary product sales force to aid in
the sale of its current and future products. Oclassen currently has an
experienced sales force which may allow Watson to forego some of its budgeted
costs which would otherwise be expended to develop its own sales force.
Additionally, Oclassen's sales force will immediately be able to sell other
Watson products, which may increase future sales of such products.
7. Talented Management Team. Both Watson and Oclassen have strong and
experienced senior management personnel. The Board of Directors of Watson
believes that the combined company will have a strong, experienced and talented
management team as a result of combining key senior managers of Watson with key
senior managers of Oclassen.
8. Terms of the Merger. In reaching its decision to approve the Merger,
the Watson Board of Directors also considered the terms of the Merger, including
the consideration to be paid to Oclassen stockholders, the structure and terms
of the pricing collar, the assumption by Watson of outstanding options to
purchase Oclassen Common Stock, the indemnification and escrow provisions and
the termination provisions. See "-- Approval of the Board of Directors of
Watson."
The Watson Board of Directors believes that the material disadvantages
of the proposed Merger to Watson and its stockholders are the following:
1. Risk of Overpayment. The Watson Board of Directors recognized and
considered the risk that the aggregate consideration to be paid by Watson to
acquire Oclassen might exceed the amount of consideration justified based on
the current level of earnings of Oclassen and based on the price of Watson
Common Stock and the pricing collar. The Watson Board of Directors also
recognized and considered the risk that Oclassen may not achieve its anticipated
future financial performance due to factors both within Oclassen's control and
factors outside Oclassen's control. If such performance is not met by Oclassen,
the consideration paid by Watson to acquire Oclassen might exceed the amount of
consideration justified for such acquisition. Additionally, the Watson Board
considered that Watson would have no ability to terminate the Merger due to
fluctuations in the Average Closing Price.
2. Risk of Non-approval. There can be no assurance that any of
Oclassen's products currently in preclinical or clinical trials will ever
receive the required regulatory approvals from the FDA. Consequently, the Watson
Board of Directors considered the risk that such products will not be approved
and that Watson will never realize the potential revenues from the production
and sale of these products.
3. Potential Disruption. Watson may experience disruption in its
business or employee base as a result of uncertainty following announcement of
the Merger and during the combination of the operations of Watson and Oclassen
if the Merger is consummated. Such disruption has not occurred to date, but
remains a risk of the Merger. In addition, there is a risk that Watson's sales
force and management team will seek employment with competitors.
4. Risk of Non-consummation of the Merger. The Watson Board of
Directors recognized and considered the risk that the Merger will not be
consummated. If the Merger is not consummated, the public announcement of the
Merger and non-consummation of the Merger may have an adverse effect on the
market price of Watson Common Stock.
5. Risk of Integration. The Watson Board of Directors also considered
the risks associated with integrating the businesses, operations and personnel
of Watson and Oclassen following the Merger and the possibility that the
anticipated benefits of the Merger will not be realized. See "Risk Factors --
Integration of the Businesses."
Although the Watson Board of Directors carefully considered the
advantages and disadvantages of the Merger described above, the Board of
Directors considered the terms of the Merger as a whole (and not individually)
and, given its experience in similar transactions, analysis of comparable
transactions and advice of Watson's financial and legal adivsors, determined to
approve the Merger and adopt the Merger Agreement. See " -- Approval of the
Board of Directors of Watson."
OCLASSEN'S REASONS FOR THE MERGER; ADVANTAGES AND DISADVANTAGES
OF THE MERGER
The Oclassen Board of Directors has unanimously approved the Merger and
the adoption of the Merger Agreement. See " -- Recommendation of the Board of
Directors of Oclassen." In reaching its decision to approve the Merger and the
adoption of the Merger Agreement, the Oclassen Board of Directors considered the
following material advantages of the Merger to Oclassen and its stockholders:
1. Diversified Revenue Base. Oclassen markets niche proprietary
products for the treatment of skin disease in a fragmented industry. Watson has
a long-established off-patent pharmaceuticals business and a stated objective of
becoming a fully integrated pharmaceutical company, which develops proprietary
and off-patent products and markets such products worldwide. As a result of the
Merger, the combined company will have a broader product portfolio, including
products targeted at different segments of the pharmaceutical market.
Accordingly, Oclassen and its stockholders will no longer be dependent upon
revenues from Oclassen's five marketed products, all of which are targeted at
the dermatological market.
2. Expanded Product Pipeline. Both Oclassen and Watson devote
significant resources to product development, and both companies have a number
of products in the development pipeline. Combining the companies and their
development activities through the Merger will result in an enhanced product
pipeline when compared to the product pipeline of each company prior to the
Merger. In addition, the financial resources of the combined company could be
utilized to acquire or in-license and develop additional products. There can be
no assurance that any of the products currently in preclinical development or
clinical trials by Oclassen or Watson will ever be successfully developed,
receive required regulatory approvals or be successfully marketed. However, by
expanding and diversifying the combined company's product pipeline through the
Merger, the failure to successfully develop, receive required regulatory
approvals for or successfully market any particular product under development is
likely to have less severe effects on the business, operations or financial
condition of the combined company than such event would have on the business,
operations or financial condition of either Oclassen or Watson alone.
3. Stronger Financial Resources and Enhanced Access to Capital. As of
September 30, 1996, Oclassen had cash, cash equivalents and marketable
securities of approximately $20 million. As of such date, Watson had cash, cash
equivalents and marketable securities of approximately $183 million. In
addition, given its status as a public company and its strong financial
position, Watson has greater access to capital, through banks and other
financial institutions, public offerings and other methods, than Oclassen. As a
result of the Merger, Oclassen and its stockholders will benefit from the
stronger financial resources and enhanced access to capital of the combined
company. These greater financial resources will be available and may be used to
acquire or in-license products, companies or technologies that Oclassen alone
might not be able to either attract or afford to acquire or in-license.
4. Stockholder Liquidity. The Merger will provide the Oclassen
stockholders, almost all of whom initially invested in Oclassen several years
ago, with the ability to convert a currently illiquid investment (their Oclassen
stock) into a liquid investment (the Watson Common Stock to be received in the
Merger) for which there is an active trading market and a significant public
float. In addition, as stockholders of Watson after the Merger, the former
Oclassen stockholders will have an opportunity to realize a future return if
Watson Common Stock appreciates after the Merger.
5. Talented Management Team. Both Oclassen and Watson have strong and
experienced senior management personnel. The Board of Directors of Oclassen
believes that the combined company will have a strong, experienced and talented
management team as a result of combining key senior managers of Watson with key
senior managers of Oclassen.
6. Employee Recruitment and Retention. Current and potential employees
of Oclassen may perceive the combined company, with its diversified revenue
base, enhanced product pipeline and stronger financial resources, as providing
greater stability. Further, a public company, such as Watson, has greater
ability to provide financial incentives (such as options to acquire a liquid
security) in order to recruit and retain employees.
7. Terms of the Merger. The Oclassen Board of Directors also
considered the terms of the Merger, including the consideration to be received
by Oclassen stockholders, (including the structure and terms of the pricing
collar), the assumption of outstanding options to purchase Oclassen Common
Stock, the continuation of employee benefits, the indemnification and escrow
provisions, the termination provisions and other terms of the proposed
transaction. "See -- Recommendation of the Board of Directors of Oclassen."
The Oclassen Board of Directors believes that the material
disadvantages of the proposed Merger to Oclassen and its stockholders are the
following:
1. Loss of Exclusive Opportunity. Oclassen stockholders will lose the
opportunity to develop and exploit Oclassen's current and potential products for
their sole benefit. In addition, the combined company may make strategic
decisions that differ from those that Oclassen would have made absent the
Merger.
2. Risk of Underpayment. The Oclassen Board of Directors recognized
and considered the risk that the aggregate consideration to be paid by Watson to
acquire Oclassen might be less than (a) the amount of consideration justified
based upon the current level of earnings of Oclassen, the potential future
performance of Oclassen, the price of Watson Common Stock and the pricing collar
or (b) the valuation Oclassen might receive if it successfully completed an
initial public offering. The Oclassen Board of Directors also recognized and
considered the potential volatility of the price of Watson Common Stock and the
risk that, after the Merger, Watson may not achieve its anticipated future
performance due to factors both within Watson's control and factors outside
Watson's control. If the price of Watson Common Stock declines or such
performance is not met by Watson, the consideration paid by Watson to acquire
Oclassen might be less than the consideration justified for such acquisition.
Additionally, the Oclassen Board of Directors considered the fact that Oclassen
would have no ability to terminate the Merger due to fluctuations in the Average
Closing Price.
3. Potential Disruption. Oclassen may experience disruption in its
business or employee base as a result of uncertainty following announcement of
the Merger and during the combination of the operations of Oclassen and Watson
if the Merger is consummated. Such disruption has not occurred to date, but
remains a risk of the Merger. In addition, there is a risk that, despite its
efforts, the combined company may not be able to retain key management and sales
personnel of Oclassen.
4. Risks Associated with Watson. As a result of the Merger, the
stockholders of Oclassen will become stockholders of Watson and will bear the
risks associated with operation of the Watson business, such as lack of control
over joint ventures, dependence on key personnel, fluctuations in quarterly
operating results and other risks described under "Risk Factors." In addition,
the market prices for securities of companies engaged primarily in
pharmaceutical development and marketing, such as Watson, have been volatile,
and the price of Watson Common Stock may fluctuate substantially in the future.
5. Risk of Non-consummation of the Merger. The terms of the
Merger were negotiated at arms-length over a significant period of
time by the parties. The Oclassen Board of Directors was concerned that, if the
Merger was not consummated after being publicly announced, Oclassen's
reputation might be damaged (even if non-consummation of the Merger was not a
result of any action or inaction by Oclassen), which could limit strategic
alternatives available to Oclassen in such event, such as an initial public
offering or other acquisition transactions. Accordingly, Oclassen's Board of
Directors deemed it important that the Merger Agreement have minimal risk of
termination, regardless of the market value of Watson Common Stock during the
period between signing of the Merger Agreement and consummation of the Merger.
In considering the terms of the Merger, particular attention was given by the
Oclassen Board of Directors to (a) the consideration to be received by the
Oclassen stockholders, including the structure and terms of the pricing collar,
(b) the treatment of outstanding options to acquire Oclassen Common Stock, (c)
the benefits to be provided to Oclassen employees after the Merger when they
will be employees of Watson, (d) the term and extent of the Escrow, including
the fact that no claims may be made against the Escrow until total claims exceed
$600,000, (f) the extent of the indemnification obligations of Oclassen and
Watson and (g) the conditions under which the Merger Agreement could be
terminated and the fact that upon any such termination, each party would bear
its own expenses incurred in connection with the transaction, but that no
break-up fees would be payable by either party. The Oclassen Board of Directors
also considered the "no-shop" provisions of the Merger Agreement, which obligate
Oclassen, (a) except to the extent reasonably required by fiduciary duty
obligations under applicable laws, not to initiate, solicit, encourage or
negotiate any other merger, acquisition, consolidation or similar transaction,
(b) to terminate any such activities existing at the time the Merger Agreement
was executed (there were none) and (c) to notify Watson if any inquiries,
proposals, discussions or negotiations are received or initiated (none have been
to date). The Oclassen Board of Directors recognized and considered the fact
that the "no-shop" provisions would essentially prevent Oclassen from
considering or entering into any other acquisition transaction with a party
other than Watson. The Oclassen Board of Directors was aware of the terms of the
employment agreements to be entered into with three executive officers of
Oclassen. See "--Interests of Certain Persons in the Merger." The Oclassen Board
of Directors believes that retention of key officers and employees of Oclassen
after consummation of the Merger will be an important factor in any future
development of the Oclassen business and considered such employment agreements
to be reasonable in scope and an effective means for retaining these officers
after consummation of the Merger. The Oclassen Board of Directors considered the
terms of the Merger as a whole (and not individually) and, given their
experience in similar transactions, analysis of comparable transactions and
advice of Oclassen's financial and legal advisors, determined to approve the
Merger and adopt the Merger Agreement.
6. Risk of Integration. The Oclassen Board of Directors also
considered the risk associated with integrating the businesses, operations and
personnel of Oclassen and Watson following the Merger and the possibility that
the anticipated benefits of the Merger will not be realized. See "Risk Factors
- -- Integration of the Businesses."
7. Dilution. Oclassen stockholders will suffer dilution in connection
with the Merger. Based on the capitalization of the companies as of January 20,
1997, Oclassen stockholders will own approximately 8.2% of the outstanding
shares of the combined company after the Merger, rather than 100% of the
outstanding shares of Oclassen.
Although the Oclassen Board of Directors carefully considered the
advantages and disadvantages of the Merger described above, the Board of
Directors did not find it practicable to, and did not, quantify or otherwise
attempt to assign relative weights to the specific advantages and disadvantages
considered. However, after discussing and considering the advantages and
disadvantages, the Oclassen Board of Directors approved the Merger and adoption
of the Merger Agreement. See "-- Recommendation of the Board of Directors of
Oclassen."
<PAGE> 31
OPINION OF WATSON'S FINANCIAL ADVISOR
Furman Selz was retained by Watson to act as its financial advisor in
connection with the Merger. In connection with such engagement, the Board of
Directors of Watson requested that Furman Selz, as investment bankers, render an
opinion to the Board of Directors of Watson of the fairness, from a financial
point of view, to Watson of the consideration to be paid to Oclassen's
stockholders in the Merger (the "Merger Consideration"). On September 24, 1996,
Furman Selz rendered to the Board of Directors its opinion to the effect that,
as of September 20, 1996 and based upon and subject to certain considerations
and assumptions, the Merger Consideration to be paid to Oclassen's stockholders
was fair, from a financial point of view, to Watson. The full text of the
written opinion of Furman Selz dated September 24, 1996 (which opinion will not
be updated) which sets forth the assumptions made, matters considered and
limitations on the review undertaken, is attached as Appendix C hereto and is
incorporated herein by reference. Stockholders of Watson are urged to read this
opinion carefully in its entirety. Furman Selz's opinion is directed only to the
fairness from a financial point of view to Watson of the Merger Consideration to
be paid to Oclassen's stockholders. The opinion is for the benefit and use of
the Board of Directors of Watson in its consideration of the Merger. The opinion
does not constitute a recommendation of the Merger over any other alternative
transactions which may be available to Watson and does not address the
underlying business decision of the Board of Directors of Watson to proceed with
or effect the Merger. Furthermore, the opinion does not constitute a
recommendation by Furman Selz to any stockholder to vote in favor of the Merger.
The summary of the opinion of Furman Selz set forth herein is qualified in its
entirety by reference to the full text of such opinion.
In conducting its analysis and arriving at its opinion, Furman Selz
reviewed and analyzed, among other things, (i) a draft of the Merger Agreement
dated September 16, 1996; (ii) Oclassen's audited financial statements for the
years ended December 31, 1993, 1994 and 1995, and on an unaudited basis, the six
month periods ended June 30, 1995 and 1996, respectively; (iii) Watson's 1995
Annual Report, Watson's Form 10-K for the year ended December 31, 1995 and
Watson's Form 10-Q for the quarter ended June 30, 1996; (iv) the trading history
of the Watson Common Stock from September 1995 through September 1996 and a
comparison of that trading history with those of other companies that Furman
Selz deemed relevant; (v) certain other publicly available information
concerning Watson and Oclassen; (vi) certain internal information relating to
Oclassen, including financial forecasts and projections provided by Oclassen;
(vii) certain internal information relating to Watson, including financial
forecasts and projections provided by Watson; (viii) the results of operations
of Watson and Oclassen and a comparison of such results of operations with those
of certain companies which Furman Selz deemed to be reasonably similar to Watson
and Oclassen, respectively; (ix) certain publicly available information
concerning other companies engaged in businesses which Furman Selz believed to
be comparable to Watson and Oclassen and the trading markets for certain such
companies' securities; and (x) the financial terms of certain mergers,
acquisitions and other transactions which Furman Selz believed to be relevant.
In addition, Furman Selz held discussions with certain current officers,
employees and representatives (including counsel and independent auditors) of
Oclassen and Watson concerning their respective businesses, operations, assets,
present condition and future prospects. Furman Selz also held discussions with
various members of the senior management of Watson concerning the strategic and
operating benefits they anticipate from the Merger. Further, Furman Selz
conducted such other financial studies, analyses and investigations as it deemed
appropriate for purposes of rendering its opinion.
<PAGE> 32
In arriving at its opinion, Furman Selz did not visit or conduct a
physical inspection of the properties and facilities of Oclassen, except for its
executive offices, nor did it make, obtain or assume any responsibility for any
independent evaluation or appraisal of any such properties and facilities or of
the assets and liabilities (contingent or otherwise) of Watson or Oclassen.
Furman Selz assumed and relied upon the accuracy and completeness of the
financial and other information supplied to or otherwise used by it in arriving
at its opinion and has not attempted independently to verify, or undertaken any
obligation to verify, such information. Furman Selz further relied upon
assurances of the managements of Watson and Oclassen that they were not aware of
any facts that would make the information they provided to Furman Selz
incomplete or misleading. In addition, with Watson's consent, Furman Selz
assumed that Watson's and Oclassen's forecasts and projections supplied to it
represent the best currently available estimates and judgment of Watson's and
Oclassen's managements as to the expected future financial condition and results
of operations of Watson and Oclassen, and assumed that such forecasts and
projections were reasonably prepared based on such currently available estimates
and judgment. Furman Selz assumed no responsibility for and expressed no view as
to such forecasts and projections or the assumptions on which they are based.
Furman Selz also assumed that the transactions described in the Merger Agreement
would be consummated on the terms set forth therein, without waiver of any such
terms. Furman Selz further assumed the Merger will qualify as a tax free
reorganization within the meaning of Section 368(a) of the Internal Revenue
Code, as amended, and that for accounting purposes, the Merger is intended to be
accounted for as a pooling-of-interests.
Furman Selz also noted that its opinion was necessarily based on its
assessment of general economic, market and financial conditions existing and
disclosed to Furman Selz as of September 20, 1996 and its experience in similar
transactions, as well as its experience in securities valuation in general.
Furman Selz did not express any view as to what the value of the Watson Common
Stock will be when issued to Oclassen stockholders pursuant to the Merger, or
the price at which the Watson Common Stock will trade prior to or subsequent to
the closing of the Merger.
In preparing its opinion to the Board of Directors of Watson, Furman
Selz performed a variety of financial and comparative analyses described below,
and provided the Board of Directors with a written presentation with respect to
such analyses. The summary of such analyses set forth herein does not purport to
be a complete description of the analyses underlying Furman Selz's opinion. The
preparation of a fairness opinion is a complex analytical process involving
various determinations as to the most appropriate and relevant methods of
financial analyses and the application of those methods to the particular
circumstances and, therefore, such an opinion is not readily susceptible to
partial analysis or a summary description. In arriving at its opinion, Furman
Selz did not attribute any particular weight to any one analysis or factor
considered by it, but rather made qualitative judgments as to the significance
and relevance of each analysis and factor.
Accordingly, Furman Selz believes that its analyses must be considered
as a whole and that selecting portions of its analyses and factors, without
considering all analyses and factors, could create a misleading or incomplete
view of the processes underlying such analyses and its opinion. In its analyses,
Furman Selz made numerous assumptions with respect to Watson and Oclassen,
industry performance, general business, economic, market and financial
conditions and other matters, many of which are beyond the control of Watson.
The estimates contained in such analyses are not necessarily indicative of
actual values or predictive of future results or values, which may be
significantly more or less favorable than those suggested by such analyses. In
addition, analyses relating to the value of businesses or securities do not
purport to be appraisals or to reflect the prices at which businesses or
securities actually may be sold. Accordingly, such analyses and estimates are
inherently subject to substantial uncertainty.
The following is a brief summary of the financial analyses utilized by
Furman Selz in rendering its opinion.
<PAGE> 33
Analyses Relating to Oclassen--Comparable Company Analysis. Furman Selz compared
selected historical, current and projected financial and operating results of
Oclassen with the publicly reported operating results of selected publicly
traded specialty pharmaceutical companies that, in Furman Selz's judgment, were
most closely comparable to Oclassen (the "Oclassen Comparable Companies"). The
Oclassen Comparable Companies were chosen by Furman Selz as companies that,
based upon publicly available data, possess general business, operating and
financial characteristics representative of companies in the industry in which
Oclassen operates, although Furman Selz recognized that each of the Oclassen
Comparable Companies is distinguishable from Oclassen in certain respects. Such
Oclassen Comparable Companies consisted of: Dura Pharmaceuticals, Inc., Forest
Laboratories, Inc., Jones Medical Industries, Inc., Medicis Pharmaceutical Corp.
and Roberts Pharmaceutical Corp. Furman Selz considered with respect to the
Oclassen Comparable Companies, among other things, (i) selected balance sheet
data; (ii) operating statement data, including latest twelve month (previous
reported four quarters, or "LTM") net revenue, earnings before interest, taxes,
depreciation and amortization ("EBITDA") and earnings before interest and taxes
("EBIT") and estimated 1996 and estimated 1997 net revenue, EBITDA and EBIT;
(iii) LTM earnings per share ("EPS") and estimated calendar 1996 and estimated
calendar 1997 EPS; and (iv) historical stock price performance. All 1996 and
1997 results are based on publicly available estimates made by investment
research analysts.
Furman Selz calculated a range of market multiples for the Oclassen
Comparable Companies by dividing the Total Capitalization (total common shares
outstanding as of June 30, 1996 multiplied by closing market price per share on
September 20, 1996, or "Market Value," plus total debt, preferred stock and
minority interests, minus cash and cash equivalents as of June 30, 1996) for
each Oclassen Comparable Company by, among other things, such company's
respective LTM net revenue, EBITDA and EBIT and estimated 1996 and estimated
1997 net revenue, EBITDA and EBIT. For the Oclassen Comparable Companies: the
LTM net revenue multiples ranged from 3.11x to 22.09x (11.13x mean), the
estimated 1996 net revenue multiples ranged from 2.74x to 13.72x (8.25x mean)
and the estimated 1997 net revenue multiples ranged from 2.19x to 10.55x (6.57x
mean); the LTM EBITDA multiples ranged from 9.9x to 133.6x (64.6x mean), the
estimated 1996 EBITDA multiples ranged from 11.4x to 56.9x (34.4x mean) and the
estimated 1997 EBITDA multiples ranged from 7.5x to 34.8x (21.5x mean); the LTM
EBIT multiples ranged from 11.4x to 106.4x (54.1x mean), the estimated 1996 EBIT
multiples ranged from 13.3x to 85.1x (47.7x mean) and the estimated 1997 EBIT
multiples ranged from 8.3x to 36.8x (23.4x mean). Furman Selz also calculated
multiples by dividing each of the Oclassen Comparable Companies' closing sale
price per share on September 20, 1996 by the respective LTM EPS, estimated
calendar 1996 EPS and estimated calendar 1997 EPS. Such stock price to LTM EPS
multiples ranged from 19.5x to 79.1x (45.6x mean), such stock price to estimated
calendar 1996 EPS multiples ranged from 29.3x to 69.3x (48.8x mean) and such
stock price to estimated calendar 1997 EPS multiples ranged from 16.4x to 48.4x
(33.3x mean). Applying the LTM mean multiples to Oclassen's LTM net revenue, LTM
EBITDA, LTM EBIT and LTM net income yield an implied equity value range of
$177.4 million to $367.7 million. Applying the 1996 mean multiples to Oclassen's
1996 net revenue, 1996 EBITDA, 1996 EBIT and 1996 net income yield an implied
equity value range of $130.4 million to $300.7 million. Applying the 1997 mean
multiples to Oclassen's 1997 net revenue, 1997 EBITDA, 1997 EBIT and 1997 net
income yield an implied equity value range of $153.9 million to $287.7 million.
Based on an assumed Merger Consideration value of $135.0 million, Oclassen's
implied multiples were as follows: (i) for LTM, estimated 1996 and estimated
1997 net revenue, 3.69x, 3.39x and 2.83x, respectively, (ii) for LTM, estimated
1996, and estimated 1997 EBITDA, 30.6x, 35.4x and 17.2x, respectively, (iii) for
LTM, estimated 1996 and estimated 1997 EBIT, 39.6x, 49.6x and 20.1x,
respectively, (iv) for LTM, estimated 1996 and estimated 1997 net income, 34.0x,
30.5x and 19.3x, respectively. (See "Analyses Relating to Oclassen - Discounted
Cash Flow Analyses" for a discussion of the Oclassen Projection). Based on an
assumed Merger Consideration value of $135.0 million, Oclassen's implied
multiples were within the range of the aforementioned multiples for the Oclassen
Comparable Companies. Because of the inherent differences in the business,
operations, and prospects of Oclassen and the businesses, operations and
prospects of the Oclassen Comparable Companies, Furman Selz believed it was
inappropriate to, and therefore did not rely solely on the quantitative results
of the analysis, but rather also made qualitative judgments concerning
differences between the financial and operating characteristics and prospects of
the Oclassen Comparable Companies that would affect the public trading values of
each as compared to Oclassen. In this regard, Furman Selz noted the dermatology
market segment in which Oclassen operates, the overall competitive environment
of this market, and the operating infrastructure and distribution network of
Oclassen. These qualitative judgments did not result in specific analyses or
conclusions but rather were part of Furman Selz's evaluation of the relevancy of
the foregoing comparative quantitative analysis.
<PAGE> 34
Discounted Cash Flow Analyses. Furman Selz performed a discounted cash
flow analysis of Oclassen based upon a series of financial projections prepared
by the management of Oclassen for calendar years ending December 31, 1996
through December 31, 2001 (the "Oclassen Projection"). Furman Selz also
performed a discounted cash flow analysis of Oclassen based on certain
adjustments to such projections deemed appropriate by the management of Watson
which reflect more conservative assumptions relating to the future prospects of
Oclassen for 1998 going forward (the "Adjusted Oclassen Projection"). In each of
the two discounted cash flow analyses Furman Selz discounted the projected free
cash flows (EBIT less taxes, capital expenditures and changes in net working
capital plus depreciation and amortization) plus the terminal value (calculated
as a multiple of future EBIT) derived from the Oclassen Projection and Adjusted
Oclassen Projection to arrive at a present value ("Present Value") for Oclassen.
In each of the discounted cash flow analyses, Furman Selz utilized multiples of
EBIT ranging from 10.0x to 19.0x. From the Present Value in each discounted cash
flow analyses, Furman Selz subtracted all debt obligations appearing on
Oclassen's balance sheet at June 30, 1996 and added the excess cash balance on
such balance sheet to arrive at an equity value ("Equity Value") for Oclassen.
For each discounted cash flow analysis, Furman Selz performed sensitivity
analyses to understand the effect on the Equity Value of different discount
rates and terminal value multiples. Such analyses were performed under discount
rate assumptions ranging from 12% to 20%, based upon assumptions regarding such
factors as inflation rates, interest rates, Oclassen's cost of capital and the
inherent risks related to Oclassen's business, as well as the pharmaceutical
industry as a whole. Furman Selz observed that the implied equity value for
Oclassen utilizing the Oclassen Projection ranged from $250.9 million to $625.3
million and that the implied equity value for Oclassen utilizing the Adjusted
Oclassen Projection ranged from $154.9 million to $367.5 million.
Comparable Transactions Analysis. Furman Selz evaluated publicly
available information regarding thirteen acquisitions of selected pharmaceutical
companies, which included: Jones Medical Industries, Inc./Daniels
Pharmaceuticals, Inc.; Teva Pharmaceutical Industries, Ltd./Biocraft
Laboratories, Inc.; The Upjohn Company/Pharmacia AB; Schein Pharmaceutical,
Inc./Marsam Pharmaceuticals, Inc.; Hoechst AG/ Marion Merrell Dow, Inc.; Glaxo
PLC/Wellcome PLC; IVAX Corp./Zenith Laboratories, Inc.; American Home Products
Corp./American Cyanamid Company; Roche Holding AG/Syntex Corp.; IVAX
Corp./McGaw, Inc.; Hoechst Celanese Corp./Copley Pharmaceutical, Inc.; Mylan
Laboratories Inc./Dow B. Hickam, Inc.; and Rhone-Poulenc S.A./Rorer Group Inc.
(the "Acquired Pharmaceutical Companies"). Furman Selz calculated net revenue,
EBITDA and EBIT multiples based on the ratio of LTM net revenue, EBITDA and EBIT
(calculated immediately prior to the acquisition) to adjusted purchase price
(offer price plus latest reported total debt, preferred stock and minority
interests, minus total cash and cash equivalents) for each Acquired
Pharmaceutical Company. Furman Selz also calculated LTM net income multiples
based on the ratio of LTM net income (calculated immediately prior to the
acquisition) to the offer price for each Acquired Pharmaceutical Company. Such
financial multiples ranged as follows: (i) 1.75x to 14.01x (4.31x mean) for LTM
net revenue, (ii) 10.2x to 65.9x (24.0x mean) for LTM EBITDA, (iii) 12.4x to
124.8x (39.3x mean) for LTM EBIT and (iv) 14.0x to 213.8x (57.6x mean) for LTM
net income. Applying the mean multiples to Oclassen's LTM net revenue, LTM
EBITDA, LTM EBIT and LTM net income yield an implied equity value range of
$110.2 million to $228.3 million. Based on an assumed Merger Consideration value
of $135.0 million, Oclassen's LTM net revenue, LTM EBITDA, LTM EBIT and LTM net
income multiples of 3.69x, 30.6x, 39.6x and 34.0x, respectively, were within the
range of the aforementioned multiples. None of such acquisitions, however, took
place under market conditions or competitive circumstances that were directly
comparable to those of the Merger, and each of the Acquired Pharmaceutical
Companies is distinguishable from Oclassen in certain respects. Accordingly, an
analysis of the results of the foregoing is not mathematical nor necessarily
precise; rather, it involves complex considerations and judgments concerning
differences in financial and operating characteristics of companies and other
factors that could affect results.
Analyses Relating to Watson -- Comparable Company Analysis. Furman Selz compared
selected historical, current and projected financial and operating results of
Watson with the publicly reported operating results of selected publicly traded
off-patent pharmaceutical companies that, in Furman Selz's judgment, were most
closely comparable to Watson (the "Watson Comparable Companies"). The Watson
Comparable Companies were chosen by Furman Selz as companies that, based upon
publicly available data, possess general business, operating and financial
characteristics representative of companies in the industry in which Watson
operates, although Furman Selz recognized that each of the Watson Comparable
Companies is distinguishable from Watson in certain respects. Such Watson
Comparable Companies consisted of: Alpharma, Inc., Barr Laboratories, Inc.,
Copley Pharmaceutical, Inc., Forest Laboratories, Pharmaceutical Resources, Inc.
and Teva Pharmaceutical Industries. Furman Selz considered with respect to the
Watson Comparable Companies, among other things, (i) selected balance sheet
data; (ii) operating statement data, including LTM net revenue, EBITDA and EBIT
and estimated 1996 and estimated 1997 net revenue, EBITDA and EBIT; (iii) LTM
EPS and estimated calendar 1996 and estimated calendar 1997 EPS; and (iv)
historical stock price performance. All 1996 and 1997 results are based on
publicly available estimates made by investment research analysts.
<PAGE> 35
Furman Selz calculated a range of market multiples for the Watson
Comparable Companies by dividing the Total Capitalization (total common shares
outstanding as of June 30, 1996 multiplied by closing market price per share on
September 20, 1996, or "Market Value," plus total debt, preferred stock and
minority interests, minus cash and cash equivalents as of June 30, 1996) for
each Watson Comparable Company by, among other things, such company's respective
LTM net revenue, EBITDA and EBIT and estimated 1996 and estimated 1997 net
revenue, EBITDA and EBIT. For the Watson Comparable Companies: the LTM net
revenue multiples ranged from 1.08x to 4.66x (2.31x mean), the estimated 1996
net revenue multiples ranged from 1.10x to 3.17x (2.38x mean) and the estimated
1997 net revenue multiples ranged from 0.99x to 2.71x (2.00x mean); the LTM
EBITDA multiples ranged from 7.4x to 25.0x (17.2x mean), the estimated 1996
EBITDA multiples ranged from 6.8x to 19.5x (13.0x mean) and the estimated 1997
EBITDA multiples ranged from 6.0x to 12.6x (9.3x mean); the LTM EBIT multiples
ranged from 11.4x to 59.1x (28.3x mean), the estimated 1996 EBIT multiples
ranged from 10.3x to 26.0x (17.1x mean) and the estimated 1997 EBIT multiples
ranged from 8.3x to 17.0x (11.3x mean). Furman Selz also calculated multiples by
dividing each of the Watson Comparable Companies' closing sale price per share
on September 20, 1996 by the respective LTM EPS, estimated calendar 1996 EPS and
estimated calendar 1997 EPS. Such stock price to LTM EPS multiples ranged from
17.1x to 93.8x (36.6x mean), such stock price to estimated calendar 1996 EPS
multiples ranged from 15.1x to 51.3x (29.7x mean) and such stock price to
estimated calendar 1997 EPS multiples ranged from 11.8x to 20.5x (15.9x mean).
Applying the LTM mean multiples to Watson's LTM net revenue, LTM EBITDA, LTM
EBIT and LTM net income yield an implied Watson share price range of $17.21 to
$64.17. Applying the 1996 mean multiples to Watson's 1996 net revenue, 1996
EBITDA, 1996 EBIT and 1996 net income yield an implied Watson share price range
of $19.21 to $57.56. Applying the 1997 mean multiples to Watson's 1997 net
revenue, 1997 EBITDA, 1997 EBIT and 1997 net income yield an implied Watson
share price range of $19.70 to $37.78. Based upon the closing price per share of
Watson's Common Stock on September 20, 1996 of $33.00: Watson's LTM, estimated
1996 and estimated 1997 net revenue multiples were 5.88x, 5.08x and 4.10x,
respectively; Watson's LTM, estimated 1996 and estimated 1997 EBITDA multiples
were 14.0x, 12.0x and 9.0x, respectively; Watson's LTM, estimated 1996 and
estimated 1997 EBIT multiples were 15.2x, 12.7x and 9.6x, respectively; and,
Watson's LTM, estimated calendar 1996 and estimated calendar 1997 EPS multiples
were 18.8x, 17.1x and 15.4x, respectively. Furman Selz compared the Watson
Comparable Company ratios to those of Watson and concluded that the Watson
multiples were consistent with the range of multiples derived from the Watson
Comparable Companies. Because of the inherent differences in the business,
operations, and prospects of Watson and the businesses, operations and prospects
of the Watson Comparable Companies, Furman Selz believed it was inappropriate
to, and therefore did not rely solely on the quantitative results of the
analysis, but rather also made qualitative judgments concerning differences
between the financial and operating characteristics and prospects of Watson and
the Watson Comparable Companies that would affect the public trading values of
each. In this regard, Furman Selz noted the markets in which Watson operates,
the overall competitive environment of these markets, and the operating
infrastructure and distribution network of Watson. These qualitative judgments
did not result in specific analyses or conclusions but rather were part of
Furman Selz's evaluation of the relevancy of the foregoing comparative
quantitative analysis.
Discounted Cash Flow Analysis. Furman Selz performed a discounted cash flow
analysis of Watson based upon a series of financial projections prepared by the
management of Watson for calendar years ending December 31, 1996 through
December 31, 2001 (the "Watson Projection"). Furman Selz discounted the
projected free cash flows (EBIT less taxes, capital expenditures and changes in
net working capital plus depreciation and amortization) plus the terminal value
(calculated as a
<PAGE> 36
multiple of future EBIT) derived from the Watson Projection to arrive at a
present value ("Present Value") for Watson. Furman Selz utilized multiples of
EBIT ranging from 7.0x to 13.0x. From this Present Value, Furman Selz
subtracted all debt obligations appearing on Watson's balance sheet at June
30, 1996 and added the excess cash balance on such balance sheet to arrive at
an equity value ("Equity Value") for Watson. Furman Selz performed sensitivity
analyses to understand the effect on the Equity Value of different discount
rates and terminal value multiples. Such analyses were performed under discount
rate assumptions ranging from 14.0% to 18.0%, based upon assumptions regarding
such factors as inflation rates, interest rates, Watson's cost of capital and
the inherent risks related to Watson's business, as well as the pharmaceutical
industry as a whole. Furman Selz observed that the implied value per share for
Watson ranged from $27.17 to $46.05 per share.
Pro Forma Merger Analyses. Furman Selz prepared pro forma analyses of the
financial impact of the Merger including and excluding estimated synergies.
Furman Selz prepared (i) a combined company analysis utilizing the Watson
Projection and the Oclassen Projection, assuming 4.091 million Watson shares
issued to Oclassen based on Watson's stock price of $33.00 as of September 20,
1996 ("Combined Company Analysis 1") and (ii) a combined company analysis
utilizing the Watson Projection and the Oclassen Projection, assuming the
maximum number of Watson shares issued to Oclassen (5.000 million) ("Combined
Company Analysis 2").
<PAGE> 37
Furman Selz calculated implied pro forma combined company share prices based on
various multiples derived from the Watson Comparable Companies analysis,
utilizing the Combined Company Analyses 1-2, including and excluding synergies.
Utilizing multiples of LTM net revenue, EBITDA, EBIT and EPS applied to Combined
Company Analysis 1, the combined company implied share price was calculated to
range from $11.90 to $28.84, $19.83 to $50.96, $25.21 to $102.51 and $28.71 to
$157.26, respectively. Utilizing multiples of 1996 net revenue, 1996 EBITDA,
1996 EBIT and 1996 EPS applied to Combined Company Analysis 1, the combined
company implied share price was calculated to range from $12.75 to $24.00,
$20.65 to $46.62, $26.60 to $56.50 and $28.00 to $94.90, respectively. Utilizing
multiples of 1997 net revenue, 1997 EBITDA, 1997 EBITDA including synergies,
1997 EBIT, 1997 EBIT including synergies, 1997 EPS and 1997 EPS including
synergies applied to Combined Company Analysis 1, the combined company implied
share price was calculated to range from $13.41 to $24.93, $23.32 to $41.61,
$23.87 to $42.76, $28.24 to $51.05, $29.00 to $52.61, $24.75 to $43.15 and
$25.45 to $44.36, respectively. Utilizing multiples of LTM net revenue, EBITDA,
EBIT and EPS applied to Combined Company Analysis 2, the combined company
implied share price was calculated to range from $11.66 to $28.25, $19.42 to
$49.92, $24.70 to $100.42 and $28.10 to $153.90, respectively. Utilizing
multiples of 1996 net revenue, 1996 EBITDA, 1996 EBIT and 1996 EPS applied to
Combined Company Analysis 2, the combined company implied share price was
calculated to range from $12.49 to $23.51, $20.22 to $45.67, $26.05 to $55.34
and $27.40 to $92.88, respectively. Utilizing multiples of 1997 net revenue,
1997 EBITDA, 1997 EBITDA including synergies, 1997 EBIT, 1997 EBIT including
synergies, 1997 EPS and 1997 EPS including synergies applied to Combined Company
Analysis 2, the combined company implied share price was calculated to range
from $13.14 to $24.42, $22.85 to $40.76, $23.38 to $41.89, $27.67 to $50.01,
$28.41 to $51.54, $24.23 to $42.24 and $24.91 to $43.42, respectively.
Furman Selz performed a series of discounted cash flow analyses based
on different pro forma combined company analyses which included the Combined
Company Analysis 1, the Combined Company Analysis 2, a combined company analysis
utilizing the Watson Projection and the Adjusted Oclassen Projection assuming
4.091 million Watson shares issued to Oclassen based on Watson's stock price of
$33.00 as of September 20, 1996 ("Combined Company Analysis 3"), and a combined
company analysis utilizing the Watson Projection and the Adjusted Oclassen
Projection assuming the maximum number of Watson shares issued to Oclassen
(5.000 million) ("Combined Company Analysis 4"), in each case, including and
excluding synergies. Furman Selz applied discount rates of 14% to 18% and
utilized multiples of EBIT of 7.0x to 13.0x. These discounted cash flow
analyses, excluding synergies, yielded a range of per share value for the
combined company common stock, on a pro forma basis, ranging from $29.32 to
$51.04, $28.72 to $50.00, $27.59 to $47.31, and $27.02 to $46.35, respectively.
Including synergies, these discounted cash flow analyses yielded a range of per
share value for the combined company common stock, on a pro forma basis, ranging
from $29.85 to $52.01, $29.25 to $50.95, $28.12 to $48.29 and $27.55 to $47.30,
respectively.
<PAGE> 38
Furman Selz examined certain historical financial information for
Watson, Oclassen and the pro forma combined company resulting from the Merger.
Furman Selz analyzed the relative pro forma contribution of Oclassen to Watson
actual and projected net revenue, gross profit, EBITDA, EBIT, pretax income and
net income for the years ended December 31, 1995, 1996, 1997 and 1998 utilizing
the Watson Projection and the Oclassen Projection. Utilizing the Watson
Projection and the Oclassen Projection, Furman Selz observed that immediately
following the consummation of the Merger, assuming 4.091 Watson shares issued to
Oclassen based on Watson's stock price on September 20, 1996, stockholders of
Watson are expected to own approximately 90.6% of the pro forma combined entity.
Assuming the maximum number of Watson shares issued to Oclassen (5.000 million),
stockholders of Watson are expected to own approximately 88.8% of the pro forma
combined entity. This analysis indicated that, for the actual year ended
December 31, 1995 Oclassen would have contributed 16.1% to net revenue, 18.0%
to gross profit, 4.1% to EBITDA, 3.1% to EBIT, 2.9% to pretax income and 4.4%
to net income of the pro forma combined entity. For the projected year ending
December 31, 1996, Oclassen would contribute 14.4% to net revenue, 16.8% to
gross profit, 3.7% to EBITDA, 2.8% to EBIT, 4.0% to pretax income and 5.7% to
net income. For the projected year ending December 31, 1997, Oclassen would
contribute 14.0% to net revenue, 16.7% to gross profit, 5.6% to EBITDA, 5.1%
to EBIT, 5.9% to pretax income and 7.9% to net income. For the projected year
ending December 31, 1998, Oclassen would contribute 14.9% to net revenue,
17.7% to gross profit, 7.2% to EBITDA, 6.9% to EBIT, 7.2% to pretax income and
6.9% to net income. Utilizing the Watson Projection, the Oclassen Projection
and the impact of the combined company synergies, Furman Selz observed that
for the projected year ended December 31, 1997, Oclassen would have
contributed 14.0% to net revenue, 16.7% to gross profit, 5.4% to EBITDA, 4.9%
to EBIT, 5.7% to pretax income and 7.7% to net income of the pro forma
combined entity. Additionally, for the projected year ended December 31, 1997,
the combined company synergies would have contributed 3.2% to EBITDA, 3.4% to
EBIT, 3.0% to pretax income and 2.7% to net income of the pro forma combined
entity. For the projected year ending December 31, 1998, Oclassen would
contribute 14.9% to net revenue, 17.7% to gross profit, 6.9% to EBITDA, 6.6%
to EBIT, 7.0% to pretax income and 6.7% to net income. Additionally, for the
projected year ending December 31, 1998, the combined company synergies would
contribute 3.4% to EBITDA, 3.6% to EBIT, 3.1% to pretax income and 3.1% to net
income. The results of the contribution analysis are not necessarily
indicative of what the actual contributions of the respective businesses to
the combined entity will be in the future.
Separately, Furman Selz noted that based on the Watson Projection, the
Oclassen Projection, the combined company synergies and utilizing 4.091 million
shares issued to Oclassen based on Watson's stock price of $33.00 as of
September 20, 1996, the Merger would be non-dilutive, on an average EPS basis
(excluding any transaction costs associated with the Merger), in the years
ending 1997 and 1998 to Oclassen stockholders.
Other Factors and Comparative Analyses. In rendering its opinion, Furman Selz
considered certain other factors and conducted certain other comparative
analyses, including, among other things, (i) the businesses and operations of
Watson and Oclassen and the industries in which they operate, (ii) Watson's and
Oclassen's historical operating results, (iii) the Watson Projection, the
Oclassen Projection, the Adjusted Oclassen Projection, Combined Company Analysis
1, Combined Company Analysis 2, Combined Company Analysis 3, and Combined
Company Analysis 4, including and excluding synergies, (iv) the
current and historical stock price performance of Watson, and (v) other
factors it deemed relevant.
<PAGE> 39
Fees and Expenses. On May 27, 1996 Watson entered into a letter agreement with
Furman Selz pursuant to which Furman Selz was engaged by Watson to render a
written opinion to the Board of Directors of Watson as to the fairness, from a
financial point of view, to Watson of the Merger Consideration to be paid to
Oclassen's stockholders. Under this letter agreement, Watson agreed to pay
Furman Selz a fee of $250,000 payable upon delivery by Furman Selz of the
opinion described above and a fee equal to 0.6% of the aggregate Merger
consideration (net of the $250,000 referred to above) payable upon the closing
of the Merger. In addition to the foregoing compensation, the Company agreed to
reimburse Furman Selz for its reasonable out-of-pocket expenses (including legal
fees and disbursements) in connection with its services and to indemnify Furman
Selz against certain liabilities and expenses arising out of or in connection
with Furman Selz's engagement.
Furman Selz is a nationally recognized investment banking firm and was selected
by Watson based on Furman Selz's experience and expertise in addition to the
fact that Furman Selz has provided investment advisory services to Watson
since August 1991. Furman Selz regularly engages in the valuation of
businesses and their securities in connection with mergers and acquisitions,
negotiated underwritings, competitive bids, secondary distributions of listed
and unlisted securities, private placements and valuations for estate,
corporate and other purposes. Furman Selz has previously provided investment
advisory and other services to Watson in the past for which Furman Selz
received customary fees, and may in the future perform similar services. In
the ordinary course of its business, Furman Selz may actively trade in the
equity securities of Watson 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.
OPINION OF OCLASSEN'S FINANCIAL ADVISOR
Lehman Brothers acted as financial advisor to Oclassen in connection
with the Merger, as described under "-- Background of the Merger." As part of
its role as financial advisor to Oclassen, Lehman Brothers was engaged to render
to the Oclassen Board an opinion as to the fairness, from a financial point of
view, to the stockholders of Oclassen of the consideration to be offered to such
stockholders in the Merger. See "-- Background of the Merger."
In connection with the evaluation of the Merger Agreement by the
Oclassen Board, Lehman Brothers made a presentation to the Oclassen Board on
September 24, 1996, with respect to the Merger and rendered a written opinion
dated September 25, 1996 that, as of the date of such opinion, and subject to
certain assumptions, factors and limitations set forth in such opinion as
described below, the consideration to be offered to Oclassen's stockholders in
the Merger is fair, from a financial point of view, to such stockholders.
Lehman Brothers' opinion will not be updated or modified.
The full text of the written opinion of Lehman Brothers is attached as
Appendix D to this Proxy Statement/Prospectus. Oclassen's stockholders may read
such opinion for a discussion of the assumptions made, factors considered and
limitations on the review undertaken by Lehman Brothers in rendering its
opinion. Lehman Brothers' opinion is for the use and benefit of the Board of
Directors of Oclassen and was rendered to the Board in connection with its
consideration of the Merger. Lehman Brothers' opinion is not intended to be and
does not constitute a recommendation to any stockholder of Oclassen as to how
such stockholder should vote with respect to the Merger Agreement. The summary
of the opinion of Lehman Brothers set forth in this Proxy Statement/Prospectus
is qualified in its entirety by reference to the full text of such opinion.
No limitations were imposed by Oclassen on the scope of Lehman
Brothers' investigation or the procedures to be followed by Lehman Brothers in
rendering its opinion except that Oclassen did not authorize Lehman Brothers to
solicit, and Lehman Brothers did not solicit, any indications of interest from
any third party with respect to the purchase of all or a part of Oclassen's
business. Lehman Brothers was not requested to and did not make any
recommendation to the Oclassen Board as to the form or amount of consideration
to be offered to Oclassen's stockholders in the Merger, which was determined
through arm's-length negotiations between Oclassen and its financial and legal
advisors and Watson and its financial and legal advisors. In arriving at its
opinion, Lehman Brothers did not ascribe a specific range of value to Oclassen
but made its determination as to the fairness, from a financial point of view,
of the consideration to be offered to Oclassen's stockholders on the basis of
the financial and comparative analyses described below. Lehman Brothers was not
requested to opine as to, and its opinion does not in any manner address, the
underlying business decision of the Oclassen Board to proceed with or effect the
Merger.
In arriving at its opinion, Lehman Brothers reviewed and analyzed: (1)
the Merger Agreement and the specific terms of the Merger, (2) such publicly
available information concerning Watson that Lehman Brothers believed to be
relevant to its analysis, (3) financial and operating information with respect
to the business, operations and prospects of Oclassen furnished to Lehman
Brothers by Oclassen, including without limitation certain projections prepared
by management of Oclassen, (4) financial and operating information with respect
to the business, operations and prospects of Watson furnished to Lehman Brothers
by Watson, including without limitation certain projections prepared by
management of Watson, (5) a three-year trading history of Watson's common stock
and a comparison of that trading history with those of other companies that
Lehman Brothers deemed relevant, (6) a comparison of the historical financial
results and present
<PAGE> 40
financial condition of Oclassen with those of other companies that Lehman
Brothers deemed relevant, (7) a comparison of the historical financial results
and present financial condition of Watson with those of other companies that
Lehman Brothers deemed relevant, (8) third party research analysts' quarterly
and annual earnings estimates and recommendations for Watson, (9) the potential
pro forma financial effects of the Merger, and (10) a comparison of the
financial terms of the Merger with the financial terms of certain other
transactions that Lehman Brothers deemed relevant. In addition, Lehman Brothers
had discussions with the managements of Oclassen and Watson concerning their
respective businesses, operations, assets, financial conditions and prospects
and the operating synergies and strategic benefits expected to result from a
combination of the businesses of Oclassen and Watson and undertook such other
studies, analyses and investigations as it deemed appropriate.
In arriving at its opinion, Lehman Brothers assumed and relied upon the
accuracy and completeness of the financial and other information used by it
without assuming any responsibility for independent verification of such
information and further relied upon the assurances of management of Oclassen
that they were not aware of any facts that would make such information
inaccurate or misleading. With respect to the financial projections of Oclassen,
upon advice of Oclassen Lehman Brothers assumed that such projections were
reasonably prepared on a basis reflecting the best currently available estimates
and judgments of the management of Oclassen as to the future financial
performance of Oclassen, and Lehman Brothers relied upon such projections in
arriving at its opinion. With respect to the financial forecasts of Watson,
Lehman Brothers assumed that such forecasts were reasonably prepared on a basis
reflecting the best currently available estimates and judgments of the
management of Watson as to the future financial performance of Watson and that
Watson would perform substantially in accordance with such forecasts. In
arriving at its opinion, Lehman Brothers did not conduct a physical inspection
of the properties and facilities of Oclassen or Watson and did not make or
obtain any evaluations or appraisals of the assets or liabilities of Oclassen or
Watson. In addition, Oclassen did not authorize Lehman Brothers to solicit, and
Lehman Brothers did not solicit, any indications of interest from any third
party with respect to the purchase of all or a part of Oclassen's business.
However, in arriving at its opinion, Lehman Brothers considered the proposals
received by Oclassen from investment banking firms regarding a theoretical
public market valuation of Oclassen in connection with an initial public
offering. Upon advice of Oclassen and its legal and accounting advisors, Lehman
Brothers assumed that the Merger would qualify as a reorganization within the
meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended, and
therefore as a tax-free transaction to the stockholders of Oclassen. Lehman
Brothers' opinion necessarily was based upon market, economic and other
conditions as they existed on, and could be evaluated as of, the date of its
September 25, 1996 written opinion.
In connection with preparing its presentation to the Oclassen Board on
September 24, 1996, and its written opinion dated September 25, 1996, Lehman
Brothers performed a variety of financial and comparative analyses as summarized
below. The preparation of a fairness opinion involves various determinations as
to the most appropriate and relevant methods of financial analysis and
application of those methods to the particular circumstances and, therefore,
such an opinion is not readily susceptible to summary description. Furthermore,
in arriving at its opinion, Lehman Brothers did not attribute any particular
weight to any analysis or factor considered by it, but rather made qualitative
judgments as to the significance and relevance of each analysis and factor.
Accordingly, Lehman Brothers believes that its analyses must be considered as a
whole and that considering any portions of such analyses and factors, without
considering all analyses and factors, could create a misleading or incomplete
view of the process underlying the opinion. In its analyses, Lehman Brothers
assumed stable business and economic conditions and a stable competitive
environment in the markets in which Oclassen and Watson operate. These
conditions and environments are beyond the control of Oclassen and Watson. Any
estimates contained in these analyses are not necessarily indicative of actual
values or predictive of future results or values, which may be more or less
favorable than as set forth therein. In addition, analyses relating to the value
of businesses do not purport to be appraisals or to reflect the prices at which
businesses actually may be sold.
Exchange Ratio Analysis. This analysis sets forth the implied value to be
received by Oclassen stockholders on a per share basis and describes the number
of Watson common shares to be received for each Oclassen common share
outstanding under various Watson common stock price scenarios. The closing
price of Watson Common Stock on September 20, 1996 (the last trading day prior
to the preparation of Lehman Brothers' presentation to the Oclassen Board on
<PAGE> 41
September 24, 1996) was $33.00. Within the negotiated collar range of $27.00 to
$35.00 per Watson common share (the "Collar Range"), the $135 million aggregate
purchase price for Oclassen implies a value of $12.93 per Oclassen share,
including common and common equivalent shares and all outstanding options. At
or above a price of $35.00 per Watson common share (the high end of the Collar
Range) and at or below a price of $27.00 per Watson common share (the low end of
the Collar Range), the implied exchange ratios are approximately 0.370 and 0.479
Watson common shares per Oclassen common share, respectively.
Analysis of Selected Publicly Traded Companies Comparable to Oclassen. In
order to compare the valuation of Oclassen, based upon a $135 million
aggregate purchase price (or $12.93 per common share on a fully diluted basis
assuming conversion of all preferred shares to common stock) within the Collar
Range (the "Oclassen Equity Value"), with the public market valuations of
certain comparable companies and to assess changes in these valuations since
January 1, 1996, Lehman Brothers analyzed selected financial data of Oclassen
and similar publicly available data of selected companies engaged in businesses
considered by Lehman Brothers to be comparable to that of Oclassen. Lehman
Brothers reviewed the ratios of the Oclassen Equity Value to certain
Oclassen-specific parameters and compared those ratios to similar ratios of the
selected publicly traded comparable companies. Lehman Brothers also reviewed the
changes in stock prices and price/earnings multiples of the selected comparable
companies from January 1, 1996 to September 20, 1996. Lehman Brothers included
in its review certain dermatology and related companies, including Medicis
Pharmaceutical Corporation ("Medicis") and Penederm Incorporated ("Penederm"),
in addition to certain specialty pharmaceutical companies, including Dura
Pharmaceuticals, Inc., Forest Laboratories, Inc., Jones Medical Industries, Inc.
and Roberts Pharmaceutical Corporation (the "Specialty Pharmaceutical Comparable
Companies"). Lehman Brothers calculated the multiple of, among other things, the
current stock price of Medicis, Penederm and the Specialty Pharmaceutical
Comparable Companies to: (i) the estimated 1996 earnings per share (the "1996
P/E multiple") and (ii) the estimated 1997 earnings per share (the "1997 P/E
multiple") for such companies based on estimates provided by IBES (a service
company used widely by the investment community to gather earnings estimates
from various research analysts). Lehman Brothers noted that, as of September 20,
1996, Medicis' 1996 P/E multiple was 41.6x, or 52.6x assuming the completion of
its then pending common stock offering valued at approximately $75 million
("Post-Offering"); and the Specialty Pharmaceutical Comparable Companies had a
mean 1996 P/E multiple of 50.6x and maximum and minimum 1996 P/E multiples of
70.5x and 18.9x, respectively. In addition, the Oclassen share prices implied
by the above multiples are $17.94, $22.68, $21.82, $30.39 and $8.15,
respectively, compared with $12.93 within the Collar Range. Lehman Brothers also
noted that, as of September 20, 1996, Medicis' 1997 P/E multiple was 30.6x, or
38.6x Post-Offering; and the Specialty Pharmaceutical Comparable Companies had a
mean 1997 P/E of 40.1x and maximum and minimum 1997 P/E multiples of 56.2x and
14.6x, respectively. In addition, the Oclassen share prices implied by the above
multiples are $20.52, $25.89, $26.89, $37.69 and $9.79, respectively, compared
with $12.93 within the Collar Range. $enederm had net losses forecasted for 1996
and 1997 and therefore provided no relevant comparison. Lehman Brothers noted
that Oclassen's 1996 P/E multiple and 1997 P/E multiple of 30.0x and 19.3x,
respectively, based on the Oclassen Equity Value, were below the multiples for
Medicis and the mean multiples for the Specialty Pharmaceutical Comparable
Companies. Lehman Brothers noted that as of September 20, 1996 the median
changes from January 1, 1996 to September 20, 1996 of: (i) the stock prices and
(ii) the 1997 P/E Multiples of Medicis, Penederm and the Specialty
Pharmaceutical Comparable Companies were 67.2% and 93.1%, respectively.
Analyses of Selected Comparable Transactions. In order to analyze the
Oclassen Equity Value versus valuations paid in certain comparable transactions,
Lehman Brothers compared selected financial data for Oclassen to similar
publicly available data for nine selected transactions in the specialty and
other pharmaceutical industries (the "Comparable Merger Transaction Universe"),
which Lehman Brothers deemed to be comparable transactions. Lehman Brothers
reviewed the ratios of either the Oclassen Equity Value or the sum of the
Oclassen Equity Value and Oclassen's net debt to certain Oclassen-specific
parameters and compared those ratios to similar ratios for the Comparable Merger
Transaction Universe. The Comparable Merger Transaction Universe included the
following transactions: Jones Medical Industries, Inc./Daniels Pharmaceuticals,
Inc.; Teva Pharmaceutical Industries Ltd./Biocraft Laboratories Inc.; Watson
Pharmaceuticals, Inc./Circa Pharmaceuticals, Inc.; IVAX Corporation/Zenith
Laboratories, Inc.; Hoechst Celanese Corporation/Copley Pharmaceutical, Inc.;
IVAX Corporation/LuChem Pharmaceuticals, Inc.; IVAX Corporation/Baker Cummins
Dermatologicals, Inc.; Mylan Laboratories Inc./Dow B Hickam and
Colgate-Palmolive Company/Scherer Healthcare, Inc. (Dental Pharmaceutical
Business). Lehman Brothers noted that the total equity value as a multiple of
LTM Net Income for Oclassen in the Merger was 34.6x as compared with 37.0x for
the mean of the Comparable Merger Transaction Universe and 65.3x and 8.3x for
the maximum and minimum multiples, respectively. The Oclassen share prices
implied by the above multiples are $13.83, $24.40 and $3.10, respectively,
compared with $12.93 within the Collar Range. Lehman Brothers also calculated
the multiple of equity value plus net debt to: Last Twelve Months ("LTM")
Revenues, LTM Earnings Before Interest, Taxes, Depreciation and Amortization
("EBITDA") and LTM Earnings Before Interest and Taxes ("EBIT"). Lehman Brothers
observed that Oclassen's transaction multiples were 3.54x, 29.4x and 38.1x,
respectively, as compared to the mean transaction multiples of the Comparable
Merger Transaction Universe of 5.22x, 24.1x and 26.4x, respectively, and as
compared to the maximum multiples of 13.99x, 39.0x and 42.4x and the minimum
multiples of 1.14x, 5.6x and 5.9x, respectively. The Oclassen share prices
implied by the above multiples are $17.99, $11.05, $9.67, $44.29, $16.43,
$14.12, $5.75, $4.36 and $3.97, respectively, compared with $12.93 within the
Collar Range.
However, because the reasons for and the circumstances surrounding each
of the transactions analyzed were specific to each such transaction, and because
of the inherent differences among the businesses, operations and prospects of
the selected acquired companies analyzed, Lehman Brothers believed that it was
inappropriate to, and therefore did not, rely solely on the quantitative results
of the comparable transactions analysis and, accordingly, also made qualitative
judgments concerning differences between the structures, terms and
characteristics of these transactions and the Merger that would affect the
transaction values of Oclassen and such acquired companies. In particular,
Lehman Brothers considered the size and desirability of the markets of
operation relative to those of Oclassen's, the strategic fit of the acquired
company with the acquiring company, the form of consideration offered to the
seller and the tax characteristics of the transaction. These qualitative
judgments do not lead to specific conclusions regarding the Oclassen Equity
Value, but rather were part of Lehman Brothers' evaluation of the relevancy of
this comparative analysis under the particular circumstances of the Merger.
<PAGE> 42
Oclassen Discounted Cash Flow Analysis. Lehman Brothers calculated the present
value of the future streams of after-tax cash flows that Oclassen could be
expected to produce over a five-year period in order to measure the potential
theoretical equity valuation of Oclassen. The analysis utilized financial and
operating information relating to the business, operations and prospects of
Oclassen provided by Oclassen's management and relied on certain assumptions
with respect to Oclassen's future business and operations. After-tax cash flows
were calculated as the unlevered after-tax earnings plus Amortization and
Depreciation less net changes in non-cash Working Capital and Capital
Expenditures. Lehman Brothers calculated terminal values for Oclassen in 2001 by
applying to a projected EBIT a range of multiples of 8.0x to 16.0x. Lehman
Brothers' determination of the appropriate range of multiples was based on an
assessment of current trading multiples of the Specialty Pharmaceutical
Comparable Companies and on Lehman Brothers' general experience in valuations of
companies. The cash flow streams and terminal values were then discounted to
present values using a range of discount rates of 25.0% to 35.0%, which were
chosen based on several assumptions regarding factors such as the inflation
rate, interest rates, the inherent business risk in Oclassen's business and new
product development, and the cost of capital of Oclassen. Lehman Brothers
calculated the implied equity values under two different scenarios which
differed only in that they utilized different product pipeline realization
assumptions in calculating the terminal year 2001 EBIT and after-tax cash flows.
The analysis yielded a range of values for Oclassen Common Stock on a fully
diluted basis of $90.4 million to $340.2 million. The Oclassen share prices
implied by the above equity values are $8.66 and $32.59, respectively, compared
with $12.93 within the Collar Range. Lehman Brothers noted that the Oclassen
Equity Value was within the reference range.
Watson Common Stock Price Trading Analysis. In order to analyze Watson's stock
as the consideration to be received in the Merger by Oclassen stockholders,
Lehman Brothers analyzed Watson's stock price over the 52-week period ended
September 20, 1996. In addition, Lehman Brothers reviewed certain publicly
available forecasts as to Watson's future earnings performance. The closing
price of Watson Common Stock on September 20, 1996 was $33.00 per share. The
high and low closing prices for Watson Common Stock for the preceding 52-week
period were $49.50 and $26.00, respectively. Lehman Brothers noted that Watson's
stock price experienced significant volatility and significant net declines
during the 52 weeks ended September 20, 1996. Watson's stock experienced four
price drops of between 15% and 25% from November 1995 through July 1996, largely
as a result of external sector and market factors including investor sentiment
about the generic pharmaceutical industry. Watson's stock price declined more
than 20% in August 1996, to its 52-week low of $26.00, as a result of the new
competitive environment for Watson's Somerset Joint Venture which had changed
based on an announcement made in August 1996 ("the Competition Announcement").
Lehman Brothers noted that the Collar Range provided protection to preserve the
$135 million of value to Oclassen's stockholders within the range of $27.00 to
$35.00 per Watson share in light of the recent volatility in Watson's share
price. In addition, for the 52-week period preceding September 20, 1996, Lehman
Brothers analyzed: (i) Watson's stock price performance relative to the Generic
Drug Comparable Companies and the Nasdaq Composite Index and (ii) the trading
volume distribution by price of Watson's common stock. Lehman Brothers noted
that during this period Watson under-performed both the Generic Drug Comparable
Companies and the Nasdaq Composite Index and that the majority of Watson common
stock traded in this period was traded for prices above the Collar Range. Lehman
Brothers also analyzed the premium or discount of the share prices at the high
and low ends of the Collar Range versus Watson's 30-, 60-, 90-, 180- and 360-day
average share prices and Watson's 52-week high and low share prices. Lehman
Brothers noted that the high end of the Collar Range represented a premium to
the 30-, 60-, and 90-day averages and the 52-week low and represented a discount
to the 180- and 360-day averages and the 52-week high share price. Lehman
Brothers also noted that the low end of the Collar Range represented a discount
to all of the above share prices excluding the 52-week low. Lehman Brothers
also observed third party analysts' expectations for Watson's earnings, noting
that Watson's five-year median IBES estimated growth rate for earnings per
share was 21.5%.
Historical Forward Price/Earnings Analysis. In order to compare the current
valuation of Watson on a forward P/E multiple (the "Forward P/E") basis with its
historical valuation on a Forward P/E basis, Lehman Brothers analyzed Watson's
current and historical Forward P/E's. Lehman Brothers calculated Watson's
current (as of September 20, 1996) and historical Forward P/E using Watson's
stock price performance since the beginning of 1993 and historical earnings per
share estimates for Watson from IBES, in addition to a modified earnings per
share estimate from First Call (another service company used widely by the
investment community to gather earnings estimates from various research
analysts), to calculate only the Forward P/E as of September 20, 1996. Lehman
Brothers utilized First Call estimates for the Forward P/E as of September 20,
1996 because First Call estimates, while substantially similar to IBES estimates
in aggregate, can be broken down by individual research analyst which allowed
Lehman Brothers to examine which analysts had revised their estimates downward
to give effect to the Competition Announcement. Lehman Brothers used a 1997
earnings per share estimate of $2.20, which was the median estimate of the three
analysts who had given effect to the Competition Announcement. As of September
20, 1996, Watson's Forward P/E multiple was 15.0x, based on Watson's $33.00
stock price and its estimated 1997 earnings per share of $2.20. This figure
falls within the Forward P/E multiple range of 14.1x to 34.7x in which Watson
Common Stock has traded since the beginning of 1993.
Watson Common Stock Trading Volume Analysis. Lehman Brothers analyzed the
historical daily trading volume of Watson Common Stock over various periods so
that the Oclassen Board could consider the opportunity for those Oclassen
stockholders who, after the Merger, choose to sell all or a portion of their
Watson Common Stock to achieve complete or partial liquidity of their holdings.
The 30, 60, 90, 180 and 360 day average daily trading volume of Watson Common
Stock was approximately 397,864,
<PAGE> 43
637,670, 634,942, 468,873 and 424,781 shares, respectively. Lehman Brothers
noted that these volumes should represent sufficient trading levels to provide
liquidity to Oclassen stockholders, if desired.
Analysis of Selected Publicly Traded Companies Comparable to Watson. In order to
compare the equity value of Watson with the public market equity values of
certain comparable companies and to assess changes in these valuations since
January 1, 1996, Lehman Brothers analyzed selected publicly available financial
data of Watson and similar data of selected companies engaged in businesses
considered by Lehman Brothers to be comparable to that of Watson. Lehman
Brothers reviewed the ratios of Watson's equity value to certain
Oclassen-specific parameters and compared those ratios to similar ratios of the
selected publicly traded comparable companies. Lehman Brothers also reviewed the
changes in stock prices and price/earnings multiples of the selected comparable
companies from January 1, 1996 to September 20, 1996. Lehman Brothers included
in its review ALPHARMA Inc., Copley Pharmaceutical, Inc., IVAX Corporation,
Mylan Laboratories Inc. and Teva Pharmaceutical Industries Ltd. ("the Generic
Drug Comparable Companies"). The Generic Drug Comparable Companies were selected
based on general business, operating and financial characteristics
representative of companies in the industry in which Watson operates. Lehman
Brothers calculated, among other things, the 1996 P/E multiple and the 1997 P/E
multiple for Watson and the Generic Drug Comparable Companies based on estimates
provided by First Call and IBES, respectively. Lehman Brothers utilized First
Call estimates for Watson for the reasons noted above. Lehman Brothers used
earnings estimates for Watson of $1.92 and $2.20 for 1996 and 1997,
respectively, which were the median 1996 earnings per share estimate among all
analysts and the median 1997 earnings per share estimate among analysts who had
given effect to the Competition Announcement. Lehman Brothers noted that as of
September 20, 1996, Watson's 1996 P/E multiple was 17.2x as compared to 25.0x
for the median of the Generic Drug Comparable Companies and as compared to
maximum and minimum 1996 P/E multiples of 42.7x and 15.1x, respectively.
Watson's 1997 P/E multiple was 15.0x as compared to 16.7x for the median
multiple of the Generic Drug Comparable Companies and as compared to maximum and
minimum 1997 P/E multiples of 20.5x and 11.8x, respectively. Lehman Brothers
noted that as of September 20, 1996 the median changes from January 1, 1996 to
September 20, 1996 of: (i) the stock prices and (ii) the 1997 P/E Multiples of
the Generic Drug Comparable Companies were negative 31.4% and 2.8%,
respectively. Lehman Brothers noted that Watson's stock price declined 32.7% and
its 1997 P/E Multiple also declined 32.7% over the above time frame.
Lehman Brothers also calculated the multiple of, among other things, equity
market value plus net debt to: (i) LTM Revenues and (ii) LTM EBIT. Lehman
Brothers noted that as of September 20, 1996, Watson Common Stock traded at
7.06x LTM Revenues and 24.5x LTM EBIT compared with 1.78x and 24.3x,
respectively, for the median multiples of the Generic Drug Comparable Companies
and compared with 4.68x and 27.7x for the maximum multiples and 1.20x and 12.1x
for the minimum multiples of the Generic Drug Comparable Companies. Lehman
Brothers noted that the 1997 P/E multiple compared to the expected five-year
growth rate in earnings per share for Watson was 0.70x compared with 0.68x for
the median of the Generic Drug Comparable Companies and compared with 0.91x and
0.47x for the maximum and minimum multiples, respectively. Finally, Lehman
Brothers calculated the multiple of, among other things, the current stock price
to: (i) LTM earnings per share (the "LTM P/E multiple") and (ii) book value (the
"book value multiple"). Lehman Brothers noted that as of September 20, 1996,
Watson's LTM P/E multiple was 19.9x as compared with 23.8x for the median
multiple of the Generic Drug Comparable Companies and compared with 36.1x and
17.3x for the maximum and minimum multiples, respectively. In addition, Watson's
book value multiple was 3.6x versus 2.2x for the median multiple of the Generic
Drug Comparable Companies and compared with 5.8x and 1.7x for the maximum and
minimum multiples, respectively. Given this analysis, Lehman Brothers noted that
Watson Common Stock was generally trading at a slight discount to its Generic
Drug Comparable Companies based on P/E multiples and at a slight premium to its
Generic Drug Comparable Companies based on other multiples.
Pro Forma Analysis. Based on an analysis of the pro forma effects of the Merger,
Lehman Brothers calculated: (i) earnings accretion or dilution to Watson and
Oclassen stockholders, (ii) the percentage of the combined company owned by
Oclassen stockholders under different Watson stock price scenarios and (iii) the
pro forma capitalization of the combined company. Lehman Brothers noted that,
assuming no synergy savings and excluding one-time extraordinary charges, the
Merger is modestly dilutive to Watson's projected earnings per share in 1996 and
slightly dilutive in 1997. However, assuming moderate synergy savings, per
discussions with Watson and Oclassen, the Merger is neither dilutive nor
accretive in 1996 and accretive in 1997. Lehman Brothers also analyzed
Oclassen's net income on a stand-alone basis and the net income of the combined
company apportionable to Oclassen stockholders and found that the transaction is
accretive to Oclassen stockholders for both fiscal 1996 and 1997. Lehman
Brothers also noted that, on a fully diluted basis, Oclassen stockholders would
own approximately 11.1%, 9.3%, or 8.8% of Watson on a fully diluted basis after
completion of the Merger, assuming Watson's stock price is: at or below the low
end of the Collar Range, at $33.00 per share (the stock price at September 20,
1996) or at or above the high end of the Collar Range, respectively. Lehman
Brothers also analyzed the pro forma capitalization of Watson and noted that the
merger would slightly increase Watson's cash and stockholders' equity accounts.
Contribution Analysis. Lehman Brothers reviewed, among other things, the
respective contributions of Watson and Oclassen to the estimated Revenue,
Operating Income and Net Income of the merged company for fiscal 1996 and fiscal
1997. The analysis utilized financial and operating information relating to the
business, operations and prospects of Watson and Oclassen provided by Watson and
Oclassen, respectively, and assumed no synergy savings. The analysis indicated
that: (i) in fiscal 1996 Oclassen would contribute approximately 14% of Revenue,
3% of EBIT and 6% of Net Income of the merged company and (ii) in fiscal 1997
Oclassen would contribute approximately 14% of Revenue, 5% of EBIT and 8% of Net
Income of the merged company.
<PAGE> 44
Engagement of Lehman Brothers. Lehman Brothers is an internationally
recognized investment banking firm and, as part of its investment banking
activities, is regularly engaged in the evaluation of businesses and their
securities in connection with mergers and acquisitions, negotiated
underwritings, competitive bids, secondary distributions of listed and unlisted
securities, private placements, and valuations for corporate, estate and other
purposes. The Oclassen Board selected Lehman Brothers because of its expertise,
reputation and familiarity with the health care industry in general, and with
Oclassen, the specialty pharmaceutical industry and generic pharmaceutical
industry in particular, and because its investment banking professionals have
substantial experience in transactions similar to the Merger. Oclassen has
been a client of Lehman Brothers for over five years.
Pursuant to an engagement letter between Oclassen and Lehman Brothers, Oclassen
has agreed to pay Lehman Brothers a fee of approximately $1,350,000 for acting
as financial advisor in connection with the Merger, including rendering its
opinion. Of such fee a $75,000 retainer was due upon signing of the engagement
letter and $300,000 was due upon delivery of the written opinion and the
remainder is payable upon consummation of the Merger. Oclassen also agreed to
reimburse Lehman Brothers for its reasonable out-of-pocket expenses and to
indemnify Lehman Brothers for certain liabilities that may arise out of the
rendering of its opinion. Lehman Brothers may actively trade in the equity
securities of Watson for its own account and for the account of its customers
and, accordingly, may at any time hold a long or short position in such
securities. Lehman Brothers has provided certain investment banking services to
Oclassen from time to time.
<PAGE> 45
CALIFORNIA FAIRNESS HEARING
In connection with the issuance of the Watson Common Stock pursuant to
the Merger, Watson requested the California Department of Corporations to issue
a permit pursuant to Section 25121 of the California Corporations Code and that
the Department of Corporations hold a hearing as to the fairness of the proposed
Merger pursuant to Section 25142 of the California Corporations Code. The
purpose of Watson's request was to facilitate an exemption from registration
under Section 3(a)(10) of the Securities Act. A hearing upon the fairness of the
proposed transaction was held on Friday, November 8, 1996 following notice to
the Oclassen stockholders. Following the hearing, the Commissioner of
Corporations issued the requested permit based upon a finding that the terms of
the proposed Merger are fair. A copy of the text of the permit is attached to
this Proxy Statement/Prospectus as Appendix F. However, this offering of Watson
Common Stock is being made by registration upon the effectiveness of the
Registration Statement, and not by means of the Section 3(a)(10) or other
exemption under the Securities Act.
RECOMMENDATION OF THE BOARD OF DIRECTORS OF OCLASSEN
The Board of Directors of Oclassen believes that the Merger is fair to
and in the best interests of Oclassen and its stockholders and recommends that
the Oclassen stockholders vote for approval and adoption of the Merger
Agreement and approval of the Merger. In reaching its determination, the
Oclassen Board of Directors consulted with Oclassen management, as well as its
legal counsel and its financial advisors, and, in addition to the anticipated
benefits described above, considered the following material factors:
(1) Oclassen's strategic alternatives, including remaining a
separate company in light of consolidation in the healthcare industry.
See "--Background of the Merger." Oclassen's Board of Directors
believes that the Merger will create a significantly stronger
pharmaceutical business than the two companies have operating
independently and will enable Oclassen's stockholders to continue to
share in the profits from Oclassen's current and future activities
while reducing the risks to which Oclassen would be subject as an
independent company.
(2) Information concerning the financial performance,
condition and business operations of Watson and Oclassen. See the
separate historical financial statements and the unaudited pro forma
condensed combined financial data of Watson and Oclassen that are
included elsewhere in this Proxy Statement/Prospectus or incorporated
in this Proxy Statement/Prospectus by reference.
<PAGE> 46
(3) The presentation of Lehman Brothers delivered to
Oclassen's Board of Directors at its meeting on September 24, 1996,
and the opinion of Lehman Brothers to the effect that, as of
September 25, 1996, the Merger was fair, from a financial point of
view, to the Oclassen stockholders. See "--Opinion of
Oclassen's Financial Advisor."
(4) The existing trading market for Watson Common Stock.
Oclassen's Board concluded that the Merger would provide Oclassen
stockholders with shares for which there is an established and liquid
trading market.
(5) The fact that the Merger will afford Oclassen's
stockholders the opportunity to receive Watson Common Stock in a
non-taxable transaction for federal income tax purposes.
(6) The opportunity for Oclassen's stockholders to continue
to share in the potential for long term gains from their investment in
Oclassen through their ownership of Watson Common Stock following the
Merger.
(7) The terms of the Merger, which were negotiated at
arms-length and over a significant period of time by the parties. The
Oclassen Board of Directors was concerned that, if the Merger was not
consummated after being publicly announced, Oclassen's reputation
might be damaged (even if non-consummation of the Merger was not a
result of any action or inaction by Oclassen), which could limit
strategic alternatives available to Oclassen in such event, such as
an initial public offering or other acquisition transactions.
Accordingly, Oclassen's Board of Directors deemed it important that
the Merger Agreement have minimal risk of termination, regardless of
the market value of Watson Common Stock during the period between
signing of the Merger Agreement and consummation of the Merger. In
considering the terms of the Merger, particular attention was given
by the Oclassen Board of Directors to (a) the consideration to be
received by the Oclassen stockholders, including the structure and
terms of the pricing collar, (b) the treatment of outstanding options
to acquire Oclassen Common Stock, (c) the benefits to be provided to
Oclassen employees after the Merger when they will be employees of
Watson, (d) the term and extent of the Escrow, including the fact
that no claims may be made against the Escrow until total claims
exceed $600,000, (f) the extent of the indemnification obligations of
Oclassen and Watson and (g) the conditions under which the Merger
Agreement could be terminated and the fact that upon any such
termination, each party would bear its own expenses incurred in
connection with the transaction, but that no break-up fees would be
payable by either party. The Oclassen Board of Directors also
considered the "no-shop" provisions of the Merger Agreement, which
obligate Oclassen, (a) except to the extent reasonably required by
fiduciary duty obligations under applicable laws, not to initiate,
solicit, encourage or negotiate any other merger, acquisition,
consolidation or similar transaction, (b) to terminate any such
activities existing at the time the Merger Agreement was executed
(there were none) and (c) to notify Watson if any inquiries, proposals,
discussions or negotiations are received or initiated (none have been
to date). The Oclassen Board of Directors recognized and considered the
fact that the "no-shop" provisions would essentially prevent Oclassen
from considering or entering into any other acquisition transaction
with a party other than Watson. The Oclassen Board of Directors was
aware of the terms of the employment agreements to be entered into with
three executive officers of Oclassen. See "--Interests of Certain
Persons in the Merger." The Oclassen Board of Directors believes that
retention of key officers and employees of Oclassen after consummation
of the Merger will be an important factor in any future development of
the Oclassen business and considered such employment agreements to be
reasonable in scope and an effective means for retaining these officers
after consummation of the Merger. The Oclassen Board of Directors
considered the terms of the Merger as a whole (and not individually)
and, given their experience in similar transactions, analysis of
comparable transactions and advice of Oclassen's financial and legal
advisors, determined to approve the Merger and adopt the Merger
Agreement.
(8) The fact that the Merger will be accounted for as a
pooling of interests.
(9) The likelihood that the Merger will be consummated.
(10) The advantages and disadvantages of the Merger of Oclassen
described above under "--Oclassen's Reasons for the Merger;
Advantages and Disadvantages of the Merger."
In view of the wide variety of factors considered in connection with
its evaluation of the proposed Merger, the Oclassen 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. See "--Oclassen's Reasons for the Merger; Advantages and
Disadvantages of the Merger."
THE OCLASSEN BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS
A VOTE FOR THE APPROVAL AND ADOPTION OF THE MERGER AGREEMENT
AND APPROVAL OF THE MERGER.
APPROVAL OF THE BOARD OF DIRECTORS OF WATSON
The Board of Directors of Watson believes that the Merger is fair to
and in the best interests of Watson and its stockholders, and therefore approved
the Merger. In reaching its determination, the Watson Board consulted with
Watson management, as well as its legal counsel and its financial advisors, and,
in addition to the anticipated benefits described above, considered the
following material factors:
(i) Watson's Board believes that the Merger will create a
significantly stronger pharmaceutical business than the two companies
have operating independently and will reduce risks to which Watson
would be subject as a stand-alone company.
(ii) Information concerning the financial performance,
condition and business operations of Watson and Oclassen. See the
separate historical financial statements and the unaudited pro forma
condensed combined financial data of Watson that are included
elsewhere in this Proxy Statement/Prospectus or incorporated in this
Proxy Statement/Prospectus by reference.
(iii) The presentation of Furman Selz delivered to Watson's
Board at its meeting on September 24, 1996, and the opinion of Furman
Selz to the effect that, as of September 20, 1996, the Merger was fair,
from a financial point of view, to the Watson stockholders. See "The
Merger -- Opinion of Watson's Financial Advisor."
(iv) The terms and conditions of the Merger, the Merger
Agreement and related matters. In considering the terms of the
Merger, particular attention was given by the Watson Board of
Directors to (a) the consideration to be received by the Oclassen
stockholders, including the structure and terms of the pricing collar,
(b) the treatment of outstanding options to acquire Oclassen Common
Stock, (c) the term and extent of the Escrow, including the fact that
no claims may be made against the Escrow until total claims exceed
$600,000, (d) the extent of the indemnification obligations of Oclassen
and Watson and (e) the conditions under which the Merger Agreement
could be terminated and the fact that upon any such termination, each
party would bear its own expenses incurred in connection with the
transaction, but that no break-up fees would be payable by either
party. The Board of Directors of Watson considered the terms of the
Merger as a whole (and not individually) and, given its experience in
similar transactions, analysis of comparable transactions and advice of
Watson's financial and legal advisors, determined to approve the Merger
and adopt the Merger Agreement.
(v) The fact that the Merger will be accounted for as a
pooling of interests.
(vi) The likelihood that the Merger will be consummated.
(vii) The advantages and disadvantages of the Merger for
Watson, described under the heading "--Watson's Reasons for the Merger;
Advantages and Disadvantages of the Merger."
In view of the wide variety of factors considered in connection with
its evaluation of the proposed Merger, the Watson Board 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.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Each of the directors and officers of Oclassen are stockholders and/or
option holders of Oclassen. As such, they will receive the same consideration as
other stockholders and option holders of Oclassen in the Merger. However, in
considering the recommendation of the Board of Directors of Oclassen with
respect to the Merger, Oclassen stockholders should be aware that Glenn A.
Oclassen, Chairman of the Board of Directors of Oclassen, Terry L. Johnson,
President, Chief Executive Officer and a director of Oclassen and Anthony A.
DiTonno, Vice President, Sales and Marketing of Oclassen have certain interests
in the Merger that are in addition to the interests of security holders of
Oclassen generally. In particular, in connection with the Merger, each of these
executive officers of Oclassen will enter into an employment agreement with
Watson providing for, among other things, the grant of additional options to
purchase shares of Watson Common Stock and severance payments under certain
circumstances. See "--Employment Agreements with Certain Oclassen Officers."
Stock Option Plans. As provided in the Merger Agreement, by virtue of
the Merger, all options (the "Oclassen Options") outstanding at the Effective
Time under Oclassen's 1992 Stock Option Plan, Oclassen's 1992 Director Stock
Option Plan or otherwise (collectively, the "Oclassen 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 of the directors and
officers of Oclassen holds one or more options to acquire Oclassen Common
Stock, which will be assumed by Watson in connection with the Merger. Each
Oclassen Option assumed by Watson will be exercisable upon the same terms and
conditions as under the applicable Oclassen Stock Option Plan and applicable
option agreements issued thereunder, except that (i) each Oclassen Option will
be exercisable for the whole number of shares of Watson Common Stock equal to
the product (rounded to the nearest whole share, with 0.5 rounded upward), of
(A) the number of shares of Oclassen Common Stock subject to the unexercised
portion of the Oclassen Option immediately prior to the Effective Time, times
(B) the Exchange Ratio (as defined below in "The Merger Agreement -- The
Merger") and (ii) the per share exercise price for each such Oclassen Option
will be equal to (A) the per share exercise price for each share of Oclassen
Common Stock subject to such Oclassen Option immediately prior to the Effective
Time divided by (B) the Exchange Ratio (the option
<PAGE> 47
price per share, as so determined, being rounded to the nearest full cent, with
$0.005 rounded upward). As of January 20, 1997, there were 1,478,479 Oclassen
Options outstanding at a weighted average price of $3.14 per share (at exercise
prices ranging from $3.00 to $10.00 per share). See "The Merger Agreement--The
Merger."
Employment Agreements with Certain Oclassen Officers. Watson believes
that the continued success of Oclassen is partially dependent on the retention
of certain key personnel of Oclassen. In order to retain the services of Glenn
A. Oclassen, the Chairman of the Board of Directors of Oclassen, Terry L.
Johnson, the President and Chief Executive Officer of Oclassen, and Anthony A.
DiTonno, the Vice President, Sales and Marketing of Oclassen, upon the
consummation of the Merger, such officers of Oclassen will each enter into an
employment agreement with Watson and Oclassen. Under the terms of the
employment agreements, Messrs. Oclassen, Johnson and DiTonno will receive
annual base salaries of $235,000, $315,000 and $188,000, respectively, subject
to such adjustments as the Chairman and Chief Executive Officer of Watson (or
the Board of Directors of Oclassen in the case of Messrs. Oclassen and DiTonno)
may, in his or its sole discretion, from time to time determine. In addition,
Mr. Johnson may receive a bonus, the amount of which will be determined at the
end of each calendar year by the Chairman and Chief Executive Officer of Watson
and which shall not exceed 40% of Mr. Johnson's then current annual base
salary. Messrs. Oclassen and DiTonno may receive a bonus, the amount of which
will be determined at the end of each calendar year by the Board of Directors
of Oclassen. These employment agreements also provide, among other items, that
upon consummation of the Merger, (i) Glenn A. Oclassen and Anthony A. DiTonno
will each be entitled to receive options to purchase 30,000 shares of Watson
Common Stock under Watson's 1991 Stock Option Plan; and (ii) Terry L. Johnson
will be entitled to receive options to purchase 40,000 shares of Watson Common
Stock under Watson's 1991 Stock Option Plan, in each case having an exercise
price equal to the fair market value of the Watson Common Stock on the date of
grant and vesting ratably over a five-year period. The value of such options
will depend upon the extent to which such options actually vest and the
difference between the exercise price for such options and the market price of
the Watson Common Stock at the time such options are exercised and the shares
are sold.
Additionally, these employment agreements provide that if Watson
terminates the employment of any of these employees without cause, Watson would
(i) in the case of Terry L. Johnson, continue to pay him his base salary for a
period of nine months after the date of termination; and (ii) in the case of
Glenn A. Oclassen and Anthony A. DiTonno, continue to pay them their base
salaries for a period of one month for each year that such employees were
employed by either Watson or Oclassen. If Watson terminates such employee's
employment without cause after a change of control of Watson or such employee
terminates his employment with Watson for good reason, the payments referenced
above will be made to such employee in one lump sum. Assuming that such
individuals were terminated without cause immediately after the Merger,
Messrs. Oclassen, Johnson and DiTonno would be entitled to receive severance
payments of $235,000, $236,250 and $125,333, respectively.
In connection with these employment agreements, each of Messrs.
Oclassen, Johnson and DiTonno has agreed, until the later of (a) the termination
of the consulting arrangement with Watson or (b) nine months after termination
of employment with Watson, not to compete in the dermatological business, and
not to solicit employees or customers of Oclassen.
Furthermore, if these employment agreements are terminated by Watson
for any reason other than cause, death or disability, or by such employee for
good reason on or prior to December 14, 1999, Watson agreed to enter into a
consulting agreement with such employee through December 14, 1999. The value of
such consulting arrangements cannot be quantified as it depends upon the date
of any such termination and the extent of the consulting services provided.
Bonuses and Benefit Plans. Each executive officer of Oclassen will,
like other employees of Oclassen, be eligible to participate in the benefit
programs assumed or made available by Watson following the Merger. In addition,
at a meeting held on November 22, 1996, the Oclassen Board of Directors approved
annual cash bonuses for 1996 performance to Oclassen officers and employees.
These bonuses were consistent with Oclassen's past practices, were within the
pool approved by Watson and were paid by Oclassen on January 2, 1997. See "The
Merger Agreement -- Bonus and 401 (k) Plan."
Board of Directors and Officers of Oclassen. At the Effective Time,
the Board of Directors of Oclassen will consist of Dr. Allen Chao, Terry L.
Johnson, Glenn A. Oclassen, Ronald R. Taylor, a current director of Watson, and
Michel Feldman, a current director of Watson and Watson's outside legal counsel.
Dr. Chao will serve as the Chairman of the Board of Directors of Oclassen, Mr.
Oclassen will serve as the Vice-Chairman of the Board of Directors of Oclassen,
Mr. Johnson will be elected as the President and Chief Executive Officer of
Oclassen, Anthony A. DiTonno will be elected as the Vice President, Sales and
Marketing of Oclassen and Frank Killey, Ph.D, the current Vice President,
Research and Development of Oclassen, will be elected as the Vice President of
Research and Development of Oclassen. The officers and directors of Watson will
not be affected by the Merger.
ACCOUNTING TREATMENT
Watson and Oclassen 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, Watson's independent public accountants. Under
this method of accounting, the assets and liabilities of Watson and Oclassen
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 Oclassen for the
entire fiscal period in which the combination occurs and the historical
<PAGE> 48
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 Watson
of a letter from Price Waterhouse LLP, stating that, in its opinion, the Merger
will qualify as a pooling of interests for accounting purposes. In addition,
consummation of the Merger is conditioned upon Oclassen having received from
Arthur Andersen LLP a letter, dated the Closing Date, indicating that Oclassen
has not taken any action that would preclude it from entering into a transaction
that would be treated 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 Oclassen Common Stock, Oclassen Preferred Stock or Watson Common
Stock by affiliates of Oclassen or Watson, respectively, may prevent the Merger
from qualifying as a pooling of interests for accounting and financial reporting
purposes. See "--Resale Restrictions."
FEDERAL INCOME TAX CONSEQUENCES
The following discussion summarizes the material federal income tax
considerations of the Merger that are generally applicable to holders of
Oclassen Common Stock and Oclassen Preferred Stock upon an exchange of such
shares in the Merger and reflects the tax opinions that have been rendered by
tax counsel to Watson, D'Ancona & Pflaum, and to Oclassen, Venture Law Group, A
Professional Corporation (the "Tax Opinions"), as to the treatment of the Merger
as a "reorganization" within the meaning of Section 368(a) of the Internal
Revenue Code of 1986 (the "Code"). The Tax Opinions have been filed as exhibits
to the Registration Statement of which this Proxy Statement/Prospectus is a
part. This discussion is based on currently existing provisions of the Code,
existing and proposed Treasury Regulations thereunder and current administrative
rulings and court decisions, all of which are subject to change. Any such
change, which may or may not be retroactive, could alter the tax consequences to
Watson, Oclassen or the Oclassen stockholders as described herein. Neither
Oclassen, Watson nor their respective counsel undertakes to advise Oclassen
stockholders of any such changes in the application or interpretation of such
federal income tax law.
The respective obligations of Watson and Oclassen to consummate the
Merger are conditioned upon the receipt of the Tax Opinions (which have been
rendered), 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.
If so treated, subject to the limitations and qualifications referred to herein,
the following tax consequences will generally result:
(a) No gain or loss should be recognized by holders of shares of
Oclassen Common Stock or Oclassen Preferred Stock solely upon their receipt in
the Merger of shares of Watson Common Stock (except to the extent of cash
received in lieu of a fractional share of Watson Common Stock) in exchange
therefor;
<PAGE> 49
(b) The aggregate tax basis of the shares of Watson Common Stock
received in the Merger (including any fractional share not actually received)
should be the same as the aggregate tax basis of shares of Oclassen Common Stock
or Oclassen Preferred Stock surrendered in exchange therefor;
(c) The tax holding period of the shares of Watson Common Stock
received in the Merger should include the period for which the shares of
Oclassen Common Stock or Oclassen Preferred Stock surrendered in exchange
therefor were held, provided that the shares of Oclassen Common Stock or
Oclassen Preferred Stock are held as a capital asset at the time of the Merger;
(d) An Oclassen stockholder who exercises appraisal rights with
respect to a share of Oclassen Common Stock or Oclassen Preferred Stock and
receives payment for such share in cash should generally recognize capital gain
or loss for federal income tax purposes (if such share is held as a capital
asset at the time of the Merger), measured by the difference between such
stockholder's basis in such share and the amount of cash received, provided that
the payment is neither essentially equivalent to a dividend within the meaning
of Section 302 of the Code nor has the effect of a distribution of a dividend
within the meaning of Section 356(a)(2) of the Code;
(e) Cash payments in lieu of a fractional share should be treated as
if a fractional share of Watson Common Stock had been issued in the Merger and
then redeemed by Watson. An Oclassen stockholder receiving such cash should
generally recognize gain or loss upon such payment equal to the difference (if
any) between such stockholder's basis in the fractional share and the amount of
cash received; and
(f) An Oclassen stockholder may recognize gain to the extent that such
stockholder receives or is treated as receiving (directly or indirectly) cash or
other consideration (other than solely shares of Watson Common Stock) in
exchange for such stockholder's shares of Oclassen Common Stock or Oclassen
Preferred Stock.
Neither Watson nor Oclassen is requesting a ruling from the Internal
Revenue Service ("IRS") in connection with the Merger. The Tax Opinions neither
bind the IRS nor preclude the IRS from adopting a contrary position. In
addition, the Tax Opinions are subject to certain assumptions and qualifications
and are based on the truth and accuracy of certain representations made by
Watson, Watson Sub, Oclassen and certain Oclassen stockholders. Of particular
importance are certain assumptions and representations relating to the
"continuity of interest" requirement.
To satisfy the continuity of interest requirement, Oclassen
stockholders must not, pursuant to a plan or intent existing at or prior to the
Merger, dispose of or transfer so much of either (i) their shares of Oclassen
Common Stock or Oclassen Preferred Stock in anticipation of the Merger or (ii)
the shares of Watson Common Stock to be received in the Merger (collectively,
"Planned Dispositions"), such that the Oclassen stockholders, as a group, would
no longer have a significant equity interest in the Oclassen business being
conducted by Watson after the Merger. Planned Dispositions include, among other
things, shares disposed of pursuant to the exercise of appraisal rights.
Oclassen stockholders will generally be regarded as having a significant equity
interest as long as the shares of Watson Common Stock received in the Merger
(after taking into account Planned Dispositions, if any), in the aggregate,
represents a substantial portion of the
<PAGE> 50
entire consideration received by the Oclassen stockholders in the Merger. If the
continuity of interest requirement is not satisfied, the Merger would not be
treated as a "reorganization."
Even if the Merger qualifies as a "reorganization," a recipient of
shares of Watson Common Stock will recognize gain to the extent that such shares
are received or considered to be received in exchange for services or property
(other than solely shares of Oclassen Common Stock or Oclassen Preferred Stock).
All or a portion of such gain may be taxable as ordinary income. Gain would also
be recognized to the extent an Oclassen stockholder was treated as receiving
other consideration (other than shares of Watson Common Stock) in exchange for
his or her Oclassen capital stock or to the extent the Oclassen capital stock
surrendered in the Merger was not equal in value to the shares of Watson Common
Stock received in exchange therefor. The Tax Opinions and this discussion assume
such equal value.
A successful IRS challenge to the status of the Merger as a
reorganization (as a result of failure to satisfy the continuity of interest
requirement or for any other reason) would result in an Oclassen stockholder
recognizing gain or loss with respect to each share of Oclassen capital stock
surrendered equal to the difference between the stockholder's basis in such
share and the fair market value, as of the time of the Merger, of the shares of
Watson Common Stock received in exchange therefor (including any cash received
in lieu of a fractional share). In such event, an Oclassen stockholder's
aggregate basis in the shares of Watson Common Stock received in the exchange
would equal such fair market value and his or her holding period for such shares
would begin the day after the closing date of the Merger.
The IRS 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 IRS 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 Oclassen 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
Oclassen Common Stock or Oclassen Preferred 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 Oclassen Common Stock and Oclassen Preferred 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.
The foregoing discussion does not deal with all federal income tax
considerations that may be relevant to Oclassen stockholders in light of their
particular circumstances, such as Oclassen stockholders who are dealers in
securities, subject to the alternative minimum tax provisions of the Code,
foreign persons, persons who do not hold their shares of Oclassen Common Stock
or Oclassen Preferred Stock as capital assets, or who acquired their shares of
Oclassen Common Stock or Oclassen Preferred Stock in connection with stock
option or stock purchase plans or in other compensatory transactions. In
addition, the foregoing discussion does not address (i) the tax consequences of
transactions effectuated prior or subsequent to or concurrently with the Merger
(whether or not such transactions are in connection with the Merger), including
without limitation, transactions in which shares of Oclassen Common Stock or
Oclassen Preferred Stock are acquired or shares of Watson Common Stock are
disposed of, or (ii) the tax consequences to holders of options or convertible
securities issued by Oclassen which are assumed, exercised or converted, as the
case may be, in connection with the Merger. Furthermore, no foreign, state or
local tax considerations are addressed herein. Accordingly, OCLASSEN
STOCKHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC TAX
CONSEQUENCES OF THE MERGER, INCLUDING THE APPLICABLE FEDERAL, STATE, LOCAL AND
FOREIGN 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 Oclassen
each filed notification and report forms under the HSR Act with the FTC and the
Antitrust Division on October 18, 1996. The waiting period under the HSR Act
expired by early termination on October 29, 1996. 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 Oclassen or
businesses or products
<PAGE> 51
of Watson or Oclassen 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 Oclassen stockholders in
the Merger will be registered under the Securities Act pursuant to the
Registration Statement 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 Oclassen at the time of the
Special 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. Rule 145(d) under the Securities Act
requires that, for specified periods, such sales may be made in compliance with
the volume limitations, manner of sale provisions and current information
requirements of Rule 144 under the Securities Act. The volume limitations should
not pose any material limitations on any Oclassen stockholder who owns less
than one percent of Watson's outstanding Common Stock after the Merger
(approximately 36,867,667 shares of Watson Common Stock as of January 20, 1997
after giving effect to the shares to be issued in the Merger) unless, pursuant
to Rule 144, such stockholder's shares are required to be aggregated with those
of another stockholder. Persons who may be deemed to be affiliates of Oclassen
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 Oclassen 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 Oclassen 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 Oclassen.
Oclassen and Watson have each agreed that their respective affiliates will not
engage in any such transactions. See "--Accounting Treatment" and "The
Merger Agreement--Certain Covenants."
THE MERGER AGREEMENT
The following is a brief summary of the material 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
Oclassen, with Oclassen being the surviving corporation in the Merger.
Immediately after the Merger, Oclassen will become the wholly-owned subsidiary
of Watson. The Merger will have the effects specified in the laws of the State
of Delaware.
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 Oclassen will cause Certificates of Merger to be executed, acknowledged and
filed with the Secretary of State of the State of Delaware. 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 (Oclassen)
will possess all the rights, privileges, powers and franchises and be subject to
all of the restrictions, disabilities, liabilities and duties of Oclassen and
Watson Sub, all as provided by applicable law.
<PAGE> 52
As a result of the Merger and without any action on the part of the
holders thereof, other than shares held by Watson or any subsidiary of Watson
or as to which dissenter's rights are properly exercised, (i) each share of
Series A Preferred Stock of Oclassen, $0.001 par value per share ("Oclassen
Series A Preferred"), outstanding at the Effective Time, plus all accrued and
unpaid dividends thereon, will be converted into the right to receive the number
of shares of Watson Common Stock equal to the following: $2.00 divided by the
Average Closing Price (as defined below) (the "Oclassen Series A Preferred
Payout"); (ii) each share of Series B Preferred Stock of Oclassen, $0.001 par
value per share ("Oclassen Series B Preferred"), outstanding at the Effective
Time, plus all accrued and unpaid dividends thereon, will be converted into the
right to receive the number of shares of Watson Common Stock equal to the
following: (A) the sum of $2.30 plus an amount equal to the cumulative dividends
accrued at the rate of $0.184 per annum from April 22, 1994 to and including the
date of closing of the Merger (the "Closing Date"); divided by (B) the Average
Closing Price (the "Oclassen Series B Preferred Payout"); (iii) each share of
Series C Preferred Stock of Oclassen, $0.001 par value per share ("Oclassen
Series C Preferred"), outstanding at the Effective Time, plus all accrued and
unpaid dividends thereon, will be converted into the right to receive the number
of shares of Watson Common Stock equal to the following: (A) the sum of $4.364
plus an amount equal to the cumulative dividends accrued at the rate of $0.35
per annum from April 22, 1994 to and including the Closing Date; divided by (B)
the Average Closing Price (the "Oclassen Series C Preferred Payout"); (iv) each
share of Series D Preferred Stock of Oclassen, $0.001 par value per share
("Oclassen Series D Preferred"), outstanding at the Effective Time, plus all
accrued and unpaid dividends thereon, will be converted into the right to
receive the number of shares of Watson Common Stock equal to the following: (A)
the sum of $5.00 plus an amount equal to the cumulative dividends accrued at the
rate of $0.40 per annum from April 22, 1994 to and including the Closing Date;
divided by (B) the Average Closing Price (the "Oclassen Series D Preferred
Payout"); (v) each share of Series E Preferred Stock of Oclassen, $0.001 par
value per share ("Oclassen Series E Preferred") outstanding at the Effective
Time, plus all accrued and unpaid dividends thereon, will be converted into the
right to receive the number of shares of Watson Common Stock equal to the
following: (A) the sum of $12.00 plus an amount equal to the cumulative
dividends accrued at the rate of $0.96 per annum from April 22, 1994 to and
including the Closing Date; divided by (B) the Average Closing Price (the
"Oclassen Series E Preferred Payout"); and (vi) each share of Oclassen Common
Stock and each share of Oclassen Preferred Stock outstanding at the Effective
Time will be converted into the right to receive the number of shares of Watson
Common Stock equal to the following: (A)(I) $135,000,000; less (II) the sum of
(v) the Oclassen Series A Preferred Payout multiplied by the number of shares of
Oclassen Series A Preferred outstanding at the Effective Time multiplied by the
Average Closing Price; plus (w) the Oclassen Series B Preferred Payout
multiplied by the number of shares of Oclassen Series B Preferred outstanding at
the Effective Time multiplied by the Average Closing Price; plus (x) the
Oclassen Series C Preferred Payout multiplied by the number of shares of
Oclassen Series C Preferred outstanding at the Effective Time multiplied by the
Average Closing Price; plus (y) the Oclassen Series D Preferred Payout
multiplied by the number of shares of Oclassen Series D Preferred outstanding at
the Effective Time multiplied by the Average Closing Price; plus (z) the
Oclassen Series E Preferred Payout multiplied by the number of shares of
Oclassen Series E Preferred outstanding at the Effective Time multiplied by the
Average Closing Price; divided by (B) the aggregate number of shares of Oclassen
Common Stock outstanding at the Effective Time on a fully diluted basis,
including, without limitation, the number of shares of Oclassen Common Stock
which can be purchased and/or received by the conversion of all outstanding
shares of Oclassen Preferred Stock at the Effective Time, or the exercise of all
outstanding options, warrants or other rights to purchase shares of Oclassen
Common Stock, whether or not such rights are currently exercisable, at the
Effective Time; and further divided by (C) the Average Closing Price (the
"Exchange Ratio").
As of December 31, 1996, the amount of accrued and unpaid dividends
with respect to the Oclassen Series A Preferred Stock, the Oclassen Series B
Preferred Stock, the Oclassen Series C Preferred Stock, the Oclassen Series D
Preferred Stock and the Oclassen Series E Preferred Stock was $0, $0.184,
$0.350, $0.400 and $0.960 per share, respectively. It is a condition of the
Merger that at least 95% of the aggregate number of outstanding shares of
Oclassen Preferred Stock shall have been voluntarily converted into shares of
Oclassen Common Stock prior to the Effective Time. To date, Oclassen has
received voluntary elections to convert from stockholders holding 100% of the
outstanding Oclassen Preferred Stock indicating that all of the outstanding
Oclassen Preferred Stock will be voluntarily converted into shares of Oclassen
Common Stock immediately prior to the Effective Time. Upon such conversion, (i)
each share of Oclassen Preferred Stock will be converted into one share of
Oclassen Common Stock, (ii) all accrued and unpaid dividends on shares of
Oclassen Preferred Stock will be forfeited and (iii) all of the premiums that
holders of Oclassen Preferred Stock would have received upon the consummation of
the Merger will be forfeited.
<PAGE> 53
As used in the Merger Agreement and herein, (i) the term "Oclassen
Preferred Stock" means the Oclassen Series A Preferred, Oclassen Series B
Preferred, Oclassen Series C Preferred, Oclassen Series D Preferred and Oclassen
Series E Preferred, together; and (ii) the term "Average Closing Price" means
the average of the per share daily closing price of Watson Common Stock as
quoted on the Nasdaq National Market (and as reported by The Wall Street Journal
or, if not reported thereby, by another authoritative source) during the ten
consecutive trading days ending two trading days prior to the Closing Date;
provided, however, that (A) if the Average Closing Price is greater than $35.00
(appropriately adjusted for any stock split, reverse stock split, stock
dividend, reorganization, recapitalization or other like change with respect to
the Watson Common Stock occurring after September 25, 1996 and prior to the
Effective Time), the Average Closing Price will be deemed to be equal to $35.00
(appropriately adjusted for any stock split, reverse stock split, stock
dividend, reorganization, recapitalization or other like change with respect to
the Watson Common Stock occurring after September 25, 1996 and prior to the
Effective Time); and (B) if the Average Closing Price is less than $27.00
(appropriately adjusted for any stock split, reverse stock split, stock
dividend, reorganization, recapitalization or other like change with respect to
the Watson Common Stock occurring after September 25, 1996 and prior to the
Effective Time), the Average Closing Price will be deemed to be equal to $27.00
(appropriately adjusted for any stock split, reverse stock split, stock
dividend, reorganization, recapitalization or other like change with respect to
the Watson Common Stock occurring after September 25, 1996 and prior to the
Effective Time).
After the Merger, each holder of a Certificate representing any shares
of Oclassen Common Stock or Oclassen Preferred Stock will thereafter cease to
have any rights with respect to such shares of Oclassen Common Stock or Oclassen
Preferred Stock, except for 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 Oclassen Common Stock and Oclassen
Preferred Stock held in Oclassen's treasury or owned by Watson or any of its
subsidiaries at the Effective Time will cease to be outstanding and will be
canceled and retired without payment of any consideration therefor.
Based upon the number of outstanding shares of Watson Common Stock on
January 20, 1997 and of Oclassen Common Stock (assuming the voluntary
conversion of all outstanding shares of Oclassen Preferred Stock into shares of
Oclassen Common Stock) on January 20, 1997, and assuming (i) no dissenting
stockholders of Oclassen, (ii) no change in the average trading price of Watson
Common Stock from the closing sale price on January 20, 1997 ($44.75 per share)
and (iii) no issuance of shares of Watson Common Stock in connection with the
Royce Merger, Watson will have approximately 40,173,118 shares of Common Stock
outstanding after the Merger, of which approximately 3,305,451 shares (or
approximately 8.2%) will be issued or issuable to holders of Oclassen Common
Stock, Oclassen Preferred Stock and Oclassen Options in connection
with the Merger.
At the Effective Time, all options then outstanding under the Oclassen
Stock Option Plans will remain outstanding and will be assumed by Watson. Each
such Oclassen Option will be exercisable upon the same terms and conditions as
under the applicable Oclassen Stock Option Plan and the applicable option
agreement issued thereunder, except that (a) the unexercised portion of each
such Oclassen Option will be exercisable for that whole number of shares of
Watson Common Stock equal to the product (rounded to the nearest whole share,
with 0.5 rounded upward) of (i) the number of shares of Oclassen Common Stock
subject to the Oclassen Option immediately prior to the Effective Time,
multiplied by (ii) the Exchange Ratio, and (b) the per share exercise price for
each such Oclassen Option will be equal to (i) the per share exercise price for
each share of Oclassen Common Stock subject to such Oclassen Option immediately
prior to the Effective Time divided by (ii) the Exchange Ratio (rounded to the
nearest whole share, with $0.005 rounded upward). See "The Merger--Interests of
Certain Persons in the Merger."
All holders of Oclassen Common Stock and Oclassen Preferred Stock at
the Effective Time (other than holders who perfect dissenter's rights) will
deposit, or cause to be deposited, 7.5% of the shares of Watson Common Stock
otherwise to be issued to such stockholders in the Merger in an escrow account
(the "Escrow"), to be held and distributed in accordance with the provisions of
the Escrow Agreement. The Escrow will have a term of 12 months and will be the
exclusive remedy of Watson with respect to
<PAGE> 54
indemnification for breaches of representations, warranties and covenants of
Oclassen made in the Merger Agreement or related agreements. See
"--Indemnification." A committee consisting of Russell H. Maddox and G. Kirk
Raab (collectively, the "Stockholder Agent") will initially represent the
interests of the Oclassen stockholders in administering the Escrow. See
"--The Stockholder Agent."
EXCHANGE PROCEDURES; FRACTIONAL SHARES
Promptly after the Effective Time, but in any event, within five
business days 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 Oclassen
Common Stock or Oclassen Preferred 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 (less the number
of shares of Watson Common Stock required to be deposited into the Escrow), 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
canceled. OCLASSEN 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 Oclassen Common Stock or Oclassen Preferred Stock entitled
under the Merger Agreement to receive a fractional share will be entitled to
receive only a cash payment in lieu thereof. For each fractional share of Watson
Common Stock that would otherwise be issuable, each eligible holder will receive
an amount of cash equal to such fractional proportion of the Average Closing
Price per share of Watson Common Stock. At the Effective Time, Watson will
deposit with the Exchange Agent a sufficient amount of cash to satisfy the
payment of cash in lieu of fractional shares to the Oclassen stockholders.
No dividends on shares of Watson Common Stock will be paid with
respect to any shares of Oclassen Common Stock or Oclassen Preferred 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
will 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 cash in lieu of fractional shares as described above; and (ii) at the
appropriate date, the 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 Oclassen one year after the
Effective Time will be delivered to Watson. Any former stockholders of Oclassen
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 Oclassen Common Stock or Oclassen Preferred Stock such stockholder
holds. Notwithstanding the foregoing, neither Oclassen, Watson, Watson Sub, the
Exchange Agent nor any other person will be liable to any former holder of
shares of Oclassen Common
<PAGE> 55
Stock or Oclassen Preferred 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 Oclassen of shares of Oclassen Common Stock or Oclassen
Preferred Stock which were outstanding immediately prior to the Effective Time.
In the event of a transfer of ownership of Oclassen Common Stock or Oclassen
Preferred Stock which is not registered in the transfer records of Oclassen, 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 Oclassen Common Stock or
Oclassen Preferred 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 (Oclassen), 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
In the Merger Agreement, Oclassen has made certain representations and
warranties to Watson with respect to, among other things, Oclassen's
organization, standing and qualification; capitalization; ownership interests in
other entities; certain charter and other documents; corporate authority; no
violation of charter documents or certain agreements; compliance with laws;
books and records; financial statements; accounts receivable; inventories; bank
accounts; intellectual property; title to properties; real estate; matters
related to contracts; insurance; litigation; warranties; products liability;
arbitration; certain tax matters; certain ERISA matters; labor matters;
environmental matters; conduct of Oclassen's business since June 30, 1996;
transactions with Oclassen's affiliates; Oclassen's significant customers,
suppliers, distributors and employees; changes in Oclassen's business; absence
of bribes; absence of indemnifiable claims; absence of undisclosed liabilities;
relationships with brokers; taking of actions which would affect tax treatment
of the Merger; opinion of financial advisor; and information contained in this
Proxy Statement/Prospectus.
In addition, Watson and Watson Sub have made certain representations
and warranties to Oclassen in the Merger Agreement, with respect to, among other
things, their organization, standing and qualification; corporate authority; no
violation of charter documents or certain agreements; Securities and Exchange
Commission filings; relationships with brokers; opinion of financial advisor;
the issuance of Watson Common Stock in the Merger; capitalization; changes in
Watson's business; litigation; information contained in this Proxy
Statement/Prospectus; and Securities Act exemption matters.
ALTERNATIVE TRANSACTIONS
Except to the extent reasonably required by fiduciary duty obligations
under applicable law, Oclassen has agreed not to, and to direct and cause its
officers,
<PAGE> 56
directors, employees, agents and representatives (including, without limitation,
any investment banker, attorney or accountant retained by it) 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, Oclassen (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. Oclassen 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
referred to above of these obligations. Oclassen has also agreed that it will
notify Watson 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.
CERTAIN COVENANTS
The Merger Agreement contains certain covenants by Oclassen in respect
of matters to occur on or prior to the Closing Date. Oclassen has agreed to,
among other things, unless Watson has consented in writing thereto (which
consent will not be unreasonably withheld) (i) conduct its operations according
to its usual, regular and ordinary course in substantially the same manner as
previously conducted; (ii) to the extent consistent with its business, use
commercially reasonable efforts to preserve intact its business organization and
goodwill, keep available the services of its officers and employees and maintain
satisfactory relationships with those persons having business relationships with
it; (iii) not amend its Certificate of Incorporation or Bylaws or comparable
governing instruments, except as contemplated by the Merger Agreement; (iv)
promptly notify Watson of any material emergency or other Company Material
Adverse Effect (as defined in the Merger Agreement), any material litigation or
material governmental complaints, investigations or hearings (or communications
indicating that the same may be contemplated), or the material breach of any
representation or warranty contained in the Merger Agreement; (v) not (A) except
pursuant to the exercise of options, warrants, conversion rights and other
contractual rights existing on the date of the Merger Agreement and disclosed
pursuant to the Merger Agreement, issue any shares of its capital stock, effect
any stock split or otherwise change its capitalization as it existed on the date
of the Merger Agreement; (B) grant, confer or award any option, warrant,
conversion right or other right not existing on the date of the Merger Agreement
to acquire any shares of its capital stock, except pursuant to Oclassen stock
option plans; (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 and employees pursuant to (I) the
discretionary bonus program of Oclassen in an amount not to exceed $500,000 in
the aggregate for calendar year 1996; and (II) the sales incentive program of
Oclassen in effect as of September 25, 1996; (D) grant any severance or
termination package to any employee or consultant, except to the extent
consistent with past practices; (E) hire any new employee who will have, or
terminate the employment of any employee who has, an annual salary in excess of
$75,000; or (F) 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, (vi) 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 or make
any
<PAGE> 57
commitment for any such action; (vii) not enter into any agreement or
transaction or agree to enter into any agreement or transaction, outside the
ordinary course of business, including, without limitation, any transaction
involving a merger, consolidation, joint venture, license agreement, partial or
complete liquidation or dissolution, reorganization, recapitalization,
restructuring or a purchase, sale, lease or other disposition of a material
portion of assets or capital stock; (viii) 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 (I) in the ordinary course of its business consistent with past practices,
but in no event in an amount exceeding $50,000 individually or $100,000 in the
aggregate (other than normal expenditures for the purchase of raw materials or
other supplies); or (II) pursuant to Oclassen's bank line of credit in the
ordinary course of business consistent with past practices; (ix) not make any
loans, advances or capital contributions to, or investments in, any other person
(except for loans to employees made in connection with the purchase of Oclassen
Common Stock under existing option agreements and advances of expenses made to
employees in the ordinary course of business); (x) except as described in the
Disclosure Statement to the Merger Agreement, not make or commit to make any
capital expenditures in excess of $50,000 individually or $100,000 in the
aggregate; (xi) 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 of its affiliates or related parties or
enter into any transaction with any affiliate or related party of Oclassen
(except for payment of salary and other customary expense reimbursements made in
the ordinary course of business to its related parties who are employees of
Oclassen); (xii) not alter the manner of keeping its books, accounts or records,
or change in any manner the accounting practices therein reflected; (xiii) 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 for
liens for taxes not currently due; and (xiv) maintain insurance on its tangible
assets and its businesses in such amounts and against such risks and losses as
are currently in effect.
The Merger Agreement contains certain covenants by Watson in respect
of matters to occur on or prior to the Closing Date. Watson has agreed to, among
other things, unless Oclassen has consented in writing thereto (which consent
will not be unreasonably withheld), (i) conduct its operations according to its
usual, regular and ordinary course in substantially the same manner as conducted
prior to the date of the Merger Agreement (except for entering into transactions
described in item (v) below); (ii) promptly deliver to Oclassen true and correct
copies of any report, statement or schedule filed with the Commission subsequent
to the date of the Merger Agreement; (iii) promptly notify Oclassen of any
material emergency or other Watson Material Adverse Effect (as defined in the
Merger Agreement), any material litigation or material governmental complaints,
investigations or hearings (or communications indicating that the same may be
contemplated), or the material breach of any representation or warranty
contained in the Merger Agreement; (iv) not amend its Articles of Incorporation
or Bylaws; (v) promptly notify Oclassen of its entering into any agreement with
respect to any material transaction involving a merger, consolidation, joint
venture, partial or complete liquidation or dissolution, reorganization or
recapitalization, restructuring or a purchase, sale, lease or other disposition
of a material portion of assets or capital stock; and (vi) not take any action
that would result in a failure to maintain the trading of Watson Common Stock on
the Nasdaq National Market.
Oclassen and Watson have agreed that, during the period from September
25, 1996 until the Effective Time, neither Oclassen 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. Watson has
also agreed that, after the Effective Time, it will not take or fail to take
(and will cause the Surviving Corporation not to take or
<PAGE> 58
fail to take) any action that is reasonably likely to jeopardize qualification
of the Merger as a reorganization within the meaning of Section 368(a) of the
Code.
Both Oclassen 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 the Merger. Oclassen 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.
EXPENSES
Whether or not the Merger is consummated, all costs and expenses
incurred in connection with the Merger Agreement and the transactions
contemplated thereby will be paid by the party incurring such expenses, except
as expressly provided in the Merger Agreement.
BENEFIT PLANS
Watson has agreed that it will continue Oclassen's existing benefit
plans and arrangements for a period of at least six months following the
Effective Time. Thereafter, to the extent the existing benefit plans and
arrangements provided by Oclassen to its employees are terminated, such
employees who remain employees of the Surviving Corporation will be entitled to
participate in all benefit plans and arrangements that are available and
subsequently become available to Watson's employees on the same basis as
Watson's employees in similar positions are eligible to participate. For
purposes of satisfying the terms and conditions of such plans, Watson will give
full credit for eligibility, vesting or benefit accrual for each participant's
period of service with Oclassen prior to the Effective Time; provided, that the
benefit plans and arrangements to be provided to Glenn A. Oclassen, Terry L.
Johnson and Anthony A. DiTonno will be determined pursuant to the terms of their
respective employment agreements with the Surviving Corporation. To the extent
Watson's benefit plans provide medical or dental welfare benefits after the
Merger, Watson will cause all pre-existing condition exclusions and actively at
work requirements to be waived and Watson will provide that any expenses
incurred on or before the Merger will be taken into account under Watson's
benefit plans for purposes of satisfying the applicable deductible, coinsurance
and maximum out-of-pocket provisions for such employees and their covered
dependents.
BONUS AND 401(K) PLAN
Watson has agreed to make, or to permit Oclassen to make, the bonus
payments which were declared by the Board of Directors of Oclassen on November
22, 1996 for calendar year 1996 pursuant to Oclassen's discretionary bonus
program in an amount not to exceed $500,000 less the aggregate amount paid by
Oclassen under such program prior to the closing of the Merger for calendar year
1996 plus amounts payable pursuant to Oclassen's sales incentive program for
calendar year 1996 less any amounts paid under such program prior to the closing
of the Merger. These bonuses were consistent with Oclassen's past practices and
were paid by Oclassen on January 2, 1997. Watson also agreed to make all
matching contribution payments to Oclassen's employee retirement savings plan
for the 1996 fiscal year up to an amount equal to $1,500 per employee.
CONDITIONS
Consummation of the Merger is subject to a number of conditions. In
particular, Watson will not be obligated to consummate the Merger if the holders
of more than 5% of the outstanding aggregate value of Oclassen Common Stock and
Oclassen Preferred Stock (based upon the number of shares of Watson Common Stock
such holders would have received
<PAGE> 59
upon consummation of the Merger) shall have perfected dissenters' appraisal
rights under the DGCL. The Merger is also conditioned on at least 95% of the
aggregate number of outstanding shares of Oclassen Preferred Stock voluntarily
converting their shares into shares of Oclassen Common Stock prior to the
Effective Time. As of the date of this Proxy Statement/Prospectus, 100% of the
outstanding shares of Oclassen Preferred Stock have made such election.
Additionally, the Merger Agreement provides that the consummation of
the Merger is subject to the fulfillment of various conditions at or prior to
the Effective Time, including but not limited to the following:
1. The waiting period applicable to the consummation of the Merger
under the HSR Act shall have expired or been terminated, which period
expired by early termination on October 29, 1996.
2. No preliminary or permanent 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.
3. Either (a) the Commissioner of Corporations of the State of
California shall have issued a permit allowing Watson to issue Watson Common
Stock in compliance with Section 3(a)(10) of the Securities Act or (b) the Form
S-4 Registration Statement (of which this Proxy Statement/Prospectus is a part)
shall have been declared effective by the Commission 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
Oclassen stockholders in connection with the Merger shall have been received.
4. All material 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 for
filings in connection with the Merger and any other documents required to be
filed after the Effective Time.
5. The shares of Watson Common Stock to be issued in the Merger shall
have been authorized for trading on the Nasdaq National Market.
6. Watson, the Stockholder Agent and American Stock Transfer & Trust
Company (the "Escrow Agent") shall have entered into an Escrow Agreement.
7. Watson and Oclassen shall each have received a written opinion from
their respective counsel, 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 Watson and Oclassen will each be a party to that
reorganization within the meaning of Section 368(b) of the Code.
8. Watson shall have received the opinion of Price Waterhouse LLP,
dated the Closing Date, to the effect that the Merger will be treated as a
pooling of interests for accounting purposes.
9. Oclassen shall have received from Arthur Andersen LLP, its
independent accountants, a letter, dated the Closing Date, indicating that
Oclassen has not taken any action that would preclude it from entering into a
transaction that would be treated as a pooling of interests for accounting
purposes.
<PAGE> 60
10. The Merger Agreement and the Merger and other transactions
contemplated by the Merger Agreement shall have been approved and adopted by the
requisite vote of the holders of Oclassen Preferred Stock and Oclassen Common
Stock.
11. Each of Glenn A. Oclassen, Terry L. Johnson and Anthony A. DiTonno
shall have entered into an employment agreement with the Surviving Corporation.
12. The representations and warranties made by each of Watson, Watson
Sub and Oclassen contained in the Merger Agreement and in any document delivered
in connection therewith shall be true and correct as of the Closing in all
material respects and each of Watson and Oclassen shall have performed, in all
material respects, all of their agreements contained in the Merger Agreement
that are required to be performed by them on or prior to the Closing Date, and
each party shall have delivered to the other party an appropriate certificate to
such effect.
13. Oclassen shall have received from Watson certified copies of the
resolutions of Watson's and Watson Sub's Boards of Directors approving and
adopting the Merger Agreement and related agreements and the transactions
contemplated thereby.
14. Watson shall have received from Oclassen certified copies of the
resolutions of Oclassen's Board of Directors and stockholders approving and
adopting the Merger Agreement and related agreements and the transactions
contemplated thereby.
15. Watson shall have received a legal opinion from Venture Law Group,
A Professional Corporation, and Oclassen shall have received a legal opinion
from D'Ancona & Pflaum, concerning such matters as each party shall reasonably
request.
16. From the date of the Merger Agreement through the Effective Time,
there shall not have occurred any event that would have or would be reasonably
likely to have a material adverse effect on the financial condition, business,
operations or prospects of Watson and its subsidiaries, taken as a whole,
provided, that such an event will not be deemed to have occurred solely as a
result of fluctuations in the value of Watson Common Stock due to or arising
from any public disclosures by Watson (including its 50% subsidiary, Somerset),
including, without limitation, disclosures relating to Watson's entering into
any other transactions (including, without limitation, transactions relating to
the acquisition of assets, stock or merger transactions).
17. From the date of the Merger Agreement through the Effective Time,
there shall not have occurred any event that would have or would be reasonably
likely to have a material adverse effect on the financial condition, business,
operations or prospects of Oclassen.
18. Oclassen shall have received all necessary consents with respect
to any contract, lease, purchase order, sales order, license agreement, permit,
environmental permit or license which are required as a result of the change of
control of Oclassen, except in those instances where failure to receive any such
consent would not have an Oclassen Material Adverse Effect (as defined in the
Merger Agreement).
19. Oclassen's Certificate of Incorporation shall have been amended
as set forth in the attached Appendix B to this Proxy Statement/Prospectus.
20. The warrants to purchase shares of Oclassen Preferred Stock held
by Sloan-Kettering Institute for Cancer Research and Glenn A. Oclassen shall
have been exercised or terminated prior to the Effective Time and shall be of no
further force and effect.
<PAGE> 61
Any of the conditions in the Merger Agreement may be waived by the
party or parties benefited thereby.
INDEMNIFICATION
Seven and one-half percent of the shares of Watson Common Stock
otherwise issuable to the holders of Oclassen Common Stock and Oclassen
Preferred Stock in the Merger will be placed, at the Closing, into the Escrow to
be maintained by American Stock Transfer & Trust Company (the "Escrow Agent").
Assuming no change in the closing price of Watson Common Stock from the closing
price of $44.75 on January 20, 1997, and assuming that an aggregate of 3,857,143
shares of Watson Common Stock be issued in the Merger, the aggregate value of
the Escrow will be equal to $11,086,320, assuming 247,739 shares of Watson
Common Stock are deposited in the Escrow Account. The former Oclassen
stockholders will be entitled to vote the shares of Watson Common Stock held on
their behalf in the escrow account. Under the terms of the Merger Agreement, the
stockholders of Oclassen, jointly and severally, agreed to indemnify, save and
keep Watson, Watson Sub, Oclassen, each of their respective subsidiaries and
their respective successors and permitted assigns (each a "Watson Indemnitee"
and collectively the "Watson Indemnitees") harmless against and from all Damages
(as defined in the Merger Agreement) sustained or incurred by any Watson
Indemnitee, as a result of or arising out of (a) any inaccuracy in or breach of
any representation and warranty made by Oclassen to Watson in the Merger
Agreement or in other related agreements; and (b) any breach by Oclassen or the
Stockholder Agent of, or failure of Oclassen or the Stockholder Agent to comply
with, any of the covenants or obligations under the Merger Agreement or other
related agreements to be performed by Oclassen or the Stockholder Agent. The
Escrow is the exclusive remedy for claims by Watson Indemnitees, and therefore,
the Watson Indemnitees are prohibited from pursuing any claim for
indemnification directly against the Oclassen stockholders. The Escrow will
survive for a period of twelve months after the Closing. Upon the expiration of
such twelve month period, anything remaining in the Escrow, after the payment of
all amounts owed to any Watson Indemnitee to satisfy claims for indemnification,
will be distributed to the Oclassen stockholders. The Escrow was established to
enable Watson to have a source of funds available to satisfy claims for
indemnification against the Oclassen stockholders instead of having to take
legal action against each of the stockholders independently to satisfy claims
for indemnification, which would be very expensive and time-consuming.
Under the terms of the Merger Agreement, Watson has agreed to
indemnify, save and keep the Oclassen stockholders and their respective
successors and permitted assigns (each a "Seller Indemnitee" and collectively
the "Seller Indemnitees"), forever harmless against and from all Damages (as
defined in the Merger Agreement) sustained or incurred by any Seller Indemnitee,
as a result of or arising out of: (a) any inaccuracy in or breach of any
representation and warranty made by Watson or Watson Sub to Oclassen in the
Merger Agreement or in other related agreements; and (b) any breach by Watson or
Watson Sub of, or failure of Watson or Watson Sub to comply with, any of the
covenants or obligations under the Merger Agreement or other related agreements
to be performed by Watson or Watson Sub.
The Merger Agreement provides for a minimum aggregate threshold of
$600,000 for indemnification claims, so that if breaches of warranties or
representations or covenants by a party result in an aggregate loss to the
indemnified party of less than $600,000, the indemnified party will not be
entitled to indemnification under the Merger Agreement. Once a party has
incurred losses exceeding $600,000, such party is entitled to indemnification
for all losses incurred by the indemnified party, including those losses that
caused the indemnified party to reach the $600,000 threshold. In no event will
the Oclassen stockholders be liable to Watson for more than the Escrow. Watson's
indemnification obligations to the Seller Indemnitees is limited to $10,125,000
in the aggregate.
Neither the Watson Indemnitees nor the Seller Indemnitees may make a
claim for indemnification under the Merger Agreement after twelve months from
the closing date. Neither the holders of Oclassen Common Stock and Oclassen
Preferred Stock nor Watson shall have any liability to the other party for any
breaches of representations, warranties and covenants of such breaching party
occurring or discovered by the non-breaching party at any time after the one
year anniversary of the Closing Date.
If at any time prior to the one year anniversary of the Closing Date,
Watson claims all or any portion of the Escrow in satisfaction of a claim for
indemnification, Watson must deliver written notice of such claim (a "Claim
Notice") to the Stockholder Agent and the Escrow Agent. Upon receipt of a Claim
Notice, the Stockholder Agent can dispute the claim by delivering written notice
of such dispute to Watson and the Escrow Agent within thirty (30) days of its
receipt of the Claim Notice (a "Dispute Notice"). If the Stockholder Agent
approves all or any part of the claim amount or fails to dispute the claim
within such thirty (30) day period, the Escrow Agent will distribute to Watson
from the Escrow the amount of the undisputed claim in cash, to the extent the
Escrow contains cash, and then in shares of Watson Common Stock (valuing each
share at the Average Closing Price).
If the Stockholder Agent disputes the claim, Watson and the
Stockholder Agent shall attempt to resolve the dispute. If Watson and the
Stockholder Agent are unable to revolve the dispute within thirty (30) days
after the delivery to Watson and the Escrow Agent of a Dispute Notice, then
Watson and the Stockholder Agent will jointly submit their dispute to an
independent and impartial arbitrator (the "Arbitrator") for resolution. The
Arbitrator's determination as to a dispute shall be final and binding on the
parties. Watson is required to pay the fees and expenses of the Arbitrator.
THE STOCKHOLDER AGENT
In the event that the Merger is approved by the Oclassen stockholders
at the Special Meeting, effective upon such vote and without any further act of
any such stockholder,
<PAGE> 62
a committee (the "Committee"") consisting of Russell H. Maddox and G. Kirk Raab
will be appointed as agents and attorneys-in-fact (collectively, the
"Stockholder Agent") for each stockholder (except such stockholders, if any, as
shall have perfected their dissenter rights under applicable law). Effective
upon the approval of the Merger Agreement by the Oclassen stockholders, the
Oclassen stockholders individually will have no power or authority to take any
actions against Watson or otherwise pursuant to the Merger Agreement or the
Escrow Agreement, and all actions of the Oclassen stockholders, whether pursuant
to the Merger Agreement or the Escrow Agreement, must be taken solely by the
Stockholder Agent. The Stockholder Agent may be removed by the Oclassen
stockholders upon not less than ten (10) days prior written notice to Watson, or
by the affirmative vote by holders of a majority in interest of the Escrow and
the identity of a substituted Stockholder Agent.
The Stockholder Agent will act by unanimous vote or unanimous written
action or consent of the members of the Committee. The Stockholder Agent will
receive no compensation for his or her services, but will be entitled to
reimbursement from the Escrow for all reasonable, documented out-of-pocket
expenses incurred by the Stockholder Agent as a result of his or her acting as
Stockholder Agent.
The Stockholder Agent, for and on behalf of Oclassen stockholders,
will have the power to take any and all actions required to be taken by the
Oclassen stockholders pursuant to the Merger Agreement or the Escrow Agreement.
Such powers include, without limitation, the power to give and receive notices
and communications, to enter into and perform the Escrow Agreement, to make
claims for indemnification against Watson, to authorize delivery to Watson of
Watson Common Stock or other property from the Escrow in satisfaction of claims
by Watson, to object to such deliveries, to agree to negotiate, enter into
settlements and compromises of, and demand arbitration and comply with orders of
courts and awards of arbitrators with respect to such claims, and to take all
actions necessary, appropriate or in the judgment of the Stockholder Agent for
the accomplishment of the foregoing.
Watson will have no liability of any kind to any Oclassen stockholder
as a result of or arising out of any action taken or not taken by the
Stockholder Agent at any time under the Merger Agreement or the Escrow
Agreement, and a vote by the Oclassen stockholders in favor of the Merger will
be deemed their release of Watson from any such liability. Watson may
conclusively rely, without any obligation of investigation or inquiry of any
kind, on any action taken by the Stockholder Agent as having been fully
authorized and approved by all necessary action by each Oclassen stockholder
(except such stockholders, if any, as shall have perfected their dissenter
rights under applicable law).
The Stockholder Agent will not be liable for any act done or omitted
to be done under the Merger Agreement or the Escrow Agreement as Stockholder
Agent while acting in good faith and in the exercise of reasonable judgement.
The Oclassen stockholders, by affirmatively voting in favor of the Merger, will
have agreed to severally indemnify the Stockholder Agent and hold the
Stockholder Agent harmless against any loss, liability or expense incurred by
the Stockholder Agent without gross negligence or bad faith on the part of the
Stockholder Agent and arising out of or in connection with the acceptance or
administration of the Stockholder Agent's duties under the Merger Agreement or
the Escrow Agreement, including the reasonable fees and expenses of any legal
counsel retained by the Stockholder Agent. Such indemnification obligations, if
any, will be payable from the Escrow.
TERMINATION
The Merger Agreement is terminable by the mutual written consent of
Watson and Oclassen. The Merger Agreement is further terminable by either Watson
or Oclassen if (a) the Merger shall not have been consummated on or prior to
February 28, 1997; provided,
<PAGE> 63
however, 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; (b) the approval of the holders of Oclassen Common Stock
and Oclassen Preferred Stock shall not have been obtained at a meeting duly
convened therefor or any adjournment thereof; provided, however, that Oclassen
shall not have the right to terminate the Merger Agreement if Oclassen caused
(directly or indirectly) or aided in the failure to obtain such approval; or (c)
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 the Merger Agreement; or
(ii) compelling Watson, Watson Sub or the surviving corporation to dispose of or
hold separate all or a material portion of the respective businesses or assets
of Watson, Oclassen or their respective subsidiaries, and such order, decree,
ruling or other action shall have become final and non-appealable.
In addition, the Merger Agreement is terminable by Oclassen if there
has been a material breach by Watson or Watson Sub of any representation,
warranty, covenant or agreement contained 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 Oclassen to Watson.
The Merger Agreement is terminable by Watson if there has been a
material breach by Oclassen of any representation, warranty, covenant or
agreement contained in the Merger Agreement on the part of Oclassen, 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 Oclassen.
Upon termination of the Merger Agreement, each party's respective
obligations will terminate, except for each party's obligations to pay their
respective costs and expenses incurred in connection with the contemplated
transaction.
MODIFICATION AND WAIVERS
The parties may at any time mutually amend in writing the Merger
Agreement or any of the other agreements contemplated thereby, or individually
waive in writing satisfaction of any of the conditions set forth therein;
provided, however, that (i) any waiver of a material condition to the Merger,
including the conditions that (a) the Merger qualify for pooling-of-interests
treatment for accounting purposes, (b) the Merger qualify as a tax-free
reorganization under the Code, (c) not more than 5% of the stockholders of
Oclassen exercise their dissenters' rights under Delaware law and (d) prior to
consummation of the Merger holders of at least 95% of the outstanding
shares of Oclassen Preferred Stock shall have converted such shares into shares
of Oclassen Common Stock prior to the Effective Time will require a
resolicitation of the approval of the Oclassen stockholders and (ii) after the
stockholders of Oclassen have approved the Merger, no amendment may be made
which by law requires the further approval of the Oclassen stockholders
without obtaining such further approval.
<PAGE> 64
DISSENTERS' RIGHTS
OCLASSEN STOCKHOLDERS
Holders of Oclassen Common Stock and Oclassen Preferred Stock who
dissent and do not vote in favor of the Merger are entitled to certain
dissenters' appraisal rights under the DGCL in connection with the Merger.
The following summary of dissenters' rights under the DGCL is qualified
in its entirety by reference to Section 262 of the DGCL, the complete text of
which is attached hereto as Appendix E and incorporated herein by reference.
If the Merger is approved by the required vote of the Oclassen
stockholders and is not abandoned or terminated, any holder of Oclassen Common
Stock or Oclassen Preferred Stock (an "Oclassen Dissenting Stockholder") may, by
complying with the provisions of Section 262 of the DGCL, be entitled to have
his or her shares of Oclassen Common Stock or Oclassen Preferred Stock appraised
by the Delaware Court of Chancery (the "Court") and to receive payment in the
amount of the "fair value" of such shares as of the Effective Time of the
Merger. The shares of Oclassen Common Stock and Oclassen Preferred Stock with
respect to which holders have perfected their demand for appraisal rights in
accordance with Section 262 of the DGCL and have not effectively withdrawn or
lost such rights are referred to in this Proxy Statement/Prospectus as the
"Oclassen Dissenting Shares."
This Proxy Statement/Prospectus is being sent by personal delivery or
by mail to all holders of record of shares of Oclassen Common Stock and Oclassen
Preferred Stock as of the Record Date and constitutes notice of the appraisal
rights available to such holders under Section 262 of the DGCL.
A stockholder of Oclassen electing to exercise appraisal rights must,
prior to the vote concerning the Merger at the Oclassen Special Meeting, demand
in writing from Oclassen the appraisal of his or her shares of Oclassen Common
Stock or Oclassen Preferred Stock. Accordingly, such written demand must be
received by Oclassen on or prior to February 25, 1997. A holder who elects to
exercise appraisal rights should mail or deliver his or her written demand to
Oclassen Pharmaceuticals, Inc., 100 Pelican Way, San Rafael, California 94901,
Attention: Craig W. Johnson, Secretary. The demand should specify the holder's
name and mailing address, the number of shares of Oclassen Common Stock or
Oclassen Preferred Stock owned and that such holder is demanding appraisal of
his or her shares. A vote against the Merger will not constitute a demand for
appraisal. A stockholder electing to exercise his or her appraisal rights must
do so by a separate written demand as provided in Section 262 of the DGCL.
Only a holder of record of shares of Oclassen Common Stock or Oclassen
Preferred Stock at the Record Date (or his or her duly appointed representative)
is entitled to assert appraisal rights for the shares registered in that
holder's name. Within ten days after the Effective Time of the Merger, Oclassen
must provide notice of the Effective Time of the Merger to all stockholders who
have complied with Section 262 of the DGCL and have not voted for approval of
the Merger.
Within 120 days after the Effective Time of the Merger, any stockholder
who has made a valid written demand and who has not voted for approval of the
Merger may (i) file a petition in the Court demanding a determination of the
fair value of the shares of Oclassen Common Stock and Oclassen Preferred Stock
and (ii) upon written request, receive from Oclassen a statement setting forth
the aggregate number of shares of Oclassen Common Stock and Oclassen Preferred
Stock not voted for approval and adoption of the Merger and with respect to
which demands for appraisal have been received and the aggregate number of
holders of such shares of Oclassen Common Stock and Oclassen Preferred Stock.
Such statement must be mailed within ten days after the written request therefor
has been received by Oclassen.
<PAGE> 65
If a petition for an appraisal is timely filed, after a hearing on
such petition, the Court is required to determine the holders of Oclassen
Dissenting Shares who are entitled to appraisal rights and to determine the
"fair value" thereof exclusive of any element of value arising from the
accomplishment or expectation of the Merger, together with a fair rate of
interest, if any, to be paid upon the value of the Oclassen Dissenting Shares.
In determining such "fair value," the Court is required to take into account all
relevant factors, including the market value of Oclassen Common Stock and
Oclassen Preferred Stock and the net asset and earnings value of Oclassen, and
in determining the fair value of interest, the Court may consider all relevant
factors, including the rate of interest which Oclassen would have had to pay to
borrow money during the pendency of the proceeding. Upon application by a
stockholder, the Court may also order that all or a portion of the expenses
incurred by any stockholder in connection with the appraisal proceeding,
including, without limitation, reasonable attorneys' fees and the fees and
expenses of experts utilized in the appraisal proceeding, be charged pro rata
against the value of all the shares of Oclassen Common Stock and Oclassen
Preferred Stock entitled to appraisal. Accordingly, pursuant to Section 262 of
the DGCL, any stockholder or the combined company may file a petition with the
Court to initiate the appraisal proceeding. The value of the stock so determined
is binding upon all stockholders entitled to appraisal.
Any holder of Oclassen Dissenting Shares who has duly demanded an
appraisal under Section 262 of the DGCL will not, after the Effective Time of
the Merger, be entitled to vote the shares subject to such demand for any
purpose or be entitled to the payment of dividends or other distributions on
such Oclassen Dissenting Shares (except dividends or other distributions payable
to stockholders of record as of a date prior to the Effective Time of the
Merger).
A holder will fail to perfect, or will effectively lose, his or her
right to appraisal if (i) he or she fails to make a written demand for appraisal
before the taking of the vote on the Merger, (ii) he or she votes for approval
of the Merger, (iii) if no petition for appraisal is filed within 120 days after
the Effective Time of the Merger or (iv) if the holder delivers to Oclassen a
written withdrawal of such holder's demand for an appraisal, except that any
such attempt to withdraw made more than 60 days after the Effective Time of the
Merger requires the written approval of Oclassen.
As a condition to the consummation of the Merger, stockholders owning
no more than five percent of the outstanding aggregate value of Oclassen
Common Stock and Oclassen Preferred Stock (based upon the number of shares of
Watson Common Stock such holders would have received upon consummation of the
Merger) shall have perfected appraisal rights. Any stockholder who wishes to
exercise appraisal rights or who wishes to preserve his or her rights to do so
should review Appendix E carefully, since failure to comply with the procedures
set forth therein will result in loss of such rights.
<PAGE> 66
WATSON STOCKHOLDERS
Watson will not be required by Nevada law to obtain the consent of its
stockholders in order to consummate the Merger, and the Watson Board has not
called for such a vote. Consequently, holders of shares of Watson Common Stock
will not be entitled to exercise dissenters' rights in connection with the
Merger.
<PAGE> 67
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The following unaudited pro forma condensed combined financial information
has been derived from and should be read in connection 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, 1995 and the unaudited consolidated financial statements for the
nine month period ended September 30, 1996 contained in Watson's Quarterly
Report on Form 10-Q for the nine month period ended September 30, 1996, all of
which are incorporated by reference in this Proxy Statement/Prospectus, and with
the audited financial statements of Oclassen for each of the years in the three
year period ended December 31, 1995 and the unaudited financial statements of
Oclassen for the nine month period ended September 30, 1996, all of which are
included elsewhere 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 sheets and statements of
income set forth below gives effect to the Merger under the pooling of
interests accounting method as if the merger had occurred on January 1, 1993.
WATSON/OCLASSEN
UNAUDITED PRO FORMA CONDENSED COMBINED
BALANCE SHEET
SEPTEMBER 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
WATSON OCLASSEN ADJUSTMENTS COMBINED
------ -------- ----------- --------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 112,111 $ 5,381 $(8,000) $ 109,492
Marketable securities 71,308 14,991 86,299
Accounts receivable, net 25,721 3,133 28,854
Royalty receivable 7,255 -- 7,255
Inventories 26,303 3,917 30,220
Deferred tax assets 11,106 -- 11,106
Other current assets 2,805 2,576 5,381
--------- -------- ---------
Total current assets 256,609 29,998 278,607
Property and equipment, net 73,010 1,160 74,170
Investments in joint ventures and
other long-term investments 60,148 -- 60,148
Other assets 5,427 1,852 7,279
--------- -------- ----------- ---------
$ 395,194 $ 33,010 $(8,000) $ 420,204
========= ======== =========== =========
Accounts payable and accruals $ 24,320 $ 5,045 $ 29,365
Current portion of long-term debt 621 -- 621
Contract obligations and reserve -- 2,659 2,659
Income taxes payable 9,984 -- 9,984
--------- -------- ---------
Total current liabilities 34,925 7,704 42,629
Long-term debt 3,116 -- 3,116
Other liabilities -- 12 12
--------- -------- ---------
Total liabilities 38,041 7,716 45,757
--------- -------- ---------
Mandatorily redeemable preferred stock -- 38,688 $(38,688) --
--------- -------- ---------
Preferred stock -- 1,000 (1,000) --
Common stock 121 1,442 (1,429) 134
Additional paid-in capital 155,031 -- 41,117 196,148
Retained earnings (deficit) 196,328 (15,130) (8,000) 173,198
Unrealized holding gain (loss) 5,813 -- 5,813
Notes receivable-common stock -- (706) (706)
Unearned compensation-stock awards (140) -- (140)
--------- -------- ---------
Total stockholders' equity (deficit) 357,153 (13,394) 374,447
---------- -------- --------- ---------
$ 395,194 $ 33,010 $ (8,000) $ 420,204
========= ======== ========= =========
</TABLE>
See accompanying notes
to the unaudited pro forma condensed combined financial information.
<PAGE> 68
WATSON/OCLASSEN
UNAUDITED PRO FORMA CONDENSED COMBINED
BALANCE SHEET
DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
WATSON OCLASSEN ADJUSTMENTS COMBINED
------ -------- ----------- --------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 92,214 $ 3,002 $ $ 95,216
Marketable securities 26,038 15,723 41,761
Accounts receivable, net 25,081 3,045 28,126
Royalty receivable 8,205 -- 8,205
Inventories 22,637 3,249 25,886
Deferred tax assets 21,115 -- 21,115
Other current assets 2,344 1,817 4,161
--------- -------- ---------
Total current assets 197,634 26,836 224,470
Property and equipment, net 69,999 1,046 71,045
Investments in joint ventures and
other long-term investments 49,355 -- 49,355
Other assets 5,133 2,139 7,272
--------- -------- --------- ---------
$ 322,121 $ 30,021 $ $ 352,142
========= ======== ========= =========
Accounts payable and accruals $ 25,215 $ 4,894 $ 30,109
Current portion of long-term debt 622 -- 622
Contract obligations and reserve -- 2,708 2,708
Income taxes payable 2,985 -- 2,985
--------- -------- ---------
Total current liabilities 28,822 7,602 36,424
Long-term debt 3,577 -- 3,577
Other liabilities 687 39 726
--------- -------- ---------
Total liabilities 33,086 7,641 40,727
--------- -------- ---------
Mandatorily redeemable preferred stock -- 36,650 $ (36,650) --
--------- -------- ---------
Preferred stock -- 1,000 (1,000) --
Common stock 120 1,226 (1,213) 133
Additional paid-in capital 146,439 -- 38,863 185,302
Retained earnings (deficit) 142,711 (15,852) 126,859
Unrealized holding gain (loss) 621 -- 621
Notes receivable-common stock -- (644) (644)
Unearned compensation-stock awards (856) -- (856)
--------- -------- ---------
Total stockholders' equity (deficit) 289,035 (14,270) 311,415
--------- -------- --------- ---------
$ 322,121 $ 30,021 $ -- $ 352,142
========= ======== ========= =========
</TABLE>
See accompanying notes
to the unaudited pro forma condensed combined financial information.
<PAGE> 69
WATSON/OCLASSEN
UNAUDITED PRO FORMA CONDENSED COMBINED
BALANCE SHEET
DECEMBER 31, 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
WATSON OCLASSEN ADJUSTMENTS COMBINED
------ -------- ----------- --------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 71,165 $ 3,453 $ 74,618
Marketable securities 35,531 14,945 50,476
Accounts receivable, net 16,128 2,842 18,970
Inventories 16,361 3,773 20,134
Deferred tax assets 30,995 -- 30,995
Other current assets 2,732 1,841 4,573
--------- -------- ---------
Total current assets 172,912 26,854 199,766
Property and equipment, net 54,115 1,187 55,302
Investments in joint ventures and
other long-term investments 31,824 -- 31,824
Other assets 3,465 -- 3,465
--------- -------- -------- ---------
$ 262,316 $ 28,041 $ -- $ 290,357
========= ======== ======== =========
Accounts payable and accruals $ 17,610 $ 5,442 $ 23,052
Current portion of long-term debt 641 -- 641
Contract obligations and reserve -- 2,919 2,919
Income taxes payable -- -- --
--------- -------- ---------
Total current liabilities 18,251 8,361 26,612
Long-term debt 5,058 -- 5,058
Deferred partnership liability 14,033 -- 14,033
Other liabilities 1,604 75 1,679
--------- -------- ---------
Total liabilities 38,946 8,436 47,382
--------- -------- ---------
Mandatorily redeemable preferred stock -- 33,933 $(33,933) --
--------- -------- ---------
Preferred stock -- 1,000 (1,000) --
Common stock 118 1,087 (1,074) 131
Additional paid-in capital 132,115 -- 36,007 168,122
Retained earnings (deficit) 94,821 (15,762) 79,059
Notes receivable-common stock -- (653) (653)
Unrealized holding gain (loss) (870) -- (870)
Unearned compensation-stock awards (2,814) -- (2,814)
--------- -------- ---------
Total stockholders' equity (deficit) 223,370 (14,328) 242,975
--------- -------- -------- ---------
$ 262,316 $ 28,041 $ -- $ 290,357
========= ======== ========= =========
</TABLE>
See accompanying notes
to the unaudited pro forma condensed combined financial information.
<PAGE> 70
WATSON/OCLASSEN
UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
WATSON OCLASSEN COMBINED
------ -------- --------
<S> <C> <C> <C>
Revenues:
Product sales, net $122,155 $24,276 $146,431
Royalty income 19,862 -- 19,862
-------- ------- --------
Total revenues 142,017 24,276 166,293
-------- ------- --------
Operating expenses:
Cost of revenues 56,842 7,099 63,941
Research and development 12,467 3,554 16,021
Selling, general and
administrative 13,371 11,666 25,037
-------- ------- --------
Total operating expenses 82,680 22,319 104,999
-------- ------- --------
Operating income 59,337 1,957 61,294
-------- ------- --------
Other income:
Equity in earnings of joint ventures 14,156 -- 14,156
Investment and other income 5,844 863 6,707
-------- ------- --------
Total other income 20,000 863 20,863
-------- ------- --------
Income before provision for income taxes 79,337 2,820 82,157
Provision for income taxes 25,720 60 25,780
-------- ------- --------
Net income $ 53,617 $ 2,760 $ 56,377
======== ======= ========
Per share data:
Earnings per share:
Primary $ 1.43 $ 0.30 $ 1.36
======== ======= ========
Fully diluted $ 0.27
=======
Weighted average number of
common and common equivalent
shares outstanding:
Primary 37,624 2,424 41,351
======== ======= ========
Fully diluted 10,063
=======
</TABLE>
See accompanying notes
to the unaudited pro forma condensed combined financial information.
<PAGE> 71
WATSON/OCLASSEN
UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
WATSON OCLASSEN COMBINED
------ -------- --------
<S> <C> <C> <C>
Revenues:
Product sales, net $ 130,688 $29,036 $ 159,724
Royalty income 22,247 -- 22,247
--------- ------- ---------
Total revenues 152,935 29,036 181,971
--------- ------- ---------
Operating expenses:
Cost of revenues 64,996 9,278 74,274
Research and development 18,573 3,777 22,350
Selling, general and
administrative 17,030 14,515 31,545
Merger expenses 13,939 -- 13,939
--------- ------- ---------
Total operating expenses 114,538 27,570 142,108
--------- ------- ---------
Operating income 38,397 1,466 39,863
--------- ------- ---------
Other income:
Equity in earnings of joint ventures 22,766 -- 22,766
Investment and other income 11,594 1,161 12,755
--------- ------- ---------
Total other income 34,360 1,161 35,521
--------- ------- ---------
Income before provision for income taxes 72,757 2,627 75,384
Provision for income taxes 24,867 -- 24,867
--------- ------- ---------
Net income $ 47,890 $ 2,627 $ 50,517
========= ======= =========
Per share data:
Earnings (loss) per share $ 1.29 $ (0.05) $ 1.24
========= ======== =========
Weighted average number of
common and common equivalent
shares outstanding 37,143 1,719 40,870
========= ======== =========
</TABLE>
See accompanying notes
to the unaudited pro forma condensed combined financial information.
<PAGE> 72
WATSON/OCLASSEN
UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1994
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
WATSON OCLASSEN COMBINED
------ -------- --------
<S> <C> <C> <C>
Revenues:
Product sales, net $93,649 $28,054 $121,703
Royalty income 1,209 -- 1,209
------- ------- --------
Total revenues 94,858 28,054 122,912
------- ------- --------
Operating expenses:
Cost of revenues 48,972 8,985 57,957
Research and development 18,980 3,585 22,565
Selling, general and
administrative 13,342 14,728 28,070
------- ------- --------
Total operating expenses 81,294 27,298 108,592
------- ------- --------
Operating income 13,564 756 14,320
------- ------- --------
Other income:
Equity in earnings of joint ventures 24,968 -- 24,968
Investment and other income 6,542 1,226 7,768
Gain from legal settlements 2,299 -- 2,299
------- ------- --------
Total other income 33,809 1,226 35,035
------- ------- --------
Income before provision for income taxes 47,373 1,982 49,355
Provision for income taxes 10,828 25 10,853
------- ------- --------
Net income $36,545 $ 1,957 $ 38,502
======= ======= ========
Per share data:
Earnings per share $ 1.00 $ 0.02 $ 0.96
======= ======= ========
Weighted average number of
common and common equivalent
shares outstanding 36,515 1,705 40,242
======= ======= ========
</TABLE>
See accompanying notes
to the unaudited pro forma condensed combined financial information.
<PAGE> 73
WATSON/OCLASSEN
UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1993
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
WATSON OCLASSEN COMBINED
------ -------- --------
<S> <C> <C> <C>
Revenues:
Product sales, net $ 70,838 $24,665 $ 95,503
Royalty income -- -- --
-------- ------- --------
Total revenues 70,838 24,665 95,503
-------- ------- --------
Operating expenses:
Cost of revenues 39,207 8,193 47,400
Research and development 15,085 3,231 18,316
Selling, general and
administrative 15,682 12,537 28,219
Other -- 533 533
-------- ------- --------
Total operating expenses 69,974 24,494 94,468
-------- ------- --------
Operating income 864 171 1,035
-------- ------- --------
Other income (expense):
Equity in earnings of joint ventures 24,688 -- 24,688
Investment and other income 16,879 1,025 17,904
Provision for legal settlements (6,297) -- (6,297)
Partnership loss (7,644) -- (7,644)
-------- ------- --------
Total other income (expense) 27,626 1,025 28,651
-------- ------- --------
Income before provision for income taxes 28,490 1,196 29,686
Provision (benefit) for income taxes (21,927) 10 (21,917)
-------- ------- --------
Net income $ 50,417 $ 1,186 $ 51,603
======== ======= ========
Per share data:
Earnings per share:
Primary $ 1.42 $ 0.63 $ 1.32
======== ======= ========
Fully diluted $ 0.13
=======
Weighted average number of
common and common equivalent
shares outstanding:
Primary 35,504 1,702 39,231
======== ======= ========
Fully diluted 8,787
=======
</TABLE>
See accompanying notes
to the unaudited pro forma condensed combined financial information.
<PAGE> 74
WATSON/OCLASSEN
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
(1) Historical Presentation. The foregoing unaudited pro forma
condensed combined financial information is derived from and should be read in
conjunction with the audited consolidated financial statements, including the
notes thereto, of Watson and Oclassen, a privately-held corporation. The fiscal
years of Watson and Oclassen end on December 31 and, as such, the historical
audited consolidated statements of income 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 Oclassen, 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 the statements of income and prior to the date of each
balance sheet presented.
Certain amounts in the consolidated historical financial statements of
Watson and Oclassen 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 Combined Financial Statements as
there were no intercompany transactions or balances.
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 in these notes, nor is it necessarily indicative of
future operating results or financial position.
(2) Watson and Oclassen Merger. The following pro forma adjustments
were made to arrive at the pro forma combined adjustments:
(a) Under the terms of the Merger Agreement, Oclassen will become a
wholly-owned subsidiary of Watson, and stockholders of Oclassen will receive
common shares of Watson valued at $135 million. The Merger Agreement provides
that, immediately prior to completion of the Merger, each shareholder of
Oclassen Preferred Stock, Series A, B, C, D, and E, will convert each share of
the Oclassen Preferred Stock into one share of Oclassen Common Stock. See Note 5
of the Notes to the Oclassen Financial Statements for discussion of the Oclassen
Preferred Stock. The following table summarizes the number of shares of Oclassen
Preferred Stock outstanding at September 30, 1996:
<TABLE>
<CAPTION>
Following Conversion
from Preferred, the
Number of Oclassen Number of Oclassen
Preferred Shares Common Shares
------------------ --------------------
<S> <C> <C>
Preferred Stock, Series A 500,000 500,000
Preferred Stock, Series B 1,418,184 1,418,184
Preferred Stock, Series C 1,442,906 1,442,906
Preferred Stock, Series D 3,105,888 3,105,888
Preferred Stock, Series E 625,000 625,000
--------- ---------
7,091,978 7,091,978
</TABLE>
(b) After the above, pursuant to the Merger Agreement, shares of
Oclassen Common Stock will be exchanged for shares of Watson Common Stock. The
number of shares of Watson Common Stock to be exchanged for Oclassen Common
Stock is dependent on the price per share of Watson Common Stock on the closing
date of the Merger. For purposes of these Unaudited Pro Forma Condensed Combined
Financial Statements it was assumed that the Average Closing Price will be
$35.00 and, accordingly, approximately 3.30 million shares of Watson Common
Stock were issued to consummate the Merger. On a fully-diluted basis, based on
the assumed Average Closing Price of $35.00, 3.86 million shares of Watson
Common Stock will be issued to consummate the transaction. See Exhibit 11.1 for
computation of pro forma earnings per share.
(c) The Unaudited Pro Forma Condensed Combined Balance Sheet at
September 30, 1996 has been adjusted to reflect estimated nonrecurring merger
costs of $8.0 million. The adjustment gives effect to these merger costs as if
they had been paid immediately prior to September 30, 1996. The estimated merger
costs are expected to include costs associated with investment banking fees,
legal, accounting, printing and other costs with respect to the Merger. These
costs have been excluded from the Pro Forma Condensed Combined Statement of
Income for the nine months ended September 30, 1996 due to their nonrecurring
nature.
<PAGE> 75
SUPPLEMENTAL UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL INFORMATION
WATSON PHARMACEUTICALS, INC., OCLASSEN PHARMACEUTICALS, INC.,
AND ROYCE LABORATORIES, INC.
The following Supplemental Unaudited Pro Forma Condensed Combined Financial
Information of Watson and Oclassen include the supplemental consolidated
financial statements of Royce Laboratories, Inc. ("Royce"). On December 24,
1996, Watson and Royce entered into a definitive merger agreement. These
transactions are planned to be accounted for under the pooling of interests
method of accounting and, accordingly, Watson's consolidated financial
statements have been retroactively adjusted as if Watson, Oclassen and Royce had
operated as one entity since inception.
The following Supplemental Unaudited Pro Forma Condensed Combined Balance
Sheet presents the pro forma financial position of Watson as of September 30,
1996 as if the pending acquisitions of Royce and Oclassen had been consummated
as of September 30, 1996.
The following Supplemental Unaudited Pro Forma Condensed Combined Statements of
Operations for the Nine Months Ended September 30, 1996 and the Years Ended
December 31, 1995, 1994 and 1993 present the pro forma results of continuing
operations of Watson as if the pending acquisitions of Royce and Oclassen, which
will be accounted for under the pooling of interests method of accounting, had
been consummated as of January 1, 1993.
The unaudited pro forma earnings per common and common equivalent share include
the weighted average number of common shares and common share equivalents
outstanding of Watson and Royce and Oclassen (based on the respective merger
share exchange ratios). Common share equivalents include, where appropriate the
assumed exercise of conversion of warrants and options. In computing the
unaudited pro forma earnings per common and common equivalent share, Watson
utilizes the treasury stock method.
These Supplemental Unaudited Pro Forma Condensed Combined Financial Statements
and notes thereto should be read in conjunction with the respective historical
consolidated financial statements and notes thereto of Watson, Royce and
Oclassen and the pro forma condensed combined financial statements of Watson and
Oclassen which are included elsewhere herein or incorporated by reference. The
supplemental unaudited pro forma condensed combined results of operations do not
necessarily reflect actual results which would have occurred if the acquisitions
had taken place on the assumed dates, nor are they necessarily indicative of the
results of future combined operations.
<PAGE> 76
WATSON/OCLASSEN/ROYCE
SUPPLEMENTAL UNAUDITED PRO FORMA CONDENSED COMBINED
BALANCE SHEET
SEPTEMBER 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA COMBINED
COMBINED WATSON/
WATSON/ OCLASSEN/
WATSON OCLASSEN ADJUSTMENTS OCLASSEN ROYCE ADJUSTMENTS ROYCE
------ -------- ----------- -------- ----- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents $112,111 $ 5,381 $ (8,000) $109,492 $ 3,950 $(6,500) $106,942
Marketable securities 71,308 14,991 86,299 -- 86,299
Accounts receivable, net 25,721 3,133 28,854 3,780 32,634
Royalty receivable 7,255 -- 7,255 -- 7,255
Inventories 26,303 3,917 30,220 5,858 36,078
Deferred tax assets 11,106 -- 11,106 -- 11,106
Other current assets 2,805 2,576 5,381 582 5,963
-------- ------- -------- ------- --------
Total current assets 256,609 29,998 278,607 14,170 286,277
Property and equipment, net 73,010 1,160 74,170 3,359 77,529
Investments in joint ventures and
other long-term investments 60,148 -- 60,148 -- 60,148
Other assets 5,427 1,852 7,279 59 7,338
-------- ------- -------- -------- ------- ------- --------
$395,194 $33,010 $ (8,000) $420,204 $17,588 $(6,500) $431,292
======== ======= ======== ======== ======= ======= ========
Accounts payable and accruals $ 24,320 $ 5,045 $ 29,365 $ 2,395 $ 31,760
Current portion of long-term debt 621 -- 621 386 1,007
Contract obligations
and reserve -- 2,659 2,659 -- 2,659
Income taxes payable 9,984 -- 9,984 -- 9,984
-------- ------- -------- ------- --------
Total current liabilities 34,925 7,704 42,629 2,781 45,410
Long-term debt 3,116 -- 3,116 1,053 4,169
Other liabilities -- 12 12 -- 12
-------- ------- -------- ------- --------
Total liabilities 38,041 7,716 45,757 3,834 49,591
-------- ------- -------- ------- --------
Mandatorily redeemable preferred
stock -- 38,688 $(38,688) -- -- --
-------- ------- -------- ------- --------
Preferred stock -- 1,000 (1,000) -- -- --
Common stock 121 1,442 (1,429) 134 67 $ (59) 142
Additional paid-in capital 155,031 -- 41,117 196,148 30,335 59 226,542
Retained earnings (deficit) 196,328 (15,130) (8,000) 173,198 (16,637) (6,500) 150,061
Treasury stock (2,500 shares,
at cost) -- -- -- (11) (11)
Unrealized holding gain 5,813 -- 5,813 -- 5,813
Notes receivable-common stock -- (706) (706) -- (706)
Unearned compensation-stock awards (140) -- (140) -- (140)
-------- ------- -------- ------- --------
Total stockholders' equity
(deficit) 357,153 (13,394) 374,447 13,754 381,701
-------- ------- -------- -------- ------- ------- --------
$395,194 $33,010 $(8,000) $420,204 $17,588 $(6,500) $431,292
======== ======= ======= ======== ======= ======= ========
</TABLE>
See accompanying notes to the supplemental unaudited pro forma
condensed combined financial information.
<PAGE> 77
WATSON/OCLASSEN/ROYCE
SUPPLEMENTAL UNAUDITED PRO FORMA CONDENSED COMBINED
BALANCE SHEET
DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
COMBINED
WATSON/
WATSON OCLASSEN ADJUSTMENTS OCLASSEN ROYCE
------ -------- ----------- --------- -----
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 92,214 $ 3,002 $ 95,216 $ 2,291
Marketable securities 26,038 15,723 41,761 --
Accounts receivable, net 25,081 3,045 28,126 3,466
Royalty receivable 8,205 -- 8,205 --
Inventories 22,637 3,249 25,886 4,212
Deferred tax assets 21,115 -- 21,115 --
Other current assets 2,344 1,817 4,161 315
-------- ------- -------- -------
Total current assets 197,634 26,836 224,470 10,284
Property and equipment, net 69,999 1,046 71,045 1,732
Investments in joint ventures and
other long-term investments 49,355 -- 49,355 --
Other assets 5,133 2,139 7,272 77
-------- ------- -------- -------- -------
$322,121 $30,021 $ -- $352,142 $12,093
======== ======= ======== ======== =======
Accounts payable and accruals $ 25,215 $ 4,894 $ 30,109 $ 3,149
Current portion of long-term debt 622 -- 622 90
Contract obligations and reserve -- 2,708 2,708 --
Income taxes payable 2,985 -- 2,985 --
-------- ------- -------- -------
Total current liabilities 28,822 7,602 36,424 3,239
Long-term debt 3,577 -- 3,577 181
Other liabilities 687 39 726 --
-------- ------- -------- -------
Total liabilities 33,086 7,641 40,727 3,420
Mandatorily redeemable preferred stock -- 36,650 $(36,650) -- --
-------- ------- -------- -------
Preferred stock -- 1,000 (1,000) -- --
Common stock 120 1,226 (1,213) 133 64
Additional paid-in capital 146,439 -- 38,863 185,302 26,471
Retained earnings (deficit) 142,711 (15,852) 126,859 (17,851)
Treasury stock (2,500 shares
at cost) -- -- -- (11)
Unrealized holding gain (loss) 621 -- 621 --
Notes receivable-common stock -- (644) (644) --
Unearned compensation-stock awards (856) -- (856) --
-------- ------- -------- -------
Total stockholders' equity
(deficit) 289,035 (14,270) 311,415 8,673
-------- ------- -------- -------- -------
$322,121 $ 30,021 $ -- $352,142 $12,093
======== ======= ======== ======== =======
<CAPTION>
PRO FORMA
COMBINED
WATSON/
OCLASSEN/
ADJUSTMENTS ROYCE
---------- -----------
<S> <C> <C>
Cash and cash equivalents $ 97,507
Marketable securities 41,761
Accounts receivable, net 31,592
Royalty receivable 8,205
Inventories 30,098
Deferred tax assets 21,115
Other current assets 4,476
--------
Total current assets 234,754
Property and equipment, net 72,777
Investments in joint ventures and
other long-term investments 49,355
Other assets 7,349
------- --------
$ -- $364,235
======= ========
Accounts payable and accruals $ 33,258
Current portion of long-term debt 712
Contract obligations and reserve 2,708
Income taxes payable 2,985
--------
Total current liabilities 39,663
Long-term debt 3,758
Other liabilities 726
--------
Total liabilities 44,147
--------
Mandatorily redeemable preferred stock --
--------
Preferred stock --
Common stock $ (56) 141
Additional paid-in capital 56 211,829
Retained earnings (deficit) 109,008
Treasury stock (2,500 shares
at cost) (11)
Unrealized holding gain (loss) 621
Notes receivable-common stock (644)
Unearned compensation-stock awards (856)
--------
Total stockholders' equity
(deficit) 320,088
------- --------
$ -- $364,235
======= ========
See accompanying notes to the supplemental unaudited pro forma condensed combined financial information.
</TABLE>
<PAGE> 78
WATSON/OCLASSEN/ROYCE
SUPPLEMENTAL UNAUDITED PRO FORMA CONDENSED COMBINED
BALANCE SHEET
DECEMBER 31, 1994
(in thousands)
<TABLE>
<CAPTION>
Pro Forma
Pro Forma Combined
Combined Watson/
Watson/ Oclassen/
Watson Oclassen Adjustments Oclassen Royce Adjustments Royce
------ -------- ----------- -------- ----- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 71,165 $ 3,453 $ 74,618 $ 3,323 $ 77,941
Marketable securities 35,531 14,945 50,476 - 50,476
Accounts receivable, net 16,128 2,842 18,970 1,453 20,423
Inventories 16,361 3,773 20,134 2,049 22,183
Deferred tax assets 30,995 - 30,995 - 30,995
Other current assets 2,732 1,841 4,573 223 4,796
-------- ------- -------- ------ -------
Total current assets 172,912 26,854 199,766 7,048 206,814
Property and equipment, net 54,115 1,187 55,302 980 56,282
Investments in joint ventures
and other long-term
investments 31,824 - 31,824 - 31,824
Other assets 3,465 - 3,465 83 3,548
------- ------ ---------- -------- ------ ---------- --------
$262,316 $28,041 $ - $290,357 $8,111 $ - $298,468
======== ======= ========== ======== ====== ========== ========
Accounts payable and accruals $ 17,610 $ 5,442 $ 23,052 $1,698 $ 24,750
Current portion of long-term
debt 641 - 641 25 666
Contract obligations and
reserve - 2,919 2,919 - 2,919
Income taxes payable - - - - -
-------- ------- -------- ------ --------
Total current liabilities 18,251 8,361 26,612 1,723 28,335
Long-term debt 5,058 - 5,058 33 5,091
Deferred partnership liability 14,033 - 14,033 - 14,033
Other liabilities 1,604 75 1,679 - 1,679
-------- ------- -------- ------ --------
Total liabilities 38,946 8,436 47,382 1,756 49,138
Mandatorily redeemable
preferred stock - 33,933 $(33,933) - - -
-------- ------- -------- ------ --------
Preferred stock - 1,000 (1,000) - - -
Common stock 118 1,087 (1,074) 131 60 $ (52) 139
Additional paid-in capital 132,115 - 36,007 168,122 21,821 52 189,995
Retained earnings (deficit) 94,821 (15,762) 79,059 (15,515) 63,544
Treasury stock (2,500 shares,
at cost) - - - (11) (11)
Unrealized holding gain (loss) (870) - (870) - (870)
Notes receivable-common stock - (653) (653) - (653)
Unearned compensation-stock
awards (2,814) - (2,814) - (2,814)
-------- ------- -------- ------ --------
Total stockholders'
equity (deficit) 223,370 (14,328) 242,975 6,355 249,330
-------- ------- --------- -------- ------ ---------- --------
$262,316 $28,041 $ - $290,357 $8,111 $ - $298,468
======== ======= ========= ======== ====== ========== ========
See accompanying notes to the supplemental unaudited pro forma condensed combined financial information.
</TABLE>
<PAGE> 79
WATSON/OCLASSEN/ROYCE
SUPPLEMENTAL UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA COMBINED
COMBINED WATSON/
WATSON/ OCLASSEN/
WATSON OCLASSEN OCLASSEN ROYCE ROYCE
------ -------- -------- ----- -------
<S> <C> <C> <C> <C> <C>
Revenues:
Product sales, net $122,155 $24,276 $146,431 $17,216 $163,647
Royalty income 19,862 -- 19,862 -- 19,862
-------- ------- -------- ------- --------
Total revenues 142,017 24,276 166,293 17,216 183,509
-------- ------- -------- ------- --------
Operating expenses:
Cost of revenues 56,842 7,099 63,941 11,200 75,141
Research and development 12,467 3,554 16,021 1,252 17,273
Selling, general and
administrative 13,371 11,666 25,037 3,633 28,670
-------- ------- -------- ------- --------
Total operating expenses 82,680 22,319 104,999 16,085 121,084
-------- ------- -------- ------- --------
Operating income 59,337 1,957 61,294 1,131 62,425
Other income:
Equity in earnings of joint
ventures 14,156 -- 14,156 -- 14,156
Investment and other income 5,844 863 6,707 115 6,822
-------- ------- -------- ------- --------
Total other income 20,000 863 20,863 115 20,978
-------- ------- -------- ------- --------
Income before provision
for income taxes 79,337 2,820 82,157 1,246 83,403
Provision for income taxes 25,720 60 25,780 32 25,812
-------- ------- -------- ------- --------
Net income $53,617 $ 2,760 $ 56,377 $ 1,214 $ 57,591
======= ======= ======== ======= ========
Per share data:
Earnings per share:
Primary $ 1.43 $ 0.30 $ 1.36 $ 0.09 $ 1.32
======= ======= ======== ======= ========
Fully diluted $ 0.27
=======
Weighted average number
of common and common
equivalent shares
outstanding:
Primary 37,624 2,424 41,351 14,013 43,763
======= ======= ======== ======= ========
Fully diluted 10,063
=======
See accompanying notes to the supplemental unaudited pro forma condensed combined financial information.
</TABLE>
<PAGE> 80
WATSON/OCLASSEN/ROYCE
SUPPLEMENTAL UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA COMBINED
COMBINED WATSON/
WATSON/ OCLASSEN/
WATSON OCLASSEN OCLASSEN ROYCE ROYCE
-------- -------- --------- ------- ---------
<S> <C> <C> <C> <C> <C>
Revenues:
Product sales, net $130,688 $29,036 $159,724 $10,503 $170,227
Royalty income 22,247 -- 22,247 -- 22,247
-------- ------- -------- ------- --------
Total revenues 152,935 29,036 181,971 10,503 192,474
-------- ------- -------- ------- --------
Operating expenses:
Cost of revenues 64,996 9,278 74,274 7,143 81,417
Research and development 18,573 3,777 22,350 2,212 24,562
Selling general and
administrative 17,030 14,515 31,545 3,634 35,179
Merger expenses 13,939 -- 13,939 -- 13,939
-------- ------- -------- ------- --------
Total operating expenses 114,538 27,570 142,108 12,989 155,097
-------- ------- -------- ------- --------
Operating income (loss) 38,397 1,466 39,863 (2,486) 37,377
Other income:
Equity in earnings of joint ventures 22,766 -- 22,766 -- 22,766
Investment and other income 11,594 1,161 12,755 150 12,905
-------- ------- -------- ------- --------
Total other income 34,360 1,161 35,521 150 35,671
-------- ------- -------- ------- --------
Income (loss) before provision
for income taxes 72,757 2,627 75,384 (2,336) 73,048
Provision for income taxes 24,867 -- 24,867 -- 24,867
-------- ------- -------- ------- --------
Net income (loss) $ 47,890 $ 2,627 $ 50,517 $(2,336) $ 48,181
======== ======= ======== ======= ========
Per share data:
Earnings (loss) per share $ 1.29 $ (0.05) $ 1.24 $ (0.19) $ 1.11
======== ======= ======== ======= ========
Weighted average number of
common and common equivalent
shares outstanding 37,143 1,719 40,870 12,352 43,282
======== ======= ======== ======= ========
</TABLE>
See accompanying notes to the supplemental unaudited pro forma
condensed combined financial information.
<PAGE> 81
WATSON/OCLASSEN/ROYCE
SUPPLEMENTAL UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1994
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA COMBINED
COMBINED WATSON/
WATSON/ OCLASSEN/
WATSON OCLASSEN OCLASSEN ROYCE ROYCE
------ -------- --------- ----- ---------
<S> <C> <C> <C> <C> <C>
Revenues:
Product sales, net $93,649 $28,054 $121,703 $ 6,191 $127,894
Royalty income 1,209 -- 1,209 -- 1,209
------- ------- -------- ------- --------
Total revenues 94,858 28,054 122,912 6,191 129,103
------- ------- -------- ------- --------
Operating expenses:
Cost of revenues 48,972 8,985 57,957 4,538 62,495
Research and development 18,980 3,585 22,565 960 23,525
Selling, general and
administrative 13,342 14,728 28,070 2,298 30,368
------- ------- -------- ------- --------
Total operating expenses 81,294 27,298 108,592 7,796 116,388
------- ------- -------- ------- --------
Operating income (loss) 13,564 756 14,320 (1,605) 12,715
Other income:
Equity in earnings of joint ventures 24,968 -- 24,968 -- 24,968
Investment and other income 6,542 1,226 7,768 128 7,896
Gain from legal settlements 2,299 -- 2,299 -- 2,299
------- ------- -------- ------- -------
Total other income 33,809 1,226 35,035 128 35,163
------- ------- -------- ------- -------
Income (loss) before provision for income taxes 47,373 1,982 49,355 (1,477) 47,878
Provision for income taxes 10,828 25 10,853 -- 10,853
------- ------- -------- ------- -------
Net income (loss) $36,545 $ 1,957 $ 38,502 $(1,477) $ 37,025
======= ======= ======== ======= ========
Per share data:
Earnings (loss) per share $ 1.00 $ 0.02 $ 0.96 $ (0.14) $ 0.87
======= ======= ======== ======= ========
Weighted average number of
common and common equivalent
shares outstanding 36,515 1,705 40,242 10,554 42,654
======= ======= ======== ======= ========
See accompanying notes to the supplemental unaudited pro forma condensed combined financial information.
</TABLE>
<PAGE> 82
WATSON/OCLASSEN/ROYCE
SUPPLEMENTAL UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1993
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA COMBINED
COMBINED WATSON/
WATSON/ OCLASSEN/
WATSON OCLASSEN OCLASSEN ROYCE ROYCE
-------- -------- --------- ------- ---------
<S> <C> <C> <C> <C> <C>
Revenues:
Product sales, net $ 70,838 $24,665 $ 95,503 $ 3,519 $ 99,022
Royalty income - - - - -
-------- ------- -------- ------- --------
Total revenues 70,838 24,665 95,503 3,519 99,022
-------- ------- -------- ------- --------
Operating expenses:
Cost of revenues 39,207 8,193 47,400 3,017 50,417
Write-off of inventory - - - 768 768
Research and development 15,085 3,231 18,316 305 18,621
Selling, general and administrative 15,682 12,537 28,219 2,084 30,303
Other - 533 533 - 533
-------- ------- -------- ------- --------
Total operating expenses 69,974 24,494 94,468 6,174 100,642
-------- ------- -------- ------- --------
Operating income (loss) 864 171 1,035 (2,655) (1,620)
Other income (expense):
Equity in earnings of joint ventures 24,688 - 24,688 - 24,688
Investment and other income 16,879 1,025 17,904 58 17,962
Provision for legal settlements (6,297) - (6,297) (1,336) (7,633)
Partnership loss (7,644) - (7,644) - (7,644)
-------- ------- -------- ------- --------
Total other income (expense) 27,626 1,025 28,651 (1,278) 27,373
-------- ------- -------- ------- --------
Income (loss) before provision for
income taxes 28,490 1,196 29,686 (3,933) 25,753
Provision (benefit) for income taxes (21,927) 10 (21,917) - (21,917)
-------- ------- -------- ------- --------
Net income (loss) $ 50,417 $ 1,186 $ 51,603 $(3,933) $ 47,670
======== ======= ======== ======= ========
Per share data:
Earnings (loss) per share:
Primary $ 1.42 $ 0.63 $ 1.32 $ (0.41) $ 1.14
======== ======= ======== ======= ========
Fully diluted $ 0.13
=======
Weighted average number of common and
common equivalent shares outstanding:
Primary 35,504 1,702 39,231 9,493 41,643
======== ======= ======== ======= ========
Fully diluted 8,787
=======
</TABLE>
See accompanying notes to the supplemental unaudited
pro forma condensed combined financial information.
WATSON/OCLASSEN/ROYCE
NOTES TO SUPPLEMENTAL UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL INFORMATION
(1) Historical Presentation. The foregoing supplemental unaudited pro
forma condensed combined financial information is derived from and should be
read in conjunction with the audited consolidated financial statements,
including the notes thereto, of Watson, Oclassen and Royce. The fiscal years of
Watson, Oclassen and Royce end on December 31 and, as such, the historical
audited consolidated statements of income have been reported on such fiscal year
bases. No adjustments have been made to the Supplemental Unaudited Pro Forma
Condensed Combined Financial Statements for differences in the application of
generally accepted accounting principles between Watson, Oclassen and Royce,
as the impact of such adjustments would not be material. The supplemental
unaudited pro forma condensed combined financial information gives effect to
the Watson/Oclassen and Watson/Royce mergers under the pooling of interests
accounting method as if the mergers had occurred at the beginning of each period
presented for the statements of income and prior to the date of each balance
sheet presented.
Certain amounts in the consolidated historical financial statements of
Watson, Oclassen and Royce have been reclassified to conform with the
Supplemental Unaudited Pro Forma Condensed Combined Financial Statement
presentation.
No adjustments are necessary to eliminate intercompany transactions and
balances in the Supplemental Unaudited Pro Forma Condensed Combined Financial
Statements as there were no intercompany transactions or balances.
The supplemental 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 mergers had been consummated
in accordance with the assumptions set forth in these notes, nor is it
necessarily indicative of future operating results or financial position.
(2) Watson and Oclassen Merger. The following pro forma adjustments
were made to arrive at the pro forma combined adjustments:
(a) Under the terms of the Merger Agreement, Oclassen will become a
wholly-owned subsidiary of Watson, and stockholders of Oclassen will receive
common shares of Watson valued at $135 million. The Merger Agreement provides
that, immediately prior to completion of the Merger, each shareholder of
Oclassen Preferred Stock, Series A, B, C, D, and E, will convert each share of
the Oclassen Preferred Stock into one share of Oclassen Common Stock. See Note 5
of the Notes to the Oclassen Financial Statements for discussion of the
Oclassen Preferred Stock. The following table summarizes the number of shares
of Oclassen Preferred Stock outstanding at September 30, 1996:
<TABLE>
<CAPTION>
Following Conversion
from Preferred, the
Number of Oclassen Number of Oclassen
Preferred Shares Common Shares
------------------ --------------------
<S> <C> <C>
Preferred Stock, Series A 500,000 500,000
Preferred Stock, Series B 1,418,184 1,418,184
Preferred Stock, Series C 1,442,906 1,442,906
Preferred Stock, Series D 3,105,888 3,105,888
Preferred Stock, Series E 625,000 625,000
--------- ---------
7,091,978 7,091,978
</TABLE>
(b) After the above, pursuant to the Merger Agreement, shares of
Oclassen Common Stock will be exchanged for shares of Watson Common Stock. The
number of shares of Watson Common Stock to be exchanged for Oclassen Common
Stock is dependent on the price per share of Watson Common Stock on the closing
date of the Merger. For purposes of these Unaudited Pro Forma Condensed Combined
Financial Statements it was assumed that the Average Closing Price will be
$35.00 and, accordingly, approximately 3.30 million shares of Watson Common
Stock were issued to consummate the Merger. On a fully-diluted basis, based on
the assumed Average Closing Price of $35.00, 3.86 million shares of Watson
Common Stock will be issued to consummate the transaction. See Exhibit 11.1 for
computation of pro forma earnings per share.
(c) The Supplemental Unaudited Pro Forma Condensed Combined Balance
Sheet at September 30, 1996 has been adjusted to reflect estimated nonrecurring
merger costs of $8.0 million. The adjustment gives effect to these merger costs
as if they had been paid immediately prior to September 30, 1996. The estimated
merger costs are expected to include costs associated with investment banking
fees, legal, accounting, printing and other costs with respect to the Merger.
(3) Watson and Royce Merger. The following pro forma adjustments were
made to arrive at the pro forma combined adjustments:
(a) Under the terms of the Royce Merger Agreement, Royce will become a
wholly-owned subsidiary of Watson, and stockholders of Royce will receive
common shares of Watson valued at $98 million. The Royce Merger Agreement
provides that Watson will issue at the closing of the Merger to the Holders of
the Royce Common Stock the number of shares of Watson Common Stock, equal to
$7.25 divided by the average closing price of Watson's Common Stock for the ten
consecutive trading days immediately preceding the effective date of the Merger,
subject to a $38 to $47 collar multiplied by the number of shares of Royce
Common Stock outstanding on the effective date.
For purposes of these Supplemental Unaudited Pro Forma Condensed
Combined Financial Statements it was assumed that the average closing price
will be $42.00 and, accordingly, approximately 2.33 million shares of Watson
Common Stock were assumed to have been issued to consummate the merger.
(b) The Supplemental Unaudited Pro Forma Condensed Combined Balance
Sheet at September 30, 1996 has been adjusted to reflect estimated nonrecurring
merger costs of $6.5 million. The adjustment gives effect to these merger costs
as if they had been paid immediately prior to September 30, 1996. The estimated
merger costs are expected to include costs associated with investment banking
fees, legal, accounting, printing and other costs with respect to the merger.
<PAGE> 83
INFORMATION REGARDING WATSON
Watson develops, manufactures and markets a comprehensive array of
off-patent pharmaceuticals, and develops proprietary pharmaceutical products.
Watson pursues a balanced strategy of generating revenue through its
long-established off-patent pharmaceuticals business, capitalizing on its proven
capabilities to support the development of off-patent and proprietary products,
and seeking opportunities to acquire businesses, technologies and products to
broaden its technology platform. 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 and
markets such products worldwide through pharmaceutical companies, joint ventures
and its own marketing efforts. To achieve this objective, Watson is pursuing a
balanced strategy of generating revenue through its established off-patent
pharmaceutical business and capitalizing on its proven research and development,
manufacturing and regulatory capabilities to support the development of advanced
proprietary products. Watson targets difficult-to-produce niche pharmaceuticals,
thereby avoiding competition with traditional commodity-oriented off-patent
pharmaceutical companies. Watson also regularly reviews potential opportunities
to acquire or invest in technologies, products or product rights and businesses
compatible with its existing business. Except for the Merger Agreement and the
Royce Merger Agreement, Watson currently has not entered into any definitive
agreements with respect to any such acquisition, although Watson may do so in
the future. See "Risk Factors--Future Acquisitions."
Watson has historically derived a substantial portion of its revenues
from the manufacture and sale of off-patent pharmaceutical products. While this
continues to be the primary revenue source, certain developments have occurred
which have augmented Watson's revenue mix resulting in a decreased emphasis upon
sales of off-patent products. Management expects this change in the mix of
revenues to continue. Product sales of off-patent medications accounted
for approximately 100% of total revenues in 1993 and for approximately 99% of
total revenues in 1994. In 1995, sales of off-patent products accounted for
approximately 85.5% of total revenues and royalty income accounted for
approximately 14.5% of total revenues. A substantial portion of Watson's income
is included in other income, as a result of its joint ventures and investments,
and is not reflected in its revenue figures.
In July 1995, Watson strengthened and diversified its revenue base
through a merger with Circa Pharmaceuticals, Inc. ("Circa"). The merger,
accounted for as a pooling-of-interests, enhanced Watson's manufacturing
capabilities and increased its product development program, particularly in the
area of proprietary products. Watson also owns a 50% equity interest in
Somerset, which primarily markets Eldepryl(R) for the treatment of Parkinson's
disease. Watson recorded equity in earnings of this joint venture of $24.8
million in 1995. Patent exclusivity expired for Eldepryl(R) in June 1996. For
the nine months ended September 30, 1996, Watson experienced a decrease in
earnings from Somerset due to increased competition for Eldepryl(R). See "Risk
Factors -- Loss of Exclusive Rights to Market Certain Products."
Circa and 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, Watson earns royalties on sales of
Dilacor XR(R) by RPR. Royalty income is determined based upon the market demand
for the product, as evidenced by prescriptions written, as defined. Revenues
under this royalty agreement were $22.2 million in 1995 and $1.2 million in
1994. Dilacor XR(R) lost patent exclusivity in May 1995. Watson and RPR intend
to launch an off-patent Dilacor XR(R) product, following approval by the United
States Food & Drug Administration (the "FDA"), as considered appropriate. The
costs and profits from the off-patent product are to be shared equally by Watson
and RPR.
Watson continues to expand its research and development efforts in the
area of proprietary product development through joint ventures, product
acquisitions and strategic alliances. Watson also continues to seek
opportunities to broaden its technology platform and to invest in new products,
technologies or businesses that are consistent with its strategy to focus on
niche or technically difficult to duplicate products. This strategy was
evidenced by Watson's increased investment in Andrx Corporation ("Andrx"), a
company engaged in the development of advanced controlled-release delivery
systems for certain orally-administered drugs. In October 1995, Watson purchased
additional Andrx common stock for approximately $15.6 million, increasing its
ownership to 19.5% of the total outstanding common stock of Andrx.
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.
In March 1996, Watson's wholly-owned subsidiary, Watson Pharmaceuticals
(Asia) Ltd. ("Watson (Asia)") entered into an agreement to form two joint
ventures with China-based Changzhou No. 4 Pharmaceutical Factory. Watson's
wholly-owned subsidiaries include Labs, Watson (Asia), Corona Pharmaceuticals,
Inc. (currently inactive) and Circa.
RECENT DEVELOPMENTS
On December 24, 1996, Watson entered into a definitive Agreement and
Plan of Merger with Royce Laboratories, Inc. ("Royce") (the "Royce Merger
Agreement"), pursuant to which Royce will merge (the "Royce Merger") with and
into a subsidiary of Watson created for purposes of the Royce Merger, with Royce
surviving the Royce Merger as a wholly-owned subsidiary of Watson.
<PAGE> 84
Royce develops, manufactures and markets off-patent prescription drugs
in solid dosage forms (tablets and capsules). At present, Royce manufactures and
markets 20 prescription drugs in 42 dosage strengths and has received approval
on an additional drug in 3 dosage strengths which it has not yet commenced
manufacturing and marketing. Additionally, Royce has, at present, ANDAs pending
with the FDA for 9 off-patent prescription products. Royce's executive offices
are located in Miami, Florida. At December 31, 1996, Royce had approximately
141 employees.
Royce Common Stock is currently traded on the Nasdaq SmallCap Market
under the symbol "RLAB." Pursuant to the terms and conditions of the Royce
Merger Agreement, at the effective time of the Royce Merger, Royce stockholders
will receive an aggregate of up to approximately 2.33 million shares of Watson
Common Stock. Under the terms of the Royce Merger Agreement, Watson will issue
at the closing of the Royce Merger to the Royce stockholders the number of
shares of Watson Common Stock equal to $7.25 divided by the average closing
price of Watson Common Stock for the ten consecutive trading days immediately
preceding the effective date of the Royce Merger, subject to a $38 and $47
collar, multiplied by the number of shares of Royce Common Stock outstanding on
the effective date of the Royce Merger.
Consummation of the Royce Merger is subject to the satisfaction of
certain conditions, including, without limitation, approval of the Royce Merger
Agreement by the Royce stockholders, regulatory approvals and treatment of the
Royce Merger as a pooling of interests for accounting purposes and treatment
of the Royce Merger as a tax-free reorganization. In connection with the Royce
Merger, Watson and Royce will enter into an employment agreement with Patrick J.
McEnany, the Chairman, President and Chief Executive Officer of Royce. The
employment agreement will be for a three-year term and will provide that Mr.
McEnany will remain as the President of Royce and will also become a Vice
President of Watson in charge of Corporate Development. Mr. McEnany has been
the President of Royce since June 1991 and its Chairman since February 1994.
Mr. McEnany was the President, Chief Executive Officer and Chief Financial
Officer of Zenex Synthetic Lubricants, Inc. ("Zenex"), a company engaged in
the distribution of synthetic lubricants from 1973 until 1985. In February
1985, Zenex merged with Home Intensive Care, Inc. ("HIC"), a provider of home
infusion therapy services, and Mr. McEnany continued to serve as a director
and chairman of the audit committee of the combined entity. In July 1993, HIC
was acquired by W.R. Grace & Co. From December 1984 through December 1991, Mr.
McEnany also served as the President of Equisource Capital, Inc., a consulting
company, in the areas of corporate finance and investment banking. He currently
serves as a director of the National Association of Pharmaceutical
Manufacturers.
<PAGE> 85
INFORMATION REGARDING OCLASSEN
BACKGROUND
Oclassen develops specialty prescription pharmaceuticals to prevent and
treat skin diseases, and markets these products to dermatologists. Oclassen
in-licenses pharmaceutical products, which have been developed beyond the
initial discovery phase, from United States and foreign pharmaceutical companies
and from universities and research institutions. Oclassen completes product
formulation and any preclinical development, conducts clinical trials and brings
products through the required regulatory approval process and into the market.
Oclassen markets its products through its 60-person nationwide direct sales
force to dermatologists. Oclassen believes that its in-licensing, development
and marketing strategy reduces the time, risks and costs associated with product
development and marketing.
MARKETED PRODUCTS
Oclassen currently markets the following five commercial prescription
brands in the United States:
- Condylox(R) (podofilox 0.5%) Topical Solution was introduced in
the United States by Oclassen in April 1991 and is the only
patient-applied topical therapy approved by the United States Food
and Drug Administration (the "FDA") for the treatment of external
genital warts, the most common viral sexually transmitted disease
("STD"). Oclassen in-licensed Condylox(R) in 1985, conducted the
preclinical studies and clinical trials necessary to file a New
Drug Application ("NDA") and, in December 1990, obtained FDA
approval. Oclassen believes Condylox(R) therapy is a less invasive
and more cost-effective alternative to most other genital wart
treatments, such as cryosurgery, laser surgery, caustic topical
agents, intralesional injections and excision. Condylox(R) Topical
Solution is promoted to dermatologists and urologists by the
Oclassen sales force.
- Monodox(R) (doxycycline monohydrate) was introduced in the United
States by Oclassen in March 1991. In 1990, Oclassen in-licensed
the rights to distribute this FDA-approved broad spectrum oral
antibiotic in the United States and Canada. In 1995, Oclassen
purchased the NDA for Monodox(R). Monodox(R) is promoted primarily
for the treatment of acne. Doxycycline, the active component of
Monodox(R), has been shown in clinical trials to be as effective
as minocycline with an alternative side effect profile.
Minocycline is the leading oral antibiotic for acne. Monodox(R) is
offered at a significantly lower price than the leading
prescription brand minocycline product.
- Cordran(R) (flurandrenolide) is a topical steroid used for the
treatment of the inflammatory and pruritic manifestations of
corticosteroid-responsive dermatoses. Oclassen commenced sales of
Cordran(R) topical steroid products in September 1992 after
Oclassen in-licensed the exclusive United States and Canadian
distribution rights to this product line through an agreement with
Eli Lilly and Company ("Lilly"). The Cordran(R) formulations
include Cordran(R) Cream, Ointment and Lotion as well as
Cordran(R) Tape, the only fluorinated steroid-impregnated tape
available in the United States. Topical steroids are used for the
treatment of skin inflammation and are among the drugs most
commonly prescribed by dermatologists.
- Cinobac(R) (cinoxacin) is an oral quinolone anti-infective,
available in 250 mg. and 500 mg. capsules, indicated in the
treatment of uncomplicated urinary tract infections ("UTI's").
Oclassen commenced sales of Cinobac(R) Capsules in the United
States in September 1992,
<PAGE> 86
under an agreement with Lilly granting Oclassen exclusive United
States and Canadian distribution rights. Oclassen promotes
Cinobac(R) primarily to urologists for the outpatient treatment of
initial and recurrent urinary tract infections and prophylaxis.
Cinoxacin is the only quinolone anti-infective with an approved
indication for prophylaxis of recurrent UTIs.
- Cormax(TM) (clobetasol propionate) is a highly potent topical
steroid used for the short-term treatment of inflammatory and
pruritic manifestations of moderate to severe
corticosteroid-responsive dermatoses. Oclassen introduced
Cormax(TM) Scalp Application in March 1996 and Cormax(TM) Ointment
in June 1996 after in-licensing the U.S. marketing and
distribution rights. According to prescription data collected by
the Scott Levin Company, clobetasol propionate is the high potency
steroid most frequently prescribed by dermatologists. Cormax(TM)
is promoted exclusively to dermatologists at a significantly lower
price than the leading prescription brand product.
PRODUCTS UNDER DEVELOPMENT
Oclassen is developing a variety of new products, as well as new
indications and formulations of its current products, for the treatment of
genital warts, acne, psoriasis, vitiligo, skin infections and dermatoses.
Extensions to the current product lines include a gel formulation of Condylox(R)
for current and expanded indications, and cream, gel and emollient cream
formulations of Cormax(TM) for inflammatory skin dermatoses. Development of a
psoralen-based phototherapy product for use in PUVA therapy for indications in
psoriasis and vitiligo is currently underway. Oclassen believes that this
product will reduce the side effects characteristic of current psoralen therapy.
Additionally, Oclassen is developing a topical anti-microbial product line based
upon proprietary technology utilizing the active form of iodine. These products
are intended to minimize irritation and microbial resistance while maintaining a
high activity level against a variety of pathogens.
PRODUCT DEVELOPMENT CAPABILITY
Oclassen's product development efforts are directed to the development
and regulatory approval of new pharmaceuticals for the treatment of skin
diseases. These products typically have been initially researched by other
pharmaceutical companies, universities and research institutions and have been
the subject of at least limited human clinical trials. Oclassen focuses its
development efforts on selected product candidates that it believes, based on
its market research and technical evaluation, have a high probability of
commercial success. Oclassen's development group also seeks to identify
additional indications for and create new formulations of previously in-licensed
products. In addition, the Oclassen team identifies promising broad application
technologies that are applicable to dermatology. Oclassen has established the
experienced product development teams necessary for the identification,
development and regulatory approval of new pharmaceutical products, including
formulation, analytical development, quality control, clinical research and
regulatory affairs. Where appropriate, Oclassen may sub-contract with third
parties for certain phases of its development activities.
Oclassen's technical development unit is responsible for the design,
formulation and scale-up to production of dosage forms, the analytical
development of testing methods and specifications, and quality control/quality
assurance of clinical supplies and marketed products. Oclassen's clinical
research group has responsibility for the design, conduct, monitoring and
evaluation of clinical trials in support of its development projects. Oclassen's
regulatory affairs team organizes the data developed for presentation to the FDA
and maintains contact with the appropriate authorities through the preclinical
development and approval stages of Oclassen's regulatory submissions. Oclassen's
regulatory affairs group is experienced
<PAGE> 87
in the preparation and filing of the various approval documents, as well as in
the compliance with the regulations governing the labeling, marketing and
distribution of Oclassen's prescription drug products.
SALES AND MARKETING
Oclassen focuses its direct sales efforts on dermatologists. There are
an estimated 7,000 dermatologists in the United States and Oclassen believes
that these physicians can be effectively reached by a highly focused and
experienced sales force. Dermatologists located in areas not covered by an
Oclassen field representative are serviced by an in-house telemarketing team. To
reach larger physician groups, which cannot be efficiently addressed by a
focused sales force, and certain geographic markets, Oclassen has entered and,
when appropriate, in the future may enter into collaborative arrangements with
pharmaceutical companies with applicable sales and marketing expertise and
capabilities.
Direct Selling. Oclassen introduced Condylox(R) Topical Solution and
Monodox(R) 100 mg Capsules in 1991 with a sales force of 17. Oclassen has been
successful in recruiting experienced field sales representatives who have an
average of seven years of selling experience to the dermatology market. At
September 30, 1996, Oclassen had a nationwide sales force of 60 people promoting
its products, including 43 field sales representatives deployed nationwide and
supervised by five regional managers, four telemarketing sales representatives
and a telemarketing sales manager. Oclassen also employs a Director of National
Accounts and five national accounts managers to address the growing importance
of managed health care delivery and other economic factors affecting its
business. The Oclassen sales team is managed by a Director of Field Sales who
has an extensive background in direct sales to the dermatology market. Oclassen
plans to expand its field sales force over the next several years so that it
will be able to increase its coverage of the target physicians who prescribe
Oclassen's products.
Although Oclassen markets its products to physicians, Oclassen
distributes its products through major drug wholesalers who supply local
pharmacies that fill physician prescriptions. During the year ended December 31,
1995, three wholesalers, McKesson Corporation, Cardinal Health, Inc. and Burgen
Brunswig Corporation, accounted for approximately 25%, 17% and 14%,
respectively, of Oclassen's product sales. The pharmacies that fill the
physician prescriptions for Oclassen's products typically purchase their
supplies from a number of drug wholesalers. Therefore, sales of Oclassen's
products to any individual drug wholesaler may fluctuate from period to period,
depending upon which drug wholesaler supplies products to the pharmacies
filling the physician prescriptions. Because Oclassen's product sales are
dependent upon the number of physician prescriptions written for Oclassen's
products and filled by local pharmacies and not on sales to any particular
drug wholesaler, management of Oclassen does not believe that the loss of any
of such customers would have a material adverse effect on Oclassen.
Marketing Collaborations. Oclassen has entered into and, when
appropriate, intends to pursue, collaborative marketing relationships to address
market opportunities not efficiently reached by a focused sales force. Such
relationships may include co-promotion and co-marketing arrangements to broaden
marketing efforts within the United States to larger physician groups, such as
Ob/Gyns and primary care physicians, to market products internationally and to
market Oclassen's current products for therapeutic applications outside
Oclassen's focus. Such co-promotion arrangements may require Oclassen to pay
commissions on sales over certain thresholds and make certain minimum payments
for promotion and advertising.
MANUFACTURING AND RAW MATERIALS
Oclassen contracts for the manufacture of its current products for
commercial purposes and intends to do so for future products. This manufacturing
strategy enables Oclassen to direct its financial resources to product
in-licensing and acquisition, product development and sales and marketing
efforts.
The manufacturers of Oclassen's products are required by the Federal
Food, Drug and Cosmetic Act ("FFDCA") and by FDA regulations to follow current
Good Manufacturing Practices ("GMP"). Accordingly, Oclassen is dependent upon
its contract manufacturers to comply with such requirements or
<PAGE> 88
similar standards imposed by foreign regulators. To ensure such compliance,
Oclassen imposes rigorous manufacturing specifications on each of its contract
manufacturers. In addition, the Oclassen quality assurance staff audits
Oclassen's contract manufacturing sites and batch records to determine whether
products are manufactured in compliance with GMP requirements and to Oclassen's
specifications. Certain aspects of final quality assurance are conducted on each
finished product batch, and file samples are maintained at Oclassen's facility
in San Rafael, California. Various recordkeeping, reporting and other related
functions with respect to the products are also handled by Oclassen. Stability
studies are conducted by Oclassen's contract manufacturers on several commercial
lots of each of Oclassen's products in order to monitor product potency
throughout their shelf lives. Many of these functions carried out by Oclassen at
its San Rafael facility are subject to GMP requirements. The FDA conducts
regular inspections and audits of firms subject to GMP requirements. Although
Oclassen has taken all actions that it believes are necessary to assure that it
and its contract manufacturers are in compliance with these requirements, there
can be no assurance that the FDA or a foreign regulator would not take action
against Oclassen or a supplier or a contract manufacturer for alleged violations
of GMP guidelines or similar standards.
With the exception of Condylox(R) Topical Solution, each of Oclassen's
products are currently manufactured by a single source. The principal raw
materials used in Oclassen's products are active drug ingredients and inactive
pharmaceutical chemicals. These active drug ingredients are generally available
from a limited number of foreign and United States sources. Because the FDA
approval process requires manufacturers to specify their proposed raw material
suppliers in their NDA, if raw materials from a specified supplier were to
become unavailable, FDA approval of a new supplier would be required. The need
for approval of such new supplier could cause a delay in the manufacture of the
product involved. Development and approval of Oclassen's products are,
therefore, dependent upon its ability to procure active ingredient raw materials
from FDA-approved sources. Arrangements with material suppliers in other
countries are subject to the usual risks of doing business internationally,
including the availability of FDA, customs and other governmental clearances,
the imposition of export duties, political and social instability, possible
currency fluctuations and restrictions on the transfer of funds.
<PAGE> 89
LICENSES, PATENTS, TRADE SECRETS AND NON-PATENT EXCLUSIVITY
Podofilox (Condylox(R)). Oclassen has entered into an exclusive license
and supply arrangement with Nycomed Pharma (Denmark) granting Oclassen the right
to manufacture and sell podofilox-based products in the United States and Puerto
Rico. In the event Oclassen fails to meet certain minimum sales under the
agreement, the license becomes non-exclusive or, in certain circumstances, may
be terminated by Nycomed. Oclassen has paid to Nycomed certain milestone
payments and pays royalties based on product sales in exchange for this license.
Nycomed has agreed to sell podofilox, the raw material required to manufacture
podofilox topical products, exclusively to Oclassen in the United States.
Oclassen has agreed to purchase a certain portion of its requirements of such
raw material from Nycomed, provided that Nycomed meets certain pricing
requirements. Under the Nycomed agreement, Oclassen is prevented from selling
any products based on podofilox, peltatins or chemically related compounds in
the United States and Puerto Rico, unless Oclassen pays Nycomed royalties on
such sales. Additionally, Nycomed owns all rights to podofilox-based products
developed by Nycomed or Oclassen during the term of the agreement, subject to
the exclusive license granted in the agreement. The agreement terminates in
2005, after which Oclassen may market products without further obligation to
Nycomed.
Monodox(R). In 1995, Oclassen purchased the NDA for Monodox(R) from
Vintage. Oclassen is the sole owner of the Monodox(R) trademark.
Cordran(R) and Cinobac(R). In August 1992, Oclassen and Lilly entered
into exclusive distribution agreements for Cordran(R) and Cinobac(R). Under the
terms of the agreements, Lilly manufactures these products and Oclassen markets
them in the United States and Canada and pays Lilly a royalty on sales. Lilly
also licensed to Oclassen rights to the Cordran(R) and Cinobac(R) trademarks.
The agreements terminate in August 2002, at which time all rights to Cordran(R)
and Cinobac(R) will become the property of Oclassen.
Cormax(TM). In November 1995, Oclassen and Dermco Development Limited
Partnership (acting through its general partner DPT Laboratories of San Antonio,
Texas) entered into a 15-year U.S. distribution agreement for clobetasol
propionate scalp application, ointment and cream. The products are marketed
under Oclassen's Cormax(TM) trademark. The term of the agreement commences on
the marketing launch date of each product. According to the terms of the
distribution agreement, DPT Laboratories retains the right to distribute the
Cormax(TM) products under a different tradename two years after the Oclassen
market launch for each of the three products.
Because Oclassen's strategy is to in-license or acquire pharmaceutical
products which typically have been discovered and initially researched by
others, such products frequently may have limited or no remaining patent
protection due to the time elapsed since their discovery. None of Oclassen's
currently marketed products have composition of matter patent protection
remaining.
Oclassen considers the protection of its technology, inventions,
improvements and discoveries in connection with its development and commercial
activities important to its business. Oclassen's policy is to seek patent
protection in the United States and foreign countries, where appropriate, to
protect Oclassen's proprietary rights. There can be no assurance that, with
respect to any pending patent application, any patent, whether in the United
States or in other countries, will be obtained. In addition, there can be no
assurance that any patent issued or licensed to Oclassen will provide
substantial protection or be of commercial benefit to Oclassen.
Oclassen will also continue to rely upon trade secrets, unpatented
proprietary know-how and continuing technological innovation to protect its
current and potential products and competitive position.
<PAGE> 90
Oclassen enters into confidentiality agreements with its employees and certain
key consultants, pursuant to which such persons agree to assign to Oclassen any
inventions relating to Oclassen's business made by them while in Oclassen's
employ or while consulting to Oclassen. However, there can be no assurance that
others may not acquire or independently develop similar technologies or, if
patents are not issued with respect to products arising from research, that
Oclassen will be able to maintain information pertinent to such development
program as proprietary technology or trade secrets.
COMPETITION
Competition is generally intense in the pharmaceutical industry.
Oclassen believes that there are numerous pharmaceutical and biotechnology
companies and academic research groups throughout the world engaged in research
and development efforts with respect to therapeutic products, including
pharmaceuticals and alternative therapies, targeted at diseases or conditions
addressed by Oclassen's current and potential products. There can be no
assurance that such other companies and research institutions will not complete
the development and regulatory approval process sooner and, therefore, market
their products earlier than Oclassen. Many of these institutions have
substantially greater financial, marketing and human resources and development
capabilities than Oclassen. Technological developments by competitors, earlier
regulatory approval for marketing competitive products or superior marketing
capabilities possessed by competitors could adversely affect the commercial
potential of Oclassen's products.
Oclassen believes that competitive factors in its industry include
scientific and technological expertise, managerial competence in identifying and
pursuing product in-licensing and acquisition opportunities, operational
competence in developing, protecting, manufacturing and marketing products and
obtaining timely regulatory agency approvals, and financial resources. Competing
successfully with respect to these factors will depend on Oclassen's continued
ability to attract and retain skilled and experienced personnel, to develop and
secure the rights to pharmaceutical products and compounds and to exploit these
products and compounds commercially prior to the development of competitive
products by others. Oclassen expects that there will be continued competition
for highly qualified scientific, technical and managerial personnel.
With respect to Oclassen's marketed products, Oclassen believes
competitive factors include therapeutic efficacy, side effect profile, ease of
use and cost. Oclassen believes that Condylox(R) Topical Solution is as
therapeutically effective as existing in-office therapies for genital warts,
with advantages as to ease of use and cost. Oclassen believes that Monodox(R) is
as effective as the leading prescription brand minocycline product for the
treatment of acne, with an alternative side effect profile and at a lower cost.
Oclassen believes that Cinobac(R) can effectively compete in the market to treat
UTIs acquired outside of hospitals due to its safety profile, moderate price and
prophylaxis claim for recurrent infections. Oclassen believes the Cordran(R)
product line can compete successfully in the topical corticosteroid market due
to its broad range of formulations. Oclassen believes that Cormax(TM) can
compete successfully in the topical corticosteroid market due to the popularity
of clobetasol propionate among dermatologists and its moderate price.
GOVERNMENT REGULATION
Regulation by governmental authorities in the United States and foreign
countries is a significant factor in the manufacture and marketing of Oclassen's
products and in its ongoing product development activities. Oclassen's products
will generally require regulatory approval by governmental agencies prior to
commercialization. In particular, human therapeutic products are subject to
rigorous preclinical and
<PAGE> 91
clinical testing and other premarket approval requirements imposed under the
FFDCA and enforced by the FDA. Similar statutes and regulatory authorities
impose similar requirements in foreign countries. Various federal, and in some
cases state, statutes and regulations also govern or influence the testing,
manufacturing, safety, labeling, storage, recordkeeping, reporting, promotion,
marketing and distribution of such products. The FDA has broad authority to
inspect facilities where prescription drug products are manufactured or held,
including Oclassen's San Rafael, California facility, in order to investigate
whether these statutes and regulations are being followed. The lengthy process
of seeking necessary approvals and the compliance with applicable federal
statutes and regulations require the expenditure of substantial resources. Any
failure by Oclassen or its collaborators or licensors to obtain, or any delay in
obtaining, regulatory approvals could adversely affect the marketing of any
products developed or obtained by Oclassen and its ability to receive product or
royalty revenue. Any failure of Oclassen or its collaborators or licensors to
comply with these and other regulatory requirements could subject Oclassen to
regulatory and/or judicial enforcement actions, including but not limited to,
product recalls or seizures, injunctions, civil and/or criminal penalties,
refusals to approve new products and withdrawal of existing approvals, as well
as potentially enhanced product liability exposure.
The activities required before a pharmaceutical agent may be marketed
in the United States begin with preclinical testing. Preclinical tests include
laboratory evaluation of product chemistry and animal studies to assess the
potential safety and efficacy of the product and its formulations. The results
of these studies must be submitted to the FDA as part of an Investigational New
Drug ("IND") application, which the FDA can reject or place on hold before
proposed clinical testing can begin. Typically, clinical testing involves a
three-phase process. In Phase I, clinical trials are conducted with a small
number of subjects to determine the early safety profile and the pattern of drug
distribution and metabolism. Oclassen is generally involved in the development
and registration of pharmaceutical products based on compounds for which the
preclinical and preliminary clinical effect has been demonstrated. In such cases
the development programs typically will enter clinical study at the Phase II
stage. In Phase II, clinical trials are conducted with groups of patients
afflicted with a specific disease in order to help determine optimal dosages and
expanded evidence of safety. Ordinarily in Phase III, large scale, multicenter,
comparative clinical trials are conducted with patients afflicted with a target
disease in order to provide enough data for the statistical proof of efficacy
and safety required by the FDA. The development plans, protocols and results of
the preclinical and clinical testing are then submitted to the FDA in the form
of an NDA for approval to commence commercial sales for a pharmaceutical
product. In responding to an NDA, the FDA may grant marketing approval, request
additional information or deny the application if it determines that the
application does not satisfy the statutory and regulatory approval criteria.
There can be no assurance that approvals will be granted on a timely basis, if
at all.
EMPLOYEES
As of December 31, 1996, Oclassen had 106 full-time employees, of whom
19 were engaged in development, clinical and regulatory affairs, 68 in sales and
marketing and 19 in general administration and operations. Oclassen's employees
are not covered by a collective bargaining agreement and Oclassen has
experienced no work stoppages. Oclassen believes that it maintains good
relations with its personnel.
PROPERTIES
Oclassen's main facility occupies approximately 23,800 square feet in a
leased facility at 100 Pelican Way, San Rafael, California. The lease continues
through December 2002 and contains a renewal option of five years.
LEGAL PROCEEDINGS
From time to time, Oclassen is involved in product liability
litigation. Oclassen is currently the defendant in two such actions which
Oclassen considers to be ordinary, routine litigation incidental to its
business. Although Oclassen believes it has meritorious defenses and intends to
vigorously defend such actions, there can be no assurance that Oclassen will
prevail in such actions. If Oclassen does not prevail in such actions, or if
Oclassen settles one or both of such actions, Oclassen could be required to make
payments to the plaintiffs. However, management of Oclassen does not believe
that any such payments, if made, would have a material adverse effect on the
financial position and results of operations of Oclassen.
<PAGE> 92
DIRECTORS AND EXECUTIVE OFFICERS OF OCLASSEN
The directors and executive officers of Oclassen, and their ages as of
December 31, 1996, are as follows:
Name Age Position
- -------------------- --- -----------------------------------------------
Glenn A. Oclassen 53 Chairman of the Board of Directors
Terry L. Johnson 52 President, Chief Executive Officer and Director
Anthony A. DiTonno 48 Vice President, Sales and Marketing
Frank P. Killey, Ph.D. 51 Vice President, Research and Development
Kirk D. Petersen 46 Vice President, Finance and Administration and
Chief Financial Officer
C. Sage Givens 40 Director
John G. Kringel 57 Director
Russell H. Maddox 55 Director
Edmund M. Olivier 58 Director
G. Kirk Raab 61 Director
Glenn A. Oclassen acquired a company in 1982, changed the corporate
name to Oclassen Pharmaceuticals, Inc. and Mr. Oclassen founded Oclassen's
current operations in February 1985. He has served as a director of Oclassen
since 1982 and has been Chairman of the Board of Directors since January 1991.
From November 1982 to January 1991, Mr. Oclassen served as President and Chief
Executive Officer of Oclassen. Prior to founding Oclassen's current operations,
Mr. Oclassen was President and Chief Operating Officer of Pharmaquest
Corporation, a pharmaceutical development consulting company, from 1984 to 1985.
From 1982 to 1984, he was a partner in the Peachtree Creek Consulting Group, a
firm providing marketing consulting services to health care and consumer
products firms. In 1977, Mr. Oclassen founded the Neutrogena Dermatologics
division of Neutrogena Corp., a skin-care company, and served as President until
1982. Mr. Oclassen received a B.S. in zoology from San Diego State University.
Terry L. Johnson has served as President, Chief Executive Officer and a
director of Oclassen since January 1991. Prior to joining Oclassen, Mr. Johnson
served as Vice President and General Manager of the IOLAB Corporation
Pharmaceuticals Division of Johnson & Johnson, a diversified healthcare company.
While there, Mr. Johnson was responsible for planning and executing the entry of
Johnson & Johnson into the ophthalmic pharmaceutical field. From February 1985
to May 1986, Mr. Johnson was employed by Syntro Corp., a biotechnology company,
where he was in charge of developing a strategy and business plan for entry into
the ophthalmic pharmaceutical business. Prior to joining Syntro Corporation, Mr.
Johnson served at Allergan, Inc., a pharmaceutical company, for approximately 18
years in a variety of sales and marketing managerial positions. Mr.
Johnson majored in marketing at Northwestern University.
Anthony A. DiTonno has served as Vice President, Marketing and Sales of
Oclassen since June 1989. From 1975 until joining Oclassen, Mr. DiTonno held
various marketing and organizational positions with Rorer Group, Inc., a
worldwide pharmaceutical company, including Director of Business Development
from December 1988 to May 1989, Director of Product Management from September
1987 to December 1988 and Director of Marketing Services from January 1986 to
September 1987. Mr. DiTonno received an M.B.A. in marketing and organizational
behavior from Drexel University and a B.S. in business administration from St.
Joseph's University.
Frank P. Killey, Ph.D. has served as Vice President, Research and
Development of Oclassen since November 1991. From July 1985 until joining
Oclassen, Dr. Killey held various research and development
<PAGE> 93
positions with Herbert Laboratories, a dermatology development company and a
division of Allergan, Inc., including Vice President, Technical Affairs from
July 1989 to October 1991, Vice President, Research and Development from July
1987 to June 1989 and Director, Research and Development from July 1985 to June
1987. From January 1982 to June 1985, Dr. Killey served as Associate Director of
Research, Toxicology/Pathology Department of Allergan, Inc. Dr. Killey received
a Ph.D. in physiology from the Medical College of Wisconsin and a B.A. in
biology from Monmouth College.
Kirk D. Petersen has served as Vice President, Finance and
Administration and Chief Financial Officer of Oclassen since May 1996. Prior to
joining Oclassen, Mr. Petersen served as Chief Financial Officer, Treasurer,
Corporate Secretary and Director of Maxim Pharmaceuticals, Inc., a
biopharmaceutical company in San Diego, California from October 1993 to April
1996. From 1980 to 1993, Mr. Petersen held senior client service positions with
Ernst & Young LLP, an international professional services firm, including
Coordinating Partner from October 1989 to September 1993, Senior Manager from
October 1985 to September 1989, and Manager from February 1980 to September
1985. Mr. Petersen received a B.S. in business administration from California
State University, San Diego and is a certified public accountant.
C. Sage Givens has served as a director of Oclassen since January 1989.
She is the Managing General Partner of Acacia Venture Partners, a private
venture capital fund dedicated to healthcare investments. She has held this
position since June 1995. From September 1983 until June 1995, Ms. Givens was a
General Partner of First Century Management Company, the sole general partner of
First Century Partners, a private venture capital fund which is a stockholder of
Oclassen. Ms. Givens serves on the board of several healthcare companies
including Healthsouth Corp., Phycor, Inc. and Urohealth, as well as several
private healthcare companies.
John G. Kringel has served as a director of Oclassen since February
1995. Since October 1990, he has served as Senior Vice President, Abbott
Laboratories and President of the Hospital Products Division of Abbott
Laboratories. Mr. Kringel previously held positions as Vice President, Sorenson
Products and President of Sorenson Research Co. From 1977 to 1980, Mr. Kringel
was Executive Vice President of the American Optical Corporation division of
Warner-Lambert Co. and President of the Vision Care and Safety Products
Division. He also previously served as General Manager of the U.S. Medical
Division of Corning Glass Works.
Russell H. Maddox has served as a director of Oclassen since June 1989.
Since July 1994, he has served as President and Chief Operating Officer of
HealthSouth Diagnostic Division. He was formerly President, Chairman of the
Board and Chief Executive Officer of Diagnostic Health Corp., a diagnostic
imaging company, from January 1992 until July 1994. From January 1980 until
joining Diagnostic Health Corp., Mr. Maddox served as President, Chairman of the
Board and Chief Executive Officer of Russ Pharmaceuticals, Inc., a marketer of
narcotic analgesics, which Mr. Maddox founded in January 1980. Russ
Pharmaceuticals, Inc. was acquired by Ethyl Corp. in March 1989. Mr. Maddox
currently serves on the boards of Scandipharm, Inc. and Bradford Health
Services, Inc.
Edmund M. Olivier has served as a director of Oclassen since April 1987
and, from April 1990 to January 1991, he served as Chairman of the Board of
Directors. Mr. Olivier has been a general partner of Fairfield Venture Partners
II, L.P., a venture capital firm, since 1984, and a general partner of Oxford
Bio-Science Partners, a venture capital firm, since 1991. From 1980 to 1983, Mr.
Olivier served as Vice President, Technology and Planning in charge of corporate
research, engineering, venture capital, planning and mergers and acquisitions
for Diamond Shamrock Inc., a chemical and energy company. From 1972 to 1980, he
was Vice President and General Manager of Scientific Products and Vice President
of Commercial Development at Corning Glass Works, a diversified technology
company. Mr. Olivier is currently a director of Prizm Pharmaceuticals, Auto
Medica, Terrapin, Gene Pharming -- Europe in Leiden, Genset in Paris and Sosei
in Tokyo.
<PAGE> 94
G. Kirk Raab has served as a director of Oclassen since June 1990. Mr.
Raab currently serves as Chairman of the Board of Directors of Oxford
GlycoSciences, Ltd., Shaman Pharmaceuticals, Inc., Connective Therapeutics, Inc.
and Sinogen International, Ltd. Mr. Raab served as President and Chief Executive
Officer of Genentech, Inc. from February 1990 until July 1995. He joined
Genentech in February 1985 as President and Chief Operating Officer. Prior to
joining Genentech, Mr. Raab worked for Abbott Laboratories from July 1975 until
January 1985. Mr. Raab is also a director of Applied Imaging, Inc. and Bridge
Medical, Inc.
EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation
paid by Oclassen for the fiscal year ended December 31, 1996 to the Chief
Executive Officer of Oclassen and the three other executive officers of Oclassen
who will be executive officers and/or directors of the surviving corporation
after the Merger (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
--------------
ANNUAL COMPENSATION AWARDS
---------------------- --------------
SECURITIES
UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS(2) OPTIONS/SARS(#) COMPENSATION(3)
- --------------------------- -------- -------- -------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Terry L. Johnson (1) 1996 $285,462 $150,000 -- $97,062
President and Chief Executive Officer 1995 275,627 110,000 3,496
Glenn A. Oclassen 1996 $220,500 $115,000 -- $ 2,364
Chairman of the Board of Directors 1995 220,500 90,000 2,282
Anthony A. DiTonno 1996 $178,880 $ 50,000 -- $ 1,949
Vice President, Sales and Marketing 1995 172,000 25,000 1,675
Frank P. Killey, Ph.D 1996 $151,840 $ 15,000 -- $ 2,087
Vice President, Research and 1995 146,000 20,000 1,803
Development
</TABLE>
- -------------------------
(1) Mr. Johnson has a severance arrangement with Oclassen pursuant to which
he is entitled to six months salary in the event his employment is terminated
without cause.
(2) Represents, with respect to 1996 data, bonus payments received in 1997
with respect to services performed in 1996 and, with respect to 1995 data,
bonus payments received in 1996 with respect to services performed in 1995.
(3) Consists of benefits associated with life insurance premiums paid by
Oclassen, matching contribution payments to Oclassen's employee retirement
savings plan (the "401(k) Plan") for the 1995 and 1996 fiscal years and, in the
case of Mr. Johnson, health insurance premiums paid by Oclassen in 1995 and
1996 and relocation expenses paid by Oclassen in 1996.
<PAGE> 95
There were no stock options granted to the Named Executive Officers
during the fiscal year ended December 31, 1996.
The following table sets forth information with respect to option
exercises by the Named Executive Officers during the fiscal year ended December
31, 1996, as well as the number and fiscal year-end values of unexercised
options held by the Named Executive Officers as of December 31, 1996.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
SHARES FISCAL YEAR END(#) FISCAL YEAR END($)
ACQUIRED EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE (#) VALUE REALIZED($)(1) UNEXERCISABLE UNEXERCISABLE (1)
---- --------------- -------------------- ------------- -----------------
<S> <C> <C> <C> <C>
Terry L. Johnson........... -- -- 156,247/118,753 $1,093,729.00/$831,271.00
Glenn A. Oclassen.......... -- -- 109,998/110,002 $769,986.00/$770,014.00
Anthony A. DiTonno......... -- -- 46,250/38,750 $323,750.00/$271,250.00
Frank P. Killey, Ph.D...... 2,850 $19,950 14,650/30,625 $102,550.00/$214,375.00
</TABLE>
(1) The value of a share of Common Stock of Oclassen, as determined by the
Board of Directors of Oclassen, was $10.00 at December 31, 1996.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On June 1, 1996, Oclassen received a Promissory Note from Terry L.
Johnson, President and Chief Executive Officer of Oclassen, and Donna L. Johnson
payable to Oclassen in the principal amount of $500,000 (the "June 1996 Loan"),
payable with interest at the rate of 3.94% per year, with interest compounded
and payable monthly. The June 1996 Loan is due and payable upon the earlier of
(a) June 1, 1999, (b) the date Mr. and Mrs. Johnson sell the real property
pledged as collateral under the June 1996 Loan, or (c) within 180 days of
termination of Mr. Johnson's employment for any reason. The June 1996 Loan
replaced a previous loan in the principal amount of $700,000 (the "Prior Loan").
During the period from January 1, 1995 through December 31, 1996, the maximum
amount (principal plus interest) payable under the Prior Loan was $702,298 and
the maximum amount (principal plus interest) payable under the June 1996 Loan
was $501,642.
Certain employees have purchased Common Stock, including upon exercise
of options, of Oclassen with promissory notes. Terry L. Johnson has entered into
two promissory notes payable to Oclassen in the principal amounts of $103,400
and $30,000, bearing interest at the rate of 7.67% and 6.25% per year,
respectively. Glenn A. Oclassen has entered into two promissory notes payable to
Oclassen in the principal amounts of $33,000 and $25,000, bearing interest at
the rate of 8.63% and 6.58% per year respectively. Anthony A. DiTonno has
entered into four promissory notes payable to Oclassen in the principal amounts
of $22,000, $5,500, $16,500 and $15,000, bearing interest at the rate of 8.22%,
7.67%, 7.67% and 6.25%, respectively. Frank P. Killey, Ph.D. has entered into
three promissory notes payable to Oclassen in the principal amounts of $33,750,
$73,125 and $8,550, bearing interest at the rate of 6.73%, 6.36% and 7.02% per
year, respectively. Such promissory notes are due and payable on the fourth
anniversary of the date the promissory notes were entered into. During the
period from January 1, 1995 through December 31, 1996, the maximum amounts
(principal plus interest) payable by Mr. Johnson , Mr. Oclassen, Mr. DiTonno and
Dr. Killey under such notes were $189,263, $83,885, $86,810 and $131,695,
respectively.
<PAGE> 96
OCLASSEN SELECTED FINANCIAL DATA
The selected financial data set forth below is qualified by reference
to and should be read in conjunction with "Oclassen Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Oclassen
Pharmaceuticals, Inc. Financial Statements and Notes thereto included elsewhere
in this Proxy Statement/Prospectus. The statements of operations data set forth
below with respect to each of the three years in the period ended December 31,
1995 and the balance sheet data at December 31, 1994 and 1995 are derived from,
and are qualified by reference to, the Oclassen Pharmaceuticals, Inc. Financial
Statements, which have been audited by Arthur Andersen LLP, independent public
accountants, included elsewhere in this Proxy Statement/ Prospectus and should
be read in conjunction with those Oclassen Pharmaceuticals, Inc. Financial
Statements and the Notes thereto. The statements of operations data for the
years ended December 31, 1991 and 1992 and the balance sheet data at December
31, 1991, 1992 and 1993 are derived from Oclassen's audited financial statements
not included in this Proxy Statement/Prospectus. The statements of operations
data for the nine months ended September 30, 1995 and 1996 and the balance sheet
data at September 30, 1996 have been derived from the unaudited financial
statements also appearing herein which have been prepared on the same basis as
the audited financial statements and, in the opinion of management of Oclassen,
contain all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the results of operations and financial
position for such periods. The results of operations for the nine months ended
September 30, 1996 are not necessarily indicative of results to be expected for
the full year or for any subsequent period.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------------------- ------------------
1991 1992 1993 1994 1995 1995 1996
------- ------ ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Product sales.............. $6,075 $16,141 $24,665 $28,054 $29,036 $21,195 $24,276
Contract revenue........... 0 2,310 483 503 211 194 49
------- ------ ------- ------- ------- ------- -------
Total revenue............ 6,075 18,451 25,148 28,557 29,247 21,389 24,325
------- ------ ------- ------- ------- ------- -------
Operating expenses:
Cost of product sales...... 1,562 4,798 8,193 8,985 9,278 6,831 7,099
Sales and marketing........ 4,950 7,114 9,067 10,793 10,574 7,551 8,099
General and administrative. 2,226 3,118 4,003 3,935 3,941 2,884 3,567
Research and development... 1,808 2,778 3,231 3,585 3,777 3,004 3,554
Co-promotion............... 1,346 1,025 -- -- -- -- --
------- ------ ------- ------- ------- ------- -------
Operating expenses....... 11,892 18,833 24,494 27,298 27,570 20,270 22,319
------- ------ ------- ------- ------- ------- -------
Operating income (loss)....... (5,817) (382) 654 1,259 1,677 1,119 2,006
Interest income............... 505 392 542 723 950 681 814
Provision for income taxes.... -- -- (10) (25) -- -- (60)
------- ------ ------- ------- ------- ------- -------
Net income (loss)............. $(5,312) $ 10 $ 1,186 $ 1,957 $ 2,627 $ 1,800 $ 2,760
======= ====== ======= ======= ======= ======= =======
Net income (loss) available to
common stockholders......... $(5,400) $ (100) $ 1,077 $ 40 $ (90) $ (238) $ 722
======= ====== ======= ======= ======= ======= =======
Net income (loss) per common
share
Primary $ (4.12) $(0.06) $ 0.63 $ 0.02 $ (0.05) $ (0.14) $ 0.30
Fully diluted(1) $ (4.12) $(0.06) $ 0.13 $ 0.02 $ (0.05) $ (0.14) $ 0.27
Shares used in per share
calculation
Primary 1,311 1,622 1,702 1,705 1,719 1,718 2,424
Fully diluted(1) 1,311 1,622 8,787 1,705 1,719 1,718 10,063
</TABLE>
- -------------------
(1) The effects of anti-dilutive securities were excluded from the calculation
of fully-diluted net income (loss) per common share.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------
1991 1992 1993 1994 1995 SEPTEMBER 30, 1996
------- ------- ------- ------- ------- ------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Current assets $ 9,847 $20,452 $24,652 $26,854 $26,836 $29,998
Working capital 8,690 15,728 16,148 18,493 19,234 22,294
Total assets 10,087 21,218 26,050 28,041 30,021 33,010
Mandatorily redeemable
preferred stock(1) 24,327 31,907 32,016 33,933 36,650 38,688
Total stockholders'
equity (deficit) (15,561) (15,558) (14,470) (14,328) (14,270) (13,394)
</TABLE>
- -------------------
(1) See Note 5 to the historical financial statements of Oclassen, included
elsewhere herein, for a discussion of the terms and conditions of the
mandatorily redeemable Preferred Stock.
<PAGE> 97
OCLASSEN MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Oclassen develops and markets specialty prescription pharmaceuticals
to prevent and treat skin diseases, and markets these products to
dermatologists. Oclassen in-licenses pharmaceutical products, which have been
developed beyond the initial discovery phase, from United States and foreign
pharmaceutical companies and from universities and research institutions. In
1991, Oclassen launched its first two commercial products: Condylox(R) Topical
Solution, the first patient-applied topical therapy approved by the FDA for the
treatment of genital warts, the most common STD, and Monodox(R) Capsules, a
broad spectrum oral antibiotic promoted primarily for the treatment of acne. In
September 1992, Oclassen commenced sales of Cordran(R) topical steroid products
for the treatment of skin inflammation, and Cinobac(R) Capsules, an oral
quinolone anti-infective which is effective in the treatment of urinary tract
infections. In 1994, Oclassen entered the wound care business by in-licensing
and marketing products under the names of Iodosorb and Iodoflex. After
evaluating the wound care business and products as they related to the core
business of Oclassen, the product line was out-licensed in 1995 in exchange for
the distribution and marketing rights to products under the name Cormax(TM).
Cormax(TM) is a highly potent topical steroid used for short-term treatment of
inflammatory skin dermatosis. Cormax(TM) Scalp Application was introduced in
March 1996 and Cormax(TM) Ointment was introduced in June 1996.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated selected items
of Oclassen's statements of operations expressed as a percentage of total
revenue:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31 SEPTEMBER 30,
----------------------------------- --------------------
1993 1994 1995 1995 1996
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Product sales.............. 98.1% 98.2% 99.3% 99.1% 99.8%
Contract revenue........... 1.9 1.8 0.7 0.9 0.2
----- ----- ----- ----- -----
Total revenue........... 100.0% 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Cost of product sales... 32.6 31.5 31.7 31.9 29.2
Sales and marketing..... 36.1 37.8 36.2 35.3 33.3
General and administrative 13.8 13.8 13.5 13.5 14.7
Research and development 12.8 12.6 12.9 14.0 14.6
Other expense........... 2.1 -- -- -- --
----- ----- ----- ----- -----
Operating income........... 2.6 4.4 5.7 5.2 8.2
Interest income............ 2.2 2.5 3.2 3.2 3.3
Provision for
income taxes -- (0.1) -- -- (0.2)
----- ----- ----- ----- -----
Net income................. 4.7% 6.9% 9.0% 8.4% 11.3%
Net income (loss) available
to common stockholders. 4.3% 0.1% (0.3%) (1.1%) 3.0%
</TABLE>
Nine Month Period Ended September 30, 1996 Compared with September 30,
1995
Product sales increased 15% in the 1996 period from the 1995 period due
primarily to a 24% increase in sales of Monodox(R). This increase resulted from
Oclassen refocusing its sales and marketing efforts back to its dermatological
products from its wound care business, which was discontinued in 1995.
Additionally, in March and June 1996, Oclassen introduced two new products,
<PAGE> 98
Cormax(TM) Scalp Application and Cormax(TM) Ointment, which resulted in
aggregate product sales of $1,556,000, or 6% of total product sales, for the
nine months ended September 30, 1996.
Gross profit on product sales increased from 68% for the nine month
period ended September 30, 1995 to 71% during the same period in 1996. The
increase was due primarily to the increased percentage of total sales
represented by Monodox(R), which maintains a higher gross margin than certain
other products, along with a negotiated reduction in the product's raw material
costs. Gross profit was also improved due to a reduction in the royalty rate
payable on sales of Condylox(R).
Sales and marketing expenses increased 7% from $7,551,000 during the
1995 period to $8,099,000 in 1996. The increase compares favorably to the 15%
increase in product sales in the nine months ended September 30, 1996 as
compared to the prior year period due, in part, to maintaining the sales force
at approximately the same level during both periods, controlling the increase in
promotional costs, and eliminating the costs associated with Oclassen's
discontinued wound care business.
General and administrative expenses, which include operations, were
$2,884,000 during the 1995 period compared with $3,567,000 in the 1996 period.
The increase was due to increased facilities expenses, management information
systems, head count and consulting expenses, as well as increased
legal expenses and personnel relocation costs.
Research and development expenses increased $550,000 during the 1996
period over the 1995 period. The increase was due principally to a $500,000
payment made in May 1996 upon the licensing of a topical anti-microbial
technology from Symbollon Corporation. This agreement provides for milestone
payments during the development period and will result in increased research and
development costs in the future. Oclassen also in-licensed a phototherapy
technology from Laboratories Bergaderm in June 1996 which provides for milestone
payments during development.
Interest income during the 1996 period increased $133,000 over the same
period in 1995, as a result of increased investment income associated with
higher cash balances (as a result of cash generated from operations) available
for investment.
No federal income taxes have been paid by Oclassen in 1995 or 1996 due
to losses in prior years. At September 30, 1996, Oclassen had federal income tax
loss carryforwards of approximately $ 1,607,000 which expire beginning on or
after 2010, and California state income tax loss carryforwards of approximately
$107,000 which expire beginning on or after 2000. The extent to which the loss
and credit carryforwards can be used to offset future taxable income could be
limited because of ownership changes as provided in the Tax Reform Act of 1996
and the California Conformity Act of 1987. Oclassen has available federal
research and experimentation credit carryforwards of approximately $ 910,000
which expire beginning on or after 2010. Oclassen currently has a valuation
allowance to the full extent of its net deferred tax assets.
Fiscal 1995 Compared with Fiscal 1994
Product sales increased 4% from $28,054,000 for the year ended December
31, 1994 to $29,036,000 for the year ended December 31, 1995. The increase
resulted from a 14% increase in sales of Monodox(R), which represented 38% of
total product sales in 1995 compared with 35% in 1994.
<PAGE> 99
The increase was partially offset by a reduction of $300,000 in product sales
related to discontinuing the Iodosorb/Iodoflex wound care product line in August
1995. Rights to this product line were exchanged for rights to the Cormax(TM)
product line, of which the first two products were introduced in 1996. Contract
revenues associated with a development and licensing agreement entered into in
1992 decreased by $292,000 in 1995 as the contract activity was winding down.
Gross profit on product sales remained level at 68% in both 1994 and
1995.
Sales and marketing expenses were $10,793,000 in 1994 and $10,574,000
in 1995. This elevated and sustained level of costs related, in part, to
Oclassen's efforts to penetrate the wound care business which, due to a
different buyer approval process, required a shift in its sales and marketing
approach.
General and administrative expenses remained constant at 14% during
1994 and 1995, as did research and development costs at 13%.
Interest income increased from $723,000 during 1994 to $950,000 during
1995 as a result of increased investment income associated with higher cash
balances (as a result of cash generated from operations) available for
investment.
Fiscal 1994 Compared with Fiscal 1993
Product sales increased 14% from $24,665,000 for the year ended
December 31, 1993 to $28,054,000 for the year ended December 31, 1994. The
increase resulted from a 23% increase in sales of Monodox(R) and an 11% increase
in sales of Condylox(R). Additionally, Oclassen generated product sales of
$386,000 in 1994 related to its entry into the wound care business.
Gross profit on product sales increased from 67% in 1993 to 68% in 1994
as a result of the increases in Monodox(R) and Condylox(R) sales, both of which
have higher gross profit margins than Cordran(R) and Cinobac(R).
Sales and marketing expenses were $9,067,000 in 1993 and $10,793,000 in
1994, a 19% increase. The increase relates primarily to an increase in
Oclassen's sales force to facilitate its entry into the wound care business
through its Iodosorb/Iodoflex product line, which was in-licensed and introduced
during 1994.
General and administrative expenses increased from $3,470,000 in 1993
to $3,935,000 in 1994. The increase was due principally to increased salaries
and wages attributable to increased staffing levels.
Research and development costs increased $354,000 in 1994 over 1993.
The increase was due principally to an increase in internal development projects
related to Oclassen's current product lines.
Other expense of $533,000 in 1993 was due to the writeoff of costs
incurred in connection with an abandoned initial public offering.
Interest income increased from $542,000 during 1993 to $723,000 during
1994 as a result of increased investment income associated with higher cash
balances (as a result of cash generated from operations) available for
investment.
<PAGE> 100
LIQUIDITY AND CAPITAL RESOURCES
Cash, Cash Equivalents and Available for Sale Securities
Cash, cash equivalents and available for sale securities increased
$1,647,000 to $20,372,000 at September 30, 1996 from $18,725,000 at December
31, 1995. Cash flows from operating activities provided $1,804,000 for the nine
months ended September 30, 1996, an increase of $1,184,000 from the 1995
nine-month period. This net inflow was supplemented by the sale of available
for sale securities ($732,000), the receipt of $200,000 in repayment of an
officer's loan and the exercise of stock options ($154,000), offset by capital
expenditures ($511,000). During the nine-month period ended September 30, 1995,
cash flows from operating activities were $620,000, offset by an investment of
$2,000,000 to acquire all rights to the Monodox(R) New Drug Application.
Working Capital
Working capital increased $3,060,000 to $22,294,000 at September 30,
1996, compared to December 31, 1995. The increase was due primarily to the
increase in cash, cash equivalents and available for sale securities of
$1,647,000, an increase in inventories of $668,000, and an increase in deferred
merger costs of $756,000.
Capital Resources
Prior to 1993, Oclassen financed its operations through private
placements of its equity securities. As of September 30, 1996, the sale of
equity securities had produced approximately $34,118,000 in net proceeds. Since
1992, cash flows from operations have been sufficient to fund operations and
increase working capital. Oclassen believes that its current cash resources and
future operating cash flows will be sufficient to fund its current and
anticipated working capital needs over the next several years. Because Oclassen
contracts for the manufacture of its products, it does not require significant
investment in capital expenditures, and no significant or unusual capital
expenditures are anticipated for 1997.
Oclassen regularly reviews potential opportunities to invest in
technologies or products either currently marketed or under development which
may be compatible with its existing business. In addition to its current cash,
cash equivalents and available for sale securities, the proposed Merger could
provide additional resources to finance any such investment.
Oclassen has a $10,000,000 secured line of credit with a bank which
will be subject to renewal as of January 31, 1997 as a result of the proposed
Merger. As of March 31, 1997, there were no borrowings against the line,
and Oclassen currently does not plan to renew the line upon completion of the
Merger.
<PAGE> 101
SECURITY OWNERSHIP OF OCLASSEN AND PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to
beneficial ownership of Oclassen's Common Stock and Preferred Stock as of
December 31, 1996 by (i) all entities known by Oclassen to be beneficial owners
of more than 5% of its Common Stock or Preferred Stock, (ii) each director and
executive officer of Oclassen and (iii) all directors and executive officers of
Oclassen as a group. Following the Merger, and based only on holdings of
Oclassen Common Stock and Oclassen Preferred Stock prior to the Merger, no
stockholders of Oclassen will own more than 2% of the outstanding Watson Common
Stock.
<TABLE>
<CAPTION>
Shares Beneficially
Owned(1)
----------------------------------------
Percent
Name and Address of Beneficial Owner Class Number of Class
- ------------------------------------------------- ------ ------ --------
<S> <C> <C> <C>
Aspen Venture Partners, L.P.
99 High Street, Suite 1530
Boston, MA 02110............................. Preferred 636,609 9.0%
Eli Lilly and Company
Lilly Corporate Center
Indianapolis, IN 46285....................... Preferred 625,000 8.8
First Century Partnership III
1111 Bayhill Drive, Suite 380
San Bruno, CA 94066.......................... Preferred 566,262 8.0
Montgomery Medical Ventures, L.P.
600 Montgomery, Suite 2100
San Francisco, CA 94111...................... Preferred 563,369 7.9
Seafield Capital Corporation
200 Grand Avenue, Suite 500
Kansas City, MO 64141......................... Preferred 500,000 7.0
Entities Affiliated with
Burr, Egan, Deleage & Co.
1 Embarcadero Center, Suite 4050
San Francisco, CA 94111(2).................... Preferred 489,572 6.9
Bessemer Venture Partners II, L.P.
83 Walnut Street
Wellesley Hills, MA 02181..................... Preferred 425,450 6.0
Glenn A. Oclassen(3)
c/o Oclassen Pharmaceuticals, Inc.
100 Pelican Way
San Rafael, CA 94901........................... Common 389,988 19.8
Preferred 37,540 *
Terry L. Johnson(4)
c/o Oclassen Pharmaceuticals, Inc.
100 Pelican Way
San Rafael, CA 94901........................... Common 415,623 20.6
Anthony A. DiTonno(5)
c/o Oclassen Pharmaceuticals, Inc.
100 Pelican Way
San Rafael, CA 94901........................... Common 156,874 8.3
Frank P. Killey, Ph.D.(6)
c/o Oclassen Pharmaceuticals, Inc.
100 Pelican Way
San Rafael, CA 94901........................... Common 111,978 6.0
Kirk D. Petersen ................................ Common -0- *
C. Sage Givens(7)................................ Common 10,000 *
John G. Kringel(8) .............................. Common 15,833 *
Russell H. Maddox(9)............................. Common 80,000 4.2
Preferred 240,920 3.4
Edmund M. Olivier(10)............................ Common 30,000 1.6
Preferred 25,490 *
G. Kirk Raab(11)................................. Common 87,500 4.6
Preferred 240,920 3.4
Mary C. Droste
P.O. Box 7
Taos Ski Valley, NM 87525..................... Common 179,909 9.7
Preferred 21,983 *
Dannie H. King, Ph.D. (12)
6787 Paseo Delicias
Rancho Santa Fe, CA 92067..................... Common 109,522 5.9%
All directors and executive
officers as a group
(10 persons)(3)(4)(5)(6)
(7)(8)(9)(10)(11)............................. Common 1,297,796 55.3
Preferred 303,950 4.3
</TABLE>
- ----------
* Less than 1%.
(1) Includes the number of shares and percentage ownership represented by such
shares determined to be beneficially owned by a person in accordance with
the rules of the Securities and Exchange Commission plus all additional
options and warrants to purchase Common Stock exercisable at any time
within 60 days after December 31, 1996. Such shares, however, are not
deemed outstanding for the purposes of computing the percentage ownership
of each other person. Such exercisable options are shown in the footnotes
to this table for each such person. The persons named in this table, to
the knowledge of Oclassen, have sole voting and investment power with
respect to all shares of Common Stock shown as owned by them, subject to
community property laws where applicable and except as
<PAGE> 102
indicated in the other footnotes to this table. Beneficial ownership
includes shares of Series A, Series B, Series C, Series D and Series E
Preferred Stock (assuming conversion of all such shares into Common
Stock on a share-for-share basis).
(2) Includes 345,901, 8,553, 81,071 and 54,047 shares of Preferred Stock
owned by Alta III Limited Partnership, Alta Jami Boston Limited
Partnership, C.V. Sofinnova Partners Four and Gallion Partners II,
respectively.
(3) Includes 4,565 shares of Preferred Stock subject to a warrant which is
currently exercisable. Excludes 74,150 shares of Common Stock owned by
other members of Mr. Oclassen's family, and Mr. Oclassen disclaims
beneficial ownership of these 74,150 shares of Common Stock. Includes
118,331 shares of Common Stock issuable upon exercise of stock options
that are exercisable within 60 days of December 31, 1996.
(4) Includes 165,623 shares of Common Stock issuable upon exercise of stock
options that are exercisable within 60 days of December 31, 1996.
(5) Includes 49,374 shares of Common Stock issuable upon exercise of stock
options that are exercisable within 60 days of December 31, 1996.
(6) Includes 17,253 shares of Common Stock issuable upon exercise of stock
options that are exercisable within 60 days of December 31, 1996.
(7) Includes 10,000 shares of Common Stock issuable upon exercise of stock
options that are exercisable within 60 days of December 31, 1996.
(8) Includes 15,833 shares of Common Stock issuable upon exercise of stock
options that are exercisable within 60 days of December 31, 1996.
(9) Includes 240,920 shares of Preferred Stock owned by Alexis Partners,
Ltd., of which Mr. Maddox is a general partner. Mr. Maddox may be deemed
to be the beneficial owner of such shares. Mr. Maddox disclaims
beneficial ownership of all shares owned by Alexis Partners, Ltd.
Includes 50,000 shares of Common Stock issuable upon exercise of stock
options that are exercisable within 60 days of December 31, 1996.
(10) Includes 30,000 shares of Common Stock issuable upon exercise of stock
options that are exercisable within 60 days of December 31, 1996.
(11) Includes 240,920 shares of Preferred Stock owned by Alexis Partners, Ltd.,
of which Mr. Raab is a general partner. Mr. Raab may be deemed to be the
beneficial owner of such shares. Mr. Raab disclaims beneficial ownership
of all shares owned by Alexis Partners, Ltd. Includes 40,782 shares of
Common Stock issuable upon exercise of stock options that are exercisable
within 60 days of December 31, 1996.
(12) Includes 25,000 shares of Common Stock owned by Deborah King.
<PAGE> 103
OCLASSEN'S PROPOSAL TO AMEND ITS AMENDED AND
RESTATED CERTIFICATE OF INCORPORATION
In connection with the Merger, it is necessary to effect an
amendment to Oclassen's Amended and Restated Certificate of Incorporation (the
"Certificate") in order to conform the language in Article FOURTH, paragraph
(D)5.(b) of such Certificate (which addresses the method of valuation of any
securities to be delivered to holders of Oclassen Common Stock and Oclassen
Preferred Stock in a merger) to the definition of Average Closing Price.
Specifically, Article FOURTH, paragraph (D)5.(b)(i)(A) of the Certificate
provides that ,with respect to securities that are to be delivered to the
holders of Oclassen Preferred Stock that are not subject to investment letter
or other similar restrictions on free marketability, if traded on a securities
exchange, the value shall be deemed to be the average of the closing prices of
the securities on such exchange over the 30-day period ending three days prior
to the closing of the transaction. If the amendment to the Certificate is
approved by the Oclassen stockholders, Article FOURTH, paragraph (D)5.(b)(i)(A)
of the Certificate would be modified to provide that with respect to such
securities, if traded on a securities exchange or the Nasdaq National Market,
the value shall be deemed to be (i) the average of the closing prices of the
securities on such exchange over the 30- day period ending three days prior to
the closing, or (ii) with respect to Watson Common Stock issued in connection
with the Merger, the average of the per share daily closing price of the
Watson Common Stock as quoted on the Nasdaq National Market (and as reported
by The Wall Street Journal or, if not reported thereby, by another
authoritative source) during the ten consecutive trading days ending two
trading days prior to the closing of the Merger, provided, however, that (A)
if the average closing price is greater than $35.00 (appropriately adjusted
for any stock split, reverse stock split, stock dividend, reorganization,
recapitalization or other like change with respect to the Watson Common Stock),
for purposes of the Merger, the average closing price shall be deemed to be
equal to $35.00 (appropriately adjusted for any stock split, reverse stock
split, stock dividend, reorganization, recapitalization or other like change
with respect to the Watson Common Stock), and (B) if the average closing price
is less than $27.00 (appropriately adjusted for any stock split, reverse stock
split, stock dividend, reorganization, recapitalization or other like change
with respect to the Watson Common Stock), for purposes of the Merger, the
average closing price shall be deemed equal to $27.00 (appropriately adjusted
for any stock split, reverse stock split, stock dividend, reorganization,
recapitalization or other like change with respect to the Watson Common Stock).
The proposed amendment will conform the language in the Certificate which
addresses the method of valuation of any securities to be delivered to holders
of Oclassen Common Stock and Oclassen Preferred Stock in a merger to the
method which has been negotiated by Watson and Oclassen in the Merger
Agreement and will not have a disparate effect on holders of different classes
or series of capital stock of Oclassen. Under the current Certificate and the
proposed amendment, the valuation of Watson Common Stock will be tied to the
trading price of the Watson Common Stock over a defined period of time.
No other amendments to the Certificate are proposed. The proposed
Certificate of Amendment of Amended and Restated Certificate of Incorporation
of Oclassen which the Oclassen stockholders are being asked to approve is
attached hereto as Appendix B.
The Board of Directors of Oclassen approved the amendment to the
Certificate and, because the amendment is technical and non-substantive in
nature and is necessary in connection with the Merger, unanimously recommends
that Oclassen stockholders vote FOR the approval of such amendment.
<PAGE> 104
COMPARATIVE RIGHTS OF STOCKHOLDERS
Watson is a Nevada corporation, and the rights of its stockholders are
governed by the Nevada General Corporation Law (the "Nevada Act") and the
Articles of Incorporation and Bylaws of Watson. Oclassen is a Delaware
corporation, and the rights of its stockholders are governed by the DGCL and the
Certificate of Incorporation and Bylaws of Oclassen. If the Merger is
consummated, former Oclassen stockholders will become stockholders of Watson.
The rights of such former Oclassen stockholders as Watson stockholders will be
governed by the Nevada Act and the Articles of Incorporation and Bylaws of
Watson. The following is a summary of certain material provisions of, and the
material differences between, (i) Nevada law and the Articles of Incorporation
and Bylaws of Watson and (ii) Delaware law and the Certificate of Incorporation
and Bylaws of Oclassen, which may significantly affect the rights of Oclassen
stockholders.
LIABILITY OF DIRECTORS
Both the DGCL and the Nevada Act allow a corporation to provide in its
certificate or 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, subject to certain
limitations.
The Nevada Act provides that the articles of incorporation may include
a provision limiting the personal liability of a director or officer to the
corporation or its stockholders for damages for breach of fiduciary duty as a
director or officer, but such provision must not eliminate or limit the
liability of a director or officer (i) for acts or omissions which involve
intentional misconduct, fraud or a knowing violation of law or (ii) the payment
of distributions to stockholders.
The DGCL provides that the certificate of incorporation may include a
provision eliminating or limiting the personal liability of its directors (but
not officers) to the corporation or its stockholders for monetary damages for
breach of fiduciary duty as a director, provided that such provisions will not
eliminate or limit the liability of a director (i) for any breach of the
director's duty of loyalty, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) for
any unlawful payment of dividend or improper stock purchase or redemption, or
(iv) for any transaction for which the director derived an improper personal
benefit.
The Certificate of Incorporation of Oclassen provides that a director
will not be liable to Oclassen or its stockholders for a breach of his or her
fiduciary duty to the fullest extent allowable under the DGCL. The Articles of
Incorporation of Watson limit a director's and officer's liability to the events
specified in the Nevada Act. Consequently, situations may arise in which an
existing Oclassen stockholder, following the Merger, would have less ability to
bring an action against an officer or director of Watson.
INDEMNIFICATION
Under the Nevada Act and the DGCL, 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 (i) expenses (including attorneys' fees)
and certain amounts paid in settlement and (ii) in the event the person seeking
indemnification has been adjudicated liable, amounts are deemed proper, fair and
reasonable by the appropriate court upon application thereto. The Nevada Act and
the
<PAGE> 105
DGCL 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. Both the Nevada Act and the DGCL also provide that 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 the Nevada Act and the DGCL, 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 Oclassen's Certificate of Incorporation
provide that directors and officers and former directors and officers will be
indemnified to the fullest extent permitted by law.
DERIVATIVE ACTIONS
Under the Nevada Rules of Civil Procedure (the "Nevada Rules") and the
DGCL, 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. Both the Nevada Rules and the DGCL 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. Both the Nevada Rules and the DGCL 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. Under both
sets of rules, an action will not be dismissed, compromised or settled without
the approval of the Court having jurisdiction of the action.
DISTRIBUTIONS AND REDEMPTIONS
Under the Nevada Act and the DGCL, corporations may make distributions
to stockholders as long as, after giving effect to such distribution (i) the
corporation would be able to pay its debts as they become due in the usual
course of business and (ii) the corporation's total assets would not be less
than the sum of its total liabilities plus (unless the articles or certificate
of incorporation permit otherwise, which Watson's Articles of Incorporation and
Oclassen's Certificate 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. The DGCL
further limits the payment and declaration of dividends and other distributions
to be made only out of surplus. Under both the Nevada Act and the DGCL, a
corporation's redemption of its own capital stock is deemed to be a
distribution.
STOCKHOLDER INSPECTION OF BOOKS AND RECORDS
Under the Nevada Act, a stockholder who has been a stockholder of
record of a Nevada corporation for at least 6 months immediately preceding his
demand or who owns 5% or more of the issued and outstanding shares of stock of
the corporation (or who has been authorized in writing by such holders) is
entitled to inspect and copy a list of the names of the corporation's
stockholders during regular business hours if the stockholder gives at least
five business days' prior written demand to the corporation. A stockholder of a
Nevada corporation must hold, or be authorized by the holders of, 15% of the
outstanding shares in order to review the books and records of the corporation.
The Nevada Act provides further that a corporation may deny
<PAGE> 106
any demand for inspection if the stockholder refuses to furnish the corporation
an affidavit that such inspection is not desired for a purpose not related to
his interest in the corporation as a stockholder. Watson's Bylaws permit a
stockholder to inspect and copy Watson's Articles of Incorporation, Bylaws,
stockholder lists, corporate minutes and accounting books and records to the
fullest extent permitted under the Nevada Act.
The DGCL permits any stockholder upon written demand under oath
stating the purpose thereof to inspect (during regular business hours) a
corporation's stock ledger, a list of its stockholders and its other books and
records and to make copies or extracts therefrom. If the corporation refuses
such request, or fails to respond within five business days after the demand has
been made, the stockholder may petition the Court for an order to compel such
inspection. The Court may prescribe limitations or conditions upon the
inspection, or award any other or further relief the court deems just and
proper. Oclassen's Bylaws permit any stockholder, upon written demand, to
inspect and copy Oclassen's stock ledger, a list of its stockholders and its
other books and records. Consequently, unless an Oclassen stockholder will,
following the Merger, own 15% or greater of the issued and outstanding shares
of Watson Common Stock, such stockholder will have fewer rights of inspection
under the Nevada Act than such stockholder held under the DGCL.
DISSENTERS' RIGHTS
A stockholder of a Nevada corporation, with certain exceptions, has
the right to dissent from, and obtain payment of the fair value of his shares in
the event of (1) a merger or consolidation 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 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
Nevada Act 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 registered on a
national securities exchange, or 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 dissent as to less than all 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 will be determined as if the
shares to which he dissented and his other shares were registered in the names
of different stockholders.
Stockholders of a Delaware corporation generally have appraisal rights
with respect to a merger or consolidation. Such appraisal rights are not
available (i) when a corporation is to be the surviving corporation and no vote
of its stockholders is required for the merger or (ii) for shares of stock
which, on the record date fixed to determine the stockholders entitled to
receive notice of and vote on the agreement of merger, are 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 more than 2,000 stockholders, unless, in case of
clauses (i) or (ii) above, such stockholders are required by the terms of the
merger to accept consideration other than shares of stock of the surviving
corporation, shares of stock of another corporation that are so listed,
designated or held by such number of record holders, cash in lieu of fractional
shares of such stock, or any combination thereof. A Delaware corporation may
provide in its certificate of incorporation for appraisal rights in connection
with transactions other than mergers and consolidations.
While the dissenters' rights provisions under the Nevada Act and the
DGCL are essentially similar, situations could theoretically arise in which
dissenters' rights, which would be available under the DGCL, are not available
under the Nevada Act.
<PAGE> 107
QUORUM FOR STOCKHOLDER MEETINGS
Under both the Nevada Act and the DGCL, 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 Nevada Act and the DGCL provide that the articles or
certificate of incorporation or bylaws may provide for a greater or lesser
quorum requirement, except that in Delaware, the quorum may not be less than
one-third of the shares entitled to vote.
The Bylaws of both Watson and Oclassen provide that the presence in
person or by proxy of a majority of the shares entitled to vote will constitute
a quorum.
BOARD VACANCIES
The Nevada Act 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.
The DGCL provides that, unless the certificate of incorporation
provides otherwise (which Oclassen's Certificate of Incorporation does not),
vacancies and newly created directorships resulting from any increase in the
authorized number of directors elected by all of the stockholders having the
right to vote as a single class may be filled by a majority of the directors
then in office, although less than a quorum, or by a sole remaining director.
Whenever the holders of any class or classes of stock or series thereof are
entitled to elect one or more directors by the provisions of the certificate of
incorporation, vacancies and newly created directorships of such class or
classes or series may be filled by a majority of the directors elected by such
class or classes or series thereof then in office, or by a sole remaining
director so elected.
CLASSIFIED BOARD OF DIRECTORS
The Nevada Act provides that a corporation's board of directors may be
divided into various classes with staggered terms of office. The Watson Bylaws
provide that the Watson Board of Directors 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. Although permissible
under the DGCL, neither Oclassen's Certificate of Incorporation nor its Bylaws
classify its Board of Directors.
Classification of directors may have the effect of making it more
difficult for stockholders to change the composition of the Watson Board of
Directors. 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
stockholder attempting to force a proxy contest, a tender 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
transaction could be beneficial to Watson and its stockholders. The
classification of the Watson Board of Directors might also increase the
likelihood that incumbent directors will retain their positions.
<PAGE> 108
NUMBER OF DIRECTORS
Watson's Articles of Incorporation provide that the number of
directors shall be nine persons. In addition, Watson's Articles of
Incorporation provide that vacancies created by newly created directorships
will be filled by a majority of directors then in office, provided that a quorum
is present. All other vacancies will be filled by a majority of directors then
in office, even if less than a quorum.
The Oclassen Bylaws provide that the number of directors shall be
seven persons. Oclassen's Certificate of Incorporation provides that vacancies
created by newly created directorships will be filled by a majority of the
directors then in office, even though less than a quorum, or by a sole
remaining director.
LOANS TO AND GUARANTEES OF OBLIGATIONS OF OFFICERS AND EMPLOYEES
Under the DGCL and the Oclassen Bylaws, a loan to, guarantee of an
obligation of, or other assistance to an officer or employee of the corporation,
including any officer or employee who is a director, requires the determination
of the Board of Directors of the corporation that the loan, guarantee or
assistance may reasonably be expected to benefit the corporation. The Nevada Act
contains no comparable provision, although it provides that directors exercising
their powers may consider, among other things, the interests of the employees
and the long-term as well as the short-term interests of the corporation and its
stockholders. Consequently, an existing Oclassen stockholder may, following the
Merger, have less ability to challenge any such loans as a Watson stockholder.
Under the DGCL, any contract or transaction (including a loan or
guarantee) between the corporation and any of its officers or directors, or
between the corporation and any other organization in which the corporation's
directors or officers are also directors or officers, or have a financial
interest, is voidable unless approved by a majority of the disinterested
directors or the shareholders after full disclosure of the material facts or
unless the transaction is fair to the corporation at the time it is approved.
The Nevada Act has a similar requirement except that such transactions may be
approved by the vote of stockholders holding a majority of the voting power, and
such transactions are also permissible if the fact of the common directorship,
office or financial interest is not disclosed or known to the director or
officer when the transaction is brought before the board for action.
Consequently, transactions involving interested persons may be more difficult to
challenge as a stockholder of Watson than as a stockholder of Oclassen.
EXERCISE OF DIRECTORS' AND OFFICERS' POWERS
Nevada law provides that directors and officers, in performing their
duties, shall be protected in relying in good faith upon the records of the
corporation and upon such information, opinions, reports or statements presented
to the corporation by any of the corporation's directors, officers or employees;
any other person as to matters reasonably believed to be within such person's
professional or expert competence and who has been selected with reasonable
care by or on behalf of the corporation; or any committee on which the director
or officer relying thereon does not serve as to matters on which the committee
is reasonably believed to merit confidence. Furthermore, directors and officers
of a Nevada corporation, in exercising their powers, may consider (i) the
interests of the corporation's employees, suppliers, creditors and customers;
(ii) the economy of the state and the nation; (iii) the interests of the
community and of society; and (iv) the long-term as well as short-term interests
of the corporation, including the possibility that these interests may be best
served by the continued independence of the corporation.
The DGCL provides that a director (but apparently not officers) shall
be protected in similar circumstances as a Nevada director except that the
Delaware statute does not contain language allowing the directors to consider
the factors enumerated as (i)-(iv) in the Nevada Act. The apparent greater
latitude under the Nevada Act may mean that directors and officers of Watson may
be able to exercise their powers in situations in which officers and directors
of Oclassen would not have such power.
<PAGE> 109
CUMULATIVE VOTING
Under both the Nevada Act and the DGCL, unless the articles or
certificate of incorporation provide otherwise, there can be no cumulative
voting for the election of directors. Watson's Bylaws proscribe cumulative
voting. Oclassen's Bylaws provide that each holder of stock of any class or
series shall be entitled to as many votes as shall equal the number of votes
which such holder would be entitled to cast for the election of directors with
respect to his shares of stock multiplied by the number of directors to be
elected by such person. An Oclassen stockholder may cast all such votes for a
single director or distribute such votes among two or more directors. The
inability to exercise cumulative voting may mean that an existing Oclassen
stockholder, following the Merger, will have less ability to influence voting
for the members of the Board of Directors of Watson than such stockholder had as
a stockholder of Oclassen.
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 the corporation; (ii) an aggregate market value equal to 5% or more of
the aggregate market value of all outstanding shares of the 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 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 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
<PAGE> 110
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 Watson 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, although the Board may consider the future adoption
of such a plan at a future meeting of the Board of Directors.
The DGCL imposes a three-year moratorium on any business combination
with an interested stockholder, although it has no fair price provision
comparable to that of the Nevada Act. The DGCL has no control share acquisition
provision. The existence of both the "Combination with Interested Stockholders"
statute and the "Control Share Acquisition" statute may make an unsolicited
acquisition of control of Watson more difficult or expensive. In addition,
provisions of Watson's Articles of Incorporation permitting the issuance of
Preferred Stock by the Board of Directors and the existence of a staggered Board
of Directors may also make an unsolicited acquisition of control more difficult
or expensive.
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, beneficially owned 27,500 shares of
Watson Common Stock. In addition, other members of D'Ancona & Pflaum own
additional shares of Watson Common Stock, which ownership is not material in
the aggregate. The federal income tax consequences in connection with the
Merger have been passed upon for Watson by D'Ancona & Pflaum. The federal income
tax consequences in connection with the Merger have been passed upon for
Oclassen by Venture Law Group, A Professional Corporation, Menlo Park,
California.
EXPERTS
The consolidated financial statements of Watson incorporated in
this Proxy Statement/Prospectus by reference to the Annual Report on Form 10-K
for the year ended December 31, 1995, have been so incorporated in reliance on
the report of Price Waterhouse LLP, independent accountants, given on the
authority of said firm as an expert in accounting and auditing.
The audited financial statements and financial statement schedule of
Oclassen Pharmaceuticals, Inc. as of December 31, 1995 and for each of the three
years in the period ended December 31, 1995 included in this Proxy
Statement/Prospectus and elsewhere in the Registration Statement, to the extent
and for the periods indicated in their report, have been audited by Arthur
Andersen LLP, independent public accountants, and are included herein in
reliance upon the authority of said firm as experts in giving said report.
The consolidated balance sheet of Circa as of December 31, 1994 and
the consolidated statements of operations, retained earnings, and cash flows for
each of the two 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.
The consolidated financial statements of Somerset Pharmaceuticals,
Inc. as of December 31, 1995 and 1994 and for each of the three years in the
period then ended incorporated in this prospectus by reference from the Annual
Report on Form 10-K/A of Watson Pharmaceuticals, Inc. for the year ended
December 31, 1995 have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report, which is incorporated herein by reference,
and have been so incorporated in reliance upon the report of such firm given
upon their authority as experts in accounting and auditing.
<PAGE> 111
INDEX TO FINANCIAL STATEMENTS
OCLASSEN PHARMACEUTICALS, INC.
<TABLE>
<S> <C>
Years ended December 31, 1993, 1994 and 1995
Report of Independent Public Accountants F-1
Balance Sheets at December 31, 1994 and 1995
Statements of Income for the Years Ended December 31, 1993, 1994 and 1995
Statements of Stockholders' Equity (Deficit) for the Years Ended
December 31, 1993, 1994 and 1995
Statements of Cash Flows for the Years Ended December 31, 1993, 1994 and 1995
Notes to Financial Statements
Supplemental Schedule of Qualifying Accounts and Reserves
Three and Nine Months Ended September 30, 1996 and 1995 (unaudited)
Interim Financial Statements
Balance Sheets at September 30, 1996 and December 31, 1995
Statements of Income for the Three and Nine Months
Ended September 30, 1996 and 1995
Statements of Cash Flows for the Nine Months
Ended September 30, 1996 and 1995
Notes to Unaudited Condensed Financial Statements
</TABLE>
<PAGE> 112
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Oclassen Pharmaceuticals, Inc.:
We have audited the accompanying balance sheets of Oclassen
Pharmaceuticals, Inc. (a Delaware corporation) as of December 31, 1994 and 1995,
and the related statements of income, stockholders' equity (deficit) and cash
flows for each of the three years in the period ended December 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Oclassen Pharmaceuticals,
Inc. as of December 31, 1994 and 1995, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental schedule of valuation
and qualifying accounts and reserves is presented for purposes of complying with
the Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Oakland, California
February 8, 1996
<PAGE> 113
OCLASSEN PHARMACEUTICALS, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
December 31,
--------------------------
1994 1995
------ -----
(In thousands, except
share amounts)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,453 $ 3,002
Available for sale securities 14,945 15,723
Accounts receivable, net of reserves of $443 and $815, respectively 2,842 3,045
Inventories 3,773 3,249
Prepaid expenses and other current assets 1,841 1,817
-------- --------
Total current assets 26,854 26,836
Furniture, equipment, and leasehold improvements, net of accumulated
depreciation of $1,125 and $1,600, respectively 1,187 1,046
Other assets, net of accumulated amortization of $306 -- 2,139
-------- --------
$ 28,041 $ 30,021
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 307 $ 192
Accrued liabilities 5,135 4,702
Contract obligations and reserve 2,919 2,708
-------- --------
Total current liabilities 8,361 7,602
Deferred rent payable 75 39
-------- --------
8,436 7,641
-------- --------
Series B, C, D and E convertible mandatorily redeemable Preferred Stock, $0.001
par value; 14,539,151 shares authorized; 6,591,978 shares issued and
outstanding; liquidation value of $36,998 33,933 36,650
-------- --------
Commitments
Stockholders' equity (deficit):
Series A convertible Preferred Stock, $0.001 par value;
1,000,000 shares authorized, 500,000 shares issued and outstanding 1,000 1,000
Common Stock, $0.001 par value; 30,000,000 shares authorized;
1,716,165 and 1,752,481 shares issued and outstanding at
December 31, 1994 and 1995, respectively 1,087 1,226
Notes receivable from stockholders (653) (644)
Accumulated deficit (15,762) (15,852)
-------- --------
Total stockholders' equity (deficit) (14,328) (14,270)
-------- --------
$ 28,041 $ 30,021
======== ========
</TABLE>
See accompanying notes to financial statements.
<PAGE> 114
OCLASSEN PHARMACEUTICALS, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------
1993 1994 1995
-------- -------- -------
(In thousands, except per share amounts)
<S> <C> <C> <C>
Product sales $24,665 $28,054 $29,036
Contract revenue 483 503 211
------- ------- -------
Total revenue 25,148 28,557 29,247
------- ------- -------
Operating expenses:
Cost of product sales 8,193 8,985 9,278
Sales and marketing 9,067 10,793 10,574
General and administrative 3,470 3,935 3,941
Research and development 3,231 3,585 3,777
Other expense 533 -- --
------- ------- -------
Operating expenses 24,494 27,298 27,570
------- ------- -------
Operating income 654 1,259 1,677
Interest income 542 723 950
------- ------- -------
Income before income taxes 1,196 1,982 2,627
Provision for income taxes 10 25 --
------- ------- -------
Net income $ 1,186 $ 1,957 $ 2,627
======= ======= =======
Net income (loss) available to
common stockholders $ 1,077 $ 40 $ (90)
======= ======= =======
Net income (loss) per common share:
Primary $0.63 $0.02 $(0.05)
======= ======= =======
Fully diluted $0.13 $0.02 $(0.05)
======= ======= =======
Shares used in per share calculation:
Primary 1,702 1,705 1,719
======= ======= =======
Fully diluted 8,787 1,705 1,719
======= ======= =======
</TABLE>
See accompanying notes to financial statements.
<PAGE> 115
OCLASSEN PHARMACEUTICALS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Series A Notes
Convertible Deferred Receivable
Preferred Stock Common Stock Compen- from Stock- Accumulated
Shares Amount Shares Amount sation holders Deficit Total
------ ------ ------ ------ ------ ------- ------- -----
(In thousands, except share amounts)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1992 500,000 $1,000 1,716,590 $ 1,308 $(246) $(741) $(16,879) $(15,558)
Repurchases of Common Stock, net
of issuances -- -- (27,864) (107) -- 113 -- 6
Exercise of stock options -- -- 563 5 -- -- -- 5
Elimination of unamortized
deferred compensation -- -- -- (246) 246 -- -- --
Accretion of issuance costs of
manditorily redeemable preferred
stock (109) (109)
Net income -- -- -- -- -- -- 1,186 1,186
------- ------ ---------- ------- ----- ----- -------- --------
Balance at December 31, 1993 500,000 1,000 1,689,289 960 -- (628) (15,802) (14,470)
Repurchases of Common Stock, net
of issuances -- -- (3,020) 37 -- (25) -- 12
Exercise of stock options -- -- 29,896 90 -- -- -- 90
Accretion of issuance costs of
manditorily redeemable preferred
stock (109) (109)
Cumulative dividends on manditorily
redeemable preferred stock -- -- -- -- -- -- (1,808) (1,808)
Net income -- -- -- -- -- -- 1,957 1,957
------- ------ ---------- ------- ----- ----- -------- --------
Balance at December 31, 1994 500,000 1,000 1,716,165 1,087 -- (653) (15,762) (14,328)
Repurchases of Common Stock, net
of issuances -- -- (1,267) 27 -- 9 -- 36
Exercise of stock options -- -- 37,583 112 -- -- -- 112
Accretion of issuance costs of
manditorily redeemable preferred
stock (109) (109)
Cumulative dividends on manditorily
redeemable preferred stock -- -- -- -- -- -- (2,608) (2,608)
Net income -- -- -- -- -- -- 2,627 2,627
------- ------ ---------- ------- ----- ----- -------- --------
Balance at December 31, 1995 500,000 $1,000 1,752,481 $ 1,226 $-- $(644) $(15,852) $(14,270)
======= ====== ========== ======= ===== ===== ======== ========
</TABLE>
See accompanying notes to financial statements.
<PAGE> 116
OCLASSEN PHARMACEUTICALS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------
1993 1994 1995
--------- --------- --------
(In thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 1,186 $ 1,957 $ 2,627
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 342 433 475
Amortization -- -- 306
Deferred rent payable (34) (36) (36)
Changes in current assets and liabilities:
Accounts receivable (631) (726) (203)
Inventories (1,969) (188) 80
Prepaid expenses and other current assets (155) (572) 23
Deferred offering costs 293 -- --
Accounts payable (121) 307 (115)
Accrued liabilities 2,368 164 (433)
Contract obligations and reserve 1,422 (503) (211)
------- ------- -------
Net cash provided by operating activities 2,701 836 2,513
------- ------- -------
Cash flows from investing activities:
Purchases of furniture, equipment and leasehold improvements (974) (223) (334)
Purchases of available for sale securities (5,302) -- (778)
Proceeds from sale of available for sale securities -- 2,147 --
Purchases of other assets -- -- (2,000)
Loan to officer -- (700) --
------- ------- -------
Net cash provided by (used in) investing activities (6,276) 1,224 (3,112)
------- ------- -------
Cash flows from financing activities:
Proceeds from sale of common stock and exercise of common stock
options, net of repurchases 11 102 148
------- ------- -------
Net cash provided by financing activities 11 102 148
------- ------- -------
Net increase (decrease) in cash and cash equivalents (3,564) 2,162 (451)
Cash and cash equivalents, beginning of period 4,855 1,291 3,453
------- ------- -------
Cash and cash equivalents, end of period $ 1,291 $ 3,453 $ 3,002
======= ======= =======
Supplemental disclosure of noncash investing and financing activities:
Issuance of common stock for notes receivable, net of repurchases $ 107 $ 37 $ 27
======= ======= =======
Deferred compensation related to certain stock purchases and option
grants $ 246 $ -- $ --
======= ======= =======
Exchange of inventory for the rights to license a new product $ -- $ -- $ 445
======= ======= =======
</TABLE>
See accompanying notes to financial statements.
<PAGE> 117
OCLASSEN PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS
1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
OPERATIONS
Oclassen Pharmaceuticals, Inc. ("the Company") develops and markets
specialty pharmaceuticals for the prevention, diagnosis and treatment of skin
diseases. The Company was founded in 1985 and began marketing its initial
products in 1991. In February 1993, the Company reincorporated in Delaware.
The Company is subject to certain risk factors including, but not
limited to, its reliance upon sole manufacturing sources for three of its four
product lines, and competition. Competition is generally intense in the
pharmaceutical industry and there can be no assurance that developments by
others will not render the Company's current and potential products obsolete or
noncompetitive. Substantially all of the Company's sales are in the United
States.
The Company's financial statements are prepared using certain
significant estimates made by management. These estimates relate to reserves for
accounts receivable and certain contract obligations and litigation in the
accompanying balance sheet.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Cash and cash equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Available for sale securities
Effective January 1, 1995, the Company implemented the provisions of
Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." Adoption of SFAS No. 115 had
no material effect on the Company's financial statements. The Company's policy
is to record debt securities as available-for-sale because the sale of such
securities may be required prior to maturity. As such, investments are stated at
fair market value. The Company's debt securities consist of U.S. government
obligations ($13,313,000) and corporate debt securities ($2,410,000). The fair
value and the amortized cost of these securities, determined for each category
of investment security, was not materially different at December 31, 1995.
Inventories
Inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out (FIFO) method.
Furniture, equipment and leasehold improvements
Furniture, equipment and leasehold improvements are stated at cost.
Depreciation is computed using the straight-line method based on the estimated
useful lives of the assets, which range from three to five years. Additions and
improvements are capitalized, while repairs and maintenance are charged to
expense as incurred.
<PAGE> 118
OCLASSEN PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Furniture, equipment and leasehold improvements consist of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1994 1995
------- -------
<S> <C> <C>
Furniture $ 429 $ 447
Equipment 1,105 1,255
Leasehold improvements 778 944
Less: Accumulated depreciation (1,125) (1,600)
------- -------
$ 1,187 $ 1,046
======= =======
</TABLE>
Revenue recognition
Revenue from product sales is recognized upon shipment. Provisions are
made for estimated doubtful accounts, customer returns, cash discounts and other
allowances based on experience and a review of specific accounts.
Income taxes
The Company accounts for income taxes under Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes", issued in
February 1992. Under the liability method specified by SFAS No. 109, deferred
taxes are determined based on the difference between the financial statement
and tax bases of assets and liabilities as measured by the effective tax rates
in effect in the years in which the differences are expected to reverse.
Deferred tax expense represents the change in the deferred tax asset/liability
balance.
Research and development costs
The costs associated with the development, testing and approval of
products, as well as the purchase of technology currently in development are
expensed as incurred. Acquisitions of New Drug Applications ("NDAs") are
capitalized as intangible assets and amortized over the expected life of the
drug.
Net income per common share
Primary net income per common share is based on the weighted average
number of common and common equivalent shares outstanding during the periods.
Common equivalent shares include the dilutive effects of stock options and
warrants using the treasury stock method. Fully diluted income per share assumes
the conversion of convertible preferred stock, if dilutive, as well as the
dilutive effects of stock options and warrants using the treasury stock method.
Adoption of Accounting Pronouncements
The Company is required to adopt SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for the Long-Lived Assets to be Disposed of"
beginning January 1, 1996. The Company is also required to adopt SFAS No. 123,
"Accounting for Stock-Based Compensation," beginning January 1, 1996. The
Company believes the adoption of these pronouncements will not have a material
impact on the financial statements of the Company taken as a whole.
2. INVENTORIES:
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
------ ------
<S> <C> <C>
Raw materials $ 171 $ 354
Finished goods 2,927 2,649
Samples 675 246
------ ------
$3,773 $3,249
====== ======
</TABLE>
3. LINE OF CREDIT:
Effective June 6, 1995, the Company renewed a secured $5,000,000 line of
credit agreement ("the line") with a bank. Proceeds from the line may be used
for general working capital purposes and financing product acquisitions.
Borrowings against the line are available on a short-term basis under various
market-based interest rate options. Additionally, the line may be converted to a
three-year term loan. The Company has
<PAGE> 119
OCLASSEN PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
agreed to comply with certain covenants. As of December 31, 1995, the Company
was in compliance with these covenants. The line is renewable on an annual
basis. There were no borrowings during 1995 under the line.
In addition, the Company has been granted both commercial letter of credit and
standby letter of credit facilities. The aggregate amount available under these
facilities is $350,000 and reduces dollar for dollar the amount available for
borrowing under the line. These facilities were not used during 1995.
<PAGE> 120
OCLASSEN PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
4. ACCRUED LIABILITIES:
Accrued liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1994 1995
-------- --------
<S> <C> <C>
Inventory accrual $1,863 $2,208
Payroll and related expenses 871 857
Accrued royalties payable 718 641
Other accrued liabilities 1,683 996
------ ------
$5,135 $4,702
====== ======
</TABLE>
5. MANDATORILY REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY:
CAPITAL STOCK
At December 31, 1995, the Company was authorized to issue 30,000,000 shares of
$0.001 par value Common Stock and 15,539,151 shares of $0.001 par value
Preferred Stock. The shares of Preferred Stock outstanding at December 31, 1995,
are as follows:
Series A
The Company is authorized to issue 1,000,000 shares, and has issued 500,000
shares of Series A Preferred Stock at a price of $2.00 per share.
Series B
The Company is authorized to issue 2,889,403 shares, and has issued 1,418,184
shares of Series B Preferred Stock at a price of $2.30 per share before
reduction for issuance costs.
Series C
The Company is authorized to issue 3,024,748 shares, and has issued 1,442,906
shares of Series C Preferred Stock at a price of $4.36 per share before
reduction for issuance costs.
Series D
The Company is authorized to issue 7,000,000 shares, and has issued 3,105,888
shares of Series D Preferred Stock at a price of $5.00 per share before
reduction for issuance costs.
Series E
The Company is authorized to issue, and has issued 625,000 shares of Series
E Preferred Stock at a price of $12.00 per share before reduction for issuance
costs.
<PAGE> 121
OCLASSEN PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
In addition, the Company is authorized to issue 1,000,000 shares of
Preferred Stock, which is undesignated as to series.
The rights of the Preferred stockholders as to dividends, redemption,
liquidation and conversion are defined by the Company's Certificate Of
Incorporation and are summarized as follows:
The shares of Series B, C, D and E Preferred Stock have liquidation
preferences which equal the sum of the original issue price plus any unpaid
cumulative dividends, whether or not declared. The priority of liquidation and
dividend preferences is first Series E, Series D, Series C and Series B
Preferred Stock as a group, then Series A Preferred Stock and then Common Stock
to the extent of book value per share, after which Preferred and Common
stockholders share ratably. The priority of liquidation in a merger, acquisition
or sale of substantially all of the Company's assets is as above except that
after the Series A preference, Common stockholders share equally with Preferred
stockholders on an "as if converted to Common" basis. Dividends of $0.96, $0.40,
$0.35, $0.18 and $0.20 per share are payable to Series E, Series D, Series C,
Series B and Series A Preferred stockholders, respectively, in preference to any
dividend distributions to Common stockholders. The Series E, Series D, Series C
and Series B Preferred Stock dividends are noncumulative through April 22, 1994,
and are cumulative thereafter. The Series A Preferred Stock dividends are
noncumulative. Undeclared cumulative dividends through December 31, 1995
totaled $4,416,276. No dividends have been declared through December 31, 1995.
Preferred stockholders vote on an "as if converted" basis with the Common
stockholders except as specifically provided in the Certificate of Incorporation
or under Delaware law.
The Series B, C, D & E Preferred Stock was recorded at issue price
less issuance costs at the date of issuance. These shares have liquidation
preferences which equal the sum of the original issue price plus any unpaid
cumulative dividends, whether or not declared. As such, issuance costs are
being accreted on an annual basis to increase the carrying amount to issue
price. The carrying amount is also increased by cumulative dividends.
Carrying values, accretion amounts and cumulative dividends are as follows (in
thousands):
<TABLE>
<CAPTION>
Series B Series C Series D Series E Total
<S> <C> <C> <C> <C> <C>
Carrying value
at 12/31/92 3,221 6,269 14,942 7,475 31,907
Accretion of issuance
costs 6 4 95 4 109
--------------------------------------------------------
Carrying value
at 12/31/93 3,227 6,273 15,037 7,479 32,016
Accretion of issuance
costs 6 4 95 4 109
Accrued dividends 181 350 861 416 1,808
--------------------------------------------------------
Carrying value
at 12/31/94 3,414 6,627 15,993 7,899 33,933
Accretion of issuance
costs 6 4 95 4 109
Accrued dividends 261 505 1,242 600 2,608
--------------------------------------------------------
Carrying value
at 12/31/95 3,681 7,136 17,330 8,503 36,650
========================================================
Liquidation value
at 12/31/95 3,704 7,146 17,632 8,516 36,998
========================================================
</TABLE>
Each share of Preferred Stock is convertible into one share of Common
Stock, subject to adjustment for certain dilutive issuances of additional shares
of capital stock. Conversion occurs automatically in the event of the closing of
a public offering of the Company's Common Stock pursuant to the filing of a
registration statement on Form S-1 under the Securities Act of 1933, which
results in gross proceeds to the Company of a minimum of $7.5 million or upon
written consent of a majority of the holders of then-outstanding shares of each
series of Preferred Stock voting separately as a class. Upon conversion, any
accrued but undeclared cumulative dividends will be eliminated.
During specified redemption periods beginning October 31 and ending
December 31 in each of the years 1997 through 2000, the Company shall redeem, at
liquidation value (issue price adjusted for any accrued but unpaid cumulative
dividends), 25% of the shares of Series B, C, D, and E Preferred Stock
outstanding on the first redemption date at the written request of holders of at
least a majority of the respective Series E, Series D and Series C Preferred
Stock then outstanding and at the written request of holders of at least
66 2/3% of the then-outstanding Series B Preferred Stock.
The amount of Series B, C, D and E Preferred Stock, including accrued
but unpaid cumulative dividends, to be redeemed in the next five years is (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S> <C>
1996 $ --
1997 10,361
1998 11,008
1999 11,655
2000 12,599
</TABLE>
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS
Net income available to common stockholders represents net income as
adjusted to reflect accrued dividends and the accretion of issuance costs
related to mandatorily redeemable Preferred Stock.
<PAGE> 122
OCLASSEN PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
Under the terms of a separate agreement, the holders of Preferred Stock are
entitled to registration rights under certain circumstances as defined in the
agreement.
STOCK OPTION PLANS
1992 Stock Option Plan
The 1992 Stock Option Plan ("1992 Option Plan") provides for the granting to
employees and officers of incentive stock options and to employees and
consultants of nonstatutory stock options. The 1992 Option Plan also provides
for the issuance to employees and consultants of stock purchase rights. As of
December 31, 1995, options for 1,393,408 shares have been granted and remain
outstanding under this plan. In December 1994, the number of shares reserved for
issuance under the 1992 Option Plan was increased to a total of 1,750,000
shares.
1992 Director Option Plan
The 1992 Director Option Plan provides for the granting of nonstatutory
stock options to nonemployee directors of the Company. As of December 31, 1995,
options for 140,833 shares have been granted and remain outstanding under this
plan. In December 1994, the number of shares reserved for issuance under the
1992 Director Option Plan was increased to a total of 400,000 shares.
During 1995, options for 20,000 shares were granted to a director of the
Company outside of the Plan and remain outstanding at December 31, 1995.
<PAGE> 123
OCLASSEN PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
Transactions involving shares under the Company's option plans are summarized
as follows:
<TABLE>
<CAPTION>
Options Option Price
Outstanding Per Share
-------------- ---------------
<S> <C> <C>
Outstanding at December 31, 1992 371,944 $3.50-$15.00
Granted 822,750 $ 3.00
Exercised (563) $ 8.00
Canceled (460,481) $3.50-$15.00
--------
Outstanding at December 31, 1993 733,650 $ 3.00
Granted 456,550 $ 3.00
Exercised (29,896) $ 3.00
Canceled (40,325) $ 3.00
--------
</TABLE>
<TABLE>
<CAPTION>
Options Option Price
Outstanding Per Share
----------- ------------
<S> <C> <C>
Outstanding at December 31, 1994 1,119,979 $3.00
Granted 550,534 $3.00
Exercised (37,583) $3.00
Canceled (78,689) $3.00
---------
Outstanding at December 31, 1995 1,554,241 $3.00
=========
Exercisable at December 31, 1995 593,818 $3.00
Available for grant at December 31, 1995 546,592
=========
</TABLE>
1987 STOCK PURCHASE PLAN
During 1987, the Company adopted the 1987 Stock Purchase Plan (the "1987
Purchase Plan") under which it has reserved 1,270,500 shares of Common Stock for
sale to employees, directors and consultants.
The terms of the 1987 Purchase Plan provide that the price of the shares to be
purchased under the 1987 Purchase Plan shall be determined by the Company's
Board of Directors, provided that such price shall not be less than fair market
value of the Common Stock at the date of grant. In the event of voluntary or
involuntary termination of employment, the Company retains the right to
repurchase, for a period of 60 days after such termination, the unvested shares
purchased under the 1987 Purchase Plan at the original purchase price. Initial
grants under the 1987 Purchase Plan generally vest at the rate of 25% at the end
of the 12 month period following commencement of employment, with the remaining
balance vesting ratably over the next 36 months. Subsequent grants under the
1987 Purchase Plan generally vest ratably over 48 months following the date of
the grant. At December 31, 1995, there were no remaining shares of Common Stock
available for issuance under the 1987 Purchase Plan.
1992 EMPLOYEE STOCK PURCHASE PLAN
Under the 1992 Employee Stock Purchase Plan ("1992 Purchase Plan"), an
eligible employee may purchase shares of Common Stock from the Company through
payroll deductions at a price per share equal to 85% of the lesser of the fair
market value of the Company's Common Stock as of the first day or the last day
of each six-month exercise period. The 1992 Purchase Plan is implemented by
consecutive 24-month offering periods ('Offering Periods"), commencing on or
about January 1 and July 1 of each year. Each Offering Period is composed of
four six-month exercise periods. The Company has reserved 200,000 shares of
Common Stock for issuance under the 1992 Purchase Plan. As of December 31, 1995,
there were no stock purchases under this plan.
NOTES RECEIVABLE FROM STOCKHOLDERS
Notes receivable from stockholders relate to shares issued under the 1987
Purchase Plan, bear interest at rates ranging from 6.25% to 9.0% per annum, and
are generally due the earlier of four years from the date of issuance or the
date of the employee's termination.
<PAGE> 124
OCLASSEN PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
WARRANTS TO PURCHASE PREFERRED STOCK
At December 31, 1995, warrants were outstanding to purchase 5,000 and
4,565 shares of Series B Preferred Stock at an exercise price of $4.36 and $2.30
per share, respectively, and expiring through December 1998 and in April 1996,
respectively. Warrants to purchase Preferred Stock convert to Common Stock
Warrants upon the closing of a public offering of the Company's Common Stock.
The value assigned to the warrants discussed above is not material and is
included in the related Preferred Stock amount. During 1993, in a cashless
exercise, warrants to purchase 150,001 shares of Series D Preferred Stock were
exercised and resulted in the issuance of 105,885 shares of Series D Preferred
Stock.
OTHER EXPENSE
Other expense of $533,000 for the year ended December 31, 1993
represents costs incurred in connection with an abandoned initial public
offering.
6. INCOME TAXES:
The provision for income tax expense consists of:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1993 1994 1995
------ ------ -------
<S> <C> <C> <C>
Current tax expense
Federal $ 25 $-- $--
State 10 25 --
---- --- -----
Total current 35 25 --
---- --- -----
Deferred tax expense
Federal (25) -- --
State -- -- --
---- --- -----
Total deferred (25) -- --
---- --- -----
Total provision $ 10 $25 $--
==== === =====
</TABLE>
<PAGE> 125
OCLASSEN PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
Deferred income taxes result from differences in the recognition of revenue and
expense for tax and financial statement purposes. Deferred tax assets are
comprised of the following at December 31 (in 000's):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1994 1995
---------- ---------
<S> <C> <C>
Returns and allowances $ -- $ 225
Contract revenue and expense recognition 1,168 1,087
Unamortized cash to accrual adjustment 396 198
Unamortized start-up cost 599 86
Net operating loss carryforwards 1,739 1,508
Research and development credit 945 1,112
Other, net 919 526
------- -------
Gross deferred tax assets 5,766 4,742
Deferred tax asset valuation allowance (5,766) (4,742)
------- -------
Net deferred tax assets $ -- $ --
======= =======
</TABLE>
The provision for income taxes differs from the amount of income tax
determined by applying the applicable U.S. statutory federal income tax rate to
income before income taxes as a result of the following differences:
<TABLE>
<CAPTION>
1993 1994 1995
--------------------- -------------------- ---------------------
Amount % Amount % Amount %
------ ---- ------ ---- ------- ---
<S> <C> <C> <C> <C> <C> <C>
Statutory U.S. tax rates $ 419 35 $ 674 34 $ 893 34
State income tax, net of
federal benefit 10 1 119 6 158 6
Utilization of net operating
loss carryforward (419) (35) (768) (39) (1,051) (40)
----- ---- ----- ---- ------- ---
$ 10 1 $ 25 1 $ -- --
===== ==== ===== ==== ======= ===
</TABLE>
For federal and state income tax reporting purposes, net operating loss
carryforwards of approximately $3,800,000 and $2,300,000 are available to reduce
future taxable income, if any, through 2010 and 2000, respectively.
Additionally, at December 31, 1995, the Company has research and development
credit carryforwards available to reduce future federal income taxes through
2010 approximating $910,000 and combined Orphan Drug and Research and
Development Credit Carryforwards available to reduce future California state
income taxes through 2000 approximating $202,000. Should significant changes in
the Company's ownership occur, the annual amount of tax loss and credit
carryovers available for future use would be limited.
<PAGE> 126
OCLASSEN PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
7. COMMITMENTS:
LEASE COMMITMENTS
The Company leases its operating facility as well as certain automobiles and
equipment under noncancelable leases which expire through October of 1999 and
that are accounted for as operating leases. Certain of these leases contain
renewal options and rent escalation clauses. Future minimum payments required
under these noncancelable operating leases are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
- ------------
<C> <C>
1996 $ 758
1997 479
1998 398
1999 396
2000 395
-------
Total minimum future lease payments $ 2,426
=======
</TABLE>
Rental expense under noncancelable operating leases was $582,000, $781,000 and
$836,000 in 1993, 1994 and 1995, respectively. Rent expense in excess of amounts
paid currently is recorded as deferred rent payable.
8. LICENSE, ROYALTY AND CO-PROMOTION ARRANGEMENTS:
The Company has entered into various license and royalty agreements which
provide the Company with certain rights to develop and market products using
certain technological and patent rights covered under the agreements. In
addition, such agreements require the Company to pay royalties on sales and
certain agreements contain requirements for development funding and/or minimum
marketing efforts to maintain exclusivity.
Beginning in 1996, the Company became obligated for minimum purchase
commitments of raw material for one of its product lines. The commitment is for
approximately $690,000 per year through the year 2001.
In August 1993, the Company terminated an agreement for the co-promotion of
one of its products. The termination agreement provided for a termination
payment of $1.2 million to be paid by the Company in eight equal quarterly
installments of $150,000 through July 1, 1995. The termination payment was
charged to expense upon signing of the termination agreement. The termination
agreement also includes a noncompete provision which expired July 1, 1995.
During August 1992, the Company entered into development and marketing
agreements with another company (the "Licensee") concerning the use of an oral
formulation of FIAU for the treatment of hepatitis-B infections. Under terms of
the agreements, all funding for the worldwide development of oral FIAU for the
treatment of hepatitis-B, would be paid by the Licensee. Additionally, the
Licensee would market any resulting products outside the United States, would
pay development milestone payments to the Company and would pay royalties to the
Company based on sales outside the United States. In connection with the matter
discussed further in note 11, all activity related to these agreements has
ceased. Contract obligations and reserves of approximately $2.7 million, net of
any contractual and legal obligations, will be relieved upon the resolution of
any uncertainties related to the agreements or their termination.
<PAGE> 127
OCLASSEN PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
During February 1995, the Company in connection with renegotiating one
of its license and supply agreements, acquired the Monodox(R) New Drug
Application ("NDA") for $2,000,000 and recorded the purchase as an intangible
asset. The Monodox(R) NDA is being amortized over a six-year period. In addition
to the NDA, the Company received various product cost reductions. The term of
the new supply agreement is through February 1, 2000, and shall be automatically
renewed in one-year increments thereafter unless terminated by one of the
parties to the agreement.
During August 1995, the Company exchanged its inventory of wound care
products with a carrying value of $445,000 for the licensing rights to topical
clobetasol propionate, a highly potent topical steroid which the Company will
market under the trade name Cormax(TM). The Company expects to launch
Cormax(TM) during 1996.
9. SALES TO MAJOR CUSTOMERS:
During 1995, three major pharmaceutical distributors contributed 25%,
17% and 14%, respectively, of the Company's product sales. During 1994, the top
three pharmaceutical distributors contributed 24%, 13% and 9%, respectively, of
the Company's product sales.
10. 401(K) PLAN:
In September 1992, the Company's Board of Directors adopted the
Oclassen Pharmaceuticals, Inc. 401(k) Plan covering all eligible employees.
Under Plan provisions, participants may elect to contribute to the Plan up to
20% of their salary, subject to a statutorily prescribed annual limit, on a tax
deferred basis. The Plan permits, but does not require, employer matching and/or
profit sharing contributions to the Plan. For the Plan years ending December 31,
1993, 1994 and 1995, the Company made matching contributions of $65,000,
$102,000 and $102,000, respectively. All expenses of the Plan are paid by the
Company.
11. CONTINGENCIES:
During 1993, clinical trials involving a compound that was licensed to
another company in 1992 were halted as a result of serious adverse events. The
potential exists for product liability claims against the Company, and several
claims have been filed through December 31, 1995. At this time, the financial
obligation related to this matter remains uncertain. However, the Company
believes, based on the opinion of outside counsel, that the outcome of this
matter will not have a material effect on the Company's financial position or
results of operations.
12. RELATED PARTY TRANSACTIONS:
In March 1994 the Company made a $700,000 loan to the Company's
President and Chief Executive Officer. The loan bears interest at 3.94 percent
per annum, payable monthly, and is secured by real property and 50,000 shares of
the Company's common stock. The principal is due the earlier of April 1997 or
within
<PAGE> 128
OCLASSEN PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
180 days of the sale of the real property securing the loan. Principal
and interest receivable are $702,000 at December 31, 1995, and are recorded in
prepaid expenses and other current assets in the accompanying balance sheets.
<PAGE> 129
OCLASSEN PHARMACEUTICALS, INC.
SUPPLEMENTAL SCHEDULE OF QUALIFYING
ACCOUNTS AND RESERVES
<TABLE>
<CAPTION>
Balance at Additions Charged
Beginning of to Costs and Balance at End of
Description Period Expenses Deductions Period
----------- ------ -------- ---------- ------
<S> <C> <C> <C> <C>
Year Ended December 31, 1993:
Product return allowance $ 164 $ 266 (A) $ (321)(B) $109
------ ------- ------- ----
164 266 (321) 109
------ ------- ------- ----
Year Ended December 31, 1994:
Allowance for doubtful accounts -- 180 (A) -- 180
Product return allowance 109 1,088 (A) (1,008)(B) 189
------ ------- ------- ----
109 1,268 (1,008) 369
------ ------- ------- ----
Year Ended December 31, 1995:
Allowance for doubtful accounts 180 (17)(A) (133)(C) 30
Product return allowance 189 2,397 (1,878)(B) 708
------ ------- ------- ----
$ 369 $ 2,380 $(2,011) $738
------ ------- ------- ----
</TABLE>
Note A -- Accruals charged to expenses netted with adjustments to reflect
actual financial exposure as of the respective balance sheet dates.
Note B -- Uncollectible receivables written off due to product returns.
Note C -- Uncollectible receivables written off.
<PAGE> 130
UNAUDITED INTERIM FINANCIAL STATEMENTS OF
OCLASSEN PHARMACEUTICALS, INC.
The following unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information. Accordingly, said financial statements do not include all of the
information and footnotes required by generally accepted accounting principles
for annual financial statements. In the opinion of management of Oclassen
Pharmaceuticals, Inc., all adjustments necessary for a fair presentation of the
financial position and results of operations for the interim periods presented
have been included. All such adjustments are of a normal recurring nature.
Operating results for the three and nine months ended September 30, 1996 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1996.
<PAGE> 131
OCLASSEN PHARMACEUTICALS, INC.
BALANCE SHEETS
(In Thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
---------- ----------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 5,381 $ 3,002
Available for sale securities 14,991 15,723
Accounts receivable, net of reserves of $1,146
and $815, respectively 3,133 3,045
Inventories 3,917 3,249
Prepaid expenses and other current assets 1,820 1,817
Deferred merger costs 756 --
-------- --------
Total current assets 29,998 26,836
Furniture, equipment, and leasehold improvements,
net of accumulated depreciation of $1,979 and $1,600,
respectively 1,160 1,046
Other assets, net of accumulated amortization of
$593 and $306, respectively 1,852 2,139
-------- --------
$ 33,010 $ 30,021
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 10 $ 192
Accrued liabilities 5,035 4,702
Contract obligations and reserve 2,659 2,708
-------- --------
Total current liabilities 7,704 7,602
Deferred rent payable 12 39
-------- --------
7,716 7,641
-------- --------
Series B, C, D and E convertible mandatorily redeemable
Preferred Stock 38,688 36,650
-------- --------
Commitments
Stockholders' equity (deficit):
Series A Preferred Stock 1,000 1,000
Common stock 1,442 1,226
Notes receivable from stockholders (706) (644)
Accumulated deficit (15,130) (15,852)
-------- --------
Total stockholders' equity (deficit) (13,394) (14,270)
-------- --------
$ 33,010 $ 30,021
======== ========
</TABLE>
See accompanying Notes to Unaudited Condensed Financial Statements
<PAGE> 132
OCLASSEN PHARMACEUTICALS, INC
STATEMENTS OF INCOME
(In Thousands, except per share amounts)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- ------------------------
1996 1995 1996 1995
--------- -------- --------- ----------
<S> <C> <C> <C> <C>
Product sales $ 7,642 $6,678 $24,276 $21,195
Contract revenue 23 84 49 194
------- ------ ------- -------
Total revenue 7,665 6,762 24,325 21,389
------- ------ ------- -------
Operating expenses:
Cost of product sales 2,244 2,169 7,099 6,831
Sales and marketing 2,879 2,132 8,099 7,551
General and administrative 1,191 907 3,567 2,884
Research and development 1,198 1,009 3,554 3,004
------- ------ ------- -------
Total operating expenses 7,512 6,217 22,319 20,270
------- ------ ------- -------
Operating income 153 545 2,006 1,119
Interest income 278 244 814 681
------- ------ ------- -------
Income before income taxes 431 789 2,820 1,800
Provision for income taxes 20 -- 60 --
------- ------ ------- -------
Net income $ 411 $ 789 $ 2,760 $ 1,800
======= ====== ======= =======
Net income (loss) available to
commmon stockholders $ (268) $ 110 $ 722 $ (238)
======= ====== ======= =======
Net income (loss) per common
share:
Primary $ (0.15) $ 0.06 $ 0.30 $ (0.14)
======= ====== ======= =======
Fully diluted $ (0.15) $ 0.06 $ 0.27 $ (0.14)
======= ====== ======= =======
Shares used in per share
calculation:
Primary 1,802 1,719 2,424 1,718
======= ====== ======= =======
Fully diluted 1,802 1,719 10,063 1,718
======= ====== ======= =======
</TABLE>
See accompanying Notes to Unaudited Condensed Financial Statements
<PAGE> 133
OCLASSEN PHARMACEUTICALS, INC
STATEMENTS OF CASH FLOWS
(In Thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1996 1995
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,760 $ 1,800
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation 397 350
Amortization 287 222
Deferred rent (27) (27)
Changes in current assets and liabilities:
Accounts receivable (88) (153)
Inventories (668) 363
Prepaid expenses and other current assets (203) (487)
Deferred merger costs (756) --
Accounts payable (182) (283)
Accrued liabilities 333 (971)
Contract obligations and reserve (49) (194)
------- -------
Net cash provided by operating activities 1,804 620
------- -------
Cash flows from investing activities:
Purchases of furniture, equipment and
leasehold improvements (511) (300)
Sales of available for sale securities 732 629
Purchases of other assets -- (2,000)
Repayment of loan to officer 200 --
------- -------
Net cash provided by (used in)
investing activities 421 (1,671)
------- -------
Cash flows from financing activities:
Proceeds from sale of common stock and exercise of
common stock options, net of repurchases 154 119
------- -------
Net increase (decrease) in cash and cash equivalents 2,379 (932)
Cash and cash equivalents, beginning of period 3,002 3,453
------- -------
Cash and cash equivalents, end of period $ 5,381 $ 2,521
======= =======
Supplemental disclosure of noncash investing and
financing activities:
Issuance of common stock for notes receivable, net
of repurchases $ 28 $ 27
======= =======
Supplemental Disclosure of Cash Flow Information:
Cash paid during the periods for income taxes $ 8 $ 3
======= =======
</TABLE>
See accompanying Notes to Unaudited Condensed Financial Statements.
<PAGE> 134
OCLASSEN PHARMACEUTICALS, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
NOTE 1 - GENERAL
The foregoing unaudited condensed financial statements of Oclassen
Pharmaceuticals, Inc. (the "Company") have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Article 10 of Regulation S-X as promulgated by the
Securities and Exchange Commission. Accordingly, these financial statements do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements and should, therefore,
be read in conjunction with the Company's financial statements for the period
ended December 31, 1995.
In the opinion of management, the accompanying financial statements contain all
adjustments (consisting of only normal recurring adjustments), necessary to
present fairly the Company's financial position as of September 30, 1996, and
the results of operations for the three and nine months ended September 30, 1996
and 1995 and cash flows for the nine months ended September 30, 1996 and 1995.
The results of operations and cash flows for the three and nine months ended
September 30, 1996 and the cash flows for the nine months ended September 30,
1996 are not necessarily indicative of the results of operations or cash flows
which may be reported for the remainder of 1996. The accounting policies
followed during the three and nine months ended September 30, 1996 were the same
as those disclosed in the Company's financial statements for the period ended
December 31, 1995.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
Impairment of Long-Lived Assets - Effective January 1, 1996, the Company adopted
Statement of Financial Accounting Standards No. 121 ("SFAS 121") on accounting
for the impairment of long-lived assets, certain identifiable intangibles, and
goodwill related to assets to be held and used. The Company did not recognize
any impairment loss as a result of applying the provisions of SFAS 121 to its
assets held for use.
Stock-Based Compensation - The Company accounts for stock-based employee
compensation plans using the intrinsic value-based method in accordance with APB
25, and provides pro forma disclosures of net income and earnings per share as
if the accounting provisions of Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" ("SFAS 123"), had been adopted.
The Company accounts for stock-based nonemployee compensation using a fair value
method of accounting in accordance with SFAS 123.
NOTE 3 - MERGER WITH WATSON PHARMACEUTICALS, INC.
The Company entered into a definitive Agreement and Plan of Merger by and among
Watson Pharmaceuticals, Inc. ("Watson"), Opalacq Co., a wholly-owned subsidiary
of Watson ("Opalacq"), and the Company dated as of September 25, 1996, as
amended effective November 14, 1996, (the "Merger Agreement"), pursuant to which
Opalacq will merge with and into the Company (the "Merger"), with the Company
being the surviving corporation in the Merger. Immediately after the Merger, the
Company will become a wholly-owned subsidiary of Watson. It is intended that the
Merger will qualify as a "pooling of interests" for accounting purposes and that
the Merger will constitute a tax free reorganization for federal income tax
purposes.
Pursuant to the terms and conditions of the Merger Agreement, at the effective
time of the Merger, the Company's shareholders will receive common shares of
Watson valued at $135 million, subject to a collar on Watson's stock price of
$27 to $35 per share.
Consummation of the Merger is subject to the satisfaction of certain conditions,
including, without limitation, approval by the Company's stockholders of the
Merger Agreement, voluntary conversion of at least ninety-five percent (95%) of
the aggregate number of outstanding shares of the Company's Preferred Stock into
shares of the Company's Common Stock prior to the Merger, regulatory approvals
and treatment of the Merger as a "pooling of interests" for accounting purposes.
<PAGE> 135
OCLASSEN PHARMACEUTICALS, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS (continued)
NOTE 4 - LINE OF CREDIT
In June, 1996 the Company renewed a secured line of credit agreement ("the
line") with a bank and increased the line from $5,000,000 to $10,000,000.
Proceeds from the line may be used for general working capital purposes and
financing product acquisitions. Borrowings against the line are available on a
short-term basis under various market based interest rate options. The Company
has agreed to comply with certain covenants. As of September 30, 1996, the
Company was in compliance with these covenants. The line is renewable on
March 31, 1997. There were no borrowings during the nine months ended
September 30, 1996 under the line.
In addition, the Company has been granted both commercial letter of credit and
standby letter of credit facilities. The aggregate amount available under these
facilities is $350,000 and reduces dollar for dollar the amount available for
borrowing under the line. These facilities were not used during the nine months
ended September 30, 1996.
NOTE 5 - LICENSE AGREEMENTS
In May 1996, the Company entered into an agreement to in-license patents and
products based on the use of 5-methoxypsoralen for the treatment of psoriasis
and vitiligo. The agreement provides for payment by the Company of technology
transfer fees aggregating up to $1.1 million if certain technology development
milestones are achieved. Additionally, the Company is required to pay royalties
based on net sales during the term of the agreement.
In June 1996, the Company in-licensed rights to a topical iodine anti-microbial
product line technology which is currently under development. The Company paid
$500,000 upon the execution of the agreement which is included in research and
development expenses. The agreement provides for payment by the Company of up to
$8 million if certain milestones are achieved, and royalties based upon net
sales during the term of the agreement.
NOTE 6 - RELATED PARTY TRANSACTIONS
In March 1994 the Company made a $700,000, interest bearing secured loan (the
"1994 loan") to the Company's President and Chief Executive Officer. In June
1996 the Company restructured the 1994 loan whereby $200,000 of the principal
balance, plus accrued interest, was repaid and the remaining $500,000 principal
balance was replaced with a new $500,000 loan (the "1996 loan"). The 1996 loan
bears interest at 3.94 percent per annum, with accrued interest payable monthly,
and is secured by real property. The 1996 loan matures on the earlier of (a)
June 1, 1999, (b) the termination of employment of the Company's President and
Chief Executive Officer, or (c) within 180 days of the sale of the real
property securing the loan.
<PAGE> 136
APPENDIX A
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER is dated as of September 25, 1996
(the "Agreement") by and among Watson Pharmaceuticals, Inc., a Nevada
corporation ("Watson"), Opalacq Co., a Delaware corporation and the wholly-owned
subsidiary of Watson ("Watson Sub") and Oclassen Pharmaceuticals, Inc., a
Delaware corporation (the "Company").
WHEREAS, the Board of Directors of each of Watson and the Company have
determined that a business combination between Watson and the Company merging
their respective pharmaceutical businesses 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 agreed to effect the merger provided for herein upon the terms
and subject to the conditions set forth herein; and
WHEREAS, it is the intention of the parties to this Agreement that (a)
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"); (b) for accounting purposes, the merger
provided for herein shall qualify as a "pooling of interests"; and (c) the
shares of Watson Common Stock (as defined herein) to be issued pursuant to the
Merger shall be exempt securities pursuant to Section 3(a)(10) of the Securities
Act of 1933, as amended (the "Securities Act"); and
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
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),
Watson Sub shall be merged with and into the Company in accordance with the laws
of the State of Delaware and the terms of this Agreement (the "Merger"),
whereupon the separate corporate existence of Watson Sub shall cease, and the
Company shall be the surviving corporation of the Merger (the Company, as the
surviving corporation after the Merger is sometimes referred to herein as the
"Surviving Corporation").
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
Venture Law Group, A Professional Corporation, 2800 Sand Hill Road, Menlo Park,
CA 94025 at 10:00 a.m. three business days 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." The Closing is expected to occur on or about November
<PAGE> 137
26, 1996.
1.3. Effective Time. If 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 VIII hereof, the parties
hereto shall cause a certificate of merger ("the Certificate of Merger") to be
properly executed and filed in accordance with the laws of the State of Delaware
and the terms of this Agreement on or before the Closing Date. The parties
hereto shall also take such further actions as may be required under the laws of
the State of Delaware in connection with the consummation of the Merger. The
Merger shall become effective at such time as the Certificate of Merger is duly
filed with the Secretary of State of the State of Delaware or at such later time
as is specified in the Certificate 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 and duties of the Company and Watson Sub, all as
provided under applicable law.
1.4. Conversion of Shares.
(a) At the Effective Time:
(i) each share of Common Stock, par value $0.01 per share, of
Watson Sub outstanding at the Effective Time, by virtue of the Merger
and without any action on the part of the holders thereof, shall be
converted into and exchanged for one share of Common Stock, par value
$0.01 per share, of the Surviving Corporation;
(ii) in addition to the consideration set forth in Section
1.4(a)(vii) below, each share of Series A Preferred Stock, $0.001 par
value per share, of the Company (the "Series A Preferred Stock")
outstanding at the Effective Time, plus all accrued and unpaid
dividends thereon, by virtue of the Merger and without any action on
the part of the holders thereof, except as otherwise provided in
Sections 1.4(d) or 1.8 hereof, shall be converted into the right to
receive the number of shares of Common Stock, par value $0.0033 per
share (the "Watson Common Stock"), of Watson equal to the following:
$2.00 divided by the Average Closing Price (as defined herein) (the
"Series A Preferred Payout");
(iii) in addition to the consideration set forth in Section
1.4(a)(vii) below, each share of Series B Preferred Stock, $0.001 par
value per share, of the Company (the "Series B Preferred Stock")
outstanding at the Effective Time, plus all accrued and unpaid
dividends thereon, by virtue of the Merger and without any action on
the part of the holders thereof, except as otherwise provided in
Sections 1.4(d) or 1.8 hereof, shall be converted into the right to
receive the number of shares of Watson Common Stock equal to the
following: (A) the sum of $2.30 plus an amount equal to the cumulative
dividends accrued at the rate of $0.184 per annum from April 22, 1994
to and including the Closing Date; divided by (B) the Average Closing
Price (the "Series B Preferred Payout");
2
<PAGE> 138
(iv) in addition to the consideration set forth in Section
1.4(a)(vii) below, each share of Series C Preferred Stock, $0.001 par
value per share, of the Company (the "Series C Preferred Stock")
outstanding at the Effective Time, plus all accrued and unpaid
dividends thereon, by virtue of the Merger and without any action on
the part of the holders thereof, except as otherwise provided in
Sections 1.4(d) or 1.8 hereof, shall be converted into the right to
receive the number of shares of Watson Common Stock equal to the
following: (A) the sum of $4.364 plus an amount equal to the cumulative
dividends accrued at the rate of $0.35 per annum from April 22, 1994 to
and including the Closing Date; divided by (B) the Average Closing
Price (the "Series C Preferred Payout");
(v) in addition to the consideration set forth in Section
1.4(a)(vii) below, each share of Series D Preferred Stock, $0.001 par
value per share, of the Company (the "Series D Preferred Stock")
outstanding at the Effective Time, plus all accrued and unpaid
dividends thereon, by virtue of the Merger and without any action on
the part of the holders thereof, except as otherwise provided in
Sections 1.4(d) or 1.8 hereof, shall be converted into the right to
receive the number of shares of Watson Common Stock equal to the
following: (A) the sum of $5.00 plus an amount equal to the cumulative
dividends accrued at the rate of $0.40 per annum from April 22, 1994 to
and including the Closing Date; divided by (B) the Average Closing
Price (the "Series D Preferred Payout");
(vi) in addition to the consideration set forth in Section
1.4(a)(vii) below, each share of Series E Preferred Stock, $0.001 par
value per share, of the Company (the "Series E Preferred Stock")
outstanding at the Effective Time, plus all accrued and unpaid
dividends thereon, by virtue of the Merger and without any action on
the part of the holders thereof, except as otherwise provided in
Sections 1.4(d) or 1.8 hereof, shall be converted into the right to
receive the number of shares of Watson Common Stock equal to the
following: (A) the sum of $12.00 plus an amount equal to the cumulative
dividends accrued at the rate of $0.96 per annum from April 22, 1994 to
and including the Closing Date; divided by (B) the Average Closing
Price (the "Series E Preferred Payout");
(vii) each share of Common Stock, $0.001 par value per share,
of the Company (the "Company Common Stock") and each share of Preferred
Stock outstanding at the Effective Time, by virtue of the Merger and
without any action on the part of the holders thereof, except as
otherwise provided in Sections 1.4(d) or 1.8 hereof, shall be converted
into the right to receive the number of shares of Watson Common Stock
equal to the following: (A)(I) $135,000,000; less (II) the sum of (v)
the Series A Preferred Payout multiplied by the number of shares of
Series A Preferred Stock outstanding at the Effective Time multiplied
by the Average Closing Price; plus (w) the Series B Preferred Payout
multiplied by the number of shares of Series B Preferred Stock
outstanding at the Effective Time multiplied by the Average Closing
Price; plus (x) the Series C Preferred Payout multiplied by the number
of shares of Series C Preferred Stock outstanding at the Effective Time
multiplied by the Average Closing Price; plus (y) the Series D
Preferred Payout multiplied by the number of shares of Series D
Preferred Stock outstanding at the Effective Time multiplied by the
Average Closing Price; plus (z) the Series E Preferred Payout
multiplied by the number of
3
<PAGE> 139
shares of Series E Preferred Stock outstanding at the Effective Time
multiplied by the Average Closing Price; divided by (B) the aggregate
number of shares of Company Common Stock outstanding at the Effective
Time on a fully diluted basis, including, without limitation, the
number of shares of Company Common Stock which can be purchased and/or
received by the conversion of all outstanding shares of Preferred Stock
(as defined herein) at the Effective Time or the exercise of all
outstanding options, warrants, or other rights to purchase shares of
Company Common Stock, whether or not such rights are currently
exercisable, at the Effective Time; and further divided by (C) the
Average Closing Price (the "Exchange Ratio").
(b) Subject to the provisions of Section 1.8, all holders of Company
Common Stock and Preferred Stock (the "Stockholders," who are listed on Exhibit
A attached hereto, which shall be updated at the Closing) shall be required to
deposit seven and one-half percent (7.5%) of the shares of Watson Common Stock
to be received by them in the Merger into an escrow account (the "Escrow"),
which shares shall be held and distributed in accordance with the terms of an
Escrow Agreement (the "Escrow Agreement") to be entered into by and among
Watson, the Stockholder Agent (as defined herein) and American Stock Transfer &
Trust Company or such other party as the parties may mutually agree upon, as
escrow agent (the "Escrow Agent"), in substantially the form attached hereto as
Exhibit B.
(c) As a result of the Merger and without any action on the part of the
holder thereof, at the Effective Time, all shares of Company Common Stock and
Preferred Stock shall cease to be outstanding and shall be canceled and retired
and shall cease to exist, and each holder of shares of Company Common Stock and
Preferred Stock shall thereafter cease to have any rights with respect to such
shares of Company Common Stock and Preferred Stock, except for the right to
receive (except as otherwise provided in Section 1.8 hereof), without interest,
the consideration set forth in this Section 1.4 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
Company Common Stock or Preferred Stock, as the case may be, in accordance with
the provisions of this Article I.
(d) Each share of Company Common Stock and Preferred Stock held by the
Company as treasury stock or owned by Watson or any Subsidiary (as defined in
Section 1.4(e) of this Agreement) of Watson at the Effective Time shall be
canceled, and no payment shall be made with respect thereto.
(e) 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 ("Nasdaq") (and as reported
by The Wall Street Journal or, if not reported thereby, by another authoritative
source) during the ten (10) consecutive trading days ending two trading days
prior to the Closing Date; provided, however, that (A) if the Average Closing
Price is greater than $35.00 (appropriately adjusted for any stock split,
reverse stock split, stock dividend, reorganization, recapitalization or other
like change with respect to the Watson Common Stock occurring after the date
hereof and prior to the Effective Time), for purposes of this Agreement, the
Average Closing
4
<PAGE> 140
Price shall be deemed to be equal to $35.00 (appropriately adjusted for any
stock split, reverse stock split, stock dividend, reorganization,
recapitalization or other like change with respect to the Watson Common Stock
occurring after the date hereof and prior to the Effective Time); and (B) if the
Average Closing Price is less than $27.00 (appropriately adjusted for any stock
split, reverse stock split, stock dividend, reorganization, recapitalization or
other like change with respect to the Watson Common Stock occurring after the
date hereof and prior to the Effective Time), for purposes of this Agreement,
the Average Closing Price shall be deemed to be equal to $27.00 (appropriately
adjusted for any stock split, reverse stock split, stock dividend,
reorganization, recapitalization or other like change with respect to the Watson
Common Stock occurring after the date hereof and prior to the Effective Time);
(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 fifty percent (50%) 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; (iii) the word "Person" means
an individual, a corporation, a limited liability company, 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 "Preferred Stock" shall mean the
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock and Series E Preferred Stock together; and (v) the term
"Preferred Payout" shall mean the Series A Preferred Payout, the Series B
Preferred Payout, the Series C Preferred Payout, the Series D Preferred Payout
and the Series E Preferred Payout together.
1.5. Stock Options. All options to acquire Company Common Stock
(individually, a "Company Option" and collectively, the "Company Options")
outstanding at the Effective Time under the Company's 1992 Stock Option Plan and
the Company's 1992 Director Stock Option Plan or otherwise (the "Company Stock
Option Plans") shall remain outstanding following the Effective Time. At the
Effective Time, such Company Options shall, by virtue of the Merger and without
any further action on the part of the Company or the holder of such Company
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 Company Options, would be such a corporation (or a parent
or a subsidiary corporation of such corporation) were Section 424 applicable to
such option. Each Company Option assumed by Watson shall be exercisable upon the
same terms and conditions as under the applicable Company Stock Option Plan and
the applicable option agreement issued thereunder, except that (x) the
unexercised portion of each such Company Option shall be exercisable for that
whole number of shares of Watson Common Stock (rounded to the nearest whole
share, with 0.5 rounded upward) equal to the number of shares of Company Common
Stock subject to the unexercised portion of such Company Option multiplied by
the Exchange Ratio; and (y) the option exercise price per share of
5
<PAGE> 141
Watson Common Stock shall be an amount equal to the option exercise price per
share of Company Common Stock subject to such Company Option in effect at the
Effective Time divided by the Exchange Ratio (the option price per share, as so
determined, being rounded to the nearest full cent, with $0.005 rounded upward).
No payment shall be made for fractional interests. The term, exercisability,
vesting schedule, status as an "incentive stock option" under Section 422 of the
Code, if applicable, and all of the other terms of the Company Options shall
otherwise remain unchanged. As soon as practicable after the Effective Time,
Watson shall deliver to the holders of Company Options appropriate notices
setting forth such holders' rights pursuant to such Company Options, as amended
by this Section 1.5. 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 Company Options after the
Effective Time. Within forty-five (45) days after the Effective Time, Watson
shall register the shares of Watson Common Stock issuable upon exercise of such
Company Options with the Securities and Exchange Commission on Form S-8.
1.6. Exchange of Certificates Representing Company Common Stock and
Preferred Stock.
(a) American Stock Transfer & Trust Company shall act as exchange agent
(the "Exchange Agent") in the Merger.
(b) As of the Effective Time, Watson shall deposit or cause to be
deposited with the Exchange Agent for exchange in accordance with this Article
I, the shares of Watson Common Stock issuable pursuant to Section 1.4 in
exchange for shares of Company Common Stock and Preferred Stock outstanding at
the Effective Time, less such number of shares of Watson Common Stock as are to
be deposited into the Escrow pursuant to the requirement of 1.4(b) and Article
VII hereof.
(c) On or promptly after the Effective Time (but not later than five
(5) business days after the Effective Time), Watson shall mail to each holder of
record of shares of Company Common Stock and Preferred Stock (i) a letter of
transmittal which shall specify that delivery shall be effected, and risk of
loss and title to such shares of Company Common Stock or Preferred Stock shall
pass, only upon delivery of the Certificates representing such shares to Watson;
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 representing shares
of Company Common Stock or Preferred Stock for cancellation to Watson, together
with such letter of transmittal, duly executed and completed in accordance with
the instructions thereto, the holder of the shares represented by such
Certificate shall be entitled to receive in exchange therefor (i) a certificate
representing that number of whole shares of Watson Common Stock; and (ii) a
check representing the amount of cash in lieu of fractional shares, if any, and
unpaid dividends and distributions, 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, after giving effect to any required withholding tax and less
the number of shares of Watson Common Stock required to be deposited by such
Stockholder into the Escrow pursuant to the terms of Section 1.4 hereof, and the
shares represented by the Certificate so surrendered shall forthwith be
canceled. 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 Company Common Stock and Preferred Stock. In the event of a transfer
of
6
<PAGE> 142
ownership of Company Common Stock or Preferred Stock which is not registered in
the transfer records of the Company, 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 Company Common Stock or Preferred Stock is presented to
Watson, accompanied by all documents required to evidence and effect such
transfer and to evidence that any applicable stock transfer taxes have been
paid. Until so surrendered, each Certificate that, at the Effective Time,
represented shares of Company Common Stock or Preferred Stock will be deemed
from and after the Effective Time, for all corporate purposes other than the
payment of dividends (except to the extent provided in Section 1.6(d) below), to
evidence the ownership of the number of full shares of Watson Common Stock into
which such shares of Company Common Stock or Preferred Stock shall have been so
converted and the right to receive an amount in cash in lieu of the issuance of
any fractional shares in accordance with Section 1.4.
(d) As of the Effective Time, Watson shall deposit or cause to be
deposited with the Escrow Agent a Certificate (issued in the name of the Escrow
Agent or its nominee) representing the Watson Common Stock deposited in the
Escrow ("Escrow Shares"), as described in Section 1.4(b), for the purpose of
securing the indemnification obligations of the Stockholders set forth in this
Agreement. The Escrow Shares shall be held by the Escrow Agent under the Escrow
Agreement pursuant to the terms thereof and shall be disbursed in accordance
with the terms of the Escrow Agreement. The adoption of this Agreement and the
approval of the Merger by the Stockholders shall constitute approval of the
Escrow Agreement and of all of the arrangements relating thereto, including
without limitation the placement of the Escrow Shares in escrow and the
appointment of the Stockholder Agent (as defined herein). Any shares of Watson
Common Stock or other equity securities issued or distributed by Watson
(including shares issued upon a stock split) ("New Shares") in respect of Watson
Common Stock in the Escrow which have not been released from the Escrow shall be
added to the Escrow and become a part thereof. New Shares issued in respect of
Watson Common Stock which have been released from the Escrow shall not be added
to the Escrow, but shall be distributed to the holders thereof. When and if cash
dividends on Watson Common Stock in the Escrow shall be declared and paid, they
shall not be added to the Escrow, but shall be paid to those on whose behalf
such Watson Common Stock is held who, at the Effective Time, held Company Common
Stock or Preferred Stock. Each Stockholder shall have voting rights with respect
to the shares of Watson Common Stock contributed to the Escrow on behalf of such
Stockholder (and on any voting securities added to the Escrow in respect of such
shares of Watson Common Stock) so long as such shares of Watson Common Stock or
other voting securities are held in the Escrow. As the record holder of such
shares, the Escrow Agent shall vote such shares in accordance with the
instructions of the Stockholders having the beneficial interest therein and
shall promptly deliver copies of all proxy solicitation materials to such
Stockholders. Watson shall show the Watson Common Stock contributed to the
Escrow Fund as issued and outstanding on its balance sheet.
(e) 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 Company Common Stock
and/or Preferred Stock represented by a Certificate until such Certificate is
surrendered for exchange as provided herein. Subject to the effect of applicable
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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.
(f) At or after the Effective Time, there shall be no transfers on the
stock transfer books of the Company of the shares of Company Common Stock or
Preferred Stock which were outstanding at the Effective Time. If, after the
Effective Time, Certificates are presented to the Surviving Corporation, they
shall be canceled and exchanged for the consideration set forth in this Article
I 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 the Company for purposes
of Rule 145(c) under the Securities Act shall not be exchanged until Watson has
received an Affiliate Letter (as defined herein) from such person as provided in
Section 5.9.
(g) 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, cash adjustments will be paid to holders
in respect of any fractional share of Watson Common Stock that would otherwise
be issuable, and the amount of such cash adjustment shall be equal to such
fractional proportion of the Average Closing Price of a share of Watson Common
Stock.
(h) All former stockholders of the Company shall look only to Watson
for payment of 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 Company Common Stock or Preferred Stock such
stockholder holds as determined pursuant to this Agreement, in each case,
without any interest thereon.
(i) None of Watson, Watson Sub, the Company, the Surviving Corporation
or any other person shall be liable to any former holder of shares of Company
Common Stock or Preferred Stock for any amount properly delivered to a public
official pursuant to applicable abandoned property, escheat or similar laws.
(j) 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, Watson will issue
in exchange for such lost, stolen or destroyed Certificate, 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
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1.6, deliverable in respect thereof pursuant to this Agreement.
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, Company Common Stock or Preferred Stock 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 and the Preferred Payouts shall be appropriately adjusted.
1.8. Dissenting Shares. Notwithstanding anything to the contrary
contained in this Agreement, in the event appraisal rights are available to the
Stockholders pursuant to applicable law, any shares of Company Common Stock or
Preferred 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
Company Common Stock or Preferred Stock, as the case may be (the "Company
Dissenting Shares"), shall not be converted into the right to receive shares of
Watson Common Stock pursuant to Section 1.4 of this Agreement but shall become
the right to receive such consideration as may be determined to be due to the
holder of such Company Dissenting Shares pursuant to applicable law; provided
however, that the Company 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 Company
Common Stock or Preferred Stock, as the case may be, into shares of Watson
Common Stock pursuant to Section 1.4 of this Agreement.
1.9. Tax Consequences and Accounting Treatment. It is intended by the
parties hereto that the Merger shall constitute a reorganization within the
meaning of Section 368 of the Code and that the transaction be accounted for as
a pooling of interests.
1.10. Taking of Necessary Action; Further Action. If, at any time after
the Effective Time, any further action is necessary or desirable to carry out
the purposes of this Agreement and to vest the Surviving Corporation with full
right, title and possession to all assets, property, rights, privileges, powers
and franchises of the Company and Watson Sub, the officers and directors of the
Company and Watson Sub are fully authorized in the name of their respective
corporations or otherwise to take, and will take, all such lawful and necessary
action, so long as such action is consistent with this Agreement.
ARTICLE II
CERTAIN MATTERS RELATING TO
THE SURVIVING CORPORATION
2.1. Certificate of Incorporation of the Surviving Corporation. The
certificate of incorporation of Watson Sub in effect at the Effective Time shall
be the certificate of incorporation of the Surviving Corporation until amended
in accordance with its terms and pursuant to applicable
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law; provided however, that Article I of the Certificate of Incorporation of the
Surviving Corporation shall be amended to read as follows: "The name of the
corporation is Oclassen Pharmaceuticals, Inc.".
2.2. By-Laws of the Surviving Corporation. The By-Laws of Watson Sub in
effect at the Effective Time shall be the By-Laws of the Surviving Corporation
until amended in accordance with the terms of such By-Laws and pursuant to
applicable law and the Certificate of Incorporation of the Surviving
Corporation.
2.3. Directors of the Surviving Corporation. The directors of the
Surviving Corporation immediately after the Effective Time shall consist of the
persons listed on Exhibit C attached hereto, to hold office until their
successors are duly appointed or elected in accordance with applicable law.
2.4. Officers of the Surviving Corporation. The officers of the
Surviving Corporation immediately after the Effective Time shall consist of the
persons listed on Exhibit D attached hereto 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 WATSON SUB
Watson and Watson Sub represent and warrant to the Company that the
statements contained in this Article III are true and correct, except as set
forth in the disclosure statement delivered by Watson and Watson Sub to the
Company concurrently herewith and identified as the"Watson Disclosure
Statement." All exceptions noted in the Watson Disclosure Statement shall be
numbered to correspond to the applicable sections to which such exception
refers.
3.1 Existence, Good Standing, Corporate Authority. Each of Watson and
Watson Sub (i) is a corporation duly incorporated, validly existing and in good
standing under the laws of its respective jurisdiction of incorporation; (ii)
has all requisite power and authority to own or lease, and operate its
properties and assets, and to carry on its business as now conducted and as
currently proposed to be conducted, except where the failure to have such power
and authority would not have a Watson Material Adverse Effect (as defined
herein); (iii) is duly qualified or licensed to do business and is in good
standing in all jurisdictions in which it owns or leases property or in which
the conduct of its business requires it to so quality or be licensed, except
where the failure to so qualify would not have a Watson Material Adverse Effect;
and (iv) has obtained all licenses, permits, franchises and other governmental
authorizations necessary to the ownership or operation of its properties or the
conduct of its business, except where the failure to have obtained such
licenses, permits, franchises or authorizations would not have a Watson Material
Adverse Effect. The copies of Watson's and Watson Sub's Articles or Certificate
of Incorporation and By-Laws previously delivered to the Company are true and
correct. For purposes of this Agreement, a "Material Adverse Effect" when used
with respect to any entity means (a) a material adverse effect on the business,
results of operations, financial condition or prospects of such entity and its
subsidiaries, if any, taken as a whole,
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or (b) a material impairment in the ability of such entity or its subsidiaries
to perform any of their obligations under this Agreement or to consummate the
Merger.
3.2 Authorization of Agreement and Other Documents. The execution and
delivery of this Agreement and the other documents executed in connection
herewith to which Watson or Watson Sub is a party (collectively, the "Watson
Ancillary Documents"), have been duly authorized by the Board of Directors of
Watson and Watson Sub and no other proceedings on the part of Watson or Watson
Sub or their stockholders are necessary to authorize the execution, delivery or
performance of this Agreement or any Watson Ancillary Document; except the
approval of the Merger by the sole stockholder of Watson Sub. This Agreement is,
and, as of the Closing Date, each of the Watson Ancillary Documents will be, a
valid and binding obligation of Watson and/or Watson Sub, as the case may be,
enforceable against Watson and/or Watson Sub, as the case may be, in accordance
with its terms, except to the extent that enforcement thereof may be limited by
bankruptcy, insolvency; reorganization, moratorium, fraudulent conveyance or
other similar laws affecting enforcement of creditors' rights generally, and by
general principles of equity (regardless of whether enforcement is considered in
a proceeding at law or in equity).
3.3 No Violation. Neither the execution and delivery by Watson and
Watson Sub of this Agreement or the Watson Ancillary Agreements, nor the
consummation by Watson and Watson Sub of the transactions contemplated hereby
and thereby in accordance with their respective terms, will (a) conflict with or
result in a breach of any provisions of the Articles or Certificate of
Incorporation or By-Laws of Watson or Watson Sub; (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 Watson Sub 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 Watson Sub is a
party, or by which Watson or Watson Sub 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, injunction,
order or decree binding upon or applicable to Watson or Watson Sub, except for
any of the foregoing matters which would not have a Watson Material Adverse
Effect; or (e) other than the filings provided for in Sections 1.3 and 5.7,
filings under applicable federal, state and local laws and regulations, filings
required under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the
"HSR Act"), the Exchange Act, the Securities Act, 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
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Material Adverse Effect.
3.4 SEC Documents. Watson has delivered to the Company each
registration statement, report, proxy statement or information statement (as
defined in Regulation 14C under the Exchange Act) prepared by it since January
1, 1994, which reports constitute 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 or (a) complied as to form in all material respects with the applicable
requirements of the Securities Act or the Exchange Act, as the case may be, and
the rules and regulations thereunder; and (b) did not 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. Watson has timely
filed with the SEC all reports required to be filed under Section 13, 14 and
15(d) of the Exchange Act since January 1, 1994. 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 in all
material respects 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 in all material respects 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). The financial statements of Watson, including the
notes thereto, included in or incorporated by reference into the SEC Documents
comply as to form in all material respects with applicable accounting
requirements and with the published rules and regulations of the SEC with
respect thereto, and have been prepared in accordance with generally accepted
accounting principles consistently applied (except as may be indicated in the
notes thereto), Since January 1, 1994, there has been no material change in
Watson's accounting methods or principles except as described in the notes to
such Watson financial statements.
3.5 No Brokers. Watson has not entered into any contract, arrangement
or understanding with any person or firm which may result in the obligation of
the Company or Watson, Watson Sub or their Subsidiaries 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 Furman Selz LLC as its
financial advisor, the arrangements with which have been disclosed in writing to
the Company prior to the date hereof.
3.6 Opinion of Financial Advisor. Watson has received the opinion of
Furman Selz LLC, to the effect that, as of the date hereof, the consideration to
be paid by Watson pursuant to the Merger is fair to Watson from a financial
point of view.
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3.7 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.
3.8 Capitalization
(a) The total authorized capital stock of Watson consists of
(i) 500,000,000 shares of Watson Common Stock, 36,778,718 shares of which are
issued and outstanding as of September 1, 1996 and (ii) 2,500,000 shares of
Preferred Stock, none of which are issued and outstanding as of the date of this
Agreement. The authorized capital stock of Watson Sub consists of 1,000 shares
of Common Stock, $0.01 par value per share, 100 shares of which, as of the date
hereof, are issued and outstanding and are held by Watson. There are no shares
of capital stock of Watson or Watson Sub of any other class authorized, issued
or outstanding. Except as set forth in the Watson Disclosure Statement, Watson
has not issued any shares of Watson Common Stock or Preferred Stock since
September 1, 1996.
(b) Except as set forth in the Watson Disclosure Statement,
each share of outstanding Watson Common Stock is to the knowledge of Watson,
free and clear of all material options, proxies, voting trusts, voting
agreements, judgements, pledges, charges, escrows, rights of first refusal or
first offer. For purposes of this Agreement, the terms "knowledge" or "known to"
when used with respect to any entity means the actual knowledge of the Chairman
of the Board of Directors, President, Chief Executive Officer or any Vice
President of such entity.
(c) Except as set forth in the Watson Disclosure Statement,
there are currently no outstanding, and as of the Closing; there will be no
outstanding (i) securities convertible into or exchangeable for any capital
stock of Watson or any of its Subsidiaries, (ii) options, warrants or other
rights to purchase or subscribe to capital stock of Watson or any of its
Subsidiaries or securities convertible into or exchangeable for capital stock of
Watson or any of its Subsidiaries, or (iii) contracts, commitments, agreements,
understandings, arrangements, calls or claims of any kind relating to the
issuance of any capital stock of Watson or any of its Subsidiaries.
3.9 Material Adverse Change. Since June 30, 1996 to the date of this
Agreement, Watson, Watson Sub and their Subsidiaries, taken as a whole, have not
suffered any change in their businesses, operations, assets, liabilities,
financial condition or prospects which would have a Watson Material Adverse
Effect; provided, that a Watson Material Adverse Effect will not be deemed to
have occurred solely as a result of fluctuations in the value of Watson Common
Stock due to or arising from any public disclosures by Watson (including its 50%
subsidiary, Somerset Pharmaceuticals, Inc.), including, without limitation,
disclosures relating to Watson's entering into any other transactions
(including, without limitation, transactions relating to the acquisition of
assets, stock or merger transactions).
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3.10 Litigation. There is no litigation or proceeding, in law or in
equity, and there are no proceedings or governmental investigations before any
commission or other administrative authority, pending or, to Watson's knowledge,
threatened against Watson, any of its Subsidiaries or any of Watson's or its
Subsidiaries' respective officers, directors or affiliates, with respect to or
affecting Watson's or any of its Subsidiaries' operations, business, products,
sales practices or financial condition, or related to the consummation of the
transactions contemplated hereby, or by the Watson Ancillary Documents or the
Ancillary Documents which, in each case, if conducted with results unfavorable
to Watson or any of its Subsidiaries, would have a Watson Material Adverse
Effect. There are no facts known to Watson which, if known by a potential
claimant or governmental authority, would give rise to a claim or proceeding
which, if asserted or conducted with results unfavorable to Watson or any of its
Subsidiaries, would have a Watson Material Adverse Effect.
3.11 Hearing Notice and Proxy Statement, At the time the notice (the
"Hearing Notice" of the hearing to be held by the California Commissioner of
Corporations to consider the terms, conditions and fairness of the transactions
contemplated hereby (the "Hearing") pursuant to Section 25142 of the Corporate
Securities Law of 1968 of the State of California (the "California Law") shall
be mailed to the Stockholders, and at the time the information statement to be
delivered to the Stockholders in connection with the solicitation of written
consents or the stockholder meeting of the Company to vote on the Merger and the
other transactions contemplated hereby (the "Proxy Statement") shall be
delivered to the Stockholders, and at all times subsequent to such dates up to
and including the date of the stockholder meeting and the Effective Time, such
Hearing Notice, with respect to all information (other than information with
respect to the Company furnished to Watson by the Company for inclusion therein,
as to which no representation or warranty is hereby made) set forth therein, and
such Proxy Statement, with respect to information (including all financial data)
set forth therein with respect to Watson or Watson Sub furnished to the Company
by Watson or Watson Sub for inclusion therein, respectively, will not contain
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements or information
contained therein, in the light of the circumstances under which such statements
are made, not misleading.
3.12 Securities Act Exemption. The Watson Common Stock to be issued
pursuant to this Agreement and the Certificate of Merger will be exempt from the
registration requirements of the Securities Act by virtue of Section 3 (a)(10)
thereunder.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to Watson and Watson Sub that the
statements contained in this Article IV are true and correct, except as set
forth in the disclosure statement delivered by the Company to Watson and Watson
Sub concurrently herewith and identified as the "Disclosure Statement." All
exceptions noted in the Disclosure Statement shall be numbered to correspond to
the applicable sections to which such exception refers.
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4.1. Organization, Standing and Qualification.
The Company is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware; (ii) has all requisite
power and authority to own or lease, and operate its properties and assets, and
to carry on its business as now conducted and as currently proposed to be
conducted except where the failure to have such power and authority would not
have a Company Material Adverse Effect; (iii) is duly qualified or licensed to
do business and is in good standing in all jurisdictions in which it owns or
leases property or in which the conduct of its business requires it to so
qualify or be licensed except where the failure to so qualify would not have a
Company Material Adverse Effect; and (iv) has obtained all licenses, permits,
franchises and other governmental authorizations necessary to the ownership or
operation of its properties or the conduct of its business except where the
failure to have obtained such licenses, permits, franchises or authorizations
would not have a Company Material Adverse Effect.
4.2. Capitalization.
(a) The total authorized capital stock of the Company consists of (i)
30,000,000 shares of common stock, par value $0.001 per share, 1,814,879 shares
of which are issued and outstanding as of the date of this Agreement; (ii)
1,000,000 shares of Series A Preferred Stock, par value $0.001 per share,
500,000 shares of which are issued and outstanding as of the date of this
Agreement; (iii) 2,889,403 shares of Series B Preferred Stock, par value $0.001
per share, 1,418,184 shares of which are issued and outstanding as of the date
of this Agreement; (iv) 3,024,748 shares of Series C Preferred Stock, par value
$0.001 per share, 1,442,906 shares of which are issued and outstanding as of the
date of this Agreement; (v) 7,000,000 shares of Series D Preferred Stock, par
value $0.001 per share, 3,105,888 shares of which are issued and outstanding as
of the date of this Agreement; (vi) 625,000 shares of Series E Preferred Stock,
par value $0.001 per share, 625,000 shares of which are issued and outstanding
as of the date of this Agreement; and (iii) 1,000,000 shares of preferred stock,
none of which are issued and outstanding as of the date of this Agreement. There
are no shares of capital stock of the Company of any other class authorized,
issued or outstanding. As of the date of this Agreement, the Common Stock and
Preferred Stock of the Company are owned of record by the Stockholders in the
amounts set forth on the attached Exhibit A. Each outstanding share of Preferred
Stock is convertible into one share of Company Common Stock.
(b) Except as set forth in the Disclosure Statement, each share of the
outstanding Company Common Stock and Preferred Stock is (i) duly authorized and
validly issued; (ii) fully paid and nonassessable and free of preemptive and
similar rights; and (iii) to the knowledge of the Company, free and clear of all
Claims and restrictions on voting and transfer other than restrictions on
transfer imposed by Federal and state securities laws.
(c) Except as set forth in the Disclosure Statement, there are
currently no outstanding, and, except as set forth in the Disclosure Statement,
as permitted pursuant to Section 5.2, as contemplated by Section 6.3(j) or the
exercise or cancellation of outstanding options in accordance with their terms,
as of the Closing, there will be no outstanding (i) securities convertible into
or exchangeable for any capital stock of the Company, (ii) options, warrants or
other rights to purchase or subscribe to capital
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stock of the Company or securities convertible into or exchangeable for capital
stock of the Company, or (iii) contracts, commitments, agreements,
understandings, arrangements, calls or claims of any kind to which the Company
is a party or is bound relating to the issuance of any capital stock of the
Company. The Disclosure Statement identifies, as of the date hereof, the option
holder, the number of shares subject to each option, the exercise price, the
vesting schedule and the expiration date of each outstanding option or warrant
to purchase capital stock of the Company.
4.3. Ownership Interests. The Company has no Subsidiaries and does not
own any direct or indirect interest in any corporation, joint venture, limited
liability company, partnership, association or other entity. Since January 1,
1990, the Company has not (i) disposed of the capital stock (other than Company
Common Stock and Preferred Stock) or all or substantially all of the assets of
any ongoing business, or (ii) purchased the business and/or all or substantially
all of the assets of another person, firm or corporation (whether by purchase of
stock, assets, merger or otherwise).
4.4. Constituent Documents. True and complete copies of the Certificate
of Incorporation and all amendments thereto, the By-Laws as amended and
currently in force, all stock records, and all corporate minute books and
records of the Company have been furnished or made available by the Company to
Watson for inspection. Said stock records accurately reflect all stock
transactions and the current stock ownership of the Company. The corporate
minute books and records of the Company contain true and complete copies of all
resolutions adopted by the stockholders or the board of directors of the Company
and any other action formally taken by them respectively as such.
4.5. Authorization of Agreement and Other Documents. The execution and
delivery of this Agreement and the other documents executed in connection
herewith to which the Company is a party (collectively, the "Ancillary
Documents"), have been duly authorized by the Board of Directors of the Company
and no other proceedings on the part of the Company or its Stockholders are
necessary to authorize the execution, delivery or performance of this Agreement
or any Ancillary Document, except the approval of the Merger by the
Stockholders. This Agreement is, and, as of the Closing Date, each of the
Ancillary Documents will be, a valid and binding obligation of the Company,
enforceable against the Company in accordance with its terms, except to the
extent that enforcement thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium, fraudulent conveyance or other similar laws
affecting enforcement of creditors' rights generally, and by general principles
of equity (regardless of whether enforcement is considered in a proceeding at
law or in equity).
4.6. No Violation. Neither the execution and delivery of this Agreement
nor the Ancillary Documents by the Company nor the consummation by the Company
of the transactions contemplated hereby and thereby in accordance with their
respective terms, will (a) conflict with or result in a breach of any provisions
of the Certificate of Incorporation or By-Laws of the Company; (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
Company 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,
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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
the Company 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 the Company is a party, or by which the Company or any of its
properties is bound or affected, except for any of the foregoing matters which
would not have a Company 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 the
Company, except for any of the foregoing matters which would not have a Company
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 Company Material Adverse Effect.
4.7. Compliance with Laws--General.
(a) The Company holds all permits, licenses, variances, exemptions,
orders and approvals of any court, arbitral, tribunal, administrative agency or
commissioner or other governmental or other regulatory authority or agency
("Governmental Entities") necessary for the lawful conduct of its business (the
"Permits"), except where the failure to hold such permits would not have a
Company Material Adverse Effect.
(b) The Company is in substantial compliance with the material terms of
its Permits.
(c) The Company is 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) that are applicable to the Company or
affect or relate to this Agreement or the transactions contemplated hereby
,except for any noncompliance that would not have a Company Material Adverse
Effect.
(d) As of the date of this Agreement, and as of the Closing, no
investigation, review, inquiry or proceeding by any Governmental Entity with
respect to the Company is to the knowledge of the Company, pending or
threatened.
(e) The Company currently is not subject to any agreement, contract or
decree with any Governmental Entities arising out of any current or previously
existing violations of any laws, ordinances or regulations applicable to the
Company.
4.8. Compliance with Laws--FDA.
(a) As to each drug of the Company for which an application has been
approved by the Food and Drug Administration (the "FDA"), which drug is
described in the Disclosure Statement, the applicant and all persons performing
operations covered by the application are in substantial
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compliance with 21 U.S.C. Sections 355 or 357, 21 C.F.R. Parts 314 or 430
et. seq., respectively, and all terms and conditions of the application.
(b) As to each biologic product of the Company for which an
establishment license application ("ELA") and/or product license application
("PLA") has been filed, which products are described in the Disclosure
Statement, the applicant and all persons performing operations covered by the
application are in substantial compliance with 42 U.S.C. Section 262, 21 C.F.R.
Part 601 et. seq., and all terms and conditions of the ELA and/or PLA.
(c) The Company is in substantial compliance with all applicable
registration and listing requirements set forth in 21 U.S.C. Section 360 and 21
C.F.R. Part 207.
(d) All manufacturing operations conducted by or, to the knowledge of
the Company, for the benefit of the Company have been and are being conducted in
substantial compliance with the good manufacturing practice regulations set
forth in 21 C.F.R. Parts 210 and 211.
(e) Neither the Company, nor, to the knowledge of the Company, its
officers, employees, or agents have made an untrue statement of material fact or
fraudulent statement to the FDA, failed to disclose a material fact required to
be disclosed to the FDA, or committed an act, made a statement, or failed to
make a statement that could reasonably be expected to provide a basis for the
FDA to invoke its policy respecting "Fraud, Untrue Statements of Material Facts,
Bribery, and Illegal Gratuities," set forth in 56 Fed. Reg 46191 (September 10,
1991).
(f) The Company 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 or issued by the FDA within the
last three years that indicate or suggest lack of compliance with the FDA
regulatory requirements by the Company, or persons covered by product
applications or otherwise performing services for the benefit of the Company.
(g) The Company has not received any written notice that the FDA has
commenced, or threatened to initiate, any action to withdraw its approval or
request the recall of any product of the Company or commenced or threatened to
initiate, any action to enjoin production at any facility owned or used by the
Company or any other facility at which any of the Company's products are
manufactured, processed, packaged, labeled, stored, distributed, tested or
otherwise handled (the "Manufacturing Locations").
(h) As to each article of drug or consumer product currently
manufactured and/or distributed by the Company, which products are described in
the Disclosure Statement, such article is not adulterated or misbranded within
the meaning of the FDCA, 21 U.S.C. Sections 301c et. seq.
(i) As to each drug referred to in (a), the Company, and its officers,
employees, agents and affiliates have included or caused to be included in the
application for such drug, where required, the certification described in 21
U.S.C. Section 335a(k)(l) and the list described in 21 U.S.C. Section
335a(k)(2), and such certification and such list was in each case true and
accurate when made and remained true
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and accurate thereafter.
(j) Neither the Company, nor, to the knowledge of the Company, its
officers, employees, agents or affiliates, has been convicted of any crime or
engaged in any conduct for which debarment is mandated by 21 U.S.C. Section
335a(a) or authorized by 21 U.S.C. Section 335a(b).
(k) As to each application submitted to, but not approved by, the FDA,
and not withdrawn by the Company, or applicants acting on its behalf as of the
date of this Agreement, the Company has complied in all material respects with
the requirements of 21 U.S.C. Sections 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 application.
4.9. Books and Records. The Company's books, accounts and records are,
and have been, in all material respects, maintained in the Company's usual,
regular and ordinary manner, in accordance with GAAP, and all material
transactions to which the Company is or has been a party are properly reflected
therein.
4.10. Financial Statements. (a) The Disclosure Statement contains
complete and accurate copies of the audited balance sheets, statements of income
and stockholders' equity, statements of cash flows and notes to financial
statements (together with any supplementary information thereto) of the Company
as of and for the years ended December 31, 1995, 1994 and 1993. The financial
statements described in the preceding sentence are hereinafter referred to as
the "Financial Statements." The Disclosure Schedule also contains complete and
accurate copies of the unaudited balance sheet, unaudited statement of income
and unaudited statement of cash flows of the Company as of and for the six-month
period ended June 30, 1996. The financial statements described in the preceding
sentence are referred to herein as the "Interim Financial Statements". The
Financial Statements and the Interim Financial Statements present accurately and
completely the financial position of the Company as of the dates thereof
(subject, in the case of the Interim Financial Statements, to normal year-end
audit adjustments) and the results of operations and cash flows of the Company
for the periods covered by said statements, in accordance with GAAP, except that
the Interim Financial Statements do not include footnotes. The Company has
provided to Watson or its counsel complete and correct copies of all attorneys'
responses to audit inquiry letters and all management letters from the Company's
independent certified public accountants for the last five (5) fiscal years of
the Company.
4.11. Accounts Receivables. To the knowledge of the Company, none of
the trade receivables and notes receivable which are reflected on the Financial
Statements, the Interim Financial Statements or which arose subsequent to the
date of the Interim Financial Statements, is or was subject to any counterclaim
or set off. All of such trade receivables arose out of bona fide, arms-length
transactions for the sale of goods or performance of services, and all such
trade receivables and notes receivable are good and collectible (or have been
collected) in the ordinary course of business using normal collection practices
at the aggregate recorded amounts thereof, less the amount of applicable
reserves for doubtful accounts and for allowances and discounts. All such
reserves, allowances and discounts, were and are adequate and materially
consistent in extent with reserves,
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allowances and discounts previously maintained by the Company in the ordinary
course of its business. Since June 30, 1996, there has not been a material
change in the aggregate amount of the Company's aggregate trade receivables or a
material adverse change in the aging thereof. The Company does not have, to a
material extent, any outstanding sales on consignment, sales on approval, sales
on return or guaranteed sales.
4.12. Inventory. All inventory of the Company which is held for sale or
resale, including raw materials, work in process and finished goods
(collectively, "Inventory"), consists of items of a quantity and quality
historically useable and/or saleable in the normal course of business, except
for items of obsolete and slow-moving material and materials which are below
standard quality, all of which have been written down to estimated net
realizable value on an item by item basis. None of such write-downs have had a
Company Material Adverse Effect since June 30, 1996. With the exception of items
of below standard quality which have been written down to their estimated net
realizable value, the Inventory is free from defects in materials and/or
workmanship. All Inventory reflected in the Financial Statements or the Interim
Financial Statements is valued at the lower of cost or market with cost
determined by the first in first out accounting method. Since June 30, 1996,
there has not been a material change in the level of the Inventory. All
Inventory is, and, to the knowledge of the Company, all tools, dies, jigs,
patterns, molds, equipment, supplies and other materials used in the production
of Inventory are, located at the Real Estate, the Leased Premises or the
Manufacturing Locations.
4.13. Bank Accounts. The Disclosure Statement contains a list showing:
(a) the name of each bank, safe deposit company or other financial institution
in which the Company has an account, lock box or safe deposit box; (b) the names
of all persons authorized to draw thereon or to have access thereto and the
names of all persons and entities, if any, holding powers of attorney from the
Company; and (c) all instruments or agreements to which the Company is a party
as an endorser, surety or guarantor, other than checks or other instruments
endorsed for collection or deposit.
4.14. Intellectual Property.
(a) The Disclosure Statement identifies all of the following which are
used in the Company's business and in which the Company claims any ownership
rights: (i) all registered trademarks, service marks, slogans, trade names,
trade dress and the like (collectively with the associated goodwill of each,
"Trademarks"), together with information regarding all registrations and pending
applications to register any such rights; (ii) all common law Trademarks; (iii)
all patents on and pending applications to patent any technology or design; (iv)
all registrations of and applications to register copyrights; and (v) all
licenses or rights in computer software, Trademarks, patents, copyrights,
unpatented formulations, manufacturing methods and other know-how, whether to or
by the Company, other than licenses to commercially available computer software
and other know-how entered into by the Company in the ordinary course of
business. The rights required to be so identified, together with all proprietary
formulation, manufacturing methods, know-how and trade secrets that are material
to the Company's business, are referred to herein collectively as the
"Intellectual Property".
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(b)(i) The Company is the owner of or duly licensed to use each
Trademark and its associated goodwill; (ii) each Trademark registration exists
and has been maintained in good standing; (iii) each patent and application
included in the Intellectual Property exists, is owned by or licensed to the
Company and, to the Company's knowledge, has been maintained in good standing;
(iv) each copyright registration exists and is owned by the Company; (v) to the
Company's knowledge, no other firm, corporation, association or person claims
the right to use in connection with similar or closely related goods and in the
same geographic area, any mark which is identical or confusingly similar to any
of the Trademarks; (vi) the Company has no knowledge of any claim that any third
party asserts ownership rights in any of the Intellectual Property; (vii) the
Company has no knowledge of any claim or knowledge of any facts that would give
the Company any reason to believe that the Company's use of any Intellectual
Property infringes any right of any third party; (viii) the Company has no
knowledge and there are no facts known to the Company that would give the
Company any reason to believe that any third party is infringing on any of the
Company's rights in any of the Intellectual Property; (ix) the Company has no
knowledge and there are no facts known to the Company that would give the
Company any reason to believe that any of its actions has infringed or is
infringing on any third party's Intellectual Property rights; (x) there is no
government restriction or any limitation, domestic or foreign, on the manner in
which any of the Intellectual Property may be used or licensed; and (xi) neither
the Company nor, to the Company's knowledge, any of its shareholders, officers,
directors or employees or former employees has disclosed any confidential
information of the Company except in the ordinary course of business of the
Company or with the authority of the Company.
4.15. Title to Properties. Attached to the Disclosure Statement is a
list and description of each item of real or tangible personal property owned by
the Company which has a net book value in excess of $50,000. The Company (i) has
good, marketable, legal and valid title to such property free and clear of all
liens, claims, encumbrances or security interests (collectively, "Liens"),
except for (A) Liens set forth on the Disclosure Statement and (B) (x)
mechanic's, materialmen's, and similar liens, (y) liens arising under worker's
compensation, unemployment insurance, social security, retirement, and similar
legislation and (z) liens on goods in transit incurred pursuant to documentary
letters of credit; and (ii) enjoys peaceful and undisturbed possession under all
leases to which it is a party as lessee. All of the leases to which the Company
is a party (other than leases for Leased Premises, as defined herein) are legal,
valid and binding obligations of the Company and in full force and effect, and
no default by the Company, or, to the knowledge of the Company, any other party
thereto has occurred or is continuing thereunder. No property or asset used by
the Company in connection with the operation of its business is held under any
lease or under any conditional sale or other title retention agreement. Except
for such assets and facilities as are immaterial to the business of the Company,
all tangible assets and facilities of the Company are in good operating
condition and repair (ordinary wear and tear excepted) and, in the aggregate,
are sufficient to conduct the business of the Company as previously conducted
prior to the date hereof.
4.16. Real Estate.
(a) The Company does not own any real estate, or have the option to
acquire any real estate, other than the premises identified in the Disclosure
Statement (the "Real Estate"). The Disclosure
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Statement accurately sets forth the street addresses and legal descriptions of
the Real Estate. The Company holds fee simple title to the Real Estate, subject
only to real estate taxes not delinquent and to covenants, conditions,
restrictions and easements of record which are set forth in the Disclosure
Statement, none of which makes title to the Real Estate unmarketable and none of
which are violated by the Company or interfere with the Company's use thereof.
The Real Estate is not subject to any leases or tenancies. None of the
improvements comprising the Real Estate or the businesses conducted or proposed
to be conducted by the Company thereon, are in violation of any material use or
occupancy restriction, limitation, condition or covenant of record or any zoning
or building law, code, ordinance or public utility easement or any other
applicable law. No material expenditures are required to be made for the repair
or maintenance of any improvements on the Real Estate or for the Real Estate to
be used for its intended purpose.
(b) The Company does not lease any real estate other than the premises
identified in the Disclosure Statement as being so leased (the "Leased
Premises"). The Leased Premises are leased to the Company, pursuant to written
leases, true, correct and complete copies of which have been provided to Watson
or its counsel. None of the improvements comprising the Leased Premises, or the
businesses conducted or proposed to be conducted by the Company thereon, are in
violation of any building line or use or occupancy restriction, limitation,
condition or covenant of record or any zoning or building law, code or
ordinance, public utility or other easements or other applicable law, except for
violations which do not have a Company Material Adverse Effect or materially
interfere with the conduct of the business of the Company. No material
expenditures are required to be made for the repair or maintenance of any
improvements on the Leased Premises or for the Leased Premises to be used for
its intended purpose. The Company is not in default under any agreement relating
to the Leased Premises nor, to the knowledge of the Company, is any other party
thereto in default thereunder. All options in favor of the Company to purchase
any of the Leased Premises, if any, are in full force and effect.
(c) The Real Estate, the Leased Premises, each facility located on the
Real Estate and the Leased Premises and, to the Company's knowledge, each of the
Manufacturing Facilities are currently served by gas, electricity, water, sewage
and waste disposal and other utilities adequate to operate such Real Estate,
Leased Premises, Manufacturing Facility and/or facility at its current rate of
production, and none of the utility companies serving any such Real Estate,
Leased Premises, any facility and, to the Company's knowledge, each of the
Manufacturing Facilities has threatened the Company with any reduction in
service.
(d) There are no challenges or appeals pending regarding the amount of
the taxes on, or the assessed valuation of, the Real Estate or the Leased
Premises, and no special arrangements or agreements exist with any governmental
authority with respect thereto (the representations and warranties contained in
this Section 4.16(d) shall not be deemed to be breached by any prospective
general increase in real estate tax rates).
(e) There are no condemnation proceedings pending or, to the Company's
knowledge, threatened with respect to any portion of the Real Estate or the
Leased Premises.
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(f) There is no tax assessment (in addition to the normal, annual
general real estate tax assessment) pending or, to the Company's knowledge,
threatened with respect to any portion of the Real Estate or, to the extent the
Company is liable for payment therefor, the Leased Premises.
(g) The buildings and other facilities located on the Real Estate and
the Leased Premises are free of any material latent structural or engineering
defects known to the Company or any material patent structural or engineering
defects.
4.17. Contracts.
(a) The Company is not a party to, or bound by, or the issuer or
beneficiary of, any undischarged written or oral: (i) agreement or arrangement
obligating the Company to pay or receive, or pursuant to which the Company has
previously paid or received, an amount in excess of $75,000; (ii) employment or
consulting agreement or arrangement; (iii) collective bargaining agreement; (iv)
plan or contract or arrangement providing for bonuses, options, deferred
compensation, retirement payments, profit sharing, medical and dental benefits
or the like covering employees of the Company, other than Plans, Welfare Plans
and Employee Benefit Plans (in each case as defined herein) described in the
Disclosure Statement; (v) agreement restricting in any manner the Company's
right to compete with any other person or entity, the Company's right to sell to
or purchase from any other person or entity, the right of any other party to
compete with the Company, or the ability of such person or entity to employ any
of the Company's employees; (vi) agreement between the Company and any of its
affiliates or other Related Parties (as herein defined); (vii) guaranty,
performance, bid or completion bond, or surety or indemnification agreement;
(viii) requirements contract; (ix) loan or credit agreement, pledge agreement,
note, security agreement, mortgage, debenture, indenture, factoring agreement or
letter of credit; (x) agreement for the treatment or disposal of Materials of
Environmental Concern (as defined herein); (xi) power of attorney; (xii)
partnership or joint venture agreement; or (xiii) any other agreement not
entered into in the ordinary course of business. The Company is not currently
negotiating (and has not entered into preliminary discussions with respect to)
any transaction involving an aggregate payment by the Company and/or receipts to
the Company in excess of $250,000.
(b) All agreements, leases, subleases and other instruments referred to
in this Section 4.17, are in full force and binding upon the Company, and, to
the knowledge of the Company, the other parties thereto. The Company is not and,
to the Company's knowledge, none of the other parties thereto are in default of
a material provision under any such agreement, lease, sublease or other
instrument. No event, occurrence or condition exists which, with the lapse of
time, the giving of notice, or both, or the happening of any further event or
condition, would become a default of a material provision under any such
agreement, lease, sublease or other instrument by the Company, or, to the
knowledge of the Company, the other contracting party. The Company has not
released or waived any material right under any such agreement, lease, sublease
or other instrument.
(c) Immediately after the Closing, except as contemplated by this
Agreement, the Company will not be bound by the terms of any stock option
agreement, registration rights agreement, stockholders agreement, management
agreement, consulting agreement or any other agreement
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relating to the equity or management of the Company.
(d) The Company is not a party to, or bound by, any unexpired,
undischarged or unsatisfied written or oral contract, agreement, indenture,
mortgage, debenture, note or other instrument under the terms of which
performance by the Company according to the terms of this Agreement will be a
default of a material provision under or an event of acceleration, or grounds
for termination, or whereby timely performance by the Company of this Agreement
may be prohibited, prevented or delayed.
4.18. Insurance. The Disclosure Statement contains a true and correct
list of all insurance policies which are owned by the Company or which name the
Company as an insured (or loss payee), including without limitation those which
pertain to the Company's assets, employees or operations. All such insurance
policies are in full force and effect and the Company has not received notice of
cancellation of any such insurance policies. In the three (3) year period ending
on the date hereof, the Company has not received any written notice from, or on
behalf of, any insurance carrier relating to or involving an annual increase by
over 10% in insurance rates (except to the extent that insurance risks may be
increased for all similarly situated risks) or non-renewal of a policy, or
requiring or suggesting material alteration of any of the Company's assets,
purchase of additional equipment, or material modification of any of the
Company's methods of doing business. The Company has not made any claim for
reimbursement from its insurance carriers since June 30, 1993.
4.19. Litigation. There is no litigation or proceeding, in law or in
equity, and there are no proceedings or governmental investigations before any
commission or other administrative authority, pending or, to the Company's
knowledge, threatened against the Company, or any of the Company's officers,
directors or affiliates, with respect to or affecting the Company's operations,
business, products, sales practices or financial condition, or related to the
consummation of the transactions contemplated hereby or by the Watson Ancillary
Documents or the Ancillary Documents. There are no facts known to the Company
which, if known by a potential claimant or governmental authority, would give
rise to a claim or proceeding which, if asserted or conducted with results
unfavorable to the Company, would have a Company Material Adverse Effect.
4.20. Warranties. The Company has not made any oral or written
warranties with respect to the quality or absence of defects of its products or
services which it has sold or performed which are in force as of the date hereof
except as are described in the Disclosure Statement. There are no material
claims pending, anticipated or threatened against the Company with respect to
the quality of or absence of defects in such products or services. The
Disclosure Statement sets forth a summary, which is accurate in all material
respects, of all returns of products during the period beginning January 1, 1995
and ending on the date hereof, and all credits and allowances for returned
products given to customers during said period, and said summary contains a
description of any reoccurring product defects (other than returns due to date
expirations). The Company has no knowledge of or reason to believe that the
percentage of products sold and services performed by the Company for which
warranties are presently in effect and for which warranty adjustments can be
expected during unexpired warranty periods which extend beyond the Closing will
be higher than the percentage of such products and services which the Company
has sold and performed for which
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warranty adjustments have been required in the past.
4.21. Products Liability. The Company has not received any written
notice relating to, nor does the Company have knowledge of any facts or
circumstances which could give rise to, any claim involving any product
manufactured, produced, distributed or sold by or on behalf of the Company
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, other than notices or claims that have been
settled or resolved by the Company prior to the date of this Agreement.
4.22. Arbitration. The Company is not a party to, or bound by, any
decree, order or arbitration award (or agreement entered into in any
administrative, judicial or arbitration proceeding with any governmental
authority) with respect to or affecting the properties, assets, personnel or
business activities of the Company.
4.23. Taxes.
(a) As used in this Agreement, (i) the term "Taxes" means all federal,
state, local, foreign and other net income, gross income, gross receipts, sales,
use, ad valorem, transfer, franchise, profits, license, lease, service, service
use, withholding, payroll, employment, excise, severance, stamp, occupation,
premium, property, windfall profits, customs, duties or other taxes, fees,
assessments or charges of any kind whatever of a nature similar to taxes,
together with any interest and any penalties, additions to tax or additional
amounts with respect thereto, and the term "Tax" means any one of the foregoing
Taxes; and (ii) the term "Returns" means all returns, declarations, reports,
statements and other documents required to be filed in respect of Taxes, and the
term "Return" means any one of the foregoing Returns.
(b) There have been properly completed and filed on a timely basis and
in correct form all Returns required to be filed by the Company. As of the time
of filing, the foregoing Returns were correct and complete. An extension of time
within which to file any Return which has not been filed has not been requested
or granted.
(c) With respect to all amounts in respect of Taxes imposed upon the
Company, or for which the Company is or could be liable, whether to taxing
authorities (as, for example, under law) or to other persons or entities (as,
for example, under tax allocation agreements), with respect to all taxable
periods or portions of periods ending on or before the date of the Interim
Financial Statements, all applicable tax laws and agreements have been fully
complied with, and all amounts required to be paid by the Company, to taxing
authorities or others, on or before the date hereof have been paid or fully
reserved for on the Financial Statements or Interim Financial Statements, and
any Taxes accrued but not due and payable as of the date of the Interim
Financial Statements have been accrued or otherwise reserved for in the Interim
Financial Statements. No Taxes have been (or will prior to the Closing Date be)
recorded by the Company other than in the ordinary course of business. There are
no Liens filed against any asset of the Company resulting from the failure to
pay any Tax when due.
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(d) No issues have been raised (and are currently pending) by any
taxing authority in connection with any of the Returns. No waivers of statutes
of limitation with respect to the Returns have been given by the Company (or
with respect to any Return which a taxing authority has asserted should have
been filed by the Company) which waivers are still in effect. The Disclosure
Statement sets forth those years for which examinations have been completed,
those years for which examinations are presently being conducted, and those
years for which required Returns have not yet been filed. All deficiencies
asserted or assessments made as a result of any examinations have been fully
paid, or are fully reflected as a liability in the Financial Statements, or are
being contested and an adequate reserve therefor has been established and is
fully reflected as a liability in the Financial Statements or the Interim
Financial Statements.
(e) The unpaid Taxes of the Company do not exceed the reserve for tax
liability (excluding any reserve for deferred Taxes established to reflect
timing differences between book and tax income) set forth or included in the
Interim Financial Statements, as adjusted for the passage of time through the
Closing.
(f) The Company is not or at any time has been a party to or bound by
(nor will the Company become a party to or bound by) any tax indemnity, tax
sharing or tax allocation agreement.
(g) The Company has never been a member of an affiliated group of
corporations, within the meaning of section 1504 of the Code.
(h) All material elections with respect to Taxes affecting the Company
as of the date hereof that are not reflected in the Company's Returns are set
forth in the Disclosure Statement.
4.24. ERISA Neither the Company nor any corporation or business which
is now or at the relevant time was an affiliate of the Company as determined
under the Code section 414(b), (c), (m) or (o) ("ERISA Affiliate") maintains,
administers, contributes to or has any liability under, or has maintained,
administered, contributed to or had any liability under, nor do the employees of
the Company, or any ERISA Affiliate receive or have any reason to expect to
receive as a condition of employment, benefits pursuant to any: employee pension
benefit plan (as defined in Section 3(2) of ERISA) ("Plan"), including, without
limitation, any multi-employer plan as defined in Section 3(37) of ERISA
("Multi-Employer Plan") or any non-qualified deferred compensation plan or
retirement plan; employee welfare benefit plan (as defined in Section 3(1) of
ERISA) ("Welfare Plan"), including any other plan, program, agreement or
arrangement under which former employees of the Company, or an ERISA Affiliate
(or their beneficiaries) are entitled, or current employees of the Company or an
ERISA Affiliate will be entitled, following termination of employment, to
medical, health or life insurance or other benefits other than pursuant to
benefit continuation rights granted by state or federal law; or bonus, stock,
stock purchase, or stock option plan, severance plan, salary continuation,
vacation, sick leave, fringe benefit, incentive, insurance, welfare or similar
plan or arrangement ("Employee Benefit Plan") other than those Plans, Welfare
Plans and Employee Benefit Plans described in the Disclosure Statement;
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(a) To the knowledge of the Company, all Plans, Welfare Plans and
Employee Benefit Plans and any related trust agreements, insurance contracts or
annuity contracts (or any related trust instruments) comply with and are and
have been operated in accordance with each applicable provision of ERISA, the
Code (including, without limitation, the requirements of Code section 401(a) to
the extent any Plan is intended to conform to that section), other Federal
statutes, state law (including, without limitation, state insurance law) and the
regulations and rules promulgated pursuant thereto or in connection therewith.
Neither the Company nor any ERISA Affiliate has any notice or knowledge of any
violation of any of the foregoing by any Plan, Welfare Plan, or Employee Benefit
Plan. Each Welfare Plan which is a group health plan (within the meaning of
section 5000(b)(1) of the Code) complies with and has been maintained and
operated in accordance with each of the requirements of section 162(k) of the
Code as in effect for years beginning prior to 1989, Section 4980B of the Code
for years beginning after December 31, 1988 and Part 6 of Subtitle B of Title I
of ERISA. A favorable determination as to the qualification under the Code of
each of the Plans which is intended to qualify under section 401 of the Code and
each material amendment thereto has been made by the Internal Revenue Service
("IRS"), each trust funding Welfare Plans or Plans is and has been tax-exempt
and each Plan and related trust agreement remain qualified under the Code.
Future compliance with the requirements of ERISA and the Code as in effect on
the date hereof and any collective bargaining agreements to which the Company or
any ERISA Affiliate is subject or bound will not result in any increase in
benefits under any Plan or any Welfare Plan. All required reports, notices and
descriptions with respect to the Plans, Welfare Plans and Employee Benefit Plans
have been appropriately filed or distributed (including without limitation IRS
Forms 5500 Annual Reports, summary plan descriptions, summary annual reports,
notice to interested parties and any notice of plan amendment which is required
prior to the effectiveness of such amendments) and all required surety bonds
have been properly and timely purchased and maintained. The costs of
administering the Plans, Welfare Plans and Employee Benefit Plans, including
fees for the trustees and other service providers which are customarily paid by
the Company, have been paid or will be paid or accrued on the Company's
financial statements prior to the date hereof.
(b) To the knowledge of the Company, neither any Plan or Welfare Plan
fiduciary nor any Plan or Welfare Plan has engaged in any transaction in
violation of Section 406 of ERISA or any "prohibited transaction" (as defined in
section 4975(c)(1) of the Code) for which a valid exemption is not available.
Neither the Company nor any ERISA Affiliate has failed to make any contributions
or to pay any amounts due and owing to a Plan, Welfare Plan or Employee Benefit
Plan, including, in all cases, Multi-Employer Plans, as required by the terms of
any Plan, Welfare Plan or Employee Benefit Plan, or collective bargaining
agreement or ERISA or any other applicable law. There has been no reduction or
curtailment of accrued benefits with respect to any of the Plans. Full payment
has been made or such amount has been accrued on the Company's financial
statements of all amounts which the Company or any ERISA Affiliate is required
or committed to pay to the Plans as of the date hereof;
(c) True and complete copies of each Plan, Welfare Plan and Employee
Benefit Plan, related trust agreements, insurance contracts, annuity contracts
or other funding vehicles, determination letters, summary plan descriptions,
copies of any pending applications, filings or notices with respect
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to any of the Plans, Welfare Plans or Employee Benefit Plans with the IRS, the
Pension Benefit Guaranty Corporation ("PBGC"), the Department of Labor or any
other governmental agency, copies of all corporate resolutions or other
documents pertaining to the adoption of the Plans, Welfare Plans or Employee
Benefit Plans or any amendments thereto or to the appointment of any fiduciaries
thereunder and copies of any investment management agreements thereunder and of
any fiduciary insurance policies, surety bonds, rules, regulations or policies,
of the trustees or of any committee thereunder, all communications and notices
to employees regarding any Plan, Welfare Plan, or Employee Benefit Plan, annual
reports on Form 5500, Form 990 financial statements and actuarial reports for
the most recent five Plan years, and each plan, agreement, instrument and
commitment referred to herein, have been furnished to Watson and its counsel,
and all such Plans, Welfare Plans, or Employee Benefit Plans are listed on the
Disclosure Statement. All of the foregoing are legally valid, binding, in full
force and effect, and there are no defaults thereunder; and none of the rights
of the Company thereunder will be impaired by this Agreement or the consummation
of the transaction contemplated hereby. The annual reports on Form 5500
furnished to Watson fully and accurately set forth the financial and actuarial
condition of each Plan and each trust funding any Welfare Plan. With respect to
each Plan, Welfare Plan and Employee Benefit Plan, the Disclosure Statement sets
forth the name and address of the administrator and trustees and the policy
number and insurer under all insurance policies;
(d) The aggregate present value of all accrued benefits, both vested
and non-vested, pursuant to each Plan subject to Title IV of ERISA, determined
on the basis of current participation and projected compensation for active
participants, and including the maximum value of all subsidized benefits, and
earnings, set forth in the 1995 actuarial report for the Plan, using PBGC
actuarial assumptions and methods applicable to a defined benefit pension plan
terminating on such date, does not exceed the current fair market value of Plan
assets. None of the Plans, Welfare Plans or Employee Benefit Plans has any
material unfunded liabilities which are not reflected on the Financial
Statements or, in the case of a Plan, on the latest actuarial report issued with
respect to such Plans. None of the Plans is a "top-heavy" plan, as defined in
Section 416 of the Code. The Company does not have plans, programs, arrangements
and has not made any other commitments to its employees, former employees or
their beneficiaries under which it has any obligation to provide any retiree or
other employee benefit payments which are not adequately funded through a trust
or other funding arrangement. There have been no changes in the operation or
interpretation of any of the Plans, Welfare Plans or Employee Benefit Plans
since the most recent annual report or actuarial report which would have any
material effect on the cost of operating or maintaining such Plans, Welfare
Plans or Employee Benefit Plans;
(e) There are no pending or threatened claims, lawsuits or arbitration
asserted or instituted against any of the Plans, Welfare Plans, or Employee
Benefit Plans, other than, in each case, Multi-Employer Plans, or any
fiduciaries thereof, except in the case of Multi-Employer Plans, fiduciaries
that are officers, employees, directors, agents or owners of the Company or
ERISA Affiliates of the Company, with respect to their duties to the Plan,
Welfare Plans or Employee Benefit Plan or the assets of any trusts thereunder,
by any employee or beneficiary covered under any Plans, Welfare Plans or
Employee Benefit Plans or otherwise involving any Plan, Welfare Plan or Employee
Benefit Plan (other than routine claims for benefits); and the Company has no
knowledge of any facts which
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would give rise to or could reasonably be expected to give rise to any such
claims, lawsuits or arbitrations. To the knowledge of the Company, neither the
Company nor any its ERISA Affiliates, nor any of their directors, officers,
employees or any other "fiduciary," as such term in defined in Section 3(21) of
ERISA, has any liability for failure to comply with ERISA or the Code or failure
to act in connection with the administration or investment of any Plan; and
4.25. Labor Matters. Except as set forth in the Disclosure Statement or
for events that occur after the date hereof which are disclosed in writing by
the Company to Watson, (a) there is no labor strike, dispute, slowdown, work
stoppage or lockout pending or, to the knowledge of the Company, threatened
against or affecting the Company and during the past three years, there has not
been any such action; (b) there are no union claims to represent the employees
of the Company, (c) the Company is not a party to or bound by any collective
bargaining or similar agreement with any labor organization, or work rules or
practices agreed to with any labor organization or employee association
applicable to employees of the Company; (d) none of the employees of the Company
are represented by any labor organization and the Company does not have any
knowledge of any current union organizing activities among the employees of the
Company, nor to the knowledge of the Company does any question concerning
representation exist concerning such employees; (e) to the knowledge of the
Company, the Company is, and has at all times been, in material compliance with
all applicable employment laws and practices, including, without limitation, any
such laws relating to employment discrimination, occupational safety and health
and unfair labor practices; (f) there is no unfair labor practice charge or
complaint against the Company pending or, to the knowledge of the Company,
threatened before the National Labor Relations Board or, to the knowledge of the
Company, any charges or complaints, or facts which could give rise to a charge
or complaint, pending or threatened with any Governmental Entity who has
jurisdiction over unlawful employment practices; (g) there is no grievance or
arbitration proceeding arising out of any collective bargaining agreement or
other grievance procedure pending relating to the Company; (h) the Company is
not delinquent in payments to any of its employees for any wages, salaries,
commissions, bonuses or other direct compensation for any services performed by
them to the date of this Agreement or amounts required to be reimbursed to such
employees; (i) upon termination of the employment of any of the employees of the
Company after the Closing, the Company will not be liable to any of its
employees for severance pay; (j) the employment of each of the Company's
employees is terminable at will without cost to the Company except for payments
disclosed on the Disclosure Statement or required under the Plans, Welfare Plans
and Employee Benefit Plans and payment of accrued salaries or wages and vacation
pay; (k) no employee or former employee of the Company has any right to be
rehired by the Company prior to the Company's hiring a person not previously
employed by the Company; and (l) the Disclosure Statement contains a true and
complete list of all employees who are employed by the Company as of June 30,
1996, and said list correctly reflects their salaries, wages, other compensation
(other than benefits under the Plans, Welfare Plans and Employee Benefit Plans),
dates of employment and positions. The Company does not owe any past or present
employee any sum in excess of $50,000 individually or $100,000 in the aggregate
other than for accrued wages or salaries for the current payroll period, and
amounts payable under Plans, Welfare Plans or Employee Benefit Plans. No
employee owes any sum to the Company in excess of $50,000, and all employees
together do not owe the Company in excess of $100,000.
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4.26. Environmental Matters.
(a) The Company and its assets and business are in substantial
compliance with all Environmental Laws and Environmental Permits (as herein
defined) applicable to it. A copy of any notice, citation, inquiry or complaint
which the Company has received in the past three years of any alleged violation
of any Environmental Law or Environmental Permit has been provided to Watson or
its counsel, and all violations alleged in said notices have been or are being
corrected. A description of all such violations currently being corrected is
contained in the Disclosure Statement. The Company possesses all Environmental
Permits which are required for the operation of its business, and is in
substantial compliance with the provisions of all such Environmental Permits.
Copies of all Environmental Permits issued to the Company have been provided or
made available to Watson or its counsel. The Company has delivered to Watson
copies of all environmental reports with respect to the Real Estate and the
Leased Premises in its possession (other than reports prepared by or on behalf
of Watson) which were conducted during the last five years.
(b) The Disclosure Statement sets forth a complete list of all
Materials of Environmental Concern stored, treated, generated, used, transported
or Released (as herein defined) in connection with the operation of the
Company's business. There has been no storage, treatment, generation,
transportation or Release of any Materials of Environmental Concern by the
Company, or, to the knowledge of the Company, by any other person or entity for
which the Company is or may be held responsible, at any Facility (as herein
defined) or any Offsite Facility (as herein defined) in violation of, or which
could give rise to any material obligation under, Environmental Laws.
(c) The Disclosure Statement sets forth a complete list of all
Containers (as herein defined) that are now present at, or have heretofore been
removed from, the Real Estate or the Leased Premises. All Containers which have
been heretofore removed from the Real Estate or the Leased Premises have been
removed substantially in accordance with all applicable Environmental Laws.
(d) For the purposes of this Agreement: (i) "Environmental Laws" means
all federal, state and local statutes, regulations, ordinances, rules,
regulations and policies, all court orders and decrees and arbitration awards,
and the common law, which pertain to environmental matters or contamination of
any type whatsoever. Environmental Laws include, without limitation, those
relating to: manufacture, processing, use, distribution, treatment, storage,
disposal, generation or transportation of Materials of Environmental Concern;
air, surface or ground water or noise pollution; Releases; protection of
wildlife, endangered species, wetlands or natural resources; Containers; health
and safety of employees and other persons; and notification requirements
relating to the foregoing; (ii) "Environmental Permits" means licenses, permits,
registrations, governmental approvals, agreements and consents which are
required under or are issued pursuant to Environmental Laws; (iii) "Materials of
Environmental Concern" means (A) pollutants, contaminants, pesticides,
radioactive substances, solid wastes or hazardous or extremely hazardous,
special, dangerous or toxic wastes, substances, chemicals or materials within
the meaning of any Environmental Law, including without limitation any (i)
"hazardous substance" as defined in CERCLA, and (ii) any "hazardous waste" as
defined in the Resource Conservation and Recovery Act ("RCRA"), 42 U.S.C., Sec.
6902 et. seq.,
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and all amendments thereto and reauthorizations thereof; and (B) even if not
prohibited, limited or regulated by Environmental Laws, all pollutants,
contaminants, hazardous, dangerous or toxic chemical materials, wastes or any
other substances, including without limitation, any industrial process or
pollution control waste (whether or not hazardous within the meaning of RCRA)
which could pose a hazard to the environment or the health and safety of any
person, or impair the use or value of any portion of the Real Estate or the
Leased Premises; (iv) "Release" means any spill, discharge, leak, emission,
escape, injection, dumping, or other release or threatened release of any
Materials of Environmental Concern into the environment, whether or not
notification or reporting to any governmental agency was or is, required,
including without limitation any Release which is subject to CERCLA; (v)
"Facility" means any facility as defined in the Comprehensive Environmental
Response, Compensation and Liability Act, 42 U.S.C. 9601, et. seq., as amended
and reauthorized ("CERCLA"); (vi) "Offsite Facility" means any Facility which is
not presently, and has not heretofore been, owned, leased or occupied by the
Company; and (vii) "Containers" means above-ground and under-ground storage
tanks, vessels and related equipment and containers.
4.27. Interim Conduct of Business. Except as otherwise contemplated by
this Agreement, and as reflected in the Interim Financial Statements, since June
30, 1996, the Company has not:
(a) sold, assigned, leased, exchanged, transferred or otherwise
disposed of any portion of its assets or property, except for sales of Inventory
and cash applied in the payment of the Company's Liabilities in the usual and
ordinary course of business in accordance with the Company's past practices;
(b) written off any asset which has a net book value which exceeds
$50,000 individually or $100,000 in the aggregate in value, or suffered any
casualty, damage, destruction or loss, or interruption in use, of any material
asset, property or portion of Inventory (whether or not covered by insurance),
on account of fire, flood, riot, strike or other hazard or Act of God;
(c) waived any material right arising out of the conduct of, or with
respect to, its business;
(d) made (or committed to make) capital expenditures in an amount which
exceeds $50,000 for any item or $200,000 in the aggregate;
(e) made any change in accounting methods or principles;
(f) borrowed any money or issued any bonds, debentures, notes or other
corporate securities (other than equity securities), including without
limitation, those evidencing borrowed money;
(g) entered into any transaction with, or made any payment to, or
incurred any liability to, any Related Party (as defined herein) in an amount
which exceeds $25,000 or $100,000 in the aggregate (except for payment of salary
and other customary expense reimbursements made in the ordinary course of
business to Related Parties who are employees of the Company);
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(h) increased the compensation payable to any employee, except for
normal pay increases in the ordinary course of business consistent with past
practices;
(i) made any payments or distributions to its employees, officers or
directors except such amounts as constitute currently effective compensation for
services rendered, or reimbursement for reasonable ordinary and necessary
out-of-pocket business expenses;
(j) paid or incurred any management or consulting fees, or engaged any
consultants, except in the ordinary course of business;
(k) hired any employee who has an annual salary in excess of $50,000,
or employees with aggregate annual salaries or wages in excess of $100,000;
(l) terminated any employee having an annual salary or wages in excess
of $50,000 or employees with aggregate annual salaries or wages in excess of
$100,000;
(m) adopted any new Plan, Welfare Plan or Employee Benefit Plan;
(n) issued or sold any securities of any class, except for the grant or
exercise of options to purchase Company Common Stock under the Company Option
Plans;
(o) paid, declared or set aside any dividend or other distribution on
its securities of any class, except as contemplated by this Agreement with
respect to the Preferred Stock, or purchased, exchanged or redeemed any of its
securities of any class; or
(p) without limitation by the enumeration of any of the foregoing,
entered into any transaction other than in the usual and ordinary course of
business in accordance with past practices.
Notwithstanding the foregoing, the Company shall not be deemed to have breached
the terms of this Section 4.27 by entering into this Agreement or by
consummating the transactions contemplated hereby.
4.28. Affiliated Transactions. Since January 1, 1993, the Company has
not been a party to any transactions (other than employee compensation and other
ordinary incidents of employment) in excess of $25,000 individually or $100,000
in the aggregate with a "Related Party". For purposes of this Agreement, the
term "Related Party" shall mean: any present or former officer or director
present 10% stockholder or present affiliate of the Company, any present or
former known spouse, ancestor or descendant of any of the aforementioned persons
or any trust or other similar entity for the benefit of any of the foregoing
persons. No property or interest in any property (including, without limitation,
designs and drawings concerning machinery) which relates to and is or will be
necessary or useful in the present or currently contemplated future operation of
the Company's business, is presently owned by or leased or licensed by or to any
Related Party. Prior to the Closing, all amounts due and owing to or from the
Company by or to any of the Related Parties (excluding employee compensation and
other incidents of employment) shall be paid in full. Except for the
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ownership of securities representing less than a 2% equity interest in various
publicly traded companies, neither the Company, nor to the Company's knowledge,
any Related Party has an interest, directly or indirectly, in any business,
corporate or otherwise, which is in competition with the Company's business.
4.29. Significant Customers, Suppliers, Distributors and Employees. The
Disclosure Statement sets forth an accurate list of the Company's Significant
Customers (as defined herein), Significant Suppliers (as defined herein),
Significant Distributors (as defined herein) and Significant Employees (as
defined herein). The Company has no knowledge of any intention or indication of
intention by a (a) Significant Customer to terminate its business relationship
with the Company or to limit or alter its business relationship with the Company
in any material respect; (b) Significant Supplier to terminate its business
relationship with the Company or to limit or alter its business relationship
with the Company in any material respect; (c) Significant Distributor to
terminate its business relationship with the Company or to limit or alter its
business relationship with the Company in any material respect; or (d)
Significant Employee intends to terminate his employment with the Company. As
used herein, (w) "Significant Customer" means the 10 largest customers of the
Company measured in terms of sales volume in dollars for each of the years ended
December 31, 1995 and 1994, (x) "Significant Supplier" means any supplier of the
Company from whom the Company has purchased $250,000 or more of goods during
either of years ended December 31, 1995 or 1994 for use in the Company's
business; (y) "Significant Distributor" means any distributor that, on the
Company's behalf, has distributed to other distributors, wholesalers, retailers
or end users, the Company's products with a value in excess of $250,000 during
either of years ended December 31, 1995 or 1994; and (z) "Significant Employee"
means the Chief Executive Officer, the President, the Senior Director of
Research and Development, any Vice President, the Director of Field Sales or any
regional sales manager of the Company.
4.30. Material Adverse Change. Since June 30, 1996 to the date of this
Agreement, the Company has not suffered any material adverse change in the
business, operations, assets, liabilities, financial condition or prospects of
the Company.
4.31. Bribes. Neither the Company, nor, to its knowledge, any of its
current officers, directors, employees, agents or representatives has made,
directly or indirectly, with respect to the Company, or its respective business
activities, any bribes or kickbacks, illegal political contributions, payments
from corporate funds not recorded on the books and records of the Company,
payments from corporate funds to governmental officials, in their individual
capacities, for the purpose of affecting their action or the action of the
government they represent, to obtain favorable treatment in securing business or
licenses or to obtain special concessions, or illegal payments from corporate
funds to obtain or retain business.
4.32. Absence of Indemnifiable Claims, etc. There are no pending claims
and, to the knowledge of the Company, no facts that would entitle any director,
officer or employee of the Company to indemnification by the Company under
applicable law, the Certificate of Incorporation or By-laws of the Company or
any insurance policy maintained by the Company.
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4.33. No Undisclosed Liabilities. There are no liabilities of the
Company other than (i) liabilities disclosed or provided for in the Interim
Financial Statements; (ii) liabilities which, individual or in the aggregate,
are not material to the Company; (iii) liabilities under this Agreement (or
contemplated hereby) or disclosed in the Disclosure Statement and (iv)
liabilities incurred since June 30, 1996 in the ordinary course of business and
consistent with past practices.
4.34. No Brokers. The Company has not entered into any contract,
arrangement or understanding with any person or firm which may result in the
obligation of the Company or Watson, Watson Sub or their Subsidiaries to pay any
finder's fee, brokerage or agent's commissions or other like payments in
connection with negotiations leading to this Agreement or the consummation of
the transactions contemplated hereby, except that the Company has retained
Lehman Brothers as its financial advisor, the arrangements with which have been
disclosed in writing to Watson prior to the date hereof.
4.35. Tax Reorganization. The Company has not taken or failed to take
any action which would prevent the Merger from (a) constituting a reorganization
within the meaning of section 368(a) of the Code or (b) being treated as a
"pooling or interests" for accounting purposes.
4.36 Opinion of Financial Advisor. The Company has received the opinion
of Lehman Brothers to the effect that, as of the date hereof, the consideration
to be received by the Company's Stockholders pursuant to the Merger is fair to
such Stockholders from a financial point of view.
4.37. Hearing Notice and Proxy Statement. At the time the Hearing
Notice shall be mailed to the Stockholders, and at the time the Proxy Statement
shall be delivered to the Stockholders, and at all times subsequent to such
dates up to and including the date of the stockholder meeting and the Effective
Time, such Hearing Notice, with respect to information (including all financial
data) set forth therein with respect to the Company furnished to Watson by the
Company for inclusion therein, and such Proxy Statement, with respect to all
information (other than information with respect to Watson or Watson Sub
furnished to the Company by Watson for inclusion therein, as to which no
representation or warranty is hereby made) set forth therein, respectively, will
not contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the statements
or information contained therein, in the light of the circumstances under which
such statements are made, not misleading.
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ARTICLE V
COVENANTS
5.1 Alternative Proposals. Prior to the Effective Time, the Company
agrees (a) except to the extent reasonably required by fiduciary duty
obligations under applicable laws, that it shall not, 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) 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, the Company (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 Watson 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.
5.2 Interim Operations.
(a) During the period from the date of this Agreement and continuing
until the earlier of the termination of this Agreement or the Effective Time,
except as set forth in the Disclosure Statement, unless Watson has consented in
writing thereto (which consent shall not be unreasonably withheld), the Company:
(i) Shall conduct its operations according to its usual,
regular and ordinary course in substantially the same manner as heretofore
conducted;
(ii) To the extent consistent with its business, shall use
commercially reasonable efforts to preserve intact its business organization and
goodwill, keep available the services of its officers and employees and maintain
satisfactory relationships with those persons having business relationships with
it;
(iii) Shall not amend its Certificate of Incorporation or
By-Laws or comparable governing instruments, except as contemplated by this
Agreement;
(iv) Shall promptly notify Watson of any material emergency or
other Company Material Adverse Effect, any material litigation or material
governmental complaints, investigations or hearings (or communications
indicating that the same may be contemplated), or the material breach of any
representation or warranty contained herein;
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(v) 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, except pursuant to the Company Stock Option Plans;
(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 and employees pursuant to (I) the discretionary bonus program of the
Company in an amount not to exceed $500,000 in the aggregate for calendar year
1996; and (II) the sales incentive program of the Company in effect as of the
date hereof; (D) grant any severance or termination package to any employee or
consultant, except to the extent consistent with past practices; (E) hire any
new employee who shall have, or terminate the employment of any employee who
has, an annual salary in excess of $75,000; or (F) 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;
(vi) 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, or make any
commitment for any such action;
(vii) Shall not enter into any agreement or transaction, or
agree to enter into any agreement or transaction, outside the ordinary course of
business, including, without limitation, any transaction involving a merger,
consolidation, joint venture, license agreement partial or complete liquidation
or dissolution, reorganization, recapitalization, restructuring or a purchase,
sale, lease or other disposition of a material portion of assets or capital
stock;
(viii) Shall 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 (i) in the
ordinary course of its business consistent with past practices, but in no event
in an amount exceeding $50,000 individually or $100,000 in the aggregate (other
than normal expenditures for the purchase of raw materials or other supplies) or
(ii) pursuant to the Company's bank line of credit in the ordinary course of
business consistent with past practices;
(ix) Shall not make any loans, advances or capital
contributions to, or investments in, any other Person (except for loans to
employees made in connection with the purchase of Company Common Stock under
existing option agreements and advances of expenses made to employees in the
ordinary course of business);
(x) Except as described in the Disclosure Statement, shall not
make or commit to made any capital expenditures in excess of $50,000
individually or $100,000 in the aggregate;
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(xi) Shall 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 or Related Party
of the Company or enter into any transaction with any affiliate or Related Party
of the Company (except for payment of salary and other customary expense
reimbursements made in the ordinary course of business to Related Parties who
are employees of the Company);
(xii) Shall not alter the manner of keeping its books,
accounts or records, or change in any manner the accounting practices therein
reflected;
(xiii) Shall 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 Liens for taxes not currently due; and
(xiv) Shall maintain insurance on its tangible assets and its
businesses in such amounts and against such risks and losses as are currently in
effect.
(b) Prior to the Effective Time, unless the Company has consented in
writing thereto (which consent shall not be unreasonably withheld), Watson:
(i) Shall conduct its operations according to its usual,
regular and ordinary course in substantially the same manner as heretofore
conducted (except for entering into transactions described in 5.2(b)(iv) below);
(ii) Shall promptly deliver to the Company true and correct
copies of any report, statement or schedule filed with the SEC subsequent to the
date of this Agreement;
(iii) Shall promptly notify the Company of any material
emergency or other Watson Material Adverse Effect, any material litigation or
material governmental complaints, investigations or hearings (or communications
indicating that the same may be contemplated), or the material breach of any
representation or warranty contained herein;
(iii) Shall not amend its Articles of Incorporation or
By-laws;
(iv) Shall promptly notify the Company of its entering into
any agreement with respect to any material transaction involving a merger,
consolidation, joint venture, partial or complete liquidation or dissolution,
reorganization or recapitalization, restructuring or a purchase, sale, lease or
other disposition of a material portion of assets or capital stock; and
(v) Shall not take any action that would result in a failure
to maintain the trading of Watson Common Stock on the Nasdaq National Market.
5.3 Meetings of Stockholders. The Company will take all action
necessary in accordance with applicable law and its Certificate of Incorporation
and By-Laws to convene a meeting of its Stockholders to consider and vote upon
the approval of this Agreement and the transactions
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contemplated hereby. It is contemplated that such Stockholder meeting will take
place on or about November 26, 1996 or as soon as practicable thereafter. Watson
will prepare as promptly as practicable in conjunction with the Company an
Application for Permit and Request for Hearing pursuant to Sections 25121 and
25142 of the California Law, including a proposed Hearing Notice for use by the
California Commissioner of Corporations in connection with the Hearing, and the
Company shall prepare an information statement for use in connection with such
Application and such Stockholder meeting. Neither the Company nor Watson shall
distribute or use such Hearing Notice or Proxy Statement other than for internal
review unless the other party shall have consented in writing to the information
set forth in such document relating to it. The Proxy Statement shall include the
recommendation of the Board of Directors of the Company in favor of the Merger
which shall not be changed unless the Board of Directors of the Company, upon
receipt of a written opinion from its outside counsel following receipt of a
written proposal or offer for an acquisition, shall determine that failure so to
change its recommendation would constitute a breach of the Board's fiduciary
duty under applicable law. The Company shall use its best efforts to solicit
from stockholders of the Company proxies or written consents in favor of the
Merger and shall take all other action necessary or advisable to secure the vote
or consent of its Stockholders required by Delaware Law to effect the Merger.
5.4 Filings; Other Action. Subject to the terms and conditions herein
provided, the Company 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; (c) use commercially reasonable efforts to obtain all
consents under or with respect to, any contract, lease, agreement, purchase
order, sales order or other instrument, Permit or Environmental Permit, where
the consummation of the transactions contemplated hereby would be prohibited or
constitute an event of default, or grounds for acceleration or termination, in
the absence of such consent; and (d) take, or cause to be taken, all other
commercially reasonable actions as are reasonably 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
commercially reasonable action is necessary or desirable to carry out the
purpose of this Agreement, the proper officers and directors of Watson and the
Surviving Corporation shall take all such necessary action.
5.5 Inspection of Records. From the date hereof to the Effective Time,
the Company shall (a) allow all designated officers, attorneys, accountants and
other representatives of Watson 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 otherwise pertaining to the business and affairs of the Company;
(b) furnish to Watson, its 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
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employees, counsel and financial advisors of the Company to cooperate with
Watson and its investigation of the business of the Company. From the date
hereof to the Effective Time, Watson shall (a) furnish to the Company, its
counsel, financial advisors, auditors and other authorized representative such
financial and operating data and other information as such persons may
reasonably request, and (b) instruct the officers, counsel and financial
advisors of Watson to cooperate with the Company in its investigation of the
business of Watson or its Subsidiaries. All information disclosed by the Company
to Watson and its representatives or by Watson to the Company and its
representatives shall be subject to the terms of that certain Non-Disclosure
Agreement (the "Confidentiality Agreement") dated as of April 18, 1996 between
Watson and the Company.
5.6 Publicity. Neither party hereto shall make any press release or
public announcement with respect to this Agreement, the Merger or the
transactions 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.
5.7 Fairness Hearing. Pursuant to Section 25142 of the California Law,
as soon as practicable after the date hereof, Watson and the Company shall
submit an application for a permit (the "Exemption Permit") with the
Commissioner of Corporations of the State of California to allow Watson to issue
the shares of Watson Common Stock pursuant to the terms of this Agreement in
compliance with Section 3(a)(10) of the Securities Act and the California
Securities Laws.
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.
5.9 Affiliate Letters. At least 30 days prior to the Closing Date, the
Company shall deliver to Watson a list of names and addresses of those persons
who were or will be, in the Company's reasonable judgment, at the record date
for its Stockholders' meeting to approve the Merger, "affiliates" (each such
person, an "Affiliate") of the Company within the meaning of Rule 145 of the
rules and regulations promulgated under the Securities Act. The Company shall
provide Watson such information and documents as Watson shall reasonably request
for purposes of reviewing such list. The Company shall deliver or cause to be
delivered to Watson, prior to the Closing Date, from each of the Affiliates of
the Company identified in the foregoing list, an Affiliate Letter in
substantially the form attached hereto as Exhibit E. 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.
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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 incurring such expenses except as
expressly provided herein.
5.11 Tax Treatment of Merger. From and after the date hereof and until
the Effective Time, neither Watson nor the Company nor any of their respective
Subsidiaries or other affiliates shall knowingly take any action, or knowingly
fail to take any action, that would jeopardize qualification of the Merger as
(a) a reorganization within the meaning of Section 368(a) of the Code; (b) a
"pooling of interests" for accounting purposes; or (c) enter into any contract,
agreement, commitment or arrangement with respect to the foregoing. After the
Effective Time, Watson shall not take or fail to take (and shall cause the
Surviving Corporation not to take or fail to take) any action that is reasonably
likely to jeopardize qualification of the Merger as a reorganization within the
meaning of Section 368(a) of the Code.
5.12 Employee Benefit Plans. Watson covenants and agrees that it will
continue the Company's existing benefit plans and arrangements for a period of
at least six months following the Effective Date. Thereafter, to the extent the
existing benefit plans and arrangements provided by the Company to its employees
are terminated, such employees who remain employees of the Surviving Corporation
shall be entitled to participate in all benefit plans and arrangements that are
available and subsequently become available to Watson's employees on the same
basis as Watson's employees in similar positions are eligible to participate.
For purposes of satisfying the terms and conditions of such plans, Watson shall
give full credit for eligibility, vesting or benefit accrual for each
participant's period of service with the Company prior to the Effective Time;
provided, that the benefit plans and arrangements to be provided to Glenn A.
Oclassen, Terry L. Johnson and Anthony A. DiTonno shall be determined pursuant
to the terms of their respective employment agreement with the Surviving
Corporation. To the extent Watson's benefit plans provide medical or dental
welfare benefits after the Closing 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 Closing Date shall be
taken into account under Watson's benefit plans for purposes of satisfying the
applicable deductible, coinsurance and maximum out-of-pocket provisions for such
employees and their covered dependents.
5.13 Company Bonus and 401 (k) Plan. Following the Closing, Watson
agrees to make the bonus payments which were declared by the Board of Directors
of the Company for calendar year 1996 pursuant to the Company's discretionary
bonus program in an amount not to exceed $500,000 less the aggregate amount paid
by the Company under such program pursuant to Section 5.2(a)(v)(C)(I) hereof
plus amounts payable pursuant to the Company's sales incentive program for
calendar year 1996 less any amounts paid under such program prior to Closing.
Watson covenants to make all matching contribution payments to the Company' s
employee retirement savings plan (the "401(k) Plan") for the 1996 fiscal year up
to an amount equal to $1,500 per employee.
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ARTICLE VI
CONDITIONS
6.1 Conditions to Each Party's Obligation to Effect the Merger. The
respective obligations 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 (unless waived by each of the parties hereto in accordance with the
provisions of Section 8.6 hereof):
(a) The waiting period applicable to the consummation of the Merger
under the HSR Act shall have expired or been terminated.
(b) No preliminary or permanent 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 this Agreement shall have been
issued and remain in effect. 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.
(c) The Commissioner of Corporations of the State of California shall
have issued the Exemption Permit, and all necessary approvals under other state
securities laws relating to the issuance or trading of the Watson Common Stock
to be issued to the Stockholders in connection with the Merger shall have been
received.
(d) All material 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.
(e) The Watson Common Stock to be issued to the Stockholders in
connection with the Merger shall have been authorized for trading on the Nasdaq
National Market.
(f) Watson, the Stockholders Agent and the Escrow Agent shall have
entered into the Escrow Agreement.
(g) At least ninety-five percent (95%) of the aggregate number of
outstanding shares of Preferred Stock shall have been voluntarily converted into
shares of Company Common Stock prior to the Effective Time.
(h) Watson shall have received the opinion of D'Ancona & Pflaum,
counsel to Watson, 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 the Company and Watson will each be a
party to that reorganization within the meaning of Section 368(b) of the Code.
In rendering such opinion, counsel shall be entitled to rely upon, among other
things, reasonable
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assumptions as well as representations and covenants of Watson, Watson Sub, the
Company and certain stockholders of the Company.
(i) The Company shall have received the opinion of Venture Law Group, A
Professional Corporation, counsel to the Company, 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 the
Company and Watson will each be a party to that reorganization within the
meaning of Section 368(b) of the Code. In rendering such opinion, counsel shall
be entitled to rely upon, among other things, reasonable assumptions as well as
representations and covenants of Watson, Watson Sub, the Company and certain
stockholders of the Company.
(j) Watson shall have received the opinion of Price Waterhouse, dated
the Closing Date, to the effect that the Merger will be treated as a "pooling of
interests" for accounting purposes.
(k) The Company shall have received from Arthur Andersen LLP a letter,
dated the Closing Date, indicating that the Company has not taken any action
that would preclude it from entering into a transaction that would be treated as
a "pooling of interests" for accounting purposes.
(l) This Agreement and the Merger and other transactions contemplated
hereby shall have been approved and adopted by the requisite vote of the
Stockholders.
(m) Glenn A. Oclassen, Terry L. Johnson and Anthony A. DiTonno shall
have entered into an Employment Agreement in substantially the form attached
hereto as Exhibit F, G and H.
6.2 Conditions to Obligation of the Company to Effect the Merger. The
obligation of the Company to effect the Merger shall be subject to the
fulfillment at or prior to the Closing Date of the following conditions (unless
waived by the Company in accordance with the provisions of Section 8.6 hereof):
(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 the Company shall have received a certificate of
the Chairman or President of Watson, dated the Closing Date, certifying to such
effect.
(b) The representations and warranties of Watson and Watson Sub
contained in this Agreement and in any document delivered in connection herewith
shall be true and correct as of the Closing in all material respects, and the
Company shall have received a certificate of the Chairman or President of
Watson, dated the Closing Date, certifying to such effect.
(c) The Company shall have received from Watson certified copies of the
resolutions of Watson's and Watson Sub's Boards of Directors approving and
adopting this Agreement, the Watson Ancillary Documents and the transactions
contemplated hereby and thereby.
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(d) The Company shall have received the opinion of D'Ancona & Pflaum to
such matters as the Company or the Company's counsel shall reasonably request.
(e) From the date of this Agreement through the Effective Time, there
shall not have occurred any event that would have or would be reasonably likely
to have a material adverse effect in the financial condition, business,
operations or prospects of Watson and its Subsidiaries, taken as a whole;
provided, that such an event will not be deemed to have occurred solely as a
result of fluctuations in the value of Watson Common Stock due to or arising
from any public disclosures by Watson (including its 50% subsidiary, Somerset
Pharmaceuticals, Inc.), including, without limitation, disclosures relating to
Watson's entering into any other transactions (including, without limitation,
transactions relating to the acquisition of assets, stock or merger
transactions).
(f) Watson and Watson Sub shall have executed and delivered such other
documents and taken such other actions as the Company shall reasonably request.
6.3 Conditions to Obligation of Watson and Watson Sub to Effect the
Merger. The obligations of Watson and Watson Sub to effect the Merger shall be
subject to the fulfillment at or prior to the Closing Date of the following
conditions (unless waived by the Company in accordance with the provisions of
Section 8.6 hereof):
(a) The Company shall have performed, in all material respects, all of
its agreements contained herein that are required to be performed by the Company
on or prior to the Closing Date, and Watson shall have received a certificate of
the Chairman or President of the Company, dated the Closing Date, certifying to
such effect.
(b) The representations and warranties of the Company contained in this
Agreement and in any document delivered in connection herewith shall be true and
correct as of the Closing in all material respects, and Watson shall have
received a certificate of the Chairman or President of the Company, dated the
Closing Date, certifying to such effect.
(c) Watson shall have received from the Company certified copies of the
resolutions of the Company's Board of Directors and Stockholders approving and
adopting this Agreement, the Ancillary Documents and the transactions
contemplated hereby and thereby.
(d) Watson shall have received the opinion of Venture Law Group, A
Professional Corporation, to such matters as Watson or Watson's counsel shall
reasonably request.
(e) From the date of this Agreement through the Effective Time, there
shall not have occurred any event that would have or would be reasonably likely
to have a material adverse effect in the financial condition, business,
operations or prospects of the Company.
(f) The holders of not more than five percent (5%) of the outstanding
aggregate value of the Company Common Stock and Preferred Stock (valued based
upon the number of shares of Watson Common Stock such holders would have
received upon the consummation of the Merger
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pursuant to Section 1.4 hereof) shall have perfected dissenters' rights under
applicable law.
(g) The Company shall have received all necessary consents with respect
to any contract, lease, purchase order, sales order, license agreement, Permit,
Environmental Permit and license which are required as a result of a change of
control of the Company except in those instances where failure to receive any
such consent would not have a Company Material Adverse Effect.
(i) The Certificate of Incorporation of the Company shall have been
amended in the form attached hereto as Exhibit I.
(j) The warrants to purchase shares of Company Preferred Stock held by
Sloan-Kettering Institute for Cancer Research and Glenn A. Oclassen shall have
been exercised or terminated prior to the Effective Time and shall be of no
further force and effect.
(k) The Company shall have executed and delivered such other documents
and taken such other actions as Watson shall reasonably request.
ARTICLE VII
INDEMNIFICATION
7.1 General. From and after the Closing, the parties shall indemnify
each other as provided in this Article VII. For the purposes of this Article
VII, each party shall be deemed to have remade all of its representations and
warranties contained in this Agreement at the Closing with the same effect as if
originally made at the Closing; provided, however, that the Watson Disclosure
Statement and the Disclosure Statement may be updated at the Closing by Watson
or the Company, as the case may be, and no indemnity shall be provided hereunder
with respect to the matters set forth therein except for anything contained in
the Company Disclosure Statement regarding the Labor-Related Proceedings with
respect to Bobby Crawford as described in Section 4.19 of the Company Disclosure
Statement. No disclosure contained in the updated Watson Disclosure Statement or
the Disclosure Statement, as the case may be, shall be deemed a waiver of
Watson's or the Company's representations and warranties made on the date hereof
with respect to the conditions to closing set forth in Sections 6.2(b) and
6.3(c) hereof; provided, however, that any updates contained in the Watson
Disclosure Statement or the Disclosure Statement that were permitted pursuant to
Section 5.2 hereof shall not give either party the right to terminate this
Agreement pursuant to Article VIII hereof.
7.2 Certain Definitions. As used in this Article VII, the following
terms shall have the indicated meanings:
(a) "Damages" shall mean all liabilities, assessments, levies,
losses, fines, penalties, damages, costs and expenses, including, without
limitation, reasonable fees and expenses of attorneys,
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accountants and other professionals, actually sustained or incurred by an
Indemnified Party in connection with the defense or investigation of any claim
(after giving effect to any insurance proceeds actually received by an
Indemnified Party and it being understood that to the extent any such Damages
have been reserved for by the Company on the Financial Statements or the Interim
Financial Statements in accordance with GAAP, the amount of such reserve shall
be deducted from the Damages sustained by a Watson Indemnitee).
(b) "Indemnified Party" shall mean a party hereto who is
entitled to indemnification from another party hereto pursuant to this Article
VII.
(c) "Indemnifying Party" shall mean a party hereto who is
required to provide indemnification under this Article VII to another party
hereto.
(d) "Third Party Claims" shall mean any claims for Damages
which are asserted or threatened by a party other than the parties hereto, their
successors and permitted assigns, against any Indemnified Party or to which an
Indemnified Party is subject.
7.3 The Stockholder's Indemnification Obligations. Each of the
Stockholders shall jointly and severally indemnify, save and keep Watson, Watson
Sub, the Surviving Corporation, each of their respective Subsidiaries and their
respective successors and permitted assigns (each a "Watson Indemnitee" and
collectively the "Watson Indemnitees") harmless against and from all Damages
sustained or incurred by any Watson Indemnitee, as a result of or arising out
of: (a) any inaccuracy in or breach of any representation and warranty made by
the Company to Watson herein or in any Ancillary Document; and (b) any breach by
the Company, or the Stockholders' Agent of, or failure of the Company, or the
Stockholders' Agent to comply with, any of the covenants or obligations under
this Agreement or the Ancillary Documents to be performed by the Company, or the
Stockholders' Agent (including without limitation the Stockholders' obligations
under this Article VII).
7.4 Watson's Indemnification Obligations. Watson shall indemnify, save
and keep the Stockholders and their respective successors and permitted assigns
("Seller Indemnitees"), forever harmless against and from all Damages sustained
or incurred by any Seller Indemnitee, as a result of or arising out of: (a) any
inaccuracy in or breach of any representation and warranty made by Watson or
Watson Sub to the Company herein or in any Watson Ancillary Document; and (b)
any breach by Watson or Watson Sub of, or failure by Watson or Watson Sub to
comply with, any of the covenants or obligations under this Agreement or the
Watson Ancillary Documents to be performed by Watson or Watson Sub (including
without limitation its obligations under this Article VII).
7.5 Limitation on Indemnification Obligations.
(a) All representations and warranties contained in this
Agreement shall survive the Closing for a period of twelve months from the
Effective Date (the "Survival Period"). A claim by a Watson Indemnitee or a
Seller Indemnitee for indemnification under this Article VII must be asserted
within the Survival Period.
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(b) Notwithstanding anything to the contrary contained herein,
(i) the Watson Indemnitees shall only be entitled to indemnification pursuant to
Section 7.3 hereof once the Watson Indemnitees' aggregate claims for
indemnification exceed $600,000.00, but after such claims exceed such amount,
the Watson Indemnitees shall be entitled to seek indemnification for all
indemnification claims from the first dollar of Damages; and (ii) the
indemnification obligations of the Stockholders pursuant to Section 7.3 hereof
shall be limited to the amount deposited by the Stockholders into the Escrow and
the Watson Indemnitees shall not be entitled to pursue any claims for
indemnification against the Stockholders directly or personally and the sole
recourse of the Watson Indemnitees shall be to make claims against the Escrow in
accordance with the terms of the Escrow Agreement. Notwithstanding anything to
the contrary contained herein, for purposes of determining the amount of Damages
incurred by a Watson Indemnitee pursuant to Section 7.3 hereof, the Company's
representations and warranties contained herein shall be read without regard to
the Company's disclosure relating to the Labor-Related Proceedings with respect
to Bobby Crawford as described in Section 4.19 of the Company Disclosure
Schedule.
(c) Notwithstanding anything to the contrary contained herein,
(i) the Seller Indemnitees shall only be entitled to indemnification pursuant to
Section 7.4 hereof once the Seller Indemnitees' aggregate claims for
indemnification exceed $600,000, but after such claims exceed such amount, the
Seller Indemnitees shall be entitled to seek indemnification for all
indemnification claims from the first dollar of Damages; and (ii) the
indemnification obligations of Watson pursuant to Section 7.4 hereof shall be
limited to an amount equal to $10,125,000 in the aggregate.
7.6 Cooperation. Subject to the provisions of Section 7.8, the
Indemnifying Party shall have the right, at its own expense, to participate in
the defense of any Third Party Claim, and if said right is exercised, the
parties shall cooperate in the investigation and defense of said Third Party
Claim.
7.7 Subrogation. The Indemnifying Party shall not be entitled to
require that any action be brought against any other person before action is
brought against it hereunder by the Indemnified Party and shall not be
subrogated to any right of action until it has paid in full or successfully
defended against the Third Party Claim for which indemnification is sought.
7.8 Indemnification Claims Procedures.
(a) Promptly following the receipt of notice by the Watson
Indemnitees of a Third Party Claim which the Watson Indemnitees believe may
result in a demand against the Escrow, Watson shall notify the Stockholder Agent
of such claim in accordance with the provisions of the Escrow Agreement.
Promptly following the receipt by the Stockholder Indemnitees of notice of a
Third Party Claim which the Stockholder Indemnitees believe may result in a
demand for indemnification pursuant to Section 7.4 hereof, the Stockholder Agent
shall notify Watson of such claim. The party receiving the notice of the Third
Party Claim shall notify the other party hereto of such Third Party Claim. The
failure to give such notice shall not relieve the Indemnifying Party of its
obligations under this Agreement except to the extent that the Indemnifying
Party is substantially prejudiced as a result of the failure to give such
notice. Within fifteen (15) business days after receipt
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of the notice by the Indemnifying Party pursuant to the preceding sentence, the
Indemnifying Party shall notify the Indemnified Party whether it elects to
control the defense of the Third Party Claim. If the Indemnifying Party elects
to undertake the defense of such Third Party Claim, it shall do so at its own
expense with counsel of its own choosing and it shall acknowledge in writing
without qualification its indemnification obligations as provided in this
Agreement to the Indemnified Party as to such Third Party Claim. If the
Indemnifying Party elects not to defend the Third Party Claim or fails to pursue
such Third Party Claim diligently, the Indemnified Party shall have the right to
undertake, conduct and control the defense of such Third Party Claim through
counsel of its own choosing. The party that litigates or contests the Third
Party Claim shall keep the other party fully advised of the progress and
disposition of such claim.
(b) In the event the Indemnifying Party elects not to undertake the
defense of the Third Party Claim or fails to pursue diligently the defense of
such a claim and the Indemnified Party litigates or otherwise contests or
settles the Third Party Claim, then, provided that a final determination has
been made that the Indemnified Party is entitled to indemnification hereunder,
the Indemnifying Party shall promptly reimburse the Indemnified Party for all
amounts paid to settle such claim or all amounts paid in satisfaction of a
judgment against the Indemnified Party in contesting such claim and in providing
its right to indemnification hereunder, all in accordance with the provisions of
this Article VII. Notwithstanding the foregoing, no settlement of any Third
Party Claim without the prior written consent of the Indemnifying Party shall be
determinative of the validity of any claim that the Indemnified Party is
entitled to indemnification hereunder.
(c) No Third Party Claim will be settled by the Indemnifying Party
without the prior written consent of the Indemnified Party, which consent will
not be unreasonably withheld; provided, however, that if such claim asserts that
the Indemnifying Party is jointly and severally liable and the Indemnified Party
shall be fully released from all liability relating to such Third Party Claim in
connection with such settlement, the Indemnifying Party shall not be required to
obtain the consent of the Indemnified Party. If, however, the Indemnified Party
refuses to consent to a bona fide offered settlement which the Indemnifying
Party wishes to accept, the Indemnified Party may continue to pursue such Third
Party Claim free of any participation by the Indemnifying Party, at the sole
expense of the Indemnified Party. In such event, the Indemnifying Party shall
pay to the Indemnified Party the amount of the offer of settlement which the
Indemnified Party refused to accept, plus the costs and expenses incurred by the
Indemnified Party prior to the date the Indemnifying Party notifies the
Indemnified Party of the offer of settlement, all in accordance with the terms
of this Article VII, and, upon the payment or receipt of such amount, as the
case may be, the Indemnifying Party shall have no further liability with respect
to such Third Party Claim. The Indemnifying Party shall be entitled to recover
from the Indemnified Party any additional expenses incurred by such Indemnifying
Party as a result of the decision of the Indemnified Party to pursue the matter.
7.9 Stockholder Agent.
(a) In the event that the Merger is approved, effective upon such vote,
and without further act of any Stockholder, a committee (the "Committee"")
consisting of Russell Maddox and Kirk Raab shall be appointed as agents and
attorneys-in-fact (collectively, the "Stockholder Agent") for each
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Stockholder (except such Stockholders, if any, as shall have perfected their
dissenter rights under applicable law). The Stockholder Agent, for and on behalf
of Stockholders, shall have the power to take any and all actions required to be
taken by the Stockholders pursuant to this Agreement or the Escrow Agreement,
including, without limitation, the power to give and receive notes and
communications, to enter into and perform the Escrow Agreement, to make claims
for indemnification against Watson, to authorize delivery to Watson of Watson
Common Stock or other property from the Escrow Fund in satisfaction of claims by
Watson, to object to such deliveries, to agree to negotiate, enter into
settlements and compromises of, and demand arbitration and comply with orders of
courts and awards of arbitrators with respect to such claims, and to take all
actions necessary appropriate or in the judgment of Stockholder Agent for the
accomplishment of the foregoing. The Stockholder Agent shall act by unanimous
vote or unanimous written action or consent of the members of the Committee.
Effective upon the approval of this Agreement by the Stockholders, the
Stockholders individually shall have no power or authority to take any actions
against Watson or otherwise pursuant to this Agreement or the Escrow Agreement,
and all actions of the Stockholders, whether pursuant to this Agreement or the
Escrow Agreement, must be taken solely by the Stockholder Agent.
(b) Watson shall have no liability of any kind to any Stockholder as a
result of or arising out of any action taken or not taken by the Stockholder
Agent at any time under this Agreement or the Escrow Agreement and each
Stockholder hereby releases Watson from any such liability. Watson may
conclusively rely, without any obligation of investigation or inquiry of any
kind, on any action taken by the Stockholder Agent as having been fully
authorized and approved by all necessary action by each Stockholder (except such
Stockholders, if any, as shall have perfected their dissenter rights under
applicable law).
ARTICLE VIII
TERMINATION
8.1 Termination by Mutual Consent. This Agreement may be terminated and
the Merger may be abandoned at any time prior to the Effective Time by the
mutual written consent of Watson and the Company.
8.2 Termination by Either Watson or the Company. This Agreement may be
terminated and the Merger may be abandoned by action of the Board of Directors
of either Watson or the Company if (a) the Merger shall not have been
consummated on or prior to (i) December 31, 1996; or (ii) if, as of December 1,
1996, the Commissioner of Corporations of the State of California has not yet
held the fairness hearing as described in Section 5.7 hereof, January 31, 1997;
provided, however, that the right to terminate this Agreement under this Section
8.2(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 the
Stockholders shall not have been obtained at a meeting duly convened therefor or
at any adjournment thereof; provided, however,
48
<PAGE> 184
that the Company shall not have the right to terminate this Agreement under this
Section 8.2(b) if the Company caused (directly or indirectly) or aided in the
failure to obtain such approval; or (c) 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, Watson Sub or the
Surviving Corporation to dispose of or hold separate all or a material portion
of the respective businesses or assets of Watson, the Company or their
respective Subsidiaries, and such order, decree, ruling or other action shall
have become final and non-appealable.
8.3 Termination by the Company. This Agreement may be terminated and
the Merger may be abandoned at any time prior to the Effective Time by action of
the Board of Directors of the Company, if there has been a material breach by
Watson or Watson Sub of any representation, warranty, covenant or agreement 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 the Company to Watson.
8.4 Termination by Watson. This Agreement may be terminated and the
Merger may be abandoned at any time prior to the Effective Time by action of the
Board of Directors of Watson, if there has been a material breach by the Company
of any representation, warranty, covenant or agreement set forth in this
Agreement on the part of the Company, 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 the Company.
8.5 Effect of Termination and Abandonment. In the event of termination
of this Agreement and the abandonment of the Merger pursuant to this Article 8,
all obligations of the parties hereto shall terminate, except the obligations of
the parties pursuant to Sections 5.10, which obligations shall survive the
termination of this Agreement.
8.6 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.
49
<PAGE> 185
ARTICLE IX
GENERAL PROVISIONS
9.1 Notices. All notices required or permitted to be given hereunder
shall be in writing and may be delivered by hand, by facsimile, by nationally
recognized private courier, or by United States mail. Notices delivered by mail
shall be deemed given three (3) business days after being deposited in the
United States mail, postage prepaid, registered or certified mail. Notices
delivered by hand by facsimile, or by nationally recognized private carrier
shall be deemed given on the day following receipt; provided, however, that a
notice delivered by facsimile shall only be effective if such notice is also
delivered by hand, or deposited in the United States mail, postage prepaid,
registered or certified mail, on or before two (2) business days after its
delivery by facsimile. All notices shall be addressed as follows:
If to Watson or Watson Sub: If to the Company:
Watson Pharmaceuticals, Inc. Oclassen Pharmaceuticals, Inc.
311 Bonnie Circle 100 Pelican Way
Corona, California 91720 San Rafael, California 94901
Fax: (909) 270-1096 Fax: (415) 258-4500
Attn: Dr. Allen Chao, Attn: Glenn A. Oclassen, Chairman
Chairman & CEO Terry L. Johnson, CEO
With copies to: With copies to:
D'Ancona & Pflaum Venture Law Group
30 North LaSalle, Suite 2900 A Professional Corporation
Chicago, Illinois 60602 2800 Sand Hill Road
Fax: (312) 580-0923 Menlo Park, California
Attn: Michel J. Feldman Fax (415) 854-1121
Attn: Craig W. Johnson
If to the Stockholder Agent:
- -------------------------
- -------------------------
- -------------------------
Fax:
Attn:
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.
50
<PAGE> 186
9.2 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 and 5.12, 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.
9.3 Entire Agreement. This Agreement, the Exhibits, the Disclosure
Statement, the Watson Disclosure Statement, the Confidentiality Agreement, the
Ancillary Documents, the Watson Ancillary Agreements, and any other 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.
9.4 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, 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.
9.5 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware without regard to its rules of
conflict of laws.
9.6 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.
9.7 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.
9.8 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.
9.9 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
51
<PAGE> 187
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.
9.10 Incorporation of Exhibits. The Disclosure Statement, the Watson
Disclosure Statement 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.
9.11 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.
9.12 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 an injunction or injunctions to prevent breaches of this Agreement and to
enforce specifically the terms and provisions hereof in any California Court,
this being in addition to any other remedy to which they are entitled at law or
in equity.
52
<PAGE> 188
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: /s/ Allen Y. Chao
____________________________
Title: CEO
___________________________
OPALACQ CO.
By: /s/ Allen Y. Chao
____________________________
Title: President
___________________________
OCLASSEN PHARMACEUTICALS, INC.
By: /s/ Terry L. Johnson
____________________________
Title: President and CEO
___________________________
53
<PAGE> 189
FIRST AMENDMENT
TO
AGREEMENT AND PLAN OF MERGER
This First Amendment (the "Amendment") dated as of November 14, 1996 to
the Agreement and Plan of Merger (the "Merger Agreement") dated as of September
25, 1996 among Watson Pharmaceuticals, Inc., a Nevada corporation ("Watson"),
Opalacq Co., a Delaware corporation and the wholly-owned subsidiary of Watson
("Watson Sub"), and Oclassen Pharmaceuticals, Inc., a Delaware corporation (the
"Company"), is entered into by and among Watson, Watson Sub and the Company.
RECITALS
A. Watson, Watson Sub and the Company have heretofore entered into the
Merger Agreement providing for the merger of Watson Sub with and into the
Company, with the Company surviving the Merger. All capitalized terms used
herein and not otherwise defined herein shall have the meanings ascribed to them
in the Merger Agreement.
B. The Merger Agreement contemplates that Watson would prepare an
Application for Permit and Request for Hearing pursuant to Sections 25121 and
25142 of the California Law in order to issue the shares of Watson Common Stock
in the Merger in reliance on the exemption pursuant to Section 3(a)(10) of the
Securities Act (the "Exemption") in lieu of registering such shares under the
Securities Act.
C. Watson, Watson Sub and the Company now wish to enter into this
Amendment to amend certain sections of the Merger Agreement due to the
uncertainty as to whether the Exemption will be applicable to the Merger and to
make certain other amendments.
AGREEMENTS
NOW THEREFORE, in consideration of the premises and mutual agreements
herein contained, and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree as
follows:
1. Status of Merger Agreement. Except as specifically set forth herein,
the Merger Agreement shall remain in full force and effect and shall not be
waived, modified, superseded or otherwise affected by this Amendment. This
Amendment is not to be construed as a release, waiver or modification of any of
the terms, conditions, representations, warranties, covenants, rights or
remedies set forth in the Merger Agreement, except as specifically set forth
herein.
2. Amendments to the Merger Agreement.
2.1 Section 1.6 of the Merger Agreement. Section 1.6 of the Merger
Agreement is hereby amended by adding the following subsection at the end of
such section:
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<PAGE> 190
"(k) Any portion of the property delivered to the Exchange
Agent in accordance with this Section 1.6 that remains unclaimed by the
Stockholders one year after the Effective Time shall be delivered to
Watson. Any Stockholders 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 the Company Common Stock or
Preferred Stock such Stockholder holds as determined pursuant to this
Agreement, in each case, without any interest thereon."
2.2 Section 3.11 of the Merger Agreement. Section 3.11 of the Merger
Agreement is hereby deleted in its entirety and replaced by the following:
"3.11 Hearing Notice; Proxy Statement; Disclosure Documents.
At the time the notice (the "Hearing Notice") of the hearing to be held
by the California Commissioner of Corporations to consider the terms,
conditions and fairness of the transactions contemplated hereby (the
"Hearing") pursuant to Section 25142 of the Corporate Securities Law of
1968 of the State of California (the "California Law") shall be mailed
to the Stockholders, and at the time the information statement to be
delivered to the Stockholders in connection with the solicitation of
written consents or the stockholder meeting of the Company to vote on
the Merger and the other transactions contemplated hereby (the
"California Proxy Statement") shall be delivered to the Stockholders,
if ever, and at all times subsequent to such dates up to and including
the date of the stockholder meeting and the Effective Time, if the
California Proxy Statement is ever delivered to the Stockholders, such
Hearing Notice, with respect to all information (other than information
with respect to the Company furnished to Watson by the Company for
inclusion therein, as to which no representation or warranty is hereby
made) set forth therein, and such California Proxy Statement, with
respect to information (including all financial data) set forth therein
with respect to Watson or Watson Sub furnished to the Company by Watson
or Watson Sub for inclusion therein, respectively, will not contain any
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements or
information contained therein, in the light of the circumstances under
which such statements are made, not misleading. If, as set forth in
Section 5.7 hereof, the Proxy Statement/Prospectus included in the Form
S-4 (as defined in Section 5.7 of this Agreement) or any amendment or
supplement thereto (the "Federal Proxy Statement") is delivered to the
Stockholders in connection with the approval of the transactions
contemplated by this Agreement, such Federal Proxy Statement, including
information incorporated therein by reference, at the time of mailing
thereof and at the time of the meeting of Stockholders, 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 under the Securities Act, will not contain any untrue
statement of a material fact or omit to state any 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 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
2
<PAGE> 191
with written information concerning the Company furnished to Watson by
the Company specifically for use in the Federal Proxy Statement."
2.3 Section 3.12 of the Merger Agreement. Section 3.12 of the Merger
Agreement is hereby amended by adding the words "If the California Proxy
Statement is delivered to the Stockholders," at the beginning of such Section
immediately after the heading of such Section.
2.4 Section 4.37 of the Merger Agreement. Section 4.37 of the Merger
Agreement is hereby deleted in its entirety and replaced by the following:
"4.37 Information Supplied. At the time the Hearing Notice
shall be mailed to the Stockholders, and at the time the California
Proxy Statement shall be delivered to the Stockholders, if ever, and at
all times subsequent to such dates up to and including the date of the
stockholder meeting and the Effective Time, if such California Proxy
Statement is ever mailed to the Stockholders, such Hearing Notice, with
respect to information (including all financial data) set forth therein
with respect to the Company furnished to Watson by the Company for
inclusion therein, and such California Proxy Statement, with respect to
all information (other than information with respect to Watson or
Watson Sub furnished to the Company by Watson for inclusion therein, as
to which no representation or warranty is hereby made) set forth
therein, respectively, will not contain any untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary to make the statements or information contained
therein, in the light of the circumstances under which such statements
are made, not misleading. If, as set forth in Section 5.7 hereof, the
Federal Proxy Statement is delivered to the Stockholders in connection
with the approval of the transactions contemplated by this Agreement,
the information with respect to the Company supplied or to be supplied
by the Company, or any of its officers, directors, representatives,
agents or employees, for inclusion in the Federal Proxy Statement, at
the time of mailing thereof and at the time of the meeting of
Stockholders or, in the case of the Form S-4 and each amendment or
supplement thereto, at the time it is filed or becomes effective under
the Securities Act, will not contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements made therein, in light of
the circumstances under which they were made, not misleading."
2.5 Section 5.7 of the Merger Agreement. Section 5.7 of the Merger
Agreement is hereby deleted in its entirety and replaced by the following:
"5.7 Fairness Hearing; Registration Statement. Pursuant to
Section 25142 of the California Law, as soon as practicable after the
date hereof, Watson and the Company shall submit an application for a
permit (the "Exemption Permit") with the Commissioner of Corporations
of the State of California to allow Watson to issue the shares of
Watson
3
<PAGE> 192
Common Stock pursuant to the terms of this Agreement in compliance with
Section 3(a)(10) of the Securities Act and the California Securities
Laws. If Watson decides, in the exercise of its reasonable business
judgement upon the advice of its counsel, that the receipt of the
Exemption Permit will not allow Watson to issue the shares of Watson
Common Stock pursuant to the terms of this Agreement in compliance with
Section 3(a)(10) of the Securities Act, as soon thereafter as is
reasonably practicable, Watson and the Company shall cooperate and
promptly prepare and Watson shall file with the SEC 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 Federal Proxy
Statement. Watson will cause the Federal 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 the Company will cooperate with Watson, to have the Form
S-4 declared effective by the SEC as promptly as practicable, unless
Watson decides to withdraw the Form S-4 because subsequent events has
led Watson to believe that the receipt of the Exemption Permit will
allow Watson to issue the shares of Watson Common Stock pursuant to the
terms of this Agreement in compliance with Section 3(a)(10) of the
Securities Act. No amendment or supplement to the Federal Proxy
Statement will be made by Watson or the Company without the approval of
the other party. Watson will advise the Company, unless the Form S-4
has been withdrawn, 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 Federal Proxy Statement or
the Form S-4 or comments thereon and responses thereto or requests by
the SEC for additional information. The Federal Proxy Statement shall
include the recommendation of the Board of Directors of the Company in
favor of the Merger which shall not be changed unless the Board of
Directors of the Company, upon receipt of advice from its outside
counsel following receipt of a written proposal or offer for an
acquisition, shall determine that failure so to change its
recommendation would constitute a breach of the Board's fiduciary duty
under applicable law. If the Form S-4 is filed with the SEC and not
later withdrawn, the Company shall timely mail the Federal Proxy
Statement to its Stockholders; provided, however, that such
recommendation of the Board of Directors of the Company or solicitation
of Stockholders is subject to any action (including any withdrawal or
change of its recommendation) taken by, or upon authority of, the Board
of Directors of the Company in the exercise of its good faith judgment
as to its fiduciary duties to its stockholders imposed by law.
4
<PAGE> 193
2.6 Section 6.1(c) of the Merger Agreement. Section 6.1(c) of the
Merger Agreement is hereby deleted in its entirety and replaced by the
following:
"(c) Either (i) the Commissioner of Corporations of the State
of California shall have issued the Exemption Permit and Watson and the
Company shall reasonably believe that Watson can issue shares of Watson
Common Stock in accordance with the terms of this Agreement in
compliance with Section 3(a)(10) of the Securities Act; or (ii) 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, in each case,
all necessary approvals under state securities laws relating to the
issuance or trading of the Watson Common Stock to be issued to the
Stockholders in connection with the Merger shall have been received."
2.7 Section 8.2 of the Merger Agreement. Section 8.2 of the Merger
Agreement is hereby amended by revising clause (ii) of the first sentence to
read as follows:
"(ii) if as of December 1, 1996, the Form S-4 shall not have
been declared effective under the Securities Act or withdrawn,
January 31, 1997."
5
<PAGE> 194
3. Representations and Warranties of Entities. Each of the Company,
Watson and Watson Sub represents and warrants that its execution, delivery and
performance of this Amendment has been duly authorized by all necessary
corporate action and this Amendment is a legal, valid and binding obligation of
such entity in accordance with its terms.
4. Counterparts. This Amendment may be executed in any number of
counterparts, each of which shall be deemed an original and all of which
together shall constitute one and the same instrument.
5. Governing Law. This Amendment shall be a contract made under and
governed by the laws of the State of Delaware, without regard to conflict of
laws principles.
6
<PAGE> 195
IN WITNESS WHEREOF, the parties have executed this Amendment and caused
the same to be duly delivered on their behalf on the day and year first written
above.
WATSON PHARMACEUTICALS, INC.
By: /s/ Allen Y. Chao
-----------------------------
Title: CEO
--------------------------
OPALACQ CO.
By: /s/ Allen Y. Chao
-----------------------------
Title: President
--------------------------
OCLASSEN PHARMACEUTICALS, INC.
By: Terry L. Johnson
-----------------------------
Title: President and CEO
--------------------------
7
<PAGE> 196
SECOND AMENDMENT
TO
AGREEMENT AND PLAN OF MERGER
This Second Amendment (the "Amendment") dated as of December 31, 1996 to
the Agreement and Plan of Merger (the "Merger Agreement") dated as of September
25, 1996 among Watson Pharmaceuticals, Inc., a Nevada corporation ("Watson"),
Opalacq Co., a Delaware corporation and the wholly-owned subsidiary of Watson
("Watson Sub"), and Oclassen Pharmaceuticals, Inc., a Delaware corporation (the
"Company"), is entered into by and among Watson, Watson Sub and the Company.
RECITALS
--------
A. Watson, Watson Sub and the Company have heretofore entered into
the Merger Agreement providing for the merger of Watson Sub with and into the
Company, with the Company surviving the Merger. All capitalized terms used
herein and not otherwise defined herein shall have the meanings ascribed to
them in the Merger Agreement.
B. The Merger Agreement contemplates that it may be terminated and
the Merger may be abandoned by action of the Board of Directors of either
Watson or the Company if the Merger shall not have been consummated on or prior
to January 31, 1997.
AGREEMENTS
----------
NOW, THEREFORE, in consideration of the premises and mutual agreements
herein contained, and for other good and valuable consideration, the receipt
and sufficiency of which is hereby acknowledged, the parties hereto agree as
follows:
1. Status of Merger Agreement. Except as specifically set forth
herein, the Merger Agreement shall remain in full force and effect and shall
not be waived, modified, superseded or otherwise affected by this Amendment.
This Amendment is not to be construed as a release, waiver or modification of
any of the terms, conditions, representations, warranties, covenants, rights or
remedies set forth in the Merger Agreement, except as specifically set forth
herein.
2. Amendment to the Merger Agreement. Section 8.2(a) of the
Merger Agreement is hereby deleted in its entirety and replaced by the
following:
"(a) the Merger shall not have been consummated on or prior to
February 28, 1997; provided, however, that the right to terminate this
Agreement under this Section 8.2(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;"
<PAGE> 197
3. Representations and Warranties of Entities. Each of the
Company, Watson and Watson Sub represents and warrants that its execution,
delivery and performance of this Amendment has been duly authorized by all
necessary corporate action and this Amendment is a legal, valid and binding
obligation of such entity in accordance with its terms.
4. Counterparts. This Amendment may be executed in any number of
counterparts, each of which shall be deemed an original and all of which
together shall constitute one and the same instrument.
5. Governing Law. This Amendment shall be a contract made under
and governed by the laws of the State of Delaware, without regard to conflict
of laws principles.
2
<PAGE> 198
IN WITNESS WHEREOF, the parties have executed this Amendment and caused
the same to be duly delivered on their behalf on the day and year first written
above.
WATSON PHARMACEUTICALS, INC.
By: /s/ Allen Y. Chao
-----------------------------
Title: Chief Executive Officer
OPALACQ CO.
By: /s/ Allen Y. Chao
-----------------------------
Title: President
OCLASSEN PHARMACEUTICALS, INC.
By: /s/ Terry L. Johnson
-----------------------------
Title: President and CEO
3
<PAGE> 199
APPENDIX B
CERTIFICATE OF AMENDMENT
OF
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
OCLASSEN PHARMACEUTICALS, INC.
Oclassen Pharmaceuticals, Inc., a corporation organized and existing
under and by virtue of the General Corporation Law of the State of Delaware,
DOES HEREBY CERTIFY:
FIRST. That the Board of Directors of said corporation, at a meeting
duly convened and held, adopted the following resolution:
RESOLVED: That the Board of Directors hereby declares it advisable and
in the best interest of the corporation that Article FOURTH, paragraph
(D)5.(b)(i)(A) of the Amended and Restated Certificate of Incorporation be
amended to read in its entirety as follows:
"If traded on a securities exchange or the Nasdaq National Market, the
value shall be deemed to be (i) the average of the closing prices of the
securities on such exchange over the 30-day period ending three days prior to
the closing, or (ii) with respect to Common Stock of Watson Pharmaceuticals,
Inc. ("Watson Common Stock") issued in connection with the merger (the "Merger")
of Opalacq, Co., a wholly owned subsidiary of Watson Pharmaceuticals, Inc. with
and into the corporation, the average of the per share daily closing price of
the Watson Common Stock as quoted on the Nasdaq National Market (and as reported
by The Wall Street Journal or, if not reported thereby by another authoritative
source) during the ten (10) consecutive trading days ending two trading days
prior to the closing of the Merger, provided, however, that (A) if the average
closing price is greater than $35.00 (appropriately adjusted for any stock
split, reverse stock split, stock dividend, reorganization, recapitalization or
other like change with respect to the Watson Common Stock), for purposes of the
Merger, the average closing price shall be deemed to be equal to $35.00
(appropriately adjusted for any stock split, reverse stock split, stock
dividend, reorganization, recapitalization or other like change with respect to
the Watson Common Stock), and (B) if the average closing price is less than
$27.00 (appropriately adjusted for any stock split, reverse stock split, stock
dividend, reorganization, recapitalization or other like change with respect to
the Watson Common Stock), for purposes of the Merger, the average closing price
shall be deemed to be equal to $27.00 (appropriately adjusted for any stock
split, reverse stock split, stock dividend, reorganization, recapitalization or
other like change with respect to the Watson Common Stock)."
SECOND. That, at a meeting duly convened and held, said amendment has
been consented to and authorized by the holders of a majority of the issued and
outstanding shares of Common Stock and Preferred Stock of the corporation,
voting together as a class; by the holders of a majority of the issued and
outstanding shares of Series B Preferred Stock of the corporation, voting as a
separate class; by the holders of a majority of the issued and outstanding
Series C Preferred Stock of the corporation, voting as a separate class; and by
the holders of a majority of the issued and outstanding Series D Preferred Stock
and Series E Preferred Stock, voting together as a separate class.
THIRD. That the aforesaid amendment was duly adopted in accordance with
the applicable provisions of Section 242 of the General Corporation Law of the
State of Delaware.
<PAGE> 200
IN WITNESS WHEREOF, Oclassen Pharmaceuticals, Inc. has caused this Certificate
to be signed by Terry L. Johnson, its President, and Craig W. Johnson, its
Secretary, this ___ day of ________________, 1996.
OCLASSEN PHARMACEUTICALS, INC.
---------------------------
Terry L. Johnson, President
---------------------------
Craig W. Johnson, Secretary
-2-
<PAGE> 201
APPENDIX C
FAIRNESS OPINION OF FURMAN SELZ LLC
September 24, 1996
Board of Directors
Watson Pharmaceuticals, Inc.
311 Bonnie Circle
Corona, California 91720
Gentlemen:
We understand that Watson Pharmaceuticals, Inc. (the
"Company"), Opalacq Co., a wholly-owned subsidiary of the Company ("Watson-Sub")
and Oclassen Pharmaceuticals, Inc., propose to enter into an Agreement and Plan
of Merger ("Agreement") substantially in the form of the draft dated September
16, 1996 which has been furnished to us (the "Agreement"), whereby, among other
things, Watson-Sub will be merged with and into Oclassen, in a transaction (the
"Merger") in which each share of Oclassen's common stock and preferred stock
will be converted into the right to receive the consideration set forth in
section 1.4 of the Agreement. The terms and conditions of the Merger are set
forth in more detail in the Agreement.
You have requested our opinion, as investment bankers, as to
the fairness, from a financial point of view, to the Company of the
consideration to be paid in the Merger as calculated based upon the closing
price of the Company's common stock on September 20, 1996 (the "Consideration").
In conducting our analysis and arriving at our opinion as
expressed herein, we have reviewed and analyzed, among other things, the
following:
a. a draft of the Agreement dated September 16, 1996;
b. Oclassen's audited financial statements for the
years ended December 31, 1993, 1994, and 1995, and
on an unaudited basis, the six month periods ending
June 30, 1995 and 1996, respectively;
c. the Company's 1995 Annual Report, the Company's Form
10-K for the year ended December 31, 1995 and the
Company's Form 10-Q for the quarter ended June 30,
1996;
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[FURMAN SELZ LOGO]
d. the trading history of the Company's common stock
from September 1995 through September 1996 and a
comparison of that trading history with those of
other companies that we deemed relevant;
e. certain other publicly available information
concerning the Company and Oclassen;
f. certain internal information relating to Oclassen,
including (i) financial forecasts and projections
provided by Oclassen;
g. certain internal information relating to the
Company, including financial forecasts and
projections provided by the Company;
h. the results of operations of the Company and
Oclassen and compared such results of operations
with those of certain companies which we deemed to
be reasonably similar to the Company and Oclassen,
respectively;
i. certain publicly available information concerning
other companies engaged in businesses which we
believe to be comparable to the Company and Oclassen
and the trading markets for certain such companies'
securities; and
j. the financial terms of certain mergers, acquisitions
and other transactions which we believe to be
relevant.
We have also met with certain current officers, employees and
representatives (including counsel and independent auditors) of the Company and
Oclassen, respectively, concerning the business and operations, assets, present
condition and future prospects of Oclassen and undertaken such other studies,
analyses and investigations as we deemed appropriate. We have further held
discussions with senior management of the Company concerning an analysis of the
strategic and operating benefits anticipated from the Merger.
In arriving at our opinion, we have not visited or conducted a
physical inspection of the properties and facilities of Oclassen except for its
executive offices, nor have we made, obtained or assumed any responsibility
<PAGE> 203
[FURMAN SELZ LOGO]
for any independent evaluation or appraisal of any such properties and
facilities or of the assets and liabilities (contingent or otherwise) of the
Company or Oclassen. We have assumed and relied upon the accuracy and
completeness of the financial and other information supplied to or otherwise
used by us in arriving at our opinion and have not attempted independently to
verify, or undertaken any obligation to verify, such information. With your
consent, we have assumed that the respective forecasts and projections of the
Company and Oclassen supplied to us represent the best currently available
estimates and judgment of the respective managements of the Company and Oclassen
as to the expected future financial condition and results of operations of the
Company and Oclassen, and have assumed that such forecasts and projections have
been reasonably prepared based on such currently available estimates and
judgment. We assume no responsibility for and express no view as to such
forecasts and projections or the assumptions on which they are based. We also
assumed that the transactions described in the Agreement would be consummated on
the terms set forth therein, without waiver of any such terms. We further have
assumed the Merger will qualify as a tax free reorganization within the meaning
of Section 368(a) of the Internal Revenue Code, as amended, and that for
accounting purposes, the Merger is intended to be accounted for as a
pooling-of-interests.
We have also taken into account our assessment of general
economic, market and financial conditions and our experience in similar
transactions, as well as our experience in securities valuation in general. Our
opinion necessarily is based upon conditions as they exist and can be evaluated
on the date hereof. Subsequent developments may affect this opinion, and we do
not have any obligation to update, revise or reaffirm this opinion.
This letter and our opinion as expressed herein are for
the benefit and use of the Board of Directors of the Company in its
consideration of the Merger. This letter does not constitute a recommendation of
the Merger over any other alternative transactions which may be available to the
Company and does not address the underlying business decision of the Board of
Directors of the Company to proceed with or effect the Merger. In addition, in
rendering this opinion, we do not express any view as to the prices at which the
Company's securities may trade prior to or following the Merger. This letter
does not constitute a recommendation by our firm to any stockholder to vote in
favor of the Merger. This letter and the contents hereof may not be published,
disseminated, referred to, summarized, described or otherwise used, nor shall
any public reference to Furman Selz LLC be made, without our prior written
consent.
As you are aware, we will receive a fee for our services to
the Board of Directors of the Company in connection with rendering this
<PAGE> 204
[FURMAN SELZ LOGO]
opinion. As you are further aware, we have previously provided investment
advisory and other services to the Company in the past for which we received
customary fees, and may in the future perform similar services. In the ordinary
course of our business, we may actively trade in the equity securities of the
Company for our own account and for the accounts of our customers and,
accordingly, may at any time hold a long or short position in such securities.
Based upon and subject to the foregoing, it is our opinion
that, as of the date hereof, the Consideration to be paid is fair, from a
financial point of view, to the Company.
Very truly yours,
FURMAN SELZ LLC
<PAGE> 205
APPENDIX D
FAIRNESS OPINION OF LEHMAN BROTHERS
September 25, 1996
Board of Directors
Oclassen Pharmaceuticals, Inc.
100 Pelican Way
San Rafael, California 94901
Members of the Board:
We understand that Oclassen Pharmaceuticals, Inc. (the "Company"),
Watson Pharmaceuticals, Inc. ("Watson") and Opalacq Co., a newly formed, wholly
owned subsidiary of Watson ("MergerSub") intend to enter into an Agreement and
Plan of Merger on September 25, 1996 (the "Agreement") pursuant to which
MergerSub will be merged with and into the Company and Watson will issue or
reserve for issuance shares of common stock valued at $135 million for all of
the shares of capital stock and outstanding options of Oclassen (the "Proposed
Transaction"). The number of shares of common stock of Watson to be issued is
subject to a collar of $27.00 to $35.00 per share, with no walk-away or
renegotiation price. The Agreement further provides that the outstanding stock
options to purchase Company common stock, whether or not exercisable, will be
automatically converted into options to purchase Watson common stock.
Furthermore, the outstanding warrants to purchase Company Series B Preferred
Stock will expire or terminate unless exercised prior to or at the close of the
Proposed Transaction. The terms and conditions of the Proposed Transaction are
set forth in more detail in the Agreement.
We have been requested by the Board of Directors of the Company to
render our opinion with respect to the fairness, from a financial point of view,
to the Company's stockholders of the consideration to be offered to such
stockholders in the Proposed Transaction. We have not been requested to opine as
to, and our opinion does not in any manner address, the Company's underlying
business decision to proceed with or effect the Proposed Transaction.
In arriving at our opinion, we reviewed and analyzed: (1) the Agreement
and the specific terms of the Proposed Transaction, (2) such publicly available
information concerning Watson that we believe to be relevant to our analysis,
(3) financial and operating information with respect to the business, operations
and prospects of the Company furnished to us by the Company, including without
limitation certain projections prepared by management of the Company, (4)
financial and operating information with respect to the business, operations and
prospects of Watson furnished to us by Watson, including without limitation
certain
<PAGE> 206
projections prepared by management of Watson, (5) a three-year trading history
of Watson's common stock and a comparison of that trading history with those of
other companies that we deemed relevant, (6) a comparison of the historical
financial results and present financial condition of the Company with those of
other companies that we deemed relevant, (7) a comparison of the historical
financial results and present financial condition of Watson with those of other
companies that we deemed relevant, (8) third party research analysts' quarterly
and annual earnings estimates and recommendations for Watson, (9) the potential
pro forma financial effects of the Proposed Transaction, and (10) a comparison
of the financial terms of the Proposed Transaction with the financial terms of
certain other transactions that we deemed relevant. In addition, we have had
discussions with the managements of the Company and Watson concerning their
respective businesses, operations, assets, financial conditions and prospects
and the operating synergies and strategic benefits expected to result from a
combination of the businesses of the Company and Watson and have undertaken such
other studies, analyses and investigations as we deemed appropriate.
In arriving at our opinion, we have assumed and relied upon the
accuracy and completeness of the financial and other information used by us
without assuming any responsibility for independent verification of such
information and have further relied upon the assurances of management of the
Company that they are not aware of any facts that would make such information
inaccurate or misleading. With respect to the financial projections of the
Company, upon advice of the Company we have assumed that such projections have
been reasonably prepared on a basis reflecting the best currently available
estimates and judgments of the management of the Company as to the future
financial performance of the Company, and we have relied upon such projections
in arriving at our opinion. With respect to the financial forecasts of Watson,
we have assumed that such forecasts have been reasonably prepared on a basis
reflecting the best currently available estimates and judgments of the
management of Watson as to the future financial performance of Watson and that
Watson will perform substantially in accordance with such forecasts. In arriving
at our opinion, we have not conducted a physical inspection of the properties
and facilities of the Company or Watson and have not made or obtained any
evaluations or appraisals of the assets or liabilities of the Company or Watson.
In addition, you have not authorized us to solicit, and we have not solicited,
any indications of interest from any third party with respect to the purchase of
all or a part of the Company's business. However, in arriving at our opinion, we
have considered the proposals received by the Company from investment banking
firms regarding a theoretical public market valuation of the Company in
connection with an initial public offering. Upon advice of the Company and its
legal and accounting advisors, we have assumed that the Proposed Transaction
will qualify as a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended, and therefore as a tax-free
transaction to the stockholders of the Company. Our opinion necessarily is based
upon market, economic and other conditions as they exist on, and can be
evaluated as of, the date of this letter.
Based upon and subject to the foregoing, we are of the opinion as of
the date hereof that, from a financial point of view, the consideration to be
offered to the stockholders of the Company in the Proposed Transaction is fair
to such stockholders.
We have acted as financial advisor to the Company in connection with
the Proposed Transaction and will receive a fee for our services which is
contingent upon the consummation
<PAGE> 207
of the Proposed Transaction. In addition, the Company has agreed to indemnify us
for certain liabilities that may arise out of the rendering of this opinion. We
also have performed various investment banking services for the Company in the
past and have received customary fees for such services. In the ordinary course
of our business, we may actively trade in the equity securities of Watson for
our own account and for the accounts of our customers and, accordingly, may at
any time hold a long or short position in such securities.
This opinion is for the use and benefit of the Board of Directors of
the Company and is rendered to the Board of Directors in connection with its
consideration of the Proposed Transaction. This opinion is not intended to be
and does not constitute a recommendation to any stockholder of the Company as to
how such stockholder should vote with respect to the Proposed Transaction.
Very truly yours,
LEHMAN BROTHERS
<PAGE> 208
APPENDIX E
SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW
SECTION 262 APPRAISAL RIGHTS.
(a) Any stockholder of a corporation of this State who holds
shares of stock on the date of the making of a demand pursuant to subsection (d)
of this section with respect to such shares, who continuously holds such shares
through the effective date of the merger or consolidation, who has otherwise
complied with subsection (d) of this section and who has neither voted in favor
of the merger or consolidation nor consented thereto in writing pursuant to
Section 228 of this title shall be entitled to an appraisal by the Court of
Chancery of the fair value of his shares of stock under the circumstances
described in subsection (b) and (c) of this section. As used in this section,
the word "stockholder" means a holder of record of stock in a stock corporation
and also a member of record of a nonstock corporation; the words "stock" and
"share" mean and include what is ordinarily meant by those words and also
membership or membership interest of a member of a nonstock corporation; and the
words "depository receipt" mean a receipt or other instrument issued by a
depository representing an interest in one or more shares, or fractions thereof,
solely of stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any
class or series of stock of a constituent corporation in a merger or
consolidation to be effected pursuant to Sections 251,252, 254, 257, 258,
263 or 264 of this title:
(1) Provided, however, that no appraisal rights under this
section shall be available for the shares of any class or series of stock, which
stock, or depository receipts in respect thereof, at the record date fixed to
determine the stockholders entitled to receive notice of and to vote at the
meeting of stockholders to act upon the agreement of merger or consolidation,
were either (i) listed on a national securities exchange or designated as a
national market system security on an interdealer quotation system by the
National Association of Securities Dealers, Inc. or (ii) held of record by more
than 2,000 holders; and further provided that no appraisal rights shall be
available for any shares of stock of the constituent corporation surviving a
merger if the merger did not require for its approval the vote of the holders of
the surviving corporation as provided in 1 subsections (f) or (g) of Section 251
of this title.
(2) Notwithstanding paragraph (1) of this subsection,
appraisal rights under this section shall be available for the shares of any
class or series of stock of a constituent corporation if the holders thereof are
required by the terms of an agreement of merger or consolidation pursuant to
Sections 251,252, 254, 257, 258, 263 and 264 of this title to accept for
such stock anything except:
a. Shares of stock of the corporation surviving or
resulting from such merger or consolidation, or depository receipts in respect
thereof;
b. Shares of stock of any other corporation, or
depository receipts in respect thereof, which shares of stock or depository
receipts at the effective date of the merger or consolidation will be either
listed on a national securities exchange or designated as a national market
<PAGE> 209
system security on an interdealer quotation system by the National Association
of Securities Dealers, Inc. or held of record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional
depository receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository
receipts and cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this paragraph.
(3) In the event all of the stock of a subsidiary Delaware
corporation party to a merger effected under Section 253 of this title is not
owned by the parent corporation immediately prior to the merger, appraisal
rights shall be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of
incorporation that appraisal rights under this section shall be available for
the shares of any class or series of its stock as a result of an amendment to
its certificate of incorporation, any merger or consolidation in which the
corporation is a constituent corporation or the sale of all or substantially all
of the assets of the corporation. If the certificate of incorporation contains
such a provision, the procedures of this section, including those set forth in
subsections (d) and (e) of this section, shall apply as nearly as is
practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal
rights are provided under this section is to be submitted for approval at a
meeting of stockholders, the corporation, not less than 20 days prior to the
meeting, shall notify each of its stockholders who was such on the record date
for such meeting with respect to shares for which appraisal rights are available
pursuant to subsections (b) or (c) hereof that appraisal rights are available
for any or all of the shares of the constituent corporations, and shall include
in such notice a copy of this section. Each stockholder electing to demand the
appraisal of his shares shall deliver to the corporation, before the taking of
the vote on the merger or consolidation, a written demand for appraisal of his
shares. Such demand will be sufficient if it reasonably informs the corporation
of the identity of the stockholder and that the stockholder intends thereby to
demand the appraisal of his shares. A proxy or vote against the merger or
consolidation shall not constitute such a demand. A stockholder electing to take
such action must do so by a separate written demand as herein provided. Within
10 days after the effective date of such merger or consolidation, the surviving
or resulting corporation shall notify each stockholder of each constituent
corporation who has complied with this subsection and has not voted in favor of
or consented to the merger or consolidation of the date that the merger or
consolidation has become effective; or
(2) If the merger or consolidation was approved pursuant to
Sections 228 or 253 of this title, the surviving or resulting corporation,
either before the effective date of the merger or consolidation or within 10
days thereafter, shall notify each of the stockholders entitled to appraisal
rights of the effective date of the merger or consolidation and that appraisal
rights are available for any or all of the shares of the constituent
corporation, and shall include in such notice a copy of this section. The notice
shall be sent by certified or registered mail, return receipt requested,
addressed to the stockholder at his address as it appears on the records of the
corporation. Any stockholder entitled to appraisal rights may, within 20 days
after the date of mailing of the notice, demand in writing from the surviving or
resulting corporation the appraisal of his shares. Such demand will be
sufficient if it
<PAGE> 210
reasonably informs the corporation of the identity of the stockholder and that
the stockholder intends thereby to demand the appraisal of his shares.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw his demand for appraisal and to accept the terms offered upon the
merger or consolidation. Within 120 days after the effective date of the merger
or consolidation, any stockholder who has complied with the requirements of
subsections (a) and (d) hereof, upon written request, shall be entitled to
receive from the corporation surviving the merger or resulting from the
consolidation a statement setting forth the aggregate number of shares not voted
in favor of the merger or consolidation and with respect to which demands for
appraisal have been received and the aggregate number of holders of such shares.
Such written statement shall be mailed to the stockholder within 10 days after
his written request for such a statement is received by the surviving or
resulting corporation or within 10 days after expiration of the period for
delivery of demands for appraisal under subsection (d) hereof, whichever is
later.
(f) Upon the filing of any such petition by a stockholder, service
of a copy thereof shall be made upon the surviving or resulting corporation,
which shall within 20 days after such service file in the office of the Register
in Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by one or more publications at
least one week before the day of the hearing, in a newspaper of general
circulation published in the City of Wilmington, Delaware or such publication
as the Court deems advisable. The forms of the notices by mail and by
publication shall be approved by the Court, and the costs thereof shall be
borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal,
the Court shall appraise the shares, determining their fair value exclusive of
any element of value arising from the accomplishment or expectation of the
merger or consolidation, together with a fair rate of interest, if any, to be
paid upon the amount determined to be the fair value. In determining such fair
value, the Court shall take into account all relevant factors. In determining
the fair rate of interest, the Court may consider all relevant factors,
including the rate of interest which the surviving or resulting corporation
would have had to pay to borrow money during the pendency of the proceeding.
Upon application by the surviving or resulting corporation or by any stockholder
entitled to participate in the appraisal proceeding, the Court may, in its
discretion, permit discovery or other pretrial proceedings and may proceed to
trial
<PAGE> 211
upon the appraisal prior to the final determination of the stockholder entitled
to an appraisal. Any stockholder who's name appears on the list filed by the
surviving or resulting corporation pursuant to subsection (f) of this section
and who has submitted his certificates of stock to the Register in Chancery, if
such is required, may participate fully in all proceedings until it is finally
determined that he is not entitled to appraisal rights under this section.
(i) The court shall direct the payment of the fair value of the
shares, together with interest, if any, by the surviving or resulting
corporation to the stockholders entitled thereto. Interest may be simple or
compound, as the Court may direct. Payment shall also be made to each such
stockholder, in the case of holders of uncertificated stock forthwith, and the
case of holders of shares represented by certificates upon the surrender to the
corporation of the certificates representing such stock. The Court's decree may
be enforced as other decrees in the Court of Chancery may be enforced, whether
such surviving or resulting corporation be a corporation of this State or of any
state.
(j) The cost of the proceeding may be determined by the Court and
taxed upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or
consolidation, no stockholder who has demanded his appraisal rights as provided
in subsection (d) of this section shall be entitled to vote such stock for any
purpose or to receive payment of dividends or other distributions on the stock
(except dividends or other distributions payable to stockholders of record at a
date which is prior to the effective date of the merger or consolidation);
provided, however, that if no petition for an appraisal shall be filed within
the time provided in subsection (e) of this section, or if such stockholder
shall deliver to the surviving or resulting corporation a written withdrawal of
his demand for an appraisal and an acceptance of the merger or consolidation,
either within 60 days after the effective date of the merger or consolidation as
provided in subsection (e) of this section or thereafter with the written
approval of the corporation, then the right of such stockholder to an appraisal
shall cease. Notwithstanding the foregoing, no appraisal proceeding in the Court
of Chancery shall be dismissed as to any stockholder without the approval of the
Court, and such approval may be conditioned upon such terms as the Court deems
just.
(l) The shares of the surviving or resulting corporation to which
the shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
<PAGE> 212
APPENDIX F
TEXT OF PERMIT ISSUED BY THE CALIFORNIA CORPORATIONS COMMISSIONER
File No. 506-0801
Applicant: WATSON PHARMACEUTICALS, INC.
CERTIFICATE OF ISSUANCE OF PERMIT
I, KEITH PAUL BISHOP, Commissioner of Corporations, hereby certify:
1. By application filed October 7, 1996, applicant seeks qualification
for the offer and sale of securities under section 25121 of the Corporate
Securities Law of 1968, as amended.
2. The terms and conditions of the proposed offer and sale of
securities are described in that application and the Notice of Hearing executed
on October 11, 1996.
3. At applicant's request and upon due notice to all persons to whom
it is proposed to issue such securities, a hearing was held on November 8,
1996, before the Department of Corporations, upon the fairness of the terms and
conditions of such offer and sale of securities. All proposed issuees had the
right to appear.
4. The terms and conditions are fair and are approved. Qualification
by permit for the offer and sale of such securities is effective the date
hereof.
Dated: San Francisco, California
November 8, 1996
KEITH PAUL BISHOP
Commissioner of Corporations
By /s/ NATHANIEL I. WEINER
--------------------------
NATHANIEL I. WEINER
Senior Corporations Counsel
<PAGE> 213
File No. 506-0801
PERMIT
THIS PERMIT IS PERMISSIVE ONLY
AND DOES NOT CONSTITUTE A RECOMMENDATION
OR ENDORSEMENT OF THE SECURITIES PERMITTED TO BE ISSUED
Issuer: WATSON PHARMACEUTICALS, INC.
is hereby qualified to offer, sell and issue the securities described in its
application filed on October 7, 1996, and any amendments and supplements
thereto to the date hereof, to the persons described in said application, for
the considerations, uses and purposes, and in the manner set forth in said
application. This qualification is effective for 12 months from the date hereof.
Dated: San Francisco, California
Nov. 8, 1996
KEITH PAUL BISHOP
Commissioner of Corporations
By /s/ Nathaniel I. Weiner
----------------------------
Nathaniel I. Weiner
Senior Corporations Counsel
<PAGE> 214
PART II
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 78.751 of the Nevada Revised Statutes authorizes a corporation,
under certain circumstances, to indemnify its directors and officers (including
reimbursement for expenses incurred). The Registrant has provided for
indemnification to the fullest extent permitted by the provisions of the Nevada
statute in its Articles of Incorporation and Bylaws.
The Registrant maintains a directors' and officers' liability
insurance policy that, subject to the terms and conditions of the policy,
insures the directors and officers of the Registrant against losses up to
$20,000,000 in the aggregate (subject to a $250,000 retention per loss) arising
from any wrongful act (as defined by the policy) in his or her capacity as a
director or officer. The policy reimburses the Registrant for amounts which
lawfully indemnifies the Registrant or as required or permitted by law to
indemnify its directors and officers.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
a. Exhibits
2.1 Agreement and Plan of Merger among the Registrant, Opalacq Co.
and Oclassen Pharmaceuticals, Inc. dated as of September 25,
1996, as amended effective November 14, 1996 and as amended
effective December 31, 1996 (incorporated by reference to
Appendix A to the Proxy Statement/Prospectus which is part of
this Registration Statement)
3(i) Articles of Incorporation of the Registrant, as amended
(incorporated by reference to Exhibit 3.1 to 33-46229)
3(ii) Bylaws of the Registrant, as amended (incorporated by
reference to Exhibit 3.2 to 33-46229)
4.1 Articles of Incorporation and Bylaws as amended, of the
Registrant (included in Exhibits 3(i) and 3(ii))
*5.1 Opinion of D'Ancona & Pflaum as to the legality of the
securities being registered
5.2 Opinion of Kummer Kaempfer Bonner & Renshaw
8.1 Form of Opinion of D'Ancona & Pflaum regarding certain tax
matters related to the transaction
8.2 Form of Opinion of Venture Law Group, A Professional
Corporation, regarding certain tax matters related to the
transaction
*10.1 Form of Employment Agreement between Oclassen Pharmaceuticals,
Inc., the Registrant and Glenn A. Oclassen
*10.2 Form of Employment Agreement between Oclassen Pharmaceuticals,
Inc., the Registrant and Terry L. Johnson
*10.3 Form of Employment Agreement between Oclassen Pharmaceuticals,
Inc., the Registrant and Anthony A. DiTonno
11.1 Historical and Pro Forma Earnings Per Share
23.1 Consent of Price Waterhouse LLP
23.2 Consent of Arthur Andersen LLP
23.3 Consent of Coopers & Lybrand L.L.P.
23.4 Consent of Deloitte & Touche LLP
II-1
<PAGE> 215
23.5 Consent of Venture Law Group, A Professional Corporation
(contained in Exhibit 8.2)
23.6 Consent of D'Ancona & Pflaum (contained in Exhibits 5.1 and
8.1)
*23.7 Consent of Furman Selz LLC
*23.8 Consent of Lehman Brothers Inc.
23.9 Consent of Kummer Kaempfer Bonner & Renshaw
*24.1 Powers of attorney
*99.1 Oclassen Pharmaceuticals, Inc. Proxy Card
-------------
* Previously filed
b. Financial Statement Schedules
ITEM 22. UNDERTAKINGS
a. The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration
statement;
(i) To include any prospectus required by Section 10(a)(3)
of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration
statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate,
represent a fundamental change in the information set
forth in the registration statement. Notwithstanding the
foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of
securities offered would not exceed that which was
registered) and any deviation from the low or high end
of the estimated maximum offering range may be reflected
in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20
percent change in the maximum aggregate offering price
set forth in the "Calculation of Registration Fee" table
in the effective registration statement.
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the
registration statement or any material change to such
information in the registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment
shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which
remain unsold at the termination of the offering.
(b) The undersigned registrant hereby undertakes to deliver or to cause to
be delivered with the prospectus, to each person to whom the prospectus
is sent or given, the latest annual report to security holders that is
incorporated by reference in the prospectus and furnished pursuant to
and meeting the requirements of Rule 14a-3 or Rule 14c-3 under the
Securities Exchange Act of 1934; and, where interim financial
information required to be presented by Article 3 of Regulation S-X are
not set forth in the prospectus, to deliver, or cause to be delivered
to each person to whom the prospectus is sent or given, the latest
quarterly report that is specifically incorporated by reference in the
prospectus to provide such interim financial information.
(c) (1) The undersigned registrant hereby undertakes as follows:
that prior to any public reoffering of the securities
registered hereunder through use of a prospectus which is a
part of this registration statement, by any person or party
who is deemed to be an underwriter within the meaning of Rule
145(c), the issuer undertakes that such reoffering prospectus
will contain the information called for by the applicable
registration form with respect to reofferings by persons who
may be deemed underwriters, in addition to the information
called for by the other Items of the applicable form.
(2) The registrant undertakes that every prospectus (i) that is
filed pursuant to paragraph (1) immediately preceding, or (ii)
that purports to meet the requirements of section 10(a)(3) of
the Act and is used in connection with an offering of
securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used
until such amendment is effective, and that, for purposes of
determining any liability under the Securities Act of 1933,
each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered
therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(d) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus
pursuant to Items 4, 10(b), 11, or 13 of this Form, within one business
day of receipt of such request and to send the incorporated documents
by first class mail or other
II-2
<PAGE> 216
equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement
through the date of responding to the request.
e. The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction and
the company being acquired involved therein, that was not the subject
of and included in the registration statement when it became effective.
f. The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each
filing of the registrant's annual report pursuant to section 13(a)
or section 15(d) of the Securities Exchange Act of 1934 that is
incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
g. Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable. In
the event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the
registrant thereof in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question of whether such indemnification
by it is against public policy as expressed in the Securities Act and
will be governed by the final adjudication of such issue.
II-3
<PAGE> 217
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Corona, State of
California, on the 31st day of January, 1997.
WATSON PHARMACEUTICALS, INC.
(Registrant)
By: /s/ Allen Chao, Ph.D.
-------------------------------------
Allen Chao, Ph.D.
Chairman and Chief Executive
Officer (Principal Executive and
Financial Officer)
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been duly signed on January 31, 1997 by the following persons
in the capacities indicated:
<TABLE>
<CAPTION>
Signatures Titles Date
- ---------- ------ ----
<S> <C> <C>
/s/ Allen Chao, Ph.D.
__________________________ Chairman and Chief January 31, 1997
Allen Chao, Ph.D. Executive Officer
(Principal Executive and
Financial officer)
*
__________________________ President and Director January 31, 1997
Melvin Sharoky, M.D.
*
__________________________ Vice President-Corporate January 31, 1997
Chato Abad Controller (Principal
Accounting Officer)
*
__________________________ Secretary and Director January 31, 1997
Michel J. Feldman
*
_________________________ Director January 31, 1997
Alec D. Keith, Ph.D.
*
__________________________ Director January 31, 1997
Albert F. Hummel
</TABLE>
II-4
<PAGE> 218
<TABLE>
<S> <C> <C>
*
__________________________ Director January 31, 1997
Michael Fedida
*
__________________________ Director January 31, 1997
Ronald R. Taylor
*By: /s/ Allen Chao
______________________
Allen Chao, Ph.D
Attorney-in-fact
</TABLE>
II-5
<PAGE> 219
EXHIBIT INDEX
2.1 Agreement and Plan of Merger among the Registrant, Opalacq Co.
and Oclassen Pharmaceuticals, Inc. dated as of September 25,
1996, as amended effective November 14, 1996 and as amended
effective December 31, 1996 (incorporated by reference to
Appendix A to the Proxy Statement/Prospectus which is part
of this Registration Statement)
3(i) Articles of Incorporation of the Registrant, as amended
(incorporated by reference to Exhibit 3.1 to 33-46229)
3(ii) Bylaws of the Registrant, as amended (incorporated by
reference to Exhibit 3.2 to 33-46229)
4.1 Articles of Incorporation and Bylaws as amended, of the
Registrant (included in Exhibits 3(i) and 3(ii))
*5.1 Opinion of D'Ancona & Pflaum as to the legality of the
securities being registered
5.2 Opinion of Kummer Kaempfer Bonner & Renshaw
8.1 Form of Opinion of D'Ancona & Pflaum regarding certain tax
matters related to the transaction
8.2 Form of Opinion of Venture Law Group, A Professional
Corporation, regarding certain tax matters related to the
transaction
*10.1 Form of Employment Agreement between Oclassen Pharmaceuticals,
Inc., the Registrant and Glenn A. Oclassen
*10.2 Form of Employment Agreement between Oclassen Pharmaceuticals,
Inc., the Registrant and Terry L. Johnson
*10.3 Form of Employment Agreement between Oclassen Pharmaceuticals,
Inc., the Registrant and Anthony A. DiTonno
11.1 Historical and Pro Forma Earnings Per Share
23.1 Consent of Price Waterhouse LLP
23.2 Consent of Arthur Andersen LLP
23.3 Consent of Coopers & Lybrand L.L.P.
23.4 Consent of Deloitte & Touche LLP
23.5 Consent of Venture Law Group, A Professional Corporation
(contained in Exhibit 8.2)
23.6 Consent of D'Ancona & Pflaum (contained in Exhibits 5.1 and
8.1)
*23.7 Consent of Furman Setz LLC
*23.8 Consent of Lehman Brothers Inc.
23.9 Consent of Kummer Kaempfer Bonner & Renshaw
*24.1 Powers of attorney
*99.1 Oclassen Pharmaceuticals, Inc. Proxy Card
-------------
* Previously filed
<PAGE> 1
EXHIBIT 5.2
[KUMMER KAEMPFER CONNER & RENSHAW LETTERHEAD]
January 10, 1997
D'Ancona & Pflaum
30 North LaSalle Street
Suite 2900
Chicago, Illinois 60602
RE: WATSON PHARMACEUTICALS, INC.
Ladies and Gentlemen:
You have requested our opinion as special counsel for Watson
Pharmaceuticals, Inc., a Nevada corporation (the "Company"), in connection with
the filing of a Registration Statement on Form S-4 relating to the merger of
Opalacq Co., a Delaware corporation and a wholly owned subsidiary of the
Company (the "Merger Subsidiary"), and Oclassen Pharmaceuticals, Inc., a
Delaware corporation ("OPI"), pursuant to an Agreement and Plan of Merger dated
as of September 25, 1996, by and among the Company, the Merger Subsidiary and
OPI (the "Merger Agreement"), as amended effective as of November 14, 1996, and
as further amended effective as of December 31, 1996. As consideration for the
merger, the shareholders of OPI (other than such shareholders who have properly
exercised dissenter's rights) will receive an aggregate amount of up to
$135,000,000 in value of the Company's common stock, par value $.0033 ("Watson
Shares"). We are not general counsel to the Company, we have been retained
specially to represent the Company in this transaction for the purpose of
rendering this opinion to you. Any opinions expressed herein shall be limited
to the extent that we have been retained as special Nevada counsel.
In connection with this opinion, we have examined the following
documents (collectively, the "Documents"):
1. Articles of Incorporation of the Company as filed with the
Nevada Secretary of State on January 2, 1985, as amended on
September 28, 1987, as amended on August 27, 1991, as amended on
February 20, 1992, as amended on July 18, 1995, and as amended
on May 30, 1996.
<PAGE> 2
D'Ancona & Pflaum
January 10, 1997
Page 2
2. Bylaws of the Company certified by the Company to be currently
in full force and effect as of the date of this opinion.
3. A mechanically executed copy of the Merger Agreement.
4. A mechanically executed copy of the First Amendment, dated as of
November 14, 1996, to the Merger Agreement (the "First
Amendment").
5. An unexecuted photocopy of the Second Amendment, dated as of
December 31, 1996, to the Merger Agreement (the "Second
Amendment").
6. Certificate of the Secretary of the Company dated as of the date
hereof.
7. Registration Statement on Form S-4 for the Company, as filed
with the Securities and Exchange Commission on November 15,
1996, file number 333-16275 (the "Registration Statement").
In our examination of the Documents, we have assumed the genuineness of
all signatures, the legal capacity of natural persons who signed the Documents,
the authenticity of all Documents submitted to us as originals, the conformity
to the originals of all Documents submitted to us as copies and the
authenticity of the originals of such latter Documents. We assume the due
authorization of each Document by each party thereto. We assume the Merger
Agreement, the First Amendment and the Second Amendment represent legal, valid,
binding and enforceable obligations of each party thereto. We assume that the
Documents have not been rescinded, modified, or altered in any manner
whatsoever as of the date hereof.
In rendering the foregoing opinions, we have relied without
investigation on the certificates of officers of the Company, and we have not
independently verified any of the factual matters set forth in any other
Documents upon which we have relied. Furthermore, we have been provided with a
copy of the Registration Statement, and we have relied without investigation
upon the representations contained therein. We have not been asked, nor have we
endeavored, to review, revise or in any manner comment upon the contents of
the Registration Statement.
We are admitted to the Bar of the state of Nevada. In rendering our
opinions hereinafter stated, we have relied upon the applicable laws of the
state of Nevada as those laws presently exist and as they have been applied and
interpreted by courts having jurisdiction within the state of Nevada. We
express no opinion as to the laws of any other jurisdiction or of the United
States of America.
Based on such examination and subject to the limitations and
assumptions hereinabove provided, we are of the opinion that the Company has
the full power and authority under the laws of the State of Nevada, and under
its Articles of Incorporation and Bylaws, as amended, to issue the Watson
Shares in accordance with the Merger Agreement, the First Amendment and the
Second Amendment and that such Watson Shares are validly authorized shares of
common stock of the
<PAGE> 3
D'Ancona & Pflaum
January 10, 1997
Page 3
Company, and when issued, will be legally issued, fully paid and nonassessable
and not subject to any preemptive or similar rights.
These opinions are effective as of the date hereof. No extensions of
our opinion may be made by implication or otherwise. We express no opinion
other than as herein expressly set forth. We understand that you will rely on
our opinion in rendering your separate opinion addressed to the Securities and
Exchange Commission in connection with the previously referred to
Registration Statement. Our opinions are not to be otherwise quoted in whole or
in part without the express written consent of this firm.
Very truly yours,
/s/ KUMMER KAEMPFER BONNER & RENSHAW
------------------------------------
Kummer Kaempfer Bonner & Renshaw
<PAGE> 1
Exhibit 8.1
January 30, 1997
Board of Directors
Watson Pharmaceuticals, Inc.
311 Bonnie Circle
Corona, CA 91720
Dear Madam and Sirs:
This opinion is being delivered to you pursuant to Section 6.1(h) of
the Agreement and Plan of Merger (the "Agreement") among Watson Pharmaceuticals,
Inc., a Nevada corporation ("Watson"), its wholly-owned subsidiary, Opalacq Co.,
a Delaware corporation ("Sub"), and Oclassen Pharmaceuticals, Inc., a Delaware
corporation ("Oclassen"), dated as of September 25, 1996, as amended effective
November 14, 1996. Pursuant to the Agreement, Sub will merge with and into
Oclassen (the "Merger"), and Oclassen will become a wholly-owned subsidiary of
Watson.
Except as otherwise provided, capitalized terms referred to herein have
the meanings set forth in the Agreement. All section references, unless
otherwise indicated, are to the Internal Revenue Code of 1986, as amended (the
"Code").
We have acted as legal counsel to Watson and Sub in connection with the
Merger. As such, and for the purpose of rendering this opinion, we have examined
(or will examine on or prior to the Effective Time of the Merger) and are
relying (or will rely) upon (without any independent investigation or review
thereof) the truth and accuracy, at all relevant times, of the statements,
covenants, representations and warranties contained in the following documents
(including all schedules and exhibits thereto):
1. The Agreement (including Exhibits and Schedules);
2. Representations made to us by Watson and Sub in a letter
reproduced as Exhibit A hereto;
3. Representations made to us by Oclassen in a letter reproduced
as Exhibit B hereto;
<PAGE> 2
Watson Pharmaceuticals, Inc.
January 30, 1997
Page 2
4. Representations made by certain shareholders of Oclassen in
"Affiliate Agreements"; and
5. Such other instruments and documents related to the formation,
organization and operation of Watson, Oclassen and Sub or to the consummation of
the Merger and the transactions contemplated thereby as we have deemed necessary
or appropriate.
In connection with rendering this opinion, we have assumed or obtained
representations (and are relying thereon, without any independent investigation
or review thereof) that:
A. Original documents (including signatures) are authentic, documents
submitted to us as copies conform to the original documents, and there has been
(or will be by the Effective Time of the Merger) due execution and delivery of
all documents where due execution and delivery are prerequisites to
effectiveness thereof;
B. Any representation or statement made "to the knowledge of" or
otherwise similarly qualified is correct without such qualification. As to all
matters in which a person or entity making a representation has represented that
such person or entity either is not a party to, does not have, or is not aware
of, any plan, intention, understanding or agreement to take an action, there is
in fact no such plan, intention, understanding or agreement and such action will
not be taken;
C. The Merger will be consummated pursuant to the Agreement and will be
effective under the laws of the State of Delaware;
D. The shareholders of Oclassen do not, and will not on or before the
Effective Time of the Merger, have an existing plan or intent to dispose of an
amount of Watson Common Stock to be received in the Merger (or to dispose of
Oclassen capital stock in anticipation of the Merger) such that the shareholders
of Oclassen will not receive and retain a meaningful continuing equity ownership
in Watson that is sufficient to satisfy the continuity of interest requirement
as specified in Treas. Reg. Section 1.368-1(b) and as interpreted in certain
Internal Revenue Service rulings and federal judicial decisions;
E. After the Merger, Oclassen will hold "substantially all" of its and
Sub's properties within the meaning of Section 368(a)(2)(E)(i) of the Code and
the regulations promulgated thereunder and will continue its historic business
or sue a significant portion of its historic business assets in a business;
<PAGE> 3
Watson Pharmaceuticals, Inc.
January 30, 1997
Page 3
F. To the extent any expenses relating to the Merger (or the "plan of
reorganization" within the meaning of Treas. Reg. Section 1.368-1(e) with
respect to the Merger) are funded directly or indirectly by a party other than
the incurring party, such expenses will be within the guidelines established in
Revenue Ruling 73-54, 1973-1 C.B. 187; any expenses paid on behalf of Oclassen
shareholders will not exceed one percent (1%) of the total consideration that
will be issued in the Merger to Oclassen shareholders in exchange for their
shares of Oclassen stock; and
G. No Oclassen shareholder guaranteed any Oclassen indebtedness
outstanding during the period immediately prior to the Merger, and at all
relevant times, including as of the Effective Time of the Merger, (i) no
outstanding indebtedness of Oclassen, Watson or Sub has or will represent equity
for tax purposes; (ii) no outstanding equity of Oclassen, Watson or Sub has or
will represent indebtedness for tax purposes; (iii) and no outstanding security,
instrument, agreement or arrangement that provides for, contains, or represents
either a right to acquire Oclassen stock or to share in the appreciation thereof
constitutes or will constitute "stock" for purposes of Section 368(e) of the
Code.
Based on our examination of the foregoing items and subject to the
assumption, exceptions, limitations and qualifications set forth herein, we are
of the opinion that, for federal income tax purposes, the Merger will be a
"reorganization" as defined in Section 368(a) of the Code.
In addition to the assumptions set forth above, this opinion is subject
to the exceptions, limitations and qualifications set forth below.
1. This opinion represents and is based upon our best judgment
regarding the application of federal income tax laws arising under the Code,
existing judicial decisions, administrative regulations and published rulings
and procedures. Our opinion is not binding upon the Internal Revenue Service or
the courts, and there is no assurance that the Internal Revenue Service will not
successfully assert a contrary position. Furthermore, no assurance can be given
that future legislative, judicial or administrative changes, on either a
prospective or retroactive basis, would not adversely affect the accuracy of the
conclusions stated herein. Nevertheless, we undertake no responsibility to
advise you of any new developments in the application or interpretation of the
federal income tax laws.
2. This opinion addresses only the classification of the Merger as a
reorganization under Section 368(a) of the Code, and does not address any other
federal, state, local or foreign tax consequences that may result from the
Merger or any other transaction (including any
<PAGE> 4
Watson Pharmaceuticals, Inc.
January 30, 1997
Page 4
transaction undertaken in connection with the Merger). In particular, except as
expressly stated in the preceding sentence, we express no opinion regarding (i)
whether and the extent to which any Oclassen shareholder who has provided or
will provide services to Oclassen, Watson or Sub will have compensation income
under any provision of the Code; (ii) the effects of such compensation income,
including but not limited to the effect upon the basis and holding period of the
Watson stock received by any such shareholder in the Merger; (iii) and the
potential application of the "golden parachute" provisions (Sections 280G,
3121(v)(2) and 4999) of the Code, the alternative minimum tax provisions
(Sections 55, 56 and 57) of the Code or Sections 305, 306, 357, 424 and 708,
or the regulations promulgated thereunder; (iv) the corporate level tax
consequences of the Merger to Watson, Sub or Oclassen, including without
limitation the recognition of any gain and the survival and/or availability,
after the Merger, of any of the federal income tax attributes or elections of
Oclassen, after application of any provision of the Code, as well as the
regulations promulgated thereunder and judicial interpretations thereof; (v)
the basis of any equity interest in Oclassen acquired by Watson in the Merger;
(vi) the tax consequences of any transaction in which Oclassen stock or a right
to acquire Oclassen stock was received: (vii) the tax consequences to any
Oclassen shareholder or to Oclassen, Watson or Sub of a forfeiture to Watson of
all or any part of the shares held in the escrow Fund; and (viii) the tax
consequences of the Merger (including the opinion set forth above) as applied
to shareholders of Oclassen with special tax status or circumstances and/or
holders of options or warrants for Oclassen stock or that may be relevant to
particular classes of Oclassen shareholders and/or holders of options or
warrants for Oclassen stock such as dealers in securities, corporate
shareholders subject to the alternative minimum tax, foreign persons, and
holders of shares acquired upon exercise of stock options or in other
compensatory transactions.
3. No opinion is expressed as to any transaction other than the Merger
as described in the Agreement or to any transaction whatsoever, including the
Merger, if all the transactions described in the Agreement are not consummated
in accordance with the terms of such Agreement and without waiver or breach of
any material provision thereof or if all of the representations, warranties,
statements and assumptions upon which we relied are not true and accurate at all
relevant times. In the event any one of the statements, representations,
warranties or assumptions upon which we have relied to issue this opinion is
incorrect, our opinion might be adversely affected and may not be relied upon.
4. This opinion has been delivered to you for the purpose of satisfying
the conditions set forth in Section 6.1(h) of the Agreement. We hereby consent
to the filing of this opinion as an exhibit to the Registration Statement on
Form S-4 (Registration No. 333-16275) filed with the Securities and Exchange
Commission with respect to the transactions described herein and to the
references to this firm in the section thereof entitled "The Merger--Federal
Income Tax Consequences."
<PAGE> 5
Watson Pharmaceuticals, Inc.
January 30, 1997
Page 5
Very truly yours,
D'ANCONA & PFLAUM
<PAGE> 1
Exhibit 8.2
January 30, 1997
Oclassen Pharmaceuticals, Inc.
100 Pelican Way
San Rafael, CA 94901
Ladies and Gentlemen:
This opinion is being delivered to you pursuant to Section 6.1(i) of
the Agreement and Plan of Merger (the "Agreement") among Watson Pharmaceuticals,
Inc., a Nevada corporation ("Watson"), its wholly-owned subsidiary, Opalacq Co.,
a Delaware corporation ("Watson Sub"), and Oclassen Pharmaceuticals, Inc., a
Delaware corporation ("Oclassen"), dated as of September 25, 1996, as amended
effective November 14, 1996. Pursuant to the Agreement, Watson Sub will merge
with and into Oclassen (the "Merger"), and Oclassen will become a wholly-owned
subsidiary of Watson.
Except as otherwise provided, capitalized terms referred to herein have
the meanings set forth in the Agreement. All section references, unless
otherwise indicated, are to the Internal Revenue Code of 1986, as amended (the
"Code").
We have acted as legal counsel to Oclassen in connection with the
Merger. As such, and for the purpose of rendering this opinion, we have examined
(or will examine on or prior to the Effective Time of the Merger) and are
relying (or will rely) upon (without any independent investigation or review
thereof) the truth and accuracy, at all relevant times, of the statements,
covenants, representations and warranties contained in the following documents
(including all schedules and exhibits thereto):
1. The Agreement (including Exhibits and Schedules);
2. Representations made to us by Watson and Watson Sub in a
letter reproduced as Exhibit A hereto (or to be made at or prior to the
Effective Time of the Merger);
3. Representations made to us by Oclassen in a letter reproduced
as Exhibit B hereto (or to be made at or prior to the Effective Time of the
Merger);
4. Representations made by certain shareholders of Oclassen in
"Continuity of Interest Certificates" or "Affiliate Agreements" (or to be made
at or prior to the Effective Time of the Merger); and
5. Such other instruments and documents related to the formation,
organization and operation of Watson, Oclassen and Watson Sub or to the
consummation of the Merger and the transactions contemplated thereby as we have
deemed necessary or appropriate.
In connection with rendering this opinion, we have assumed or obtained
representations (and are relying thereon, without any independent investigation
or review thereof) that:
A. Original documents (including signatures) are authentic,
documents submitted to us as copies conform to the original documents, and there
has been (or will be by the Effective Time of the Merger) due execution and
delivery of all documents where due execution and delivery are prerequisites to
effectiveness thereof;
B. Any representation or statement made "to the knowledge of "or
otherwise similarly qualified is correct without such qualification. As to all
matters in which a person or entity making a representation has represented that
such person or entity either is not a party to, does not have, or is not aware
of, any plan, intention, understanding or agreement to take an action, there is
in fact no such plan, intention, understanding or agreement and such action will
not be taken;
<PAGE> 2
C. The Merger will be consummated pursuant to the Agreement and
will be effective under the laws of the State of Delaware;
D. The shareholders of Oclassen do not, and will not on or before
the Effective Time of the Merger, have an existing plan or intent to dispose of
an amount of Watson Common Stock to be received in the Merger (or to dispose of
Oclassen capital stock in anticipation of the Merger) such that the shareholders
of Oclassen will not receive and retain a meaningful continuing equity ownership
in Watson that is sufficient to satisfy the continuity of interest requirement
as specified in Treas. Reg. Section 1.368-1(b) and as interpreted in certain
Internal Revenue Service rulings and federal judicial decisions;
E. After the Merger, Oclassen will hold "substantially all" of
its and Watson Sub's properties within the meaning of Section 368(a)(2)(E)(i) of
the Code and the regulations promulgated thereunder and will continue its
historic business or use a significant portion of its historic business assets
in a business;
F. To the extent any expenses relating to the Merger (or the
"plan of reorganization" within the meaning of Treas. Reg. Section 1.368-1(e)
with respect to the Merger) are funded directly or indirectly by a party other
than the incurring party, such expenses will be within the guidelines
established in Revenue Ruling 73-54, 1973-1 C.B. 187; any expenses paid on
behalf of Oclassen shareholders will not exceed one percent (1%) of the total
consideration that will be issued in the Merger to Oclassen shareholders in
exchange for their shares of Oclassen stock; and
G. No Oclassen shareholder guaranteed any Oclassen indebtedness
outstanding during the period immediately prior to the Merger, and at all
relevant times, including as of the Effective Time of the Merger, (i) no
outstanding indebtedness of Oclassen, Watson or Watson Sub has or will represent
equity for tax purposes; (ii) no outstanding equity of Oclassen, Watson or
Watson Sub has or will represent indebtedness for tax purposes; (iii) and no
outstanding security, instrument, agreement or arrangement that provides for,
contains, or represents either a right to acquire Oclassen stock or to share in
the appreciation thereof constitutes or will constitute "stock" for purposes of
Section 368(e) of the Code.
Based on our examination of the foregoing items and subject to the
assumptions, exceptions, limitations and qualifications set forth herein, we are
of the opinion that, for federal income tax purposes, the Merger will be a
"reorganization" as defined in Section 368(a) of the Code and Watson and
Oclassen will each be a party to that reorganization within the meaning of
Section 368(b) of the Code.
In addition to the assumptions set forth above, this opinion is subject
to the exceptions, limitations and qualifications set forth below.
1. This opinion represents and is based upon our best judgment
regarding the application of federal income tax laws arising under the Code,
existing judicial decisions, administrative regulations and published rulings
and procedures. Our opinion is not binding upon the Internal Revenue Service or
the courts, and there is no assurance that the Internal Revenue Service will not
successfully assert a contrary position. Furthermore, no assurance can be given
that future legislative, judicial or administrative changes, on either a
prospective or retroactive basis, would not adversely affect the accuracy of the
conclusions stated herein. Nevertheless, we undertake no responsibility to
advise you of any new developments in the application or interpretation of the
federal income tax laws.
2. This opinion addresses only the classification of the Merger
as a reorganization under Section 368(a) of the Code, and does not address any
other federal, state, local or foreign tax consequences that may result from the
Merger or any other transaction (including any transaction undertaken in
connection with the Merger). In particular, except as expressly stated in the
preceding sentence, we express no opinion regarding (i) whether and the extent
to which any Oclassen shareholder who has provided or will provide services to
Oclassen, Watson or Watson Sub will have compensation income under any provision
of the Code; (ii) the effects of such compensation income, including but not
limited to the effect upon the basis and holding period of the Watson stock
received by any such
<PAGE> 3
shareholder in the Merger; (iii) the potential application of the "golden
parachute" provisions (Sections 280G, 3121(v)(2) and 4999) of the Code, the
alternative minimum tax provisions (Sections 55, 56 and 57) of the Code or
Sections 305, 306, 357, 424, and 708, or the regulations promulgated thereunder;
(iv) the corporate level tax consequences of the Merger to Watson, Watson Sub or
Oclassen, including without limitation the recognition of any gain and the
survival and/or availability, after the Merger, of any of the federal income tax
attributes or elections of Oclassen, after application of any provision of the
Code, as well as the regulations promulgated thereunder and judicial
interpretations thereof; (v) the basis of any equity interest in Oclassen
acquired by Watson in the Merger; (vi) the tax consequences of any transaction
in which Oclassen stock or a right to acquire Oclassen stock was received; (vii)
the tax consequences to any Oclassen shareholder or to Oclassen, Watson or
Watson Sub of a forfeiture to Watson of all or any part of the shares held in
the Escrow Fund; and (viii) the tax consequences of the Merger (including the
opinion set forth above) as applied to shareholders of Oclassen with special tax
status or circumstances and/or holders of options or warrants for Oclassen stock
or that may be relevant to particular classes of Oclassen shareholders and/or
holders of options or warrants for Oclassen stock such as dealers in securities,
corporate shareholders subject to the alternative minimum tax, foreign persons,
and holders of shares acquired upon exercise of stock options or in other
compensatory transactions.
3. No opinion is expressed as to any transaction other than the
Merger as described in the Agreement or to any transaction whatsoever, including
the Merger, if all the transactions described in the Agreement are not
consummated in accordance with the terms of such Agreement and without waiver or
breach of any material provision thereof or if all of the representations,
warranties, statements and assumptions upon which we relied are not true and
accurate at all relevant times. In the event any one of the statements,
representations, warranties or assumptions upon which we have relied to issue
this opinion is incorrect, our opinion might be adversely affected and may not
be relied upon. In addition, in the event that executed copies of the letters
and agreements referred to in 2, 3 or 4 of the third paragraph of this letter
are not furnished to us at or prior to the Effective Time, this opinion shall
be void and of no further effect, and may not be relied upon.
4. This opinion has been delivered to you for the purpose of
satisfying the conditions set forth in Section 6.1(i) of the Agreement. We
hereby consent to the filing of this opinion as an exhibit to the Registration
Statement on Form S-4 (Registration No. 333-16275) filed with the Securities and
Exchange Commission with respect to the transactions described herein and to the
references to this firm in the section thereof entitled "The Merger -- Federal
Income Tax Consequences."
Very truly yours,
VENTURE LAW GROUP
A Professional Corporation
<PAGE> 1
EXHIBIT 11.1
Watson Pharmaceuticals, Inc.
Computation of Earnings Per Share
Years Ended December 31, 1995, 1994 and 1995
and the Nine Months Ended September 30, 1996
(in thousands, except per share data)
<TABLE>
<CAPTION>
Nine Months Nine Months
Year Ended December 31, Ended Ended
---------------------------- September 30, September 30,
1993 1994 1995 1996 1995
---- ---- ---- ------------- -------------
<S> <C> <C> <C> <C> <C>
WATSON PHARMACEUTICALS, INC.
- ----------------------------
Net income $50,417 $36,545 $47,890 $53,617 $31,011
======= ======= ======= ======= =======
Weighted average number of common
shares outstanding 34,336 35,663 36,044 36,655 35,783
Net additional shares issuable in
connection with stock options
pursuant to the treasury stock
option 1,168 852 1,099 969 1,204
------- ------- ------- ------- -------
Weighted average number of common
stock and common equivalent
shares outstanding 35,504 36,515 37,143 37,624 36,987
======= ======= ======= ======= =======
Earnings per share $ 1.42 $ 1.00 $ 1.29 $ 1.43 $ 0.84
======= ======= ======= ======= =======
OCLASSEN PHARMACEUTICALS, INC.
- ------------------------------
PRIMARY EARNINGS PER SHARE:
Net income $ 1,186 $ 1,957 $ 2,627 $ 2,760 $1,800
Accretion of issuance costs and
accrued dividends 109 1,917 2,717 2,038 2,038
------- ------- -------- ------- ------
Net income (loss) available to common
stockholders $ 1,077 $ 40 $ (90) $ 722 $ (238)
======= ======= ======== ======= ======
Weighted average common shares
outstanding 1,702 1,705 1,719 1,770 1,718
Common stock options and warrants
outstanding (using the treasury
stock method) -- -- -- 654 --
------- ------- ------- ------- ------
Total 1,702 1,705 1,719 2,424 1,718
======= ======= ======= ======= ======
Earnings (loss) per share $ 0.63 $ 0.02 $ (0.05) $ 0.30 $(0.14)
======= ======= ======= ======= ======
FULLY DILUTED EARNINGS PER SHARE:
Net income (loss) available to
common stockholders $ 1,077 $ 40 $ (90) $ 722 $ (238)
Accretion of issuance costs and
accrued dividends for dilutive
convertible preferred stock 109 -- -- 2,038 --
------- ------- ------- ------- ------
Adjusted income, assuming conversion $ 1,186 $ 40 $ (90) $ 2,760 $ (238)
of diluted preferred stock ======= ======= ======= ======= ======
Weighted average common shares
outstanding 1,702 1,705 1,719 1,770 1,718
Series A, B, C, D and E convertible
preferred stock (if dilutive) 7,085 -- -- 7,092 --
Common stock options and warrants
outstanding (using the treasury
stock method-if dilutive) -- -- -- 1,201 --
------- ------- ------- ------- ------
Total 8,787 1,705 1,719 10,063 1,718
======= ======= ======= ======= ======
Earnings (loss) per share $ 0.13 $ 0.02 $ (0.05) $ 0.27 $(0.14)
======= ======= ======= ======= ======
WATSON & OCLASSEN - PRO FORMA COMBINED:
- ---------------------------------------
Pro forma combined net income $51,603 $38,502 $50,517 $56,377
======= ======= ======= =======
Reconciliation of Watson historical
weighted average number of common
and common equivalent shares
outstanding to pro forma combined
weighted average shares:
Watson historical weighted average
number of common and common
equivalent shares outstanding 35,504 36,515 37,143 37,624
Weighted average shares issued
in connection with the Merger of
Watson and Oclassen 3,727 3,727 3,727 3,727
------- ------- ------- -------
Pro forma weighted average number
of common and common equivalent
shares outstanding 39,231 40,242 40,870 41,351
======= ======= ======= =======
Pro forma combined earnings
per share $ 1.32 $ 0.96 $ 1.24 $ 1.36
======= ======= ======= =======
</TABLE>
<PAGE> 1
Exhibit 23.1
CONSENT OF PRICE WATERHOUSE LLP
We hereby consent to the incorporation by reference in the Prospectus
constituting part of this Registration Statement on Form S-4 of Watson
Pharmaceuticals, Inc. (the "Company") of our report dated February 5, 1996,
except as to Note 11, which is as of March 4, 1996 appearing on page F-2 of the
Company's Annual Report on Form 10-K for the year ended December 31, 1995. We
also consent to the reference to us under the heading "Experts" in such
Prospectus.
Price Waterhouse LLP
Costa Mesa, California
January 31, 1997
<PAGE> 1
Exhibit 23.2
CONSENT OF ARTHUR ANDERSEN LLP
As independent public accountants, we hereby consent to the use of our
report dated February 8, 1996 included herein and to all references to our Firm
included in this Registration Statement.
/s/ Arthur Andersen LLP
----------------------
ARTHUR ANDERSEN LLP
Oakland, California,
January 31, 1997
<PAGE> 1
Exhibit 23.3
CONSENT OF COOPERS & LYBRAND L.L.P.
We consent to the incorporation by reference in the registration statement of
Watson Pharmaceuticals, Inc. on Form S-4 (File No. 333-16275), of our report
dated February 7, 1995, on our audits of the consolidated financial statements
and financial statement schedule of Circa Pharmaceuticals, Inc. as of December
31, 1994, and for the years ended December 31, 1994 and 1993. We also consent to
the reference to our Firm under the caption "Experts."
COOPERS & LYBRAND L.L.P.
/s/ Coopers & Lybrand L.L.P.
Melville, New York
January 31, 1997.
<PAGE> 1
Exhibit 23.4
CONSENT OF DELOITTE & TOUCHE LLP
We consent to the incorporation by reference in this Amendment No. 2 to
Registration Statement No. 333-16275 of Watson Pharmaceuticals, Inc. on Form S-4
of our report dated February 2, 1996, relating to the consolidated financial
statements of Somerset Pharmaceuticals, Inc. and subsidiaries as of December 31,
1995 and 1994 and for each of the three years in the period then ended,
appearing in the Annual Report on Form 10-K/A of Watson Pharmaceuticals, Inc.
for the year ended December 31, 1995 and to the reference to us under the
heading "Experts" in the Prospectus, which is part of such Registration
Statement.
Deloitte & Touche LLP
Pittsburgh, Pennsylvania
January 31, 1997
<PAGE> 1
EXHIBIT 23.9
SPECIAL NEVADA COUNSEL'S CONSENT
WATSON PHARMACEUTICALS, INC.
We hereby consent to the references to our firm included in the
registration statement and to the filing of our opinion as an exhibit to the
registration statement and any and all amendments thereto (including pre-
effective and post-effective amendments).
/s/ Kummer Kaempfer Bonner & Renshaw
-----------------------------------
KUMMER KAEMPFER BONNER & RENSHAW
Las Vegas, Nevada
January 30, 1997
