<PAGE> 1
This filing is made pursuant
to Rule 424(b)(5) under
the Securities Act of
1933 in connection with
Registration No. 333-49079
SUBJECT TO COMPLETION, DATED MAY 7, 1998
PRELIMINARY PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED MAY 6, 1998)
$150,000,000
WATSON PHARMACEUTICALS, INC.
LOGO
% SENIOR NOTES DUE 2008
The % Senior Notes due 2008 (the "Notes") are being offered (the
"Offering") by Watson Pharmaceuticals, Inc., a Nevada corporation ("Watson" or
the "Company"). Interest on the Notes is payable semi-annually on
and of each year, commencing on
, 1998. The Notes are general, unsecured obligations of the
Company, ranking pari passu in right of payment with all other senior, unsecured
obligations of the Company. As of March 31, 1998, the Company and its
subsidiaries had approximately $73,036,000 aggregate principal amount of
indebtedness outstanding. The Notes are effectively subordinated to liabilities
of the Company's subsidiaries. See "Description of Notes."
The Notes are redeemable, in whole or in part, at the option of the
Company, at any time and from time to time at a redemption price equal to the
Make-Whole Price (as defined). See "Description of Notes -- Redemption at the
Company's Option." The Notes will not be subject to any sinking fund.
The Notes will each be represented by a Global Note (as defined) registered
in the name of the nominee of the Depositary (as defined), which will act as
securities depositary. Beneficial interests in a Global Note will be shown on,
and transfers thereof will be effected only through, records maintained by the
Depositary and its direct and indirect participants. Except as described herein,
the Notes will not be issued in definitive form. See "Description of
Notes -- Book-Entry, Delivery and Form."
THESE SECURITIES 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 PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRICE UNDERWRITING PROCEEDS
TO THE DISCOUNT AND TO THE
PUBLIC(1) COMMISSIONS(2) COMPANY(3)
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------
Per Note................................................. % % %
Total.................................................... $ $ $
</TABLE>
- --------------------------------------------------------------------------------
(1) Plus accrued interest, if any, from the date of issuance.
(2) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended (the "Securities Act"). See "Underwriting."
(3) Before deducting expenses payable by the Company estimated at $600,000.
The Notes are offered by the Underwriters, subject to prior sale, when, as
and if delivered to and accepted by them, subject to certain conditions,
including their rights to withdraw, cancel or reject orders in whole or in part.
It is expected that delivery of the Notes will be made in New York, New York, on
or about , 1998, in book-entry form through the facilities
of the Depositary against payment therefor in immediately available funds.
DONALDSON, LUFKIN & JENRETTE GOLDMAN, SACHS & CO.
SECURITIES CORPORATION
INFORMATION CONTAINED IN THIS PROSPECTUS SUPPLEMENT IS SUBJECT TO COMPLETION
PURSUANT TO RULE 424 UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"). A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS
BEEN DECLARED EFFECTIVE BY THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO
RULE 415 UNDER THE SECURITIES ACT. A FINAL PROSPECTUS SUPPLEMENT AND PROSPECTUS
WILL BE DELIVERED TO PURCHASERS OF THE SECURITIES OFFERED HEREBY. THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS SHALL NOT CONSTITUTE AN
OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE
OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD
BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF
ANY SUCH STATE.
<PAGE> 2
THE UNDERWRITERS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICES OF THE NOTES IN THE OPEN
MARKET. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
<PAGE> 3
PROSPECTUS SUPPLEMENT SUMMARY
This Prospectus Supplement (the "Prospectus Supplement") supplements and is
made part of the Company's Prospectus dated May 6, 1998. To the extent there
exists inconsistent information as between the Prospectus Supplement and the
Prospectus, the Prospectus Supplement shall be deemed to govern.
The following summary is qualified in its entirety by the more detailed
information, including the Company's Annual Report on Form 10-K, as amended, for
the year ended December 31, 1997; the Company's Current Reports on Form 8-K
filed March 16, 1998 and April 30, 1998; and the Company's Proxy Statement filed
March 31, 1998; included or incorporated by reference in this Prospectus
Supplement and the accompanying Prospectus. The "Company" and "Watson" refer to
Watson Pharmaceuticals, Inc. and its subsidiaries and predecessors, unless
otherwise indicated or the context requires otherwise. Capitalized terms used in
this Prospectus Supplement but not defined herein have the meanings assigned to
them in the accompanying Prospectus, to the extent defined therein or
incorporated therein by reference. See "Prospectus -- Incorporation of Certain
Documents by Reference" and "-- Cautionary Statement for Purposes of the Safe
Harbor Provisions of the Private Securities Litigation Reform Act of 1995."
THE COMPANY
Watson is engaged in the research and development, production, marketing
and distribution of off-patent (generic) pharmaceutical products and branded
pharmaceutical products. The Company is recognized as a leader in the off-patent
pharmaceutical product industry. The Company is a fully integrated
pharmaceutical company which: (i) develops, acquires and markets niche,
difficult-to-produce, off-patent pharmaceuticals, (ii) develops and acquires
branded pharmaceutical products, and (iii) markets such products through
pharmaceutical companies, joint ventures and its own marketing and sales
efforts. The Company has an extensive product line of over 90 off-patent and 17
branded products. The Company pursues a balanced strategy of generating revenue
through its long-established off-patent pharmaceutical business and emerging
branded pharmaceutical business and capitalizing on its proven capabilities to
support the development of off-patent and branded products. Branded
pharmaceutical products are generally characterized by higher profit margins
over the course of the products' life cycle. In 1997 off-patent product sales
accounted for 59% of total revenues, branded products sales accounted for 37% of
total revenues and royalty income from branded sales accounted for 4% of total
revenues. The Company markets branded pharmaceutical products in the United
States primarily through its direct sales force of over 300 representatives. In
1997, the Company generated $338.3 million in total revenues and $162.3 million
of EBITDA, as adjusted (as defined in Note 4 to "Summary Financial
Data -- Selected Historical Financial Data").
Several strategic acquisitions in the past 18 months have contributed
significantly to the Company's growth. Watson acquired The Rugby Group, Inc.
("Rugby"), a developer and marketer of off-patent pharmaceutical products, on
February 27, 1998. See "Recent Developments." During 1997, the Company acquired
Oclassen Pharmaceuticals, Inc. ("Oclassen"), a developer and marketer of
dermatology products and Royce Laboratories, Inc. ("Royce"), a developer and
manufacturer of off-patent pharmaceutical products. The Company also made
several product acquisitions during 1997, including the acquisition of oral
contraceptive products from G.D. Searle & Co. and the acquisition of Dilacor
XR(R), a hypertension product, from Rhone-Poulenc Rorer, Inc. The Company
continues to review opportunities to acquire or invest in other complementary
technologies, businesses and products or product rights.
The principal executive offices of Watson are located at 311 Bonnie Circle,
Corona, California 91720 and the telephone number is (909) 270-1400. Watson's
Common Stock is traded on the New York Stock Exchange under the symbol "WPI."
RECENT DEVELOPMENTS
On February 27, 1998, Watson and Hoechst Marion Roussel, Inc. ("HMR")
finalized an agreement by which Watson acquired all of the outstanding stock of
Rugby, HMR's wholly owned United States off-patent drug subsidiary. In addition,
HMR has agreed to manufacture certain off-patent products for Watson. The
S-3
<PAGE> 4
acquisition was accounted for as a purchase, and the financial results of Rugby,
from the date of acquisition, have been consolidated with the Company's
financial statements. Immediately after the acquisition, Rugby became a wholly
owned subsidiary of Watson.
Major assets obtained in the Rugby acquisition include approximately 35
owned products, licenses of several HMR off-patent products, and sales and
marketing capabilities for pharmaceutical products. The consideration paid by
Watson in connection with the Rugby acquisition consisted of an initial cash
payment of $67.5 million, future royalty payments on sales of certain products
licensed from HMR and a contingent payment based on future operating results.
The initial cash payment was made from cash on hand. Watson expects to make
future contingent payments from a combination of cash on hand and future
operating cash flows. In connection with the Rugby acquisition, Watson recorded
a special non-cash charge of $18.8 million for the write-off of in-process
research and development associated with Rugby's wholly owned subsidiary,
Chelsea Laboratories, Inc.
On April 30, 1998, the Company reported its financial results for the first
quarter ended March 31, 1998. For this three month period, the Company generated
revenue of $121.9 million and EBITDA, as adjusted (as defined in Note 4 to
"Summary Financial Data -- Selected Historical Financial Data") of $54.0
million.
THE OFFERING
Securities Offered............ $150,000,000 aggregate principal amount of %
Senior Notes due 2008.
Maturity...................... , 2008.
Interest Payment Dates........ and of each year,
commencing , 1998.
Optional Redemption........... The Notes are redeemable, in whole or in part,
at the option of the Company, at any time and
from time to time, at a redemption price equal
to the Make-Whole Price. See "Description of
Notes -- Redemption at the Company's Option."
Sinking Fund.................. None.
Ranking....................... The Notes are general, unsecured obligations of
the Company, ranking pari passu in right of
payment with all other senior, unsecured
obligations of the Company. See "Description of
Notes -- General." As of March 31, 1998, the
Company and its subsidiaries had approximately
$73,036,000 aggregate principal amount of
indebtedness outstanding. The Notes are
effectively subordinated to liabilities of the
Company's subsidiaries. See "Description of
Notes -- General."
Covenants..................... The Indenture (as defined) governing the Notes
will contain covenants, including, but not
limited to, covenants limiting (i) the creation
of liens securing Indebtedness, (ii) Sale and
Leaseback Transactions, and (iii) the
incurrence of Indebtedness by Subsidiaries.
Use of Proceeds............... The net proceeds from the sale of the Notes in
this Offering are expected to be used for
general corporate purposes, including working
capital to fund potential acquisitions of
complementary products, technologies or
businesses, future commitments with respect to
recent acquisitions and capital expenditures.
See "Use of Proceeds."
S-4
<PAGE> 5
USE OF PROCEEDS
The proceeds to the Company from the sale of the Notes in this Offering,
after deducting underwriting discounts and commissions and estimated offering
expenses, are estimated to be $148,275,000. The net proceeds of this Offering
are expected to be used for general corporate purposes, including working
capital to fund potential acquisitions of complementary products, technologies
or businesses, future commitments with respect to recent acquisitions, and
capital expenditures.
CAPITALIZATION
The following table sets forth the unaudited consolidated cash, cash
equivalents and marketable securities and capitalization of the Company as of
March 31, 1998, on a historical basis and as adjusted to give effect to the sale
of the Notes. This table should be read in connection with the audited
consolidated financial statements of the Company and related notes included in
the Company's Annual Report on Form 10-K for 1997, as amended (the "Form 10-K")
and incorporated by reference herein.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1998
----------------------------
HISTORICAL AS ADJUSTED
---------- --------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Cash, cash equivalents and marketable securities............ $ 35,212 $183,487
======== ========
Short-term debt:
Current portion of long-term debt......................... $ 859 $ 859
Current liability from acquisition of product rights...... 50,000 50,000
-------- --------
Total short-term debt............................. 50,859 50,859
-------- --------
Long-term debt:
Long-term debt............................................ 2,177 2,177
% Senior Notes due , 2008.......... 150,000
Long-term liability from acquisition of product rights.... 20,000 20,000
-------- --------
Total long-term debt.............................. 22,177 172,177
-------- --------
Total stockholders' equity.................................. 595,461 595,461
-------- --------
Total capitalization........................................ $668,497 $818,497
======== ========
</TABLE>
S-5
<PAGE> 6
SUMMARY FINANCIAL DATA
The following table sets forth selected consolidated historical financial
data of the Company. The consolidated historical financial data, insofar as they
relate to each of the years 1993 through 1997, have been derived from audited
financial statements of the Company, including consolidated balance sheets at
December 31, 1997 and 1996 and the related consolidated statements of income and
of cash flows for the three years ended December 31, 1997, and notes thereto
which are incorporated by reference herein. The data for the three months ended
March 31, 1997 and 1998 have been derived from unaudited financial statements of
the Company which, in the opinion of management, include all adjustments,
consisting only of normal, recurring adjustments, necessary for a fair statement
of the results for the unaudited interim periods.
The following selected financial data of the Company should be read in
conjunction with the audited consolidated financial statements and accompanying
notes thereto and the "Management's Discussion and Analysis of Financial
Conditions and Results of Operations," in the Form 10-K which is incorporated by
reference herein.
On February 27, 1998, Watson acquired all of the outstanding common stock
of Rugby. The acquisition was accounted for as a purchase and the financial
results of Rugby from the acquisition date have been recorded in the Company's
consolidated financial statements. The Company merged with Circa
Pharmaceuticals, Inc. ("Circa"), in July 1995, with Oclassen in February 1997,
and with Royce in April 1997. These transactions were accounted for as poolings
of interests, and consequently, the consolidated financial data presented
include those of Circa, Oclassen, and Royce for all periods presented. In
October 1997, the Company effected a two-for-one stock split in the form of a
100% stock dividend. Share and per share amounts for all reported periods have
been restated to reflect the stock split.
SELECTED HISTORICAL FINANCIAL DATA
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------------------- ------------------
1993 1994 1995 1996 1997 1997 1998
-------- -------- -------- -------- -------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED INCOME STATEMENT DATA:
Total revenue.............................. $ 99,022 $129,103 $192,474 $250,801 $338,264 $65,740 $121,872
-------- -------- -------- -------- -------- ------- --------
Operating expenses:
Cost of revenues......................... 51,185 62,495 81,417 101,921 125,057 25,688 45,100
Research and development................. 18,621 23,525 24,562 22,895 18,055 4,619 5,648
Selling, general and administrative...... 30,836 30,368 34,873 38,891 50,937 10,424 20,757
Amortization of product rights........... -- -- 306 386 7,213 -- 4,617
Merger and acquisition charges........... -- -- 13,939 -- 14,718 8,897 18,790
-------- -------- -------- -------- -------- ------- --------
Total operating expenses........... 100,642 116,388 155,097 164,093 215,980 49,628 94,912
-------- -------- -------- -------- -------- ------- --------
Operating income (loss).................... (1,620) 12,715 37,377 86,708 122,284 16,112 26,960
-------- -------- -------- -------- -------- ------- --------
Other income:
Equity in earnings of joint ventures..... 24,688 24,968 22,766 17,909 10,694 4,135 1,610
Investment and other income, net(1)...... 2,685 10,195 12,905 9,861 11,620 3,515 1,005
-------- -------- -------- -------- -------- ------- --------
Total other income................. 27,373 35,163 35,671 27,770 22,314 7,650 2,615
-------- -------- -------- -------- -------- ------- --------
Income before provision for income
taxes.................................. 25,753 47,878 73,048 114,478 144,598 23,762 29,575
Provision (benefit) for income
taxes(2)............................... (21,917) 10,853 24,867 35,916 54,414 9,711 17,750
-------- -------- -------- -------- -------- ------- --------
Net income......................... $ 47,670 $ 37,025 $ 48,181 $ 78,562 $ 90,184 $14,051 $ 11,825
======== ======== ======== ======== ======== ======= ========
Basic earnings per share................... $ 0.60 $ 0.45 $ 0.58 $ 0.92 $ 1.04 $ 0.16 $ 0.13
======== ======== ======== ======== ======== ======= ========
Diluted earnings per share................. $ 0.59 $ 0.44 $ 0.56 $ 0.89 $ 1.01 $ 0.16 $ 0.13
======== ======== ======== ======== ======== ======= ========
Weighted shares, no dilution............... 78,982 81,849 83,317 85,028 86,991 86,279 88,301
======== ======== ======== ======== ======== ======= ========
Weighted shares, diluted basis............. 81,128 83,563 85,515 88,081 89,325 88,377 90,588
======== ======== ======== ======== ======== ======= ========
</TABLE>
S-6
<PAGE> 7
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF MARCH 31,
-------------------------------------------------------- ----------------------
1993 1994 1995 1996 1997 1997 1998
-------- -------- -------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Current assets................... $183,115 $206,814 $234,754 $326,203 $246,765 $359,036 $203,509
Working capital.................. 151,002 178,479 195,091 292,948 146,925 318,346 73,313
Total assets..................... 265,825 298,468 364,235 472,854 754,981 524,038 775,658
Total debt....................... 2,718 5,757 4,470 4,889 98,249 4,634 73,036
Total stockholders' equity....... $206,092 $249,330 $320,088 $423,108 $565,010 $457,742 $595,461
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------------------------------- ----------------------
1993 1994 1995 1996 1997 1997 1998
-------- -------- -------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Ratio of earnings to fixed
charges(3)..................... 25.9 41.0 64.6 103.1 123.6 76.8 104.0
EBITDA, as adjusted(4)........... $ 27,215 $ 42,774 $ 81,448 $113,242 $162,290 $ 31,241 $ 54,047
EBITDA, as adjusted, as a % of
total revenue.................. 27.5% 33.1% 42.3% 45.2% 48.0% 47.5% 44.3%
Capital expenditures............. $ 14,571 $ 22,255 $ 23,877 $ 12,835 $ 14,605 $ 2,151 $ 4,256
</TABLE>
- ---------------
(1) Included in "Investment and other income, net" in 1993, 1994 and 1995 were
gains from the sale of common stock of Marsam Pharmaceuticals, Inc.
("Marsam") of $14.5 million, $3.2 million and $6.2 million, respectively.
The Company has no remaining investment in Marsam. Also included in
"Investment and other income, net" in 1993 was a provision for legal
settlement of $7.6 million and a partnership loss of $7.6 million. In 1994,
a gain from legal settlement of $2.3 million was recorded. The legal
settlements were the result of lawsuits in which Circa was a defendant; all
matters were settled by the first quarter of 1996.
(2) In conjunction with the acquisition of Circa in 1995, an income tax benefit
of $29.8 million was recorded for the year 1993. This income tax benefit
resulted from a reduction in the valuation allowance of Circa's net deferred
tax assets. These net deferred tax assets represented net operating loss and
tax credit carryforwards generated by Circa prior to its merger with the
Company.
(3) The ratio of earnings to fixed charges is computed by dividing the sum of
earnings from continuing operations before provision for income taxes and
fixed charges, by total fixed charges. Total fixed charges consist of
interest expense and the interest factor of all rentals, assumed to be
one-third of consolidated rent expense. The ratio of earnings to fixed
charges above reflects the acquisitions in 1997 and 1995 accounted for under
the pooling of interests method as further discussed in Notes 1 and 2 of the
Notes to the Consolidated Financial Statements in the Form 10-K.
(4) EBITDA, as adjusted, is defined as operating income plus depreciation,
amortization, merger and acquisition charges and equity in earnings of joint
ventures. EBITDA, as adjusted is presented because it is a widely accepted
financial indicator of a company's ability to incur and service debt.
However, EBITDA should not be considered in isolation nor as a substitute
for net income or cash flow data prepared in accordance with generally
accepted accounting principles.
EBITDA is calculated as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------------------- ------------------
1993 1994 1995 1996 1997 1997 1998
------- ------- ------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Operating income (loss).................. $(1,620) $12,715 $37,377 $ 86,708 $122,284 $16,112 $26,960
Equity in earnings of joint ventures..... 24,688 24,968 22,766 17,909 10,694 4,135 1,610
Depreciation expense..................... 4,147 5,091 6,019 7,283 7,381 2,097 2,070
Amortization expense..................... -- -- 1,347 1,342 7,213 -- 4,617
Merger and acquisition charges........... -- -- 13,939 -- 14,718 8,897 18,790
------- ------- ------- -------- -------- ------- -------
EBITDA, as adjusted.............. $27,215 $42,774 $81,448 $113,242 $162,290 $31,241 $54,047
======= ======= ======= ======== ======== ======= =======
</TABLE>
S-7
<PAGE> 8
THE COMPANY
Watson is engaged in the research and development, production, marketing
and distribution of off-patent (generic) pharmaceutical products and branded
pharmaceutical products (which include proprietary products, proprietary
products that have lost their patent pharmaceutical protection and branded
generic products). The Company is recognized as a leader in the off-patent
industry. The Company is a fully integrated pharmaceutical company which: (i)
develops, acquires and markets niche, difficult-to-produce, off-patent
pharmaceuticals, (ii) develops and acquires branded pharmaceutical products, and
(iii) markets such products through pharmaceutical companies, joint ventures and
its own marketing and sales efforts. The Company has an extensive product line
of over 90 off-patent and 17 branded products. The Company pursues a balanced
strategy of generating revenue through its long-established off-patent
pharmaceutical business and emerging branded pharmaceutical business and
capitalizing on its proven capabilities to support the development of off-patent
and branded products. Branded pharmaceutical products are generally
characterized by higher profit margins over the course of the products' life
cycle. In 1997 off-patent product sales accounted for 59% of total revenues,
branded products sales accounted for 37% of total revenues and royalty income
from branded sales accounted for 4% of total revenues. The Company markets
branded pharmaceutical products in the United States primarily through its
direct sales force of over 300 representatives. In 1997, the Company generated
$338.3 million in total revenues and $162.3 million of EBITDA, as adjusted.
INDUSTRY
United States sales of branded pharmaceuticals aggregated approximately $81
billion in 1997. In addition, in 1997 the United States off-patent
pharmaceutical industry had total United States sales of approximately $13
billion. Watson's sales of off-patent drugs have increased significantly in
recent years. The Company believes this growth is attributable to a number of
factors, including (i) modification of certain federal and state laws to permit
or mandate substitution of off-patent drugs by pharmacists, (ii) the enactment
of abbreviated procedures for obtaining FDA approval to manufacture off-patent
prescription drugs, (iii) changes in government and third-party payor
reimbursement policies to encourage cost containment by health care providers
and consumers, (iv) increased acceptance of off-patent drugs by physicians,
pharmacists and consumers, and (v) an increasing number of branded
pharmaceuticals which have recently lost patent protection and for which Watson
has acquired FDA approval to manufacture.
Over the next few years, patent protection on a large number of branded
drugs will expire, thereby providing additional off-patent product
opportunities. The branded products targeted for off-patent development by
Watson include those with specialized or growing markets as well as some of
those products with annual United States sales of over $100 million.
When a new drug is developed, the innovator company typically applies for
and is granted a product patent which expires on the date 20 years from the
first date a patent application was filed (or, for patents in force on, or that
result from a patent application filed before, June 8, 1995, the later of such
date and the date 17 years from the date a patent is issued) plus certain
extensions which may be available. Because no other company can, without
authorization, make, use, sell, import or offer for sale an off-patent version
of such original branded product until the patent on such product expires, the
innovator has a monopoly during the patent period on marketing a branded
product. Once the product patent and, if applicable, the exclusivity period (the
three or five year period during which there is an exclusive right to market a
brand name product granted by the FDA), on a product expires, other companies
may be able to market an off-patent version of that branded product if no other
patents or exclusivity periods apply and regulatory approval is obtained. Upon
regulatory approval of an off-patent product, it is labeled as an off-patent
substitute for the branded product and pharmacists generally can substitute the
off-patent product for the branded product prescribed by a physician (and
frequently must substitute the lower cost off-patent product for patients
covered by a managed care or insurance program which pays pharmacy benefits).
An off-patent pharmaceutical product is approved by the FDA upon the
establishment of bioequivalence to the original branded product. Demonstration
of bioequivalence requires that the off-patent product produce the same rate of
release and concentration of the drug in the blood over time as the original
branded product.
S-8
<PAGE> 9
Such off-patent products are generally sold at a significant price discount to
the corresponding branded product and are generally manufactured by independent
off-patent pharmaceutical companies to compete with the larger pharmaceutical
companies on the basis of price. Many off-patent products have received
widespread market acceptance. Accordingly, certain off patent pharmaceuticals
have provided a safe, effective and cost-efficient alternative to users of these
drugs.
Products which include the same compound as the original branded products
but are not off-patent versions of these brands may, however, be approved by the
FDA on the basis of the more extensive regulatory procedures applicable to
branded products. Once such products are approved, they may be marketed as
distinct brands in competition with other brand name products upon expiration of
the applicable patent on the drug compound in the original branded products.
Watson believes that there is an opportunity for the marketing of branded
generic products and has increased its emphasis in this area.
BUSINESS STRATEGY
The Company pursues a balanced strategy of generating revenue through its
long-established off-patent pharmaceutical business and emerging branded
pharmaceutical business and capitalizing on its proven capabilities to support
the development of off-patent and branded pharmaceutical products.
The Company's strategy is to:
O Continue to develop off-patent and branded products.
O Seek to acquire or license existing branded products or proprietary
products currently in development.
O Expand the Company's product offerings to physicians and prescribers
currently marketed by its specialty sales forces.
O Focus on those products that are difficult to produce or are otherwise in
niche markets which may result in sales stability and favorable margins.
The Company has made significant recent acquisitions of businesses,
products and technologies, and continues to review on a regular basis potential
opportunities to acquire or invest in other technologies, products or product
rights and businesses complementary to its existing business. Some of the
proceeds of this Offering may be used for acquisitions. See "Use of Proceeds."
The Company may require additional financing in the future to fund potential
acquisitions and continues to consider alternative sources of financing.
PRODUCTS
Off-Patent Pharmaceuticals. The Company is recognized as one of the leaders
in the off-patent pharmaceutical industry. Watson markets over 90 off-patent
prescription products in capsule or tablet forms in approximately 193 dosage
strengths. The Company received the first abbreviated new drug application
("ANDA") approval for 42 products and/or dosage strengths, and, as of April 30,
1998, the Company believed it held the only ANDA approval for 18 products and/or
dosage strengths. The Company promotes its products to drug distributors,
pharmaceutical wholesalers, chain drug stores, hospitals, health maintenance
organizations and other drug companies. Certain of the Company's more
significant off-patent products are in the pain management, hormonal,
cardiovascular, and central nervous system therapeutic categories. During 1997,
seven dosages in the hydrocodone bitartrate/acetaminophen product group
accounted for approximately 21% of Watson's total revenues.
Branded Pharmaceuticals. As a result of recent acquisitions, the
proportionate revenues derived from Watson's branded business increased
significantly. The Company's strategy regarding branded pharmaceuticals is to
acquire additional branded products, particularly branded generic products,
which can be effectively promoted through the Company's specialty sales forces.
As part of its strategy, Watson may enter into collaborative or licensing
agreements with various parties at various stages of product development.
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The Company's branded pharmaceutical business is focused primarily on three
therapeutic areas: Dermatology, NeuroPsychiatric and Women's Health. Watson has
strategically focused on these markets due to its belief in their growth
opportunities. The Company anticipates greater penetration into these markets
through effective promotion to an identifiable base of physician prescribers.
Dermatology sales group: Watson promotes to dermatologists several
products for the prevention and treatment of skin diseases such as severe
acne, dermatoses, and genital warts.
NeuroPsychiatric sales group: Watson promotes to psychiatrists and
neurologists three central nervous system products for the treatment of
psychotic disorders and epilepsy.
Women's Health sales group: Watson promotes to gynecologists a variety
of oral contraceptive products, products for the treatment of urinary tract
infections and products for the treatment of genital warts.
Primary Care sales group: Watson promotes several hypertension and
pain management drugs as well as other Watson branded products to primary
care physicians. In 1997, sales of Dilacor XR(R) accounted for
approximately 19% of Watson's total revenues.
Each of the Company's four sales groups focuses on physicians who
specialize in the diagnosis and treatment of different medical conditions and
each offers products to satisfy the needs of these specialty physicians. The
Company believes that this focused marketing approach enables it to develop
highly knowledgeable and dedicated sales representatives and to foster close
professional relationships with physicians. During 1997, the Company created or
acquired the sales forces for each therapeutic area as well as the marketing
infrastructure to support sales efforts in these specialty areas. The Company's
branded products sales force has grown to more than 300 representatives at the
end of 1997. Of the 300, approximately 60 sales representatives are in
Dermatology, 60 are in NeuroPsychiatric, 40 are in Women's Health and 140 are in
Primary Care. The Company believes that its Dermatology sales force, acquired in
its merger with Oclassen, is one of the largest and best trained in the country.
PRODUCT DEVELOPMENT
Off-Patent Product Development. The Company's core development efforts
remain in the area of off-patent prescription drugs. Watson continues to focus
on niche products that it believes offer significant opportunity, but which may
not necessarily attract numerous competitors. The Company also focuses on
technically difficult-to-formulate products, or products that require advanced
manufacturing technology. By emphasizing the development of
difficult-to-formulate products, the Company seeks markets with limited
competition, thereby creating higher margin sales from its off-patent products.
In addition, when evaluating which drug development projects to undertake,
Watson considers whether the product, once developed, will complement other
products in its portfolio.
The Company's acquisitions of Royce and Rugby have increased its resources
which are focused on off-patent product development. During 1997 and through
April 30, 1998, Watson received 10 off-patent product approvals from the FDA.
The Company presently has pending before the FDA submissions for approval
representing 19 separate products of varying dosage strengths. In addition,
approximately 20 projects are currently under development.
Proprietary Product Development. Watson is developing certain proprietary
products, some of which utilize novel drug delivery systems. The Company is also
developing proprietary products through a combination of internal and
collaborative programs, including joint ventures.
Based on data gathered during clinical studies, the Company has focused its
efforts on two products that utilize its proprietary injection molding drug
delivery technology. The Progesterone Vaginal Insert and Estradiol Vaginal
Insert, which will be used for hormone replacement therapy, are currently in
Phase II/III clinical studies.
The Company is also involved in the development of a gum-delivery
technology and is developing two prescription pharmaceutical products in this
area. In 1994, an application was filed with the FDA for an off-
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patent version of Nicorette(R), a nicotine gum product developed and marketed by
Smith Kline Beecham ("SKB"). In February 1996, SKB's Nicorette(R) was approved
by the FDA as an over-the-counter product and its exclusivity was extended to
1999.
Patents and Proprietary Rights. Watson believes that patents, proprietary
products, technologies, processes and proprietary know-how are an important and
valuable component of its business. The Company holds approximately 15 United
States patents, has additional United States patents pending and has several
patent applications at different stages of development. Recent changes to the
patent law resulting from passage of the Uruguay Round Agreements Act will
lengthen the term of some granted patents. Generally, patents have terms that
are the longer of 17 years from patent grant or 20 years from patent
application. The Company also seeks patent protection in major foreign
pharmaceutical markets, and has numerous foreign patents and patents pending.
There can be no assurance, however, that the measures taken by the Company are
or will be sufficient to prevent independent development by others of similar
products or misappropriation of the Company's proprietary techniques.
Additionally, the laws of some foreign countries do not protect intellectual
property to the same extent as do the laws of the United States. There can also
be no assurance that third parties will not claim infringement by the Company
with respect to current or future products. Any such claim, with or without
merit, could result in substantial costs and diversion of management resources,
and a successful claim could effectively block the Company's ability to use or
license services or products in the United States or abroad. Any such claim,
therefore, could have a material adverse effect on the Company.
COMPETITION
The pharmaceutical industry is highly competitive, with offerings from
numerous proprietary manufacturers, off-patent manufacturers and products from
off-patent divisions of major international innovator companies. Watson competes
in the marketplace by developing, acquiring or licensing pharmaceutical products
for indications that generally have relatively large patient populations or for
which limited or inadequate treatments are available. With respect to off-patent
pharmaceuticals, Watson's philosophy is to develop, acquire or license
therapeutic equivalents to previously patented products that are difficult to
formulate. There can be no assurance, however, that developments by others will
not render the Company's pharmaceutical products or technologies obsolete or
uncompetitive. In addition to product development, other competitive factors in
the pharmaceutical industry include product quality and price, reputation and
dissemination of technical information.
Revenues and gross profit derived from the sales of off-patent
pharmaceutical products tend to follow a pattern based on factors unique to the
industry including the number of competitors in that product's market and the
timing of that product's regulatory approval in relation to competing approvals.
Watson therefore is dependent, in part, on its ability to develop and introduce
rapidly new products, the timing of regulatory approval of such products and the
number and timing of regulatory approvals of competing products. In addition,
brand name companies are increasingly pursuing strategies to prevent or delay
the introduction of off-patent competition. These strategies include, among
other things, seeking to establish regulatory obstacles to the bioequivalence of
off-patent drugs to the brand name products and instituting legal actions based
on a host of alleged infringements. In addition, during 1996 and 1997, certain
national drug wholesalers instituted programs designed to provide cost savings
to independent retail pharmacies on their purchases of certain off-patent
pharmaceutical products. As a result of the institution of the programs, the
off-patent drug industry experienced a significant reduction in the prices
charged by suppliers for many off-patent pharmaceutical products. In addition,
the Company has arrangements with certain customers that provide for various
discounts and rebates, including shelf stock adjustments when prices decline as
is often the case when a new off-patent product obtains FDA approval.
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GOVERNMENT REGULATION
All pharmaceutical manufacturers are subject to extensive regulation by the
federal government, principally the FDA and, to a lesser extent, by state and
local governments. The Federal Food, Drug and Cosmetic Act and other federal
statutes and regulations govern or influence the testing, manufacture, safety,
labeling, storage, record keeping, approval, advertising, promotion, sale and
distribution of pharmaceutical products. Noncompliance with applicable
requirements can result in fines, recall or seizure of products, total or
partial suspension of production and/or distribution, refusal of the government
to enter into supply contracts or to approve NDAs or ANDAs, and in the most
severe cases, criminal prosecution. The FDA also has the authority to revoke
previously granted drug approvals. Changes in FDA procedure have increased the
time and expense involved in obtaining NDA and ANDA approvals.
The Company's manufacturing operations are required to comply with the
FDA's current Good Manufacturing Procedures ("cGMP"). The evolving and complex
nature of regulatory requirements, the broad authority and discretion of the FDA
and the generally high level of regulatory oversight results in a continuing
possibility that from time to time the Company will be adversely affected by
regulatory actions despite its ongoing efforts and commitment to achieve and
maintain full compliance with all regulatory requirements. It has become
increasingly expensive and time consuming to comply with cGMP.
Medicaid, Medicare and other reimbursement legislation or programs govern
reimbursement levels, including requiring that all pharmaceutical manufacturers
rebate to individual states a percentage of their revenues arising from
Medicaid-reimbursed drug sales. The Company believes that the federal and/or
state governments may continue to enact measures in the future aimed at reducing
the cost of drugs to the public. The Company cannot predict the nature of such
measures or their impact on the Company's profitability.
Federal, state and local laws of general applicability, such as laws
regulating working conditions also govern Watson. In addition, the Company is
subject, as are all manufacturers generally, to various federal, state and local
environmental protection laws and regulations, including those governing the
discharge of material into the environment. Compliance with such environmental
provisions is not expected to have a material effect on the earnings, cash
requirements or competitive position of the Company in the foreseeable future.
However, no assurance can be given that changes to, or compliance with such
environmental provisions will not have an adverse effect on the Company's
business, financial position or results of operations.
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MANAGEMENT
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE OFFICE
<S> <C> <C>
Allen Chao, Ph.D........... 52 Chairman, President and Chief Executive Officer
David C. Hsia, Ph.D........ 53 Senior Vice President -- Scientific Affairs
Chato Abad................. 44 Vice President -- Finance
Frederick Wilkinson........ 41 Vice President
Michel J. Feldman.......... 55 Secretary and Director
Michael Fedida............. 51 Director
Albert F. Hummel........... 53 Director
Alec D. Keith, Ph.D........ 65 Director
Ronald R. Taylor........... 50 Director
Andrew L. Turner........... 51 Director
</TABLE>
Allen Chao, Ph.D., has been President of the Company since February 1, 1998
and previously served in that capacity from August 1983 until July 1995. Dr.
Chao has also been Chief Executive Officer of the Company since August 1983 and
Chairman of the Board of the Company since May 1996, and a director of Circa
since July 1995. Dr. Chao also serves on the Board of Directors of Somerset. He
is a co-founder of the Company and has been a director of the Company and Watson
Laboratories, Inc. since their inception. He served as Director of
Pharmaceutical Technology and Packaging Development at Searle Laboratories, Inc.
from September 1979 to August 1983, where he had overall responsibility for new
product implementation and new pharmaceutical technology development. He
received a Ph.D. in industrial and physical pharmacy from Purdue University in
1973.
David C. Hsia, Ph.D., a co-founder of Watson, has been its Senior Vice
President -- Scientific Affairs since July 1997 and an officer of the Company
since 1984. Dr. Hsia received a Ph.D. in industrial and physical pharmacy from
Purdue University in 1975. Dr. Hsia is Dr. Chao's brother-in-law.
Chato Abad has been Vice-President -- Finance and Principal Financial and
Accounting Officer of the Company since June 1997 and Corporate Controller of
the Company since joining the Company in 1987. Ms. Abad is a Certified Public
Accountant in the states of New York and California and received her M.B.A. from
St. John's University in 1973.
Frederick Wilkinson has been the Executive Vice President -- Sales &
Marketing of Watson Labs since July 1997 and Vice President of the Company since
joining the Company in June 1996. Prior to his employment with the Company, Mr.
Wilkinson was the President and General Manager of Creighton Pharmaceuticals
from 1994 to 1996. Prior to that, he was the Executive Director of Multisource
Marketing at Sandoz Pharmaceuticals Corporation from 1992 to 1994. Mr. Wilkinson
received his M.B.A. from Capital University in 1984 and his B.S. in Pharmacy
from Ohio Northern University in 1979.
Michel J. Feldman has been Secretary of the Company since 1995 and a
Director since 1984. Mr. Feldman has also been a partner at the law firm of
D'Ancona & Pflaum, Chicago, Illinois, since June 1991, which law firm is the
Company's general outside counsel.
Michael Fedida has been a director of the Company since 1995 and is a
registered pharmacist who has served for the past eleven years as an officer and
director of several retail pharmacies wholly or partially owned by him.
Albert F. Hummel has been a director of the Company since March 1986,
except for a period from July 1991 to October 1991, and is currently a partner
in Affordable Residential Communities, a property management firm. Additionally,
Mr. Hummel is President of Pentech Pharmaceuticals, Inc., a development stage
company which is not affiliated with the Company.
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Alec D. Keith, Ph.D., has been a director of the Company since 1991 and was
Chairman of the Company from October 1991 until he retired from that office in
May 1996. He has been a director of Circa since July 1995. Mr. Keith is
presently a consultant to Watson pursuant to a consulting agreement which he
entered into with Watson in July 1996.
Ronald R. Taylor has been a director of the Company since 1994. Mr. Taylor
has also been a consultant to Cardinal Health, Inc. since May 1996.
Andrew L. Turner has been a director of the Company since 1997. Mr. Turner
has also been Chairman and Chief Executive Officer of Sun Healthcare Group, Inc.
since its formation in 1989.
DESCRIPTION OF NOTES
The Notes offered hereby constitute a series of Senior Debt Securities
described in the accompanying Prospectus that will be issued under an indenture,
dated as of , 1998 (the "Indenture"), between the Company and First
Union National Bank, as trustee (the "Trustee"). The following description of
the particular terms of the Notes offered hereby supplements, and to the extent
inconsistent therewith replaces, the description of the general terms and
provisions of the Senior Debt Securities set forth in the accompanying
Prospectus, to which reference is hereby made. Capitalized terms used but not
defined herein or in the accompanying Prospectus have the meanings given to them
in the Indenture. As used in this section, the "Company" means Watson
Pharmaceuticals, Inc., excluding its subsidiaries, unless the context otherwise
requires. The following summary of the Indenture and the Notes does not purport
to be complete and such summary is subject to the detailed provisions of the
Indenture and the Notes to which reference is hereby made for a full description
of such provisions.
GENERAL
The Notes offered by this Prospectus Supplement will be limited in
aggregate principal amount to $150,000,000. The Notes are general, unsecured
obligations of the Company, ranking pari passu in right of payment with all
other senior, unsecured obligations of the Company. The Notes are not guaranteed
by the Company's subsidiaries and are effectively subordinated to liabilities of
the Company's subsidiaries. As of March 31, 1998, the Company and its
subsidiaries had approximately $73,036,000 aggregate principal amount of
indebtedness outstanding.
The Notes will mature , 2008. The Notes will bear interest at
the rate per annum set forth on the front cover of this Prospectus Supplement
and will be payable semiannually on and of each year,
commencing , 1998, to the persons in whose names such Notes are
registered at the close of business on the and immediately
preceding such Interest Payment Date. Interest will be calculated on the basis
of a 360-day year consisting of twelve 30-day months. The Notes will be issued
only in fully registered form, without coupons, in denominations of $1,000 and
integral multiples thereof. There is no sinking fund applicable to the Notes.
REDEMPTION AT THE COMPANY'S OPTION
The Notes will be redeemable at the option of the Company at any time and
from time to time, in whole or in part, upon not less than 30 nor more than 45
days notice to each Holder of Notes, at a redemption price equal to the
Make-Whole Price. "Make-Whole Price" means an amount equal to the greater of (i)
100% of the principal amount of the Notes and (ii) as determined by an
Independent Investment Banker, the sum of the present values of the remaining
scheduled payments of principal and interest thereon discounted to the date of
redemption on a semi-annual basis (assuming a 360-day year consisting of twelve
30-day months) at the Adjusted Treasury Rate, plus, in each case, accrued and
unpaid interest thereon to the date of redemption. Unless the Company defaults
in payment of the redemption price, on and after the date of redemption,
interest will cease to accrue on the Notes or portions thereof called for
redemption.
"Adjusted Treasury Rate" means, with respect to any date of redemption, the
rate per annum equal to the semi-annual equivalent yield to maturity of the
Comparable Treasury Issue, assuming a price for the
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Comparable Treasury Issue (expressed as a percentage of its principal amount)
equal to the Comparable Treasury Price at such date of redemption, plus %.
"Comparable Treasury Issue" means the United States Treasury security
selected by an Independent Investment Banker as having a maturity comparable to
the remaining term of the Notes to be redeemed that would be utilized, at the
time of selection and in accordance with customary financial practice, in
pricing new issues of corporate debt securities of comparable maturity to the
remaining term of such Notes.
"Comparable Treasury Price" means, with respect to any date of redemption,
(i) the average of the bid and asked prices for the Comparable Treasury Issue
(expressed in each case as a percentage of its principal amount) on the third
Business Day preceding such date of redemption, as set forth in the daily
statistical release (or any successor release) published by the Federal Reserve
Bank of New York and designated "Composite 3:30 p.m. Quotations for U.S.
Government Securities", or (ii) if such release (or any successor release) is
not published or does not contain such prices on such Business Day, (A) the
average of the Reference Treasury Dealer Quotations for such date of redemption,
after excluding the highest and lowest such Reference Treasury Dealer
Quotations, or (B) if the Trustee obtains fewer than three such Reference
Treasury Dealer Quotations, the average of both such Reference Treasury Dealer
Quotations.
"Independent Investment Banker" means one of the Reference Treasury Dealers
appointed by the Trustee after consultation with the Company.
"Reference Treasury Dealer" means, for the Notes, each of Donaldson, Lufkin
& Jenrette Securities Corporation and Goldman, Sachs & Co. and their respective
successors; provided, however, that if any of the foregoing shall not be a
primary U.S. Government securities dealer in New York City (a "Primary Treasury
Dealer"), the Company shall substitute therefor another Primary Treasury Dealer.
"Reference Treasury Dealer Quotations" means, with respect to each
Reference Treasury Dealer and any date of redemption, the average, as determined
by the Trustee, of the bid and asked prices for the Comparable Treasury Issue
(expressed in each case as a percentage of its principal amount) quoted in
writing to the trustee by such Reference Treasury Dealer at 5:00 p.m. on the
third Business Day preceding such date of redemption.
The Company may purchase the Notes in the open market, by tender or
otherwise. Notes so purchased may be held, resold or surrendered to the Trustee
for cancellation. If applicable, the Company will comply with the requirements
of Rule 14e-1 under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and other securities laws and regulations in connection with
any such purchase. The Notes may be defeased in the manner provided in the
Indenture.
BOOK-ENTRY, DELIVERY AND FORM
Except as set forth below, the Notes will initially be issued in the form
of one or more registered Notes in global form (the "Global Notes"). Each Global
Note will be deposited on the date of the closing of the sale of the Notes (the
"Closing Date") with, or on behalf of, The Depository Trust Company (the
"Depositary") and registered in the name of Cede & Co., as nominee of the
Depositary.
The Company has been advised that the Depositary is a limited-purpose trust
company organized under the New York Banking Law, a "banking organization"
within the meaning of the New York Banking Law, a member of the Federal Reserve
System, a "clearing corporation" within the meaning of the New York Uniform
Commercial Code, and a "clearing agency" registered pursuant to the provisions
of Section 17A of the Exchange Act. The Depositary holds securities that its
participants ("Participants") deposit with it. The Depositary also facilitates
the settlement among Participants of securities transactions, such as transfers
and pledges, in deposited securities through electronic computerized book-entry
changes in Participants' accounts, thereby eliminating the need for physical
movement of securities certificates. Direct Participants include securities
brokers and dealers, banks, trust companies, clearing corporations, and certain
other organizations ("Direct Participants"). The Depositary is owned by a number
of its Direct Participants and by the New York Stock Exchange, Inc., the
American Stock Exchange, Inc. and the National Association of Securities
Dealers, Inc. Access to the Depositary's system is also available to others such
as securities brokers and dealers, banks
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and trust companies that clear through or maintain a custodial relationship with
a Direct Participant, either directly or indirectly ("Indirect Participants").
The rules applicable to the Depositary and its Participants are on file with the
Securities and Exchange Commission.
The Company expects that pursuant to procedures established by the
Depositary (i) upon deposit of the Global Notes, the Depositary will credit the
accounts of Participants designated by the Underwriters with an interest in the
Global Notes and (ii) ownership of the Notes evidenced by the Global Notes will
be shown on, and the transfer of ownership thereof will be effected only
through, records maintained by the Depositary (with respect to the interests of
Participants), the Participants and the Indirect Participants. The laws of some
states require that certain persons take physical delivery in definitive form of
securities that they own and that security interests in negotiable instruments
can only be perfected by delivery of a certificate representing these
instruments. Consequently, the ability to transfer the Notes evidenced by the
Global Note will be limited to such extent.
So long as the Depositary or its nominee is the registered owner of a Note,
the Depositary or such nominee, as the case may be, will be considered the sole
owner or holder of the Notes represented by the Global Note for all purposes
under the Indenture. Except as provided below, owners of beneficial interests in
a Global Note will not be entitled to have Notes represented by such Global Note
registered in their names, will not receive or be entitled to receive physical
delivery of certificated notes (the "Certificated Notes"), and will not be
considered the owners or holders thereof under the Senior Indenture for any
purpose, including with respect to the giving of any directions, instructions or
approvals to the Trustee thereunder. As a result, the ability of a person having
a beneficial interest in Notes represented by a Global Note to pledge such
interest to persons or entities that do not participate in the Depositary's
system, or to otherwise take actions with respect to such interest, may be
affected by the lack of a physical certificate evidencing such interest. The
Company understands that under existing industry practices, if the Company
requests any action of Holders or if an owner of a beneficial interest in a
Global Note desires to give any notice or take any action that a Holder is
entitled to give or take under the Senior Indenture, the Depositary would
authorize Participants holding the relevant beneficial interests to give such
notice or take such action, and such Participants would authorize beneficial
owners owning through such Participants to give such notice or take such action
or would otherwise act upon the instructions of beneficial owners holding
through them.
Neither the Company nor the Trustee will have any responsibility or
liability for any aspect of the records relating to or payments made on account
of Notes by the Depositary, or for maintaining, supervising or reviewing any
records of the Depositary relating to such Notes.
Payments with respect to the principal of, premium, if any, and interest
on, any Note represented by a Global Note registered in the name of the
Depositary or its nominee on the applicable record date will be payable by the
Trustee to, or at the direction of, the Depositary or its nominee in its
capacity as the registered Holder of the Global Note representing such Notes
under the Indenture. Under the terms of the Indenture, the Company and the
Trustee may treat the persons in whose names the Notes, including the Global
Notes, are registered as the owners thereof for the purpose of receiving such
payments and for any and all other purposes whatsoever. Consequently, neither
the Company nor the Trustee has or will have any responsibility or liability for
the payment of such amounts to beneficial owners of Notes (including principal,
premium, if any, or interest), or to immediately credit the accounts of the
relevant Participants with such payment, in amounts proportionate to their
respective holdings in principal amount of beneficial interests in the Global
Note as shown on the records of the Depositary. Payments by the Participants and
the Indirect Participants to the beneficial owners of Notes will be governed by
standing instructions and customary practice and will be the sole responsibility
of the Participants or the Indirect Participants.
Because transactions in any Note which is represented by a Global Note (a
"Book-Entry Security") can be effected only through the Depositary, Participants
and Indirect Participants, the ability of a beneficial owner of Book-Entry
Securities to pledge such Book-Entry Security to persons or entities that do not
participate in the Depositary, or otherwise to take action in respect of such
Book-Entry Security, may be limited due to the lack of a physical certificate
representing such Book-Entry Security. Issuance of the Book-Entry Securities in
book-entry form may reduce the liquidity of such Book-Entry Securities in the
secondary
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trading market because investors may be unwilling to purchase Book-Entry
Securities for which they cannot obtain physical certificates.
CERTIFICATED NOTES
If (i) the Company notifies the Trustee in writing that the Depositary is
no longer willing or able to act as a depositary and the Company is unable to
locate a qualified successor, (ii) the Company, at its option, notifies the
Trustee in writing that it elects to cause the issuance of Notes in definitive
form under the Indenture, or (iii) there shall have occurred and be continuing
an Event of Default with respect to the Notes, then, upon surrender by the
Depositary of the Global Notes, Certificated Notes will be issued to each person
that the Depositary identifies as the beneficial owner of the Notes represented
by a Global Note. Upon any such issuance, the Trustee is required to register
such Certificated Notes in the name of such person or persons (or the nominee of
any thereof), and cause the same to be delivered thereto.
Certificated Notes may be presented for registration or exchange at the
offices of the Company required to be maintained under the Indenture for such
purpose.
Neither the Company nor the Trustee shall be liable for any delay by the
Depositary or any Participant or Indirect Participant in identifying the
beneficial owners of the Notes, and the Company and the Trustee may conclusively
rely on, and shall be protected in relying on, instructions from the Depositary
for all purposes (including with respect to the registration and delivery, and
the respective principal amounts, of the Notes to be issued).
The information in this and the preceding section concerning the Depositary
and the Depositary's book-entry system has been obtained from sources that the
Company believes to be reliable. The Company will have no responsibility for the
performance by the Depositary or its Participants of their respective
obligations as described hereunder or under the rules and procedures governing
their respective operations.
SAME-DAY FUNDS SETTLEMENT AND PAYMENT
Settlement for the Notes will be made by the Underwriters in immediately
available funds. Payments in respect of the Notes represented by a Global Note
(including principal, premium, if any, and interest) will be made by wire
transfer of immediately available funds to the accounts specified by the
Depositary. With respect to Notes represented by Certificated Notes, all
payments (including principal, premium, if any, and interest) will be made at
the office or agency of the Company maintained for such purpose, which office or
agency shall be maintained in the Borough of Manhattan, the City of New York,
except that, at the option of the Company, any payments of interest may be made
by mailing a check on or before the due date to the address of the person
entitled thereto as such address shall appear in the Security Register. The
Notes will trade in the Depositary's Same-Day Funds Settlement System until
maturity, or until the Notes are issued in certificated form, and secondary
market trading activity in the Notes will therefore be required by the
Depositary to settle in immediately available funds. No assurance can be given
as to the effect, if any, of settlement in immediately available funds on
trading activity in the Notes.
CERTAIN UNITED STATES FEDERAL INCOME TAX
CONSEQUENCES TO NON-U.S. HOLDERS
The following is a summary of certain United States Federal income tax
consequences of the purchase, ownership, and disposition of Notes by an initial
purchaser of Notes that, for United States Federal income tax purposes, is not a
"United States person" as defined below (a "Non-U.S. Holder"). This summary is
based upon existing United States Federal income tax law, which is subject to
change, possibly retroactively. This summary does not discuss all aspects of
United States Federal income taxation which may be important to particular
Non-U.S. Holders in light of their individual investment circumstances, such as
Notes held by investors subject to special tax rules (e.g., financial
institutions, insurance companies, broker-dealers, and tax-exempt organizations)
or to persons that will hold the Notes as a part of a straddle, hedge, or
synthetic security transaction for United States Federal income tax purposes or
that have a functional currency other
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than the United States dollar, all of whom may be subject to tax rules that
differ significantly from those summarized below. In addition, this summary does
not discuss any foreign, state, or local tax considerations. This summary
assumes that investors will hold their Notes as "capital assets" (generally,
property held for investment) under the United States Internal Revenue Code of
1986, as amended (the "Code"). Prospective investors are urged to consult their
tax advisors regarding the United States Federal, state, local, and foreign
income and other tax considerations of the purchase, ownership, and disposition
of the Notes.
For purposes of this summary, a "United States person" is (i) an individual
who is a citizen or resident of the United States, (ii) a corporation,
partnership, or other entity created or organized under the laws of the United
States or any state or political subdivision thereof, (iii) an estate that is
subject to United States Federal income taxation without regard to the source of
its income, or (iv) a trust whose administration is subject to the primary
supervision of a United States court and which has one or more United States
persons who have the authority to control all substantial decisions of the
trust.
PAYMENTS OF INTEREST
Interest paid by the Company to Non-U.S. Holders will not be subject to
United States Federal income or withholding tax provided that (i) such holder
does not actually or constructively own 10% or more of the total combined voting
power of all classes of stock of the Company entitled to vote, (ii) such holder
is not a controlled foreign corporation that is related to the Company through
stock ownership, a foreign tax-exempt organization or foreign private foundation
for United States Federal income tax purposes, and (iii) the requirements of
section 871(h) or 881(c) of the Code are satisfied as described below under the
heading "Owner Statement Requirement". Notwithstanding the above, a Non-U.S.
Holder that is engaged in the conduct of a United States trade or business will
be subject to (i) United States Federal income tax on interest that is
effectively connected with the conduct of such trade or business and (ii) if the
Non-U.S. Holder is a corporation, a United States branch profits tax equal to
30% of its "effectively connected earnings and profits" as adjusted for the
taxable year, unless the holder qualifies for an exemption from such tax or a
lower tax rate under an applicable treaty.
GAIN ON DISPOSITION
A Non-U.S. Holder will generally not be subject to United States Federal
income tax on gain recognized on a sale, redemption, or other disposition of a
Note unless (i) the gain is effectively connected with the conduct of a trade or
business within the United States by the Non-U.S. Holder or (ii) in the case of
a Non-U.S. Holder who is a nonresident alien individual, such holder is present
in the United States for 183 or more days during the taxable year and certain
other requirements are met. Any such gain that is effectively connected with the
conduct of a United States trade or business by a Non-U.S. Holder will be
subject to United States Federal income tax on a net income basis in the same
manner as if such holder were a United States person and, if such Non-U.S.
Holder is a corporation, such gain may also be subject to the 30% United States
branch profits tax described above.
FEDERAL ESTATE TAXES
A Note held by an individual who at the time of death is not a citizen or
resident of the United States will not be subject to United States Federal
estate tax as a result of such individual's death, provided that (i) the
individual does not actually or constructively own 10% or more of the total
combined voting power of all classes of stock of the Company entitled to vote
and (ii) the interest accrued on the Note was not effectively connected with a
United States trade or business.
OWNER STATEMENT REQUIREMENT
Sections 871(h) and 881(c) of the Code require that either the beneficial
owner of a Note or a securities clearing organization, bank or other financial
institution that holds customers' securities in the ordinary course of its trade
or business (a "Financial Institution") and that holds a Note on behalf of such
owner file a statement with the Company or its agent to the effect that the
beneficial owner is not a United States person in
S-18
<PAGE> 19
order to avoid withholding of United States Federal income tax. Under current
regulations, this requirement will be satisfied if the Company or its agent
receives (i) a statement (an "Owner's Statement") from the beneficial owner of a
Note in which such owner certifies, under penalties of perjury, that such owner
is not a United States person and provides such owner's name and address or (ii)
a statement from the Financial Institution holding the Note on behalf of the
beneficial owner in which the Financial Institution certifies, under penalties
of perjury, that it has received the Owner's Statement together with a copy of
the Owner's Statement. The beneficial owner must inform the Company or its agent
(or, in the case of a statement described in clause (ii) of the immediately
preceding sentence, the Financial Institution) within 30 days of any change in
information on the Owner's Statement.
BACKUP WITHHOLDING AND INFORMATION REPORTING
Current United States Federal income tax law provides that in the case of
payments of interest to Non-U.S. Holders, the 31% backup withholding tax will
not apply to payments made outside the United States by the Company or a paying
agent on a Note if an Owner's Statement is received or an exemption has
otherwise been established; provided in each case that the Company or the paying
agent, as the case may be, does not have actual knowledge that the payee is a
United States person.
Under current Treasury Regulations, payments of the proceeds of the sale of
a Note to or through a foreign office of a "broker" will not be subject to
backup withholding but will be subject to information reporting if the broker is
a United States person, a controlled foreign corporation for United States
Federal income tax purposes, or a foreign person 50% or more of whose gross
income is from a United States trade or business for a specified three-year
period, unless the broker has in its records documentary evidence that the
holder is not a United States person and certain other conditions are met or the
holder otherwise establishes an exemption. Payment of the proceeds of a sale to
or through the United States office of a broker is subject to backup withholding
and information reporting unless the holder certifies its non-United States
status under penalties of perjury or otherwise establishes an exemption.
Recently, the Treasury Department has promulgated final regulations (the
"Final Regulations") regarding the withholding and information reporting rules
discussed above. In general, the Final Regulations do not significantly alter
the substantive withholding and information reporting requirements but unify
current certification procedures and forms and clarify reliance standards. Under
the Final Regulations, special rules apply which permit the shifting of primary
responsibility for withholding to certain financial intermediaries acting on
behalf of beneficial owners. The Final Regulations are generally effective for
payments made after December 31, 1999, subject to certain transition rules.
S-19
<PAGE> 20
UNDERWRITING
Subject to the terms and conditions of an underwriting agreement, dated May
, 1998 (the "Underwriting Agreement"), the Underwriters named below (the
"Underwriters") have severally, and not jointly, agreed to purchase from the
Company the respective principal amount of Notes set forth opposite their names
below.
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT OF
UNDERWRITERS NOTES
------------ ---------
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation
Goldman, Sachs & Co.
------------
Total $150,000,000
============
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to purchase and accept delivery of the Notes offered hereby are
subject to approval by their counsel of certain legal matters and to certain
other conditions. The Underwriters are obligated to purchase and accept delivery
of all the Notes offered hereby if any are purchased.
The Underwriters initially propose to offer the Notes in part directly to
the public at the initial public offering price set forth on the cover page of
this Prospectus and in part to certain dealers at such price less a concession
not in excess of % of the principal amount of the Notes. The Underwriters
may allow, and such dealers may re-allow, to certain other dealers a concession
not in excess of % of the principal amount of the Notes. After the initial
offering of the Notes, the public offering price and other selling terms may be
changed by the Underwriters at any time without notice.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute to
payments that the Underwriters may be required to make in respect thereof.
The Notes are a new issue of securities with no established trading market.
The Company does not intend to apply for listing of the Notes on any securities
exchange or the Nasdaq National Market. The Company has been advised by the
Underwriters that the Underwriters intend to make a market in the Notes;
however, they are not obligated to do so, and they may discontinue any such
market making at any time without notice. Therefore, no assurance can be given
as to the liquidity of the trading market for the Notes.
Other than in the United States, no action has been taken by the Company or
the Underwriters that would permit a public offering of the Notes in any
jurisdiction where action for that purpose is required. The Notes offered hereby
may not be offered or sold, directly or indirectly, nor may this Prospectus or
any other offering material or advertisements in connection with the offer and
sale of the Notes be distributed or published in any jurisdiction, except under
circumstances that will result in compliance with the applicable rules and
regulations of such jurisdiction. Persons into whose possession this Prospectus
comes are advised to inform themselves about and to observe any restrictions
relating to the Offering of the Notes and the distribution of this Prospectus.
This Prospectus does not constitute an offer to sell or a solicitation of an
offer to buy any of the Notes offered hereby in any jurisdiction in which such
an offer or a solicitation is unlawful.
In connection with the Offering, the Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
Notes. Specifically, the Underwriters may overallot the Offering, creating a
syndicate short position. The Underwriters may bid for and purchase Notes in the
open market to cover such syndicate short position or to stabilize the price of
the Notes. These activities may stabilize or maintain the market price of the
Notes above independent market levels. The Underwriters are not required to
engage in these activities, and may end either of these activities at any time.
Certain of the Underwriters and their respective affiliates have, from time
to time, performed and may in the future perform various investment banking and
commercial services for the Company, for which they have received or will
receive usual and customary fees.
S-20
<PAGE> 21
LEGAL MATTERS
The validity of the Notes offered hereby will be passed upon for the
Company by D'Ancona & Pflaum, Chicago, Illinois and certain legal matters will
be passed upon for the Underwriters by Skadden, Arps, Slate, Meagher & Flom LLP,
Los Angeles, California.
S-21
<PAGE> 22
PROSPECTUS
WATSON PHARMACEUTICALS, INC.
DEBT SECURITIES
PREFERRED STOCK
COMMON STOCK
------------------------
Watson Pharmaceuticals, Inc. ("Watson" or the "Company") may offer and sell
from time to time, in one or more series, its unsecured debt securities
consisting of notes, debentures or other evidences of indebtedness (the "Debt
Securities"). The Company may also offer and sell from time to time shares of
its Common Stock, par value $0.0033 per share (the "Common Stock"), and shares
of its Preferred Stock, no par value per share (the "Preferred Stock"). The
aggregate initial offering prices of the Debt Securities, the Common Stock and
the Preferred Stock offered by the Company hereby (the "Securities") will not
exceed $300,000,000 or, if applicable, the equivalent thereof in any other
currency or currency unit. The Securities will be offered in amounts, at prices
and on terms to be determined by market conditions at the time of sale and set
forth in a supplement to this Prospectus (a "Prospectus Supplement").
If the offering and sale of Securities in respect of which this Prospectus
is being delivered includes a series of Debt Securities, then the terms of such
series of Debt Securities, including, where applicable, the specific
designation, aggregate principal amount, authorized denominations, ranking as
senior or subordinated Debt Securities, maturity, interest rate or rates (or
method of determining the same) and time or times of payment of any interest,
any terms for optional or mandatory redemption, which may include redemption at
the option of holders upon the occurrence of certain events, conversion into
Common Stock, or payment of additional amounts or any sinking fund provisions,
any covenants or events of default that are in addition to or different from
those described herein, any initial public offering price, the proceeds to the
Company and any other specific terms in connection with the offering and sale of
such series of Debt Securities will be set forth from time to time in a
Prospectus Supplement. As used herein, Debt Securities shall include securities
denominated in United States Dollars or, at the option of the Company, if so
specified in an applicable Prospectus Supplement, in any other currency or
currency unit, or in amounts determined by reference to an index.
The Securities may be sold directly by the Company to investors, through
agents designated from time to time or to or through underwriters or dealers. If
any agents of the Company or any underwriters are involved in the sale of any
Securities in respect of which this Prospectus is being delivered, the names of
such agents or underwriters and any applicable commissions or discounts will be
set forth in a Prospectus Supplement. See "Plan of Distribution." The net
proceeds to the Company from such sale also will be set forth in a Prospectus
Supplement. See "Use of Proceeds." Debt Securities may be issued in registered
form ("Registered Securities") or bearer form ("Bearer Securities") with or
without interest coupons attached, or both. In addition, all or a portion of the
Debt Securities of a series may be issuable in temporary or permanent global
form. Debt Securities in bearer form would be offered only to non-United States
persons and to offices located outside the United States of certain United
States financial institutions. The applicable Prospectus Supplement will also
contain information where appropriate about certain United States Federal income
tax consequences relating to, and any listing on any securities exchange of the
Securities covered by, such Prospectus Supplement.
The Common Stock is traded on the New York Stock Exchange under the symbol
"WPI." Any Common Stock sold pursuant to a Prospectus Supplement will be listed
on such exchange, subject to official notice of issuance.
THESE SECURITIES 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 PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
No Securities may be sold without delivery of this Prospectus, or without
being accompanied by a Prospectus Supplement, describing the method and terms of
the offering of such series of Securities.
------------------------
The Date of this Prospectus is May 6, 1998.
<PAGE> 23
CERTAIN PERSONS PARTICIPATING IN AN OFFERING OF SECURITIES MAY ENGAGE IN
TRANSACTIONS THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE
SECURITIES. SUCH TRANSACTIONS MAY INCLUDE STABILIZING THE PURCHASE OF SECURITIES
TO COVER SYNDICATE SHORT POSITIONS AND THE IMPOSITION OF PENALTY BIDS. FOR A
DESCRIPTION OF THOSE ACTIVITIES, SEE "PLAN OF DISTRIBUTION" IN THE ACCOMPANYING
PROSPECTUS SUPPLEMENT.
No dealer, salesperson or other person has been authorized to give any
information or to make any representation not contained or incorporated by
reference in this Prospectus or any Prospectus Supplement, and if given or made,
such information or representation must not be relied upon as having been
authorized by the Company or by an underwriter, agent or dealer. This Prospectus
and any Prospectus Supplement shall not constitute an offer to sell or
solicitation of an offer to any of the Securities offered hereby in any
jurisdiction to any person to whom it is unlawful to make such offer or
solicitation in such jurisdiction. Neither the delivery of this Prospectus and
any Prospectus Supplement nor any sale made pursuant thereto shall under any
circumstances create any implication that the information therein is correct as
of the time subsequent to the date thereof.
AVAILABLE INFORMATION
The Company is subject to the information requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith, files reports, proxy statements, and other information with the
Securities and Exchange Commission (the "SEC"). Such reports, proxy statements,
and other information filed by the Company with the SEC can be inspected and
copied at the public reference facilities maintained by the SEC at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
following Regional Offices of the SEC: Chicago Regional Office, Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511 and New York
Regional Office, Seven World Trade Center, Suite 1300, New York, New York 10048.
Copies of such material can be obtained from the Public Reference Section of the
SEC at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The
SEC maintains an Internet Web site at http://www.sec.gov that contains reports,
proxy and information statements, and other information regarding registrants
that file electronically with the SEC. In addition, reports, proxy statements
and other information concerning the Company can be inspected at the New York
Stock Exchange, 20 Broad Street, New York, New York 10005.
This Prospectus constitutes a part of a Registration Statement on Form S-3
(together with all amendments and exhibits thereto, the "Registration
Statement") filed by the Company with the SEC under the Securities Act of 1933,
as amended (the "Securities Act"), with respect to the Securities. This
Prospectus omits certain of the information contained in the Registration
Statement in accordance with the rules and regulations of the SEC. Reference is
hereby made to the Registration Statement and exhibits thereto for further
information with respect to the Company and the securities offered hereby. Any
statements contained herein concerning the provisions of any document filed as
an exhibit to the Registration Statement or otherwise filed with the SEC are not
necessarily complete, and in each instance reference is made to the copy of such
document so filed. Each such statement is qualified in its entirety by such
reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the SEC under the
Exchange Act are incorporated by reference in this Prospectus:
(a) the Company's Annual Report on Form 10-K, as amended, for the year
ended December 31, 1997;
(b) the Company's Current Report on Form 8-K filed March 16, 1998; and
(c) the description of the Common Stock contained in Watson's
Registration Statement on Form 8-A dated April 3, 1992.
All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to
the termination of the offering of the Securities pursuant hereto shall be
deemed to be incorporated by reference herein and to be a part hereof from the
date of filing of
2
<PAGE> 24
such document. Any statement contained herein or in a document incorporated or
deemed to be incorporated by reference herein shall be deemed to be modified or
superseded for purposes of this Prospectus and any Prospectus Supplement dated
earlier than such document to the extent that a statement contained herein or in
any other subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any such
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus.
The Company will provide without charge to each person to whom this
Prospectus is delivered, upon written or oral request of such person, a copy of
any or all of the documents that are incorporated by reference in this
Prospectus (other than exhibits to such documents, unless such exhibits are
specifically incorporated by reference into such documents). Requests should be
directed to, Watson Pharmaceuticals, Inc., 311 Bonnie Circle, Corona, California
91720, telephone number (909) 270-1400; Attention: Investor Relations.
3
<PAGE> 25
THE COMPANY
Watson Pharmaceuticals, Inc., incorporated in 1985, is engaged in the
research and development, production, marketing and distribution of off-patent
and branded pharmaceutical products. The Company pursues a strategy of
generating revenue through its off-patent and branded pharmaceutical businesses
and capitalizing on its abilities to support the development and acquisition of
off-patent and branded products. The Company is a fully integrated
pharmaceutical company which (i) develops, acquires, and markets niche,
difficult-to-produce, off-patent pharmaceuticals, (ii) develops and acquires
branded products, and (iii) markets such products through pharmaceutical
companies, joint ventures and its own marketing efforts. The Company has made
significant recent acquisitions of businesses, products and technologies. During
1997, the Company acquired Royce Laboratories, Inc., a developer and
manufacturer of off-patent pharmaceutical products and Oclassen Pharmaceuticals,
Inc., a developer and marketer of dermatology products. Watson acquired The
Rugby Group, Inc., a developer and marketer of off-patent pharmaceutical
products, on February 27, 1998. The Company also made several product
acquisitions during 1997 including the acquisition of certain oral contraceptive
products from G.D. Searle & Co. and the acquisition of a anti-hypertensive
product from Rhone-Poulenc Rorer. The Company continues regularly to review
potential opportunities to acquire or invest in other technologies, products or
product rights and businesses compatible with its existing business. The
principal executive offices of Watson are located at 311 Bonnie Circle, Corona,
California 91720 and the telephone number is (909) 270-1400. Watson's Common
Stock is traded on the New York Stock Exchange ("NYSE") under the symbol "WPI."
USE OF PROCEEDS
Except as may otherwise be described in the Prospectus Supplement relating
to an offering of Securities, the net proceeds from the sale of the Securities
offered pursuant to this Prospectus and such Prospectus Supplement will be used
for general corporate purposes. Any specific allocation of the net proceeds of
an offering of Securities by the Company to a specific purpose will be
determined at the time of such offering and will be described in the related
Prospectus Supplement.
CAUTIONARY STATEMENT FOR PURPOSES OF THE SAFE HARBOR PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This Prospectus contains forward-looking statements. The Company desires to
take advantage of the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995 and is including this statement for the express
purpose of availing itself of the protections of the safe harbor with respect to
all forward-looking statements. Several important factors, in addition to the
specific factors discussed in connection with such forward-looking statements
individually, could affect the future results of the Company and could cause
those results to differ materially from those expressed in the forward-looking
statements contained herein.
Such additional factors include, among other things, future economic,
competitive and regulatory conditions, demographic trends, financial market
conditions, product development, the management of acquisitions and future
business decisions of the Company and its competitors, all of which are
difficult or impossible to predict accurately and many of which are beyond the
control of the Company. Therefore, the Company wishes to caution each reader of
this Prospectus to consider carefully these factors as well as the specific
factors discussed with each forward-looking statement in this Prospectus and as
disclosed in the Company's filings with the SEC as such factors, in some cases,
have affected, and in the future (together with other factors) could affect, the
ability of the Company to implement its business strategy and may cause actual
results to differ materially from those contemplated by the statements expressed
herein.
4
<PAGE> 26
RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth the Company's consolidated ratio of earnings
to fixed charges for the periods shown:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1997 1996 1995 1994 1993
----- ----- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Ratio of earnings to fixed charges(1)................. 123.6 103.1 64.6 41.0 25.9
</TABLE>
- ---------------
(1) The ratio of earnings to fixed charges is computed by dividing the sum of
earnings from continuing operations before provision for income taxes and
fixed charges, by total fixed charges. Total fixed charges consist of
interest expense and the interest factor of all rentals, assumed to be
one-third of consolidated rent expense. The ratio of earnings to fixed
charges above reflects the acquisitions in 1997 and 1995 accounted for under
the pooling of interests method as further discussed in Notes 1 and 2 of the
Notes to the Consolidated Financial Statements in the Watson
Pharmaceuticals, Inc. 1997 Form 10-K.
DESCRIPTION OF DEBT SECURITIES
The Debt Securities will constitute either senior debt of the Company
("Senior Debt Securities") or subordinated debt of the Company ("Subordinated
Debt Securities"). Debt Securities may be issued from time to time under one or
more indentures, each dated as of a date on or prior to the issuance of the Debt
Securities to which it relates. Senior Debt Securities and Subordinated Debt
Securities may be issued pursuant to separate indentures (respectively, a
"Senior Debt Indenture" and a "Subordinated Debt Indenture"), in each case
between the Company and First Union National Bank ("First Union"), and in the
forms that would be filed as exhibits in a subsequently filed amendment or
supplement to this Prospectus, subject to such amendments or supplements as may
be adopted from time to time. The Senior Debt Indenture and the Subordinated
Debt Indenture, as amended or supplemented from time to time, are sometimes
hereinafter referred to individually as an "Indenture" and collectively as the
"Indentures." First Union (and any successors thereto as trustees under the
respective Indentures) is hereafter referred to as the "Trustee." The following
summaries of actual or anticipated provisions of the Indentures and the Debt
Securities do not purport to be complete and such summaries are subject to the
detailed provisions of the applicable Indenture to which reference is hereby
made. The Indentures are substantially identical, except for certain covenants
of the Company and provisions relating to subordination and conversion.
The Debt Securities may be issued from time to time in one or more series.
The following description of the Debt Securities sets forth certain general
terms and provisions of the Debt Securities of all series. The particular terms
of each series of Debt Securities offered by any Prospectus Supplement will be
described therein.
PROVISIONS APPLICABLE TO BOTH SENIOR AND SUBORDINATED DEBT SECURITIES
General. The Debt Securities will be unsecured senior or subordinated
obligations of the Company and may be issued from time to time in one or more
series. The Indentures generally do not limit the amount of Debt Securities,
debentures, notes or other types of indebtedness that may be issued by the
Company nor, other than as may be set forth in any Prospectus Supplement, do
they restrict transactions between the Company and its affiliates or the payment
of dividends or other distributions by the Company to its stockholders. Unless
specifically stated otherwise, holders of Debt Securities will be creditors of
the Company only and not its Subsidiaries. In addition, other than as may be set
forth in any Prospectus Supplement, the Indentures do not and the Debt
Securities will not contain any covenants or other provisions that are intended
to afford holders of the Debt Securities special protection in the event of
either a change of control of the Company or a leveraged transaction by the
Company.
Reference is made to the Prospectus Supplement for the Indentures and the
following terms of and information relating to the Debt Securities (to the
extent such terms are applicable to such Debt Securities): (i) the title of the
Debt Securities; (ii) classification as either Senior Debt Securities or
Subordinated Debt
5
<PAGE> 27
Securities; (iii) whether the Debt Securities that constitute Subordinated Debt
Securities are convertible into Common Stock and, if so, the terms and
conditions upon which such conversion will be effected, including the initial
conversion price or conversion rate and any adjustments thereto in addition to
or different from those described herein, the conversion period and other
conversion provisions in addition to or in lieu of those described herein; (iv)
any limit on the aggregate principal amount of the Debt Securities; (v) whether
the Debt Securities are to be issuable as Registered Securities or Bearer
Securities or both, whether any of the Debt Securities are to be issuable
initially in temporary global form and whether any of the Debt Securities are to
be in permanent global form; (vi) the price or prices (expressed as a percentage
of the aggregate principal amount thereof) at which the Debt Securities will be
issued; (vii) the date or dates on which the Debt Securities will mature; (viii)
the rate or rates per annum (or the method by which such will be determined) at
which the Debt Securities will bear interest, if any, and the date from which
any such interest will accrue; (ix) the Interest Payment Dates on which any such
interest on the Debt Securities will be payable, the date on which payment of
such interest, if any, will commence and the Regular Record Dates for any
interest payable on any Debt Securities which are Registered Securities on any
Interest Payment Date and the extent to which, or the manner in which, any
interest payable on a temporary global Debt Security on an Interest Payment Date
will be paid; (x) any mandatory or optional sinking fund or analogous
provisions; (xi) each office or agency where, subject to the terms of the
Indentures as described below under "Payment and Paying Agents," the principal
of and any premium and interest on the Debt Securities will be payable and each
office or agency where, subject to the terms of the Indentures as described
below under "Form, Exchange, Registration and Transfer," the Debt Securities may
be presented for registration of transfer or exchange; (xii) the right, if any,
or obligation, if any, of the Company to redeem the Debt Securities at its
option and the period or periods, if any, within which and the price or prices
at which the Debt Securities may, pursuant to any optional or mandatory
redemption provisions, be redeemed, in whole or in part, and the other detailed
terms and provisions of any such optional or mandatory redemption; (xiii) the
denominations in which any Debt Securities which are Registered Securities will
be issuable, if other than denominations of $1,000 and any integral multiple
thereof, and the denomination or denominations in which any Debt Securities
which are Bearer Securities will be issuable, if other than the denomination of
$5,000; (xiv) the currency or currencies (including composite currencies) in
which payment of principal of and any premium and interest on the Debt
Securities is payable if other than United States Dollars; (xv) any index used
to determine the amount of payments of principal of and any premium and interest
on the Debt Securities; (xvi) information with respect to book-entry procedures,
if any; (xvii) any deletions from, modification of or additions to the Events of
Default or covenants of the Company with respect to such Debt Securities;
(xviii) the right of holders to cause the Company to acquire the Securities, if
any; (xviii) with respect to securities issued with original issue discount, the
rate of accretion thereof; and (xix) any other terms of the Debt Securities not
inconsistent with the provisions of the Indentures. Any such Prospectus
Supplement will also describe any special provisions for the payment of
additional amounts with respect to the Debt Securities.
Certain Definitions. For purposes of the following discussion, the
following definitions are applicable.
"Consolidated Net Worth" of any Person means the excess of (i) the
consolidated assets of such Person and its Subsidiaries after all appropriate
deductions in accordance with U.S. GAAP (as defined below) (including without
limitation, reserves for doubtful receivables, obsolescence, depreciation and
amortization) less (ii) the consolidated liabilities of such Person and its
Subsidiaries, in each case computed and consolidated in accordance with U.S.
GAAP.
"Funded Debt" shall mean any Indebtedness which by its terms matures at or
is extendable or renewable at the sole option of the obligor without requiring
the consent of the obligee to a date more than twelve months after the date of
the creation of such Indebtedness.
"Guarantor" means each Subsidiary of the Company that is required to
provide a Guaranty as provided for in the Indentures.
"Guaranty" shall mean any agreement, undertaking or arrangement by which
any Person guarantees, endorses or otherwise becomes or is contingently liable
upon (by direct or indirect agreement, contingent or otherwise, to provide funds
for payment, to supply funds to, or otherwise to invest in, a debtor, or
otherwise to
6
<PAGE> 28
assure a creditor against loss) the debt, obligation or other liability of any
other Person (other than by endorsements of instruments in the course of
collection), or guarantees the payment of dividends or other distributions upon
the shares of any other Person. The amount of the obligor's obligation under any
Guaranty shall (subject to any limitation set forth therein) be deemed to be the
amount of such other Person's debt, obligation or other liability or the amount
of such dividends or other distributions guaranteed.
"Indebtedness" with respect to any Person is defined to mean, at any time,
without duplication, (i) any debt (a) for money borrowed, or (b) evidenced by a
bond, note, debenture, or similar instrument for the payment of which such
Person is responsible or liable, or (c) which is a direct or indirect obligation
which arises as a result of banker's acceptances; (ii) any Off-Balance Sheet
Liability (as defined in the Indentures), (iii) any debt of others described in
the preceding clause (i) which such Person has guaranteed or for which it is
otherwise directly liable; (iv) any Attributable Debt; (v) the obligation of
such Person as lessee under any lease of property which is reflected on such
Person's balance sheet as a capitalized lease; (vi) to the extent not otherwise
included in this definition, net obligations under any Rate Hedging Obligations
(as defined in the Indentures); and (vii) any deferral, amendment, renewal,
extension, supplement or refunding of any liability of the kind described in any
of the preceding clauses (i), (ii), (iii), (iv), (v) and (vi) provided, however,
that, in computing the Indebtedness of any Person, there shall be excluded any
particular Indebtedness of any Person, if (1) upon or prior to the maturity
thereof, there shall have been deposited with a depository in trust money (or
evidence of Indebtedness if permitted by the instrument creating such
Indebtedness) in the necessary amount to pay, redeem or satisfy such
Indebtedness as it becomes due and (2) as a result of the foregoing clause (1)
such Indebtedness would not have appeared as a liability on a balance sheet of
such Person prepared in conformity with U.S. GAAP.
"Issue Date" means the date any Debt Securities are first issued pursuant
to any Debt Indenture.
"Principal Property" shall mean all real and tangible property owned or
leased by the Company or a Subsidiary constituting a part of any manufacturing
facility, quality control laboratory, warehouse or office within the United
States, except (a) any such facilities, laboratories, warehouses or offices (i)
owned or leased jointly or in common with one or more persons other than the
Company and its Subsidiaries in which the interest of the Company and its
Subsidiaries does not exceed 50%, or (ii) which the Board of Directors
determines in good faith is not of material importance to the total business
conducted, or assets owned, by the Company and its Subsidiaries as an entirety,
or (b) any portion of such facilities, laboratories, warehouses or offices which
the Board of Directors determines in good faith not to be of material importance
to the use or operation thereof.
"Security Instrument" shall mean any security agreement, chattel mortgage,
assignment, financing or similar statement or notice, continuation statement,
other agreement or instrument, or amendment or supplement to any thereof,
providing for, evidencing, creating, or perfecting any Security Interest or
lien.
"Security Interest" shall mean any interest in any real or personal
property or fixture which secures payment or performance of an obligation and
shall include any mortgage, lien, encumbrance, charge or other security interest
of any kind, whether arising under a Security Instrument or as a matter of law,
judicial process or otherwise.
"Subsidiary," with respect to any Person, means (i) a corporation a
majority of whose equity interests with voting power, under ordinary
circumstances, to elect directors is at the time, directly or indirectly, owned
by such Person, by such Person and one or more Subsidiaries of such Person or by
one or more Subsidiaries of such Person, or (ii) any other Person (other than a
corporation) in which such Person, one or more Subsidiaries of such Person,
directly or indirectly, at the date of determination thereof has at least the
majority ownership interest; provided that in the case of (i) and (ii) such
Subsidiary shall be required to be consolidated with the Company for financial
reporting purposes in compliance with U.S. GAAP.
"U.S. GAAP" shall mean generally accepted accounting principles set forth
in the opinions and pronouncements of the Accounting Principles Board of the
American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
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<PAGE> 29
statements by such other entity as may be approved by a significant segment of
the accounting profession as in effect on the Issue Date.
Consolidation, Merger, Sale. The Indentures provide that the Company may
not consolidate with or merge into any other Person or convey, transfer or lease
its properties and assets as an entirety or substantially as an entirety to any
Person, unless (1) the Person formed by such consolidation or into which the
Company is merged or the Person which acquires by conveyance or transfer, or
which leases, the properties and assets of the Company substantially as an
entirety shall be a corporation, partnership or trust which shall expressly
assume, by a supplemental indenture, executed and delivered to the Trustee, in
form satisfactory to the Trustee, the due and punctual payment of the principal
of and any premium and interest (including all additional amounts, if any,
payable pursuant to the Indentures) on all the Debt Securities and the
performance or observance of every other covenant of the Indentures on the part
of the Company to be performed or observed; and (2) immediately after giving
effect to such transaction and treating any Indebtedness which becomes an
obligation of the Company or a Subsidiary as a result of such transaction as
having been incurred by the Company or such Subsidiary at the time of such
transaction, no Event of Default, and no event which, after notice or lapse of
time or both, would become an Event of Default, shall have happened and be
continuing. Upon any consolidation of the Company with, or merger of the Company
into, any other Person or any conveyance, transfer or lease of the properties
and assets of the Company as an entirety or substantially as an entirety, the
successor Person formed by such consolidation or into which the Company is
merged or to which such conveyance, transfer or lease is made shall succeed to,
and be substituted for, and may exercise every right and power of, the Company
under the Indentures with the same effect as if such successor Person had been
named as the Company herein, and thereafter, except in the case of a lease, the
predecessor Person shall be relieved of all obligations and covenants under the
Indentures and the Debt Securities and coupons and may liquidate and dissolve.
Debt Securities may be issued as Original Issue Discount Securities. An
Original Issue Discount Security is a Debt Security, including any zero-coupon
security, which is issued at a price lower than the amount payable upon the
Stated Maturity thereof (excluding interest at Stated Maturity) and which
provides that upon redemption or acceleration of the maturity thereof an amount
less than the amount payable upon the Stated Maturity thereof (excluding
interest at Stated Maturity) and determined in accordance with the terms of such
Debt Security shall become due and payable. Special United States Federal income
tax considerations applicable to Debt Securities issued at an original issue
discount, including Original Issue Discount Securities, and special United
States tax considerations and other terms and restrictions applicable to any
Debt Securities which are issued in bearer form will be set forth in a
Prospectus Supplement relating thereto.
Event of Default. Unless otherwise specified in the applicable Prospectus
Supplement, an Event of Default is defined under the Indentures with respect to
the Debt Securities of any series issued under the Indentures as being one or
more of the following events:
(a) default in the payment of any interest upon any Debt Security of
that series when it becomes due and payable, and continuance of such
default for a period of 30 days; or
(b) default in the payment of the principal of (or premium, if any,
on) any Debt Security of that series as and when the same becomes due and
payable whether at Stated Maturity, by declaration of acceleration, call
for redemption or otherwise; or
(c) default in the deposit of any sinking fund payment, when and as
due by the terms of a Debt Security of that series; or
(d) default in the performance, or breach, of any other covenant or
warranty of the Company in the Indentures (other than a covenant or
warranty a default in whose performance or whose breach is elsewhere in the
Indenture specifically dealt with or which has expressly been included in
the Indenture solely for the benefit of a series of Debt Securities other
than that series), and continuance of such default or breach for a period
of 60 days for Senior Debt Securities and 90 days for Subordinated Debt
Securities, after there has been given, by registered or certified mail, to
the Company by the Trustee or to the
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<PAGE> 30
Company and the Trustee by the Holders of at least 25% in aggregate
principal amount of the Outstanding Debt Securities of that series a
written notice specifying such default or breach and requiring it to be
remedied and stating that such notice is a "Notice of Default" under the
Indenture; or
(e) the entry by a court having jurisdiction of (A) a decree or order
for relief in respect of the Company in an involuntary case or proceeding
under any applicable Federal or State bankruptcy, insolvency,
reorganization or other similar law or (B) a decree or order adjudging the
Company a bankrupt or insolvent, or approving as properly filed a petition
seeking reorganization, arrangement, adjustment or composition of or in
respect of the Company under any applicable Federal or State law, or
appointing a custodian, receiver, liquidator, assignee, trustee,
sequestrator or other similar official of the Company or of any substantial
part of its property, or ordering the winding up or liquidation of its
affairs, and the continuance of any such decree or order for relief or any
such other decree or order unstayed and in effect for a period of 90
consecutive days; or
(f) the commencement by the Company of a voluntary case or proceeding
under any applicable Federal or State bankruptcy, insolvency,
reorganization or other similar law or of any other case or proceeding to
be adjudicated a bankrupt or insolvent, or the consent by it to the entry
of a decree or order for relief in respect of the Company in an involuntary
case or proceeding under any applicable Federal or State bankruptcy,
insolvency, reorganization or other similar law or the commencement of any
bankruptcy or insolvency case or proceeding against it, or the filing by it
of a petition or answer or consent seeking reorganization or relief under
any applicable Federal or State law, or the consent by it to the filing of
such petition or to the appointment of or taking possession by a custodian,
receiver, liquidator, assignee, trustee, sequestrator or similar official
of the Company or of any substantial part of its property, or the making by
it of an assignment for the benefit of creditors, or the admission by it in
writing of its inability to pay its debts generally as they become due, or
the taking of corporate action by the Company in furtherance of any such
action; or
(g) any other Event of Default provided with respect to Debt
Securities of that series.
If an Event of Default with respect to Debt Securities of any series at the
time Outstanding occurs and is continuing, then in every such case, either the
Trustee or the Holders of not less than 25% in aggregate principal amount of the
Outstanding Debt Securities of that series may declare the aggregate principal
amount (or, if any of the Debt Securities of that series are Original Issue
Discount Securities, such portion of the aggregate principal amount of such Debt
Securities as may be specified in the terms thereof) of all of the Debt
Securities of that series to be due and payable immediately, by a notice in
writing to the Company (and to the Trustee if given by Holders), and upon any
such declaration such aggregate principal amount (or specified amount) shall
become immediately due and payable. At any time after such a declaration of
acceleration with respect to the Debt Securities of any series has been made and
before a judgment or decree for payment of the money due has been obtained by
the Trustee, the Holders of a majority in aggregate principal amount of the
Outstanding Debt Securities of that series, by written notice to the Company and
the Trustee, may rescind and annul such declaration and its consequences if: (1)
the Company has paid or deposited with the Trustee a sum sufficient to pay (A)
all overdue interest on all Debt Securities of that series, (B) the principal of
(and premium, if any, on) any Debt Securities of that series which has become
due otherwise than by such declaration of acceleration and any interest thereon
at the rate or rates prescribed therefor in such Debt Securities, (C) to the
extent that payment of such interest is lawful, interest upon overdue interest
at the rate or rates prescribed therefor in such Debt Securities, and (D) all
sums paid or advanced by the Trustee hereunder and the reasonable compensation,
expenses, disbursements and advances of the Trustee, its agents and counsel; and
(2) all Events of Default with respect to Debt Securities of that series, other
than the non-payment of the principal of Debt Securities of that series which
has become due solely by such declaration of acceleration, have been cured or
waived as provided in the Indentures. No such rescission shall affect any
subsequent default or impair any right consequent thereon.
If the Trustee or any Holder of a Debt Security or coupon has instituted
any proceeding to enforce any right or remedy under the Indentures and such
proceeding has been discontinued or abandoned for any reason, or has been
determined adversely to the Trustee or to such Holder, then and in every such
case, subject to any
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<PAGE> 31
determination in such proceeding, the Company, the Trustee and the Holders of
Debt Securities and coupons shall be restored severally and respectively to
their former positions under the Indentures and the Debt Securities and
thereafter all rights and remedies of the Trustee and the Holders shall continue
as though no such proceeding had been instituted.
The Indentures provide that, subject to the duty of the Trustee during
default to act with the required standard of care, the Trustee is under no
obligation to exercise any of its rights or powers under such Indentures at the
request or direction of any of the Holders, unless such Holders shall have
offered to the Trustee reasonable indemnity.
No Holder of any Debt Security of any series or any related coupons shall
have any right to institute any proceeding, judicial or otherwise, with respect
to the Indentures, or for the appointment of a receiver or trustee, or for any
other remedy thereunder, unless (1) such Holder has previously given written
notice to the Trustee of a continuing Event of Default with respect to the Debt
Securities of that series; (2) the Holders of not less than 25% in aggregate
principal amount of the Outstanding Debt Securities of that series shall have
been made written request to the Trustee to institute proceedings in respect of
such Event of Default in its own name as Trustee under the Indentures; (3) such
Holder or Holders have offered to the Trustee reasonable indemnity against the
costs, expenses and liabilities to be incurred in compliance with such request;
(4) the Trustee for 60 days after its receipt of such notice, request and offer
of indemnity has failed to institute any such proceeding; and (5) no direction
inconsistent with such written request has been given to the Trustee during such
60-day period by the Holders of a majority in aggregate principal amount of the
Outstanding Debt Securities of that series.
Notwithstanding any other provisions in the Senior Debt Indenture, the
right of any Holder of any Senior Debt Security or coupon to receive payment of
the principal of and any premium and any interest on such Senior Debt Security
or payment of such coupon on the Stated Maturity or Maturities expressed in such
Senior Debt Security or coupon, or to institute suit for the enforcement of any
such payment on or after such respective dates shall not be impaired or affected
without the consent of such Holder.
Notwithstanding any other provisions in the Subordinated Debt Indenture,
but subject to the subordination provision of the Subordinated Debt Indenture,
the right of any Holder of any Subordinated Debt Security or coupon to receive
payment of the principal of and any premium and any interest on such
Subordinated Debt Security or payment of such coupon on the Stated Maturity or
Maturities expressed in such Subordinated Debt Security or coupon and, if
applicable, to convert such Subordinated Debt Security as provided in the
conversion provisions of the Subordinated Debt Indenture and, to institute suit
for the enforcement of any such payment on or after such respective dates shall
not be impaired or affected without the consent of such Holder.
The Holders of a majority in aggregate principal amount of the Outstanding
Debt Securities of any series shall have the right to direct the time, method
and place of conducting any proceeding for any remedy available to the Trustee,
or exercising any trust or power conferred on the Trustee, with respect to the
Debt Securities of such series, provided that (1) such direction shall not be in
conflict with any rule of law or with the Indentures; (2) the Trustee may take
any other action deemed proper by the Trustee which is not inconsistent with
such direction; and (3) the Trustee shall not be obligated to take any action
unduly prejudicial to Holders not joining in such direction or involving the
Trustee in personal liability.
The Holders of a majority in aggregate principal amount of the Outstanding
Debt Securities of any series may on behalf of the Holders of all the Debt
Securities of such series waive any past default under the Indentures with
respect to the Debt Securities of such series and its consequences, except a
default in the payment of the principal of or any premium or interest on any
Debt Security of such series or in respect of a covenant or provision of the
Indentures which, pursuant to the Indentures, cannot be modified or amended
without the consent of the Holder of each Outstanding Debt Security of such
series affected. Upon any such waiver, such default shall cease to exist, and
any Event of Default arising therefrom shall be deemed to have been cured, for
every purpose of the Indentures; but no such waiver shall extend to any
subsequent or other default or impair any right consequent thereon.
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<PAGE> 32
If a default occurs under the Indentures with respect to Debt Securities of
any series, the Trustee shall give the Holders of Debt Securities of such series
notice of such default as and to the extent provided by the Trust Indenture Act;
provided, however, that in the case of any default or breach of certain
covenants or warranties with respect to Debt Securities of such series, no such
notice to Holders shall be given until at least 30 days after the occurrence
thereof (the term "default" for purposes of these provisions being defined as
any event which is, or after notice or lapse of time or both would become, an
Event of Default with respect to the Debt Securities of such series).
In any case in which Debt Securities are Outstanding that are denominated
in more than one currency and the Trustee is directed to make ratable payments
under the Indentures to Holders of such Debt Securities, unless otherwise
provided with respect to any series of Debt Securities, the Trustee shall
calculate the amount of such payments as follows: (i) as of the day the Trustee
collects an amount under the Indentures, the Trustee shall, as to each Holder of
a Debt Security to whom an amount is due and payable under the Indentures that
is denominated in a foreign currency, determine that amount in United States
dollars that would be obtained for the amount owing such Holder, using the rate
of exchange at which in accordance with normal banking procedures the Trustee
could purchase in the City of New York, dollars with such amount owing; (ii)
calculate the sum of all dollar amounts determined under (i) and add thereto any
amounts due and payable in dollars; and (iii) using the individual amounts
determined in (i) or any individual amounts due and payable in dollars, as the
case may be, as a numerator, and the sum calculated in (ii) as a denominator,
calculate as to each Holder of a Debt Security to whom an amount is owed under
the Indentures the fraction of the amount collected under the Indentures payable
to such Holder. Any expenses incurred by the Trustee in actually converting
amounts owing Holders of Debt Securities denominated in a currency other than
that in which any amount is collected under the Indentures shall be likewise (in
accordance with the foregoing) borne ratably by all Holders of Debt Securities
to whom amounts are payable under the Indentures.
To the fullest extent allowed under applicable law, if for the purpose of
obtaining judgment against the Company in any court it is necessary to convert
the sum due in respect of the principal of, or premium, if any, or interest on,
the Debt Securities of any series (the "Required Currency") into a currency in
which a judgment will be rendered (the "Judgment Currency"), the rate of
exchange used shall be the rate at which in accordance with normal banking
procedures the Trustee could purchase in the City of New York the Required
Currency with the Judgment Currency on the Business Day in the City of New York
next preceding that on which final judgment is given. Neither the Company nor
the Trustee shall be liable for any shortfall nor shall either of them benefit
from any windfall in payments to Holders of Debt Securities under this provision
of the Indentures caused by a change in exchange rates between the time the
amount of a judgment against the Company is calculated as above and the time the
Trustee converts the Judgment Currency into the Required Currency to make
payments under the foregoing provisions of the Indentures to Holders of Debt
Securities, but payment of such judgment shall discharge all amounts owed by the
Company on the claim or claims underlying such judgment.
The Company is required to furnish to the Trustee annually a statement as
to the compliance by the Company with all conditions and covenants under the
Indentures.
Form, Exchange, Registration and Transfer. Debt Securities of a series may
be issuable in definitive form solely as Registered Securities, solely as Bearer
Securities or as both Registered Securities and Bearer Securities. Unless
otherwise indicated in an applicable Prospectus Supplement, Bearer Securities
will have interest coupons attached. The Indentures also provide that Debt
Securities of a series may be issuable in temporary or permanent global form.
Registered Securities of any series will be exchangeable for other
Registered Securities of the same series of any authorized denominations and of
a like aggregate principal amount and tenor. In addition, if Debt Securities of
any series are issuable as both Registered Securities and Bearer Securities, at
the option of the Holder, and subject to the terms of the applicable Indenture,
Bearer Securities (with all unmatured coupons, except as provided below, and all
matured coupons in default) of such series will be exchangeable for Registered
Securities of the same series of any authorized denominations and of a like
aggregate principal amount and tenor. Bearer Securities surrendered in exchange
for Registered Securities between a Regular
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<PAGE> 33
Record Date or a Special Record Date and the relevant date for payment of
interest shall be surrendered without the coupon relating to such date for
payment of interest, and interest accrued as of such date for payment of
interest will not be payable in respect of the Registered Security issued in
exchange for such Bearer Security, but will be payable only to the Holder of
such coupon when due in accordance with the terms of the applicable Indenture.
Bearer Securities will not be issued in exchange for Registered Securities.
Debt Securities may be presented for exchange as provided above, and
Registered Securities may be presented for registration of transfer (with the
form of transfer endorsed thereon duly executed), at the office of the Security
Registrar or at the office of any transfer agent designated by the Company for
such purpose with respect to any series of Debt Securities and referred to in an
applicable Prospectus Supplement, without service charge and upon payment of any
taxes and other governmental charges as described in the Indentures. Such
transfer or exchange will be effected upon the Security Registrar or such
transfer agent, as the case may be, being satisfied with the documents of title
and identity of the person making the request. Unless otherwise indicated in any
Prospectus Supplement, the Company will serve as Security Registrar. If a
Prospectus Supplement refers to any transfer agents (in addition to the Security
Registrar) initially designated by the Company with respect to any series of
Debt Securities, the Company may at any time rescind the designation of any such
transfer agent or approve a change in the location through which any such
transfer agent acts, except that, if Debt Securities of a series are issuable
solely as Registered Securities, the Company will be required to maintain a
transfer agent in each place of payment for such series and, if Debt Securities
of a series are also issuable as Bearer Securities, the Company will be required
to maintain (in addition to the Security Registrar) a transfer agent in a place
of payment for such series located outside the United States. The Company may at
any time designate additional transfer agents with respect to any series of Debt
Securities.
Title to any Bearer Securities (including Bearer Securities in permanent
global form) and any coupons appertaining thereto will pass by delivery. The
Company, the Trustee and any agent of the Company or the Trustee may treat the
bearer of any Bearer Security and the bearer of any coupon and the registered
holder of any Registered Security as the owner thereof (whether or not such Debt
Security or coupon shall be overdue and notwithstanding any notice to the
contrary) for the purpose of making payment and for all other purposes.
In the event of any redemption in part, the Company shall not be required
to (i) issue, register the transfer of or exchange Debt Securities of any series
during a period beginning at the opening of business 15 days prior to the
selection of Debt Securities of that series for redemption and ending on the
close of business on (A) if Debt Securities of the series are issuable only as
Registered Securities, the day of mailing of the relevant notice of redemption
and (B) if Debt Securities of the series are issuable as Bearer Securities, the
date of the first publication of the relevant notice of redemption or, if
Securities of the series are also issuable as Registered Securities and there is
no publication, the mailing of the relevant notice of redemption; (ii) register
the transfer of or exchange any Registered Security, or portion thereof, called
for redemption, except the unredeemed portion of any Registered Security being
redeemed in part; or (iii) exchange any Bearer Security called for redemption,
except to exchange such Bearer Security for a Registered Security of that series
in like principal amount and like tenor which is immediately surrendered for
redemption.
Replacement of Securities and Coupons. Any mutilated Debt Security or a
Debt Security with a mutilated coupon appertaining thereto will be replaced by
the Company at the expense of the Holder upon surrender of such Debt Security to
the Trustee. Debt Securities or coupons that become destroyed, stolen or lost
will be replaced by the Company at the expense of the Holder upon delivery to
the Trustee of the Debt Security and coupons or evidence of destruction, loss or
theft thereof satisfactory to the Company and the Trustee; in the case of any
coupon which becomes destroyed, stolen or lost, such coupon will be replaced by
issuance of a new Debt Security in exchange for the Debt Security to which such
coupon appertains. In the case of a destroyed, lost or stolen Debt Security or
coupon, an indemnity satisfactory to the Trustee and the Company may be required
at the expense of the Holder of such Debt Security or coupon before a
replacement Debt Security will be issued.
Payment and Paying Agents. Unless otherwise indicated in an applicable
Prospectus Supplement, payment of principal of and any premium and interest on
Bearer Securities will be payable, subject to any applicable laws and
regulations, at the offices of such Paying Agents outside the United States as
the
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<PAGE> 34
Company may designate from time to time, in the manner indicated in such
Prospectus Supplement. Unless otherwise indicated in an applicable Prospectus
Supplement, payment of interest on Bearer Securities on any Interest Payment
Date will be made only against surrender to the Paying Agent of the coupon
relating to such Interest Payment Date. No payment with respect to any Bearer
Security will be made at any office or agency of the Company in the United
States or by check mailed to any address in the United States or by transfer to
any account maintained with a bank located in the United States. Notwithstanding
the foregoing, payments of principal of and any premium and interest on Bearer
Securities denominated and payable in United States dollars will be made at the
office of the Company's Paying Agent in the Borough of Manhattan, the City of
New York, if (but only if) payment of the full amount thereof in United States
Dollars at all offices or agencies outside the United States is illegal or
effectively precluded by exchange controls or other similar restrictions.
Unless otherwise indicated in an applicable Prospectus Supplement, payment
of principal of and any premium and interest on Registered Securities will be
made at the office of such Paying Agent or Paying Agents as the Company may
designate from time to time, except that at the option of the Company payment of
any interest may be made by check mailed on or before the due date to the
address of the Person entitled thereto as such address shall appear in the
Security Register. Unless otherwise indicated in an applicable Prospectus
Supplement, payment of any installment of interest on Registered Securities will
be made to the Person in whose name such Registered Security is registered at
the close of business on the Regular Record Date for such interest.
Unless otherwise indicated in an applicable Prospectus Supplement, the
Company, at its principal executive offices in Corona, California, will act as
its own Paying Agent for payments with respect to Debt Securities which are
issuable solely as Registered Securities and the Company will maintain a Paying
Agent outside the United States for payments with respect to Debt Securities
(subject to limitations described above in the case of Bearer Securities) which
are issuable solely as Bearer Securities or as both Registered Securities and
Bearer Securities. Any Paying Agents outside the United States and any other
Paying Agents in the United States initially designated by the Company for the
Debt Securities will be named in an applicable Prospectus Supplement. The
Company may at any time designate additional Paying Agents or rescind the
designation of any Paying Agent or approve a change in the office through which
any Paying Agent acts, except that, if Debt Securities of a series are issuable
solely as Registered Securities, the Company will be required to maintain a
Paying Agent in each place of payment for such series and, if Debt Securities of
a series are issuable as Bearer Securities, the Company will be required to
maintain (i) a Paying Agent in the Borough of Manhattan, The City of New York
for principal payments with respect to any Registered Securities of the series
(and for payments with respect to Bearer Securities of the series in the
circumstances described above, but not otherwise), and (ii) a Paying Agent in a
place of payment located outside the United States where Debt Securities of such
series and any coupons appertaining thereto may be presented and surrendered for
payment.
All moneys paid by the Company to a Paying Agent for the payment of
principal of and any premium or interest on any Debt Security which remain
unclaimed at the end of two years after such principal, premium or interest
shall have become due and payable will (subject to applicable escheat laws) be
repaid to the Company, and the Holder of such Debt Security or any coupon will
thereafter look only to the Company for payment thereof.
Global Debt Securities. Debt Securities of a series may be issued in whole
or in part in the form of one or more global Debt Securities that will be
deposited with, or on behalf of, a depository identified in the Prospectus
Supplement relating to such series. Global Debt Securities may be issued only in
fully registered form and in either temporary or permanent form. Unless and
until it is exchanged in whole or in part for the individual Debt Securities
represented thereby, a global Debt Security may not be transferred except as a
whole by the depository for such global Debt Security to a nominee of such
depository or by a nominee of such depository to such depository or another
nominee of such depository or by the depository or any nominee to a successor
depository or any nominee of such successor.
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<PAGE> 35
The specific terms of the depository arrangement with respect to a series
of Debt Securities in the form of one or more Global Debt Securities will be
described in the Prospectus Supplement relating to such series.
Satisfaction and Discharge of Indenture. Each Indenture provides that the
Company may discharge the Indenture (except as to any surviving rights of
registration of transfer or exchange of Debt Securities and any right to receive
additional amounts) with respect to all Debt Securities issued under the
Indenture, which Debt Securities have not already been delivered to the Trustee
for cancellation and which either have become due and payable or are by their
terms due and payable within one year (or are to be called for redemption within
one year) by depositing with the Trustee as trust funds an amount sufficient to
pay when due the principal of and premium, if any, and interest, if any, on all
outstanding Debt Securities when due.
Defeasance and Discharge. Each Indenture provides that, if the Company so
elects by Board Resolution with respect to the Debt Securities of any series
issued under such Indenture (other than convertible Subordinated Debt
Securities), the Company will be discharged from any and all obligations in
respect of the Debt Securities of such series (except those as to conversion and
except for certain obligations relating to temporary Debt Securities and
exchange of Debt Securities, registration of transfer or exchange of Debt
Securities of such series, replacement of stolen, lost or mutilated Debt
Securities of such series, maintenance of paying agencies to hold moneys for
payment in trust and payment of additional amounts, if any, required in
consequence of United States withholding taxes imposed on payments to non-United
States persons) upon the deposit with the Trustee, in a trust account in which
the Trustee for the ratable benefit of the Holders would have a perfected
security interest, of money and/or U.S. Government Obligations which through the
payment of interest and principal in respect thereof in accordance with their
terms will provide money in an amount sufficient to pay the principal of (and
premium, if any), and each installment of interest on, the Debt Securities of
such series on the Stated Maturity of such payments in accordance with the terms
of such Indenture and the Debt Securities of such series. Such a trust may only
be established if, among other things, the Company has delivered to the Trustee
an Opinion of Counsel to the effect that (i) the Company has received from, or
there has been published by, the Internal Revenue Service a ruling, or (ii)
since the date of such Indenture there has been a change in applicable Federal
income tax law, in either case to the effect that, and based thereon such
Opinion of Counsel shall confirm that, the Holders of such series will not
recognize income, gain or loss for Federal income tax purposes as a result of
such deposit, defeasance and discharge, and will be subject to Federal income
tax on the same amounts and in the same manner and at the same times as would
have been the case if such deposit, defeasance and discharge had not occurred.
In the event of any such defeasance and discharge of Debt Securities of such
series, Holders of such series would be entitled to look only to such trust fund
for payment of principal of and any premium and any interest on their Debt
Securities until Stated Maturity.
Covenant Defeasance. Each Indenture also provides that, if the Company so
elects by Board Resolution with respect to the Debt Securities of any series
issued thereunder, the Company may omit to comply with certain restrictive
covenants, including (in the case of the Senior Debt Indenture) the covenants
described under "-- Provisions Applicable Solely to Senior Debt
Securities -- Limitation on Liens" and "-- Limitations on Sale and Leaseback
Transactions," but excluding (in the case of the Subordinated Debt Indenture)
any applicable obligation of the Company respecting the conversion of Debt
Securities of such series into Common Stock, and any such omission shall not be
an Event of Default with respect to the Debt Securities of such series, upon the
deposit with the Trustee, in trust, of money and/or U.S. Government Obligations
which through the payment of interest and principal in respect thereof in
accordance with their terms will provide money in an amount sufficient to pay
the principal of (and premium, if any), and each installment of interest on, the
Debt Securities of such series on the Stated Maturity of such payments in
accordance with the terms of such Indenture and the Debt Securities of such
series. The obligations of the Company under such Indenture and the Debt
Securities of such series other than with respect to such covenants shall remain
in full force and effect. Such a trust may be established only if, among other
things, the Company has delivered to the Trustee an Opinion of Counsel to the
effect that the Holders of such series will not recognize income, gain or loss
for Federal income tax purposes as a result of such deposit and defeasance of
certain obligations and will be subject to Federal income tax on the same
amounts and in the same manner and at the same time as would have been the case
if such deposit and defeasance had not occurred.
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Although the amount of money and U.S. Government Obligations on deposit
with the Trustee would be intended to be sufficient to pay amounts due on the
Debt Securities of such series at the time of their Stated Maturity, in the
event the Company exercises its option to omit compliance with the covenants
defeased with respect to the Debt Securities of any series as described above,
and the Debt Securities of such series are declared due and payable because of
the occurrence of any Event of Default, such amount may not be sufficient to pay
amounts due on the Debt Securities of such series at the time of the
acceleration resulting from such Event of Default. The Company shall in any
event remain liable for such payments as provided in the applicable Indenture.
Federal Income Tax Consequences. Under current United States Federal
income tax law, defeasance and discharge would likely be treated as a taxable
exchange of Debt Securities to be defeased for an interest in the defeasance
trust. As a consequence, a holder would recognize gain or loss equal to the
difference between the holder's cost or other tax basis for such Debt Securities
and the value of the holder's interest in the defeasance trust, and thereafter
would be required to include in income the holder's share of the income, gain or
loss of the defeasance trust. Under current United States Federal income tax
law, covenant defeasance would ordinarily not be treated as a taxable exchange
of such Debt Securities.
Meetings, Modification and Waiver. Modifications and amendments of either
Indenture may be made by the Company and the Trustee with the consent of the
Holders of a majority in aggregate principal amount of the Outstanding Debt
Security of each series affected by such modification or amendment; provided,
however, that no such modification or amendment may, without the consent of the
Holder of each Outstanding Debt Security affected thereby, (a) change the Stated
Maturity of the principal of, or any installment of principal of or interest on,
any Debt Security, (b) change the terms, including the definitions used with
respect thereto, of any mandatory redemption or any redemptions at the option of
the Company, (c) reduce the principal amount of, or premium or interest on, any
Debt Security, (d) reduce the amount of principal of an Original Issue Discount
Security payable on the Maturity thereof, upon acceleration or otherwise, (e)
change the coin or currency in which any Debt Security or any premium or
interest thereon is payable, (f) impair the right to institute suit for the
enforcement of any payment on or with respect to any Debt Security or any
conversion right with respect thereto, (g) reduce the percentage in the
aggregate principal amount of Outstanding Debt Securities of any series, the
consent of whose Holders is required for modification or amendment of such
Indenture or for waiver of compliance with certain provisions of such Indenture
or for waiver of certain defaults, (h) reduce the requirements contained in such
Indenture for quorum or voting, (i) change any obligation of the Company to
maintain an office or agency in the places and for the purposes required by such
Indenture, (j) adversely affect the right to convert Subordinated Debt
Securities, if applicable, or (k) modify any of the above provisions.
The Subordinated Debt Indenture may not be amended to alter the
subordination of any outstanding Subordinated Debt Securities without the
consent of each holder of Senior Indebtedness (as defined below under
"-- Provisions Applicable Solely to Subordinated Debt Securities") then
outstanding that would be adversely affected thereby.
The Holders of a majority in aggregate principal amount of the Outstanding
Debt Securities of each series may, on behalf of all Holders of that series,
waive, insofar as that series is concerned, compliance by the Company with
certain restrictive provisions of the Indenture under which such series has been
issued. The Holders of a majority in aggregate principal amount of the
Outstanding Debt Securities of each series may, on behalf of all Holders of that
series, waive any past default under the applicable Indenture with respect to
any Debt Securities of that series, except a default (a) in the payment of
principal of, or premium, if any, or any interest on any Debt Security of such
series or (b) in respect of a covenant or provision of such Indenture which
cannot be modified or amended without the consent of the Holder of each
Outstanding Debt Security of such series affected.
Each Indenture provides that in determining whether the Holders of the
requisite aggregate principal amount of the Outstanding Debt Securities have
given any request, demand, authorization, direction, notice, consent or waiver
thereunder or are present at a meeting of the Holders for quorum purposes, (i)
the aggregate principal amount of an Original Issue Discount Security that is
deemed to be Outstanding will be
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the amount of the principal that would be due and payable as of the date of such
determination upon acceleration of the Maturity thereof, and (ii) the aggregate
principal amount of a Debt Security denominated in a foreign currency or
currency units will be the United States Dollar equivalent, determined on the
date of original issuance of such Debt Security, of the aggregate principal
amount of such Debt Security or, in the case of an Original Issue Discount
Security, the United States Dollar equivalent, determined on the date of
original issuance of such Security, of the amount determined as provided in (i)
above.
Each Indenture contains provisions for convening meetings of the Holders of
a series if Debt Securities of that series are issuable as Bearer Securities. A
meeting may be called at any time by the Trustee, and also, upon request, by the
Company or the Holders of at least 10% in aggregate principal amount of the
Outstanding Debt Securities of such series, in any such case upon notice given
in accordance with "Notices" below. Except for any consent which must be given
by the Holder of each Outstanding Debt Security affected thereby, as described
above, any resolution presented at a meeting (or adjourned meeting at which a
quorum is present) may be adopted by the affirmative vote of the Holders of a
majority in aggregate principal amount of the Outstanding Debt Securities of
that series; provided, however, that any resolution with respect to any request,
demand, authorization, direction, notice, consent, waiver or other action which
may be made, given or taken by the Holders of a specified percentage, which is
less than a majority, in aggregate principal amount of the Outstanding Debt
Securities of a series may be adopted at a meeting (or adjourned meeting duly
reconvened at which a quorum is present) by the affirmative vote of the Holders
of such specified percentage in aggregate principal amount of the Outstanding
Debt Securities of that series. Any resolution passed or decision taken at any
meeting of Holders of any series duly held in accordance with the applicable
Indenture will be binding on all Holders of that series and related coupons. The
quorum at any meeting, and at any reconvened meeting, will be Persons holding or
representing a majority in aggregate principal amount of the Outstanding Debt
Securities of a series.
Notices. Except as otherwise provided in an applicable Prospectus
Supplement, notices to Holders of Bearer Securities will be given by publication
at least twice in a daily newspaper in the city of New York and in such other
city or cities as may be specified in such Bearer Securities. Notices to Holders
of Registered Securities will be given by first-class mail to the addresses of
such Holders as they appear in the Security Register.
Governing Law. The Indentures, the Debt Securities, and coupons, if any,
will be governed by, and construed in accordance with, the laws of the State of
New York, without regard to principles of conflicts of law.
Regarding the Trustee. The Trustee appointed and serving as trustee
pursuant to each of the Senior Debt Indenture and the Subordinated Debt
Indenture is First Union.
Each Indenture contains certain limitations on the right of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize for its own account on certain property received in
respect of any such claim as security or otherwise. The Trustee is permitted to
engage in certain other transactions; however, if it acquires any conflicting
interest (as described in the Indentures), it must eliminate such conflict or
resign.
The holders of a majority in aggregate principal amount of all outstanding
Debt Securities of a series (or if more than one series is affected thereby, all
series so affected, voting as a single class) will have the right to direct the
time, method and place of conducting any proceeding for exercising any remedy or
power available to the Trustee for such series or all such series so affected.
In case an Event of Default shall occur (and shall not be cured) under any
Indenture relating to a series of Debt Securities and is known to the Trustee
for such series, such Trustee shall exercise such of the rights and powers
vested in it by such Indenture and use the same degree of care and skill in its
exercise as a prudent person would exercise or use under the circumstances in
the conduct of his own affairs. Subject to such provisions, no Trustee will be
under any obligation to exercise any of its rights or powers under the
applicable Indenture at the request of any of the holders of Debt Securities
unless they shall have offered to such Trustee security and indemnity
satisfactory to it.
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Pursuant to the Trust Indenture Act, a trustee under an indenture may be
deemed to have a conflicting interest, and may, under certain circumstances set
forth in the Trust Indenture Act, be required to resign as trustee under such
indenture, if the securities under such indenture are in default (as such term
is defined in such indenture) and the trustee is the trustee under another
indenture under which any other securities of the same obligor are outstanding,
subject to certain exceptions set forth in the Trust Indenture Act. In such
event, the obligor must take prompt steps to have a successor trustee appointed
in the manner provided in the indenture from which the trustee has resigned.
Accordingly, a trustee under the Senior Debt Indenture and the Subordinated Debt
Indenture could be required to resign as trustee under one of such Indentures
should a default occur under one of such Indentures. In such event, the Company
would be required to take prompt steps to have a successor trustee or successor
trustees appointed in the manner provided in the applicable Indenture.
A trustee under the Senior Debt Indenture and the Subordinated Debt
Indenture, may be a depositary for funds of, may make loans to and may perform
other routine banking services for, the Company and certain of its affiliates in
the normal course of business.
PROVISIONS APPLICABLE SOLELY TO SENIOR DEBT SECURITIES
General. Senior Debt Securities will be issued under the Senior Debt
Indenture, and each series will rank pari passu as to the right of payment of
principal and any premium and interest with each other series issued thereunder
and will rank senior in right of payment to all series of Subordinated Debt
Securities issued and outstanding and that may be issued from time to time.
Definition of "Attributable Debt." "Attributable Debt" shall mean, as of
any particular time, the present value, discounted at a rate per annum equal to
the weighted average interest rate of all Senior Debt Securities outstanding at
the time under the Senior Debt Indenture compounded semi-annually, in either
case, of the obligation of a lessee for rental payments during the remaining
term of any lease on any portion of Principal Property (including any period for
which such lease has been extended or may, at the option of the lessor, be
extended); the net amount of rent required to be paid for any such period shall
be the total amount of the rent payable by the lessee with respect to such
period, but may exclude amounts required to be paid on account of maintenance
and repairs, insurance, taxes, assessments, water rates and similar charges;
and, in the case of any lease which is terminable by the lessee upon the payment
of a penalty, such net amount shall also include the amount of such penalty.
Restrictions On Subsidiary Indebtedness. Unless the applicable Prospectus
Supplement provides otherwise, the Senior Debt Indenture will provide that so
long as any of the Senior Debt Securities are outstanding, the Company will not
permit any of its Subsidiaries to issue, assume, incur or guarantee any
Indebtedness, except that this restriction shall not apply to:
(a) Indebtedness existing as of the date of the Indenture;
(b) Indebtedness of any Person existing at the time it becomes a
Subsidiary (including through merger or consolidation) and not incurred as
a result of, or in connection with or in anticipation of, such Person
becoming a Subsidiary, provided that such Indebtedness (including
Guarantees with respect thereto) is non-recourse to any Person other than
such Person and any Person who is not a Subsidiary of the Company;
(c) Indebtedness of any Subsidiary to the Company or any Guarantor of
the Senior Debt Indenture and unsecured intercompany Indebtedness of a
Subsidiary that is not a Guarantor for loans or advances made to another
Subsidiary provided that in any case, upon either (i) the transfer or other
disposition by the Company or a Subsidiary of any Indebtedness so permitted
to a Person other than the Company or another Subsidiary or (ii) the
issuance, sale, transfer or other disposition (other than a pledge of the
shares of such Subsidiary) of shares of capital stock (including
acquisition through merger or consolidation) of such Subsidiary to a Person
other than the Company or another Subsidiary which, after giving effect
thereto, results in such Subsidiary ceasing to be a Subsidiary of the
Company, the provisions of this clause (c) shall no longer be applicable to
such Indebtedness and such Indebtedness shall be
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deemed to have been issued, assumed incurred or guaranteed at the time of
such transfer or other disposition;
(d) The endorsement of negotiable instruments for deposit or
collection or similar transactions in the ordinary course of business;
(e) The extension, renewal, refinancing or replacement (or successive
extensions, renewals, refinancings or replacements), in whole or in part,
of any Indebtedness referred to in the foregoing clauses (a) and (b), and
this clause (e), provided, however, that: (i) the Indebtedness so issued
has (A) an aggregate principal amount or accreted value, as applicable, not
in excess of the aggregate principal amount or accreted value, as
applicable, of the Indebtedness being extended, renewed, refinanced or
replaced (which amount shall be deemed to include the amount of any undrawn
or available amounts under any committed credit or lease facility to be so
extended, renewed, refinanced or replaced), (B) a final maturity date or
redemption date, as applicable, later than the final stated maturity or
final redemption date, if any, of the Indebtedness being extended, renewed,
refinanced or replaced and (C) an average life at the time of issuance of
such Indebtedness that is greater than the average life of the Indebtedness
being extended, renewed refinanced or replaced; (ii) the group of direct or
contingent obligors on such Indebtedness shall not be expanded as a result
of any such action (except that third parties that are not Affiliates of
the Company or any Guarantor may be such obligors); and (iii) immediately
prior to and immediately after giving effect to any such extension, renewal
or replacement, no Event of Default shall have occurred and be continuing;
(f) Attributable Debt issued, incurred or assumed in compliance with,
or otherwise permitted by the "Limitation on Sale and Leaseback
Transactions" covenant; and
(g) Guarantees by any Subsidiary of any Indebtedness provided the
Company is in compliance with the "Subsidiary Guarantees" and "Additional
Guarantors" covenants.
Notwithstanding the foregoing provisions of this covenant, any Subsidiary
may issue, assume, incur or guarantee Indebtedness in an aggregate amount
outstanding at any time, that together with the aggregate of, without
duplication, (1) all other Indebtedness of Subsidiaries outstanding immediately
prior to such issuance, assumption, incurrence or guarantee (but not including
Indebtedness issued, assumed, incurred or guaranteed under clauses (a) through
(f) above), (2) all Attributable Debt of the Company and its Subsidiaries, not
issued, incurred, assumed in compliance with, or otherwise permitted without
limitation under, the "Limitations on Sale and Leaseback Transactions" covenant
and (3) all Indebtedness secured by a Security Interest not incurred in
compliance with or otherwise permitted under the "Limitation on Liens" covenant,
does not exceed 15% of the Consolidated Net Worth of the Company.
Subsidiary Guarantees. Unless otherwise set forth in the applicable
Prospectus Supplement, upon the granting of any Guarantee of Indebtedness of the
Company by any Subsidiary of the Company (whether or not a Default or Event of
Default has occurred and is continuing), the Company shall cause such Subsidiary
unconditionally and fully to guarantee on a senior or pari passu basis (on a
senior basis, if such Indebtedness is subordinated in right of payment to the
Senior Debt Securities) all of the Company's obligations under the Senior Debt
Securities and the Senior Debt Indenture on the terms set forth in the Senior
Debt Indenture and execute and deliver such further documents as necessary to
effect said guarantees of the Senior Debt Securities. Upon (i) the full and
unconditional release by all the obligees under such Indebtedness of a Guarantor
of all obligations with respect thereto (whether or not a Default or an Event of
Default has occurred and is continuing) or (ii) the sale or disposition in its
entirety (whether by merger, stock purchase, asset sale or otherwise) of a
Guarantor (or substantially all of its assets) to a Person other than the
Company or a Guarantor, which is otherwise in compliance with the Senior Debt
Indenture, such Guarantor (in the event or such a release of such Guarantor or a
sale or disposition of such Guarantor) or the Person acquiring such assets (in
the event of sale or disposition of all or substantially all the assets of such
Guarantor) shall be deemed automatically and unconditionally released and
discharged from all its obligations under its guarantee of the Senior Debt
Securities.
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Notwithstanding the above paragraph, if and for so long as the Senior Debt
Securities are (without any requirement that any Subsidiary subsequently be a
Guarantor of any Senior Debt Securities) assigned a rating of Baa2 (or the
equivalent) or higher by Moody's Investors Service, Inc., or its successors
("Moody's") and a rating of BBB (or the equivalent) or higher by Standard &
Poor's Ratings Services, a division of the McGraw-Hill Companies, Inc., or its
successors ("S&P"), such Guarantors shall be deemed automatically and
unconditionally released and discharged from all their obligations under their
Guarantees of the Senior Debt Securities.
The obligations of each Guarantor under its guarantee of the Senior Debt
Securities are limited to the maximum amount as will, after giving effect to all
other contingent and fixed liabilities of such Guarantor and after giving effect
to any collections or rights with respect thereto from or payments made by or on
behalf of any other Guarantor in respect of the obligations of such other
Guarantor under its guarantee of the Senior Debt Securities or pursuant to its
contribution obligations under the Senior Debt Indenture, result in the
obligations of such Guarantor under such guarantee of the Senior Debt Securities
not constituting a fraudulent conveyance or fraudulent transfer under applicable
Federal or state law. Each Guarantor that makes a payment or distribution under
the guarantee of the Senior Debt Securities shall be entitled to a contribution
from each other Guarantor in pro rata amount based on the Consolidated Net Worth
of each Guarantor such that, immediately after all such contributions, such
payment will be borne by each such Guarantor in an amount equal to such payment
multiplied by a fraction, the numerator of which is such Guarantor's
Consolidated Net Worth and the denominator of which is the aggregate
Consolidated Net Worth of all Guarantors.
Additional Guarantors. The Senior Debt Indenture will provide that, with
respect to the Senior Debt Securities, if at a time when there are guarantees by
any Subsidiary of any Indebtedness of the Company outstanding, the Company or
any of the Guarantors Invests (as defined in the Indentures) or transfers or
causes to be transferred, in one transaction or a series of related
transactions, any assets or property (whether real or personal, tangible or
intangible) to any Subsidiary of the Company that is not a Guarantor, or if at a
time when there are guarantees by any Subsidiary of any Indebtedness of the
Company outstanding the Company or any of the Guarantors shall organize, acquire
or otherwise Invest in another Person that becomes a Subsidiary of the Company
or such Subsidiary becomes a Guarantor of any Indebtedness of the Company, then
the Company shall cause such transferee or acquiree or other Subsidiary to (i)
execute and deliver to the Trustee a supplemental indenture in form reasonably
satisfactory to the Trustee pursuant to which such Subsidiary shall fully and
unconditionally guarantee all of the Company's obligations under the Senior Debt
Securities and the Indenture on the terms set forth in the Indenture and (ii)
deliver to the Trustee an opinion of counsel that such supplemental indenture
has been duly authorized, executed and delivered by such Subsidiary and
constitutes a legal, valid, binding and enforceable obligation of such
Subsidiary. Thereafter, such Subsidiary shall be a Guarantor for all purposes of
the Indenture (as it relates to all series of Notes issued thereunder).
Limitation on Liens. Unless provided otherwise in the applicable
Prospectus Supplement, the provisions of this covenant shall apply to each
series of Senior Debt Securities issued under the Senior Debt Indenture:
(a) The Company will not, and will not permit any of its Subsidiaries
to, create, incur, assume or suffer to exist, directly or indirectly, any
Indebtedness secured by a Security Interest upon any Principal Property of
the Company or of a Subsidiary, or on any share of stock or debt of any
Subsidiary, whether owned as of the date of this Indenture or hereafter
acquired, without making effective provision (and the Company hereby
covenants that in any such case it shall make or cause to be made effective
provision) whereby the Senior Debt Securities of that series then
outstanding and any other Indebtedness of the Company or any Subsidiary
then entitled by its terms thereto shall be secured by such Security
Interest equally and ratably with (or, in the case of the Senior Debt
Securities of that series and if the Company shall so determine, and in any
case where the other secured Indebtedness is subordinated in right of
payment to the Senior Debt Securities, prior to) any and all other
Indebtedness of the Company or any Subsidiary thereby secured for so long
as any such other Indebtedness of the Company or any Subsidiary
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shall be so secured; provided, that nothing in the Senior Debt Indenture
shall prevent, restrict or apply to Indebtedness secured by:
(1)(A) Any Security Interest upon property or assets which is
created prior to or contemporaneously with, or within 360 days after,
(i) in the case of the acquisition of such property or assets, the
completion of such acquisition and (ii) in the case of the construction,
development or improvement of such property or assets, the later to
occur of the completion of such construction, development or improvement
or the commencement of operation or use of the property or assets, which
Security Interest secures or provides for the payment, financing or
refinancing, directly or indirectly, of all or any part of the
acquisition cost of such property or assets or the cost of construction,
development or improvement thereof; or (B) any Security Interest upon
property or assets existing at the time of the acquisition thereof (but
not any Security Interest established in anticipation of the acquisition
thereof), which Security Interest secures obligations assumed by the
Company or any Subsidiary; or (C) any conditional sales agreement or
other title retention agreement with respect to any property or assets
acquired by the Company or any Subsidiary; or (D) any Security Interest
existing on the property or assets or shares of stock of a corporation
or firm at the time such corporation or firm is merged into or
consolidated with the Company or any Subsidiary or at the time of a
sale, lease or other disposition of the property or assets of such
corporation or firm as an entirety or substantially as an entirety to
the Company or any Subsidiary or at the time such corporation becomes a
Subsidiary (but not any Security Interest established in anticipation of
the acquisition thereof); or (E) any Security Interest existing on the
property, assets or shares of stock of any successor which shall have
become the Company in accordance with the provisions of the covenant
described in "Consolidation, Merger, Sale"; provided, in each case, that
any such Security Interest described in the foregoing clauses (B), (C),
(D) or (E) does not attach to or affect property or assets owned by the
Company or any Subsidiary prior to the event referred to in such
clauses; or
(2) Mechanics', materialmen's, carriers' or other like liens
arising in the ordinary course of business (including construction of
facilities) in respect of obligations which are not due or which are
being contested in good faith; or
(3) Any Security Interest arising by reason of deposits with, or
the giving of any form of security to, any governmental agency or any
body created or approved by law or governmental regulation, which is
required by law or governmental regulation as a condition to the
transaction of any business or the exercise of any privilege, franchise
or license; or
(4) Security Interests for taxes, assessments or governmental
charges or levies not yet delinquent or Security Interests for taxes,
assessments or governmental charges or levies already delinquent but the
validity of which is being contested in good faith; or
(5) Security Interests (including judgment liens) arising in
connection with legal proceedings so long as such proceedings are being
contested in good faith and, in the case of judgment liens, execution
thereon is stayed; or
(6) Landlords' liens on fixtures located on premises leased by the
Company or any Subsidiary in the ordinary course of business; or
(7) Any Security Interest in favor of any governmental authority in
connection with the financing of the cost of construction or acquisition
of property; or
(8) Any Security Interest arising by reason of deposits to qualify
the Company or any Subsidiary to conduct business, to maintain
self-insurance, or to obtain the benefit of, or comply with, laws; or
(9) Any Security Interest that secures any Indebtedness of a
Subsidiary owing to the Company or another Subsidiary or by the Company
to a Subsidiary; or
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(10) Any Security Interest incurred in connection with industrial
revenue or similar financing; or
(11) Any Security Interest created by any program providing for the
financing, sale or other disposition of trade or other receivables
qualified as current assets in accordance with U.S. GAAP entered into by
the Company or by any Subsidiary, provided that such program is on terms
comparable for similar transactions, or any document executed by the
Company or any Subsidiary in connection therewith, and provided that
such Security Interest is limited to the trade or other receivables in
respect of which such program is created or exists and the proceeds
thereof; or
(12) Any extension, renewal or refunding (or successive extensions,
renewals or refundings) in whole or in part of any Indebtedness secured
by any Security Interest referred to in the foregoing clauses (1)
through (11), inclusive, provided the Security Interest securing such
Indebtedness shall be limited to the property or assets which,
immediately prior to such extension, renewal or refunding, secured such
Indebtedness and additions to such property or assets and shall be on no
more onerous terms than such prior Security Interest.
Notwithstanding the foregoing provisions of this covenant, the Company or
any of its Subsidiaries may create, incur, assume or suffer to exist any
Indebtedness secured by a Security Interest without so securing the Senior Debt
Securities of that series if, at the time such Security Interest becomes a
Security Interest upon any Principal Property of the Company, or on any shares
of stock or debt of any Subsidiary, or such Subsidiary and after giving effect
thereto, the outstanding aggregate principal amount of all Indebtedness of the
Company and its Subsidiaries secured by Security Interests incurred other than
as a result of reliance on clauses (1) through (12) above (excluding
Indebtedness secured by a Security Interest existing as of the date of the
Senior Debt Indenture, but including the Attributable Debt in respect of Sale
and Leaseback Transactions, other than (i) Sale and Leaseback Transactions
which, if the Attributable Debt in respect thereof had been Indebtedness secured
by a Security Interest, would have been permitted by clause (a)(1)(A) above,
(ii) Sale and Leaseback Transactions the proceeds of which have been applied or
committed to be applied in accordance with the covenant described in
"Limitations on Sale and Leaseback Transactions" and (iii) Sale and Leaseback
Transactions between the Company and any Subsidiary) together with all
Subsidiary Indebtedness not otherwise permitted under "Restrictions on
Subsidiary Indebtedness," does not exceed 15% of the Consolidated Net Worth of
the Company. If, upon any consolidation or merger of any Subsidiary with or into
any other corporation, or upon any consolidation or merger of any other
corporation with or into the Company or any Subsidiary or upon any sale or
conveyance of the Principal Property of any Subsidiary as an entirety or
substantially as an entirety to any other Person, or upon any acquisition by the
Company or any Subsidiary by purchase or otherwise of all or any part of the
Principal Property of any other Person, any Principal Property theretofore owned
by the Company or such Subsidiary would thereupon become subject to any Security
Interest not permitted by the terms of the foregoing covenant, the Company,
prior to such consolidation, merger, sale or conveyance, or acquisition, will,
or will cause such Subsidiary to, secure payment of the principal of and
interest, if any, on the Senior Debt Securities of that series (equally and
ratably with, or if the Company shall determine (or in any case where the other
Security Interest is on Subordinated Indebtedness), prior to any other
Indebtedness of the Company or such Subsidiary then entitled thereto) by a
direct lien on all such Principal Property prior to all liens, other than all
liens for taxes, and other than any liens theretofore existing thereon by a
supplemental indenture or otherwise.
Limitations on Sale and Leaseback Transactions. Unless provided otherwise
in the applicable Prospectus Supplement, the provisions of this covenant shall
apply to each series of Senior Debt Securities issued under the Senior Debt
Indenture.
The Company will not, and will not permit any Subsidiary to, enter into any
arrangement with any Person (other than with any Subsidiary) providing for the
leasing to the Company or any Subsidiary of any Principal Property owned or
hereafter acquired by the Company or such Subsidiary (except for temporary
leases for a term, including any renewal thereof, of not more than three years
and except for leases between the Company and a Subsidiary or between
Subsidiaries), which Principal Property has been or is to be sold or transferred
by the Company or such Subsidiary to such Person (a "Sale and Leaseback
Transaction") unless (a) the
21
<PAGE> 43
Company or such Subsidiary would be entitled, pursuant to the covenant described
in "-- Provisions Applicable Solely to Senior Debt Securities -- Limitation on
Liens," to incur Indebtedness secured by a Security Interest on the property to
be leased without equally and ratably securing the Senior Debt Securities of
that series, or (b) the Company shall, and in any such case the Company
covenants that it will, within 180 days after the effective date of any such
arrangement, apply an amount equal to the fair value (as determined by the Board
of Directors) of such property to the redemption of Senior Debt Securities that,
by their terms, are subject to redemption, or to the purchase and retirement of
Senior Debt Securities, or to the payment or other retirement of Funded Debt for
money borrowed, incurred or assumed by the Company which is pari passu with the
Senior Debt Securities of that series or of Funded Debt for money borrowed,
incurred or assumed by any Subsidiary (other than, in either case, intercompany
Indebtedness), or (c) the Company shall within 180 days after entering into the
Sale and Leaseback Transaction, enter into a bona fide commitment or commitments
to expend for the acquisition or capital improvement of a Principal Property an
amount at least equal to the fair value (as determined by the Board of
Directors) of such property.
Notwithstanding the foregoing, the Company may, and may permit any
Subsidiary to, effect any Sale and Leaseback Transaction that is not permitted
pursuant to clauses (a) through (c), inclusive, of the foregoing paragraph,
provided that the Attributable Debt associated with such Sale and Leaseback
Transaction, together with the aggregate principal amount of outstanding debt
secured by Security Interests upon Principal Property not permitted pursuant to
clauses (1) through (12) of the covenant described in "-- Provisions Applicable
Solely to Senior Debt Securities -- Limitation on Liens," and all Subsidiary
Indebtedness not otherwise permitted under "Restrictions on Subsidiary
Indebtedness," inclusive, do not together, and without duplication, exceed 15%
of the Consolidated Net Worth of the Company.
PROVISIONS APPLICABLE SOLELY TO SUBORDINATED DEBT SECURITIES
Subordination. The foregoing provision will apply to Subordinated Debt
Securities to the extent not otherwise provided in the applicable Prospectus
Supplement. The Subordinated Debt Securities will be subordinate and junior in
right of payment, to the extent set forth in the Subordinated Debt Indenture, to
all Senior Indebtedness (as defined below) of the Company. If the Company should
default on any Senior Indebtedness, then, upon written notice of such default to
the Company by the holders of such Senior Indebtedness or any trustee therefor,
unless and until such default has been cured or waived or ceases to exist, no
direct or indirect payment (in cash, property, securities, by set-off or
otherwise) will be made or agreed to be made for principal or premium, if any,
or interest, if any, on the Subordinated Debt Securities, or in respect of any
redemption, retirement, purchase or other acquisition of the Subordinated Debt
Securities other than those made in capital stock of the Company (or cash in
lieu of fractional shares thereof) pursuant to any conversion right of the
Subordinated Debt Securities.
"Senior Indebtedness" is defined in the Subordinated Debt Indenture as
Indebtedness (as described above under "Provisions Applicable to Both Senior and
Subordinated Debt Securities") of the Company outstanding at any time except (a)
any Indebtedness as to which, by the terms of the instrument creating or
evidencing the same, it is provided that such Indebtedness is not senior in
right of payment to the Subordinated Debt Securities, (b) the Subordinated Debt
Securities, (c) any Indebtedness of the Company to a Subsidiary of the Company,
(d) interest accruing after the filing of a petition initiating certain
bankruptcy or insolvency proceedings unless such interest is an allowed claim
enforceable against the Company in a proceeding under Federal or state
bankruptcy or insolvency laws, (e) obligations under performance guarantees,
support agreements and other agreements in the nature thereof relating to the
obligations of any Subsidiary of the Company, and (f) trade accounts payable.
If (i) without the consent of the Company a court having jurisdiction shall
enter (A) an order for relief with respect to the Company under the United
States Federal bankruptcy laws, (B) a judgment, order or decree adjudging the
Company a bankrupt or insolvent, or (C) an order for relief for reorganization,
arrangement, adjustment or composition of or in respect of the Company under the
United States Federal bankruptcy laws or state insolvency laws or (ii) the
Company shall institute proceedings for the entry of an order for relief with
respect to the Company under the United States Federal bankruptcy laws or for an
22
<PAGE> 44
adjudication of insolvency, or shall consent to the institution of bankruptcy or
insolvency proceedings against it, or shall file a petition seeking, or seek or
consent to reorganization, arrangement, composition or similar relief under the
United States Federal bankruptcy laws or any applicable state law, or shall
consent to the filing of such petition or to the appointment of a receiver,
custodian, liquidator, assignee, trustee, sequestrator or similar official in
respect of the Company or of substantially all of its property, or the Company
shall make a general assignment for the benefit of creditors as recognized under
the United States Federal bankruptcy laws, then all Senior Indebtedness
(including any interest thereon accruing after the commencement of any such
proceedings) will first be paid in full before any payment or distribution,
whether in cash, securities or other property, may be made to any Holder of
Subordinated Debt Securities on account thereof. In such event, any payment or
distribution, whether in cash, securities or other property (other than
securities of the Company or any other corporation provided for by a plan of
reorganization or readjustment the payment of which is subordinate, at least to
the extent provided in the subordination provisions with respect to the
Subordinated Debt Securities, to the payment of all Senior Indebtedness then
outstanding and to any securities issued in respect thereof under any such plan
of reorganization or readjustment), which would otherwise (but for the
subordination provisions) be payable or deliverable in respect of Subordinated
Debt Securities of any series will be paid or delivered directly to the holders
of Senior Indebtedness in accordance with the priorities then existing among
such holders until all Senior Indebtedness (including any interest thereon
accruing after the commencement of any such proceedings) has been paid in full.
If any payment or distribution of any character, whether in cash, securities or
other property (other than securities of the Company or any other corporation
provided for by a plan of reorganization or readjustment the payment of which is
subordinate, at least to the extent provided in the subordination provisions
with respect to the Subordinated Debt Securities, to the payment of all Senior
Indebtedness then outstanding and to any securities issued in respect thereof
under any such plan of reorganization or readjustment), shall be received by the
Trustee or any holder of any Subordinated Debt Securities in contravention of
any of the terms of the Subordinated Debt Indenture, such payment or
distribution will be received in trust for the benefit of, and will be paid over
or delivered and transferred to, the holders of the Senior Indebtedness then
outstanding in accordance with the priorities then existing among such holders
for application to the payment of all Senior Indebtedness remaining unpaid, to
the extent necessary to pay all such Senior Indebtedness in full. In the event
of the failure of the Trustee or any holder to endorse or assign any such
payment, distribution or security, each Holder of Senior Indebtedness is
irrevocably authorized to endorse or assign the same. In the event of any such
proceeding, after payment in full of all sums owing with respect to Senior
Indebtedness, the holders of Subordinated Debt Securities, together with the
holders of any other obligations of the Company ranking on a parity with the
Subordinated Debt Securities, will be entitled to be repaid from the remaining
assets of the Company the amounts at that time due and owing on account of
unpaid principal of and any premium and interest on the Subordinated Debt
Securities and such other obligations before any payment or other distribution,
whether in cash, property or otherwise, shall be made on account of any capital
stock or obligations of the Company ranking junior to the Subordinated Debt
Securities and such other obligations.
The Subordinated Debt Indenture will provide that Senior Indebtedness shall
not be deemed to have been paid in full unless the holders thereof shall have
received cash, securities or other property equal to the amount of such Senior
Indebtedness then outstanding. Upon the payment in full of all Senior
Indebtedness, the holders of Subordinated Debt Securities of each series shall
be subrogated to all rights of any holders of Senior Indebtedness to receive any
further payments or distributions applicable to such Senior Indebtedness until
the indebtedness evidenced by the Subordinated Debt Securities of such series
shall have been paid in full, and such payments or distributions received by
such Holders, by reason of such subrogation, of cash, securities or other
property that otherwise would be paid or distributed to the holders of Senior
Indebtedness, shall, as between the Company and its creditors other than the
holders of such Senior Indebtedness, on the one hand, and such Holders, on the
other hand, be deemed to be a payment by the Company on account of such Senior
Indebtedness, and not on account of the Subordinated Debt Securities of such
series.
The Prospectus Supplement respecting any series of Subordinated Debt
Securities will set forth any subordination provisions applicable to such series
in addition to or different from those described above.
23
<PAGE> 45
By reason of such subordination, in the event of a liquidation, bankruptcy,
reorganization, insolvency, receivership or similar proceeding involving the
Company or an assignment for the benefit of creditors of the Company or any of
its Subsidiaries or a marshalling of assets or liabilities of the Company and
its Subsidiaries, holders of Senior Indebtedness and holders of other
obligations of the Company that are not subordinated to Senior Indebtedness may
receive more, ratably, than holders of the Subordinated Debt Securities. Such
subordination will not prevent the occurrence of any Default or Event of Default
or limit the rights of the Trustee or any Holder, subject to the other
provisions of the Subordinated Debt Indenture, to pursue any other rights or
remedies with respect to the Subordinated Debt Securities.
Conversion. The Subordinated Debt Indenture may provide for a right of
conversion of Subordinated Debt Securities into Common Stock (or cash in lieu
thereof).
The following provisions will apply to Debt Securities that are convertible
Subordinated Debt Securities unless otherwise provided in the applicable
Prospectus Supplement for such Debt Securities.
The holder of any convertible Subordinated Debt Securities will have the
right exercisable prior to maturity, unless previously redeemed or otherwise
purchased by the Company, to convert such Subordinated Debt Securities into
shares of Common Stock at the conversion price or conversion rate set forth in
the applicable Prospectus Supplement, subject to adjustment.
The holder of convertible Subordinated Debt Securities may convert any
portion thereof which is $1,000 in aggregate principal amount or any integral
multiple thereof.
In certain events, the conversion price or conversion rate will be subject
to adjustment as set forth in the Subordinated Debt Indenture. Such events
include the issuance of shares of Common Stock of the Company as a dividend or
distribution on the Common Stock; subdivisions, combinations and
reclassifications of the Common Stock; the issuance to all holders of Common
Stock of rights or warrants entitling the holders thereof (for a period not
exceeding 45 days) to subscribe for or purchase shares of Common Stock at a
price per share less than the then current market price per share of Common
Stock (as determined pursuant to the Subordinated Debt Indenture); and the
distribution to substantially all holders of Common Stock of evidences of
indebtedness, equity securities (including equity interests in the Company's
Subsidiaries) other than Common Stock, or other assets (excluding cash dividends
paid from surplus) or rights or warrants to subscribe for securities (other than
those referred to above). No adjustment of the conversion price or conversion
rate will be required unless an adjustment would require a cumulative increase
or decrease of at least 1% in such price or rate.
The Company has been advised by its counsel, D'Ancona & Pflaum, that
certain adjustments in the conversion price or conversion rate in accordance
with the foregoing provisions may result in constructive distributions to either
holders of the Subordinated Debt Securities or holders of Common Stock which
would be taxable pursuant to Treasury Regulations issued under Section 305 of
the Internal Revenue Code of 1986, as amended. The amount of any such taxable
constructive distribution would be the fair market value of the Common Stock
which is treated as having been constructively received, such value being
determined as of the time the adjustment resulting in the constructive
distribution is made.
Fractional shares of Common Stock will not be issued upon conversion, but,
in lieu thereof, the Company will pay a cash adjustment based on the then
Current Market Price for the Common Stock.
Upon conversion, no adjustments will be made for accrued interest or
dividends, and therefore convertible Subordinated Debt Securities surrendered
for conversion between an Interest Payment Date and on or prior to the record
date pertaining to the subsequent Interest Payment Date will not be considered
Outstanding and no interest will be paid on the related Interest Payment Date.
Convertible Subordinated Debt Securities (except convertible Subordinated Debt
Securities called for redemption on a redemption date during such period)
surrendered for conversion during the period between the close of business on
any record date for an Interest Payment Date for such convertible Subordinated
Debt Security and the opening of business on the related Interest Payment Date
shall be considered Outstanding for purposes of payment of interest, and,
therefore, must be accompanied by payment of an amount equal to the interest
payable thereon on such Interest Payment Date.
24
<PAGE> 46
In the case of any consolidation or merger of the Company (with certain
exceptions) or any conveyance, transfer or lease of the properties and assets of
the Company substantially as an entirety or substantially as an entirety, to any
Person, each holder of convertible Subordinated Debt Securities, after the
consolidation, merger, conveyance, transfer or lease, will have the right to
convert such convertible Subordinated Debt Securities only into the kind and
amount of securities, cash and other property which the holder would have been
entitled to receive upon or in connection with such consolidation, merger,
conveyance, transfer or lease, if the holder had held the Common Stock issuable
upon conversion of such convertible Subordinated Debt Securities immediately
prior to such consolidation, merger, conveyance, transfer or lease.
25
<PAGE> 47
DESCRIPTION OF CAPITAL STOCK
GENERAL
Watson is authorized to issue up to 500,000,000 shares of Common Stock,
$.0033 par value per share, 89,026,973 shares of which were issued and
outstanding at March 16, 1998, and 2,500,000 shares of Preferred Stock no par
value per share, none of which were outstanding as of March 16, 1998. The
Company has no restriction upon its ability to engage in fully leveraged
transactions.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share held of
record on all matters on which stockholders are entitled or permitted to vote.
Such holders may not cumulate votes in the election of directors. The holders of
Common Stock are entitled to receive such dividends as may lawfully be declared
by the Board of Directors out of funds legally available therefor and to share
pro rata in any other distribution to the holders of Common Stock. The holders
of Common Stock are entitled to share ratably in Watson's assets remaining after
payment of liabilities in the event of any liquidation, dissolution or winding
up of the affairs of Watson and after payment of any liquidation preferences on
preferred stock. The holders of Common Stock have no preemptive rights. There
are no conversion rights, redemption or sinking fund provisions or fixed
dividend rights with respect to the Common Stock. All outstanding shares of
Common Stock are fully paid and non-assessable.
PREFERRED STOCK
The Company's Board of Directors has the authority to issue Preferred Stock
in one or more series and to fix the rights, preferences, privileges and
restrictions thereof, including dividend rights, dividend rates, conversion
rights, voting rights, terms of redemption, redemption prices, liquidation
preferences and the number of shares constituting any series or the designation
of such series, without further vote or action by the Watson stockholders. The
issuance of Preferred Stock may have the effect of delaying, deferring or
preventing a change in control of the Company without further action by the
stockholders and may adversely affect the voting and other rights of the holders
of the Company's Common Stock.
ADDITIONAL SECURITIES
The Company has adopted several stock option plans that authorize the
granting of options to purchase the Company's common stock subject to certain
conditions. Under these plans, the Company has reserved 5,044,000 shares for
issuance at March 16, 1998. The options are granted at the fair market value of
the shares underlying the option at the date of the grant, generally become
exercisable over a five-year period and expire in ten years. In conjunction with
the mergers with Circa, Oclassen, and Royce, the Company assumed certain stock
option and warrant plans. The options and warrants in these plans were adjusted
by the individual exchange ratios specified in each merger agreement. No
additional options or warrants will be granted under any of the assumed plans.
AUTHORIZED BUT UNISSUED SHARES
Authorized but unissued shares of Common Stock or Preferred Stock can be
reserved for issuance by the Board of Directors from time to time without
further stockholder action for proper corporate purposes, including stock
dividends or stock splits, raising equity capital and structuring future
corporate transactions, including acquisitions.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company, 40 Wall Street, New York, New York 10005.
26
<PAGE> 48
NEVADA ANTI-TAKEOVER LAW
Watson is a Nevada corporation, and therefore the Company is 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 or a series of transactions,
with an "interested stockholder" having: (a) an aggregate market value equal to
5% or more of the aggregate market value of the assets of the corporation; (b)
an aggregate market value equal to 5% or more of the aggregate market value of
all outstanding shares of the corporation; or (c) 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, who at any time within the three prior
years was a beneficial owner of 10% or more of the voting power of the
corporation. A corporation may not engage in a "combination" within three years
unless the combination was approved by the board of directors prior to the date
upon which the acquiror became an interested shareholder. A corporation may not
engage in a combination after three years 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, (a) for common stock, (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, or (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, and (b) for preferred stock, in addition to (i)
and (ii) discussed above, or 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 certain
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 Statutes 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 Share Acquisition Statute also
provides that in the event Control Shares are accorded full voting rights and
the acquiring person has acquired Control Shares with 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 may not apply to Watson because Watson does not believe it has
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 the Company'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.
27
<PAGE> 49
PLAN OF DISTRIBUTION
GENERAL
The Company may sell Securities to or through underwriters or dealers, and
also may sell Securities directly to other purchasers or through agents.
The distribution of the Securities may be effected from time to time in one
or more transactions at a fixed price or prices, which may be changed, or at
market prices prevailing at the time of sale, at prices related to such
prevailing market prices or at negotiated prices.
In connection with the sale of Securities, underwriters may receive
compensation from the Company, or purchasers of Securities for whom they may act
as agents in the form of discounts, concessions or commissions. Underwriters,
dealers and agents that participate in the distribution of Securities may be
deemed to be underwriters, and any discounts or commissions received by them
from the Company or the purchasers of Securities, as the case may be, and any
profit on the resale of Securities by them may be deemed to be underwriting
discounts and commissions under the Securities Act. Any such person who may be
deemed to be an underwriter will be identified, and any such compensation
received from the Company will be described as required, in the applicable
Prospectus Supplement.
Debt Securities and/or Preferred Stock, when first issued, will have no
established trading market. Any underwriters or agents to or through whom Debt
Securities and/or Preferred Stock are sold by the Company for public offering
and sale may make a market in such Debt Securities and/or Preferred Stock, but
such underwriters or agents will not be obligated to do so and may discontinue
any market making at any time without notice.
No assurance can be given as to the liquidity of the trading market for any
Debt Securities and/or Preferred Stock.
Under agreements which may be entered into by the Company, underwriters,
dealers and agents who participate in the distribution of Securities may be
entitled to indemnification by the Company against or contribution toward
certain liabilities, including liabilities under the Securities Act.
DELAYED DELIVERY ARRANGEMENT
If so indicated in the applicable Prospectus Supplement, the Company will
authorize underwriters or other persons acting as the Company's agents to
solicit offers by certain institutions to purchase Debt Securities and/or
Preferred Stock from the Company pursuant to contracts providing for payment and
delivery on a future date. Institutions with which such contracts may be made
include commercial and savings banks, insurance companies, pension funds,
investment companies, educational and charitable institutions and others, but in
all cases will be subject to the approval of the Company. The obligations of any
purchaser under any such contract will be subject to the condition that the
purchase of the Debt Securities and/or Preferred Stock shall not at the time of
delivery be prohibited under the laws of any jurisdiction to which such
purchaser is subject. The underwriters and such agents will not have any
responsibility in respect of the validity or performance of such contracts.
VALIDITY OF SECURITIES
The validity of the Securities, as well as certain tax matters in
connection therewith, will be passed upon for the Company by D'Ancona & Pflaum,
Chicago, Illinois and certain legal matters will be passed upon for the
underwriters by Skadden, Arps, Slate, Meagher & Flom LLP As of the date of this
Prospectus, Michel J. Feldman, a partner of D'Ancona & Pflaum and a director and
Secretary of the Company, beneficially owned 26,000 shares (including 1,000
shares beneficially owned by Mr. Feldman's spouse) of the Company's Common
Stock. In addition, other members of D'Ancona & Pflaum own additional shares of
the Company's Common Stock, which ownership is not material in the aggregate.
28
<PAGE> 50
EXPERTS
The consolidated financial statements of Watson Pharmaceuticals, Inc. as of
December 31, 1997, and 1996 and for each of the three years in the period ended
December 31, 1997 incorporated in this Prospectus by reference to the Annual
Report on Form 10-K of Watson Pharmaceuticals, Inc. for the year ended December
31, 1997 have been so incorporated in reliance on the report of Price Waterhouse
LLP, independent accountants, given on the authority of said firm as experts in
auditing and accounting.
The consolidated financial statements of Somerset Pharmaceuticals, Inc. and
subsidiaries as of December 31, 1997 and 1996, and for each of the three years
in the period ended December 31, 1997, incorporated in this Prospectus by
reference from the Annual Report on Form 10-K of Watson Pharmaceuticals, Inc.
for the year ended December 31, 1997, have been audited by Deloitte & Touche
LLP, independent auditors, as stated in their report, which is incorporated
herein by reference, and has been so incorporated in reliance upon the report of
such firm given upon their authority as experts in accounting and auditing.
The financial statements of Oclassen Pharmaceuticals, Inc. as of and for
the years ended December 31, 1995 and 1996 and incorporated in this Prospectus
by reference from the Annual Report on Form 10-K of Watson Pharmaceuticals, Inc.
for the year ended December 31, 1997, have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their report, and are
incorporated herein by reference in reliance upon the authority of said firm as
experts in giving said report.
29
<PAGE> 51
======================================================
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS
PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY THE SECURITIES OFFERED HEREBY BY ANYONE IN
ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN
WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR
TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS NOR ANY SALE MADE
HEREUNDER AND THEREUNDER SHALL CREATE ANY IMPLICATION THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
PROSPECTUS SUPPLEMENT
Prospectus Supplement Summary........... S-3
Use of Proceeds......................... S-5
Capitalization.......................... S-5
Summary Financial Data.................. S-6
The Company............................. S-8
Management.............................. S-13
Description of Notes.................... S-14
Certain United States Federal Income Tax
Consequences to Non-U.S. Holders...... S-17
Underwriting............................ S-20
Legal Matters........................... S-21
PROSPECTUS
Available Information................... 2
Incorporation of Certain Documents by
Reference............................. 2
The Company............................. 4
Use of Proceeds......................... 4
Cautionary Statement for Purposes of the
Safe Harbor Provisions of the Private
Securities Litigation Reform Act of
1995.................................. 4
Ratio of Earnings to Fixed Charges...... 5
Description of Debt Securities.......... 5
Provisions Applicable to Both Senior and
Subordinated Debt Securities.......... 5
Provisions Applicable Solely to Senior
Debt Securities....................... 17
Provisions Applicable Solely to
Subordinated Debt Securities.......... 22
Description of Capital Stock............ 26
Plan of Distribution.................... 28
</TABLE>
======================================================
======================================================
$150,000,000
WATSON
PHARMACEUTICALS, INC.
LOGO
% SENIOR NOTES DUE 2008
------------------------
PROSPECTUS SUPPLEMENT
------------------------
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
GOLDMAN, SACHS & CO.
, 1998
======================================================
