<PAGE>
As filed with the Securities and Exchange Commission on November 25, 1998
Registration No. 333-_____
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________
FORM S-4
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
___________________________________
WATSON PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
NEVADA 2834 95-3872914
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of Classification Code Number) Identification No.)
incorporation or
organization)
311 BONNIE CIRCLE
CORONA, CALIFORNIA 91720
(909) 270-1400
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
ALLEN CHAO, PH.D.
WATSON PHARMACEUTICALS, INC.
311 BONNIE CIRCLE
CORONA, CALIFORNIA 91720
(909) 270-1400
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies to:
Michel J. Feldman, Esq. Keith S. Crow, Esq.
Steve Curtis, Esq. Gerald T. Nowak, Esq.
D'Ancona & Pflaum Kirkland & Ellis
30 N. LaSalle Street 200 E. Randolph Street
Chicago, IL 60602 Chicago, IL 60601
(312) 580-2000 (312) 861-2000
Approximate date of commencement of proposed sale of the securities to the
public: As soon as practicable after the effective date of this Registration
Statement and the effective time of the proposed merger of TheraTech, Inc.
("TheraTech") with a subsidiary of the registrant, as described in the Agreement
and Plan of Merger (the "Merger Agreement"), dated as of October 23, 1998,
attached as Appendix A to the Proxy Statement/Prospectus forming a part of this
Registration Statement.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1993, as amended (the
"Securities Act"), check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
==================================================================================================================
PROPOSED PROPOSED
AMOUNT MAXIMUM MAXIMUM AMOUNT OF
TO BE OFFERING PRICE AGGREGATE REGISTRATION
TITLE OF EACH CLASS OF SECURITIES REGISTERED (1) PER SHARE OFFERING PRICE FEE (2), (3)
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
Common Stock, $0.0033 par value per share....... 6,300,612 N/A N/A $79,700.00
==================================================================================================================
</TABLE>
(1) Based on the maximum number of shares of Watson common stock to be issued
in connection with the Merger.
(2) Estimated pursuant to Rule 457(f)(1), solely for the purpose of calculating
the registration fee, based upon the average of the high and low price
reported for TheraTech common stock on the Nasdaq National Market ("Nasdaq
NMS") on November 19, 1998.
(3) A registration fee of $56,800 was previously paid in connection with the
filing by TheraTech of its Schedule 14A (File No. 000-20063) on November
19, 1998. Accordingly, pursuant to Rule 457(b), the registration fee has
been reduced by the amount of the fee previously filed and a fee of $22,900
has been paid herewith.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT, OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE
ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY
DETERMINE.
<PAGE>
[THERATECH LOGO]
December 7, 1998
Fellow Stockholders:
I am pleased to invite you to attend a special meeting of stockholders of
TheraTech, Inc. to be held on January 14, 1999 at 9:00 a.m., local time, at
TheraTech's offices at 417 Wakara Way, Salt Lake City, Utah.
THIS IS A VERY IMPORTANT MEETING THAT AFFECTS YOUR INVESTMENT IN THERATECH.
At this special meeting, you will be asked to vote on a merger between
TheraTech and a wholly-owned subsidiary of Watson Pharmaceuticals, Inc., and on
any other business to come before the special meeting. In the merger, each
share of TheraTech common stock that you hold will be converted into the right
to receive not less than 0.2663 or more than 0.29589 shares of Watson common
stock. Subject to the above minimum and maximum, the exact ratio of Watson
common stock that you will receive for each share of your TheraTech common
stock will be calculated as follows: twelve divided by the average daily
closing price of Watson common stock as quoted on the New York Stock Exchange
during the ten consecutive trading day period ending on the second trading day
before the closing date of the merger.
YOUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR APPROVAL OF
THE MERGER, WHICH WE BELIEVE IS IN YOUR BEST INTERESTS AND IS CONSISTENT WITH
THERATECH'S LONG-TERM BUSINESS STRATEGIES.
We have enclosed a Proxy Statement/Prospectus discussing the merger and
describing the Watson common stock you will receive if the merger is approved,
and a proxy card so you can vote on the merger without attending the meeting.
The Agreement and Plan of Merger, which governs the transaction, is included in
the Proxy Statement/Prospectus. We encourage you to read these documents
carefully.
After the merger is completed, we will notify you as to how you should
proceed to exchange your TheraTech certificates for Watson certificates. DO NOT
SEND IN YOUR CERTIFICATES UNTIL YOU RECEIVE THIS NOTIFICATION.
This letter is your notice of the special meeting and is being sent to
stockholders of record as of the close of business on November 23, 1998, who
are the only holders entitled to notice of and to vote at the special meeting
and any adjournments or postponements thereof.
IT IS IMPORTANT THAT YOUR SHARES BE REPRESENTED AT THE SPECIAL MEETING. NOT
RETURNING YOUR CARD OR NOT INSTRUCTING YOUR BROKER HOW TO VOTE ANY SHARES HELD
FOR YOU IN "STREET NAME" WILL HAVE THE SAME EFFECT AS A VOTE AGAINST THE
MERGER. PLEASE COMPLETE, SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD IN THE
ENCLOSED POSTAGE-PAID ENVELOPE, EVEN IF YOU PLAN TO ATTEND THE SPECIAL MEETING.
IF YOU DO ATTEND THE SPECIAL MEETING, YOU MAY PERSONALLY VOTE, WHICH WILL
REVOKE YOUR SIGNED PROXY. YOU MAY ALSO REVOKE YOUR PROXY AT ANY TIME BEFORE THE
MEETING BY FOLLOWING THE INSTRUCTIONS IN THE PROXY STATEMENT/PROSPECTUS.
By order of the TheraTech Board of
Directors,
Dinesh C. Patel, Ph.D.
Chairman, President and
Chief Executive Officer
TheraTech, Inc.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Where You Can Find More Information....................................... 2
Summary................................................................... 4
Risk Factors.............................................................. 17
The Merger................................................................ 25
Information Regarding Watson.............................................. 44
Information Regarding TheraTech........................................... 45
Special Meeting of Stockholders........................................... 46
The Merger Agreement...................................................... 49
Description of Watson Capital Stock....................................... 61
Comparison of Rights of Holders of Watson Common Stock
and TheraTech Common Stock............................................... 62
Legal Matters............................................................. 72
Experts................................................................... 72
Unaudited Pro Forma Condensed Combined Financial Statements............... F-1
Notes to Unaudited Pro Forma Condensed Combined Financial Statements...... F-8
Index of Certain Defined Terms
Appendices
Appendix A--Agreement and Plan of Merger................................ A-1
Appendix B--Fairness Opinion of CIBC Oppenheimer........................ B-1
</TABLE>
i
<PAGE>
THERATECH, INC. WATSON PHARMACEUTICALS, INC.
MERGER PROPOSED--YOUR VOTE IS VERY IMPORTANT
The Board of Directors of TheraTech, Inc. has approved a merger proposal
whereby TheraTech will merge with Jazz Merger Corp., a wholly-owned subsidiary
of Watson Pharmaceuticals, Inc. that was formed solely for the purpose of this
transaction. If approved by you, the proposed transaction will result in
TheraTech becoming a wholly-owned subsidiary of Watson.
In the merger each share of TheraTech common stock that you hold will be
converted into the right to receive not less than 0.2663 or more than 0.29589
shares of Watson common stock. Subject to the above minimum and maximum, the
exact ratio of Watson common stock that you will receive for each share of your
TheraTech common stock will be calculated as follows: twelve divided by the
average daily closing price of Watson common stock as quoted on the New York
Stock Exchange during the ten consecutive trading day period ending on the
second trading day before the closing date of the merger. Fractional shares
will be paid in cash. Additionally, each outstanding option to purchase
TheraTech common stock will be assumed by Watson and converted into the right
to purchase Watson common stock at the exchange ratio described above.
We cannot complete this merger unless you approve it. TheraTech will hold a
special meeting of its stockholders to vote on the merger. YOUR VOTE IS VERY
IMPORTANT. Whether or not you plan to attend the special meeting, please take
the time to vote by completing and mailing the enclosed proxy card to us. If
you sign, date and mail your proxy card without indicating how you want to
vote, your proxy will be counted in favor of the merger. Not returning your
card or not instructing your broker how to vote any shares held for you in
"street name" will have the same effect as a vote against the merger.
The date, time and place of the special meeting is as follows:
THERATECH SPECIAL MEETING OF STOCKHOLDERS
January 14, 1999, 9:00 a.m., local time
417 Wakara Way
Salt Lake City, Utah
SEE "RISK FACTORS" BEGINNING ON PAGE 17 FOR CERTAIN RISKS INVOLVED WITH AN
INVESTMENT IN WATSON COMMON STOCK.
This Proxy Statement/Prospectus provides you with detailed information about
the special meeting and the proposed merger. We encourage you to read this
entire document carefully. You can also get information about both Watson and
TheraTech from publicly available documents that both companies file with the
Securities and Exchange Commission.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE SECURITIES TO BE ISSUED UNDER
THIS PROXY STATEMENT/PROSPECTUS OR DETERMINED IF THIS PROXY
STATEMENT/PROSPECTUS IS ACCURATE OR ADEQUATE. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
Proxy Statement/Prospectus dated December 7, 1998.
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
Information regarding Watson and TheraTech, including historical financial
statements and detailed descriptions of the businesses of Watson and TheraTech,
is included in documents other than this Proxy Statement/Prospectus. Watson and
TheraTech each file annual, quarterly and special reports, proxy statements and
other information with the Securities and Exchange Commission. You may read and
copy reports, statements or other information about Watson and TheraTech on
file at the Securities and Exchange Commission's public reference rooms in
Washington, D.C., New York, New York and Chicago, Illinois. Please call the
Securities and Exchange Commission at 1-800-SEC-0330 for further information on
the public reference rooms. You may also find Watson's and TheraTech's
Securities and Exchange Commission filings through commercial document
retrieval services and the web site maintained by the Securities and Exchange
Commission at http://www.sec.gov. You may find additional information about
Watson and TheraTech via their respective websites: http://www.watsonpharm.com;
and http://www.thrt.com. Information in the companies' web sites is intended to
be timely and accurate; however, there can be no assurance that this is the
case. Such information is expressly excluded from this Proxy
Statement/Prospectus.
Watson has filed with the Securities and Exchange Commission a registration
statement on Form S-4 to register the shares of Watson common stock to be
issued to TheraTech stockholders in exchange for shares of TheraTech common
stock in the merger. This document is a part of that registration statement and
is a prospectus of Watson as well as a proxy statement of TheraTech for the
special meeting of TheraTech stockholders. Additional information is included
in the registration statement, which has been omitted from this Proxy
Statement/Prospectus in accordance with the rules and regulations of the
Securities and Exchange Commission. For complete information, you should read
this entire document and any other document that we refer you to, including
documents filed with the Securities and Exchange Commission and all appendices
and exhibits to this or any other document.
DOCUMENTS INCORPORATED BY REFERENCE
This Proxy Statement/Prospectus refers you to information about Watson and
TheraTech located in other documents. The information in those documents, which
are identified below, is specifically deemed to be a part of this Proxy
Statement/Prospectus and to have been delivered to you in connection with
making your decision to vote on the merger. You can obtain a free copy of these
and other documents on the Securities and Exchange Commission's web site or by
writing, calling or faxing:
Mr. Alexander L. Searl Ms. Sara Swee
Senior Vice President and Director of Corporate Communications
Chief Financial Officer Watson Pharmaceuticals, Inc.
TheraTech, Inc. 311 Bonnie Circle
417 Wakara Way Corona, California 91720
Salt Lake City, Utah 84108 Tel: (909) 270-1400, ext. 4278
Tel: (801) 588-6200 Fax: (909) 270-1429
Fax: (801) 583-0050
2
<PAGE>
In order to ensure timely delivery of these documents to you prior to the
special meeting of TheraTech stockholders, you must request them by December
23, 1998.
The following Watson documents are incorporated by reference in this Proxy
Statement/Prospectus:
1. Annual Report on Form 10-K for the year ended December 31, 1997, as
amended.
2. Quarterly Reports on Form 10-Q for the quarterly periods ended March 31,
1998, June 30, 1998 and September 30, 1998, as amended.
3. Current Reports on Form 8-K dated February 28, 1998, April 30, 1998 and
May 13, 1998.
4. The description of the Watson common stock contained in its Registration
Statement on Form 8-A dated April 3, 1992.
The following TheraTech documents are incorporated by reference in this Proxy
Statement/Prospectus:
1. Annual Report on Form 10-K for the year ended December 31, 1997.
2. Quarterly Reports on Form 10-Q for the quarterly periods ended March 31,
1998, June 30, 1998 and September 30, 1998, as amended.
3. Current Report on Form 8-K dated October 28, 1998.
4. The description of the TheraTech common stock contained in its
Registration Statement on Form 8-A dated May 13, 1992.
You should also consider as a part of this document all documents that Watson
and TheraTech file under the Securities Exchange Act of 1934, as amended, after
the date of this Proxy Statement/Prospectus but prior to the date of the
special meeting. If any document Watson or TheraTech files under the Securities
Exchange Act of 1934 during this time period changes in any way a statement
made in any earlier document, including this document, you should consider the
most recently reported information to be the correct information, rendering the
earlier statements invalid to the extent they are modified.
You should rely only on the information contained in this document or that we
have referred you to. We have not authorized anyone to provide you with
different information. You should only consider this Proxy Statement/Prospectus
an offer to purchase the securities discussed in this Proxy
Statement/Prospectus or a solicitation of your proxy if it is lawful in the
jurisdiction in which you reside. Although we believe we have provided you with
all the information which would be helpful to you in your decision to vote, it
is possible that after we have delivered this Proxy Statement/Prospectus to you
events may occur at Watson or TheraTech which might affect your decision or the
value of your stock.
CAUTIONARY STATEMENT
This Proxy Statement/Prospectus contains forward-looking statements regarding
Watson and TheraTech within the meaning of Section 27A of the Securities Act of
1933 and Section 21E of the Securities Exchange Act of 1934. Actual results
could differ materially from those projected in the forward-looking statements
as a result of the risk factors set forth under "Risk Factors" and elsewhere in
this Proxy Statement/Prospectus. You should carefully consider the information
in this Proxy Statement/Prospectus before deciding whether to vote in favor of
the merger.
3
<PAGE>
SUMMARY
This summary highlights selected information from this document and may not
contain all of the information that is important to you. To understand the
merger fully, and for more complete descriptions of the terms of the merger,
you should read carefully this entire document and the documents we have
referred you to.
An index of certain capitalized terms used in this Proxy Statement/Prospectus
is included at the end of this document before the Appendices. Also, please
refer to "Where You Can Find More Information" on page 2.
QUESTIONS AND ANSWERS ABOUT THE MERGER
WHO IS WATSON?
Watson is a fully integrated pharmaceutical company engaged in the research and
development, production, marketing and distribution of off-patent and branded
pharmaceutical products.
Watson has made significant recent acquisitions of businesses, products and
technologies. Watson continues to regularly review potential opportunities to
acquire or invest in other technologies, products or product rights and
businesses compatible with its existing business. See "Information Regarding
Watson" on page 44.
Watson's principal executive offices are located at 311 Bonnie Circle, Corona,
California 91720, and its telephone number is (909) 270-1400.
WHO IS THERATECH?
TheraTech develops advanced controlled-release and other drug delivery products
which administer drugs through the skin, by oral delivery to the
gastrointestinal tract, through tissues in the oral cavity, through absorption
in the lungs and by other means. TheraTech believes its products provide
advantages over existing controlled-release drug delivery products and
conventional oral, injectable, inhalation and continuous infusion methods by
increasing efficacy, safety, bioavailability and/or patient compliance and
comfort. See "Information Regarding TheraTech" on page 45.
TheraTech's principal executives offices are located at 417 Wakara Way, Salt
Lake City, Utah 84108 and its telephone number is (801) 588-6200.
WHAT ARE THERATECH'S REASONS FOR THE MERGER?
TheraTech's Board of Directors believes that the merger will help implement and
accelerate TheraTech's business strategy, by giving TheraTech access to
Watson's significant marketing capabilities and financing strength. In reaching
its conclusion to approve the merger, TheraTech's Board considered a variety of
factors, including the exchange ratio in the merger, TheraTech's business and
prospects (both on a stand-alone and a combined basis), industry conditions and
market conditions. See "The Merger -- TheraTech's Reasons for the Merger"
beginning on page 28.
ARE THERE RISKS I SHOULD CONSIDER?
Your decision to approve the merger and to exchange your TheraTech shares for
Watson shares involves certain risks that you should be
4
<PAGE>
aware of. Risks associated with holding Watson common stock may differ from
risks associated with holding TheraTech common stock. See "Risk Factors"
beginning on page 17.
. TheraTech and Watson may experience difficulties in integrating their two
businesses.
. The price of Watson common stock fluctuates significantly from time to time,
and Watson has no present intention of paying any dividends.
. Certain directors and officers of TheraTech have interests in the merger in
addition to their interests as TheraTech stockholders.
. Your legal rights as a Watson stockholder will be different in some respects
from your legal rights as a TheraTech stockholder.
. The number of shares of Watson common stock you receive in exchange for your
TheraTech shares will depend on the market price of Watson common stock
before the merger is completed. See "What Will I Receive for My TheraTech
Common Stock," below.
WHAT DOES THE THERATECH BOARD OF DIRECTORS RECOMMEND?
The TheraTech Board of Directors has unanimously approved the merger and
recommends that TheraTech stockholders vote FOR the proposal to approve the
Agreement and Plan of Merger.
WHAT WILL I RECEIVE FOR MY THERATECH COMMON STOCK?
Each share of your TheraTech common stock will be exchanged for not less than
0.2663 or more than 0.29589 shares of Watson common stock. Subject to the above
minimum and maximum, the exact exchange ratio of Watson common stock that you
will receive for each share of your TheraTech common stock will be calculated
as follows: twelve (12) divided by the average closing price of Watson common
stock for the ten (10) consecutive trading days ending on the second trading
day immediately prior to the closing date of the merger.
UNDER THIS FORMULA:
. The minimum exchange ratio of 0.2663 of a share of Watson common stock will
apply if the average closing price of Watson common stock is $45.06 or more
for the specified period.
. The maximum exchange ratio of 0.29589 of a share of Watson common stock will
apply if the average closing price of Watson common stock is $40.56 or less
for the specified period.
. The exchange ratio will vary between the minimum and maximum if the average
closing price of Watson common stock is between $40.56 and $45.06 for the
specified period.
. The value of Watson common stock may fluctuate between the time the exchange
ratio is determined and when you receive your shares of Watson common stock.
In addition, you will receive a cash payment for the value of any fraction of a
share of Watson common stock to which you would otherwise be entitled under the
exchange ratio.
FOR EXAMPLE:
. If the average closing price of Watson common stock as quoted on the New York
Stock Exchange during the ten consecutive trading days ending on the second
trading day immediately preceding the closing date is $43.00, then twelve
divided by $43.00
5
<PAGE>
equals 0.27907, which means you will receive 0.27907 of a share of Watson
common stock for each share of your TheraTech common stock. If you have 100
shares of TheraTech common stock, you will receive 27 shares of Watson common
stock (100 x 0.27907 = 27.907 shares) and a cash payment in the amount of
$39.00 (0.907 shares x $43.00 = $39.00), since no fractional shares will be
issued in connection with the merger.
If the average closing price of Watson common stock for the specified period is
at or between $40.56 and $45.06, then pursuant to the exchange ratio a portion
of a share of Watson common stock having a market value at that time of $12.00
will be issued for each share of TheraTech common stock (based on the average
closing price of Watson common stock for the specified period).
The market value of that portion of a share of Watson common stock to be issued
for each share of the TheraTech common stock in the merger may exceed $12.00 if
the average closing price of Watson common stock for the specified period
exceeds $45.06. Conversely, the market value of such portion of a share of
Watson common stock to be issued in the merger will be less than $12.00 if the
average closing price of Watson common stock for the specified period is less
than $40.56.
FOR EXAMPLE:
. If the average closing price of Watson common stock for the specified period
is $55.00, you will receive the minimum portion of a share of Watson common
stock under the exchange ratio of 0.2663. However, due to the higher average
closing price of Watson common stock, the market value as determined over the
specified period will be approximately $14.65, rather than $12.00.
. If the average closing price of Watson common stock for the specified period
is $35.00, you will receive the maximum portion of a share of Watson common
stock under the exchange ratio of 0.29589. However, due to the lower average
closing price of Watson common stock, the market value as determined over the
specified period will be approximately $10.36, rather than $12.00.
The table below shows the average closing prices on the New York Stock Exchange
for Watson common stock and the Nasdaq National Market System for TheraTech
common stock for the ten (10) consecutive trading day period ending on October
23, 1998, the last trading day before the public announcement of the merger,
and the average closing price for the ten (10) consecutive trading day period
ending on November 23, 1998, the most recent day for which closing prices were
available at the time we mailed this Proxy Statement/Prospectus. The table also
shows the market value at that time of the shares of Watson common stock that
TheraTech stockholders would have received for each share of their TheraTech
common stock in the merger applying the exchange ratio based on the average
closing price of Watson common stock for each specified period. This example is
provided to you for explanatory purposes as the actual calculation cannot be
provided in advance.
<TABLE>
<CAPTION>
AVERAGE TEN DAY VALUE OF
CLOSING PRICE WATSON
---------------- ASSUMED COMMON
THERATECH WATSON EXCHANGE STOCK
SPECIFIED PERIOD ENDING: PRICE PRICE RATIO RECEIVED
- -------------------------------------------- --------- ------ -------- --------
<S> <C> <C> <C> <C>
October 23, 1998............................ $ 8.76 $49.98 0.2663 $13.31
November 23, 1998........................... $13.44 $51.55 0.2663 $13.73
</TABLE>
Stockholders are urged to obtain current market quotations for Watson common
stock and TheraTech common stock.
6
<PAGE>
IS THE PRICE FAIR?
TheraTech engaged CIBC Oppenheimer Corp. and William Blair & Company, L.L.C. as
its financial advisors in connection with the merger. CIBC Oppenheimer issued
an opinion letter dated October 23, 1998 addressed to the TheraTech Board of
Directors stating that the number of shares of Watson common stock you will
receive for your TheraTech common stock is fair from a financial point of view.
The scope of William Blair's engagement did not include, and William Blair was
not asked to issue, such an opinion letter. See "The Merger--Opinion of
TheraTech's Financial Advisor" on page 29.
WILL I BE TAXED ON THE MERGER?
We expect that for U.S. federal income tax purposes:
. You will not have taxable gain or loss on the exchange of your TheraTech
common stock for Watson common stock (except with respect to any cash you
receive in lieu of a fractional share of Watson common stock); and,
. The holding period for the Watson common stock that you receive in the merger
generally will include the holding period for your TheraTech common stock.
See "The Merger--Certain Federal Income Tax Consequences of the Merger" on
page 42.
WHEN WILL THE MERGER BE COMPLETED?
We expect the merger to be completed on or about January 14, 1999. However,
delays in obtaining regulatory approvals and other factors could delay the
merger.
In addition, the obligations of each of the parties to consummate the merger is
subject to certain conditions to closing that, if not satisfied, would allow
such party to terminate the Agreement and Plan of Merger. Consequently, we
cannot assure you that the merger will be completed.
WHAT CIRCUMSTANCES MIGHT PREVENT THE MERGER?
EITHER WATSON OR THERATECH MAY WITHDRAW FROM THE MERGER IF, AMONG OTHER
CIRCUMSTANCES:
. The merger is not approved by TheraTech stockholders.
. The merger is not cleared by regulatory authorities.
. Government or court action prevents or has a material adverse effect on the
merger.
. The merger has not occurred by March 31, 1999.
Also, neither TheraTech nor Watson intends to complete the merger unless each
receives opinions confirming that the merger will be treated as a tax-free
reorganization under the Internal Revenue Code and a pooling of interests for
accounting purposes. The opinions will not, however, bind the Internal Revenue
Service or the Securities and Exchange Commission, either of which could take a
contrary position. TheraTech and Watson expect to receive these opinions.
Watson and TheraTech can also withdraw from the merger by mutual consent or in
the following circumstances:
WATSON MAY WITHDRAW IF:
. TheraTech breaches certain representations, warranties or promises it made to
Watson or doesn't satisfy its obligations under the Agreement and Plan of
Merger.
. TheraTech receives and accepts an alternative proposal for a transaction with
a third party.
7
<PAGE>
. TheraTech's Board of Directors withdraws or modifies its approval or
recommendation of the merger.
. There has been a material adverse change in TheraTech's business.
. TheraTech fails to obtain third-party consents to certain agreements.
. Dr. Dinesh C. Patel and Dr. Charles D. Ebert fail to execute amended
employment agreements and non-competition agreements.
THERATECH MAY WITHDRAW IF:
. Watson breaches certain representations, warranties or promises it made to
TheraTech or doesn't satisfy its obligations under the Agreement and Plan of
Merger.
. TheraTech receives an unsolicited alternative proposal which its board
believes is superior to Watson's offer.
. There has been a material adverse change in Watson's business.
WHAT HAPPENS IF THERATECH RECEIVES A BETTER PROPOSAL?
If TheraTech receives an unsolicited written alternative proposal from a third
party the Board of Directors of TheraTech determines in good faith to be more
favorable to TheraTech stockholders than Watson's proposal, it may accept the
superior proposal, so long as the TheraTech Board satisfies certain conditions.
See "The Merger Agreement--Alternative Proposals" on page 54.
IS THERE A COST TO THERATECH FOR FAILING TO COMPLETE THE MERGER AGREEMENT?
TheraTech has agreed to pay Watson a $5 million fee if the merger is not
completed under any of the following circumstances:
. If TheraTech terminates the Agreement and Plan of Merger in order to accept a
superior proposal, or
. If Watson terminates the Agreement and Plan of Merger because the TheraTech
Board has accepted an alternative proposal, or
. If TheraTech terminates the Agreement and Plan of Merger because the merger
did not occur by March 31, 1999, and TheraTech enters into an agreement, or
consummates a transaction, relating to an alternative proposal within four
months of such termination, or
. If Watson terminates the merger agreement because TheraTech has breached the
Agreement and Plan of Merger, and TheraTech enters into an agreement, or
consummates a transaction, relating to an alternative proposal within four
months of such termination, or
. If Watson terminates the Agreement and Plan of Merger because the TheraTech
Board of Directors withdrew or modified its recommendation of the merger, and
TheraTech enters into an agreement, or consummates a transaction, relating to
an alternative proposal within one year of such termination.
HOW WILL THE MERGER BE TREATED FOR ACCOUNTING PURPOSES?
Watson expects the merger to qualify as a pooling of interests, which means
that for accounting and financial reporting purposes Watson will treat Watson
and TheraTech as if they had always been a combined entity.
WHEN AND WHERE WILL THE SPECIAL MEETING BE HELD?
The special meeting of TheraTech stockholders to vote on the merger will be
held at 9:00 a.m., local time, on January 14, 1999, at TheraTech's
8
<PAGE>
headquarters at 417 Wakara Way, Salt Lake City, Utah.
WHO CAN VOTE ON THE MERGER?
Holders of TheraTech common stock at the close of business on November 23, 1998
can vote at the special meeting.
WHAT VOTE IS REQUIRED TO APPROVE THE MERGER?
The merger must be approved by holders of a majority of the voting power of the
outstanding shares of TheraTech common stock.
The directors, executive officers and affiliates of TheraTech, as a group, own
approximately 28% of the outstanding shares of TheraTech common stock entitled
to vote at the special meeting. TheraTech presently expects that all of these
shares will be voted in favor of the merger. Except as provided below, however,
there are no agreements to this effect. Dr. Dinesh C. Patel and Dr. William I.
Higuchi have each agreed to vote all their shares of TheraTech common stock in
favor of the merger. As of November 23, 1998, Dr. Dinesh C. Patel held
approximately 12.6% of the outstanding TheraTech common stock and Dr. William
I. Higuchi held approximately 10.6% of the outstanding TheraTech common stock.
WHAT SHOULD I DO NOW TO VOTE ON THE MERGER?
Just vote and sign your proxy card and mail it as soon as possible in the
enclosed return envelope, so that your shares can be voted at the special
meeting of TheraTech stockholders.
IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER VOTE MY
SHARES FOR ME?
Your broker cannot vote your shares for you without your instructions. You
should instruct your broker to vote your shares, following the directions your
broker provides to you. Shares that are not voted because you do not instruct
your broker will be counted as votes against the merger.
CAN I CHANGE MY VOTE AFTER I MAIL MY PROXY CARD?
Yes, you can change your vote at any time before your proxy is voted at the
special meeting of TheraTech stockholders. You can do this in three ways: (1)
you can send TheraTech a written statement that you would like to revoke your
proxy; (2) you can send TheraTech a new proxy card (if you choose either (1) or
(2), you should send your revocation or new proxy card to TheraTech's
Secretary); or (3) you can attend the special meeting and vote in person.
However your attendance alone will not revoke your proxy. If you instructed a
broker to vote your shares, you must follow your broker's directions for
changing those instructions.
DO THE OFFICERS OR DIRECTORS OF THERATECH HAVE ANY OTHER INTERESTS?
You should be aware that certain members of management and the Board of
Directors of TheraTech have certain interests in the merger in addition to
their interests as TheraTech stockholders. These interests include that:
. Watson has agreed to assume all of the options outstanding under each of (i)
the TheraTech 1992 Amended and Restated Employees' Stock Option Plan, which
will be exercisable for approximately 654,835 shares of Watson common stock,
(ii) the TheraTech 1992 Amended and Restated Directors' Stock Option Plan,
which will be exercisable for approximately 60,983 shares of Watson
9
<PAGE>
common stock and (iii) any options otherwise issued outside of any plan, which
will be exercisable for approximately 80,356 shares of Watson common stock.
The conversion of TheraTech common stock to Watson common stock in this
paragraph and elsewhere in this Proxy Statement/Prospectus has been calculated
using an assumed exchange ratio of 0.2663. Information with respect to
outstanding stock options is as of October 31, 1998.
. Upon consummation of the merger, Dr. Dinesh C. Patel and Dr. Charles D. Ebert
of TheraTech will enter into amendments to their employment agreements that
provide for, among other terms, the grant of options to purchase shares of
Watson common stock.
. TheraTech options held by four individuals have vesting periods that will
accelerate and become immediately exercisable upon consummation of the
merger.
. Certain severance payments to Alexander L. Searl, the Senior Vice President
and Chief Financial Officer of TheraTech, will be triggered by the merger.
. Watson has agreed to cause TheraTech to indemnify the directors and officers
of TheraTech and to maintain a directors and officers liability insurance
policy for a period of two years following the merger, subject to market
availability and cost limitations. See "The Merger -- Interests of Certain
Persons in the Merger" on page 38.
DO THERATECH STOCKHOLDERS HAVE APPRAISAL RIGHTS?
No. Under Delaware law, TheraTech stockholders do not have appraisal rights in
connection with the merger.
HOW WILL MY RIGHTS AS A WATSON STOCKHOLDER BE DIFFERENT FROM MY RIGHTS AS A
THERATECH STOCKHOLDER?
Your rights as a Watson stockholder will differ in certain ways, including
that:
. Watson has a classified board of directors, therefore it will be more
difficult for you to change the composition of Watson's Board of Directors;
. It will be more difficult for you to bring an action against an officer or
director of Watson after the merger because Nevada law limits your ability to
do so;
. As a Watson stockholder you will have the ability to act through a written
consent in lieu of a stockholder meeting where you did not have that ability
as a stockholder of TheraTech;
. You will not have the ability to amend the Bylaws of Watson as you did with
TheraTech;
. Transactions involving interested persons may be more difficult to challenge
as a Watson stockholder than as a TheraTech stockholder;
. Unless you own at least 15% of the outstanding shares of Watson, you will not
have the ability to review the books and records of Watson; and
. Situations may arise in which appraisal rights, which might have been
available to you as a TheraTech stockholder, will not be available to you as
a Watson stockholder.
SHOULD I SEND IN MY STOCK CERTIFICATES NOW?
No. After the merger is completed you will receive written instructions for
exchanging your TheraTech certificates for Watson certificates.
10
<PAGE>
WHAT IS THE VALUE OF THE WATSON COMMON STOCK TO BE EXCHANGED?
Based on 21,576,676 shares of TheraTech common stock outstanding on November
23, 1998 and assuming an exchange ratio of 0.2663:
. TheraTech stockholders will receive approximately 5,745,869 shares of Watson
common stock in the merger, or approximately 6.0% of the issued and
outstanding shares of Watson common stock following the merger.
. The aggregate value of Watson common stock to be exchanged for TheraTech
common stock in the merger will be approximately $296 million.
These calculations assume that, for purposes of the exchange ratio, the average
closing price of Watson common stock as quoted on the New York Stock Exchange
for the ten (10) consecutive trading days ending on the second trading day
immediately preceding the closing date was the same as the average closing
price of Watson common stock for the ten (10) consecutive trading days ending
on November 23, 1998 (which was the latest practicable day for which closing
prices were available when we mailed this Proxy Statement/Prospectus to you)
and that there are 89,475,000 shares of Watson common stock outstanding as of
November 23, 1998. See "What Will I Receive for My TheraTech Common Stock" on
page 5.
ARE ANY REGULATORY APPROVALS REQUIRED?
The Hart-Scott-Rodino Antitrust Improvements Act of 1976 prohibits Watson and
TheraTech from completing the merger until each has furnished certain
information to the Antitrust Division of the U.S. Department of Justice and the
U.S. Federal Trade Commission and a required waiting period has expired or been
terminated. On November 18, 1998 Watson and TheraTech completed the required
filings to the Antitrust Division and the U.S. Federal Trade Commission. We
expect the waiting period to expire on or before December 18, 1998 unless
additional information is requested.
CAN THE AGREEMENT AND PLAN OF MERGER BE AMENDED OR WAIVED?
TheraTech and Watson may mutually agree to amend in writing the terms of the
Agreement and Plan of Merger. Additionally, either party can agree in writing
to waive a requirement set forth in the Agreement and Plan of Merger which the
other party is required to perform. However, after the merger is approved by
the TheraTech stockholders neither party may materially change the Agreement
and Plan of Merger without the approval of the TheraTech stockholders.
WHERE ARE THE WATSON COMMON STOCK AND THERATECH COMMON STOCK TRADED?
TheraTech common stock is listed on the Nasdaq National Market System under the
symbol "THRT." TheraTech common stock will be delisted after the merger.
Watson common stock is listed on the New York Stock Exchange under the symbol
"WPI." Prior to September 17, 1997, Watson common stock was traded on the
Nasdaq National Market System under the symbol "WATS."
11
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data are derived from, and
should be read in conjunction with, the consolidated financial statements and
Management's Discussion and Analysis of Financial Condition and Results of
Operations of each of Watson and TheraTech, which are incorporated by reference
in the Proxy Statement/Prospectus. The condensed consolidated financial
statements of each of Watson and TheraTech as of September 30, 1998 and for the
nine months ended September 30, 1998 and 1997 are unaudited; however, in the
respective managements' opinions, they reflect all adjustments, consisting only
of normal recurring adjustments, necessary for a fair presentation of the
financial position and results of operations for such periods. The interim
financial statements are not necessarily indicative of full year operating
results or year-end financial position of the companies. See "Where You Can
Find More Information" on page 2.
WATSON PHARMACEUTICALS, INC.
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------------------- -----------------
1993 (3)(4)(5) 1994 (3)(4) 1995 (3) 1996 1997 1997 1998 (6)
-------------- ----------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED INCOME
STATEMENT DATA (1)(2): (UNAUDITED)
Product sales........... $99,022 $127,894 $170,227 $223,639 $324,015 $214,251 $409,703
Royalty revenue......... -- 1,209 22,247 27,162 14,249 14,249 --
------- -------- -------- -------- -------- -------- --------
Total revenues......... 99,022 129,103 192,474 250,801 338,264 228,500 409,703
Net income.............. 47,670 37,025 48,181 78,562 90,184 60,761 78,413
Basic earnings per
share.................. 0.60 0.45 0.58 0.92 1.04 0.70 0.88
Diluted earnings per
share.................. 0.59 0.44 0.56 0.89 1.01 0.68 0.86
Weighted shares, basic.. 78,982 81,849 83,317 85,028 86,991 86,712 88,942
Weighted shares,
diluted................ 81,128 83,563 85,515 88,081 89,325 89,037 91,383
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------- SEPTEMBER 30,
1993 1994 1995 1996 1997 1998 (6)
-------- -------- -------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE
SHEET DATA (1): (UNAUDITED)
Current assets.......... $183,783 $207,467 $235,398 $326,930 $246,789 $ 384,376
Working capital......... 151,670 179,132 195,735 293,675 146,949 275,205
Total assets............ 266,493 299,121 364,879 473,581 755,005 1,000,371
Long-term debt.......... 2,143 5,091 3,758 3,864 2,385 150,093
Other long-term
liabilities............ 25,477 15,691 706 12,226 86,887 56,625
Total stockholders'
equity................. 206,760 250,004 320,752 423,835 565,034 683,482
</TABLE>
- -------
(1) Watson merged with Circa Pharmaceuticals, Inc. in July 1995, Oclassen
Pharmaceuticals, Inc. in February 1997 and Royce Laboratories, Inc. in
April 1997 in separate transactions accounted for as poolings of interests.
All Watson historical financial data include the accounts of Circa,
Oclassen and Royce for all periods presented. The special charges
associated with these mergers were $13.9 million in 1995 and $14.7 million
in 1997.
(2) In October 1997, Watson effected a two-for-one stock split in the form of a
100% stock dividend. Share and per share amounts for all periods have been
restated to reflect the stock split.
(3) Included in net income for the years ended December 31, 1993, 1994, and
1995 were gains from the sale of common stock of Marsam Pharmaceuticals,
Inc. of $14.5 million, $3.2 million and $6.2 million, respectively. Watson
has no remaining investment in Marsam.
(4) Included in net income for the years ended December 31, 1993 and 1994 was a
provision for $7.6 million and a gain of $2.3 million, respectively, from
legal settlements in which Circa was involved.
(5) As a result of the pooling of interests accounting for Watson's 1995 merger
with Circa, an income tax benefit of $29.8 million was recorded in 1993.
This tax benefit resulted from a reduction in the valuation allowance for
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 Watson.
(6) Watson acquired The Rugby Group, Inc. in February 1998 in a transaction
accounted for as a purchase. Rugby's results of operations have been
recorded in Watson's financial statements since the date of acquisition. 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.
12
<PAGE>
THERATECH, INC.
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------- ---------------
1993 1994 1995 1996 1997 1997 1998
------- ------- -------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT
OF OPERATIONS DATA (1):
Product sales........... $ -- $ -- $ 4,318 $11,296 $15,470 $10,680 $14,007
Research and development
and licensing revenue.. 5,363 7,505 18,713 23,412 22,736 17,268 20,075
------- ------- -------- ------- ------- ------- -------
Total revenues......... 5,363 7,505 23,031 34,708 38,206 27,948 34,082
Net income (loss)....... (7,875) (11,637) (7,841) 4,225 5,851 3,863 4,941
Basic earnings (loss)
per share.............. (0.50) (0.61) (0.40) 0.21 0.28 0.19 0.23
Diluted earnings (loss)
per share.............. (0.50) (0.61) (0.40) 0.20 0.27 0.18 0.23
Weighted shares, basic.. 15,695 18,972 19,789 20,292 20,778 20,714 21,190
Weighted shares,
diluted................ 15,695 18,972 19,789 21,587 21,734 21,621 21,726
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------- SEPTEMBER 30,
1993 1994 1995 1996 1997 1998
------- ------- ------- ------- ------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE
SHEET DATA:
Current assets.......... $19,433 $23,648 $23,443 $30,254 $32,121 $32,828
Working capital......... 14,831 20,012 14,530 22,302 24,710 25,420
Total assets............ 28,060 49,818 50,836 53,847 61,861 60,581
Long-term debt.......... 652 8,662 10,320 8,661 7,261 1,243
Other long-term
liabilities............ 212 212 1,212 1,212 3,632 3,252
Total stockholders'
equity................. 22,595 37,307 30,391 36,022 43,557 48,679
</TABLE>
- -------
(1) In June 1996, TheraTech effected a three-for-two split of its common stock
in the form of a stock dividend. Share and per share amounts have been
adjusted retroactively for all years presented to reflect the split.
13
<PAGE>
WATSON / THERATECH
SUMMARY UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The summary unaudited pro forma condensed combined financial information has
been derived from, or prepared on a basis consistent with, the unaudited pro
forma condensed combined financial statements included elsewhere in this Proxy
Statement/Prospectus. It has been prepared to give effect to the merger under
the pooling of interests method and reflects an assumed exchange ratio of
0.2663 of a share of Watson common stock for each share of TheraTech common
stock. Such pro forma information assumes the merger had been effective as of
January 1, 1995 for purposes of the income statement information and as of
September 30, 1998 for the balance sheet information. This information is
presented for illustrative purposes only and is not necessarily indicative of
the combined results of operations or financial position that would have
occurred if the merger had occurred as of January 1, 1995 or on the dates
indicated, nor is it necessarily indicative of future operating results or
financial position of the combined companies. The following summary unaudited
pro forma condensed combined financial information should be read in
conjunction with the unaudited pro forma condensed combined financial
statements included elsewhere in this Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------- -----------------
1995 1996 1997 1997 1998
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PRO FORMA CONDENSED COMBINED
INCOME STATEMENT DATA:
Product sales.................... $174,545 $234,935 $339,485 $224,931 $423,710
Royalty, research and development
and licensing revenue........... 40,960 50,574 36,985 31,517 20,075
-------- -------- -------- -------- --------
Total revenues............... 215,505 285,509 376,470 256,448 443,785
Net income....................... 43,940 83,182 95,650 64,369 81,501
Basic earnings per share......... 0.50 0.92 1.03 0.70 0.86
Diluted earnings per share....... 0.48 0.89 1.01 0.68 0.84
Weighted shares, basic........... 88,587 90,432 92,524 92,228 94,585
Weighted shares, diluted......... 91,135 93,830 95,113 94,795 97,169
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30,
1998
-------------
<S> <C>
PRO FORMA CONDENSED COMBINED BALANCE SHEET DATA:
Current assets.................................................... $ 417,204
Working capital................................................... 286,626
Total assets...................................................... 1,064,562
Long-term debt.................................................... 151,336
Other long-term liabilities....................................... 61,985
Total stockholders' equity........................................ 719,663
</TABLE>
14
<PAGE>
COMPARATIVE PER SHARE DATA
The following table sets forth certain historical per share data of Watson
and TheraTech and Watson/TheraTech combined per share data on an unaudited pro
forma basis, prepared to give effect to the merger under the pooling of
interests accounting method. Pro forma combined earnings per share information
assumes the merger had been effective as of January 1, 1995. The pro forma
comparative per share data gives effect to the merger at an assumed exchange
ratio of 0.2663 assuming the average per share closing price of Watson common
stock was equal to or greater than $45.06. The following table sets forth the
earnings and book value per share for TheraTech on an unaudited per share
equivalent pro forma basis. The equivalent pro forma combined for TheraTech
earnings and book value per share are calculated by multiplying the pro forma
combined per share amounts by the assumed exchange ratio of 0.2663. Book value
per share has been adjusted to include the shares of Watson common stock to be
issued in the merger and assumes that the merger had been effective at the end
of each period presented. The pro forma comparative per share data does not
purport to represent what Watson's financial position or results of operations
would actually have been had the merger occurred at the beginning of the
earliest period presented or to project Watson's financial position or results
of operations for any future date or period. This data should be read in
conjunction with the unaudited pro forma condensed combined financial
statements included elsewhere herein and the separate historical financial
statements and notes thereto of Watson and TheraTech incorporated by reference
into this Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS
DECEMBER 31, ENDED
------------------- SEPTEMBER 30,
1995 1996 1997 1998
------ ----- ----- --------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Watson--Historical:
Basic earnings per share................. $ 0.58 $0.92 $1.04 $0.88
Diluted earnings per share............... 0.56 0.89 1.01 0.86
Book value per share..................... 3.81 4.96 6.43 7.64
Watson/TheraTech Pro Forma Combined
(unaudited):
Basic earnings per share................. $ 0.50 $0.92 $1.03 $0.86
Diluted earnings per share............... 0.48 0.89 1.01 0.84
Book value per share..................... 3.81 4.95 6.40 7.57
TheraTech--Historical:
Basic (loss) earnings per share.......... $(0.40) $0.21 $0.28 $0.23
Diluted (loss) earnings per share........ (0.40) 0.20 0.27 0.23
Book value per share..................... 1.52 1.75 2.07 2.29
Equivalent Pro Forma Combined for TheraTech
(unaudited):
Basic earnings per share................. $ 0.13 $0.24 $0.27 $0.23
Diluted earnings per share............... 0.13 0.24 0.27 0.22
Book value per share..................... 1.01 1.32 1.70 2.02
</TABLE>
15
<PAGE>
COMPARATIVE MARKET DATA
Watson common stock is traded on the New York Stock Exchange under the
trading symbol "WPI." TheraTech common stock is traded on the Nasdaq National
Market System under the trading symbol "THRT." Prior to September 17, 1997,
Watson's common stock was traded on the Nasdaq National Market System under the
symbol "WATS." The following table presents trading information for Watson
common stock and TheraTech common stock on October 23, 1998 and November 23,
1998. October 23, 1998 was the last full trading day prior to the announcement
of the signing of the Agreement and Plan of Merger. November 23, 1998 was the
last trading day for which information was available prior to the date of the
first mailing of this Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
WATSON THERATECH
-------------------- --------------------
HIGH LOW CLOSE HIGH LOW CLOSE
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
October 23, 1998................ $52.81 $51.56 $52.25 $10.25 $ 9.50 $ 9.75
November 23, 1998............... $53.75 $51.75 $51.19 $13.94 $13.63 $13.88
</TABLE>
Stockholders are urged to obtain current market quotations for Watson common
stock and TheraTech common stock.
The following table sets forth, for the periods indicated, the high and low
sales price per share, based on published financial sources, of Watson common
stock and TheraTech common stock. All numbers have been adjusted to reflect the
October 1997 Watson common stock two-for-one stock split and the June 1996
TheraTech common stock three-for-two stock split, both of which were effected
as stock dividends.
<TABLE>
<CAPTION>
WATSON THERATECH
COMMON STOCK COMMON STOCK
------------- -------------
HIGH LOW HIGH LOW
------ ------ ------ ------
<S> <C> <C> <C> <C>
1996:
First Quarter............................. $24.75 $18.50 $16.83 $10.42
Second Quarter............................ 24.25 18.25 16.33 12.00
Third Quarter............................. 20.00 13.00 14.00 8.38
Fourth Quarter............................ 23.00 15.88 13.63 9.38
1997:
First Quarter............................. $23.06 $17.69 $14.75 $ 9.50
Second Quarter............................ 22.25 16.00 12.25 7.50
Third Quarter............................. 30.38 21.63 12.13 9.69
Fourth Quarter............................ 34.13 27.00 12.13 7.00
1998:
First Quarter............................. $42.94 $30.50 $11.00 $ 7.44
Second Quarter............................ 49.50 36.25 11.00 7.88
Third Quarter............................. 52.88 40.25 10.75 5.75
Fourth Quarter (through November 23,
1998).................................... 56.81 42.00 14.81 6.88
</TABLE>
Watson and TheraTech have not paid any cash dividends on their common stock
to date and have no present intention of paying cash dividends in the near
future.
As of November 23, 1998, there were approximately 10,700 record holders of
Watson common stock and approximately 220 record holders of TheraTech common
stock.
16
<PAGE>
RISK FACTORS
This Proxy Statement/Prospectus contains forward-looking statements within
the meaning of Section 27A of the Securities Act and Section 21E of the
Exchange Act. You should be aware that any such statements are projections or
estimates as to future events, which may or may not occur. In addition to the
other information in this Proxy Statement/Prospectus, you should carefully
consider the following risk factors before voting on the merger.
DIFFICULTIES INTEGRATING THE BUSINESSES OF WATSON AND THERATECH
The merger involves the integration of two companies that have previously
operated independently. Watson and TheraTech may encounter difficulties in
integrating their businesses, which could have a material adverse effect on the
operating results or financial condition of the combined company's business.
Watson or TheraTech may experience disruption in its business or employee base
as a result of uncertainty following announcement of the merger and during the
integration process if the merger is consummated. There is also a risk that key
employees of TheraTech may seek employment elsewhere, including with
competitors. Furthermore, the operations, management and personnel of the two
companies may not be compatible, and Watson or TheraTech may also experience
the loss of key personnel for that reason. We also cannot assure you that the
companies will be able to successfully blend their products and technology to
create the advantages which this merger is intended to create. Further, there
may be overlap between the products or customers of Watson and TheraTech which
may create conflicts in relationships or other commitments detrimental to the
integrated businesses.
DEPENDENCE ON PRODUCT DEVELOPMENT AND COMMERCIALIZATION
Watson's and TheraTech's future results of operations will depend to a
significant extent upon their ability to successfully commercialize new
proprietary and off-patent pharmaceutical products in a timely manner. As a
result, new products must be continually developed, tested and manufactured
and, in addition, must meet regulatory standards and receive requisite
regulatory approvals. Products of Watson or TheraTech currently in development
may or may not receive the regulatory approvals necessary for marketing by
TheraTech, Watson or other third-party partners. Furthermore, the development
and commercialization process is time-consuming and costly, and we cannot
assure you that any of Watson's or TheraTech's products, if and when developed
and approved, can be successfully commercialized. Risk particularly exists with
respect to the development of proprietary products, because of the
uncertainties and higher costs associated with research and development of such
products and the unproven market acceptability of such products. Delays or
unanticipated costs in any part of the process or the inability of Watson and
TheraTech to obtain regulatory approval for their products, including failure
to maintain their manufacturing facilities in compliance with all applicable
regulatory requirements, could adversely affect the combined company's
operating results.
EFFECT OF FUTURE TRANSACTIONS ON WATSON'S BUSINESS OR STOCK PRICE IS UNCERTAIN
Watson regularly reviews potential transactions related to technologies,
products or product rights and businesses complementary to its business. Such
transactions could include mergers, acquisitions, strategic alliances,
licensing agreements or co-promotion
17
<PAGE>
agreements. In the future, Watson may choose to enter into such transactions at
any time. The impact of transactions on the market price of a company's stock
is often uncertain, but may cause substantial fluctuations to the market price.
Consequently, you should be aware that any announcement of any such transaction
could have a material adverse effect upon the market price of Watson's common
stock. Moreover, depending upon the nature of any transaction, Watson may
experience a charge to earnings, which could be material, and possibly have an
adverse impact upon the market price of Watson common stock. In connection with
the TheraTech merger, Watson expects to record merger expenses of approximately
$14 million. In addition, any such transaction could be disruptive to the
management of Watson, and any such disruption could also have a material
adverse effect on its business or financial condition.
WATSON'S AND THERATECH'S BUSINESSES ARE AFFECTED BY GOVERNMENT REGULATION
All pharmaceutical manufacturers are subject to extensive, complex, costly
and evolving governmental regulations and restrictions administered by the
Federal Food and Drug Administration ("FDA"), other federal and state agencies,
and numerous governmental authorities in other countries. Moreover, Watson and
TheraTech and certain of their vendors are subject to the periodic inspection
of their facilities and operations and/or the testing of their products by the
FDA, the U.S. Drug Enforcement Agency ("DEA"), the U.S. Environmental
Protection Agency ("EPA") and similar state, local and foreign regulatory
authorities. Each of these organizations conducts periodic inspections to
confirm continued compliance with its regulations. Failure to comply with any
of these regulations could result in fines, unanticipated compliance
expenditures, interruption of production and criminal prosecution. Although
Watson and TheraTech have instituted internal compliance programs, we cannot
assure you that such programs will meet regulatory agency standards and that
any lack of compliance will not have a material adverse effect on Watson or
TheraTech.
In recent years, the process for obtaining governmental approval to market
pharmaceutical products has become more rigorous, time-consuming and costly,
and neither Watson nor TheraTech can predict the extent to which they may be
affected by legislative and regulatory developments. Watson and TheraTech are
dependent on receiving FDA and other governmental approvals prior to marketing
and shipping their respective products. Consequently, there is always the
chance that the FDA or other applicable agency will not approve products, or
that the rate, timing and cost of such approvals will adversely affect Watson's
or TheraTech's product introduction plans or results of operations. The Uruguay
Round Agreements Act ("URAA"), which became effective June 8, 1994, lengthens
the term of existing and future patents by changing the patent term to the
longer of 17 years from the date of patent grant or 20 years from the date of
patent application. These URAA changes could postpone approval eligibility of
some products.
INDUSTRY IS COMPETITIVE
The pharmaceutical industry is intensely competitive. Watson's and
TheraTech's competitors vary depending upon product categories, and within each
product category, upon dosage strengths and drug delivery systems. Such
competitors include the major brand name and off-patent manufacturers of
pharmaceuticals, especially those doing business in the United States. Many
competitors have been in business for a longer period of
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time than either Watson or TheraTech, have a greater number of products on the
market and have greater financial and other resources. Newly introduced off-
patent products with limited or no off-patent competition are typically sold at
higher selling prices, often resulting in increased gross profit margins. As
competition from other manufacturers intensifies, selling prices typically
decline. Consequently, the maintenance of profitable operations will depend, in
part, on both companies' ability to maintain efficient production capabilities
and to develop and introduce new products in a timely and cost-effective
manner. It is possible that developments by others will make Watson's or
TheraTech's products or technologies noncompetitive or obsolete.
WATSON IS DEPENDENT ON KEY PERSONNEL
The success of Watson's present and future operations will depend, to a great
extent, upon the experience, abilities and continued services of certain
executive officers of Watson, including Allen Chao, Ph.D. The loss of the
services of any of these officers could have a material adverse effect on the
combined company. Watson has entered into employment agreements with certain of
its executive officers, including Dr. Chao, and, effective on consummation of
the merger, Dinesh C. Patel, Ph.D. Watson does not carry key-man life insurance
on any of its officers. The success of the combined company also will depend
upon its ability to attract and retain other highly qualified scientific,
managerial, sales and manufacturing personnel. However, when two companies
merge, there is a risk of departure of employees due to certain factors,
including factors relating to the integration process, and such departures may
occur with respect to the combined company. Competition for such personnel is
intense. In this respect, Watson and TheraTech compete with numerous
pharmaceutical and healthcare companies, as well as universities and nonprofit
research organizations. We cannot assure you that the combined company will
continue to attract and retain qualified personnel.
POTENTIAL VOLATILITY OF STOCK PRICE AND ABSENCE OF DIVIDENDS
The market prices for securities of companies engaged primarily in
pharmaceutical development, manufacture and distribution have historically been
highly volatile, and the market price of Watson's common stock has been and may
continue to be volatile. For example, the market price of Watson's common stock
fluctuated during the past twelve months between $27.00 per share and $57.88
per share and may continue to fluctuate. Generally market price fluctuations in
a company's stock may be due to acquisition or other material public
announcements, along with a variety of additional factors including, without
limitation, (i) new product introductions, (ii) the purchasing practices of a
company's customers, (iii) changes in the degree of competition for a company's
products, (iv) the announcement of technological innovations or new commercial
products by a company or its competitors, (v) governmental regulation, (vi)
regulatory approvals or regulatory issues, (vii) developments relating to
patents or proprietary rights, (viii) publicity regarding actual or potential
clinical results with respect to products under development by a company or
others and (ix) political developments or proposed legislation in the
pharmaceutical or healthcare industry. Any of these factors, among others,
could have a significant impact on the market price of the Watson common stock.
Watson has not paid any cash dividends since inception, although certain of
its wholly-owned subsidiaries may have paid dividends
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prior to a combination with Watson. After the merger, Watson does not
anticipate paying cash dividends in the foreseeable future. Certain financing
contracts and arrangements between Watson and third parties restrict Watson's
ability to pay dividends.
DIFFICULTY IN OBTAINING AND PROTECTING PATENTS AND PROPRIETARY RIGHTS
Watson's and TheraTech's success with their proprietary products will depend in
part on their ability to obtain patent protection for their products. Both
Watson and TheraTech have a number of U.S. and foreign patents issued and
pending. However, we cannot assure you that Watson's or TheraTech's patent
applications will be approved, or if approved will be upheld in a court of law.
We also cannot assure you that such patents will provide competitive advantages
for their respective products or will not be challenged or circumvented by
competitors.
Watson and TheraTech also rely on trade secrets and proprietary know-how
which they seek to protect, in part, through confidentiality agreements with
their respective partners, customers, employees and consultants. It is possible
that these agreements will be breached or that they won't be enforceable in
every instance, and that Watson or TheraTech will not have adequate remedies
for any such breach. It is also possible that Watson's or TheraTech's trade
secrets will become known or independently developed by competitors.
Watson and TheraTech may be required or may desire to obtain licenses to
patents and other proprietary rights held by third parties to develop,
manufacture and market products. We cannot assure you that the combined company
will be able to obtain these licenses on commercially reasonable terms, if at
all, or that any licensed patents or proprietary rights will be valid or
enforceable. In addition, intellectual property law is subject to change by the
courts and other governmental bodies. For example, a 1997 Supreme Court ruling
could impact a party's ability to enforce its patents and to defend against
potential patent infringement claims by third parties. The combined company's
ability to commercialize its products will depend on it not infringing the
valid patent rights of others. Litigation concerning patents and proprietary
technologies can be protracted and expensive and brand companies are
increasingly suing competitors as a way of delaying the introduction of
competitors' products. Any such litigation may be costly and time consuming,
and could result in a substantial delay in a new product introduction, any of
which could have a material adverse effect on the combined company's business,
financial condition or results of operations.
INCREASED COMPETITION RELATED TO CERTAIN SIGNIFICANT PRODUCTS
During the nine months ended September 30, 1998, sales of Dilacor XR(R) and
Diltiazem XR accounted for approximately 18% of Watson's total revenues. In the
same period, sales in the hydrocodone bitartrate/acetaminophen product group
accounted for approximately 15% of Watson's total revenues. During fiscal year
1997, sales in the hydrocodone bitartrate/acetaminophen product group accounted
for approximately 23% of total revenues. Also in fiscal year 1997, sales of
Dilacor XR(R) and Diltiazem XR accounted for approximately 22% of total
revenues following the purchase by Watson of Dilacor XR(R) in June of 1997. In
fiscal years 1996 and 1995, sales in the hydrocodone bitartrate/acetaminophen
product group accounted for approximately 29% and 35% of total 1996 and 1995
revenues, respectively. Due to FDA approval of products that will compete with
Watson's products, there has been and will
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continue to be increased price competition with respect to the hydrocodone
group, Dilacor XR(R) and Diltiazem XR. Consequently Watson may experience a
reduction in future sales of such products which, absent additional offsetting
revenues, could have a material adverse effect on the financial condition and
results of operations of Watson.
DEPENDENCE ON CERTAIN SUPPLIERS
Some materials used in Watson's and TheraTech's manufactured products, and
some products sold by Watson and TheraTech, are currently available only from
sole or limited suppliers. This includes products which have historically
accounted for a significant portion of Watson's revenues. In addition, sources
for materials for Watson's and TheraTech's products must be approved by the
FDA, the DEA and/or other governmental agencies or bodies. For some products
sold by Watson and TheraTech, only one or very few suppliers have been approved
for certain materials or products used in Watson's or TheraTech's products. Any
interruption or delay in supply of materials or products from sole or limited
source suppliers, or delays in the applicable governmental approval of new
suppliers, or delay in approving Watson as the manufacturer of such products,
could have a material adverse effect on the combined company's business.
WATSON'S AND THERATECH'S ABILITY TO ADDRESS THE YEAR 2000 ISSUE
Each of Watson and TheraTech has assessed and continues to assess the
potential impact of the situation commonly referred to as the "Year 2000
Issue." The Year 2000 Issue concerns the inability of information systems and
computer software programs to properly recognize and process date sensitive
information relating to the Year 2000 and beyond. Each of Watson and TheraTech
has several information system improvement initiatives underway which
management believes will adequately address the Year 2000 Issue. However, if
third party payors, suppliers, distributors, transporters or joint venture
partners do not adequately address their Year 2000 Issues or if Watson and/or
TheraTech fail to successfully complete their respective Year 2000 initiatives,
the combined company could be adversely affected in the future. For more
information on the companies' Year 2000 preparedness, see also Watson's
Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1998
and TheraTech's Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1998. Each of these documents is incorporated by reference into
this Proxy Statement/Prospectus.
INTERESTS OF CERTAIN PERSONS IN THE MERGER MAY CONFLICT WITH INTERESTS OF
THERATECH STOCKHOLDERS
Certain members of TheraTech's management and TheraTech's Board of Directors
have interests in the merger that may conflict with the interests of TheraTech
stockholders. Specifically, by virtue of the merger (i) all options currently
outstanding under existing TheraTech stock option plans will be assumed by
Watson, (ii) the TheraTech employment agreements with Dr. Dinesh C. Patel and
Dr. Charles D. Ebert will be amended upon consummation of the merger and
continued after the merger and will provide for, among other things, the grant
of additional options to purchase shares of Watson common stock to such
individuals, (iii) severance payments to Alexander L. Searl, the Senior Vice
President and Chief Financial Officer of TheraTech, will be triggered by the
merger, (iv) Watson has agreed to cause TheraTech to indemnify the TheraTech
officers and directors following the merger, and to continue to maintain
liability insurance covering the TheraTech officers and directors for a period
of two years following the merger, subject to
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market availability and cost limitations and (v) the vesting of TheraTech
options held by four individuals will be accelerated upon closing of the
merger. See "The Merger -- Interests of Certain Persons in the Merger" on page
38.
DILUTION
In April, 1998, Watson filed a registration statement with the SEC which
allows Watson to raise up to $300 million from offerings of senior or
subordinated debt securities, common stock, preferred stock or a combination
thereof, at such times and in such amounts as Watson deems appropriate. To
date, Watson has issued $150 million in senior unsecured notes pursuant to such
registration statement. In addition, (i) Watson may engage in future
transactions, including the acquisition of technologies, products, products
rights and businesses, which could involve the issuance of its securities and
(ii) Watson has commitments pursuant to existing option plans and free-standing
options and warrants which are likely to result in the issuance of additional
shares of Watson common stock. You should be aware that the issuance of any
securities for these or other reasons could result in dilution of your equity
interest in Watson. In addition, the Watson Board of Directors has the
authority to issue, without vote or action of shareholders, shares of preferred
stock, in one or more series, and to fix the rights, preferences, privileges
and restrictions thereof. You should be aware that any such series of preferred
stock could contain dividend rights, conversion rights, voting rights, terms of
redemption, redemption prices, liquidation preferences or other rights superior
to the rights of holders of Watson common stock. The Watson Board of Directors
has no present intention of issuing any such preferred series, but reserves the
right to do so in the future.
THE MERGER IS CONDITIONED UPON SEVERAL FACTORS
The Agreement and Plan of Merger requires certain conditions to be satisfied
before the merger can be consummated. If any of these conditions are not
satisfied and not waived by the other party, the merger may not be consummated.
A waiver of a material condition to the merger, including the conditions that
(i) the merger qualify for pooling of interests treatment for accounting
purposes and (ii) the merger qualify as a tax-free reorganization under
applicable tax laws, may require a resolicitation of the vote of the TheraTech
stockholders prior to consummation of the merger.
UNCERTAINTY OF JOINT VENTURE INCOME
A portion of Watson's net income is derived from joint ventures. In addition,
a substantial portion of Watson's efforts in developing controlled-release
technology prior to the merger has been primarily conducted through joint
ventures. These arrangements involve various partners. Watson does not control
the joint ventures or the commercial exploitation of the licensed products, and
we cannot assure you that such joint ventures will be, or, if profitable, will
continue to be profitable. Although restrictions contained in certain of
Watson's joint venture arrangements have not in the past had a material adverse
impact on Watson's marketing of its products, any such marketing restriction
could affect future revenues and have a material adverse effect on the
operations of the combined company. Further, in connection with its proprietary
drug delivery systems, TheraTech has depended upon certain partners to fund all
or a portion of the costs of, or to undertake, product development, testing,
regulatory approval and marketing. We cannot assure you that Watson or
TheraTech could replace such collaborative arrangements or successfully
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develop, test and market such products on their own. The combined company's
earnings could be negatively impacted if existing collaborative partners
withdraw or if these products are not timely developed, approved or
successfully commercialized. Additionally, it is uncertain how the combination
of Watson and TheraTech will affect TheraTech's ability to continue its
collaborative efforts and partnerships with certain third parties, including
large pharmaceutical companies.
PRODUCT LIABILITY INSURANCE IS EXPENSIVE AND DIFFICULT TO OBTAIN
The design, development and manufacture of Watson's and TheraTech's products
involve an inherent risk of product liability claims and associated adverse
publicity. Insurance coverage is expensive and difficult to obtain, and may not
be available in the future on acceptable terms, or at all. Although Watson and
TheraTech currently maintain product liability insurance for their products in
the amounts each company believes to be commercially reasonable, we cannot
assure you that the coverage limits of Watson's or TheraTech's insurance
policies will be adequate. A claim brought against Watson or TheraTech, whether
fully covered by insurance or not, could have a material adverse effect upon
the combined company.
YOUR RIGHTS AS A WATSON STOCKHOLDER WILL DIFFER FROM YOUR RIGHTS AS A THERATECH
STOCKHOLDER
After the merger, you will no longer be a stockholder of TheraTech, which is
a Delaware corporation. You will be a stockholder of Watson, which is a Nevada
corporation. While your rights as a stockholder of a Delaware corporation are
similar to the rights of a stockholder in a Nevada corporation, some
differences do exist. In addition, the Certificate or Articles of Incorporation
and Bylaws of each of TheraTech and Watson contain further differences. Certain
of these differences are identified in this Proxy Statement/Prospectus under
"Summary" beginning on page 4, and "Comparison of Rights of Holders of Watson
Common Stock and TheraTech Common Stock" beginning on page 62.
Certain provisions of Nevada law could make an unsolicited acquisition of
control of Watson more difficult and/or expensive. In addition, provisions of
Watson's Articles of Incorporation permitting the issuance of preferred stock
by the Board of Directors and the existence of a staggered board of directors
may also make an unsolicited acquisition of control more difficult or
expensive. See "Comparison of Rights of Holders of Watson Common Stock and
TheraTech Common Stock -- Structure of the Board" on page 62 and "-- Required
Vote for Certain Business Combinations and Other Anti-Takeover Provisions" on
page 67.
FLUCTUATIONS IN THE EXCHANGE RATIO MAY AFFECT THE MERGER CONSIDERATION WHICH
YOU WILL RECEIVE
Each share of your TheraTech common stock will be exchanged for not less that
0.2663 or more than 0.29589 shares of Watson common stock. Subject to the above
minimum and maximum, the exact exchange ratio of Watson common stock that you
will receive for each share of your TheraTech common stock will be calculated
as follows: twelve (12) divided by the average closing price of Watson common
stock for the ten (10) consecutive trading days ending on the second trading
day immediately prior to the closing date of the merger.
If the average closing price of Watson common stock for the specified period
is at or between $40.56 and $45.06, then pursuant to
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the exchange ratio a portion of a share of Watson common stock having a market
value at that time of $12.00 will be issued for each share of TheraTech common
stock (based on the average closing price of Watson common stock for the
specified period).
The market value of that portion of a share of Watson common stock to be
issued for each share of TheraTech common stock in the merger may exceed $12.00
if the average closing price of Watson common stock for the specified period
exceeds $45.06. Conversely, the market value of such portion of a share of
Watson common stock to be issued in the merger will be less than $12.00 if the
average closing price of Watson common stock for the specified period is less
than $40.56.
The market value of Watson common stock may fluctuate between the time the
exchange ratio is determined and when you receive your shares of Watson common
stock.
THERATECH WILL NO LONGER BE AN INDEPENDENT COMPANY; THERATECH WILL BE A WHOLLY-
OWNED SUBSIDIARY OF WATSON.
As a result of the merger, TheraTech will no longer be an independent company
and will become a wholly-owned subsidiary of Watson. TheraTech stockholders
will become Watson stockholders. Your continuing direct interest will cease in
the business of TheraTech and you will have a direct interest in the business
of Watson. As a Watson stockholder, you will be entitled to vote on all matters
submitted to a vote of the Watson stockholders; however, you will no longer
have the right to vote on matters specifically affecting TheraTech.
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THE MERGER
GENERAL
The Agreement and Plan of Merger dated as of October 23, 1998 (the "Merger
Agreement") provides for a business combination between Watson Pharmaceuticals,
Inc. ("Watson") and TheraTech, Inc. ("TheraTech") in which Jazz Merger Corp., a
newly formed, wholly-owned subsidiary of Watson (the "Sub"), will be merged
with and into TheraTech (the "Merger") and the holders of TheraTech common
stock, $0.01 par value per share ("TheraTech Common Stock"), will be issued
shares of Watson common stock, $0.0033 par value per share ("Watson Common
Stock") (plus cash in lieu of any fractional shares), in a transaction intended
to qualify as a pooling of interests for accounting purposes and as a tax-free
reorganization for federal income tax purposes. The discussion in this Proxy
Statement/Prospectus of the Merger and the description of the Merger's
principal terms are subject to and qualified in their entirety by reference to
the Merger Agreement, a copy of which is attached to this Proxy
Statement/Prospectus as Appendix A and which is incorporated herein by
reference.
EXCHANGE RATIO
In the Merger, each share of TheraTech Common Stock outstanding immediately
prior to the time of consummation of the Merger will be converted into the
right to receive a portion of a share of Watson Common Stock (the "Exchange
Ratio") equal to twelve (12) divided by the Average Closing Price (as defined
below); provided that the Exchange Ratio shall not be less than 0.2663 or
greater than 0.29589. The "Average Closing Price" will equal the average of the
per share last daily closing price of Watson Common Stock as quoted on the New
York Stock Exchange (the "NYSE") for the ten (10) consecutive trading days
ending on the second trading day immediately preceding the closing date.
EFFECTIVE TIME OF THE MERGER
The Merger will become effective upon the filing of the Certificate of Merger
with the Secretary of State of Delaware. The Certificate of Merger will be
filed as promptly as practicable after approval by TheraTech's stockholders has
been obtained and all other conditions to the Merger have been satisfied or
waived (the "Effective Time").
BACKGROUND OF THE MERGER
The TheraTech Board and management regularly consider TheraTech's strategic
alternatives as part of their ongoing efforts to enhance stockholder value.
These alternatives have included: (i) continuing TheraTech's strategy of
entering into alliances with larger pharmaceutical companies for the
development, commercialization and marketing of TheraTech's products and
technologies, (ii) seeking additional financing, which would enhance
TheraTech's ability to develop, commercialize and market its products and
technologies on an independent basis or (iii) merging with a strategic partner
to gain access to greater financial resources and marketing capabilities.
Over the past several years, directors and management of TheraTech have had
contacts with a number of organizations that were potentially interested in a
strategic combination. These organizations have included both research and
development companies and large pharmaceutical
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firms. All of these discussions remained preliminary. In January 1995,
TheraTech retained William Blair & Company, L.L.C. ("William Blair") as a
financial advisor in connection with the evaluation of strategic alternatives
from time to time.
In October 1996, Dinesh C. Patel, Ph.D., Chairman of the Board, President and
Chief Executive Officer of TheraTech, and Allen Chao, Ph.D, Chairman of the
Board, Chief Executive Officer and President of Watson, first met and held
introductory discussions concerning their respective businesses. On February
19, 1997, TheraTech and Watson entered into a confidentiality agreement in
order to generally explore business opportunities between them. On March 12,
1997, Dr. Patel and William Blair made a presentation to the TheraTech Board
regarding TheraTech's alternatives, including a possible business combination
with Watson. At this time, the TheraTech Board authorized management to
investigate the possibility of a merger with Watson. However, the TheraTech
Board ultimately concluded that TheraTech should continue to execute its
business strategy on an independent basis and exploratory discussions with
Watson were terminated.
In April 1998, TheraTech engaged CIBC Oppenheimer Corp. ("CIBC Oppenheimer")
to provide financial advice in connection with (i) financing alternatives which
would permit TheraTech to expand its product development and commercialization
activities and (ii) possible strategic combinations. With CIBC Oppenheimer's
assistance, TheraTech reviewed potential sources of financing, including the
creation of a research and development vehicle that would offer interests to
outside investors. TheraTech and its financial advisors also analyzed a
possible strategic combination with Watson and others. In late April 1998, Drs.
Chao and Patel also held preliminary discussions regarding a possible
transaction between Watson and TheraTech.
On May 4, 1998, Dr. Patel made a presentation to the Watson Board concerning
TheraTech and the possible strategic advantages of a merger of the two
companies. On May 5, 1998, Dr. Chao made a presentation to the TheraTech Board
concerning Watson and the strategic advantages of a merger between the two
companies. Among the benefits reviewed at both meetings were Watson's need for
additional research and development capabilities, which TheraTech could
address, and TheraTech's need for additional financing and marketing
capabilities, which Watson could address. After the meeting on May 5, 1998, the
TheraTech Board instructed management and its financial advisors to continue
exploratory discussions with Watson. Watson and TheraTech executed a standstill
agreement on May 13, 1998. Discussions between TheraTech and Watson occurred
periodically for the next few months, although no agreement was reached to
proceed with a merger or as to possible terms.
Over the summer of 1998, TheraTech also had exploratory discussions with, and
furnished confidential information to, five other potential strategic partners.
Meanwhile, in early August 1998 TheraTech and Watson held discussions,
regarding both the strategic advantages of a merger and a possible exchange
ratio. On August 31, 1998, Watson delivered a letter to TheraTech (the "Watson
Proposal") setting forth key terms of a proposed merger.
At a meeting held on September 2, 1998, the TheraTech Board considered
TheraTech's strategic alternatives in light of conditions in the capital
markets, the results of exploratory discussions with other potential merger
partners and the terms of the Watson Proposal. At the meeting, TheraTech's
financial advisors made a presentation to the TheraTech Board concerning Watson
and the proposed terms of a merger. The TheraTech Board directed management and
its advisors to continue to
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analyze Watson and the proposed merger, as well as other options. In addition,
the TheraTech Board directed management to arrange a meeting between the
members of the TheraTech Board and senior managers of Watson, which meeting
took place in Salt Lake City, Utah on September 10, 1998.
Also at its September 2, 1998 meeting, the TheraTech Board discussed a
written offer received from a third party for a stock-for-stock merger.
Subsequent to the meeting, the TheraTech Board and management conducted due
diligence concerning the third party and held discussions to clarify the terms
of its offer. During the due diligence process, TheraTech concluded that a
merger with this party would not fully address TheraTech's strategic needs for
increased access to financing and marketing capabilities. In addition, during
discussions to clarify the proposal, TheraTech concluded that the third party's
proposal would yield less value per share than the Watson Proposal.
At a meeting held on September 16, 1998, the TheraTech Board again considered
its strategy of remaining an independent company. Based on a variety of
factors, including the expected two-to-three year time horizon for
commercialization of several of TheraTech's key products and conditions in the
capital markets, the TheraTech Board concluded that it would be desirable to
pursue a combination with a strategic partner with more significant financial
resources and marketing capabilities. After a further review of the Watson
Proposal, as well as Watson's financial resources, marketing capabilities and
success to date in the pharmaceutical industry, the TheraTech Board instructed
management and its advisors to pursue a transaction with Watson. Detailed due
diligence commenced in late September 1998. On October 9, 1998, TheraTech
signed an agreement under which it committed to negotiate exclusively with
Watson until October 21, 1998. Beginning on October 9, 1998, the parties and
their counsel had a series of negotiations over the terms of the Merger
Agreement.
On October 20, 1998, the TheraTech Board met to discuss the Merger, the terms
of the Merger Agreement and the proposed exchange ratio. Representatives of
CIBC Oppenheimer, William Blair and TheraTech's legal counsel attended the
meeting. At the meeting, CIBC Oppenheimer discussed the Exchange Ratio and
delivered its opinion to the TheraTech Board that the proposed Exchange Ratio
is fair from a financial point of view to the TheraTech stockholders. The
TheraTech Board noted that the Exchange Ratio allows TheraTech stockholders to
benefit from increases in the Average Closing Price of Watson Common Stock
above $45.06 and yields TheraTech stockholders $12.00 of Watson Common Stock
per share of TheraTech Common Stock, as of the date the Exchange Ratio is
determined, if the Average Closing Price is between $45.06 and $40.56. The
TheraTech Board noted that, conversely, the Exchange Ratio is fixed at prices
below $40.56 per share, meaning that TheraTech stockholders would receive, as
of the date the Exchange Ratio is determined, less than $12.00 in value should
the Average Closing Price of Watson Common Stock be below this level. The
TheraTech Board also considered the other key terms of the Merger Agreement,
including the termination and non-solicitation provisions. These provisions
permit the Board to consider and, if desirable, accept an unsolicited superior
proposal in the event one is presented prior to the Closing Date. The TheraTech
Board also gave specific consideration to the termination fee of $5 million
contained in the Merger Agreement. The TheraTech Board determined that such fee
is both reasonable and customary in the market, and was demanded by Watson as a
condition to executing the Merger Agreement. The TheraTech Board then
conditionally approved the Merger Agreement, subject to continued negotiation
and the approval of a special committee of the TheraTech Board, consisting of
Dr. Dinesh C. Patel, James O'Brien and Robert K. deVeer, Jr.
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Negotiations continued over the next several days between representatives of
Watson and TheraTech. On October 23, 1998, representatives of Watson and
TheraTech approved the final terms of the Merger Agreement and authorized its
execution.
THERATECH'S REASONS FOR THE MERGER
In reaching its conclusion to approve the Merger Agreement, the TheraTech
Board consulted with management of TheraTech, as well as its financial and
legal advisors and considered a number of factors, including the following:
1. The TheraTech Board considered the importance of the Merger in
implementing and accelerating TheraTech's basic long-term growth
strategy in light of the current economic, financial and business
environment.
2. The TheraTech Board analyzed TheraTech's financial condition, results of
operations, business and prospects, and compared them to those of the
combined companies. In considering this financial information, the
TheraTech Board took into account TheraTech's and Watson's recent and
historic stock prices and earnings performances, as well as its own
analysis of the business opportunities presented by the Merger. The
TheraTech Board considered detailed financial analyses and pro forma and
other financial data presented by CIBC Oppenheimer and William Blair, as
well as the TheraTech Board's own knowledge of the industry and of
TheraTech and Watson and their respective businesses.
3. The TheraTech Board considered the terms of the Merger Agreement, as
well as other information concerning the Merger, including the terms and
structure of the Merger. Among other things, the Board considered the
expectation that the Merger will be treated as a tax-free transaction
for U.S. federal income tax purposes both to TheraTech stockholders and
to Watson and will be accounted for as a pooling of interests
transaction. See "The Merger--Certain Federal Income Tax Consequences of
the Merger" on page 42 and "The Merger--Accounting Treatment" on page
38.
4. The TheraTech Board considered Watson's access to capital to finance
research and development which would enable TheraTech to (i) pursue more
product development and (ii) license products to others at a later stage
in development, thereby increasing its share of profits.
5. The TheraTech Board considered economies of scale, since the
pharmaceutical industry is characterized by intense competition and
consolidation. See "Risk Factors--Industry is Competitive" on page 18.
6. The TheraTech Board considered TheraTech's existing dependence on
certain products, particularly Androderm(R) which is marketed by
SmithKline Beecham and Alora(R) which is marketed by Proctor & Gamble,
Inc. The TheraTech Board believes the Merger will reduce TheraTech's
dependence on these products.
7. The TheraTech Board considered TheraTech's access to Watson's marketing
expertise which TheraTech believes it can leverage in certain co-
promotion agreements.
8. The TheraTech Board considered the effect on TheraTech stockholders of
TheraTech continuing as a stand-alone entity compared to the effect of
TheraTech combining with Watson, in light of the factors summarized
above.
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The TheraTech Board also considered a number of potential risks relating to
the Merger, including (i) the difficulty and management distraction inherent in
integrating two businesses, (ii) risks relating to the disparate nature of
TheraTech's and Watson's core businesses, (iii) the risk that the Merger would
not be consummated and (iv) the charge that Watson is expected to incur in
connection with the Merger. See "Risk Factors" on page 17. The TheraTech Board
believed that these risks were outweighed by the potential benefits to be
realized from the Merger.
The foregoing discussion of the information and factors considered by the
TheraTech Board is not intended to be exhaustive but is believed to include all
material factors considered by the TheraTech Board in approving the Merger. In
view of the wide variety of information and factors considered, the TheraTech
Board did not find it practical to, and did not, assign any relative or
specific weights to the foregoing factors and individual directors may have
given differing weights to different factors.
OPINION OF THERATECH'S FINANCIAL ADVISOR
TheraTech retained CIBC Oppenheimer and William Blair to act as its financial
advisors and CIBC Oppenheimer to render an opinion to the Board of Directors of
TheraTech as to the fairness of the Merger, from a financial point of view, to
the stockholders of TheraTech. TheraTech selected CIBC Oppenheimer and William
Blair based on their qualifications, expertise and familiarity with the drug
delivery and generic and specialty pharmaceuticals industries and with
TheraTech and Watson in particular.
CIBC Oppenheimer has delivered its written opinion, dated October 23, 1998,
to the TheraTech Board of Directors to the effect that, subject to the various
considerations set forth in such opinion, as of such date, the Exchange Ratio
to be received by TheraTech stockholders pursuant to the Merger Agreement was
fair, from a financial point of view, to the stockholders of TheraTech (the
"CIBC Oppenheimer Opinion"). CIBC Oppenheimer did not recommend to TheraTech
that any specific amount of consideration constituted the appropriate
consideration for the Merger. The Exchange Ratio was established by the parties
to the Merger. No limitations were imposed by the TheraTech Board of Directors
on CIBC Oppenheimer with respect to the investigations made or procedures
followed by it in rendering the CIBC Oppenheimer Opinion. The CIBC Oppenheimer
Opinion addresses only the fairness, from a financial point of view, of the
Exchange Ratio to be received by TheraTech stockholders, and does not
constitute a recommendation to any TheraTech stockholder as to how such
stockholder should vote at the TheraTech Special Meeting.
The summary of the CIBC Oppenheimer Opinion set forth in this Proxy
Statement/Prospectus is qualified in its entirety by reference to the full text
of the CIBC Oppenheimer Opinion attached hereto as Appendix B. TheraTech's
stockholders are urged to read the CIBC Oppenheimer Opinion carefully in its
entirety in conjunction with this Proxy Statement/Prospectus for the
assumptions made, procedures followed, matters considered and limits of the
review by CIBC Oppenheimer.
As set forth in the CIBC Oppenheimer Opinion, CIBC Oppenheimer relied upon
and assumed the accuracy and completeness of all of the financial and other
information available to it from public sources and provided to it by the
managements of TheraTech and Watson and their respective representatives. Each
of TheraTech and Watson provided CIBC Oppenheimer with financial
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projections for their respective companies. CIBC Oppenheimer assumed that all
such projections were prepared on a reasonable basis reflecting the best
available information, estimates and judgment of the respective managements of
the two companies and that such projections will be realized in the amounts and
time periods currently estimated by the managements of TheraTech and Watson. In
arriving at its opinion, CIBC Oppenheimer neither made nor obtained any
independent valuation or appraisal of the assets or liabilities of TheraTech or
Watson. CIBC Oppenheimer also assumed the accuracy of the advice and
conclusions of TheraTech's legal counsel and accountants with respect to tax
and accounting matters as provided to CIBC Oppenheimer by TheraTech's
management, including, without limitation, the treatment of the Merger as a
tax-free reorganization for federal income tax purposes and as a pooling of
interests for accounting and financial reporting purposes. The CIBC Oppenheimer
Opinion is based upon CIBC Oppenheimer's analyses of certain factors in light
of its assessment of general economic, financial and market conditions that
could be evaluated by it as of the date of the CIBC Oppenheimer Opinion. In all
cases, historical results were adjusted for extraordinary items and other non-
recurring or non-operating charges.
In rendering the CIBC Oppenheimer Opinion, CIBC Oppenheimer, among other
things: (a) reviewed the Merger Agreement; (b) reviewed TheraTech's annual
reports to stockholders and its annual reports on Form 10-K for fiscal years
ended December 31, 1995, 1996 and 1997 and its quarterly report on Form 10-Q
for the three months ended June 30, 1998; (c) reviewed Watson's annual reports
to stockholders and its annual reports on Form 10-K for fiscal years ended
December 31, 1995, 1996 and 1997 and its quarterly report on Form 10-Q for
three months ended June 30, 1998; (d) reviewed the Certificate of Incorporation
for TheraTech and the Articles of Incorporation for Watson; (e) reviewed
certain financial projections prepared by management of Watson and TheraTech;
(f) held discussions with the senior management of each of TheraTech and Watson
to review historical and current operations and financial conditions as well as
projections and strategies of the respective companies and visited certain of
their respective facilities; (g) reviewed current and historical market prices
and trading data of the TheraTech Common Stock and the Watson Common Stock; (h)
reviewed financial and market data for certain public companies CIBC
Oppenheimer deemed comparable to TheraTech and Watson; (i) reviewed and
analyzed recent mergers and acquisitions of companies in lines of business CIBC
Oppenheimer deemed comparable to TheraTech and Watson; (j) analyzed the
financial impact of the Merger on the combined company, including pro forma
earnings per share; (k) prepared a discounted cash flow valuation of TheraTech
and Watson; (l) reviewed the relative contributions to the combined company of
TheraTech and Watson with respect to certain historical and projected financial
parameters; and (m) performed such other analyses and reviewed such other
documents and information as were deemed appropriate.
Valuation of TheraTech. CIBC Oppenheimer performed four primary valuation
analyses of TheraTech: (i) a comparison of TheraTech with certain publicly
traded operating stage and development stage companies in the drug delivery
industry (the "Drug Delivery Companies") which analysis consisted of reviewing
and considering certain financial and market data for the Drug Delivery
Companies (the "TheraTech Comparable Companies Analysis"); (ii) a comparison of
the premiums to stock price paid and operating multiples paid in certain merger
and acquisition transactions involving companies in the drug delivery and
generic and specialty pharmaceuticals industry (the "TheraTech Comparable
Merger and Acquisition Transactions Analysis"); (iii) a discounted cash flow
analysis which consisted of adding the discounted present value of the
projected
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future cash flows of TheraTech from June 30, 1998 to December 31, 2002 and the
discounted present value of the terminal value of TheraTech, based on a
multiple of the net income projected for the fiscal year ending December 31,
2002 (the "TheraTech Discounted Cash Flow Analysis") and (iv) a comparison of
the premiums to stock price paid in merger and acquisition transactions
completed from January 1, 1998 to October 16, 1998 (the "TheraTech Premiums
Paid Analysis").
TheraTech Common Stock Analysis. CIBC Oppenheimer reviewed current and
historical market closing prices and trading data of TheraTech's Common Stock
over the past year. CIBC Oppenheimer noted that over the past 52 weeks ended
October 16, 1998, the high trading price was $12.13, low trading price was
$5.75, average trading price was $9.06 and median trading price was $9.06.
TheraTech Comparable Companies Analysis. CIBC Oppenheimer analyzed 13 Drug
Delivery Companies to evaluate the market and aggregate values at which these
companies trade relative to their respective historical and projected financial
performance. The Drug Delivery Companies in the TheraTech Comparable Companies
Analysis consisted of the following companies that are operating stage drug
delivery companies or development stage companies focused on the oral,
controlled-release and transdermal segments of the drug delivery market: ALZA
Corporation, Andrx Corporation, Anesta Corp., Biovail Corporation
International, CIMA Labs Inc., Cygnus, Inc., Elan Corporation PLC, Emisphere
Technologies, Inc., Flamel Technologies S.A., Fuisz Technologies Ltd., K-V
Pharmaceutical Company, Noven Pharmaceuticals, Inc. and SkyePharma plc. CIBC
Oppenheimer analyzed, among other things, the market values and certain
financial criteria for the Drug Delivery Companies, including their revenue,
product sales, earnings before interest and taxes ("EBIT") and earnings per
share, in each case, for the most recent twelve-month periods for which
financial data was available and on an estimated basis for 1998 and 1999. Such
estimates for the Drug Delivery Companies were derived from publicly available
research reports published by a variety of investment firms and research
analysts. The average and median values, respectively, for market value of
treasury method diluted common equity on October 16, 1998 plus total debt and
preferred stock less cash ("Aggregate Value") as a multiple of each of the
indicated statistics for the Drug Delivery Companies were as follows: (a)
trailing twelve months ("TTM") revenue: 7.7x and 4.3x; (b) TTM product sales:
8.1x and 6.9x; (c) TTM EBIT: 21.6x and 22.5x; (d) 1998 revenue: 4.4x and 3.2x;
(e) 1998 product sales: 5.9x and 5.1x; (f) 1998 EBIT: 21.7x and 20.6x; (g) 1999
revenue: 3.7x and 2.7x; (h) 1999 product sales: 6.0x and 3.2x; and (i) 1999
EBIT: 14.2x and 12.6x. The average and median values, respectively, for market
values of treasury method diluted common equity on October 16, 1998 as a
multiple of earnings per share for the following periods for the Drug Delivery
Companies were as follows: (a) TTM earnings per share: 27.6x and 29.0x; (b)
1998 earnings per share: 26.5x and 28.4x; and, (c) 1999 earnings per share:
20.2x and 22.2x.
Applying these results to TheraTechs TTM results and the financial
projections for TheraTech prepared by independent research analysts yielded
implied market values for TheraTech ranging from $95.2 million ($4.28 per
share) to $558.6 million ($25.13 per share), with an average of $221.8 million
($9.98 per share) and a median of $193.4 million ($8.70 per share).
TheraTech Merger and Acquisition Transaction Analysis. CIBC Oppenheimer
reviewed the consideration paid in certain merger and acquisition transactions
involving drug delivery and generic and specialty pharmaceuticals companies.
The transactions which CIBC Oppenheimer reviewed (in
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descending order of size) consisted of the following acquisitions: R.P. Scherer
Corporation by Cardinal Health, Inc.; Neurex Corporation by Elan Corporation
PLC; Sano Corporation by Elan Corporation PLC; Biocraft Laboratories, Inc. by
Teva Pharmaceutical Industries Ltd.; Faulding Inc. by F.H. Faulding & Co.
Limited; Penederm, Inc. by Mylan Laboratories Inc.; Oclassen Pharmaceuticals,
Inc. by Watson; Royce Laboratories, Inc. by Watson and Rugby Group by Watson;
(collectively, the Drug Delivery and Generic and Specialty Pharmaceuticals M&A
Transactions).
CIBC Oppenheimer calculated premiums paid to price for each transaction based
on such acquired companies' respective average trading prices for the one day,
one month, three months and one year prior to announcement of the acquisitions.
The high, low, average and median premiums paid to the price one day before
announcement for the Drug Delivery and Generic and Specialty Pharmaceuticals
M&A Transactions were 53.0%, 1.0%, 27.3% and 25.6%. The high, low, average and
median premiums paid to the average price one month before announcement for the
Drug Delivery and Generic and Specialty Pharmaceuticals M&A Transactions were
55.1%, 12.5%, 34.2% and 35.6%. The high, low, average and median premiums paid
to the average price three months before announcement for the Drug Delivery and
Generic and Specialty Pharmaceuticals M&A Transactions were 72.7%, 22.4%, 44.8%
and 42.6%. The high, low, average and median premiums paid to the average price
one year before announcement for the Drug Delivery and Generic and Specialty
Pharmaceuticals M&A Transactions were 155.3%, 21.3%, 66.3% and 56.6%.
Applying the premiums to TheraTech's one day, one month average, three month
average and one year average trading prices yielded derived values of TheraTech
equity of $185.2 million ($8.33 per share) to $514.2 million ($23.13 per share)
with an average value of $277.9 million ($12.50 per share) and a median value
of $261.8 million ($11.78 per share).
CIBC Oppenheimer also calculated multiples for each transaction based on the
ratio of the equity value of the transaction ("Purchase Equity Value") to such
acquired companies' respective pre-acquisition TTM, next fiscal year and second
future fiscal year net income and the ratio of Purchase Equity Value plus total
debt and preferred stock less cash ("Purchase Aggregate Value") to such
acquired companies' pre-acquisition TTM revenue, TTM earnings before interest,
taxes, depreciation and amortization ("EBITDA") and TTM EBIT. The high, low,
average and median Purchase Equity Value multiples of TTM net income for the
Drug Delivery and Generic and Specialty Pharmaceuticals M&A Transactions were
49.9x, 31.6x, 40.7x and 40.7x. The high, low, average and median Purchase
Equity Value multiples of next fiscal year net income for the Drug Delivery and
Generic and Specialty Pharmaceuticals M&A Transactions were 31.3x, 25.5x, 28.4x
and 28.4x. The high, low, average and median Purchase Equity Value multiples of
second future fiscal year net income for the Drug Delivery and Specialty
Pharmaceuticals M&A Transactions were 44.4x, 23.9x, 31.1x and 25.0x. The high,
low, average and median values of the Purchase Aggregate Value as a multiple of
each of the indicated statistics for the Drug Delivery and Generic and
Specialty Pharmaceuticals M&A Transactions were as follows: TTM revenue: 13.7x,
0.5x, 4.5x and 3.5x; (b) TTM EBITDA: 17.5x, 16.7x, 17.1x, and 17.1x; and (c)
TTM EBIT: 22.6x, 22.1, 22.4x and 22.4x.
Applying the average multiples to TheraTech's TTM, 1998 and 1999 results
yielded values of TheraTech equity of $37.6 million ($1.69 per share) to $598.3
million ($26.92 per share) with an average value of $231.2 million ($10.40 per
share) and a median value of $208.3 million ($9.37 per share).
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TheraTech Discounted Cash Flow Analysis. CIBC Oppenheimer performed a
discounted cash flow analysis, based on the financial projections provided by
TheraTech's management (the "TheraTech Management Projections"). The TheraTech
Management Projections were not risk adjusted by CIBC Oppenheimer. In the short
term, TheraTech's financial projections are highly dependent on signing major
corporate partnership/outlicensing agreements and inlicensing as yet
unidentified products by TheraTech. In the long run, TheraTech's financial
projections are highly dependent on the outcome of clinical trials, market
acceptance of untested products and the efforts of corporate partners.
An intrinsic value of TheraTech's equity was determined by the following
discounted cash flow methods: (i) calculating the present value of TheraTech's
estimated future cash flows from June 30, 1998 to December 31, 2002, and adding
to such amount the present value of TheraTech's terminal value obtained by
capitalizing TheraTech's projected net income for the year ending December 31,
2002 at multiples of 20.0x, 22.5x and 25.0x and (ii) calculating the present
value of the sum of (a) TheraTech's terminal value obtained by capitalizing
TheraTech's projected net income for the year ending December 31, 2002 at
multiples of 20.0x, 22.5x and 25.0x, plus (b) TheraTech's projected cash
balance at December 31, 2002, less (c) TheraTech's projected debt outstanding
at December 31, 2002. The range of these terminal value multiples was based on
a range of multiples of net income at which the Drug Delivery companies are
expected to trade over the long term.
CIBC Oppenheimer applied discount rates of 30.0%, 35.0% and 40.0% to
calculate the present value of TheraTech's estimated future cash flows from
June 30, 1998 to December 31, 2002 and the terminal value calculated based on a
multiple of TheraTech's 2002 projected net income. This range of discount rates
was derived using certain assumptions as to TheraTech's weighted average cost
of capital and the risk associated with achievement of the TheraTech Management
Projections.
The range of present values derived for TheraTech using these discounted cash
flow approaches based upon the TheraTech Management Projections was $216.7
million ($9.75 per share) to $380.3 million ($17.11 per share), with an average
value of $293.4 million ($13.20 per share) and a median value of $291.0 million
($13.09 per share).
TheraTech Premiums Paid Analysis. CIBC Oppenheimer reviewed the consideration
paid in certain merger and acquisition transactions completed during the period
January 1, 1998 to October 16, 1998 (the "1998 M&A Transactions").
CIBC Oppenheimer calculated premiums paid to price for each transaction based
on such acquired companies' respective average trading prices one day, one
month, three months and one year prior to announcement of the acquisitions. The
average and median premiums paid to the price one day before announcement for
the 1998 M&A Transactions were 23.4% and 19.6%. The average and median premiums
paid to the average price one month before announcement for the 1998 M&A
Transactions were 37.0% and 30.1%. The average and median premiums paid to the
average price three months before announcement for the 1998 M&A Transactions
were 32.6% and 21.9%. The average and median premiums paid to the average price
one year before announcement for the 1998 M&A Transactions were 62.8% and
52.5%.
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Applying the premiums to TheraTech's one day, one month average, three month
average and one year average trading prices yielded derived values of TheraTech
equity of $219.3 million ($9.86 per share) to $327.9 million ($14.75 per share)
with an average value of $257.8 million ($11.60 per share) and a median value
of $247.2 million ($11.12 per share).
Valuation of Watson. In consideration of the fact that the Merger requires
the issuance of Watson's Common Stock, CIBC Oppenheimer conducted a variety of
analyses to determine that the range of potential market values of the Watson
Common Stock to be issued in connection with the Merger appropriately reflects
the stock's intrinsic value. CIBC Oppenheimer performed three primary valuation
analyses of Watson: (i) a comparison of Watson with certain publicly traded
companies in the generic and specialty pharmaceuticals industry (the "Generic
and Specialty Pharmaceuticals Companies") which analysis consisted of reviewing
and considering certain financial and market data for the Generic and Specialty
Pharmaceuticals Companies (the "Watson Comparable Companies Analysis"); (ii) a
discounted cash flow analysis which consisted of adding the discounted present
value of the projected future cash flows of Watson from June 30, 1998 to
December 31, 2000 and the discounted present value of the terminal value of
Watson, based on a multiple of the net income projected for the fiscal year
ending December 31, 2000 (the "Watson Discounted Cash Flow Analysis") and (iii)
an analysis of the price targets and earnings estimates of the Wall Street
research analysts who cover Watson (the "Watson Independent Research Analysts'
Price Targets Analysis").
Watson Common Stock Analysis. CIBC Oppenheimer reviewed current and
historical market closing prices and trading data of Watson's Common Stock over
the past year. CIBC Oppenheimer noted that over the past 52 weeks ended October
16, 1998, the high trading price was $52.88, low trading price was $27.00,
average trading price was $39.85 and median trading price was $40.34.
Watson Comparable Companies Analysis. CIBC Oppenheimer compared Watson to a
group of 10 Generic and Specialty Pharmaceuticals Companies. The companies
included in this group are as follows: Barr Laboratories, Inc., Dura
Pharmaceuticals, Inc., Forest Laboratories, Inc., IVAX Corporation, Jones
Pharma Incorporated, King Pharmaceuticals, Inc., Medicis Pharmaceutical
Corporation, Mylan Laboratories Inc., Roberts Pharmaceutical Corporation and
Teva Pharmaceutical Industries Ltd.
CIBC Oppenheimer analyzed, among other things, the market values and certain
financial criteria for the Generic and Specialty Pharmaceuticals Companies,
including their revenue, EBITDA, EBIT and earnings per share, in each case, for
the most recent twelve-month periods for which financial data was available and
on an estimated basis for 1998 and 1999. Such estimates for the Generic and
Specialty Pharmaceuticals Companies were derived from publicly available
research reports published by a variety of investment firms and research
analysts. The average and median values, respectively, for Aggregate Value as a
multiple of each of the indicated statistics for the Generic and Specialty
Pharmaceuticals Companies were as follows: (a) TTM revenue: 4.3x and 5.0x; (b)
TTM EBITDA: 20.5x and 14.4x; (c) TTM EBIT: 32.2x and 17.8x; (d) 1998 revenue:
4.0x and 4.4x; (e) 1998 EBITDA: 17.1x and 15.7x; (f) 1998 EBIT: 19.4x and
16.2x; (g) 1999 revenue: 3.3x and 3.6x; (h) 1999 EBITDA: 11.0x and 11.1x; and
(i) 1999 EBIT: 13.0x and 13.2x. The average and median values, respectively,
for market values of treasury method diluted common equity on October 16, 1998
as a multiple of earnings per share for the following periods for the Generic
and Specialty
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Pharmaceuticals Companies were as follows: (a) TTM earnings per share: 24.7x
and 29.4x; (b) 1998 earnings per share: 29.7x and 24.8x; and, (c) 1999 earnings
per share: 19.4x and 18.3x.
Watson trades above or at the high end of most of the trading multiple ranges
CIBC Oppenheimer analyzed, reflecting the Watson's strong growth and operating
margin performance as well as superior size (measured by both sales and market
capitalization). The value for Aggregate Value as a multiple of each of the
indicated statistics for Watson were as follows: (a) TTM revenue: 10.1x; (b)
TTM EBITDA: 24.0x; (c) TTM EBIT: 26.4x; (d) 1998 revenue: 8.3x; (e) 1998
EBITDA: 20.7x; (f) 1998 EBIT: 22.8x; (g) 1999 revenue: 7.2x; (h) 1999 EBITDA:
17.4x; and (i) 1999 EBIT: 18.8x. The average and median market values of
treasury method diluted common equity on October 16, 1998 as a multiple of
earnings per share for the following periods for Watson were as follows: (a)
TTM earnings per share: 36.7x; (b) 1998 earnings per share: 34.2x; and, (c)
1999 earnings per share: 28.6x.
CIBC Oppenheimer believes that two of the companies within the group, Mylan
Laboratories Inc. ("Mylan"), a generic pharmaceuticals company, and Forest
Laboratories, Inc. ("Forest"), a specialty pharmaceuticals company, are the
most comparable companies, based on profit margins and relative size. The
average values for Aggregate Value as a multiple of each of the indicated
statistics for Mylan and Forest were as follows: (a) TTM revenue: 6.1x; (b) TTM
EBITDA: 24.0x; (c) TTM EBIT: 28.4x; (d) 1998 revenue: 6.1x; (e) 1998 EBITDA:
27.0x; (f) 1998 EBIT: 32.3x; (g) 1999 revenue: 5.1x; (h) 1999 EBITDA: 16.8x;
and (i) 1999 EBIT: 18.7x. The average values for market value of treasury
method diluted common equity on October 16, 1998 as a multiple of earnings per
share for the following periods for Mylan and Forest were as follows: (a) TTM
earnings per share: 37.8x; (b) 1998 earnings per share: 34.0x; and, (c) 1999
earnings per share: 24.8x.
Applying these results to Watson's TTM results and the 1998 and 1999
financial projections for Watson prepared by independent research analysts
yielded implied market values for Watson ranging from $2.81 billion ($30.75 per
share) to $7.73 billion ($84.66 per share), with an average of $4.54 billion
($49.62 per share) and a median of $4.46 billion ($48.75 per share).
Watson Discounted Cash Flow Analysis. CIBC Oppenheimer derived an intrinsic
valuation of Watson's equity based on a discounted cash flow analysis similar
to the approach used to value TheraTech's equity (the "Watson Discounted Cash
Flow Analysis") based on financial projections through December 31, 2000
provided by Watson's management (the "Watson Management Projections"). In
consideration of Watson's estimated weighted average cost of capital and the
risk associated with achievement of the Watson Management Projections, CIBC
Oppenheimer used discount rates of 10%, 15% and 20% to calculate the present
value of each of the following: (i) Watson's estimated future cash flows from
June 30, 1998 to December 31, 2000, plus Watson's terminal value obtained by
capitalizing Watson's projected net income for the year ending December 31,
2000 at multiples of 25.0x, 27.5x and 30.0x and (ii) the sum of (a) Watson's
terminal value obtained by capitalizing Watson's projected net income for the
year ending December 31, 2000 at multiples of 25.0x, 27.5x and 30.0x, plus (b)
Watson's projected cash balance at December 31, 2000, less (c) Watson's
projected debt outstanding at December 31, 2000. The range of these terminal
value multiples was based on a range of multiples of net income at which the
Generic and Specialty Pharmaceuticals Companies currently trade.
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This valuation methodology produced a market value for Watson Common Stock
ranging from $3.60 billion ($39.36 per share) to $5.17 billion ($56.56 per
share), with an average of $4.33 billion ($47.39 per share) and a median of
$4.31 billion ($47.18 per share).
Watson Independent Research Analysts' Price Targets Analysis. CIBC
Oppenheimer conducted an analysis of the price targets and earnings estimates
of the independent research analysts who cover Watson. The high, low, average
and median price targets for Watson's Common Stock are $57, $50, $54 and $54.
The high, average and median price targets are all above Watson's closing stock
price on October 16, 1998. In addition, the analysts' earnings estimates fell
within a very narrow range of $1.43-$1.46 per share for 1998 and $1.72-$1.80
per share in 1999.
Contribution Analysis. CIBC Oppenheimer compared the relative contributions
(the "Contribution Analysis") of both TheraTech and Watson to tax affected net
income and net income. The Contribution Analysis based on projections for
TheraTech and for Watson derived from publicly available research reports
published by a variety of investment firms and research analysts indicated that
for the twelve months ended June 30, 1998, and the projected fiscal year ending
December 31, 1999: (a) the contribution of TheraTech to the pro forma tax
affected net income of the combined company was 3.1% and 4.2%, respectively and
(b) the contribution of TheraTech to the pro forma net income of the combined
company was 4.9% and 6.6%, respectively.
These percentages reflect the contributions provided by TheraTech to the
combined company based on these parameters. Assuming the lowest exchange rate
contemplated in the Merger Agreement (0.2663 of a share of Watson Common Stock
for each share of TheraTech Common Stock), TheraTech stockholders will own
approximately 6.0% of Watson (6.1% on a fully diluted basis) following the
Merger.
Historical Ratio of Relative Value. As part of CIBC Oppenheimer's analysis of
the exchange ratio to be received by TheraTech stockholders, CIBC Oppenheimer
considered the relative ratio of value of a share of TheraTech Common Stock per
share of Watson Common Stock over the past year. CIBC Oppenheimer found a range
of relative values of a share of TheraTech Common Stock per share of Watson
Common Stock of 0.1331 to 0.3754, with an average relative value of 0.2350 and
a median relative value of 0.2280.
Exchange Ratio Analysis. CIBC Oppenheimer calculated a range of appropriate
exchange ratios to be received by TheraTech stockholders. In calculating the
range, CIBC Oppenheimer used the range of average and median valuations of
TheraTech's Common Stock, based on the various valuation methods, of $8.70 to
$13.20 and the range of average and median valuations of Watson's Common Stock,
based on Mylan Laboratories and Forest Labs, of $43.71 to $53.63. In comparing
the low end of the range of valuations of TheraTech to the high end of the
range of valuations of Watson (and vice versa), the analysis yielded a range of
possible exchange ratios of 0.1622 to 0.3020.
The foregoing summary does not purport to be a complete description of the
analyses performed by CIBC Oppenheimer. A fairness opinion is the product of a
complex process and cannot necessarily be partially analyzed or readily
summarized. Examining portions of the analyses summarized above, without
considering the analyses as a whole, could create an incomplete view of the
processes underlying the CIBC Oppenheimer Opinion. In arriving at its opinion,
CIBC
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Oppenheimer did not attribute any particular weight to any analysis or fact
considered by it, but rather made qualitative judgments as to the significance
and relevance of each analysis and factor. The analyses were prepared by CIBC
Oppenheimer solely for purposes of providing its opinion as to the fairness of
the Exchange Ratio, from a financial point of view, to the stockholders of
TheraTech. Analyses based upon projections of future results are inherently
subject to substantial uncertainties and are not necessarily indicative of
actual future results, which may be significantly more or less favorable than
suggested by any analysis. Additionally, analyses relating to the values of
business do not purport to be appraisals or to reflect the prices at which
businesses may actually be sold or combined. Accordingly, CIBC Oppenheimer
expressed no opinion as to what the value of Watson Common Stock actually will
be subsequent to the Merger. As described above, CIBC Oppenheimer's Opinion and
presentation to TheraTech's Board of Directors was one of many factors taken
into consideration by TheraTech's Board of Directors in making its
determination to approve the Merger.
CIBC Oppenheimer is a nationally recognized investment banking firm. As part
of its investment banking services, it is regularly engaged in the valuation of
businesses and securities in connection with mergers and acquisitions and for
other purposes.
In the ordinary course of its business, CIBC Oppenheimer may actively trade
the securities of both TheraTech and Watson for its own account or for the
accounts of its customers and, accordingly, may at any time hold a long or
short position in such securities. CIBC Oppenheimer also provides equity
research coverage of both TheraTech and Watson. Steve Gerber, CIBC
Oppenheimer's research analyst covering TheraTech and Watson, may actively
trade the securities of both TheraTech and Watson and accordingly, may at any
time hold a position in such securities.
TheraTech has agreed to pay CIBC Oppenheimer a fee of $400,000 for rendering
its opinion in connection with the Merger, $200,000 of which was payable at the
time it delivered its fairness opinion to the Board of Directors and $200,000
of which was payable at the inclusion of its fairness opinion in this Proxy
Statement/Prospectus. Further, CIBC Oppenheimer will be paid a fee of 0.9% of
the transaction value for the Merger, upon the closing of the Merger which is
approximately $2.5 million. The fee payable for the fairness opinion will not
be credited against the fee payable upon the closing of the Merger. TheraTech
has also agreed to reimburse CIBC Oppenheimer for its reasonable out-of-pocket
expenses (including fees of its counsel), subject to certain adjustments, and
to indemnify CIBC Oppenheimer and certain related persons against certain
potential liabilities in connection with the engagement of CIBC Oppenheimer,
including certain potential liabilities under the federal securities laws.
TheraTech also retained William Blair to render certain financial advisory
and investment banking services to TheraTech in connection with the evaluation
of its strategic alternatives, including a possible business combination.
William Blair is a nationally recognized firm and, as part of its investment
banking activities, is regularly engaged in the valuation of businesses and
their securities in connection with merger transactions and other types of
strategic combinations and acquisitions. William Blair has acted as the lead
manager for TheraTech's public offerings and has received underwriting fees for
those services. In the ordinary course of its business, William Blair and its
affiliates actively trade TheraTech and Watson Common Stock for their own
accounts and for the accounts of their customers, and accordingly may hold a
long or short position in these securities.
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As consideration for William Blair's services, TheraTech agreed to pay
William Blair a fee of 0.6% of the transaction value of the Merger, upon the
closing of the Merger, which is approximately $1.8 million. In addition,
TheraTech has agreed to indemnify William Blair and its affiliates against
certain liabilities, including liabilities arising under applicable securities
laws.
RECOMMENDATION OF THE THERATECH BOARD
The TheraTech Board has unanimously approved the Merger Agreement and has
determined that the Merger is in the best interests of TheraTech and its
stockholders. The TheraTech Board has unanimously recommended approval of the
Merger Proposal by the TheraTech stockholders.
ACCOUNTING TREATMENT
Watson and TheraTech believe that the Merger will qualify as a pooling of
interests for accounting and financial reporting purposes, and have been so
advised by their respective independent public accountants. Under this method
of accounting, the assets and liabilities of Watson and TheraTech will be
combined based on the respective carrying values of the accounts in the
historical financial statements of each entity. Results of operations of the
combined company will include income and losses of Watson and TheraTech for the
entire fiscal period in which the combination occurs and the historical results
of operations of the separate companies for fiscal years prior to the Merger
will be combined and reported as the results of operations of the combined
company.
Consummation of the Merger is conditioned upon, among other things, the
receipt by Watson of a letter from its independent public accountants, dated
the Closing Date, stating that the Merger will qualify as a pooling of
interests for accounting purposes. In addition, consummation of the Merger is
conditioned upon TheraTech having received from its independent public
accountants a letter, dated the Closing Date, indicating that TheraTech has not
taken any action that would preclude it from entering into a transaction that
would be treated as a pooling of interests for accounting purposes.
The costs of merging the operations of Watson and TheraTech are expected to
result in a charge to Watson's earnings of approximately $14 million following
the merger.
DELISTING: EXCHANGE ACT REGISTRATION
Following completion of the Merger, it is expected that TheraTech Common
Stock will cease being traded on the Nasdaq National Market System ("Nasdaq
NMS") and that TheraTech's registration under the Securities Exchange Act of
1934, as amended (the "Exchange Act") will be terminated. Accordingly,
TheraTech will no longer be required to file periodic reports with the
Securities and Exchange Commission (the "SEC").
INTERESTS OF CERTAIN PERSONS IN THE MERGER
You should be aware that certain members of the management and the Board of
Directors of TheraTech have certain interests in the Merger in addition to
their interests as TheraTech stockholders.
Employment with Watson. In conjunction with the closing of the Merger,
TheraTech's employment agreements with Dinesh C. Patel, Ph.D., the Chairman,
President and Chief Executive
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Officer of TheraTech, and Charles D. Ebert, Ph.D., the Senior Vice President of
Research and Development of TheraTech, will be amended in certain respects
(collectively the "Amended Employment Agreements") but will otherwise remain in
full force and effect.
Under Dr. Patel's Amended Employment Agreement, he will remain the Chairman,
President and Chief Executive Officer of TheraTech with such duties as are
assigned to him by the Chief Executive Officer ("CEO") of Watson, and he will
report solely to the CEO of Watson. Dr. Patel will also hold the title of
Senior Vice President of Watson. Under Dr. Ebert's Amended Employment
Agreement, he will remain the Senior Vice President of Research and Development
of TheraTech, and will report to the CEO of TheraTech, or such other person as
is designated by the CEO of Watson.
Under Dr. Patel's existing Employment Agreement, Dr. Patel receives (a) a
base salary of $290,000 per annum in 1998, $350,000 in 1999, and $400,000 in
2000, (b) customary benefits consistent with the other officers of the
TheraTech, and (c) an annual bonus of up to 25% of his salary. In addition, Dr.
Patel will execute an Amendment to his Employment Agreement upon consummation
of the Merger which will give him (i) 80,000 options to purchase Watson Common
Stock, and (ii) an additional 10,000 options to purchase Watson Common Stock on
each of the first, second and third year anniversaries of the Merger. Under Dr.
Ebert's existing Employment Agreement, Dr. Ebert receives (a) a base salary of
$190,340 per annum, (b) customary benefits consistent with the other officers
of TheraTech and (iii) an annual bonus of up to 20% of his salary. In addition,
Dr. Ebert will execute an Amendment to his Employment Agreement upon
consummation of the Merger which will give him (a) 40,000 options to purchase
Watson Common Stock, and (b) 5,000 options to purchase Watson Common Stock on
each of the first, second and third year anniversaries of the Merger.
All options to purchase Watson Common Stock received by Dr. Patel and Dr.
Ebert under their respective Amendments to their Employment Agreements will be
granted at the fair market value of the underlying shares on the date of grant,
will be for a term of 10 years and will vest over a five year period, with the
first 20% vesting on the anniversary date of the grant and 20% on each
anniversary thereafter.
Each of the existing Employment Agreements provides that if TheraTech
terminates the Employment Agreement for any reason other than cause, the
employee will receive monthly severance benefits payable over a period of two
years in an aggregate amount equal to twice the employee's annual salary. Under
the Amended Employment Agreements, Drs. Patel and Ebert will waive their
existing rights to severance benefits to the extent triggered by the Merger.
Each of the existing Employment Agreements also prohibit Drs. Patel and Ebert
from competing with TheraTech for a period of one year after their termination
of their employment with TheraTech. In connection with the merger, each of Drs.
Patel and Ebert will execute an independent non-competition agreement which
will prohibit them from competing with Watson for a period of time after
consummation of the Merger. Dr. Patel will be prohibited from competing for
three years and Dr. Ebert will be prohibited from competing for two years after
consummation of the Merger.
Acceleration of Options. The vesting of options to acquire shares of
TheraTech Common Stock ("TheraTech Options") for certain individuals associated
with TheraTech will be accelerated by the Merger. TheraTech Options held by the
following persons as of November 18, 1998, will become
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immediately exercisable upon consummation of the Merger: (1) options held by
Alexander L. Searl, Senior Vice President and Chief Financial Officer of
TheraTech, to acquire 60,000 shares of TheraTech Common Stock; (2) options held
by Warren Dudley, Vice President Marketing and Sales of TheraTech, to acquire
80,000 shares of TheraTech Common Stock; (3) options held by Eric Aguiar, a
consultant to TheraTech, to acquire 80,000 shares of TheraTech Common Stock;
and (4) options held by Stefan Arver, a consultant to TheraTech, to acquire
50,000 shares of TheraTech Common Stock.
Assumption of Options. At the closing of the Merger, outstanding TheraTech
Options will be converted into the right to purchase a number of shares of
Watson Common Stock based upon the Exchange Ratio. Except as set forth above,
TheraTech Options issued pursuant to TheraTech's 1992 Amended and Restated
Directors' Stock Option Plan, the TheraTech 1992 Amended and Restated Employee
Stock Option Plan, and all other TheraTech Options will not be accelerated by
the Merger and will continue to vest in accordance with the vesting or
acceleration provisions contained in the agreements evidencing such TheraTech
Options. As of November 18, 1998, the directors and officers of TheraTech held
options currently exercisable for 1,732,655 shares of TheraTech Common Stock,
which upon consummation of the Merger will entitle the holders thereof to
purchase 461,401 shares of Watson Common Stock (assuming an Exchange Ratio of
0.2663).
Stockholder Voting Agreements. Dr. Patel and Dr. William I. Higuchi have
entered into voting agreements with Watson whereby they have agreed: (a) not to
sell, transfer, pledge, assign or otherwise dispose of, or enter into any
agreement, option or other arrangement or understanding with respect to the
sale, transfer, pledge, assignment or other disposition of the stock that they
hold in TheraTech to any person other than Watson or Watson's designee subject
to permitted dispositions consented to by Watson; (b) to grant irrevocable
proxies to, and appoint, any individual who shall be designated by Watson,
their proxy and attorney-in-fact to vote their stock at any meeting of the
stockholders of TheraTech in any circumstance where their vote, consent, or
other approval is sought in favor of the Merger, the adoption by TheraTech of
the Merger Agreement and the approval of the other transactions contemplated by
the Merger Agreement and the calling of the Special Meeting to consider any of
the foregoing, and against any alternative proposal or frustrating transaction;
and (c) to vote in favor of the Merger Agreement at any meeting of the
TheraTech stockholders called to vote upon the Merger Agreement or vote against
any other proposal or frustrating transaction. Each of the voting agreements
terminates upon the earliest of (i) one year from the date of the Merger
Agreement, (ii) the termination of the Merger Agreement or (iii) the closing of
the Merger. Notwithstanding (a) above, Dr. Higuchi is permitted to sell up to
65,000 shares of TheraTech's Common Stock for the limited purpose specified in
the voting agreement.
Indemnification and Directors and Officers Insurance for TheraTech Directors
and Officers. As part of the Merger Agreement, Watson has agreed to cause
TheraTech to indemnify each present and former director and officer of
TheraTech against costs or expenses incurred in connection with any claim or
lawsuit, whether civil or criminal, arising out of or pertaining to matters
existing or occurring at or prior to the Effective Time to the fullest extent
that TheraTech would have been able to indemnify such individuals under
applicable law. Furthermore, Watson has agreed to cause TheraTech to maintain
in effect directors and officers liability insurance policy for a two year
period after the consummation of the Merger, subject to market availability and
cost limitations, covering the same persons who are currently covered by
TheraTech's director's and officer's liability insurance policy.
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FEDERAL SECURITIES LAWS CONSEQUENCES / RESALE RESTRICTIONS
All shares of Watson Common Stock received by TheraTech stockholders in the
Merger will be registered under the Securities Act of 1933 (the "Securities
Act") pursuant to the registration statement and will be freely transferable,
except that shares of Watson Common Stock received by persons who are deemed to
be "affiliates" (as such term is defined under the Securities Act) of TheraTech
at the time of the Special Meeting may be resold by them only in transactions
permitted by the resale provisions of Rule 145 promulgated under the Securities
Act (or Rule 144 in the case of such persons who become affiliates of Watson)
or as otherwise permitted under the Securities Act. Rule 145(d) under the
Securities Act requires that, for specified periods, such sales may be made in
compliance with the volume limitations, manner of sale provisions and current
information requirements of Rule 144 under the Securities Act. The volume
limitations should not pose any material limitations on any TheraTech
stockholder who owns less than one percent of outstanding Watson Common Stock
after the Merger (approximately 89,475,000 shares of Watson Common Stock were
outstanding as of November 23, 1998, after giving effect to the shares to be
issued in the Merger) unless, pursuant to Rule 144, such stockholder's shares
are required to be aggregated with those of another stockholder. Persons who
may be deemed to be affiliates of TheraTech or Watson generally include
individuals or entities that control, are controlled by, or are under common
control with, such party, and may include certain officers and directors of
such party as well as principal stockholders of such party. The Merger
Agreement requires TheraTech to cause each of its affiliates to execute a
written agreement to the effect that such person will not offer to sell,
transfer or otherwise dispose of any of the shares of Watson Common Stock
issued to such person in or pursuant to the Merger unless (a) such sale,
transfer or other disposition has been registered under the Securities Act, (b)
such sale, transfer or other disposition is made in conformity with Rule 145
under the Securities Act or (c) in the opinion of counsel or pursuant to a "no-
action" letter obtained from the SEC by such person, such sale, transfer or
other disposition is exempt from registration under the Securities Act. In
order to qualify for pooling of interests treatment, an affiliate of either
Watson or TheraTech may not sell (subject to certain de minimis exceptions) or
in any other way reduce said affiliate's risk relative to the shares of Watson
Common Stock until after such time as Watson publishes results covering at
least 30 days of combined operations of Watson and TheraTech. TheraTech and
Watson have each agreed that their respective affiliates will not engage in any
such transactions subject to certain de minimis exceptions. See "The Merger--
Accounting Treatment" on page 38 and "The Merger Agreement--Certain Covenants"
on page 53.
REGULATORY APPROVALS
Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR
Act"), and the rules promulgated by the U.S. Federal Trade Commission (the
"FTC"), the Merger cannot be consummated until notifications have been given
and certain information has been furnished to the FTC and the Antitrust
Division of the U.S. Department of Justice ("Antitrust Division") and specified
waiting period requirements have been satisfied. Watson and TheraTech each
filed notification and report forms under the HSR Act with the FTC and the
Antitrust Division on or before November 18, 1998. At any time before or after
the Effective Time, even if the HSR Act waiting period has expired, the
Antitrust Division, the FTC or any state could take action under the antitrust
laws as it deems necessary or desirable. Such action could include seeking to
enjoin the consummation of the Merger or seeking divesture of TheraTech or
businesses or products of Watson
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or TheraTech by Watson. Private parties may also seek to take legal action
under the antitrust laws under certain circumstances.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
The obligations of Watson and TheraTech to complete the Merger are
conditioned on the receipt of opinions of Kirkland & Ellis and D'Ancona &
Pflaum, respectively (which opinions have been rendered), to the effect that
the Merger will be treated for federal income tax purposes as a reorganization
within the meaning of Section 368(a) of the Internal Revenue Code (the "Code").
See "The Merger Agreement--Conditions to Closing." Such tax opinions have been
filed as exhibits to the registration statement of which this Proxy
Statement/Prospectus is a part. If the Merger is treated as a reorganization
within the meaning of Section 368(a) of the Code, the following are the
expected results:
Consequences to TheraTech Stockholders. Generally no gain or loss will be
recognized by TheraTech stockholders upon their receipt of Watson Common Stock
as a result of the Merger (except to the extent of cash received in lieu of a
fractional share of Watson Common Stock).
The aggregate tax basis of Watson Common Stock received in the Merger will be
the same as the aggregate tax basis of TheraTech Common Stock surrendered in
exchange therefor, excluding any basis allocated to fractional shares for which
cash is received.
The holding period, for federal income tax purposes, of each share of Watson
Common Stock received by each TheraTech stockholder in the Merger will include
the period during which the TheraTech stockholder held his or her TheraTech
Common Stock surrendered in exchange therefor, provided that the TheraTech
Common Stock is held as a capital asset at the time of the Merger.
Cash payments received in lieu of a fractional share will be treated as if a
fractional share of Watson Common Stock had been issued in the Merger and then
redeemed by Watson. A TheraTech stockholder receiving such cash should
generally recognize gain or loss upon such payment equal to the difference (if
any) between the amount of cash received and the stockholder's basis in the
fractional share (which will be a pro rata portion of the stockholder's basis
in the stockholder's TheraTech Common Stock).
Consequences to TheraTech and Watson. The Merger will result in no gain or
loss to Watson or TheraTech.
Limitation on Opinion and Discussion. The foregoing discussion is intended
only as a summary of material federal income tax consequences of the Merger
under current law and does not purport to be a complete analysis or description
of all potential tax effects of the Merger. The summary does not address the
tax consequences that may be important to stockholders subject to special tax
treatment, such as insurance companies, corporations subject to the alternative
minimum tax, banks, dealers in securities, tax exempt organizations, or foreign
persons, or to stockholders who acquired their share of TheraTech Common Stock
as compensation. No information is provided herein with respect to the tax
consequences, if any, of the Merger under foreign, state, local or other tax
laws. The discussion is based on the current provisions of the Code and
Treasury Regulations promulgated thereunder, published Revenue Rulings,
published Revenue Procedures and existing administrative rulings and court
decisions in effect as of the date hereof. All of the foregoing are subject to
change
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(which could be retroactive) and any such change could affect the accuracy of
this discussion. No ruling on any of the issues discussed above will be sought
from the Internal Revenue Service (the "IRS"). Therefore the IRS is not
precluded from challenging the tax free reorganization status of the Merger.
THERATECH STOCKHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE
SPECIFIC TAX CONSEQUENCES TO THEM OF THE MERGER, INCLUDING TAX RETURN REPORTING
REQUIREMENTS, THE APPLICABILITY AND EFFECT OF FEDERAL, STATE, LOCAL AND OTHER
APPLICABLE TAX LAWS AND THE EFFECT OF ANY PROPOSED CHANGES IN THE TAX LAWS.
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INFORMATION REGARDING WATSON
Watson is a fully integrated pharmaceutical company engaged in the research
and development, production, marketing and distribution of off-patent and
branded pharmaceutical products.
Watson has made significant recent acquisitions of businesses, products and
technologies. During 1997, Watson 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, in February 1998. Watson also made several product
acquisitions during 1997 and 1998, including the acquisition of certain oral
contraceptive products from G.D. Searle & Co. and the acquisition of an anti-
hypertensive product from Rhone-Poulenc Rorer. Watson continues regularly to
review potential opportunities to acquire or invest in other technologies,
products or product rights and businesses compatible with its existing
business.
Watson's principal executive offices are located at 311 Bonnie Circle,
Corona, California 91720, and its telephone number is (909) 270-1400.
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INFORMATION REGARDING THERATECH
The information in this section pertains to the business of TheraTech as it
is currently conducted without giving effect to the Merger.
TheraTech develops advanced, controlled-release and other drug delivery
products which administer drugs through the skin, by oral delivery to the
gastrointestinal tract, through tissues in the oral cavity, through absorption
in the lungs and by other means. TheraTech believes its products provide
advantages over existing controlled-release drug delivery products and
conventional oral, injectable, inhalation and continuous infusion methods by
increasing efficacy, safety, bioavailability and/or patient compliance and
comfort. TheraTech focuses its research and development efforts on the design
and development of improved delivery systems for off-patent and proprietary
drugs.
Historically, TheraTech's product development activities have been conducted
independently or pursuant to collaborative research and development agreements
with pharmaceutical companies. For products developed independently by
TheraTech, marketing rights may later be transferred to pharmaceutical and
other companies under licensing and marketing agreements. These agreements
normally provide for TheraTech to receive payments in various forms, which can
include licensing fees and other payments upon the execution of an agreement,
milestone payments upon achievement of technical and regulatory goals, and
periodic payments in the form of cost reimbursements for product development
and clinical evaluation of a specified product, including a portion of general
and administrative expenses. The client generally receives marketing rights to
the product and TheraTech generally retains manufacturing rights, for which it
recognizes product sales revenue at the time TheraTech ships product to the
client and/or at the time the client sells product to its customers.
To date, four research and development programs have resulted in
commercialized products. The FDA has cleared for marketing three of TheraTech's
developed products. Two of these products, the Androderm(R) two and one half
milligram (2.5 mg) testosterone transdermal system for men and the Alora(R)
estradiol transdermal system for women, received marketing clearances within
one year of their respective initial submissions. Prior to 1997, the
testosterone transdermal system had received marketing clearances in Brazil,
Denmark, Finland, Ireland, South Korea, Sweden, Switzerland and the United
Kingdom, and during 1997 marketing clearances were received in Australia,
Germany, Norway and certain Central and South American countries. During 1997,
the FDA cleared for marketing TheraTech's third product, its Androderm five
milligram (5 mg) testosterone transdermal system. This clearance was received
within six months of filing its supplemental New Drug Application ("sNDA") with
the FDA. One of TheraTech's marketing partners, together with that partner's
sublicensees, have obtained regulatory approval to market in certain European
countries TheraTech's fourth product, its nitroglycerin transdermal system. An
ANDA for TheraTech's nitroglycerin product is under review by the FDA.
Additionally, TheraTech has more than 20 other drug delivery products under
development and testing in the United States, Europe, Japan and South Korea, of
which nine are in various stages of clinical development.
TheraTech's principal executive offices are located at 417 Wakara Way, Salt
Lake City, Utah 84108 and its telephone number is (801) 588-6200.
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SPECIAL MEETING OF STOCKHOLDERS
DATE, TIME AND PLACE OF MEETING
The Special Meeting will be held on January 14, 1999 at 9 a.m., local time,
at the offices of TheraTech, located at 417 Wakara Way, Salt Lake City, Utah.
TheraTech intends to mail this Proxy Statement/Prospectus and accompanying
proxy on or about December 7, 1998, to all TheraTech stockholders entitled to
vote at the Special Meeting.
RECORD DATE AND OUTSTANDING SHARES
Only holders of record of TheraTech Common Stock at the close of business on
November 23, 1998 (the "Record Date"), are entitled to notice of and to vote at
the Special Meeting. As of the close of business on the Record Date, there were
21,576,676 shares of TheraTech Common Stock outstanding and entitled to vote at
the Special Meeting, which were held of record by approximately 220
stockholders. Each TheraTech stockholder is entitled to one vote for each share
of TheraTech Common Stock held as of the Record Date. Representatives of Ernst
& Young LLP, TheraTech's independent accountants, are expected to be present at
the Special Meeting with the opportunity to make a statement, if they desire to
do so, and they are expected to be available to respond to appropriate
questions.
VOTING OF PROXIES
The TheraTech proxy accompanying this Proxy Statement/Prospectus is solicited
on behalf of the Board of Directors of TheraTech for use at the Special Meeting
and at any adjournment or postponement thereof. Stockholders are requested to
complete, date and sign the accompanying proxy and promptly return it in the
accompanying envelope. All proxies that are properly executed and returned, and
that have not been revoked, will be voted at the Special Meeting, and any
adjournment or postponement thereof, in accordance with the instructions
indicated on the proxies or, if no direction is indicated, to approve the
Merger Agreement. The TheraTech Board of Directors does not presently intend to
bring any business before the Special Meeting other than the specific proposal
referred to in this Proxy Statement/Prospectus and specified in the notice of
the Special Meeting. So far as is known to TheraTech's Board of Directors, no
other matters are to be brought before the Special Meeting. As to any business
that may properly come before the Special Meeting and any adjournment or
postponement thereof, however, it is intended that proxies, in the form
enclosed, will be voted in respect thereof in accordance with the judgment of
the persons voting such proxies.
REVOCABILITY OF PROXIES
A TheraTech stockholder who has given a proxy may revoke it at any time
before it is exercised at the Special Meeting, by (i) delivering to the
Secretary of TheraTech (by any means, including facsimile) a written notice
bearing a date later than the date of the proxy, stating that the proxy is
revoked, (ii) signing and so delivering a proxy relating to the same shares and
bearing a later date prior to the vote at the Special Meeting or (iii)
attending the Special Meeting and voting in person (although attendance at the
Special Meeting will not, by itself, revoke a proxy). Any written notice of
revocation or subsequent proxy should be sent to Alexander L. Searl at
TheraTech on or before the taking of the vote at the Special Meeting.
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VOTE REQUIRED
Approval of the Merger Agreement requires the affirmative vote of the holders
of a majority of the outstanding shares of TheraTech Common Stock entitled to
vote. As of the date of this Proxy Statement/Prospectus, the directors,
executive officers and affiliates of TheraTech, as a group, own approximately
28% of the outstanding shares of TheraTech Common Stock entitled to vote at the
Special Meeting. Presently, TheraTech expects that these shares will be voted
in favor of the merger, although no agreements exist to that effect, except for
those agreements disclosed in the following sentence. Dinesh C. Patel, Ph.D.
and William I. Higuchi, Ph.D. have contractually agreed to vote all of the
shares of TheraTech Common Stock that they beneficially own in favor of the
Merger Agreement. On the Record Date, such stockholders beneficially owned
approximately 23% of the then outstanding shares of TheraTech Common Stock. See
"The Merger--Interests of Certain Persons in the Merger" on page 38. No vote of
the stockholders of Watson is required to approve the Merger nor is such a vote
being solicited by the Board of Directors of Watson.
QUORUM; ABSTENTIONS; BROKER NON-VOTES
The presence, in person or by proxy, of a majority of the shares of TheraTech
Common Stock outstanding on the Record Date is necessary to constitute a quorum
for the transaction of business at the Special Meeting. Abstentions and, if
applicable, broker non-votes (proxies that are returned by the record holder,
typically a brokerage house, but not voted on a particular matter because no
instructions were received from the beneficial owner) will each be included in
determining whether a quorum is present. Because the Merger Agreement must be
approved by the holders of a majority of the outstanding shares of TheraTech
Common Stock, abstentions and broker non-votes will each have the same effect
as a vote against the Merger Agreement.
SOLICITATION OF PROXIES AND EXPENSES
Each of Watson and TheraTech will pay its own expenses (including, without
limitation, financial, legal and tax advice) incurred in connection with the
Merger and the transactions contemplated thereby, except that the parties have
agreed to share equally all expenses incurred in connection with the printing
and mailing of this Proxy Statement/Prospectus to the TheraTech stockholders.
Watson and TheraTech will each pay their own professional fees incurred in
connection with preparation of this Proxy Statement/Prospectus. Copies of the
solicitation materials will be furnished to banks, brokerage houses,
fiduciaries and custodians holding in their names shares of TheraTech's Common
Stock beneficially owned by others to forward to such beneficial owners.
TheraTech may reimburse persons representing beneficial owners of TheraTech
Common Stock for their costs of forwarding solicitation materials to such
beneficial owners. Original solicitation of proxies by mail may be supplemented
by telephone, telegram, letter or personal solicitation by directors, officers
or other regular employees of TheraTech. No additional compensation will be
paid to directors, officers and other regular employees for such services.
TheraTech will bear the cost of the solicitation of proxies from its
stockholders. TheraTech has engaged a professional proxy solicitation firm,
Corporate Investor Communications, Inc., to assist in such solicitation for an
estimated fee of $10,000, including disbursements.
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STOCKHOLDER PROPOSALS
If the Merger is consummated, no annual meeting of TheraTech's public
stockholders will occur in 1999. If the Merger is not consummated, a
stockholder proposal to be considered under SEC Rule 14a-8 for presentation at
the Annual Meeting of Stockholders of TheraTech to be held in 1999 must be
received by Alexander L. Searl, Secretary, TheraTech, Inc., 417 Wakara Way,
Salt Lake City, Utah, 84108, no later than December 24, 1998.
Under amended Rules 14a-4 and 14a-5, a company is permitted discretionary
voting authority in those instances in which the company did not have notice of
the matter by a date more than 45 days before the month and day in the current
year corresponding to the date on which the company first mailed its proxy
materials for the prior year's Annual Meeting of Stockholders, or by a date
established by an overriding advance notice provision in a company's articles
of incorporation or bylaws. TheraTech has not implemented such an advance
notice provision. Accordingly, in connection with TheraTech's 1999 Annual
Meeting of Stockholders, if one is held, the date after which notice of a
stockholder proposal submitted outside of Rule 14a-8 will be considered
untimely is March 8, 1999.
BOARD RECOMMENDATION
THE BOARD OF DIRECTORS OF THERATECH BELIEVES THAT THE MERGER IS IN THE BEST
INTERESTS OF THERATECH AND ITS STOCKHOLDERS AND THEREFORE UNANIMOUSLY
RECOMMENDS A VOTE FOR APPROVAL OF THE MERGER PROPOSAL.
STOCKHOLDERS SHOULD NOT SEND ANY STOCK
CERTIFICATES WITH THEIR PROXY CARDS.
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THE MERGER AGREEMENT
The following is a brief summary of the material provisions of the Merger
Agreement, a copy of which is attached as Appendix A to this Proxy
Statement/Prospectus and is incorporated herein by reference. The description
of the Merger Agreement contained in the Proxy Statement/Prospectus is not
complete and is qualified in its entirety by reference to the full text of the
Merger Agreement.
GENERAL
The Board of Directors of both Watson and TheraTech, meeting separately, each
authorized the execution and performance of the Merger Agreement.
EFFECTIVE TIME; EFFECT OF MERGER
If the Merger Agreement is approved and adopted by the requisite vote of the
TheraTech stockholders, and all other conditions to the obligations of the
parties to consummate the Merger are satisfied or waived, the Merger will
become effective upon the Effective Time. As of the Effective Time, the Sub
will be merged into TheraTech and the separate corporate existence of the Sub
will terminate and each share of common stock of the Sub will be converted into
one share of TheraTech Common Stock. In addition, upon consummation of the
Merger, TheraTech will continue as the surviving corporation of the Merger and
as a wholly-owned subsidiary of Watson. Watson will issue to the holders of
TheraTech Common Stock the aggregate number of shares of Watson Common Stock
which is equal to the Exchange Ratio multiplied by the number of outstanding
shares of TheraTech Common Stock, subject to adjustment as described in
"Conversion of Shares" below.
CLOSING DATE
Consummation of the Merger and the other transactions contemplated by the
Merger Agreement will take place three business days after the satisfaction of
all of the conditions set forth in the Merger Agreement, or such other date as
agreed upon by the parties.
CERTIFICATE OF MERGER
Upon the satisfaction or waiver of all of the conditions to the Merger set
forth in the Merger Agreement, and provided that the Merger Agreement has not
been terminated, Watson and TheraTech will cause a Certificate of Merger to be
prepared, executed, delivered and filed with the Secretary of State of
Delaware, upon which filing the Merger will become effective.
CONVERSION OF SHARES
Each share of your TheraTech Common Stock will be exchanged for not less than
0.2663 or more than 0.29589 shares of Watson Common Stock. Subject to the above
minimum and maximum, the exact Exchange Ratio of Watson Common Stock that you
will receive for each share of your TheraTech Common Stock will be calculated
as follows: twelve (12) divided by the Average Closing Price of Watson Common
Stock for the ten (10) consecutive trading days ending on the second trading
day immediately prior to the Closing Date.
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If the Average Closing Price of Watson Common Stock is either at or between
$40.56 and $45.06, pursuant to the Exchange Ratio a portion of a share of
Watson Common Stock having a market value at that time of $12.00 (as of the
date the Exchange Ratio is determined, based on the Average Closing Price of
Watson Common Stock) will be issued for each share of TheraTech Common Stock.
However, above a trading price of $45.06 per share of Watson Common Stock,
there is no limit on the value of Watson Common Stock to be issued to TheraTech
stockholders in the Merger. Conversely, below a trading price of $40.56, there
is no minimum value of Watson Common Stock to be issued to TheraTech
stockholders in the Merger.
If from October 23, 1998 through the Effective Time, the outstanding shares
of Watson Common Stock or TheraTech Common Stock are changed into a different
number of shares or a different class as a result of a stock split, reverse
stock split, stock dividend, subdivision, reclassification, split, combination,
exchange, recapitalization or other similar transaction, the Exchange Ratio and
the Average Closing Price will be appropriately adjusted so that the holders of
shares of TheraTech Common Stock will receive the consideration contemplated by
the terms of the Merger Agreement. From October 23, 1998 through the date of
this Proxy Statement/Prospectus, no such actions have occurred and none are
contemplated.
A VOTE TO APPROVE AND ADOPT THE MERGER AGREEMENT BY THERATECH'S STOCKHOLDERS
WILL BE DEEMED APPROVAL OF THE EXCHANGE RATIO AND ANY ADJUSTMENTS THERETO.
EXCHANGE OF SHARES
Watson has authorized American Stock Transfer & Trust Company to serve as
exchange agent (the "Exchange Agent") for the exchange of certificates
representing TheraTech Common Stock for certificates representing Watson Common
Stock and for the payment of cash in lieu of fractional shares that would
otherwise be issued as described above. Promptly after the Effective Time, but
no later than ten (10) business days after the Effective Time, Watson will
deliver to the Exchange Agent certificates representing Watson Common Stock
representing the number of whole shares of Watson Common Stock which the
holders of TheraTech Common Stock are entitled to receive in connection with
the Merger as well as cash for the payment of fractional share interests.
Promptly after the Effective Time, Watson is required to cause the Exchange
Agent to mail to each record holder of TheraTech Common Stock a letter of
transmittal (the "Letter of Transmittal") and instructions for use in effecting
the surrender of the certificates representing TheraTech Common Stock for
exchange and payment. Delivery will be effected and risk of loss and title to
shares of TheraTech Common Stock represented by the TheraTech Common Stock
certificates will pass only upon proper delivery of the certificate
representing TheraTech Common Stock to the Exchange Agent. Upon surrender to
the Exchange Agent of a certificate representing TheraTech Common Stock,
together with a duly executed Letter of Transmittal, the holder of such
TheraTech Common Stock will be entitled to receive in exchange therefor one or
more certificates representing that number of whole shares of Watson Common
Stock to which such holder of TheraTech Common Stock will have become entitled,
and a check representing a cash payment for any fractional share interests. No
interest will be paid or accrued on the cash payable upon surrender of
certificates representing TheraTech Common Stock.
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From and after the Effective Time, until surrendered, each certificate
representing TheraTech Common Stock will be deemed for all corporate purposes
to evidence the ownership of the number of whole shares of Watson Common Stock
into which such shares of TheraTech Common Stock have been converted. Unless
and until any such certificates are so surrendered, the holder of such
TheraTech Common Stock certificates will not be entitled to receive payment of
any dividends on such shares of Watson Common Stock payable to the holders
thereof after the Effective Time. Upon surrender of the certificate
representing TheraTech Common Stock, the holder thereof will receive
certificates representing the number of whole shares of Watson Common Stock to
which such holder will be entitled and the amount of dividends or other
distributions that will have been payable to holders of record of Watson Common
Stock on or after the Effective Time with respect to such shares of Watson
Common Stock, without interest. Any dividends payable to holders of record of
Watson Common Stock as of any record date prior to the Effective Time will not
be payable to holders of TheraTech Common Stock.
After the Merger, each holder of TheraTech Common Stock will thereafter cease
to have any rights with respect to such shares of TheraTech Common Stock,
except for the right to receive, without interest, shares of Watson Common
Stock and cash for fractional interests of Watson Common Stock upon the
surrender of the certificate representing such shares of TheraTech Common
Stock. Each share of TheraTech capital stock held in treasury by TheraTech or
owned by Watson or any of its subsidiaries at the Effective Time will cease to
be outstanding and will be canceled and retired without payment of any
consideration therefor.
At or after the Effective Time, there will be no transfers on the stock
record books of TheraTech of shares of TheraTech Common Stock which were
outstanding immediately prior to the Effective Time. In the event of a transfer
of ownership of TheraTech Common Stock which is not registered in the stock
record books of TheraTech, a certificate representing the proper number of
shares of Watson Common Stock, together with a check for the cash to be paid in
lieu of fractional shares, if any, and unpaid dividends and distributions, if
any, may be issued to such a transferee if the certificate representing
TheraTech Common Stock is presented to the Exchange Agent, accompanied by all
documents required to evidence and effect such transfer and to evidence that
any applicable stock transfer taxes have been paid.
No fractional shares of Watson Common Stock will be issued upon consummation
of the Merger. In lieu thereof, each TheraTech stockholder who would otherwise
be entitled to a fractional share will be paid an amount of cash, without
interest, equal to such fractional proportion of the Average Closing Price per
share of Watson Common Stock.
A stockholder must provide any appropriate affidavit to TheraTech, as the
surviving corporation, if any certificate is lost, stolen or destroyed.
Further, if TheraTech requires, the TheraTech stockholder must also indemnify
TheraTech against any claim relating to the TheraTech Common Stock certificate
before TheraTech issues to such stockholder the consideration for such
share(s).
The Exchange Agent will deliver to Watson any Watson Common Stock or checks
issued for fractional shares which remain unclaimed one year after the
Effective Date. Thereafter, TheraTech stockholders must look only to Watson for
payment of their consideration on their TheraTech shares.
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STOCKHOLDERS SHOULD NOT SEND STOCK CERTIFICATES WITH THEIR PROXY CARDS.
FOLLOWING THE EFFECTIVE DATE OF THE MERGER, THERATECH'S STOCKHOLDERS WILL BE
PROVIDED WITH A LETTER OF TRANSMITTAL AND INSTRUCTIONS RELATING TO THE EXCHANGE
OF THEIR STOCK CERTIFICATES.
THERATECH OPTIONS
Under the Merger Agreement, each of the outstanding options under TheraTech's
1992 Amended and Restated Employee Stock Option Plan, under TheraTech's 1992
Amended and Restated Directors' Stock Option Plan or otherwise will become an
option to purchase a number of whole shares of Watson Common Stock equal to the
number of shares of TheraTech Common Stock into which such TheraTech Option is
exercisable immediately prior to the Effective Time multiplied by the Exchange
Ratio (rounded to the nearest whole share with 0.5 rounded upward) at an option
exercise price determined by dividing the exercise price of such option
immediately prior to the Effective Date by the Exchange Ratio (the option price
per share, as so determined, being rounded to the nearest full cent with $0.005
rounded upward).
The following table sets forth the aggregate number of shares outstanding
under each of TheraTech's stock option plans and granted outside of the plans:
<TABLE>
<CAPTION>
AS OF
OCTOBER 31, 1998
----------------
<S> <C>
1992 Amended and Restated Employees' Stock Option
Plan............................................... 2,459,012
1992 Amended and Restated Directors' Stock Option
Plan............................................... 229,000
Options Granted Outside the Plans................... 301,750
---------
Total........................................... 2,989,762
=========
</TABLE>
Certain options issued under TheraTech's 1992 Amended and Restated Employee
Stock Option Plan, whether or not then exercisable, will automatically become
fully vested and immediately exercisable upon consummation of the Merger. As of
the Effective Time, the provisions of TheraTech's option plans providing for
issuance or grant of any additional options to purchase TheraTech's Common
Stock will be deleted. The options previously granted will remain subject to
TheraTech's option plans, with all actions to be taken under such plans after
the Effective Date by Watson's Board of Directors or a committee thereof. See
"Merger--Interests of Certain Persons in the Merger" on page 38.
Watson is required to register the shares of Watson Common Stock issuable
upon exercise of the TheraTech Options within 60 days after the Closing Date.
Watson will advise holders of TheraTech Options when the shares have been
registered and if applicable, when such registration is effective.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various representations and warranties. The
representations and warranties of Watson and Sub relate to, among other things:
(a) Watson's, Sub's and all material subsidiaries of Watson's existence,
standing and corporate authority; (b) the authorization of the Merger and the
Merger Agreement and ancillary documents executed in connection therewith by
Watson and Sub; (c) the absence of restrictions and conflicts with the Merger
Agreement; (d) the
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accuracy of Watson's reports filed with the SEC; (e) the use of brokers in
connection with the Merger; (f) the receipt of an opinion of Watson's financial
advisor; (g) the authorization and validity of shares of Watson Common Stock to
be issued in the Merger; (h) the capitalization of Watson and Sub; (i) the
accuracy of information in this Proxy Statement/Prospectus; (j) the tax and
accounting treatment of the Merger; and (k) the absence of certain changes with
respect to Watson and its subsidiaries since June 30, 1998.
The representations and warranties of TheraTech relate to, among other
things: (a) TheraTech's and each of its subsidiaries' organization, good
standing and corporate authority; (b) the capitalization of TheraTech; (c) the
ownership of its subsidiaries; (d) the lack of other ownership interests; (e)
TheraTech's constituent documents; (f) TheraTech's authorization of the Merger
and Merger Agreement and ancillary documents executed in connection therewith;
(g) the absence of restrictions and conflicts with the Merger and the Merger
Agreement; (h) TheraTech's compliance with laws; (i) TheraTech's compliance
with the rules and regulations of the FDA, of comparable foreign organizations
and other related laws; (j) the maintenance of its books and records; (k) the
accuracy of TheraTech's reports filed with the SEC; (1) the nature of its
accounts receivable; (m) the nature of its inventory; (n) its bank accounts;
(o) its intellectual property; (p) its title to property; (q) its owned and
leased real estate; (r) its existing contracts; (s) its insurance; (t) its
existing litigation; (u) its warranties; (v) products liability; (w)
arbitration; (x) taxes; (y) Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), matters; (z) its labor matters; (aa) certain environmental
matters; (bb) the interim conduct of its business; (cc) affiliated
transactions; (dd) its significant customers, suppliers, joint venture partners
and employees; (ee) the absence of certain changes with respect to TheraTech
and its subsidiaries; (ff) the absence of bribes; (gg) the absence of
indemnifiable claims; (hh) the absence of undisclosed liabilities; (ii) the
employees of TheraTech and its subsidiaries; (jj) Year 2000 compliance; (kk)
the use of brokers in connection with the Merger; (ll) the tax and accounting
treatment of the Merger; (mm) the receipt of an opinion of TheraTech's
financial advisor; (nn) the accuracy of information in this Proxy
Statement/Prospectus; and (oo) the non-applicability of anti-takeover statutes.
CERTAIN COVENANTS
Each of Watson and TheraTech has agreed, among other things, to use its
reasonable efforts to: (a) proceed promptly to make or give the necessary
applications, notices, requests and filings in order to obtain the HSR Act
approvals; (b) cooperate with the other and use commercially reasonable efforts
to: (i) receive all necessary and appropriate consents of third parties
required in connection with the Merger, (ii) satisfy all requirements
prescribed by law and (iii) effect the Merger at the earliest practicable date;
and (c) cooperate with the other in the preparation of the registration
statement and this Proxy Statement/Prospectus.
Between October 23, 1998 and the earlier of the termination of the Merger
Agreement and the Effective Date, TheraTech has agreed that, unless otherwise
consented to in writing by Watson, it will, and it will cause each of its
subsidiaries to: (a) conduct their operations in the ordinary course,
consistent with past practices; (b) use commercially reasonable efforts to
preserve intact their businesses; (c) refrain from amending their Certificates
of Incorporation or By-Laws or other governing instruments; (d) promptly notify
Watson of any material emergency or other material event effecting TheraTech;
(e) promptly deliver to Watson copies of all SEC filings made by TheraTech
after the date of the Merger Agreement; (f) refrain from changing its
capitalization in any
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manner after the Effective Date or grant any severance or termination package,
other than in the ordinary course of business; (g) refrain from selling,
licensing or disposing of intellectual property, material assets or capital
stock or enter into any merger, consolidation, joint venture, reorganization,
recapitalization, or partial or complete liquidation; (h) refrain from entering
into any material contract or arrangement or amend or terminate certain
existing contracts; (i) refrain from making loans or capital contributions to,
or investments in, any person or entity; (j) not settle or initiate litigation,
or make capital expenditures in excess of specified amounts; (k) not increase
the salaries of its employees or pay bonuses in excess of certain specified
amounts; (l) not encumber its assets; (m) not enter into transactions with any
related parties; (n) maintain insurance; (o) not waive any material right; (p)
not make changes in accounting methods or alter the manner of keeping its books
and records; (q) not borrow any money or guarantee any debt of any other person
or entity; (r) not hire or terminate any employee whose salary exceeds $75,000;
(s) not adopt or modify any benefit plan; (t) not pay any liability outside the
ordinary course of business; and (v) not pay any dividends or redeem any stock.
In addition Watson has agreed, unless TheraTech otherwise consents in
writing, to, and to cause its subsidiaries to (a) promptly deliver to TheraTech
all copies of any SEC filings made by Watson after the date of the Merger
Agreement; (b) promptly notify TheraTech of any material emergency or other
material event affecting Watson; (c) refrain from amending its Articles of
Incorporation or By-Laws or comparable governing instruments; and (d) refrain
from taking any action which would cause trading of Watson Common Stock on the
NYSE to halt.
INDEMNIFICATION OF DIRECTORS
For a period of two years after consummation of the Merger, Watson has agreed
to cause TheraTech to maintain a director's and officer's liability insurance
policy covering those persons who are currently covered by TheraTech's
director's and officer's liability insurance policy. The coverage must be in an
amount and scope at least as favorable as TheraTech's existing coverage to the
extent such insurance is available in the market; provided that Watson is not
required to pay an annual premium for the insurance in excess of 150% of the
last annual premium paid by TheraTech prior to the Merger Agreement. However,
Watson must purchase as much coverage as possible for that amount.
ALTERNATIVE PROPOSALS
For purposes of the Merger Agreement, an "Alternative Proposal" means (a) a
tender offer or exchange offer for 25% or more of the then outstanding shares
of TheraTech Common Stock; (b) a merger, consolidation or other business
combination with TheraTech or any of its subsidiaries, or any agreement or
letter of intent or understanding relating to any such transaction; (c) any
sale, lease, exchange, mortgage, pledge, transfer, or other disposition
(whether in one transaction or a series of related transactions) involving a
substantial part of TheraTech's consolidated assets, or any agreement or letter
of intent or understanding relating to such transaction; (d) the acquisition by
any third party (other than Watson or one of its subsidiaries) of beneficial
ownership of 25% or more of the outstanding shares of TheraTech Common Stock
(including TheraTech Common Stock currently beneficially owned by such third
person); (e) any reclassification of securities or recapitalization of
TheraTech or other transaction that has the effect, directly or indirectly, of
increasing the
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proportionate share of any class of equity security (including securities
convertible into equity securities) of TheraTech that is owned by any third
party, or any agreement or letter of intent or understanding relating to such
transaction; (f) any transaction having an effect similar to those described in
(a) through (e) above; or (g) a public announcement with respect to a proposal,
plan, or intention by TheraTech or another third party to effect any of the
foregoing transactions (which may include publication of notice of filing or
any similar notice under applicable law).
For purposes of the Merger Agreement, "Superior Proposal" means a bona fide,
written and unsolicited proposal or offer made by any third party (other than
Watson or any of its subsidiaries) with respect to an Alternative Proposal on
terms which the Board of Directors of TheraTech determines in good faith, and
in the exercise of reasonable judgment (based on the advice of independent
financial advisors and legal counsel), to be more favorable to TheraTech and
its stockholders than the transactions contemplated by the Merger Agreement.
Except as provided below, TheraTech has agreed; (a) not to, and to direct and
cause its subsidiaries and each of their respective officers, directors,
employees, agents and representatives (including, without limitation, any
investment banker, attorney or accountant retained by it or any of its
subsidiaries) not to initiate, solicit, encourage or take any other action to
facilitate, directly or indirectly, any inquiries or the making or
implementation of any proposal or offer that constitutes, or may reasonably be
expected to lead to any Alternative Proposal or engage in any negotiations
concerning, or provide any confidential information or data to, or have any
discussions with, any person relating to an Alternative Proposal, or otherwise
to facilitate any effort or attempt to make or implement an Alternative
Proposal; (b) to immediately terminate any existing activities, discussions or
negotiations with any person with respect to any Alternative Proposal; and (c)
to notify Watson immediately if any such inquiries or proposals are received
by, any such information is requested from, or any such negotiations or
discussions are sought to be initiated or continued with TheraTech; provided
that the Board of Directors of TheraTech may, in response to any unsolicited
written bona-fide proposal from a third party regarding a Superior Proposal,
furnish or cause to be furnished information to, and engage in discussions
with, such third party, but only if the Board of Directors of TheraTech
determines in good faith to take such action pursuant to the exercise of its
fiduciary duties under applicable law and complies with certain other
conditions precedent.
In response to TheraTech's receipt of an unsolicited written bona-fide
proposal from a third party regarding an Alternative Proposal, TheraTech may
make inquiries to such third party to clarify questions relating to ambiguities
of the terms of such proposal in order for TheraTech to determine whether such
proposal is a Superior Proposal.
CONDITIONS TO CLOSING
The respective obligations of Watson and TheraTech to consummate the Merger
are subject to the fulfillment of several conditions, including:
(a) The Merger Agreement will have been approved and adopted by the
affirmative vote of the holders of a majority of all of the outstanding
shares of TheraTech Common Stock.
(b) The waiting periods (and any extensions thereof) applicable to the
Merger under the HSR Act shall have expired or been terminated.
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(c) No preliminary or permanent injunction or other order or decree by
any federal or state court which prevents the consummation of the Merger or
materially changes the terms or conditions of the Merger Agreement shall
have been issued and remain in effect. In the event any such order or
injunction is issued, each party will use its reasonable efforts to have
any such injunction lifted.
(d) The Registration Statement on Form S-4 (which this Proxy
Statement/Prospectus is a part of) will have been declared effective by the
SEC and shall be effective at the Effective Time, and no stop order
suspending the effectiveness of such registration statement shall have been
issued, no action, suit, proceeding or investigation by the SEC to suspend
the effectiveness thereof shall have been initiated and be continuing, and
Watson and TheraTech shall have received all necessary approvals under
state securities laws relating to the issuance or trading of the Watson
Common Stock to be issued to the TheraTech stockholders in connection with
the Merger.
(e) All material consents, authorizations, orders and approvals of (or
filings or registrations with) any governmental commission, board or other
regulatory body required in connection with the execution, delivery and
performance of the Merger Agreement shall have been obtained or made,
except for filings in connection with the Merger and any other documents
required to be filed after the Effective Time.
(f) The Watson Common Stock to be issued to the TheraTech stockholders in
connection with the Merger will have been authorized for listing on the
NYSE.
(g) Watson will have received the opinion of PricewaterhouseCoopers LLP,
dated the Closing Date, to the effect that the Merger will be treated as a
pooling of interests for accounting purposes.
(h) TheraTech will have received from Ernst & Young LLP, a letter, dated
the Closing Date, indicating that TheraTech has not taken any action that
would preclude TheraTech from entering into a transaction that will be
treated as a pooling of interests for accounting purposes.
Except as may be waived in writing by Watson, the obligations of Watson and
the Sub to consummate the transactions contemplated by the Merger Agreement are
subject to the satisfaction of the following additional conditions:
(a) TheraTech will have performed, in all material respects, all of its
agreements contained in the Merger Agreement that it is required to perform
on or prior to the Closing Date, and Watson shall have received a
certificate of an executive officer of TheraTech, dated the Closing Date,
certifying to such effect.
(b) The representations and warranties of TheraTech contained in the
Merger Agreement are true and correct as of September 23, 1998 in all
material respects (or to the extent representations or warranties contain
material modifiers, true and correct as modified).
(c) The representations and warranties of TheraTech contained in the
Merger Agreement will be true and correct as of the Closing Date, except as
would not reasonably be expected to have a material adverse effect on
TheraTech.
(d) TheraTech will have delivered to Watson certified copies of the
resolutions of TheraTech's Board of Directors and TheraTech stockholders
approving and adopting the Merger Agreement, the related documents and the
transactions contemplated thereby.
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(e) Watson will have received the opinion from Kirkland & Ellis, counsel
to TheraTech, covering customary opinions.
(f) From October 23, 1998 through the Effective Time, there will not have
occurred any event that has had, would have or would be reasonably likely
to have a material adverse effect on TheraTech.
(g) TheraTech will have received third party consents regarding certain
specified agreements.
(h) Watson will have received the opinion of Kirkland & Ellis dated the
Closing Date, to the effect that the Merger will be treated for federal
income tax purposes as a reorganization within the meaning of Section
368(a) of the Code, and that TheraTech and Watson will each be a party to
that reorganization within the meaning of Section 368(b) of the Code.
(i) Dinesh C. Patel, Ph.D. and Charles D. Ebert, Ph.D. will have executed
and delivered to Watson an amendment to their employment agreements with
TheraTech and non-competition agreements.
(j) Watson will have received the written resignations of such directors
and officers of TheraTech's subsidiaries as are designated by Watson to
resign.
(k) TheraTech will have delivered to Watson all of the Affiliate Letters
executed by each of the Affiliates of TheraTech, acknowledging their
trading limitations in Watson Common Stock under Rule 145 of the Exchange
Act and due to the transaction being accounted for as a pooling of
interests.
Except as may be waived in writing by TheraTech, the obligations of TheraTech
to consummate the transactions contemplated by the Merger Agreement are subject
to the satisfaction of the following additional conditions:
(a) Watson will have performed, in all material respects, all of the
agreements contained in the Merger Agreement that it is required to perform
on or prior to the Closing Date, and TheraTech will have received a
certificate of an executive officer of Watson, dated the Closing Date,
certifying to such effect.
(b) The representations and warranties of Watson and the Sub contained
the Merger Agreement are true and correct as of October 23, 1998, in all
material respects.
(c) The representations and warranties of Watson and the Sub contained in
the Merger Agreement shall be true and correct as of the Closing Date,
except as would not reasonably be expected to have a material adverse
effect on Watson.
(d) TheraTech will have received from Watson certified copies of the
resolutions of Watson's and the Sub's Boards of Directors and from the sole
stockholder of Sub approving and adopting the Merger Agreement, the Watson
ancillary documents and the transactions contemplated by the Merger
Agreement.
(e) TheraTech will have received the opinion from D'Ancona & Pflaum,
counsel to Watson, covering customary opinions.
(f) TheraTech will have received the opinion of D'Ancona & Pflaum dated
the Closing Date, to the effect that the Merger will be treated for federal
income tax purposes as a
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reorganization within the meaning of Section 368(a) of the Code, and that
TheraTech and Watson will each be a party to that reorganization within the
meaning of Section 368(b) of the Code.
(g) From October 23, 1998 through the Effective Time, there will not have
occurred any event that has had, would have or would be reasonably likely
to have a material adverse effect on Watson; provided, that such an event
will not be deemed to have occurred solely as a result of fluctuations in
the market value of Watson Common Stock.
For purposes of the Merger Agreement, a material adverse effect when used
with respect to any party means (i) a material adverse effect on the business,
assets, results of operations, financial condition, or the products and
technology of such party and its subsidiaries, in each case, taken as a whole;
or (ii) an impairment in the ability of such party or its subsidiaries to
perform any of their material obligations under the Merger Agreement or to
consummate the Merger.
TERMINATION
The Merger Agreement provides that it may be terminated and the Merger may be
abandoned at any time on or before the Effective Time:
(a) By mutual written consent of TheraTech and Watson.
(b) By written notice from the Board of Directors of either Watson or
TheraTech if (i) the Merger has not been consummated by March 31, 1999;
provided, however, that such right to terminate the Merger Agreement will
not be available to any party whose failure to fulfill any obligation under
the Merger Agreement has been the cause of, or resulted in, the failure of
the Merger to occur on or before such date; (ii) the approval of the
TheraTech stockholders of the Merger and the Merger Agreement shall not
have been obtained at a meeting duly convened therefor or at any
adjournment thereof; provided, however, that TheraTech shall not have the
right to terminate the Merger Agreement under this provision if TheraTech
withdrew, modified, or amended in any adverse respect its recommendation
that the TheraTech stockholders vote in favor of the Merger Agreement; or
(iii) a court of competent jurisdiction or a governmental, regulatory or
administrative agency or commission shall have issued an order, decree or
ruling or taken any other action either (A) permanently restraining,
enjoining or otherwise prohibiting the transactions contemplated by the
Merger Agreement; or (B) compelling Watson, Sub or TheraTech to dispose of
or hold separate all or a material portion of the respective businesses or
assets of Watson, TheraTech or any of their respective Subsidiaries, or to
sell or license any material product of Watson, TheraTech or any of their
respective Subsidiaries, and such order, decree, ruling or other action
shall have become final and non-appealable.
(c) By written notice from the Board of Directors of Watson, if without
the prior written approval of Watson, (i) TheraTech (A) shall have
withdrawn, modified, or amended in any adverse respect its approval or
recommendation of the Merger Agreement or the transactions contemplated
thereby, (B) shall not have recommended or shall have withdrawn, modified,
or amended in any respect its recommendation that the TheraTech
stockholders vote in favor of the Merger Agreement, or (C) shall not have
included such recommendation in this Proxy Statement/Prospectus; (ii) the
Board of Directors of TheraTech shall have resolved to do any of
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the foregoing; or (iii) any director of TheraTech shall take any action
inconsistent with such approval or recommendation and such action has not
been renounced by the Board of Directors of TheraTech; provided that, in
each of subparagraphs (i), (ii) or (iii) above, other than upon the
happening of the events described below in subparagraph (f).
(d) By written notice from the Board of Directors of Watson if (A) there
is an Alternative Proposal initiated or made by or relating to TheraTech
which is approved of or agreed to by the Board of Directors of TheraTech;
or (B) any person shall have solicited proxies in opposition to the
approval of the Merger, and the Board of Directors of TheraTech has taken
action or a public position consistent with approving such person's proxy
solicitation.
(e) By written notice from the Board of Directors of TheraTech, if the
Board of Directors of TheraTech shall have reasonably determined, after
consultation with its legal and financial advisors, that a proposal for an
Alternative Proposal constitutes a Superior Proposal and shall have decided
to accept such Superior Proposal pursuant to its fiduciary duties under
applicable law; provided, however, that TheraTech may not have the right to
terminate the Merger Agreement pursuant to this subparagraph (e) unless (i)
five (5) business days shall have elapsed after delivery to Watson of a
written notice of such determination by the Board of Directors of TheraTech
and, during such five (5) business day period, TheraTech shall have
informed Watson of the material terms and conditions and financing
arrangements of such proposal for an Alternative Proposal and the identity
of the third party or group making such proposal for an Alternative
Proposal and (ii) at the end of such five (5) business day period, such
board shall continue to reasonably believe that such proposal for an
Alternative Proposal constitutes a Superior Proposal and promptly
thereafter TheraTech shall enter into a definitive acquisition, merger or
similar agreement to effect such Superior Proposal. Notwithstanding the
foregoing, TheraTech shall not have the right to terminate the Merger
Agreement pursuant to this subsection (e) unless it has simultaneously or
previously paid the $5 million fee owed to Watson pursuant to the Merger
Agreement ("Termination Fee").
(f) By written notice from the Board of Directors of TheraTech, if (i) as
of October 23, 1998, the representations and warranties made by Watson and
Sub are not true and correct, in all material respects; (ii) there has been
a breach by Watson or Sub of any representation or warranty contained in
the Merger Agreement which would reasonably be expected to have a material
adverse effect on Watson; or (iii) there has been a material breach of any
of the material covenants or agreements set forth in the Merger Agreement
on the part of Watson, which breach is not curable or, if curable, is not
cured within thirty (30) days after written notice of such breach is given
by TheraTech to Watson.
(g) By written notice from the Board of Directors of Watson, if (i) as of
October 23, 1998, the representations and warranties made by TheraTech are
not true and correct, in all material respects; (ii) there has been a
breach by TheraTech of any representation or warranty contained in the
Merger Agreement which would reasonably be expected to have a material
adverse effect on TheraTech; or (iii) there has been a material breach of
any of the material covenants or agreements set forth in the Merger
Agreement on the part of TheraTech, which breach is not curable or, if
curable, is not cured within thirty (30) days after written notice of such
breach is given by Watson to TheraTech.
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TERMINATION FEE
In the event the Merger Agreement is terminated (i) by TheraTech or Watson as
a result of TheraTech entering into a Alternative Proposal; (ii) by Watson as a
result of TheraTech's Board of Directors having withdrawn or modified its
approval or recommendation of the Merger Agreement or the Merger, and TheraTech
enters into an agreement or an understanding with respect to an Alternative
Proposal or consummates a transaction relating to Alternative Proposal within
one (1) year of the date of termination; or (iii) by TheraTech because the
Merger has not been consummated by March 31, 1998 or by Watson due to
TheraTech's material breach of the Merger Agreement and within four (4) months
after such termination, TheraTech enters into an agreement or understanding
with respect to an Alternative Proposal or consummates a transaction relating
to an Alternative Proposal, then, in each of such events, TheraTech must pay
Watson a cash Termination Fee of $5 million within five business days after the
occurrence of any of such events.
If the fees described above are not paid when due, all amounts owing will
accrue interest at a rate equal to 10% per annum.
EXPENSES AND FEES
Each of Watson and TheraTech has agreed to pay its own expenses (including,
without limitation, in connection with financial, legal and tax advice)
incurred in connection with the Merger and the transactions contemplated
thereby, except that the parties have agreed to share equally all expenses
incurred in connection with the printing and mailing of this Proxy
Statement/Prospectus to the TheraTech stockholders.
However, if either party terminates the Merger Agreement because the other
party breached certain representations or covenants contained in the Merger
Agreement, then the breaching party must reimburse the non-breaching party for
its expenses incurred in connection with the Merger. Additionally, if Watson
terminates the Merger Agreement because TheraTech's Board of Directors
withdraws or modifies its approval or recommendation of the Merger Agreement,
TheraTech must reimburse Watson for its expenses incurred in connection with
the Merger.
EXTENSION AND WAIVER
The Board of Directors of either TheraTech or Watson may, prior to the
Effective Time and to the extent legally allowed, (a) extend the time for
performance of any of the obligations or other acts of the other parties to the
Merger Agreement; (b) waive any inaccuracies in the representations and
warranties made to such party contained in or delivered pursuant to the Merger
Agreement; and (c) waive compliance with any of the agreements or conditions
for the benefit of such party to the Merger Agreement. Any agreement by either
TheraTech or Watson to such an extension or waiver will be valid only if set
forth in writing and signed on behalf of such party.
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DESCRIPTION OF WATSON CAPITAL STOCK
Watson is authorized to issue up to 500,000,000 shares of common stock,
$0.0033 par value per share, 89,475,000 shares of which were issued and
outstanding at November 23, 1998 and 2,500,000 shares of preferred stock, none
of which were outstanding as of the date hereof.
WATSON COMMON STOCK
The holders of Watson Common Stock are entitled to one vote for each share
held of record on all matters on which stockholders are entitled or permitted
to vote. Such holders may not cumulate votes in the election of directors. The
holders of Watson Common Stock are entitled to receive such dividends as may
lawfully be declared by the Watson Board of Directors out of funds legally
available therefor and to share pro rata in any other distribution to the
holders of Watson Common Stock. The holders of Watson 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. The holders of Watson Common Stock have no preemptive rights. There are
no conversion rights, redemption or sinking fund provisions or fixed dividend
rights with respect to the Watson Common Stock. All outstanding shares of
common stock are fully paid and non-assessable, and the shares of Watson Common
Stock to be issued pursuant to the Merger Agreement will be fully paid and non-
assessable.
WATSON TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for Watson's Common Stock is American Stock
Transfer & Trust Company.
WATSON PREFERRED STOCK
The Watson 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 Common
Stockholders. The issuance of preferred stock may have the effect of delaying,
deferring or preventing a change in control of Watson without further action by
the stockholders and may adversely affect the voting and other rights of the
holders of Watson Common Stock. At present, Watson has no plans to issue any of
the preferred stock.
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COMPARISON OF RIGHTS OF HOLDERS OF WATSON COMMON STOCK AND THERATECH COMMON
STOCK
Upon consummation of the Merger, holders of TheraTech Common Stock will
become holders of Watson Common Stock and the rights of former TheraTech
stockholders will be governed by Watson's Articles of Incorporation, Watson's
Bylaws and the Nevada General Corporation Law (the "Nevada Act").
GENERAL
Watson is a Nevada corporation, and the rights of its stockholders are
governed by the Nevada Act and the Articles of Incorporation and Bylaws of
Watson. TheraTech is a Delaware corporation, and the rights of its stockholders
are governed by the Delaware General Corporation Law (the "DGCL") and the
Certificate of Incorporation and Bylaws of TheraTech. If the Merger is
consummated, former TheraTech stockholders will become stockholders of Watson.
The rights of such former TheraTech stockholders as Watson stockholders will be
governed by the Nevada Act and the Articles of Incorporation and Bylaws of
Watson. The following is a summary of certain material provisions of, and the
material differences between, (i) Nevada law and the Articles of Incorporation
and Bylaws of Watson and (ii) Delaware law and the Certificate of Incorporation
and Bylaws of TheraTech, which could significantly affect the rights of
TheraTech stockholders.
NUMBER OF DIRECTORS
Watson's Articles of Incorporation provide that the number of directors shall
be nine persons. In addition, Watson's Articles of Incorporation provide that
vacancies created by newly created directorships will be filled by a majority
of directors then in office, provided that a quorum is present. All other
vacancies must be filled by a majority of directors then in office, even if
less than a quorum.
The TheraTech Bylaws provide that the number of directors shall be such
number as the Board of Directors shall have designated from time to time,
except that in the absence of any such designation, such number shall be six.
TheraTech's Board of Directors currently consists of seven persons. TheraTech's
Bylaws provide that vacancies created by newly created directorships will be
filled by a majority of the directors then in office, even though less than a
quorum or by a sole remaining director.
STRUCTURE OF THE BOARD
The Nevada Act provides that a corporation's board of directors may be
divided into various classes with staggered terms of office. The Watson Bylaws
provide that the Watson Board of Directors be divided into three classes of
directors, as nearly equal in number as reasonably possible. One class of
directors must be elected each year for a three-year term. Although permissible
under the DGCL, neither TheraTech's Certificate of Incorporation nor its Bylaws
classify its Board of Directors.
Classification of directors may have the effect of making it more difficult
for stockholders to change the composition of the Watson Board of Directors. At
least two annual meetings of
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stockholders, instead of one, will generally be required to effect a change in
the majority of the Watson Board. Such a delay may help ensure that Watson's
directors, if confronted by a stockholder attempting to force a proxy contest,
a tender or exchange offer or other extraordinary corporate transaction, would
have sufficient time to review the proposal as well as any available
alternatives to the proposal and to act in what they believe to be the best
interests of the stockholders.
The classification provisions could also have the effect of discouraging a
third party from initiating a proxy contest, making a tender offer or otherwise
attempting to obtain control of Watson, even though such a transaction could be
beneficial to Watson and its stockholders. The classification of the Watson
Board of Directors might also increase the likelihood that incumbent directors
will retain their positions.
BOARD VACANCIES
The Nevada Act provides that a vacancy on the board of directors may
generally be filled by the affirmative vote of a majority of the remaining
directors, although less than a quorum of the board of directors, unless the
articles of incorporation provide otherwise. Watson's Articles of Incorporation
do not alter this provision.
The DGCL provides that, unless the certificate of incorporation or bylaws
provides otherwise, vacancies and newly created directorships resulting from
any increase in the authorized number of directors elected by all of the
stockholders having the right to vote as a single class may be filled by a
majority of the directors then in office, although less than a quorum, or by a
sole remaining director. Whenever the holders of any class or classes of stock
or series thereof are entitled to elect one or more directors by the provisions
of the certificate of incorporation, vacancies and newly created directorships
of such class or classes or series may be filled by a majority of the directors
elected by such class or classes or series thereof then in office, or by a sole
remaining director so elected. TheraTech's Bylaws provide that vacancies and
newly created directorships resulting from any increase in the authorized
number of directors may be filled by a majority of the directors then in
office, although less than a quorum, or by a sole remaining director.
REMOVAL OF DIRECTORS
The Nevada Act provides that any director may be removed from office by the
vote of stockholders representing not less than two-thirds of the voting power
of the issued and outstanding stock entitled to voting power, except that in
the case of corporations which have provided in their articles of incorporation
for the election of directors by cumulative voting, no director may be removed
from office except upon the vote of stockholders owning sufficient shares to
have prevented his election to office in the first instance; and the articles
of incorporation may require the concurrence of a larger percentage of the
stock entitled to voting power in order to remove a director. Watson's Bylaws
provide that any director may be removed from office with or without cause, at
a meeting called expressly for that purpose, by the vote or written consent of
the holders of a majority of the outstanding shares of the corporation; and
that no director may be removed if the number of votes cast against his removal
would be sufficient to elect him at an annual meeting of the stockholders.
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The DGCL provides that any director or the entire board of directors may be
removed, with or without cause, by the holders of a majority of the shares then
entitled to vote at an election of directors, unless the certificate of
incorporation provides otherwise (which TheraTech's Certificate of
Incorporation does not). In the case of a corporation whose board is
classified, stockholders may effect such removal only for cause. In the case of
a corporation having cumulative voting (which TheraTech does not), if less than
the entire board is to be removed, no director may be removed without cause if
the votes cast against such director's removal would be sufficient to elect
such director if then cumulatively voted at an election of the entire board of
directors, or, if there are classes of directors, at an election of the class
of directors of which such director is a part.
LIMITATION ON PERSONAL LIABILITY OF DIRECTORS AND OFFICERS
Both the DGCL and the Nevada Act allow a corporation to provide in its
certificate or articles of incorporation that a director or officer will not be
personally liable for monetary damages to the corporation or its stockholders
for breach of fiduciary duty as a director or officer, subject to certain
limitations.
The Nevada Act provides that articles of incorporation may include a
provision limiting the personal liability of a director or officer to the
corporation or its stockholders for damages for breach of fiduciary duty as a
director or officer, but such provision must not eliminate or limit the
liability of a director or officer (i) for acts or omissions which involve
intentional misconduct, fraud or a knowing violation of law or (ii) the payment
of distributions to stockholders.
The DGCL provides that the certificate of incorporation may include a
provision eliminating or limiting the personal liability of its directors (but
not officers) to the corporation or its stockholders for monetary damages for
breach of fiduciary duty as a director, provided that such provisions will not
eliminate or limit the liability of a director (i) for any breach of the
director's duty of loyalty, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) for
any unlawful payment of dividend or improper stock purchase or redemption or
(iv) for any transaction for which the director derived an improper personal
benefit.
The Certificate of Incorporation of TheraTech provides that a director will
not be liable to TheraTech or its stockholders for a breach of his or her
fiduciary duty to the fullest extent allowable under the DGCL. The Articles of
Incorporation of Watson limit a director's and officer's liability to the
events specified in the Nevada Act. Consequently, situations may arise in which
an existing TheraTech stockholder, following the Merger, would have less
ability to bring an action against an officer or director of Watson.
INDEMNIFICATION
Under the Nevada Act and the DGCL, a corporation may generally indemnify its
officers, directors, employees and agents against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement of any
proceedings (other than derivative actions), if they acted in good faith and in
a manner they reasonably believed to be in or not opposed to the best interests
of the corporation and, with respect to any criminal action or proceeding, had
no reasonable cause to believe their conduct was unlawful. A similar standard
is applicable in derivative actions, except that
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indemnification may be made only for (i) expenses (including fees) and certain
amounts paid in settlement and (ii) in the event the person seeking
indemnification has been adjudicated liable, amounts that are deemed proper,
fair and reasonable by the appropriate court upon application thereto. The
Nevada Act and the DGCL both provide that to the extent that such persons have
been successful in defense of any proceeding, they must be indemnified by the
corporation against expenses. Both the Nevada Act and the DGCL also provide
that if a corporation does not so indemnify such persons, they may seek, and a
court may order, indemnification under certain circumstances even if the board
of directors or stockholders of the corporation have determined that the
persons are not entitled to indemnification.
In addition, under both the Nevada Act and the DGCL, expenses incurred by an
officer or director in connection with a proceeding may be paid by the
corporation in advance of the final disposition, upon receipt of an undertaking
by such director or officer to repay such amount if he is ultimately found not
to be entitled to indemnification by the corporation.
The Bylaws of Watson and TheraTech's Certificate of Incorporation provide
that directors and officers and former directors and officers will be
indemnified to the fullest extent permitted by law.
DERIVATIVE ACTIONS
Under the Nevada Rules of Civil Procedure (the "Nevada Rules") and the DGCL,
a person may not bring a derivative action unless the person was a stockholder
of the corporation at the time of the challenged transaction or unless the
person acquired the shares by operation of law from a person who was a
stockholder at such time. Both the Nevada Rules and the DGCL provide that a
complaint in a derivative proceeding must be verified and must allege with
particularity the efforts, if any, made by the plaintiff to obtain the desired
action, and the reasons for his failure to obtain the action he desires or for
not making the effort. Both the Nevada Rules and the DGCL also provide that a
derivative action may not be maintained if it appears that the plaintiff does
not fairly and adequately represent the interests of stockholders. Under both
sets of Rules, an action will not be dismissed, compromised or settled without
the approval of a court having jurisdiction of the action.
QUORUM FOR STOCKHOLDER MEETINGS
Under both the Nevada Act and the DGCL, unless otherwise provided in a
corporation's articles or certificate of incorporation or bylaws, a majority of
shares entitled to vote on a matter constitutes a quorum at a meeting of
stockholders. The Nevada Act and the DGCL provide that the articles or
certificate of incorporation or bylaws may provide for a greater or lesser
quorum requirement, except that in Delaware, the quorum may not be less than
one-third of the shares entitled to vote.
The Bylaws of both Watson and TheraTech provide that the presence in person
or by proxy of a majority of the shares entitled to vote will constitute a
quorum.
NOTICE OF STOCKHOLDERS MEETINGS, AND SPECIAL STOCKHOLDER MEETINGS
Under both the Nevada Act and the DGCL, whenever stockholders are required or
permitted to take any action at a meeting, a written notice of the meeting is
required to be given which must state the place, date and hour of the meeting;
and such written notice must be given not less than 10 or
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more than 60 days before the date of the meeting. Under the Nevada Act, the
purpose or purposes for which the meeting is called must be included in the
notice, and the notice must be signed by the president or a vice president, or
the secretary, or an assistant secretary or such other natural person as the
bylaws may prescribe or permit or the directors may designate. Under the DGCL,
the purpose of the meeting must be included in the written notice only in the
case of a special meeting.
The Watson Bylaws provide that the notice of any meeting at which directors
are to be elected shall include the name of any nominee or nominees whom, at
the time of notice, management intends to present for election, and if action
is proposed to be taken at any meeting for approval of (a) a contract or
transaction in which a director has a direct or indirect financial interest,
(b) an amendment of the articles of incorporation, (c) a reorganization of the
corporation, (d) a voluntary dissolution of the corporation or (e) a
distribution in dissolution other than in accordance with the rights of any
outstanding preferred shares, the notice shall also state the general nature of
that proposal. The Watson Bylaws also provide that a special meeting of the
stockholders may be called at any time by one or more stockholders holding
shares in the aggregate entitled to cast not less than 10% of the votes at that
meeting. If a stockholder calls such a meeting he or she must make a written
request to the board of directors specifying the time of such meeting and the
general nature of the business proposed to be transacted, and the request shall
be delivered personally or sent to the Chairman of the Board, or the President.
The TheraTech Bylaws state that if at any meeting action is proposed that
would trigger stockholder appraisal rights, the notice of such meeting must
contain a statement of that purpose and must be accompanied by a copy of
section 262(d) of the DGCL, and that special stockholder meetings may only be
called by the Chairman of the Board or the President or the Board of Directors.
After the Merger, any former TheraTech stockholders who alone, or in the
aggregate, hold shares entitled to cast at least 10% of the votes at a Watson
stockholder meeting will have an ability to make proposals for action where
they did not have such an ability as stockholders of TheraTech.
WRITTEN CONSENT IN LIEU OF STOCKHOLDER MEETING
Under both the Nevada Act and the DGCL, unless the articles of incorporation
or the bylaws provide otherwise (which Watson's do not), any action required or
permitted to be taken at a meeting of the stockholders may be taken without a
meeting if a written consent thereto is signed by stockholders holding at least
a majority of the voting power, except that if a different proportion of voting
power is required for such an action at a meeting, then that proportion of
written consents is required. All such written consents must be delivered to
TheraTech in order to be maintained in the corporate records. The TheraTech
Certificate of Incorporation states that any action required or permitted to be
taken by the stockholders of TheraTech must be effected at a duly called annual
or special meeting of stockholders of TheraTech and may not be effected by any
consent in writing by the stockholders. Therefore, after the merger former
TheraTech stockholders will be able to act through a written consent in lieu of
a meeting where they could not do so as stockholders of TheraTech.
AMENDMENT OF CERTIFICATES (OR ARTICLES) OF INCORPORATION
The Nevada Act provides that in order to amend the Articles of Incorporation
the board of directors must adopt a resolution setting forth the amendment
proposed and declaring its advisability,
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and call a meeting, either annual or special, of the stockholders entitled to
vote for the consideration thereof. At the meeting, of which notice must be
given to each stockholder entitled to vote, a vote of the stockholders either
in person or in proxy must be taken for the proposed amendment. If it appears
upon the canvassing of the votes that the stockholders holding shares in the
corporation entitling them to exercise at least a majority of the voting power,
or greater as may be required by the provisions of the articles of
incorporation, have voted in favor of the amendment, the president, or vice
president, and secretary, or assistant secretary is required to execute a
certificate setting forth the amendment, or setting forth the articles of
incorporation as amended, and the vote by which the amendment was adopted. The
certificate then must be filed in the office of the secretary of state.
The DGCL is substantially similar to the Nevada Act except that the notice to
stockholders must set forth the amendment in full or a brief summary of the
changes to be effected thereby. TheraTech's Certificate of Incorporation
provides that TheraTech reserves the right to amend the Certificate of
Incorporation in the manner prescribed by statute.
AMENDMENT OF BYLAWS
The Watson Bylaws give the board of directors the power to amend the Bylaws.
The Watson Bylaws further state that the Bylaws may contain any provisions for
the regulation and management of the affairs of TheraTech not inconsistent with
the law. The DGCL provides that the bylaws may only be amended by the
stockholders entitled to vote, provided, however, any corporation may, in its
certificate of incorporation, confer the power to amend or repeal bylaws upon
the directors. But, the fact that such power has been so conferred upon the
directors does not divest the stockholders or members of the power, nor limit
their power to amend the bylaws. The TheraTech Bylaws provide that the Bylaws
may be amended by written consent of the stockholders, or at any meeting of the
stockholders, by the affirmative vote of a majority of the stock entitled to
vote at such meeting, and the board of directors also has the power to amend
the Bylaws by unanimous written consent or at any meeting by the affirmative
vote of a majority of the whole number of directors, subject to the power of
the stockholders to change or repeal such Bylaws and provided that the board of
directors shall not make or alter any Bylaws fixing the qualifications,
classifications or term of office of directors.
Following the Merger, former TheraTech stockholders will no longer have the
ability to amend the Bylaws of Watson as they did the Bylaws of TheraTech, and
the new board of directors will be able to fix the qualifications,
classifications and term of office of directors.
REQUIRED VOTE FOR CERTAIN BUSINESS COMBINATIONS AND OTHER ANTI-TAKEOVER
PROVISIONS
Watson may be subject to the provisions of Nevada's anti-takeover laws known
respectively as the "Combination with Interested Stockholders Statute" and the
"Control Share Acquisition Statute."
The Combination with Interested Stockholders Statute prevents "interested
stockholders" and an applicable Nevada corporation from entering into a
"combination" unless certain conditions are met. A combination means any merger
or consolidation with an "interested stockholder", or any sale, lease,
exchange, mortgage, pledge, transfer or other disposition, in one transaction
or a series of
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transactions, with an "interested stockholder" having: (i) an aggregate market
value equal to 5% or more of the aggregate market value of the assets of the
corporation; (ii) an aggregate market value equal to 5% or more of the
aggregate market value of all outstanding shares of the corporation; or (iii)
representing 10% or more of the earning power or net income of the corporation.
An "interested stockholder" means the beneficial owner of 10% or more of the
voting shares of a corporation, or an affiliate or associate thereof. A
corporation may not engage in a "combination" within three years after the
interested stockholder acquires his shares unless the combination or purchase
is approved by the board of directors or a majority of the voting power held by
disinterested stockholders, or if the consideration to be paid by the
interested stockholder is at least equal to the highest of: (i) the highest
price per share paid by the interested stockholder within the three years
immediately preceding the date of the announcement of the combination or in the
transaction in which he became an interested stockholder, whichever is higher,
(ii) the market value per common share on the date of announcement of the
combination or the date the interested stockholder acquired the shares,
whichever is higher, or (iii) if higher for the holders of preferred stock, the
highest liquidation value of the preferred stock.
The Control Share Acquisition Statute prohibits an acquirer, under certain
circumstances, from voting shares of a target corporation's stock after
crossing certain threshold ownership percentages, unless the acquirer obtains
the approval of the target corporation's stockholders. The Control Share
Acquisition Statute specifies three thresholds; one-fifth or more but less than
one-third, one-third or more but less than a majority and a majority or more,
of the voting power of the corporation in the election of directors. Once an
acquirer crosses one of the above thresholds, those shares acquired in such
offer or acquisition and those shares acquired within the preceding ninety days
become "Control Shares" and such Control Shares are deprived of the right to
vote until disinterested stockholders restore the right. The Control Shares
Acquisition Statute also provides that in the event Control Shares are accorded
full voting rights and the acquiring person has acquired a majority or more of
all voting power, all other stockholders who do not vote in favor of
authorizing voting rights to the Control Shares arc entitled to demand payment
for the fair value of their shares. The board of directors is to notify the
stockholders within twenty days after such an event has occurred that they have
the right to receive the fair value of their shares in accordance with
statutory procedures established generally for dissenters' rights. The Control
Share Acquisition Statute currently does not apply to Watson because Watson
does not have 100 or more stockholders who are residents of the state of
Nevada.
The Board of Directors of Watson has no present intention to adopt a
stockholder protection plan, although the Board may consider the future
adoption of such a plan at a future meeting of the Board of Directors.
The DGCL imposes a three-year moratorium on any business combination with an
interested stockholder, although it has no fair price provision comparable to
that of the Nevada Act. TheraTech's Certificate of Incorporation, however, does
contain a provision that generally mirrors the Nevada Act's fair price
provision. The DGCL has no control share acquisition provision. The existence
of both the "Combination with Interested Stockholders" statute and the "Control
Share Acquisition" statute may make an unsolicited acquisition of control of
Watson more difficult or expensive. In addition, provisions of Watson's
Articles of Incorporation permitting the issuance of Preferred Stock by the
Board of Directors and the existence of a staggered Board of Directors may also
make an unsolicited acquisition of control more difficult or expensive.
68
<PAGE>
CUMULATIVE VOTING
Under both the Nevada Act and the DGCL, unless the articles or certificate of
incorporation provide otherwise, there can be no cumulative voting for the
election of directors. Watson's Bylaws proscribe cumulative voting, as do
TheraTech's Bylaws.
STOCKHOLDER INSPECTION OF RECORDS
Under the Nevada Act, a stockholder who has been a stockholder of record of a
Nevada corporation for at least 6 months immediately preceding his demand or
who owns 5% or more of the issued and outstanding shares of stock of the
corporation (or who has been authorized in writing by such holders) is entitled
to inspect and copy a list of the names of the corporation's stockholders
during regular business hours if the stockholder gives at least five business
days' prior written demand to the corporation. A stockholder of a Nevada
corporation must hold, or be authorized by the holders of 15% of the
outstanding shares in order to review the books and records of the corporation.
The Nevada Act provides further that a corporation may deny any demand for
inspection if the stockholder refuses to furnish the corporation an affidavit
that such inspection is not desired for a purpose not related to his interest
in the corporation as a stockholder. Watson's Bylaws permit a stockholder to
inspect and copy Watson's Articles of Incorporation, Bylaws, stockholder lists,
corporate minutes and accounting books and records to the fullest extent
permitted under the Nevada Act.
The DGCL permits any stockholder upon written demand under oath stating the
purpose thereof to inspect (during regular business hours) a corporation's
stock ledger, a list of its stockholders and its other books and records and to
make copies or extracts therefrom. If the corporation refuses such request, or
fails to respond within five business days after the demand has been made, the
stockholder may petition the Court for an order to compel such inspection. The
Court may prescribe limitations or conditions upon the inspection, or award any
other or further relief the court deems just and proper. TheraTech's Bylaws
provide that the officer in charge of the stock ledger of the corporation must
prepare, at least 10 days before every meeting of the stockholders, a complete
list of the stockholders entitled to vote at said meeting. TheraTech's Bylaws
further provide that any stockholder is permitted to examine such list of
stockholders, for any purpose germane to the meeting, during ordinary business
hours, for a period of at least 10 days prior to the meeting, either at a place
within the city where the meeting is to be held and which place must be
specified in the notice of the meeting, or, if not specified, at the place
where said meeting is to be held, and the list must be produced and kept at the
time and place of meeting during the whole time thereof, and may be inspected
by any stockholder who is present. Consequently, unless a TheraTech stockholder
will, following the Merger, own 15% or greater of the issued and outstanding
shares of Watson Common Stock, such stockholder will have fewer rights of
inspection under the Nevada Act than such stockholder held under the DGCL.
DISTRIBUTIONS AND REDEMPTIONS
Under the Nevada Act, corporations may make distributions to stockholders as
long as, after giving effect to such distribution (i) the corporation would be
able to pay its debts as they become due in the usual course of business and
(ii) the corporation's total assets would not be less than the
69
<PAGE>
sum of its total liabilities plus (unless the articles or certificate of
incorporation permit otherwise, which Watson's Articles of Incorporation do
not) the amount that would be needed if the corporation were to be dissolved at
the time of the distribution to satisfy the preferential rights upon
dissolution of stockholders whose preferential rights are superior to those
receiving the distribution.
Under the DGCL, corporations may make distributions to stockholders, subject
to any restrictions contained in its certificate of incorporation, to its
stockholders either (1) out of its surplus, or (2) in case there is no such
surplus, out of its net profits for the fiscal year in which the dividend is
declared and/or the preceding fiscal year. If the capital of the corporation
has been diminished by depreciation in the value of its property, or by losses,
or otherwise, to an amount less than the aggregate amount of the capital
represented by the issued and outstanding stock of all classes having a
preference upon the distribution of assets, the directors of such corporation
may not declare and pay out of such net profits any dividends upon any shares
of any classes of its capital stock until the deficiency in the amount of
capital represented by the issued and outstanding stock of all classes having a
preference upon the distribution of assets shall have been repaired.
Under both the Nevada Act and the DGCL, a corporation's redemption of its own
capital stock is deemed to be a distribution.
EXERCISE OF DIRECTORS' AND OFFICERS' POWERS
Nevada law provides that directors and officers, in performing their duties,
shall be protected in relying in good faith upon the records of the corporation
and upon such information, opinions, reports or statements presented to the
corporation by any of the corporation's directors, officers or employees; any
other person as to matters reasonably believed to be within such person's
professional or expert competence and who has been selected with reasonable
care by or on behalf of the corporation; or any committee on which the director
or officer relying thereon does not serve as to matters on which the committee
is reasonably believed to merit confidence. Furthermore, directors and officers
of a Nevada corporation, in exercising their powers, may consider (i) the
interests of the corporation's employees, suppliers, creditors and customers,
(ii) the economy of the state and the nation, (iii) the interests of the
community and of society and (iv) the long-term as well as short-term interests
of the corporation, including the possibility that these interests may be best
served by the continued independence of the corporation.
The DGCL provides that a director (but apparently not officers) shall be
protected in similar circumstances as a Nevada director except that the
Delaware statute does not contain language allowing the directors to consider
the factors enumerated as (i)-(iv) in the Nevada Act. The apparent greater
latitude under the Nevada Act may mean that directors and officers of Watson
may be able to exercise their powers in situations in which officers and
directors of TheraTech would not have such power.
LOANS TO AND GUARANTEES OF OBLIGATIONS OF OFFICERS AND EMPLOYEES
Under the DGCL, a loan to, guarantee of an obligation of, or other assistance
to an officer or employee of the corporation, including any officer or employee
who is a director, requires the determination of the Board of Directors of the
corporation that the loan, guarantee or assistance may
70
<PAGE>
reasonably be expected to benefit the corporation. The Nevada Act contains no
comparable provision, although it provides that directors exercising their
powers may consider, among other things, the interests of the employees and the
long-term as well as the short-term interests of the corporation and its
stockholders. Consequently, an existing TheraTech stockholder may, following
the Merger, have less ability to challenge any such loans as a Watson
stockholder.
Under the DGCL, any contract or transaction (including a loan or guarantee)
between the corporation and any of its officers or directors, or between the
corporation and any other organization in which the corporation's directors or
officers are also directors or officers, or have a financial interest, is
voidable unless approved by a majority of the disinterested directors or the
stockholders after full disclosure of the material facts or unless the
transaction is fair to the corporation at the time it is approved. The Nevada
Act has a similar requirement except that such transactions may be approved by
the vote of stockholders holding a majority of the voting power, and such
transactions are also permissible if the fact of the common directorship,
office or financial interest is not disclosed or known to the director or
officer when the transaction is brought before the board for action.
Consequently, transactions involving interested persons may be more difficult
to challenge as a stockholder of Watson than as a stockholder of TheraTech.
APPRAISAL AND DISSENTERS' RIGHTS
A stockholder of a Nevada corporation, with certain exceptions, has the right
to dissent from, and obtain payment of the fair value of his shares in the
event of (1) a merger or consolidation to which the corporation is a party, (2)
consummation of a plan of exchange to which the corporation is a party as the
corporation whose shares will be acquired, if the stockholder is entitled to
vote on the plan and (3) any corporate action taken pursuant to a vote of the
stockholders to the extent that the articles of incorporation, bylaws or a
resolution of the board of directors provides that voting or non-voting
stockholders are entitled to dissent and obtain payment for their shares. The
Nevada Act provides that unless a corporation's articles of incorporation
provide otherwise (which Watson's Articles of Incorporation do not), a
stockholder does not have dissenters' rights with respect to a plan of merger
or share exchange if the shares held by the stockholder are either registered
on a national securities exchange, or designated as a national market system
security on an interdealer quotation system by the National Association of
Securities Dealers, Inc., or held of record by 2,000 or more stockholders. A
stockholder of record of a Nevada corporation may dissent as to less than all
the shares registered in his name only if he dissents with respect to all
shares beneficially owned by any one person and notifies the corporation in
writing of the name and address of each person on whose behalf he asserts
dissenter's rights. In such event, the stockholder's rights will be determined
as if the shares to which he dissented and his other shares were registered in
the names of different stockholders.
Stockholders of a Delaware corporation generally have appraisal rights with
respect to a merger or consolidation. However, such appraisal rights are not
available (i) when a corporation is to be the surviving corporation and no vote
of its stockholders is required for the merger or (ii) for shares of stock
which, on the record date fixed to determine the stockholders entitled to
receive notice of and vote on the agreement of merger, are listed on a national
securities exchange, designated as a national market system security on an
interdealer quotation system by the National Association of
71
<PAGE>
Securities Dealers, Inc., or held of record by more than 2,000 stockholders,
unless, in case of clauses (i) or (ii) above, such stockholders are required by
the terms of the merger to accept consideration other than shares of stock of
TheraTech, shares of stock of another corporation that are so listed,
designated or held by such number of record holders, cash in lieu of fractional
shares of such stock, or any combination thereof. A Delaware corporation may
provide in its certificate of incorporation for appraisal rights in connection
with transactions other than mergers and consolidations.
While the dissenters' rights provisions under the Nevada Act and the DGCL are
essentially similar, situations could theoretically arise in which dissenters'
rights, which would be available under the DGCL, would not be available under
the Nevada Act.
LEGAL MATTERS
The validity of the issuance of the shares of Watson Common Stock being
offered hereby will be passed upon for Watson by D'Ancona & Pflaum, Chicago,
Illinois. As of the date of this Proxy Statement/Prospectus, Michel J. Feldman,
a partner of D'Ancona & Pflaum, beneficially owned 42,000 shares of Watson
Common Stock, of which he disclaims beneficial ownership of 7,000 shares. In
addition, other members of D'Ancona & Pflaum own additional shares of Watson
Common Stock, which ownership is not material in the aggregate. The federal
income tax consequences in connection with the Merger have been passed upon by
D'Ancona & Pflaum and Kirkland & Ellis.
EXPERTS
The consolidated financial statements of TheraTech, Inc. incorporated by
reference in TheraTech, Inc.'s Annual Report (Form 10-K) for the year ended
December 31, 1997, have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon incorporated by reference
therein and incorporated herein by reference. Such consolidated financial
statements are incorporated herein by reference in reliance upon such report
given upon the authority of such firm as experts in accounting and auditing.
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, as amended, have been so incorporated in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
The financial statements of Oclassen Pharmaceuticals, Inc. for the years
ended December 31, 1996 and 1995 incorporated by reference in this prospectus
and elsewhere in the registration statement have been audited by Arthur
Andersen LLP, independent public accountants, as indicated in their reports
with respect thereto, and are included herein in reliance upon the authority of
said firm as experts in accounting and auditing in giving said reports.
72
<PAGE>
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 Proxy
Statement/Prospectus by reference from the Annual Report on Form 10-K of Watson
Pharmaceuticals, Inc. for the year ended December 31, 1997, as amended, have
been audited by Deloitte & Touche LLP, independent auditors, as stated in their
report, which is incorporated herein by reference, and have been so
incorporated in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
73
<PAGE>
WATSON / THERATECH
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma condensed combined financial statements are
based on the historical consolidated financial statements of Watson and
TheraTech, combined and adjusted to give effect to the Merger. The condensed
consolidated financial statements of Watson and TheraTech as of September 30,
1998 and for the nine months ended September 30, 1998 and 1997 are unaudited;
however, in the respective managements' opinions, they reflect all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the financial position and results of operations for such
periods. Certain reclassifications have been made to the historical financial
statements to conform with this pro forma presentation. These pro forma
financial statements should be read in conjunction with such historical
financial statements and notes thereto, which are incorporated by reference in
this Proxy Statement/Prospectus. See "Where You Can Find More Information" on
page 2.
The unaudited pro forma condensed combined statements of income for the years
ended December 31, 1995, 1996 and 1997 and for the nine months ended September
30, 1998 and 1997 present the results for Watson and TheraTech as if the Merger
had occurred as of January 1, 1995. The accompanying unaudited pro forma
condensed combined balance sheet as of September 30, 1998 gives effect to the
Merger as of that date.
The pro forma adjustments are based upon preliminary estimates, information
currently available and certain assumptions that management believes are
reasonable under the circumstances. Watson's actual consolidated financial
statements will reflect the effects of the Merger on and after the date the
certificate of merger (the "Certificate of Merger") is duly filed with the
Secretary of State of Delaware or such later time as specified in the
Certificate of Merger rather than the dates indicated above. The unaudited pro
forma condensed combined financial statements neither purport to represent what
the combined results of operations or financial condition actually would have
been had the Merger in fact occurred on the assumed dates, nor to project the
combined results of operations and financial position for any future period.
It is intended that the Merger will be accounted for by the pooling of
interests method and, therefore, assets and liabilities of TheraTech will be
combined with those of Watson at their respective historical values. Each share
of TheraTech Common Stock outstanding immediately prior to the consummation of
the Merger will be converted at the Exchange Ratio into the right to receive a
portion of a share of Watson Common Stock. The final Exchange Ratio will be
subject to a minimum of 0.2663 and a maximum of 0.29589. The pro forma
condensed combined financial statements assume that all TheraTech Common Stock
and options were converted into Watson Common Stock at an assumed Exchange
Ratio of 0.2663.
F-1
<PAGE>
WATSON / THERATECH
UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
WATSON THERATECH ADJUSTMENTS COMBINED
-------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues:
Product sales, net................. $170,227 $ 4,318 $ -- $174,545
Cost of sales...................... 81,417 4,711 -- 86,128
-------- ------- ------- --------
Gross profit (loss).............. 88,810 (393) -- 88,417
-------- ------- ------- --------
Research and development, royalty
and licensing revenue............. 22,247 18,713 -- 40,960
-------- ------- ------- --------
Operating expenses:
Research and development........... 24,562 19,959 -- 44,521
Selling, general and
administrative.................... 34,873 6,694 -- 41,567
Amortization expense............... 306 -- -- 306
Merger expenses.................... 13,939 -- -- 13,939
-------- ------- ------- --------
Total operating expenses......... 73,680 26,653 -- 100,333
-------- ------- ------- --------
Operating income (loss).......... 37,377 (8,333) -- 29,044
Other income (expense):
Equity in earnings of joint
ventures.......................... 22,766 -- -- 22,766
Investment and other income........ 13,387 1,490 -- 14,877
Interest expense................... (482) (998) -- (1,480)
-------- ------- ------- --------
Total other income, net.......... 35,671 492 -- 36,163
-------- ------- ------- --------
Income (loss) before income tax
provision........................... 73,048 (7,841) -- 65,207
Provision (benefit) for income
taxes............................... 24,867 -- (3,600) 21,267
-------- ------- ------- --------
Net income (loss)................ $ 48,181 $(7,841) $ 3,600 $ 43,940
======== ======= ======= ========
Per share data:
Basic earnings (loss) per share.... $ 0.58 $ (0.40) $ -- $ 0.50
======== ======= ======= ========
Diluted earnings (loss) per share.. $ 0.56 $ (0.40) $ -- $ 0.48
======== ======= ======= ========
Weighted average number of common
shares outstanding................ 83,317 19,789 -- 88,587
Common stock equivalents........... 2,198 -- -- 2,548
-------- ------- ------- --------
Diluted weighted average shares.... 85,515 19,789 -- 91,135
======== ======= ======= ========
</TABLE>
See accompanying notes to the unaudited pro forma condensed combined financial
statements.
F-2
<PAGE>
WATSON / THERATECH
UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
WATSON THERATECH ADJUSTMENTS COMBINED
-------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues:
Product sales, net................. $223,639 $11,296 $ -- $234,935
Cost of sales...................... 101,921 8,009 -- 109,930
-------- ------- ----- --------
Gross profit..................... 121,718 3,287 -- 125,005
-------- ------- ----- --------
Research and development, royalty
and licensing revenue............. 27,162 23,412 -- 50,574
-------- ------- ----- --------
Operating expenses:
Research and development........... 22,895 18,086 -- 40,981
Selling, general and
administrative.................... 38,891 4,935 -- 43,826
Amortization expense............... 386 -- -- 386
-------- ------- ----- --------
Total operating expenses......... 62,172 23,021 -- 85,193
-------- ------- ----- --------
Operating income................. 86,708 3,678 -- 90,386
Other income (expense):
Equity in earnings of joint
ventures............................ 17,909 -- -- 17,909
Investment and other income.......... 10,282 1,653 -- 11,935
Interest expense..................... (421) (1,106) -- (1,527)
-------- ------- ----- --------
Total other income, net.......... 27,770 547 -- 28,317
-------- ------- ----- --------
Income before income tax provision... 114,478 4,225 -- 118,703
Provision (benefit) for income
taxes............................... 35,916 -- (395) 35,521
-------- ------- ----- --------
Net income....................... $ 78,562 $ 4,225 $ 395 $ 83,182
======== ======= ===== ========
Per share data:
Basic earnings per share........... $ 0.92 $ 0.21 $ -- $ 0.92
======== ======= ===== ========
Diluted earnings per share......... $ 0.89 $ 0.20 $ -- $ 0.89
======== ======= ===== ========
Weighted average number of common
shares outstanding................ 85,028 20,292 -- 90,432
Common stock equivalents........... 3,053 1,295 -- 3,398
-------- ------- ----- --------
Diluted weighted average shares.... 88,081 21,587 -- 93,830
======== ======= ===== ========
</TABLE>
See accompanying notes to the unaudited pro forma condensed combined financial
statements.
F-3
<PAGE>
WATSON / THERATECH
UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
WATSON THERATECH ADJUSTMENTS COMBINED
-------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues:
Product sales, net................. $324,015 $15,470 $ -- $339,485
Cost of sales...................... 125,057 10,640 -- 135,697
-------- ------- ----- --------
Gross profit..................... 198,958 4,830 -- 203,788
-------- ------- ----- --------
Research and development, royalty
and licensing revenue............. 14,249 22,736 -- 36,985
-------- ------- ----- --------
Operating expenses:
Research and development........... 18,055 16,952 -- 35,007
Selling, general and
administrative.................... 50,937 5,370 -- 56,307
Amortization expense............... 7,213 -- -- 7,213
Merger expenses.................... 14,718 -- -- 14,718
-------- ------- ----- --------
Total operating expenses......... 90,923 22,322 -- 113,245
-------- ------- ----- --------
Operating income................. 122,284 5,244 -- 127,528
Other income (expense):
Equity in earnings of joint
ventures............................ 10,694 -- -- 10,694
Investment and other income.......... 11,967 1,544 -- 13,511
Interest expense..................... (347) (937) -- (1,284)
-------- ------- ----- --------
Total other income, net.......... 22,314 607 -- 22,921
-------- ------- ----- --------
Income before income tax provision... 144,598 5,851 -- 150,449
Provision for income taxes........... 54,414 -- 385 54,799
-------- ------- ----- --------
Net income....................... $ 90,184 $ 5,851 $(385) $ 95,650
======== ======= ===== ========
Per share data:
Basic earnings per share........... $ 1.04 $ 0.28 $ -- $ 1.03
======== ======= ===== ========
Diluted earnings per share......... $ 1.01 $ 0.27 $ -- $ 1.01
======== ======= ===== ========
Weighted average number of common
shares outstanding................ 86,991 20,778 -- 92,524
Common stock equivalents........... 2,334 956 -- 2,589
-------- ------- ----- --------
Diluted weighted average shares.... 89,325 21,734 -- 95,113
======== ======= ===== ========
</TABLE>
See accompanying notes to the unaudited pro forma condensed combined financial
statements.
F-4
<PAGE>
WATSON / THERATECH
UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENT OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
WATSON THERATECH ADJUSTMENTS COMBINED
-------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues:
Product sales, net................. $214,251 $10,680 $ -- $224,931
Cost of sales...................... 87,025 7,560 -- 94,585
-------- ------- ----- --------
Gross profit..................... 127,226 3,120 -- 130,346
Research and development, royalty
and licensing revenue............. 14,249 17,268 -- 31,517
-------- ------- ----- --------
Operating expenses:
Research and development........... 13,041 13,074 -- 26,115
Selling, general and
administrative.................... 31,825 3,880 -- 35,705
Amortization expense............... 3,280 -- -- 3,280
Merger expenses.................... 14,718 -- -- 14,718
-------- ------- ----- --------
Total operating expenses......... 62,864 16,954 -- 79,818
-------- ------- ----- --------
Operating income................. 78,611 3,434 -- 82,045
Other income (expense):
Equity in earnings of joint
ventures............................ 9,713 -- -- 9,713
Investment and other income.......... 9,817 1,144 -- 10,961
Interest expense..................... (274) (715) -- (989)
-------- ------- ----- --------
Total other income, net.......... 19,256 429 -- 19,685
-------- ------- ----- --------
Income before income tax provision... 97,867 3,863 -- 101,730
Provision for income taxes........... 37,106 -- 255 37,361
-------- ------- ----- --------
Net income....................... $ 60,761 $ 3,863 $(255) $ 64,369
======== ======= ===== ========
Per share data:
Basic earnings per share........... $ 0.70 $ 0.19 $ -- $ 0.70
======== ======= ===== ========
Diluted earnings per share......... $ 0.68 $ 0.18 $ -- $ 0.68
======== ======= ===== ========
Weighted average number of common
shares outstanding................ 86,712 20,714 -- 92,228
Common stock equivalents........... 2,325 907 -- 2,567
-------- ------- ----- --------
Diluted weighted average shares.... 89,037 21,621 -- 94,795
======== ======= ===== ========
</TABLE>
See accompanying notes to the unaudited pro forma condensed combined financial
statements.
F-5
<PAGE>
WATSON / THERATECH
UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENT OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
WATSON THERATECH ADJUSTMENTS COMBINED
-------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues:
Product sales, net................. $409,703 $14,007 $ -- $423,710
Cost of sales...................... 156,515 9,468 -- 165,983
-------- ------- ------- --------
Gross profit..................... 253,188 4,539 -- 257,727
-------- ------- ------- --------
Research and development, royalty
and licensing revenue............. -- 20,075 -- 20,075
-------- ------- ------- --------
Operating expenses:
Research and development........... 22,402 14,900 -- 37,302
Selling, general and
administrative.................... 67,224 5,497 -- 72,721
Amortization expense............... 15,642 -- -- 15,642
Charge for acquired in-process
research and development.......... 18,790 -- -- 18,790
-------- ------- ------- --------
Total operating expenses......... 124,058 20,397 -- 144,455
-------- ------- ------- --------
Operating income................. 129,130 4,217 -- 133,347
Other income (expense):
Equity in earnings of joint
ventures............................ 5,688 -- -- 5,688
Investment and other income.......... 5,026 1,081 -- 6,107
Interest expense..................... (4,237) (357) -- (4,594)
-------- ------- ------- --------
Total other income, net.......... 6,477 724 -- 7,201
-------- ------- ------- --------
Income before income tax provision... 135,607 4,941 -- 140,548
Provision for income taxes........... 57,194 -- 1,853 59,047
-------- ------- ------- --------
Net income....................... $ 78,413 $ 4,941 $(1,853) $ 81,501
======== ======= ======= ========
Per share data:
Basic earnings per share........... $ 0.88 $ 0.23 $ -- $ 0.86
======== ======= ======= ========
Diluted earnings per share......... $ 0.86 $ 0.23 $ -- $ 0.84
======== ======= ======= ========
Weighted average number of common
shares outstanding................ 88,942 21,190 -- 94,585
Common stock equivalents........... 2,441 536 -- 2,584
-------- ------- ------- --------
Diluted weighted average shares.... 91,383 21,726 -- 97,169
======== ======= ======= ========
</TABLE>
See accompanying notes to the unaudited pro forma condensed combined financial
statements.
F-6
<PAGE>
WATSON / THERATECH
UNAUDITED PRO FORMA CONDENSED COMBINED
BALANCE SHEET
SEPTEMBER 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
WATSON THERATECH ADJUSTMENTS COMBINED
---------- --------- ----------- ----------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....... $ 196,126 $23,223 $ -- $ 219,349
Marketable securities........... 2,928 -- -- 2,928
Accounts receivable, net........ 75,234 6,715 -- 81,949
Inventories..................... 69,947 2,517 -- 72,464
Prepaid expenses and other
current assets................. 1,051 373 -- 1,424
Deferred tax assets............. 39,090 -- -- 39,090
---------- ------- ------- ----------
Total current assets.......... 384,376 32,828 -- 417,204
Property and equipment, net....... 105,409 18,263 -- 123,672
Investments and other assets...... 153,314 2,426 -- 155,740
Product rights and other
intangibles, net................. 357,272 7,064 -- 364,336
Deferred tax assets............... -- -- 3,610 3,610
---------- ------- ------- ----------
$1,000,371 $60,581 $ 3,610 $1,064,562
========== ======= ======= ==========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Accounts payable and accrued
expenses....................... $ 66,333 $ 6,183 $14,000 $ 86,516
Current portion of long-term
debt........................... 971 1,224 -- 2,195
Current liability from
acquisition of product rights.. 30,500 -- -- 30,500
Income taxes payable............ 11,367 -- -- 11,367
---------- ------- ------- ----------
Total current liabilities..... 109,171 7,407 14,000 130,578
Long-term debt.................... 150,093 1,243 -- 151,336
Long-term liability from
acquisition of product rights.... 20,000 3,040 -- 23,040
Other liabilities................. -- 212 -- 212
Deferred tax liabilities.......... 36,625 -- 2,108 38,733
---------- ------- ------- ----------
Total liabilities............. 315,889 11,902 16,108 343,899
Commitments and contingencies
Minority interest................. 1,000 -- -- 1,000
---------- ------- ------- ----------
Stockholders' equity:
Common stock.................... 295 213 (194) 314
Additional paid-in capital...... 291,800 71,973 194 363,967
Retained earnings (deficit)..... 353,450 (22,270) (12,498) 318,682
Accumulated other comprehensive
income......................... 37,937 (1,237) -- 36,700
---------- ------- ------- ----------
Total stockholders' equity.... 683,482 48,679 (12,498) 719,663
---------- ------- ------- ----------
$1,000,371 $60,581 $ 3,610 $1,064,562
========== ======= ======= ==========
</TABLE>
See accompanying notes to the unaudited pro forma condensed combined financial
statements.
F-7
<PAGE>
WATSON / THERATECH
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS
(1) Historical Presentation. The foregoing unaudited pro forma condensed
combined financial statements are derived from, and should be read in
conjunction with, the audited consolidated financial statements, including the
notes thereto, of Watson and TheraTech incorporated by reference in this Proxy
Statement/Prospectus. The fiscal years of Watson and TheraTech end on December
31, and, as such, the unaudited pro forma condensed combined financial
statements have been reported on such fiscal year bases. No adjustments have
been made to the unaudited pro forma condensed combined financial statements
for differences in the application of generally accepted accounting principles
between Watson and TheraTech, as the impact of such adjustments would not be
material. Based on the number of shares of TheraTech Common Stock outstanding
at October 31, 1998, approximately 5.7 million additional shares of Watson
Common Stock would be issued in the Merger, using an assumed Exchange Ratio of
0.2663.
Certain amounts in the historical audited consolidated financial statements
of Watson and TheraTech have been reclassified to conform to the unaudited pro
forma condensed combined financial statement presentation.
No adjustments are necessary to eliminate intercompany transactions and
balances in the unaudited pro forma condensed combined financial statements as
there were no intercompany transactions or balances.
The unaudited pro forma condensed combined financial statements are presented
for illustrative purposes only. They are not necessarily indicative of the
operating results or financial position that would have occurred if the Merger
had been consummated in accordance with the assumptions set forth in these
notes, nor are they necessarily indicative of future operating results or
financial position.
(2) Unaudited Pro Forma Condensed Combined Adjustments. (a) The unaudited pro
forma condensed combined financial statements reflect the reduction in the
valuation allowance of deferred tax assets established in the historical
financial statements of TheraTech, resulting in the recognition of tax benefits
relating to certain net operating losses incurred by TheraTech. For purposes of
the unaudited pro forma condensed combined financial statements, the estimated
reduction in the valuation allowance has been recorded in the year ended
December 31, 1995. In determining that a portion of the deferred tax assets was
realizable by the combined company, management of Watson, based in part on
information furnished by TheraTech, considered the prior operating results of
each company and the future plans and expectations of the combined company.
(b) The unaudited pro forma condensed combined balance sheet at September 30,
1998 has been adjusted to reflect estimated nonrecurring merger costs of $14.0
million. The adjustment gives effect to these merger costs as if they had been
accrued as of September 30, 1998. The estimated merger costs are expected to
include investment banking fees, legal, accounting, printing and other costs
associated with the Merger. These costs have been excluded from the unaudited
pro forma condensed combined statement of income for the nine months ended
September 30, 1998 due to their nonrecurring nature.
F-8
<PAGE>
(c) The unaudited pro forma condensed combined financial statements do not
reflect the positive effects of potential cost savings which may be achieved
upon combining the resources of the two companies.
(3) TheraTech Options. As of October 31, 1998, the following TheraTech
Options were outstanding:
<TABLE>
<S> <C>
TheraTech 1992 Amended and Restated Employees' Stock Option
Plan........................................................ 2,459,012
TheraTech 1992 Amended and Restated Directors' Stock Option
Plan........................................................ 229,000
Options Granted Outside of TheraTech Plans................... 301,750
---------
Total........................................................ 2,989,762
=========
</TABLE>
Certain options issued under TheraTech's 1992 Amended and Restated Employee
Stock Option Plan, whether or not then exercisable, will automatically become
fully vested and immediately exercisable upon consummation of the Merger. As of
the Effective Time, the provisions of TheraTech's option plans providing for
issuance or grant of any additional options to purchase TheraTech's Common
Stock will be deleted. The options previously granted will remain subject to
TheraTech's option plans, with all actions to be taken under such plans after
the Effective Date by Watson's Board of Directors or a committee thereof. See
"Merger--Interests of Certain Persons in the Merger" on page 38.
Watson is required to register the shares of Watson Common Stock issuable
upon exercise of the TheraTech Options within 60 days after the Closing Date.
Watson will advise holders of TheraTech Options when the shares have been
registered and, if applicable, when such registration is effective.
F-9
<PAGE>
INDEX OF CERTAIN DEFINED TERMS
Definitions of the following terms can be found at the page of this Proxy
Statement/Prospectus indicated in the following table:
<TABLE>
<CAPTION>
PAGE
----
A
<S> <C>
Alternative Proposal....................................................... 54
Average Closing Price...................................................... 25
D
Delaware General Corporation Law (the "DGCL").............................. 62
E
Effective Time............................................................. 25
Environmental Protection Agency ("EPA").................................... 18
Exchange Agent............................................................. 50
Exchange Ratio............................................................. 25
F
Federal Food and Drug Administration ("FDA")............................... 18
Federal Trade Commission ("FTC")........................................... 41
L
Letter of Transmittal...................................................... 50
N
Nevada General Corporation Law (the "Nevada Act").......................... 62
S
Securities and Exchange Commission ("SEC")................................. 38
Superior Proposal.......................................................... 55
U
U.S. Drug Enforcement Agency ("DEA")....................................... 18
</TABLE>
<PAGE>
APPENDICES
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
Appendix A-- Agreement and Plan of Merger................................ A-1
Appendix B-- Fairness Opinion of CIBC Oppenheimer Corp. ................. B-1
</TABLE>
<PAGE>
APPENDIX A
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER is dated as of October 23, 1998 (the
"Agreement") by and among Watson Pharmaceuticals, Inc., a Nevada corporation
("Watson"), Jazz Merger Corp., a Delaware corporation and the wholly-owned
subsidiary of Watson ("Watson Sub"), and TheraTech, Inc., a Delaware
corporation (the "Company").
WHEREAS, the Board of Directors of each of Watson and the Company have
determined that a business combination between Watson and the Company merging
their respective pharmaceutical businesses is in the best interests of their
respective companies and stockholders and accordingly have agreed to effect the
merger provided for herein upon the terms and subject to the conditions set
forth herein; and
WHEREAS, it is the intention of the parties to this Agreement that (a) for
federal income tax purposes, the merger provided for herein shall qualify as a
"reorganization" within the meaning of Section 368 of the Internal Revenue Code
of 1986, as amended (the "Code"); and (b) for accounting purposes, the merger
provided for herein shall qualify as a "pooling of interests";
WHEREAS, the Company has delivered to Watson voting agreements executed by
Dinesh C. Patel and William I. Higuchi; and
NOW, THEREFORE, in consideration of the premises and of the representations,
warranties, covenants and agreements set forth herein, the parties hereto
hereby agree as follows:
ARTICLE I
THE MERGER
1.1. The Merger. Upon the terms and subject to the conditions of this
Agreement, at the Effective Time (as defined in Section 1.3 of this Agreement),
Watson Sub shall be merged with and into the Company in accordance with the
laws of the State of Delaware and the terms of this Agreement (the "Merger"),
whereupon the separate corporate existence of Watson Sub shall cease, and the
Company shall be the surviving corporation of the Merger (the Company, as the
surviving corporation after the Merger is sometimes referred to herein as the
"Surviving Corporation").
1.2. Closing. Subject to the terms and conditions of this Agreement, the
closing of the Merger (the "Closing") shall take place (a) at the offices of
D'Ancona & Pflaum, 30 North LaSalle Street, Chicago, Illinois 60602 at 10:00
a.m. three business days after all the conditions set forth in Article VI of
this Agreement (other than those that are waived by the party or parties for
whose benefit such conditions exist) are satisfied; or (b) at such other place,
time, and/or date as the parties hereto may otherwise agree. The date upon
which the Closing shall occur is referred to herein as the "Closing Date."
1.3. Effective Time. If all the conditions to the Merger set forth in Article
VI of this Agreement have been fulfilled or waived and this Agreement shall not
have been terminated as provided in
A-1
<PAGE>
Article VII hereof, the parties hereto shall cause a certificate of merger (the
"Certificate of Merger") to be properly executed and filed in accordance with
the laws of the State of Delaware and the terms of this Agreement on or before
the Closing Date. The parties hereto shall also take such further actions as
may be required under the laws of the State of Delaware in connection with the
consummation of the Merger. The Merger shall become effective at such time as
the Certificate of Merger is duly filed with the Secretary of State of Delaware
or at such later time as is specified in the Certificate of Merger (the
"Effective Time"). From and after the Effective Time, the Surviving Corporation
shall possess all the rights, privileges, powers and franchises and be subject
to all of the restrictions, disabilities and duties of the Company and Watson
Sub, all as provided under applicable law.
1.4. Conversion of Shares. (a) At the Effective Time:
(i) each share of Common Stock, par value $0.01 per share, of Watson Sub
outstanding at the Effective Time, by virtue of the Merger and without any
action on the part of the holders thereof, shall be converted into and
exchanged for one share of Common Stock, par value $0.01 per share, of the
Surviving Corporation; and
(ii) each share of Common Stock, $0.01 par value per share, of the
Company (the "Company Common Stock") outstanding at the Effective Time, by
virtue of the Merger and without any action on the part of the holders
thereof, except as otherwise provided in Section 1.4(c) hereof, shall be
converted into the right to receive the following portion of a share of
Watson Common Stock (the "Exchange Ratio"): Twelve (12) divided by the
Average Closing Price; provided, however, that the Exchange Ratio shall not
be greater than 0.29589 nor less than 0.2663.
(b) As a result of the Merger and without any action on the part of the
holder thereof, at the Effective Time, all shares of Company Common Stock shall
cease to be outstanding and shall be canceled and retired and shall cease to
exist, and each holder of shares of Company Common Stock shall thereafter cease
to have any rights with respect to such shares of Company Common Stock, except
for the right to receive, without interest, the consideration set forth in this
Section 1.4 and cash for fractional shares of Watson Common Stock in accordance
with Section 1.6 of this Agreement upon the surrender of a certificate (each, a
"Certificate") representing such shares of Company Common Stock in accordance
with the provisions of this Article I.
(c) Each share of Company Common Stock held by the Company as treasury stock
or owned by Watson or any Subsidiary (as defined in Section 1.4(d) of this
Agreement) of Watson at the Effective Time shall be canceled, and no payment
shall be made with respect thereto.
(d) For purposes of this Agreement, (i) the term "Average Closing Price"
shall mean the average of the per share last daily closing price of Watson
Common Stock as quoted on the New York Stock Exchange ("NYSE") (and as reported
by The Wall Street Journal or, if not reported thereby, by another
authoritative source) during the ten (10) consecutive trading days ending on
the second trading day immediately preceding the Closing Date; (ii) the word
"Subsidiary" when used with respect to any Person means any corporation or
other organization, whether incorporated or unincorporated, of which (A) at
least fifty percent (50%) of the securities or other interests having by
A-2
<PAGE>
their terms ordinary voting power to elect a majority of the board of directors
or others performing similar functions with respect to such corporation or
other organization is directly or indirectly owned or controlled by such Person
or by any one or more of its Subsidiaries; or (B) such Person or any other
Subsidiary of such Person is a general partner, it being understood that
representations and warranties of a Person concerning any former Subsidiary of
such Person shall be deemed to relate only to the periods during which such
former Subsidiary was a Subsidiary of such Person; and (iii) the word "Person"
means an individual, a corporation, a limited liability company, a partnership,
an association, a trust or any other entity or organization, including a
government or political subdivision or any agency or instrumentality thereof,
or any affiliate (as that term is defined in the Securities Exchange Act of
1934, as amended, and the rules and regulations promulgated thereunder (the
"Exchange Act")) of any of the foregoing.
1.5. Stock Options. All options and warrants to acquire Company Common Stock
(individually, a "Company Option" and collectively, the "Company Options")
outstanding at the Effective Time under the Company's Restated 1992 Employee
Stock Option Plan, the Company's 1992 Directors' Stock Option Plan or otherwise
(collectively, the "Company Stock Option Plans") shall remain outstanding
following the Effective Time. At the Effective Time, such Company Options, by
virtue of the Merger and without any further action on the part of the Company
or the holder of such Company Options, shall be assumed by Watson in such
manner that Watson (a) is a corporation (or a parent or a subsidiary
corporation of such corporation) "assuming a stock option in a transaction to
which Section 424(a) applied" within the meaning of Section 424 of the Code; or
(b) to the extent that Section 424 of the Code does not apply to any such
Company Options, would be such a corporation (or a parent or a subsidiary
corporation of such corporation) were Section 424 applicable to such option.
Each Company Option assumed by Watson shall be exercisable upon the same terms
and conditions as under the applicable Company Stock Option Plan and the
applicable option agreement issued thereunder, except that (x) the unexercised
portion of each such Company Option shall be exercisable for that whole number
of shares of Watson Common Stock (rounded to the nearest whole share, with 0.5
rounded upward) equal to the number of shares of Company Common Stock subject
to the unexercised portion of such Company Option multiplied by the Exchange
Ratio; and (y) the option exercise price per share of Watson Common Stock shall
be an amount equal to the option exercise price per share of Company Common
Stock subject to such Company Option in effect at the Effective Time divided by
the Exchange Ratio (the option price per share, as so determined, being rounded
to the nearest full cent, with $0.005 rounded upward). No payment shall be made
for fractional interests. The term, exercisability, vesting schedule, status as
an "incentive stock option" under Section 422 of the Code, if applicable, and
all of the other terms of the Company Options shall otherwise remain unchanged.
As soon as practicable after the Effective Time, Watson shall deliver to the
holders of Company Options appropriate notices setting forth such holders'
rights pursuant to such Company Options, as amended by this Section 1.5 as well
as notice of Watson's assumption of the Company's obligations with respect
thereto (which occurs by virtue of this Agreement). Watson shall take all
corporate actions necessary to reserve for issuance such number of shares of
Watson Common Stock as will be necessary to satisfy exercises in full of all
Company Options after the Effective Time.
1.6. Exchange of Certificates Representing Company Common Stock. (a) American
Stock Transfer & Trust Company shall act as exchange agent (the "Exchange
Agent") in the Merger.
A-3
<PAGE>
(b) At or promptly after the Effective Time and in any event, no later than
ten (10) business days after the Effective Time, Watson shall deposit or cause
to be deposited with the Exchange Agent for exchange in accordance with this
Article I, the shares of Watson Common Stock issuable pursuant to Section 1.4
in exchange for shares of Company Common Stock outstanding at the Effective
Time and a sufficient amount of cash to satisfy the cash payments to be made in
lieu of fractional share interests pursuant to the terms of Section 1.6(f)
hereof.
(c) At or promptly after the Effective Time, Watson shall cause the Exchange
Agent to mail to each holder of record of shares of Company Common Stock (i) a
letter of transmittal which shall specify that delivery shall be effected, and
risk of loss and title to such shares of Company Common Stock shall pass, only
upon delivery of the Certificates representing such shares to Watson; and (ii)
instructions for use in effecting the surrender of such Certificates in
exchange for the consideration to be received by such holder pursuant to
Sections 1.4 and 1.6 hereof. Upon surrender of a Certificate representing
shares of Company Common Stock for cancellation to Watson, together with such
letter of transmittal, duly executed and completed in accordance with the
instructions thereto, the holder of the shares represented by such Certificate
shall be entitled to receive in exchange therefor, a certificate representing
that number of whole shares of Watson Common Stock and a check representing the
amount of cash in lieu of fractional shares, if any, and unpaid dividends and
distributions, if any, which such holder has the right to receive in respect of
the Certificate surrendered pursuant to the provisions of this Section 1.6,
after giving effect to any required withholding tax, and the shares represented
by the Certificate so surrendered shall forthwith be canceled. No interest will
be paid or accrued on the cash in lieu of fractional shares and unpaid
dividends and distributions, if any, payable to holders of shares of Company
Common Stock who receive shares of Watson Common Stock pursuant to Section 1.4
hereof. In the event of a transfer of ownership of Company Common Stock which
is not registered in the transfer records of the Company, the consideration to
be paid to such holder of Company Common Stock pursuant to Sections 1.4 and 1.6
hereof may be issued to such a transferee if the Certificate representing such
Company Common Stock is presented to Watson, accompanied by all documents
required to evidence and effect such transfer and to evidence that any
applicable stock transfer taxes have been paid or, alternatively, payments of
such transfer tax to the Exchange Agent. Until so surrendered, each Certificate
that, at the Effective Time, represented shares of Company Common Stock will be
deemed from and after the Effective Time, for all corporate purposes other than
the payment of dividends (except to the extent provided in Section 1.6(d)
below), to evidence the consideration to be received by the holders of Company
Common Stock pursuant to Sections 1.4 and 1.6 hereof.
(d) Notwithstanding anything to the contrary contained herein, no dividends
or other distributions declared after the Effective Time on Watson Common Stock
shall be paid with respect to any shares of Company Common Stock represented by
a Certificate until such Certificate is surrendered for exchange as provided
herein. Subject to the effect of applicable laws, following surrender of any
such Certificate, there shall be paid to the holder of the certificates
representing whole shares of Watson Common Stock issued in exchange therefor,
without interest, (i) at the time of such surrender, the amount of dividends or
other distributions with a record date after the Effective Time theretofore
payable with respect to such whole shares of Watson Common Stock and not paid,
less the amount of any withholding taxes which may be required thereon; and
(ii) at the appropriate payment date, the amount of dividends or other
distributions with a record date after the
A-4
<PAGE>
Effective Time but prior to surrender and a payment date subsequent to
surrender payable with respect to such whole shares of Watson Common Stock,
less the amount of any withholding taxes which may be required thereon.
(e) At or after the Effective Time, there shall be no transfers on the stock
transfer books of the Company of the shares of Company Common Stock which were
outstanding at the Effective Time. If, after the Effective Time, Certificates
are presented to the Surviving Corporation, they shall be canceled and
exchanged for the consideration set forth in this Article I deliverable in
respect thereof pursuant to this Agreement in accordance with the procedures
set forth in this Section 1.6. Certificates surrendered for exchange by any
person constituting an "affiliate" of the Company for purposes of Rule 145(c)
under the Securities Act of 1933, as amended (the "Securities Act") shall not
be exchanged until Watson has received an Affiliate Letter (as defined herein)
from such person as provided in Section 5.9.
(f) No fractional shares of Watson Common Stock shall be issued pursuant
hereto. In lieu of the issuance of any fractional share of Watson Common Stock
pursuant to Section 1.4, cash adjustments will be paid to holders in respect of
any fractional share of Watson Common Stock that would otherwise be issuable,
and the amount of such cash adjustment shall be equal to such fractional
proportion of the Average Closing Price of a share of Watson Common Stock.
(g) All former stockholders of the Company (each, a "Stockholder" and
collectively the "Stockholders") shall look only to Watson for payment of
shares of Watson Common Stock, cash in lieu of fractional shares and unpaid
dividends and distributions on the Watson Common Stock, deliverable in respect
of each share of Company Common Stock such Stockholder holds as determined
pursuant to this Agreement, in each case, without any interest thereon.
(h) None of Watson, Watson Sub, the Company, the Surviving Corporation or any
other person shall be liable to any former holder of shares of Company Common
Stock for any amount properly delivered to a public official pursuant to
applicable abandoned property, escheat or similar laws.
(i) In the event any Certificate shall have been lost, stolen or destroyed,
upon the making of an affidavit of that fact by the Person claiming such
Certificate to be lost, stolen or destroyed and, if required by the Surviving
Corporation, the posting by such Person of a bond in such reasonable amount as
the Surviving Corporation may direct as indemnity against any claim that may be
made against it with respect to such Certificate, Watson will issue in exchange
for such lost, stolen or destroyed Certificate, the consideration to be
received by the holder of such Certificate pursuant to Sections 1.4 and 1.6
hereof.
(j) Any portion of the property delivered to the Exchange Agent in accordance
with this Section 1.6 that remains unclaimed by the Stockholders one year after
the Effective Time shall be delivered to Watson. Any Stockholders who have not
theretofore complied with this Section 1.6 shall thereafter look only to Watson
for payment of their consideration to be received by such Stockholder pursuant
to Sections 1.4 and 1.6 hereof deliverable in respect of each share of the
Company Common Stock such Stockholder holds as determined pursuant to this
Agreement, in each case, without any interest thereon.
A-5
<PAGE>
1.7. Adjustment of Exchange Ratio. In the event that, subsequent to the date
of this Agreement but prior to the Effective Time, the outstanding shares of
Watson Common Stock or Company Common Stock shall have been changed into a
different number of shares or a different class as a result of a stock split,
reverse stock split, stock dividend, subdivision, reclassification, split,
combination, exchange, recapitalization or other similar transaction, the
Exchange Ratio and the Average Closing Price shall be appropriately adjusted.
1.8. Tax Consequences and Accounting Treatment. It is intended by the parties
hereto that the Merger shall constitute a reorganization within the meaning of
Section 368 of the Code and that the transaction be accounted for as a pooling
of interests.
1.9. Taking of Necessary Action; Further Action. If, at any time after the
Effective Time, any further action is necessary or desirable to carry out the
purposes of this Agreement and to vest the Surviving Corporation with full
right, title and possession to all assets, property, rights, privileges, powers
and franchises of the Company and Watson Sub, the officers and directors of the
Company and Watson Sub are fully authorized in the name of their respective
corporations or otherwise to take, and will take, all such lawful and necessary
action, so long as such action is consistent with this Agreement.
ARTICLE II
CERTAIN MATTERS RELATING TO THE SURVIVING CORPORATION
2.1. Certificate of Incorporation of the Surviving Corporation. The
certificate of incorporation of Watson Sub in effect at the Effective Time
shall be the certificate of incorporation of the Surviving Corporation until
amended in accordance with its terms and pursuant to applicable law; provided
however, that Article I of the Certificate of Incorporation of the Surviving
Corporation shall be amended to read as follows: "The name of the corporation
is TheraTech, Inc."
2.2. By-Laws of the Surviving Corporation. The By-Laws of Watson Sub in
effect at the Effective Time shall be the By-Laws of the Surviving Corporation
until amended in accordance with the terms of such By-Laws and pursuant to
applicable law and the Certificate of Incorporation of the Surviving
Corporation.
2.3. Directors of the Surviving Corporation. The directors of the Surviving
Corporation immediately after the Effective Time shall consist of the persons
listed in the Certificate of Merger, to hold office until their successors are
duly appointed or elected in accordance with applicable law.
2.4. Officers of the Surviving Corporation. The officers of the Surviving
Corporation immediately after the Effective Time shall consist of the persons
listed in the Certificate of Merger, who shall hold the offices listed opposite
their respective names until their successors are duly appointed or elected in
accordance with applicable law.
A-6
<PAGE>
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF WATSON AND WATSON SUB
Watson and Watson Sub represent and warrant to the Company that the
statements contained in this Article III are true and correct, except as set
forth in the disclosure statement delivered by Watson and Watson Sub to the
Company concurrently herewith and identified as the "Watson Disclosure
Statement." All exceptions noted in the Watson Disclosure Statement shall be
numbered to correspond to the applicable sections to which such exception
refers.
3.1. Existence, Good Standing, Corporate Authority. Each of Watson, Watson
Sub and each Watson Material Subsidiary (as defined below) (i) is a corporation
duly incorporated, validly existing and in good standing under the laws of its
respective jurisdiction of incorporation; (ii) has all requisite power and
authority to (A) own or lease and operate its properties and assets and to
carry on its business as now conducted and as currently proposed to be
conducted, except where the failure to have such power and authority would not
reasonably be expected to have a Watson Material Adverse Effect (as defined
herein), and (B) consummate the transactions contemplated hereby; (iii) is duly
qualified or licensed to do business and is in good standing in all
jurisdictions in which it owns or leases property or in which the conduct of
its business requires it to so qualify or be licensed, except where the failure
to so qualify, individually or in the aggregate, would not reasonably be
expected to have a Watson Material Adverse Effect; and (iv) has obtained all
licenses, permits, franchises and other governmental authorizations necessary
to the ownership or operation of its properties or the conduct of its business,
except where the failure to have obtained such licenses, permits, franchises or
authorizations would not reasonably be expected to have a Watson Material
Adverse Effect. For purposes of this Agreement, (x) a "Material Adverse Effect"
when used with respect to any Person means (i) a material adverse effect on the
business, assets, results of operations, financial condition, or the Products
and Technology of such Person and its Subsidiaries, in each case taken as a
whole; or (ii) an impairment in the ability of such Person or its Subsidiaries
to perform any of their material obligations under this Agreement or to
consummate the Merger; (y) a "Watson Material Subsidiary" shall mean each
Subsidiary of Watson which has total assets or total revenues for the previous
fiscal year in excess of $10,000,000; and (z) "Products and Technology," with
respect to a Person, means such Person's products (including products in
development) technology and Intellectual Property (as defined herein).
3.2. Authorization of Agreement and Other Documents. The execution and
delivery of this Agreement and the other documents executed or to be executed
in connection herewith to which Watson or Watson Sub is a party (collectively,
the "Watson Ancillary Documents"), have been duly authorized by the Board of
Directors of each of Watson and Watson Sub and no other proceedings on the part
of Watson or Watson Sub or their stockholders are necessary to authorize the
execution, delivery or performance of this Agreement or any Watson Ancillary
Document. This Agreement is, and, as of the Closing Date, each of the Watson
Ancillary Documents will be, a valid and binding obligation of Watson and/or
Watson Sub, as the case may be, enforceable against Watson and/or Watson Sub,
as the case may be, in accordance with its terms, except to the extent that
enforcement thereof may be limited by bankruptcy, insolvency, reorganization,
moratorium, fraudulent conveyance or other similar laws affecting enforcement
of creditors' rights generally, and by general principles of equity (regardless
of whether enforcement is considered in a proceeding at law or in equity).
A-7
<PAGE>
3.3. No Violation. Neither the execution and delivery by Watson or Watson Sub
of this Agreement or the Watson Ancillary Agreements, nor the consummation by
Watson or Watson Sub of the transactions contemplated hereby and thereby in
accordance with their respective terms, will (a) conflict with or result in a
breach of any provisions of the Articles or Certificate of Incorporation or By-
Laws of Watson or any of the Watson Material Subsidiaries; (b) result in a
breach or violation of, a default under, or the triggering of any payment or
other material obligations pursuant to, or accelerate vesting under, any of the
Watson stock option plans, or any grant or award made under any of the
foregoing; (c) violate, conflict with, result in a breach of any provision of,
constitute a default (or an event which, with notice or lapse of time or both,
would constitute a default) under, result in the termination, or in a right of
termination or cancellation of, accelerate the performance required by, result
in the triggering of any payment or other material obligations pursuant to,
result in the creation of any lien, security interest, charge or encumbrance
upon any of the material properties of Watson or any Watson Material Subsidiary
under, or result in being declared void, voidable, or without further binding
effect, any of the terms, conditions or provisions of any note, bond, mortgage,
indenture, deed of trust or any material license, franchise, permit, lease,
contract, agreement or other instrument, commitment or obligation to which
Watson or any Watson Material Subsidiary is a party, or by which Watson or any
Watson Material Subsidiary or any of their respective properties is bound,
except for any of the foregoing matters which would not reasonably be expected
to have a Watson Material Adverse Effect; (d) contravene or conflict with or
constitute a violation of any provision of any law, regulation, judgement,
injunction, order or decree binding upon or applicable to Watson or any Watson
Material Subsidiary, except for any of the foregoing matters which would not
reasonably be expected to have a Watson Material Adverse Effect; or (e) other
than the filings provided for in Sections 1.3 and 5.7, filings required under
the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR Act"), the
Exchange Act, the Securities Act, or applicable state securities and "Blue Sky"
laws or filings in connection with the maintenance of qualification to do
business in other jurisdictions (collectively, the "Regulatory Filings"),
require any material consent, approval or authorization of, or declaration of,
or filing or registration with, any domestic governmental or regulatory
authority, the failure to obtain or make which would reasonably be expected to
have a Watson Material Adverse Effect.
3.4. SEC Documents. Watson has delivered or made available to the Company
each registration statement, report, proxy statement or information statement
(as defined in Regulation 14C under the Exchange Act) prepared by it since
January 1, 1997, which reports constitute all of the documents required to be
filed by Watson with the Securities and Exchange Commission ("SEC") since such
date, each in the form (including exhibits and any amendments thereto) filed
with the SEC (collectively, the "Watson Reports"). As of their respective
dates, the Watson Reports and any Watson Reports filed after the date hereof
and prior to the Effective Time (a) complied as to form in all material
respects with the applicable requirements of the Securities Act or the Exchange
Act, as the case may be, and the rules and regulations thereunder; and (b) did
not contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements made
therein, in the light of the circumstances under which they were made, not
misleading. Watson has timely filed with the SEC all reports required to be
filed under Sections 13, 14 and 15(d) of the Exchange Act since January 1,
1997. Each of the consolidated balance sheets of Watson included in or
incorporated by reference into the Watson Reports (including the related notes
and schedules) fairly present in all material respects the consolidated
financial position of
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Watson and its Subsidiaries as of its date (subject, in the case of unaudited
statements, to normal year-end audit adjustments which are not reasonably
expected to be material in amount or effect), and each of the consolidated
statements of income, retained earnings and cash flows of Watson included in or
incorporated by reference into the Watson Reports (including any related notes
and schedules) fairly present in all material respects the results of
operations, retained earnings or cash flows, as the case may be, of Watson and
its Subsidiaries for the periods set forth therein (subject, in the case of
unaudited statements, to normal year-end audit adjustments which are not
reasonably expected to be material in amount or effect). The financial
statements of Watson, including the notes thereto, included in or incorporated
by reference into the Watson Reports comply as to form in all material respects
with applicable accounting requirements and with the published rules and
regulations of the SEC with respect thereto, and have been prepared in
accordance with generally accepted accounting principles consistently applied
("GAAP") (except as may be indicated in the notes thereto). Since January 1,
1997, there has been no material change in Watson's accounting methods or
principles except as described in the notes to such Watson financial
statements.
3.5. No Brokers. Watson has not entered into any contract, arrangement or
understanding with any person or firm which may result in the obligation of the
Company, Watson, Watson Sub or their respective Subsidiaries to pay any
finder's fee, brokerage or agent's commissions or other like payments in
connection with the negotiations leading to this Agreement or the consummation
of the transactions contemplated hereby, except that Watson has retained Bear,
Stearns & Co. Inc. as its financial advisor.
3.6. Opinion of Financial Advisor. Watson has received the opinion of Bear,
Stearns & Co. Inc., to the effect that, as of the date of such opinion, the
consideration to be paid by Watson pursuant to the Merger is fair to Watson
from a financial point of view.
3.7. Watson Common Stock. The issuance and delivery by Watson of shares of
Watson Common Stock in connection with the Merger and this Agreement have been
duly and validly authorized by all necessary corporate action on the part of
Watson. The shares of Watson Common Stock to be issued in connection with the
Merger and this Agreement, when issued in accordance with the terms of this
Agreement, will be validly issued, fully paid and nonassessable and free of
preemptive rights, and may be sold by "Affiliates" (as defined below) under
paragraph (d) of Rule 145 promulgated under the Securities Act.
3.8. Capitalization. (a) The total authorized capital stock of Watson
consists of (i) 500,000,000 shares of Watson Common Stock, 89,414,516 shares of
which are issued and outstanding as of October 1, 1998 and 6,100,000 shares of
which have been reserved for issuance pursuant to the Merger and (ii) 2,500,000
shares of preferred stock, none of which are issued and outstanding as of the
date of this Agreement. The authorized capital stock of Watson Sub consists of
1,000 shares of Common Stock, $0.01 par value per share, 100 shares of which,
as of the date hereof, are issued and outstanding and are held by Watson. There
are no shares of capital stock of Watson or Watson Sub of any other class
authorized, issued or outstanding. All of such outstanding shares of Watson
Common Stock have been validly issued, are fully paid and nonassessable and
were issued in compliance with all preemptive rights. The issuance of Watson
Common Stock pursuant to the Merger is not subject to any pre-emptive or other
similar rights to acquire Watson Common Stock.
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(b) As of October 1, 1998, except as set forth in the Watson Reports, there
are no outstanding (i) securities convertible into or exchangeable for any
capital stock of Watson, (ii) options, warrants or other rights to purchase or
subscribe to capital stock of Watson or securities convertible into or
exchangeable for capital stock of Watson, or (iii) contracts, commitments,
agreements, understandings, arrangements, calls or claims of any kind relating
to the issuance of any capital stock of Watson.
3.9. Disclosure Documents. The Proxy Statement/Prospectus to be delivered to
the Stockholders in connection with the approval of the transactions
contemplated by this Agreement, or any amendment or supplement thereto (the
"Proxy Statement") at the time of mailing thereof and at the time of the
meeting of Stockholders, or, in the case of the Form S-4 (as defined in Section
5.7 of this Agreement) and each amendment or supplement thereto, at the time it
is filed or becomes effective under the Securities Act, will not contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading; provided,
however, that the foregoing shall not apply to the extent that any such untrue
statement of a material fact or omission to state a material fact was made by
Watson in reliance upon and in conformity with written information concerning
the Company furnished to Watson by the Company specifically for use in the
Proxy Statement.
3.10. Tax Reorganization; Accounting Matters. To its knowledge, after
consulting with its independent auditors, neither Watson nor any of its
Subsidiaries has taken or failed to take any action which would prevent the
Merger from (a) constituting a reorganization within the meaning of section
368(a) of the Code; or (b) being treated as a "pooling or interests" in
accordance with Accounting Principles Board Opinion No. 16, the interpretative
releases issued pursuant thereto, and the pronouncements of the SEC.
3.11. Material Adverse Change. Since June 30, 1998, Watson and its
Subsidiaries, taken as a whole, have not suffered, and no event or occurrence
has taken place that would reasonably be expected to have, a Watson Material
Adverse Effect; provided, that a Watson Material Adverse Effect will not be
deemed to have occurred solely as a result of fluctuations in the value of
Watson Common Stock.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to Watson and Watson Sub that the
statements contained in this Article IV are true and correct, except as set
forth in the disclosure statement delivered by the Company to Watson and Watson
Sub concurrently herewith and identified as the "Disclosure Statement." All
exceptions noted in the Disclosure Statement shall be numbered to correspond to
the applicable sections to which such exception refers. The Company represents
and warrants that the Disclosure Statement has been prepared in good faith, in
a commercially reasonable manner consistent with the requirements of this
Agreement and any material violation of this representation shall be deemed to
be a violation of Section 6.2(b) and 7.1(g) of this Agreement.
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4.1. Organization, Standing and Qualification. Each of the Company and each
of its Subsidiaries (i) is a corporation duly organized, validly existing and
in good standing under the laws of its jurisdiction of incorporation; (ii) has
all requisite power and authority to (A) own or lease and operate its
properties and assets and to carry on its business as now conducted and as
currently proposed to be conducted, except where the failure to have such power
and authority would not reasonably be expected to have a Company Material
Adverse Effect, and (B) consummate the transactions contemplated hereby; (iii)
is duly qualified or licensed to do business and is in good standing in all
jurisdictions in which it owns or leases property or in which the conduct of
its business requires it to so qualify or be licensed, except where the failure
to so qualify, individually or in the aggregate, would not reasonably be
expected to have a Company Material Adverse Effect; and (iv) has obtained all
licenses, permits, franchises and other governmental authorizations necessary
to the ownership or operation of its properties or the conduct of its business,
except where the failure to have obtained such licenses, permits, franchises or
authorizations would not reasonably be expected to have a Company Material
Adverse Effect. The Disclosure Statement lists each jurisdiction in which the
Company or any of its Subsidiaries is qualified or licensed to do business.
4.2. Capitalization. (a) Except for shares of Company Common Stock issued
upon the exercise of outstanding options to purchase Company Common Stock
listed in the Disclosure Statement, the total authorized capital stock of the
Company consists of (i) 50,000,000 shares of common stock, par value $0.01 per
share, 21,293,762 shares of which are issued and outstanding; and (ii)
5,000,000 shares of preferred stock, none of which are issued and outstanding.
There are no shares of capital stock of the Company of any other class
authorized, issued or outstanding.
(b) Each share of the outstanding Company Common Stock is (i) duly authorized
and validly issued; (ii) fully paid and nonassessable and free of preemptive
and similar rights; and (iii) to the knowledge of the Company, free and clear
of all liens, pledges, security interests, claims or other encumbrances and
restrictions on voting and transfer other than restrictions on transfer imposed
by Federal and state securities laws.
(c) There are currently no outstanding, and, as of the Closing, there will be
no outstanding (i) securities convertible into or exchangeable for any capital
stock of the Company or any of its Subsidiaries, (ii) options, warrants or
other rights to purchase or subscribe to capital stock of the Company or any of
its Subsidiaries or securities convertible into or exchangeable for capital
stock of the Company or any of its Subsidiaries, or (iii) contracts,
commitments, agreements, understandings, arrangements, calls or claims of any
kind to which the Company or any of its Subsidiaries is a party or is bound
relating to the issuance of any capital stock of the Company or any of its
Subsidiaries. The Disclosure Statement identifies, as of the date hereof, the
option holder, the number of shares subject to each option, the exercise price,
the vesting schedule and the expiration date of each outstanding option or
warrant to purchase capital stock of the Company or any of its Subsidiaries.
All options, warrants or other rights to purchase Company Common Stock have
been duly authorized and validly issued. All options issued under the Company
Stock Option Plans have been issued in accordance with the terms of such plans.
The Company has reserved out of the authorized and unissued shares of Company
Common Stock a sufficient number of shares that will be issued upon the
exercise of all outstanding options, warrants or other rights to purchase
Company Common Stock.
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4.3. Subsidiaries. The Company owns directly or indirectly each of the
outstanding shares of capital stock (or other ownership interests having by
their terms ordinary voting power to elect a majority of directors or others
performing similar functions with respect to such Subsidiary) of each of the
Company's Subsidiaries indicated in the Disclosure Schedule as being owned by
the Company. Each of the outstanding shares of capital stock owned by the
Company of each of the Company's Subsidiaries is duly authorized, validly
issued, fully paid and nonassessable, and is owned, directly or indirectly, by
the Company free and clear of all liens, pledges, security interests, claims or
other encumbrances. The following information for each Subsidiary of the
Company is listed in the Disclosure Schedule, if applicable: (a) its name and
jurisdiction of incorporation or organization; (b) the location of its chief
executive office; (c) a summary of its lines of business and products; (d) its
authorized capital stock or share capital; (e) the number of issued and
outstanding shares of capital stock or share capital and the owner(s) thereof;
and (f) the officers and directors of such Subsidiary.
4.4. Ownership Interests. Except for the interests in the Company's
Subsidiaries listed in the Disclosure Statement, neither the Company nor any of
its Subsidiaries owns any direct or indirect interest in any Person. Since
January 1, 1996, the Company has not (i) disposed of the capital stock (other
than Company Common Stock) or all or substantially all of the assets of any
ongoing business, or (ii) purchased the business and/or all or substantially
all of the assets of another Person (whether by purchase of stock, assets,
merger or otherwise).
4.5. Constituent Documents. True and complete copies of the Certificate or
Articles of Incorporation and all amendments thereto or other appropriate
formation documents, the By-Laws as amended and currently in force and all
corporate minute books and records of the Company and each of its Subsidiaries
have been furnished or made available by the Company to Watson for inspection.
The corporate minute books and records of the Company and its Subsidiaries
contain true and complete copies of all resolutions adopted by the stockholders
or the Board of Directors of the Company and its Subsidiaries or any committees
thereof.
4.6. Authorization of Agreement and Other Documents. The execution and
delivery of this Agreement and the other documents executed or to be executed
in connection herewith to which the Company is a party (collectively, the
"Company Ancillary Documents"), have been duly authorized by the Board of
Directors of the Company and no other corporate or stockholder approvals are
necessary to authorize the execution, delivery or performance of this Agreement
or any Company Ancillary Document, except the approval of the Merger by the
Stockholders. This Agreement is, and, as of the Closing Date, each of the
Company Ancillary Documents will be, a valid and binding obligation of the
Company, enforceable against the Company in accordance with its terms, except
to the extent that enforcement thereof may be limited by bankruptcy,
insolvency, reorganization, moratorium, fraudulent conveyance or other similar
laws affecting enforcement of creditors' rights generally, and by general
principles of equity (regardless of whether enforcement is considered in a
proceeding at law or in equity) and subject to the receipt of Stockholder
approval of the Merger.
4.7. No Violation. Neither the execution and delivery by the Company of this
Agreement or the Company Ancillary Documents, nor the consummation by the
Company of the transactions contemplated hereby and thereby in accordance with
their respective terms, will (a) conflict with or result in a breach of any
provisions of the Certificate or Articles of Incorporation or By-Laws of the
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Company or any of its Subsidiaries; (b) result in a breach or violation of, a
default under, or the triggering of any payment or other material obligations
pursuant to, or accelerate vesting under, any of the Company Stock Option
Plans, or any grant or award made under any of the foregoing; (c) violate,
conflict with, result in a breach of any provision of, constitute a default (or
an event which, with notice or lapse of time or both, would constitute a
default) under, result in the termination, or in a right of termination or
cancellation of, cause the forfeiture or adversely affect any material right
of, accelerate the performance required by, result in the triggering of any
payment or other material obligations pursuant to, result in the creation of
any lien, security interest, charge or encumbrance upon any of the material
properties of the Company (including Intellectual Property) or any of its
Subsidiaries under, or result in being declared void, voidable, or without
further binding effect, any of the terms, conditions or provisions of any
material note, bond, mortgage, indenture, deed of trust or any material
license, franchise, permit, lease, contract, agreement or other material
instrument, commitment or obligation to which the Company or any of its
Subsidiaries is a party, or by which the Company or any of its Subsidiaries or
any of their respective properties is bound; (d) contravene or conflict with or
constitute a violation of any provision of any material law, regulation,
judgment, injunction, order or decree binding upon or applicable to the Company
or any of its Subsidiaries, except for any of the foregoing matters which would
not reasonably be expected to have a Company Material Adverse Effect; or (e)
other than the Regulatory Filings, require any consent, approval or
authorization of, or declaration of, or filing or registration with, any
domestic governmental or regulatory authority, except for any of the foregoing
matters which would not reasonably be expected to have a Company Material
Adverse Effect.
4.8. Compliance with Laws--General. (a) To the Company's knowledge, the
Company and each of its Subsidiaries hold, in its own name, all material
permits, licenses, variances, exemptions, orders and approvals of any court,
arbitral, tribunal, administrative agency or commissioner or other governmental
or other regulatory authority or agency ("Governmental Entities") necessary for
the lawful conduct of its business (the "Permits"), each of which is listed on
the Disclosure Statement. To the Company's knowledge, all such material Permits
are valid and in full force and effect and will remain so upon consummation of
the transactions contemplated by this Agreement. To the knowledge of the
Company, no suspension, cancellation or termination of any Permit is
threatened. True and correct copies of all Permits have been provided or made
available to Watson prior to the date hereof. The Company has provided to
Watson copies of all notices from any Governmental Entity relating to any
material alleged violation or material non-compliance with any law, ordinance
or regulation of any Governmental Entity by the Company during the last three
years and all such matters have been resolved as of the date hereof.
(b) To the Company's knowledge, the Company and its Subsidiaries are not in
violation of, in any material respect, and are in material compliance with, the
terms of its material Permits.
(c) To the Company's knowledge, the Company and its Subsidiaries are not in
violation of, and are in substantial compliance with, all laws, ordinances or
regulations of all Governmental Entities (including, but not limited to, those
related to occupational health and safety, controlled substances or employment
and employment practices) that are applicable to the Company or any of its
Subsidiaries or affect or relate to this Agreement or the transactions
contemplated hereby, except for any of the foregoing matters which would not
reasonably be expected to have a Company Material Adverse Effect.
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(d) No investigation, review, inquiry or proceeding by any Governmental
Entity with respect to the Company or any of its Subsidiaries is pending or, to
the knowledge of the Company, threatened, other than those related to FDA
product approvals requested by the Company, and in the good faith opinion of
the Senior Officers (as defined herein), based upon their actual knowledge
after reasonable inquiry ("Good Faith Opinion"), there are no facts which could
reasonably be expected to form a legitimate basis for any of the foregoing.
(e) Neither the Company nor any of its Subsidiaries are subject to any
agreement, contract or decree with any Governmental Entities arising out of any
current or previously existing violations of any laws, ordinances or
regulations applicable to the Company or any of its Subsidiaries.
(f) To the Company's knowledge, all finished products purchased from third
party manufacturers by the Company or its Subsidiaries meet the specifications
therefor in all material respects and there is no material violation of any
applicable law by any third party manufacturer.
4.9. Compliance with Laws--FDA. (a) To the Company's knowledge, as to each
drug of the Company or any of its Subsidiaries for which a new drug application
("NDA") or abbreviated new drug application ("ANDA") has been approved by the
U.S. Food and Drug Administration ("FDA"), which drugs are described in the
Disclosure Statement and such NDAs and ANDAs are exclusively owned by the
Company or one of its Subsidiaries, the applicant and all Persons performing
operations covered by the application are not in violation of, in any material
respect, and are in material compliance with, 21 U.S.C. (S)(S) 355, 21 C.F.R.
Parts 314 et. seq., respectively, and all terms and conditions of the
application.
(b) The Company does not manufacture, sell or distribute, and has not
developed and is not currently developing any "biologic product," "medical
devices" or "antibiotics."
(c) To the Company's knowledge, the Company and each of its Subsidiaries are
not in violation of, in any material respect, and are in material compliance
with, all applicable registration and listing requirements set forth in 21
U.S.C. (S) 360 and 21 C.F.R. Part 207. To the Company's knowledge, to the
extent required, the Company and each of its Subsidiaries have obtained
licenses from the U.S. Drug Enforcement Agency ("DEA") and are not in violation
of, in any material respect, and are in material compliance with, all such
licenses and all applicable regulations promulgated by the DEA.
(d) To the Company's knowledge, all manufacturing operations conducted by or
for the benefit of the Company and its Subsidiaries are not in violation of, in
any material respect, and have been and are being conducted in material
compliance with, the good manufacturing practice regulations set forth in 21
C.F.R. Parts 210 and 211.
(e) To the Company's knowledge, neither the Company, its Subsidiaries nor
their respective officers, employees, or agents have made an untrue statement
of material fact or fraudulent statement to the FDA or the DEA, failed to
disclose a material fact required to be disclosed to the FDA or the DEA, or
committed an act, made a statement, or failed to make a statement that could
reasonably be expected to provide a basis for the FDA to invoke its policy
respecting "Fraud, Untrue Statements of Material Facts, Bribery, and Illegal
Gratuities," set forth in 56 Fed. Reg 46191 (September 10, 1991) and any
amendments thereto.
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(f) No reports of inspection observations, establishment inspection reports
or warning letters have been received from or issued by the FDA or the DEA
within the last three years that allege lack of compliance with the FDA or the
DEA regulatory requirements by the Company, its Subsidiaries or, to the
Company's knowledge, persons covered by product applications or otherwise
performing services for the benefit of the Company or its Subsidiaries.
(g) Neither the Company nor its Subsidiaries have received any written notice
or has knowledge that the FDA or the DEA has commenced or threatened to
initiate, any action to withdraw its approval or request the recall of any
product of the Company or its Subsidiaries or commenced or threatened to
initiate, any action to enjoin production at any facility owned or used by the
Company or its Subsidiaries or any facility at which any of the Company's or
its Subsidiaries' products are manufactured, processed, packaged, labeled,
stored, distributed, tested or otherwise handled (the "Manufacturing
Locations").
(h) To the Company's knowledge, as to each article of drug or consumer
product currently manufactured and/or distributed by the Company or its
Subsidiaries, which products are described in the Disclosure Statement, such
article is not adulterated or misbranded within the meaning of the FDCA, 21
U.S.C. (S)(S) 321 et. seq.
(i) To the Company's knowledge, as to each drug referred to in Section
4.9(a), the Company, its Subsidiaries and their respective officers, employees,
agents and affiliates have included or caused to be included in the application
for such drug, where required, the certification described in 21 U.S.C. (S)
335a(k)(l) and the list described in 21 U.S.C. (S) 335a(k)(2), and such
certification and such list was in each case true and accurate, in all material
respects, when made and remained true and accurate in all material respects
thereafter.
(j) Neither the Company, its Subsidiaries, nor, to the knowledge of the
Company, their respective officers, employees, agents or affiliates, has been
convicted of any crime or engaged in any conduct for which debarment is
mandated by 21 U.S.C. (S) 335a(a) or authorized by 21 U.S.C. (S) 335a(b).
(k) As to each application or abbreviated application submitted to, but not
approved by, the FDA, and not withdrawn by the Company or its Subsidiaries, or
applicants acting on its behalf as of the date of this Agreement, the Company
and its Subsidiaries have complied, in all material respects, and are in
material compliance with, the requirements of 21 U.S.C. (S)(S) 355 and 21
C.F.R. Parts 312 and 314 et. seq. and has provided all additional information
and taken all additional action reasonably requested by the FDA in connection
with the application.
(l) In the Company's Good Faith Opinion, there are no facts or circumstances
that would reasonably be expected to delay, in any material respect, outside
the ordinary course of business, or prevent approval of any pending NDAs or
ANDAs, or any amendments and/or supplements thereto.
(m) To the Company's knowledge, there are no lawsuits, actions, arbitrations
or legal or administrative or regulatory proceedings, charges, complaints, or
investigations by the FDA or any other Governmental Entity pending against the
Company or any of its Subsidiaries with respect to any Permit. To the Company's
knowledge, there are no proceedings pending with respect to a
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violation by the Company or any Subsidiary of the Food, Drug and Cosmetic Act,
FDA regulations adopted thereunder, or any other legislation or regulation
promulgated by any other Governmental Entity which might result in the
revocation, cancellation, suspension, limitation or adverse modification of any
Permit.
(n) Neither the Company nor any of its Subsidiaries have been served with any
complaint or received any other notices of lawsuits, arbitrations, legal or
administrative or regulatory proceedings, charges, complaints or investigations
by any federal, state or foreign regulatory agency threatened or pending
against or relating to the Company or any of its Subsidiaries or any Permit of
the Company or any of its Subsidiaries. There have been no product recalls or
similar actions by the Company or any of its Subsidiaries since January 1,
1994.
(o) To the Company's knowledge, the Company and each of its Subsidiaries are
not in violation of, in any material respect, and are in material compliance
with, all applicable laws and regulations regarding the conduct of pre-clinical
and clinical investigations including but not limited to good laboratory
practices, investigational new drug requirements, and requirements regarding
informed consent and Institutional Review Boards designed to ensure the
protection of the rights and welfare of human subjects, including but not
limited to the requirements provided in 21 C.F.R. Parts 50, 56, 58 and 312.
(p) To the Company's knowledge, the Disclosure Statement identifies all the
countries in which the Company's or its Subsidiaries' products have been or are
being registered and/or approved for manufacturing, marketing or sale and the
products approved in each respective country. To the Company's knowledge, the
Company or its Subsidiaries are authorized to sell products in each of the
countries in which such products are currently being sold and all Permits
necessary for such sale are held by the Company or one of its Subsidiaries. The
Disclosure Statement describes the owners of the approvals or registrations for
the manufacture, marketing or sale of the Company's or its Subsidiaries'
products.
4.10. Books and Records. The Company's and its Subsidiaries' books, accounts
and records are, and have been, in all material respects, maintained in the
Company's and its Subsidiaries usual, regular and ordinary manner, in
accordance with GAAP, and all material transactions to which the Company or any
of its Subsidiaries is or has been a party are properly reflected therein. To
the Company's knowledge, all documents or information that the Company or its
Subsidiaries have provided or made available to Watson are true and correct
copies of such documents or information as they exist in the Company's or its
Subsidiaries' books and records.
4.11. SEC Documents. The Company has delivered or made available to Watson
each registration statement, report, proxy statement or information statement
(as defined in Regulation 14C under the Exchange Act) prepared by it since
January 1, 1997, which reports constitute all of the documents required to be
filed by the Company with the SEC since such date, each in the form (including
exhibits and any amendments thereto) filed with the SEC (collectively, the
"Company Reports"). As of their respective dates, the Company Reports and any
Company Reports filed after the date hereof and prior to the Effective Time (a)
complied as to form in all material respects with the applicable requirements
of the Securities Act or the Exchange Act, as the case may be, and the rules
and regulations thereunder; and (b) did not contain any untrue statement of a
material fact or
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omit to state a material fact required to be stated therein or necessary to
make the statements made therein, in the light of the circumstances under which
they were made, not misleading. The Company has timely filed with the SEC all
reports required to be filed under Section 13, 14 and 15(d) of the Exchange Act
since January 1, 1997. Each of the consolidated balance sheets of the Company
included in or incorporated by reference into the Company Reports (including
any related notes and schedules) fairly present in all material respects the
consolidated financial position of the Company and its Subsidiaries as of its
date (subject, in the case of unaudited statements, to normal year-end audit
adjustments which are not reasonably expected to be material in amount or
effect), and each of the consolidated statements of income, retained earnings
and cash flows of the Company included in or incorporated by reference into the
Company Reports (including any related notes and schedules) fairly present in
all material respects the results of operations, retained earnings or cash
flows, as the case may be, of the Company and its Subsidiaries for the periods
set forth therein (subject, in the case of unaudited statements, to normal
year-end audit adjustments which are not reasonably expected to be material in
amount or effect). The financial statements of the Company, including the notes
thereto, included in or incorporated by reference into the Company Reports
comply as to form in all material respects with applicable accounting
requirements and with the published rules and regulations of the SEC with
respect thereto, and have been prepared in accordance with GAAP (except as may
be indicated in the notes thereto). Since January 1, 1997, there has been no
material change in the Company's accounting methods or principles except as
described in the notes to such Company financial statements.
4.12. Accounts Receivables. To the Company's knowledge, none of the trade
receivables and notes receivable which are reflected in the financial
statements contained in the Company Reports or which arose subsequent to June
30, 1998, is or was subject to any counterclaim or set off (other than claims
in the ordinary course of business or otherwise covered by the reserve for
doubtful accounts in the Company's financial statements). All of such trade
receivables arose out of bona fide, arms-length transactions for the sale of
goods, performance of services or the right to receive royalty income, and to
the Company's knowledge, all such trade receivables and notes receivable are
good and collectible (or have been collected) in the ordinary course of
business at the aggregate recorded amounts thereof, less the amount of
applicable reserves for doubtful accounts and for allowances and discounts.
4.13. Inventory. To the Company's knowledge, all inventory of the Company or
any of its Subsidiaries which is held for sale or resale, including raw
materials, work in process and finished goods (collectively, "Inventory"),
consists of items of a quality historically useable and/or saleable in the
normal course of business, net of any applicable reserves.
4.14. Bank Accounts. The Disclosure Statement contains a list showing: (a)
the name of each bank, safe deposit company or other financial institution in
which the Company or any of its Subsidiaries has an account, lock box or safe
deposit box; and (b) the names of all persons authorized to draw thereon or to
have access thereto and the names of all Persons, if any, holding powers of
attorney from the Company or any of its Subsidiaries.
4.15. Intellectual Property. (a) The Disclosure Statement lists all Patents,
registered and applied for Trademarks and material unregistered trademarks,
service marks and trade names owned by (or
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registered in the name of) the Company or any of its Subsidiaries. The
Disclosure Statement includes as to each Patent or Trademark listed thereon: a
Patent registration or application number, as applicable for each listed
Trademark and non-U.S. Patent, and a docket or patent number for each listed
U.S. Patent; the country or countries in which each Patent or Trademark is
issued, registered or applied for, as applicable; the application date or
registration date for each listed Trademark and the docket number or issue date
for each listed Patent, as applicable; and the owner of such Patent or
Trademark. To the Company's knowledge, all Patents and Trademarks listed on the
Disclosure Statement exist and have been maintained in good standing, including
without limitation, the timely payment of any maintenance fees and annuities
thereon. The Company has taken all commercially reasonable actions and made all
commercially reasonable applications and filings pursuant to applicable laws to
secure, perfect and protect its rights in the Intellectual Property, necessary,
required or desirable for the conduct of its business as presently conducted
and, to the Company's knowledge, as currently proposed to be conducted; and, to
the Company's knowledge, neither the Company, its Subsidiaries nor any of their
respective agents has practiced inequitable conduct under the Patent laws or
other applicable laws with respect to any of the foregoing. The Company and
each of its Subsidiaries has taken all commercially reasonable steps (including
without limitation entering into appropriate confidentiality, non-disclosure
and non-competition agreements with all officers, directors and employees of
the Company and its Subsidiaries with access to or knowledge of the
Intellectual Property of the Company or its Subsidiaries (and the products and
technology of the Company and its Subsidiaries)) to safeguard and maintain the
secrecy and confidentiality of, and to assign to the Company or its
Subsidiaries, as applicable, all of such employee's rights in all such
Intellectual Property invented or developed by such employee within the scope
of such employee's employment. All full-time employees of the Company and its
Subsidiaries have signed a confidentiality and invention assignment agreement
for the benefit of the Company or one of its Subsidiaries to assign such
employee's rights in Intellectual Property to the Company or one of its
Subsidiaries.
(b) To the Company's knowledge, the Company and its Subsidiaries own, are
duly licensed or otherwise have the right to use all of the Intellectual
Property used or required for use in connection with the business of the
Company and its Subsidiaries as presently conducted and, to the Company's
knowledge, as currently proposed to be conducted; and, to the Company's
knowledge, all such Intellectual Property is valid and enforceable against
third parties. Except as set forth in the Disclosure Statement, to the
Company's knowledge, the Company and its Subsidiaries own, on an exclusive
basis, free and clear of any Liens, and have the unrestricted right to use,
license, sell or dispose of, and the right to bring infringement actions with
respect to all the Intellectual Property owned by the Company and its
Subsidiaries. Except as set forth in the Disclosure Statement, to the Company's
knowledge, the Company and its Subsidiaries do not pay, and have no obligation
(whether absolute or contingent) to pay, royalties, honoraria, fees or other
payments to any Person by reason of the ownership, use, license, sale or
disposition of any Intellectual Property by the Company or its Subsidiaries.
Except as set forth in the Disclosure Statement, to the Company's knowledge,
neither the Company nor any of its Subsidiaries has received notice (written or
oral) of any claim of any Person asserting rights in, or a conflict with, the
Intellectual Property used or required for use in connection with the business
of the Company and its Subsidiaries as presently conducted and as currently
proposed to be conducted (including without limitation the Patents and
Trademarks listed in the Disclosure Statement); and, in the Company's Good
Faith Opinion, there is no reasonable basis
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for such a claim. Without limiting the foregoing, to the Company's knowledge,
no other Person has claimed the right to use in connection with substantially
similar or closely related goods and in the same geographic area any Trademark
which is identical or confusingly similar to any Trademark used by the Company
or its Subsidiaries, except pursuant to written agreements with the Company or
its Subsidiaries which are listed in the Disclosure Statement. To the Company's
knowledge, neither the Company nor any of its Subsidiaries has provided notice
(written or oral) to any Person of infringement of any Intellectual Property
right held by the Company or its Subsidiaries; and, in the Company's Good Faith
Opinion, there is no reasonable basis for such a claim. There is no agreement,
arrangement or understanding (written or oral) between the Company or any of
its Subsidiaries and another Person which would prevent or restrict Watson and
its Subsidiaries after the Merger from using, selling, licensing or disposing
of any material Intellectual Property of the Company and its Subsidiaries on
substantially the same terms and conditions applicable to the Company and its
Subsidiaries immediately prior to the Merger.
(c) The Disclosure Statement lists all material agreements, arrangements or
understandings (whether written or oral, and if oral, the Disclosure Statement
contains a brief description of the principal terms thereof) pursuant to which
the Company or its Subsidiaries has either purchased, sold, licensed, secured
or disposed of rights in Intellectual Property from or to another Person or
agreed to do any of the foregoing (other than licenses to commercially
available off-the-shelf computer software acquired or entered into by the
Company or its Subsidiaries in the ordinary course of business) ("Intellectual
Property Agreements"). To the Company's knowledge, each of the parties thereto
have performed, in all material respects, all obligations under each
Intellectual Property Agreement which are required to be performed by such
party, and there is no default (or event which with notice or lapse of time
would constitute a default) thereunder. To the Company's knowledge, each
Intellectual Property Agreement is enforceable against each of the parties
thereto pursuant to its terms.
(d) To the Company's knowledge, the operation of the business of the Company
and its Subsidiaries as presently conducted and, to the Company's knowledge, as
currently proposed to be conducted (including without limitation the
manufacture, sale, use, trade dress, packaging, license, or other exploitation
of products and technology currently marketed or in development) does not and
will not infringe, trespass or otherwise violate the Intellectual Property
rights of any Person. Without limiting the foregoing, to the Company's
knowledge, neither the Company nor any of its Subsidiaries has received a
notice (written or oral) of infringement of any Intellectual Property right
held by another Person; and, in the Company's Good Faith Opinion, there is no
reasonable basis for such a claim. Except as set forth in the Intellectual
Property Agreements, neither the Company nor any of its Subsidiaries is
obligated to indemnify any Person for any liability, cost or expense arising
from such Person's use, sale, licensing or disposition of any Intellectual
Property or such Person's manufacture, use, sale, license or other exploitation
of any product or technology.
(e) As used herein, the following capitalized terms shall have the meanings
ascribed to them as set forth below: "Intellectual Property" shall mean any and
all intellectual or proprietary property, including without limitation Patents,
Trademarks, and Know-How. "Patents" shall mean patents, including U.S. and
foreign patents and counterparts (whether original, reissue, reexamine,
division, continuation, continuation-in-part, or extension thereof), patent
applications, and invention
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disclosures. "Trademarks" shall mean trademarks, trade names, trade dress,
domain names, service marks, or copyrights (in each case, whether registered or
not) as well as any applications therefor or registrations thereof and all
goodwill associated therewith. "Know-How" shall mean any research and
development records and results, stability data, clinical data, raw data and
lab journals, technology, processes and methods, technical information, trade
secrets, manufacturing and other know-how (including without limitation
proprietary know-how and use and application know-how), formulas, formulations,
production records and specifications, raw material specifications,
manufacturing processes, procedures and records, test procedures, quality
control records and data, product specifications, algorithms, adverse drug
experience information and complaints, marketing and competition analysis,
customer and supplier lists or proprietary information.
4.16. Title to Properties. Attached to the Disclosure Statement is a list and
description of each item of real or tangible personal property owned by the
Company or any of its Subsidiaries which has a net book value in excess of
$50,000. To the Company's knowledge, the Company or its Subsidiaries has good,
marketable, legal and valid title to such property free and clear of all liens,
claims, encumbrances or security interests (collectively, "Liens"), except for
(A) Liens set forth on the Disclosure Statement and (B) (w) mechanic's,
materialmen's, and similar liens, (x) liens arising under worker's
compensation, unemployment insurance, social security, retirement, and similar
legislation, (y) liens on goods in transit incurred pursuant to documentary
letters of credit, and (z) other immaterial items. The Company and its
Subsidiaries enjoy peaceful and undisturbed possession under all material
leases to which it is a party as lessee. To the Company's knowledge, all of the
material leases to which the Company or any of its Subsidiaries is a party
(other than leases for Leased Premises) are legal, valid and binding
obligations of the Company or its Subsidiaries and in full force and effect,
and no default by the Company or its Subsidiaries, or any other party thereto
has occurred or is continuing thereunder. The Disclosure Schedule lists all
material properties and assets used by the Company or any of its Subsidiaries
in connection with the operation of their respective businesses which are held
under any lease or under any conditional sale or other title retention
agreement. Except for such assets and facilities, taken as a whole, as are
immaterial to the business of the Company or its Subsidiaries, all tangible
assets and facilities of the Company and its Subsidiaries are in good operating
condition and repair (ordinary wear and tear excepted) and, in the aggregate
with the intangible assets of the Company, are sufficient to conduct the
business of the Company and its Subsidiaries as presently conducted or as
currently proposed to be conducted prior to the date hereof.
4.17. Real Estate. (a) Neither the Company nor any of its Subsidiaries owns
any real estate, or has the option to acquire any real estate, other than the
premises identified in the Disclosure Statement (the "Real Estate"). The
Disclosure Statement accurately sets forth the street addresses of the Real
Estate. The Company has provided Watson with true and correct copies of all
title insurance policies, surveys and environmental reports in its possession
relating to the Real Estate. The Company or one of its Subsidiaries holds fee
simple title to the Real Estate, subject only to real estate taxes not
delinquent and to covenants, conditions, restrictions and easements of record
and other immaterial items, none of which would reasonably be expected to have
a Company Material Adverse Effect. The Real Estate is not subject to any leases
or tenancies. To the Company's knowledge, none of the improvements comprising
the Real Estate or the businesses conducted or
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proposed to be conducted by the Company or its Subsidiaries thereon, are in
violation of any material use or occupancy restriction, limitation, condition
or covenant of record or any zoning or building law, code, ordinance or public
utility easement, except for violations which do not materially interfere with
the conduct of the business of the Company or its Subsidiaries as presently
conducted or proposed to be conducted. To the Company's knowledge, no material
expenditures are required to be made in the next twenty-four months for the
repair or maintenance of the Real Estate or any improvements thereon for the
business conducted or currently proposed to be conducted by the Company or its
Subsidiaries.
(b) Neither the Company nor any of its Subsidiaries leases any real estate
other than the premises identified in the Disclosure Statement as being so
leased (the "Leased Premises"). The Disclosure Statement accurately sets forth
the street address for each of the Leased Premises. The Leased Premises are
leased to the Company or its Subsidiaries, pursuant to written leases, true and
complete copies of which have been provided to Watson or its counsel. To the
Company's knowledge, none of the improvements comprising the Leased Premises,
or the businesses conducted or proposed to be conducted by the Company or its
Subsidiaries thereon, are in violation of any building line or use or occupancy
restriction, limitation, condition or covenant of record or any zoning or
building law, code or ordinance, public utility or other easements or other
applicable law, except for violations which do not materially interfere with
the conduct of the business of the Company or its Subsidiaries as presently
conducted or proposed to be conducted. To the Company's knowledge, no material
expenditures are required to be made in the next twenty-four months for the
repair or maintenance of the Leased Premises or any improvements thereon for
the business conducted or currently proposed to be conducted by the Company or
its Subsidiaries. To the Company's knowledge, neither the Company nor its
Subsidiaries are in default (nor in the Company's Good Faith Opinion, there are
no facts that would reasonably give rise to a default) under any agreement
relating to the Leased Premises nor, to the knowledge of the Company, is any
other party thereto in default thereunder. There are no options in favor of the
Company or its Subsidiaries to purchase any of the Leased Premises.
(c) Except as would not reasonably be expected to have a Company Material
Adverse Effect, the Real Estate, the Leased Premises, each facility located on
the Real Estate and the Leased Premises and, to the Company's knowledge, each
of the Company's or its Subsidiaries' Manufacturing Locations are currently
served by gas, electricity, water, sewage and waste disposal and other
utilities adequate to operate such Real Estate, Leased Premises, Manufacturing
Locations and/or facility at its current rate of production, and none of the
utility companies serving any such Real Estate, Leased Premises, any facility
and, to the Company's knowledge, each of such Manufacturing Locations has
threatened the Company, its Subsidiaries or, to the knowledge of the Company,
any other Person with any reduction in service.
(d) Except as would not reasonably be expected to have a Company Material
Adverse Effect, there are no challenges or appeals pending or, to the Company's
knowledge, threatened regarding the amount of the Taxes on, or the assessed
valuation of, the Real Estate or the Leased Premises, and no special
arrangements or agreements exist with any governmental authority with respect
thereto (the representations and warranties contained in this Section 4.17(d)
shall not be deemed to be breached by any prospective general increase in real
estate tax rates).
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(e) There are no condemnation proceedings pending against the Company or, to
the Company's knowledge, threatened with respect to any portion of the Real
Estate or the Leased Premises.
(f) Except as would not reasonably be expected to have a Company Material
Adverse Effect, there is no tax assessment (in addition to the normal, annual
general real estate tax assessment) pending against the Company or, to the
Company's knowledge, threatened with respect to any portion of the Real Estate
or, to the extent the Company or its Subsidiaries is liable for payment
therefor, the Leased Premises.
(g) Except as would not reasonably be expected to have a Company Material
Adverse Effect, the buildings and other facilities located on the Real Estate
and the Leased Premises are free of any material latent structural or
engineering defects known to the Company or any material patent structural or
engineering defects.
4.18. Contracts. (a) Neither the Company nor any of its Subsidiaries is a
party to, or bound by, or the issuer or beneficiary of, any undischarged
written or oral: (i) agreement or arrangement obligating the Company or its
Subsidiaries to pay or receive (other than pursuant to indemnification
arrangements where no claim has been asserted) an amount in excess of $100,000
(excluding purchase and sale orders not in excess of $250,000 entered into by
the Company or its Subsidiaries in the ordinary course of business consistent
with past practices); (ii) employment or consulting agreement or arrangement;
(iii) plan or contract or arrangement providing for bonuses, severance,
options, deferred compensation, retirement payments, profit sharing, medical
and dental benefits or the like covering employees of the Company or any of its
Subsidiaries, other than the Benefit Plans (as defined herein) described in the
Disclosure Statement; (iv) agreement restricting in any manner the Company's or
any of its Subsidiaries' right to compete with any other Person, the Company's
or any of its Subsidiaries' right to purchase, develop, manufacture, sell or
distribute any product, the right of any other Person to compete with the
Company or any of its Subsidiaries, or the ability of the Company or any of its
Subsidiaries to employ or hire any Person; (v) secrecy or confidentiality
agreements entered into outside the ordinary course of business; (vi) any
material distributorship, development, co-promotion, manufacturing,
collaborative, non-employee commission or marketing agent, representative or
franchise agreement providing for the purchase, distribution, marketing,
development, manufacture and/or sale of the products or services of the Company
or any of its Subsidiaries; (vii) agreement between the Company and any of its
affiliates or other Related Parties (as herein defined); (viii) guaranty,
performance, bid or completion bond, or surety or indemnification agreement
other than such provisions as are contained in any of the agreements listed in
the Disclosure Statement; (ix) requirements contract; (x) loan or credit
agreement, pledge agreement, note, security agreement, mortgage, debenture,
indenture, factoring agreement or letter of credit; (xi) material agreement for
the treatment or disposal of Materials of Environmental Concern (as defined
herein); (xii) any agreement relating to the ownership or control of any
interest in any Person; (xiii) any contract, agreement or arrangement
containing change of control provisions; or (xiv) any agreement for the
purchase or sale of all or substantially all of the equity interests or assets
of a business, or an agreement relating to a merger or consolidation to which
the Company or any of its Subsidiaries is or was a party. True and correct
copies of all agreements listed in the Disclosure Statement have been provided
or made available to Watson. Neither the Company nor any of its Subsidiaries
are currently negotiating any transaction involving (i) a license or other
disposition of
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any material Intellectual Property; or (ii) an aggregate payment by the Company
or its Subsidiaries and/or receipts to the Company or its Subsidiaries in
excess of $250,000.
(b) To the Company's knowledge, all agreements, leases, subleases and other
instruments referred to in this Section 4.18, are, in accordance with and
subject to their terms, in full force and binding upon the Company or its
Subsidiaries, and the other parties thereto. To the Company's knowledge,
neither the Company nor any of its Subsidiaries is and none of the other
parties thereto are in default of a material provision under any such
agreement, lease, sublease or other instrument. In the Company's Good Faith
Opinion, there is no event, occurrence or condition which, with the lapse of
time, the giving of notice, or both, would become a default of a material
provision under any such agreement, lease, sublease or other instrument by the
Company or its Subsidiaries, or, to the knowledge of the Company, the other
contracting party. Since January 1, 1997, neither the Company nor any of its
Subsidiaries has released or waived any material right under any such
agreement, lease, sublease or other instrument other than in the ordinary
course of business consistent with past practices.
(c) Immediately after the Closing, except as contemplated by this Agreement,
neither the Company nor any of its Subsidiaries will be bound by the terms of
any stock option agreement, registration rights agreement, stockholders
agreement, management agreement, consulting agreement or any other agreement
relating to the equity or management of the Company or its Subsidiaries.
4.19. Insurance. The Disclosure Statement contains a true and correct list of
all insurance policies to which the Company or any of its Subsidiaries is a
party, including without limitation those which pertain to the Company's or its
Subsidiaries' assets, employees or operations. To the Company's knowledge, all
such insurance policies are in full force and effect. Neither the Company nor
any of its Subsidiaries have received notice of cancellation of any such
insurance policies. In the two (2) year period ending on the date hereof,
neither the Company nor any of its Subsidiaries have received any written
notice from, or on behalf of, any insurance carrier of non-renewal of a policy,
or requiring alteration of any of the Company's or its Subsidiaries' assets,
purchase of additional equipment, or modification of any of the Company's or
its Subsidiaries' methods of doing business, in each case, which would
reasonably be likely to have a Company Material Adverse Effect. Neither the
Company nor any of its Subsidiaries made any claim for reimbursement from its
insurance carriers since June 30, 1996. The insurance coverages listed in the
Disclosure Statement provide the Company and its Subsidiaries with coverages of
risks as the Company believes are comparable to companies of established repute
engaged in a similar business.
4.20. Litigation. To the Company's knowledge, there is no material claim,
arbitration, litigation or proceeding, in law or in equity, and there are no
material proceedings or governmental investigations before any commission or
other administrative authority, pending or threatened against the Company or
any of its Subsidiaries, or any of the Company's or its Subsidiaries'
respective officers, directors or affiliates, with respect to the Company's or
its Subsidiaries' respective operations, businesses, products, sales practices
or financial condition, or relate to the consummation of the transactions
contemplated hereby, by the Watson Ancillary Documents or the Company Ancillary
Documents. In the Company's Good Faith Opinion, there are no facts which, if
known by a potential claimant or governmental authority, would reasonably give
rise to a claim or proceeding which, if asserted or conducted with results
unfavorable to the Company or its Subsidiaries, would
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have a Company Material Adverse Effect. Neither the Company nor any of its
Subsidiaries are bound by any order, judgment or decree issued by any
Governmental Entity.
4.21. Warranties. Neither the Company nor any of its Subsidiaries has made
any oral or written warranties with respect to the quality or absence of
defects of its products or services which they have sold or performed which are
in force as of the date hereof. To the Company's knowledge, there are no
material claims pending or threatened against the Company or any of its
Subsidiaries with respect to the quality of or absence of defects in such
products or services. In the Company's Good Faith Opinion, there are no facts
relating to the quality of or absence of defects in such products or services
which, if known by a potential claimant or Governmental Entity, would
reasonably give rise to a material claim or proceeding. The Disclosure
Statement sets forth a summary, which is accurate in all material respects, of
all returns of products during the period beginning January 1, 1996 and ending
on the date hereof, and all credits and allowances for returned products given
to customers during said period and said summary contains a description of any
reoccurring product defects (other than returns due to date expirations).
4.22. Products Liability. Neither the Company nor any of its Subsidiaries
have received any written notice relating to any material claim involving any
product manufactured, produced, distributed or sold by or on behalf of the
Company or its Subsidiaries resulting from an alleged defect in design,
manufacture, materials or workmanship, or any alleged failure to warn, or from
any breach of implied warranties or representations, other than notices or
claims that have been settled or resolved by the Company or its Subsidiaries
prior to the date of this Agreement. In the Company's Good Faith Opinion, there
are no facts which would reasonably give rise to any of the foregoing.
4.23. Arbitration. Neither the Company nor any of its Subsidiaries is a party
to, or bound by, any decree, order or arbitration award (or agreement entered
into in any administrative, judicial or arbitration proceeding with any
Governmental Entity) with respect to or affecting the properties, assets,
personnel or business activities of the Company or its Subsidiaries.
4.24. Taxes. (a) As used in this Agreement, (i) the term "Taxes" means all
federal, state, local, foreign and other net income, gross income, gross
receipts, sales, use, ad valorem, transfer, franchise, profits, license, lease,
service, service use, withholding, payroll, employment, excise, severance,
stamp, occupation, premium, property, windfall profits, customs, duties or
other taxes, fees, assessments or charges of any kind whatever of a nature
similar to taxes, together with any interest and any penalties, additions to
tax or additional amounts with respect thereto, and the term "Tax" means any
one of the foregoing Taxes; and (ii) the term "Returns" means all returns,
declarations, reports, statements and other documents required to be filed in
respect of Taxes, and the term "Return" means any one of the foregoing Returns.
(b) To the Company's knowledge, the Company has completed and filed on a
timely basis and in correct form all Returns required to be filed by the
Company or any of its Subsidiaries. To the Company's knowledge, as of the time
of filing, the foregoing Returns were correct and complete in all material
respects. To the Company's knowledge, an extension of time within which to file
any Return which has not been filed has not been requested or granted.
(c) With respect to all amounts in respect of Taxes imposed upon the Company
or any of its Subsidiaries, or for which the Company or any of its Subsidiaries
is or could be liable, whether to
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taxing authorities (as, for example, under law) or to other persons or entities
(as, for example, under tax allocation agreements), with respect to all taxable
periods or portions of periods ending on or before September 30, 1998, (i) all
applicable tax laws and agreements have been complied with in all material
respects, and (ii) all amounts required to be paid by the Company or its
Subsidiaries, to taxing authorities or others, on or before the date hereof
have been paid or adequately reserved for on the financial statements contained
in the Company Reports, and any Taxes accrued but not due and payable as of
September 30, 1998 have been accrued or otherwise reserved for in financial
statements contained in the most recent Company Report. There are no Liens
filed against any asset of the Company or any of its Subsidiaries resulting
from the failure to pay any Tax when due.
(d) To the Company's knowledge, no issues have been raised (and are currently
pending) by any taxing authority in connection with any of the Returns. No
waivers of statutes of limitation with respect to the Returns have been given
by the Company or any of its Subsidiaries (or with respect to any Return which
a taxing authority has asserted should have been filed by the Company or any of
its Subsidiaries) which waivers are still in effect. The Disclosure Statement
sets forth those years for which examinations are presently being conducted.
All deficiencies asserted or assessments made as a result of any examinations
have been fully paid, or are fully reflected as a liability in the financial
statements contained in the Company Report, or are being contested and an
adequate reserve therefor has been established and is fully reflected as a
liability in the financial statements contained in the most recent Company
Report.
(e) The unpaid Taxes of the Company or any of its Subsidiaries do not
materially exceed the reserve for tax liability (excluding any reserve for
deferred Taxes established to reflect timing differences between book and tax
income) set forth or included in the financial statements included in the most
recent Company Report, as adjusted for the passage of time through the Closing.
(f) Neither the Company nor any of its Subsidiaries is or at any time has
been a party to or bound by (nor will the Company or any of its Subsidiaries
become a party to or bound by) any tax indemnity, tax sharing or tax allocation
agreement.
(g) Neither the Company nor any of its Subsidiaries has ever been a member of
an affiliated group of corporations, within the meaning of section 1504 of the
Code other than a group the common parent of which was the Company.
4.25. ERISA. (a) The Disclosure Schedule contains a list of all "employee
pension benefit plans" (as defined in Section 3(2) of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA")) (sometimes referred to
herein as "Pension Plans"), "employee welfare benefit plans" (as defined in
Section 3(1) of ERISA and referred to herein as a "Welfare Plan") and all other
Benefit Plans (defined herein as any Pension Plan, Welfare Plan and any other
plan, fund, program, arrangement or agreement to provide employees, directors,
independent contractors, or officers of any Commonly Controlled Entity (as
defined below) with medical, health, life, bonus, stock (option, ownership or
purchase), deferred compensation, severance, salary continuation, vacation,
sick leave, material fringe, incentive insurance or other benefits) maintained,
or contributed to, or required to be contributed to, by the Company or any of
its Subsidiaries or any other Person that, together with the Company at any
time during the last six years, is or was treated as a single employer under
Section 414(b), (c), (m) or (o) of the Code (the Company and each such other
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Person, a "Commonly Controlled Entity") for the benefit of any current or
former employees, officers or directors of any Commonly Controlled Entity
(collectively, the "Benefit Plans") and no Commonly Controlled Entity has any
liability, direct or indirect, under any Benefit Plan not listed on the
Disclosure Statement.
(b) Each Benefit Plan has been established, funded, maintained and
administered in all material respects in accordance with its terms and is in
material compliance with, and has been maintained in material compliance with,
the applicable provisions of ERISA, the Code, all other applicable laws and all
applicable collective bargaining agreements.
(c) All Pension Plans which are intended to be tax-qualified have been the
subject of favorable and up-to-date (through any applicable remedial amendment
period) determination letters from the Internal Revenue Service, true and
complete copies of which have been delivered to Watson, or have filed, or will
file, a timely application therefor, to the effect that such Pension Plans are
qualified and exempt from federal income taxes under Section 401(a) and 501(a),
respectively, of the Code, and no such determination letter has been revoked,
nor has any such Pension Plan been amended since the date of its most recent
determination letter or application therefor in any respect that could
adversely affect its qualification or materially increase its costs.
(d) To the Company's knowledge, no Commonly Controlled Entity has ever
adopted or been obligated to contribute to, or has, or has ever had, any
liability under, any "defined benefit pension plan" as defined in Section 3(35)
of ERISA subject to Title IV of ERISA or any pension plan to which the minimum
funding requirements of Section 412 of the Code are applicable or any single-
employer pension plan which is subject to Title IV of ERISA. No Commonly
Controlled Entity currently has any liability under any such plans.
(e) To the Company's knowledge, no Commonly Controlled Entity is currently,
or has ever been required to contribute to any "multiemployer plan" (as defined
in Section 4001(a)(3) of ERISA ), and no employee of any Commonly Controlled
Entity may reasonably expect to participate in any multiemployer plan on
account of his or her employment with a Commonly Controlled Entity. No Commonly
Controlled Entity has any liability, potential liability or contingent
liability (including without limitation liability for past due contributions)
to any multiemployer plan or, to the Company's knowledge, has withdrawn from
any multiemployer plan where such withdrawal has either: (i) resulted or could
result in any "withdrawal liability" (within the meaning of Section 4201 of
ERISA, and without regard to subsequent reduction or waiver of such liability
under Sections 4207 or 4208 thereof) that has not been fully paid; or (ii)
engaged in a transaction that might have resulted in withdrawal liability but
for the application of Section 4204 of ERISA.
(f) With respect to any Welfare Plan, (i) no such Welfare Plan is funded
through a "welfare benefits fund", as such term is defined in Section 419(e) of
the Code, (ii) no such Welfare Plan is self-insured, and (iii) each such
Welfare Plan that is a "group health plan", as such term is defined in Section
5000(b)(1) of the Code, complies with the applicable requirements of Section
4980B(f) of the Code.
(g) Neither the Company or any Commonly Controlled Entity nor any Person
acting on behalf of the Company or any Commonly Controlled Entity has, in
contemplation of any corporate
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transaction involving Watson, issued any written communication to, or otherwise
made or entered into any legally binding commitment with, any employees of the
Company or of any Commonly Controlled Entity to the effect that, following the
date hereof, (i) except in the normal course of business, any benefits or
compensation provided to such employees under existing Benefit Plans or under
any other plan or arrangement will be enhanced, (ii) except in the normal
course of business, any new plans or arrangements providing benefits or
compensation will be adopted, (iii) any Benefit Plans will be continued for any
period of time or cannot be amended or terminated at any time or for any
reason, or (iv) any plans or arrangements provided by Watson will be made
available to such employees.
(h) To the Company's knowledge, no Commonly Controlled Entity has ever
promised or been obligated to provide former employees with coverage or
benefits under Benefit Plans, other than as required by benefit continuation
rights granted by state or federal law, including but not limited to the
Consolidated Omnibus Budget Reconciliation Act of 1985, as amended. No Commonly
Controlled Entity has any liability to provide such coverage.
(i) With respect to all Pension Plans of the Commonly Controlled Entities,
all required contributions for all Plan years ending prior to the Closing Date
have been timely made. Contributions with respect to all current Plan years
(i.e. from the first day of the current plan year to the Closing Date) shall be
made or accrued prior to the Closing Date by the Company in accordance with the
terms of the plan and past practice, with respect to each Pension Plan which is
a qualified defined contribution plan. With respect to all other Plans, all
required or recommended (in accordance with plan terms and past practice)
payments, premiums, contributions, reimbursements or accruals for all periods
ending prior to or as of the Closing Date shall have been made or properly
accrued on the financial statements. None of the Plans has any unfunded
liabilities which are not reflected on the financial statements of the Company
contained in the Company Reports. None of the Pension Plans is a "top-heavy"
plan, as defined in Section 416 of the Code. Neither the Company nor any of its
subsidiaries has any plans, programs, arrangements or made any other
commitments to its employees, former employees or their beneficiaries under
which it has any obligation to provide any retiree or other employee benefit
payments which are not adequately funded through a trust or other funding
arrangement. There have been no changes in the operation or interpretation of
any of the Benefit Plans since the most recent annual report which would have
any material effect on the cost of operating or maintaining such Plans.
Commonly Controlled Entities are not obligated to contribute with respect to
any Benefit Plan that involves a retroactive contribution, assessment or
funding waiver arrangement. All administrative costs attributable to Benefit
Plans have been paid when due, and all such costs which are customarily paid by
the Company, have been paid or will be paid or accrued prior to the Closing
Date.
(j) There have been no prohibited transactions as defined in Section 406 of
ERISA or Section 4975 of the Code for which there is or may be any material
liability, directly or indirectly, to any Commonly Controlled Entity, under
Section 4975 of the Code or Section 502 of ERISA, with respect to any of the
Pension Plans or the Welfare Plans or any parties in interest or disqualified
persons with respect to such Benefit Plans.
(k) There are no pending or threatened claims (other than routine claims for
benefits), lawsuits, arbitrations or audits which have been asserted or
instituted against any Benefit Plan, any fiduciary
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(as defined by Section 3(21) of ERISA) thereof, any Commonly Controlled Entity
or any employee or administrator thereof in connection with the existence,
operation or administration of a Benefit Plan, or in connection with the assets
of any Benefit Plan, and the Company has no knowledge of any facts which would
give rise to or could reasonably be expected to give rise to any such claims,
lawsuits, arbitrations or audits. Neither the Company, nor any subsidiary of
the Company, nor any of their directors, officers, employees or any other
"fiduciary", as such term is defined in Section 3(21) of ERISA, has any
liability for failure to comply with ERISA or the Code or failure to act in
connection with the administration or investment of any Plan.
(l) Nothing in this Agreement or the transaction contemplated hereunder will:
(i) cause the termination or, to the best knowledge of the Company, repricing
of any insurance contract to which a Commonly Controlled Entity or Benefit Plan
is a party for the purposes of providing employee benefits; (ii) trigger a
right of any employee of any Commonly Controlled Entity to severance, deferred
compensation or retirement benefits; or (iii) cause any early withdrawal or
premature termination penalty with respect to any asset held in connection with
any Benefit Plan.
(m) No Commonly Controlled Entity maintains any unfunded plan of deferred
compensation.
(n) The Company has delivered or made available to Watson true, complete and
correct copies of (i) each Benefit Plan (or, in the case of any unwritten
Benefit Plans, descriptions thereof), (ii) the most recent annual reports on
Forms 5500 and 990, if any, filed with the Internal Revenue Service, and the
most recent financial statements (to the extent not included with a Form 5500),
with respect to each Benefit Plan, (iii) the most recent summary plan
description for each Benefit Plan for which such summary plan description is
required, together with any summaries of material modifications for such
Benefit Plan that have been distributed to Benefit Plan participants subsequent
to distribution of the most recent summary plan description, and with respect
to each Benefit Plan for which summary plan descriptions are not required, a
copy of the most recent booklets, brochures or other explanatory material
provided to employees; (iv) each trust agreement, group annuity contract or
other funding vehicle, relating to any Benefit Plan; (v) the most recent
determination letters received from the Internal Revenue Service regarding the
Pension Plans and copies of any pending applications, filings, or notices with
respect to any of the Benefit Plans with the Internal revenue Service, the
Pension Benefit Guaranty Corporation, the Department of Labor or any other
governmental agency; (vii) copies of any investment management agreements under
any of the Benefit Plans and copies of any fiduciary insurance policies, surety
bonds, rules, regulations or policies of the trustees or of any committee
member under any of the Benefit Plans; and (viii) a list of all assets and
liabilities of, allocated to or accounted for separately with respect to every
Benefit Plan (including insurance contracts associated with every Benefit Plan
regardless of whether any current cash value exists).
4.26. Labor Matters. (a) There is no labor strike, dispute, slowdown, work
stoppage or lockout pending or, to the knowledge of the Company, threatened
against or affecting the Company or any of its Subsidiaries and during the past
three years, there has not been any such action; (b) neither the Company nor
any of its Subsidiaries is a party to or bound by any collective bargaining or
similar agreement with any labor organization, or work rules or practices
agreed to with any labor organization or employee association applicable to
employees of the Company or any of its Subsidiaries; (c) none of the employees
of the Company or any of its Subsidiaries are represented by any labor
organization and the Company does not have any knowledge of any union
organizing
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activities during the last three years among the employees of the Company or
any of its Subsidiaries; (d) to the Company's knowledge, the Company and its
Subsidiaries are, and has at all times been in compliance with all applicable
employment laws and practices, including, without limitation, any such laws
relating to employment discrimination, occupational safety and health and
unfair labor practices, except such as would not be reasonably expected to have
a Company Material Adverse Effect; (e) there is no unfair labor practice charge
or complaint against the Company or any of its Subsidiaries pending or, to the
knowledge of the Company, threatened before the National Labor Relations Board
or, to the knowledge of the Company, any charges or complaints pending or
threatened with any Governmental Entity who has jurisdiction over unlawful
employment practices; (f) there is no grievance or arbitration proceeding
arising out of any collective bargaining agreement or other grievance procedure
pending or, to the knowledge of the Company, threatened relating to the Company
or any of its Subsidiaries; (g) neither the Company nor any of its Subsidiaries
is materially delinquent in payments to any of its employees for any wages,
salaries, commissions, bonuses or other direct compensation for any services
performed by them to the date of this Agreement or amounts required to be
reimbursed to such employees; (h) upon termination of the employment of any of
the employees of the Company or any of its Subsidiaries after the Closing,
neither the Company nor any of its Subsidiaries will be liable to any of its
employees for severance pay, except as otherwise required by federal law or by
agreements or policies listed in the Disclosure Statement; (i) the employment
of each of the Company's or its Subsidiaries employees is terminable at will
without cost to the Company or any of its Subsidiaries except for payments
required under the Benefit Plans, under agreements or policies listed in the
Disclosure Statement and payment of accrued salaries or wages and vacation pay;
(j) no employee or former employee of the Company or any of its Subsidiaries
has any right to be rehired by the Company or its Subsidiaries prior to the
Company's or its Subsidiaries hiring a person not previously employed by the
Company or its Subsidiaries; and (k) the Company has separately furnished to
Watson a true and complete list of all employees who are employed by the
Company or any of its Subsidiaries as of October 1, 1998, and said list
correctly reflects their salaries, wages, other compensation (other than
benefits under the Benefit Plans), dates of employment and positions. Neither
the Company nor any of its Subsidiaries owes any past or present employee any
sum in excess of $25,000 individually or $100,000 in the aggregate other than
for accrued wages or salaries for the current payroll period, and amounts
payable under Benefit Plans. No employee owes any sum to the Company or any of
its Subsidiaries in excess of $25,000, and all employees together do not owe
the Company or any of its Subsidiaries in excess of $100,000.
4.27. Environmental Matters. To the Company's knowledge:
(a) The Company, its Subsidiaries and their respective assets and
businesses are in material compliance with all Environmental Laws and
Environmental Permits (as herein defined) applicable to them. A copy of any
notice, citation, inquiry or complaint which the Company or any of its
Subsidiaries has received in the past three years of any alleged material
violation of any Environmental Law or Environmental Permit is contained in
the Disclosure Statement, and all violations alleged in said notices have
been or are being corrected. A description of all such material violations
currently being corrected is contained in the Disclosure Statement. To the
Company's knowledge, the Company and its Subsidiaries possess all material
Environmental Permits which are required for the operation of their
respective businesses, and are in material
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compliance with the provisions of all such material Environmental Permits.
Copies of all material Environmental Permits issued to the Company or any
of its Subsidiaries have been provided or made available to Watson or its
counsel. The Company has delivered to Watson copies of all environmental
reports with respect to the Real Estate and the Leased Premises in its
possession which were conducted during the last five years.
(b) True and correct copies of all material safety data sheets of all
Materials of Environmental Concern stored, treated, generated, used,
transported or Released (as herein defined) in connection with the
operation of the Company's or any of its Subsidiaries' respective
businesses have been provided to Watson. There has been no storage,
treatment, generation, transportation or Release of any Materials of
Environmental Concern by the Company or any of its Subsidiaries, or, to the
knowledge of the Company, by any other Person for which the Company or any
of its Subsidiaries is or may be held responsible, at any Facility (as
herein defined) or any Offsite Facility (as herein defined) which could
give rise to any Company Material Adverse Effect.
(c) To the Company's knowledge, the Disclosure Statement sets forth a
complete list of all Containers (as herein defined) that are now present
at, or have heretofore been removed from, the Real Estate or the Leased
Premises. All Containers which have been heretofore removed from the Real
Estate or the Leased Premises have been removed in material compliance with
all applicable Environmental Laws.
(d) For the purposes of this Agreement: (i) "Environmental Laws" means
all applicable federal, state and local statutes, regulations, ordinances,
rules, regulations and policies, all court orders and decrees and
arbitration awards, and the common law, which pertain to environmental
matters or contamination of any type whatsoever; and Environmental Laws
include, without limitation, those relating to: manufacture, processing,
use, distribution, treatment, storage, disposal, generation or
transportation of Materials of Environmental Concern; air, surface or
ground water or noise pollution; Releases; protection of wildlife,
endangered species, wetlands or natural resources; Containers; health and
safety of employees and other persons; and notification requirements
relating to the foregoing; (ii) "Environmental Permits" means licenses,
permits, registrations, governmental approvals, agreements and consents
which are required under or are issued pursuant to Environmental Laws;
(iii) "Materials of Environmental Concern" means (A) pollutants,
contaminants, pesticides, radioactive substances, solid wastes or hazardous
or extremely hazardous, special, dangerous or toxic wastes, substances,
chemicals or materials within the meaning of any Environmental Law,
including without limitation any (i) "hazardous substance" as defined in
CERCLA, and (ii) any "hazardous waste" as defined in the Resource
Conservation and Recovery Act ("RCRA"), 42 U.S.C., Sec. 6902 et. seq., and
all amendments thereto and reauthorizations thereof; (iv) "Release" means
any spill, discharge, leak, emission, escape, injection, dumping, or other
release of any Materials of Environmental Concern into the environment,
whether or not notification or reporting to any governmental agency was or
is, required, including without limitation any Release which is subject to
CERCLA; (v) "Facility" means any facility as defined in the Comprehensive
Environmental Response, Compensation and Liability Act, 42 U.S.C. 9601, et.
seq., as amended and reauthorized ("CERCLA"); (vi) "Offsite Facility" means
any Facility which is not presently, and has not heretofore been, owned,
leased or occupied by the Company or any of its Subsidiaries; and (vii)
"Containers" means above-ground storage tanks in excess of 250
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gallons, all under-ground storage tanks and all other related vessels and
related equipment and containers.
4.28. Interim Conduct of Business. Except as otherwise contemplated by this
Agreement, since June 30, 1998, neither the Company nor any of its Subsidiaries
has:
(a) sold, assigned, leased, exchanged, transferred or otherwise disposed
of any material portion of its assets or property, except for sales of
Inventory in the usual and ordinary course of business in accordance with
the Company's or its Subsidiaries' past practices;
(b) written off any asset which has a net book value which exceeds
$25,000 individually or $100,000 in the aggregate in value, or suffered any
casualty, damage, destruction or loss of any material asset, property or
portion of Inventory (whether or not covered by insurance), on account of
fire, flood, riot, strike or other hazard or Act of God;
(c) waived any material right arising out of the conduct of, or with
respect to, its business;
(d) made (or committed to make) capital expenditures in an amount which
exceeds $50,000 for any item or $100,000 in the aggregate;
(e) made any change in accounting methods or principles or voluntarily
elected to alter the manner of keeping its books, accounts and records;
(f) borrowed any money or issued any bonds, debentures, notes or other
corporate securities (other than equity securities) or guaranteed the debt
of any other Person, including without limitation, those evidencing
borrowed money;
(g) increased the compensation payable to, or entered into or amended any
employment agreement with, any employee, except for normal pay increases in
the ordinary course of business consistent with past practices, but in no
event, in an amount in excess of five percent (5%) of the annual salary of
each such employee as set forth in the Disclosure Statement;
(h) paid or incurred any management or consulting fees, or engaged any
consultants, except in the ordinary course of business consistent with past
practices;
(i) hired any employee who has an annual salary in excess of $75,000;
(j) terminated any employee having an annual salary or wages in excess of
$75,000;
(k) adopted any new Benefit Plan or amended any existing Benefit Plan in
any material respect;
(l) issued or sold any securities of any class, except for the exercise
of options to purchase Company Common Stock under the Company Option Plans
or the issuance of Company Common Stock under the Company's stock purchase
plan;
(m) discharged any material liability except in the usual and ordinary
course of business in accordance with past practices, or prepaid any
liability;
(n) not settled or initiated any litigation or threatened litigation with
any Person with an amount in controversy in excess of $50,000 individually
or $100,000 in the aggregate; or
(o) paid, declared or set aside any dividend or other distribution on its
securities of any class or other ownership interests, or, directly or
indirectly, purchased, exchanged, redeemed or
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otherwise acquired any of its securities of any class or made any
commitment for any such action.
Notwithstanding the foregoing, the Company shall not be deemed to have breached
the terms of this Section 4.28 by entering into this Agreement or by
consummating the transactions contemplated hereby.
4.29. Affiliated Transactions. Since January 1, 1997, neither the Company nor
any of its Subsidiaries has been a party to any transaction (other than
employee compensation) with a "Related Party". For purposes of this Agreement,
the term "Related Party" shall mean: any present or former officer or director,
10% stockholder or present affiliate of the Company or any of its Subsidiaries,
any present or former known spouse, ancestor or descendant of any of the
aforementioned persons or any trust or other similar entity for the benefit of
any of the foregoing persons. No property or interest in any property
(including, without limitation, designs and drawings concerning machinery or
rights in Intellectual Property) which relates to and is necessary in the
present or currently contemplated future operation of the Company's or its
Subsidiaries' respective businesses, is presently owned by or leased or
licensed by or to any Related Party. Except for the ownership of securities
representing less than a 2% equity interest in various publicly traded
companies, neither the Company, its Subsidiaries, nor to the Company's
knowledge, any Related Party has an interest, directly or indirectly, in any
business, corporate or otherwise, which is in competition with the Company's or
its Subsidiaries respective businesses.
4.30. Significant Customers, Suppliers, Joint Venture Partners and Employees.
The Disclosure Statement sets forth an accurate list of the Company's and its
Subsidiaries' Significant Customers (as defined herein), Significant Suppliers
(as defined herein); Joint Venture Partners (as defined herein) and Significant
Employees (as defined herein). The Company has no knowledge nor has it received
any notice of any intention by a (a) Significant Customer to terminate its
business relationship with the Company or its Subsidiaries or to limit or alter
its business relationship with the Company or its Subsidiaries in any material
respect; (b) Significant Supplier to terminate its business relationship with
the Company or its Subsidiaries or to limit or alter its business relationship
with the Company or its Subsidiaries in any material respect; (c) Joint Venture
Partner to terminate its business relationship with the Company or its
Subsidiaries or to limit or alter its business relationship with the Company or
its Subsidiaries in any material respect; or (d) Significant Employee intends
to terminate his employment with the Company or its Subsidiaries. As used
herein, (w) "Significant Customer" means the 10 largest customers of the
Company and its Subsidiaries, taken as a whole, including distributors of the
Company's products, measured in terms of sales volume in dollars for the years
ended December 31, 1996 and 1997 and for the ten month period ending September
30, 1998, (x) "Significant Supplier" means any supplier of the Company and its
Subsidiaries from whom the Company or its Subsidiaries has purchased $250,000
or more of goods during the years ended December 31, 1996 and 1997 or $208,333
or more goods during the ten month period ending September 30, 1998, for use in
the Company's or its Subsidiaries' respective businesses; (y) "Joint Venture
Partner" means any Person that has entered into an agreement with the Company
or its Subsidiaries relating to the purchase, development, distribution,
manufacture and/or sale of any of the Company's or its Subsidiaries' products
or technologies; and (z) "Significant Employee" means the Chief Executive
Officer, the President, the Senior Director of Research and Development or any
Vice President of the Company or its Subsidiaries.
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<PAGE>
4.31. Material Adverse Change. Since June 30, 1998, neither the Company nor
its Subsidiaries has suffered, and no event or occurrence has taken place that
would reasonably be expected to have, a Company Material Adverse Effect.
4.32. Bribes. Neither the Company, its Subsidiaries nor, to the Company's
knowledge, any of their respective officers, directors, employees, agents or
representatives has made, directly or indirectly, with respect to the Company,
its Subsidiaries or their respective business activities, any bribes or
kickbacks, illegal political contributions, payments from corporate funds not
recorded on the books and records of the Company or its Subsidiaries, payments
from corporate funds to governmental officials, in their individual capacities,
for the purpose of affecting their action or the action of the government they
represent, to obtain favorable treatment in securing business or licenses or to
obtain special concessions, or illegal payments from corporate funds to obtain
or retain business.
4.33. Absence of Indemnifiable Claims, etc. There are no pending or
threatened claims by any director or officer of the Company or its Subsidiaries
to indemnification by the Company or its Subsidiaries under applicable law, the
Certificate or Articles of Incorporation or By-laws of the Company or its
Subsidiaries or any insurance policy maintained by the Company or its
Subsidiaries. Other than pursuant to applicable law or the certificate of
incorporation or by-laws of the Company or its Subsidiaries, no officer,
director or employee of the Company or its Subsidiaries has any right to
indemnification by the Company or any of its Subsidiaries.
4.34. No Undisclosed Liabilities. To the Company's knowledge, there are no
liabilities or obligations of any nature whatsoever (whether accrued, absolute,
contingent or otherwise) of the Company or its Subsidiaries other than (i)
liabilities disclosed or provided for in the most recent financial statements
contained in the Company Reports; (ii) liabilities which, individually or in
the aggregate, would not reasonably be expected to have a Company Material
Adverse Effect; (iii) liabilities under this Agreement (or contemplated hereby)
or disclosed in the Disclosure Statement and (iv) liabilities incurred since
June 30, 1998 in the ordinary course of business and consistent with past
practices.
4.35. Employees of Company and Subsidiaries. To the Company's knowledge,
neither the Company nor any of its Subsidiaries have taken any actions which
were calculated to dissuade any present employees, representatives or agents of
the Company or any of its Subsidiaries from continuing an association with the
Company or any of its Subsidiaries after the Merger.
4.36. Year 2000 Compliance. The Company and each of its Subsidiaries have
conducted a commercially reasonable inventory of the hardware and software (the
"Computer Systems") used by the Company and its Subsidiaries in its business,
in order to determine which parts of the Computer Systems are not Year 2000
compliant (as defined below) and to estimate the cost of rendering such
Computer Systems Year 2000 compliant prior to January 1, 2000 or such earlier
date on which the Computer Systems may shut down (a "hard crash") or produce
incorrect calculations or otherwise malfunction without becoming totally
inoperable (a "soft crash"). Based on the above inventory, the estimated total
cost of rendering the Computer Systems Year 2000 compliant is $100,000. For
purposes of this Agreement, "Year 2000 compliant" means that all of the
hardware and software comprising the Computer Systems will correctly
differentiate between years, in different centuries,
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that end in the same two digits, and will accurately process date/time data
(including, but not limited to, calculating, comparing, and sequencing) from,
into, and between the twentieth and twenty-first centuries, including leap year
calculations.
4.37. No Brokers. Neither the Company nor any of its Subsidiaries has entered
into any contract, arrangement or understanding with any Person which may
result in the obligation of the Company, Watson, Watson Sub or their respective
Subsidiaries to pay any finder's fee, brokerage or agent's commissions or other
like payments in connection with negotiations leading to this Agreement or the
consummation of the transactions contemplated hereby, except that the Company
has retained CIBC Oppenheimer Corp. and William Blair & Co. as its financial
advisors, the arrangements with which have been disclosed in writing to Watson
prior to the date hereof.
4.38. Tax Reorganization. To the Company's knowledge, after consulting with
its independent advisors, neither the Company nor any of its Subsidiaries has
taken or failed to take any action which would prevent the Merger from (a)
constituting a reorganization within the meaning of section 368(a) of the Code
or (b) being treated as a "pooling or interests" in accordance with Accounting
Principles Board Opinion No. 16, the interpretative releases issued pursuant
thereto, and the pronouncements of the SEC.
4.39. Opinion of Financial Advisor. The Company has received the opinion of
CIBC Oppenheimer, Inc. to the effect that, as of the date hereof, the
consideration to be received by the Stockholders pursuant to the Merger is fair
to such Stockholders from a financial point of view.
4.40. Information Supplied. The information supplied or to be supplied in
writing by the Company, its Subsidiaries, or any of their respective officers,
directors, representatives, agents or employees, for inclusion or incorporation
by reference in (a) the Proxy Statement will not, at the time the Proxy
Statement is first mailed to the Stockholders and at the time such Stockholders
vote on adoption of this Agreement, contain any untrue statement of a material
fact or omit to state any material fact necessary in order to make the
statements made therein, in light of the circumstances under which they were
made, not misleading and (b) the Form S-4, together with all amendments and
supplements thereto, will not, at the time the Form S-4 is filed or becomes
effective under the Securities Act and at the Effective Time, contain any
untrue statement of a material fact or omit to state a material fact necessary
in order to make the statements made therein, in light of the circumstances
under which they were made, not misleading. No representation is made by the
Company with respect to statements made or incorporated by reference therein
based on information supplied by Watson or any of Watson's Subsidiaries
specifically for inclusion or incorporation by reference in the Proxy Statement
or the Form S-4.
4.41. Takeover Statutes. Section 203 of the Delaware General Corporation Law
is not applicable to the Company, its Subsidiaries or (by reason of the
Company's participation therein) the Merger. No other "fair price,"
"moratorium," "control share acquisition," or other similar anti-takeover
statute or regulation is applicable to the Company, its Subsidiaries or (by
reason of the Company's participation therein) the Merger or the other
transactions contemplated by this Agreement.
4.42. Definition of Knowledge. For purposes of this Agreement, the phrase "to
the Company's knowledge" shall only be deemed to include the knowledge of
Dinesh C. Patel, Ph.D., Charles D.
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<PAGE>
Ebert, Ph.D., Alexander L. Searl, Reyn Gallacher, Norman A. Mazor, William R.
Good, Ph.D., Don Mantle, Warren Dudley, Ray Varnakis, Debra Eppstein, Chad
Briggs, Ramesh Acharya, Ph.D. and Ichiro Nakatomi, Ph.D. (the "Senior
Officers").
ARTICLE V
COVENANTS
5.1. Alternative Proposals. (a) Prior to the Effective Time, the Company
agrees (i) that neither it nor any of its Subsidiaries shall, and it shall
direct and cause its and its Subsidiaries' respective officers, directors,
employees, agents and representatives (including, without limitation, any
investment banker, attorney or accountant retained by it or any of its
Subsidiaries) not to, initiate, solicit, encourage or take any other action to
facilitate, directly or indirectly, any inquiries or the making or
implementation of any proposal or offer that constitutes, or may reasonably be
expected to lead to, any Alternative Proposal (as defined below) or engage in
any negotiations concerning, or provide any confidential information or data
to, or have any discussions with, any Person relating to an Alternative
Proposal, or otherwise facilitate any effort or attempt to make or implement an
Alternative Proposal; (ii) that it will immediately terminate any existing
activities, discussions or negotiations with any Person conducted heretofore
with respect to any of the foregoing; and (iii) that it will notify Watson
immediately if any such inquiries or proposals are received by, any such
information is requested from, or any such negotiations or discussions are
sought to be initiated or continued with, it; provided, however, that the Board
of Directors of the Company may, in response to any unsolicited written bona-
fide proposal from a third party regarding a Superior Proposal (as defined
below), furnish or cause to be furnished information to, and engage in
discussions with, such third party, but only if (v) the Board of Directors of
the Company determines in good faith, after consultation with its independent
financial and legal advisors to take such action pursuant to the exercise of
its fiduciary duties under applicable law; (w) prior to furnishing such
information to, or entering into discussions or negotiations with such third
party, the Company receives from such third party an executed confidentiality
agreement with terms no less favorable than those contained in the
Confidentiality Agreement (as defined herein); (x) prior to furnishing such
information to, or entering into discussions or negotiations with, such third
party, the Company provides written notice to Watson to the effect that it is
furnishing information to, or entering into discussions or negotiations with,
such third party; (y) the Company provides to Watson all of the relevant
details relating to all inquiries and proposals that the Company may receive
relating to any of such matters (including the identity of the Person making
such inquiry or proposal and the material terms and conditions of any such
proposal) and provides Watson with copies of all materials delivered to such
Person; and (z) the Company keeps Watson informed of the status of any such
discussions or negotiations. Notwithstanding anything to the contrary contained
in this Section 5.1, in response to the Company's or its agent's receipt of an
unsolicited written bona-fide proposal from any Person regarding an Alternative
Proposal, the Company or its agents may make inquiries to such Person and its
agents to clarify questions relating to ambiguities of the terms of such
proposal in order for the Company to determine whether such proposal is a
Superior Proposal, but the Company and its agents shall continue to be
prohibited from entering into any other discussions or negotiations with
respect to such proposal until such time as the Board of Directors of the
Company determines, in accordance with and pursuant to the terms of this
Section 5.1, that such proposal is a Superior Proposal.
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(b) As used herein, the term (i) "Alternative Proposal" means (in each case
other than the transactions contemplated hereby) (A) a tender offer or exchange
offer for 25% or more of the then outstanding shares of Company Common Stock;
(B) a merger, consolidation or other business combination with the Company or
any of its Subsidiaries, or any agreement or letter of intent or understanding
relating to any such transaction; (C) any sale, lease, exchange, mortgage,
pledge, transfer, or other disposition (whether in one transaction or a series
of related transactions) involving a substantial part of the Company's
consolidated assets, or any agreement or letter of intent or understanding
relating to such transaction; (D) the acquisition by any Person (other than
Watson or one of its Subsidiaries) of beneficial ownership (within the meaning
of Rule 13d-3 under the Exchange Act, which will be deemed for purposes hereof
to provide that a Person beneficially owns any shares of Company Common Stock
that may be acquired by such Person pursuant to any right, option, warrant, or
other agreement, regardless of when such acquisition would be permitted by the
terms thereof) of 25% or more of the outstanding shares of Company Common Stock
(including Company Common Stock currently beneficially owned by such Person);
(E) any reclassification of securities or recapitalization of the Company or
other transaction that has the effect, directly or indirectly, of increasing
the proportionate share of any class of equity security (including securities
convertible into equity securities) of the Company that is owned by any Person,
or any agreement or letter of intent or understanding relating to such
transaction; (F) any transaction having an effect similar to those described in
(A) through (E) above; or (G) a public announcement with respect to a proposal,
plan, or intention by the Company or another Person to effect any of the
foregoing transactions (which may include publication of notice of filing or
any similar notice under applicable law); and (ii) a "Superior Proposal" means
a bona fide, written and unsolicited proposal or offer made by any Person
(other than Watson or any of its Subsidiaries) with respect to an Alternative
Proposal on terms which the Board of Directors of the Company determines in
good faith, and in the exercise of reasonable judgment (based on the advice or
independent financial advisors and legal counsel), to be more favorable to the
Company and its Stockholders than the transactions contemplated hereby
(including taking into account the financing thereof).
(c) Nothing in this Section 5.1 shall (i) permit the Company to terminate
this Agreement (except as specifically provided in Article VII hereof); (ii)
permit the Company to enter into any agreement with respect to an Alternative
Proposal during the term of this Agreement (it being agreed that during the
term of this Agreement, the Company shall not enter into any agreement with any
person that provides for, or in any way facilitates, an Alternative Proposal
(other than a confidentiality agreement in customary form)); or (iii) affect
any other obligation of the Company under this Agreement.
5.2. Interim Operations. (a) During the period from the date of this
Agreement and continuing until the earlier of the termination of this Agreement
or the Effective Time, except as set forth in the Disclosure Statement
(provided, that, disclosures in the Disclosure Statement regarding negotiations
with third parties shall not permit the Company to enter into any binding
agreement or arrangement with respect to such disclosures if such agreement or
arrangement would be prohibited by the terms of this Section 5.2) unless Watson
has consented in writing thereto (which consent shall not be unreasonably
withheld), the Company shall, and shall cause each of its Subsidiaries to,:
(i) conduct their respective operations according to their usual, regular
and ordinary course consistent with past practice;
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(ii) to the extent consistent with their respective businesses, use
commercially reasonable efforts to preserve intact their respective
business organizations and goodwill, keep available the services of their
respective officers and employees and maintain satisfactory relationships
with those Persons having business relationships with them;
(iii) not amend their respective Certificates or Articles of
Incorporation or By-Laws or comparable governing instruments;
(iv) promptly notify Watson of any material emergency or other Company
Material Adverse Effect, any material correspondence with, or any
investigation by, the FDA or other Governmental Entities, any material
litigation or material governmental complaints, investigations or hearings
(or communications indicating that the same may be contemplated), or the
material breach by the Company of any of its representations or warranties
contained herein;
(v) promptly deliver to Watson true and correct copies of any report,
statement or schedule filed with the SEC subsequent to the date of this
Agreement;
(vi) not (A) effect any stock split or otherwise change its
capitalization as it existed on the date hereof; (B) grant, confer or award
any option, warrant, conversion right or other right not existing on the
date hereof to acquire any shares of its capital stock; or (C) grant any
severance or termination package to any employee or consultant, other than
in the ordinary course of business consistent with the policies of the
Company disclosed to Watson prior to the date hereof;
(vii) not enter into any agreement or transaction, or agree to enter into
any agreement or transaction involving a sale, license or other disposition
of any Intellectual Property, a merger, consolidation, joint venture,
license agreement, partial or complete liquidation or dissolution,
reorganization, recapitalization, restructuring or a purchase, sale, lease
or other disposition of a material portion of assets or capital stock;
(viii) not enter into any contract or arrangement of any type described
in Section 4.18 hereof or amend or terminate any of the contracts or
arrangements listed in the Disclosure Statement;
(ix) not make any loans or capital contributions to, or investments in,
any other Person;
(x) not perform any of the actions described in Sections 4.28(c), (e),
(f), (h), (i), (j), (k), (l), (m), (o) or (p) hereof;
(xi) not settle or initiate any litigation or threatened litigation,
other than a settlement of such matters resulting in a payment of less than
$50,000, or $100,000 in the aggregate for all such matters;
(xii) not make (or commit to make) capital expenditures in an amount
which exceeds $369,400 in the aggregate;
(xiii) not enter into any transaction with, or made any payment to, or
incurred any liability to, any Related Party (except for payment of salary
and other customary expense reimbursements made in the ordinary course of
business to Related Parties who are employees of the Company or its
Subsidiaries);
(xiv) not increase the compensation payable to, enter into or amend any
employment agreement with, or pay any bonus or other compensation to, any
employee, except for (A)
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normal pay increases in the ordinary course of business consistent with
past practices, but in no event, in an amount in excess of five percent
(5%) of the annual salaries of all employees of the Company and its
Subsidiaries as of the date hereof, in the aggregate; and (B) year end
bonuses not to exceed $485,000 in the aggregate;
(xv) not grant or make any mortgage or pledge or subject itself or any of
its material properties or assets to any lien, charge or encumbrance of any
kind, except Liens for taxes not currently due and liens granted to incur
the indebtedness contemplated by Section 5.2(a)(x) hereof; and
(xvi) maintain insurance on its tangible assets and its businesses in
such amounts as are substantially similar to those currently in effect.
(b) During the period from the date of this Agreement and continuing until
the earlier of the termination of this Agreement or the Effective Time, except
as set forth in the Disclosure Statement, unless the Company has consented in
writing thereto (which consent shall not be unreasonably withheld), Watson
shall, and shall cause each of its Subsidiaries to,:
(i) promptly deliver to the Company true and correct copies of any
report, statement or schedule filed with the SEC subsequent to the date of
this Agreement;
(ii) promptly notify the Company of any material emergency or other
Watson Material Adverse Effect, any material litigation or material
governmental complaints, investigations or hearings (or communications
indicating that the same may be contemplated), or the material breach by
Watson or Watson Sub of any of their respective representations or
warranties contained herein;
(iii) not amend their respective Certificates or Articles of
Incorporation or By-laws or comparable governing instruments; and
(iv) not take any action that would result in a failure to maintain the
trading of Watson Common Stock on the New York Stock Exchange.
5.3. Meetings of Stockholders. The Company will take all action necessary in
accordance with applicable law and its Certificate of Incorporation and Bylaws
to convene a meeting of the Stockholders as promptly as practicable to consider
and vote upon the approval of the Merger, this Agreement and the transactions
contemplated hereby. The Board of Directors of the Company shall recommend such
approval and the Company shall take all lawful action to solicit such approval,
including, without limitation, timely mailing the Proxy Statement to the
Stockholders; provided, however, that such recommendation or solicitation is
subject to any action (including any withdrawal or change of its
recommendation) taken by, or upon authority of, the Board of Directors of the
Company in the exercise of its good faith judgment as to its fiduciary duties
to the Stockholders imposed by law.
5.4. Filings; Other Action. Subject to the terms and conditions herein
provided, the Company and Watson shall: (a) promptly make their respective
filings and thereafter make any other required submissions under the HSR Act
with respect to the Merger; (b) use all reasonable efforts to cooperate with
one another in (i) determining which filings are required to be made prior to
the Effective Time with, and which consents, approvals, permits or
authorizations are required to be obtained prior to the Effective Time from,
governmental or regulatory authorities of the United
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States, the several states and foreign jurisdictions in connection with the
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby; and (ii) timely making all such filings and
timely seeking all such consents, approvals, permits or authorizations; (c) use
commercially reasonable efforts to obtain all consents under or with respect
to, any contract, lease, agreement, purchase order, sales order or other
instrument, Permit or Environmental Permit, where the consummation of the
transactions contemplated hereby would be prohibited or constitute an event of
default, or grounds for acceleration or termination, in the absence of such
consent; and (d) take, or cause to be taken, all other commercially reasonable
actions as are reasonably necessary, proper or appropriate to consummate and
make effective the transactions contemplated by this Agreement. If, at any time
after the Effective Time, any further commercially reasonable action is
necessary or desirable to carry out the purpose of this Agreement, the proper
officers and directors of Watson and the Surviving Corporation shall take all
such necessary action.
5.5. Inspection of Records. From the date hereof to the Effective Time, the
Company shall (a) allow all designated officers, attorneys, accountants and
other representatives of Watson reasonable access at all reasonable times to
the offices, records and files, correspondence, audits and properties, as well
as to all information relating to commitments, contracts, titles and financial
position, or otherwise pertaining to the business and affairs of the Company
and its Subsidiaries; (b) furnish to Watson, its counsel, financial advisors,
auditors and other authorized representatives such financial and operating data
and other information as such persons may reasonably request; and (c) instruct
the employees, counsel and financial advisors of the Company and its
Subsidiaries to cooperate with Watson and its investigation of the business of
the Company and its Subsidiaries and provide access to such employees to
Watson. From the date hereof to the Effective Time, Watson shall (a) furnish to
the Company, its counsel, financial advisors, auditors and other authorized
representatives such financial and operating data and other information as such
persons may reasonably request, and (b) instruct the officers, counsel and
financial advisors of Watson to cooperate with the Company in its investigation
of the business of Watson or its Subsidiaries. All information disclosed by the
Company to Watson and its representatives or by Watson to the Company and its
representatives shall be subject to the terms of that certain Non-Disclosure
Agreement (the "Confidentiality Agreement") dated as of February 19, 1997
between Watson and the Company.
5.6. Publicity. Neither party hereto shall make any press release or public
announcement with respect to this Agreement, the Merger or the transactions
contemplated hereby without the prior written consent of the other party hereto
(which consent shall not be unreasonably withheld); provided, however, that
each party hereto may make any disclosure or announcement which such party, in
the reasonable opinion of its legal counsel, is obligated to make pursuant to
applicable law or regulation of any national securities exchange, in which
case, the party desiring to make the disclosure shall consult with the other
party hereto prior to making such disclosure or announcement and shall provide
a copy of such disclosure to the other party for comment prior to release.
5.7. Registration Statement. Watson and the Company shall cooperate and
promptly prepare and Watson shall file with the SEC as soon as practicable a
Registration Statement on Form S-4 (the "Form S-4") under the Securities Act,
with respect to the Watson Common Stock issuable in the Merger, a portion of
which Registration Statement shall also serve as the Proxy Statement. The
respective parties will cause the Proxy Statement and the Form S-4 to comply as
to form in all
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material respects with the applicable provisions of the Securities Act, the
Exchange Act and the rules and regulations promulgated thereunder. Watson shall
use all reasonable efforts, and the Company will cooperate with Watson, to have
the Form S-4 declared effective by the SEC as promptly as practicable. Watson
shall use reasonable commercial efforts to obtain, prior to the effective date
of the Form S-4, all necessary state securities law or "Blue Sky" permits or
approvals required to carry out the transactions contemplated by this Agreement
and will pay all expenses incident thereto. No amendment or supplement to the
Proxy Statement will be made by Watson or the Company without the approval of
the other party, which approval shall not be unreasonably withheld. Watson will
advise the Company, promptly after it receives notice thereof, of the time when
the Form S-4 has become effective or any supplement or amendment has been
filed, the issuance of any stop order, the suspension of the qualification of
the Watson Common Stock issuable in connection with the Merger for offering or
sale in any jurisdiction, or any request by the SEC for amendment of the Proxy
Statement or the Form S-4 or comments thereon and responses thereto or requests
by the SEC for additional information and Watson shall use reasonable
commercial efforts to promptly resolve any such stop order, suspension or
qualification.
5.8. Stock Exchange Listing. Watson shall use all reasonable efforts to cause
the shares of Watson Common Stock to be issued in the Merger and the shares of
Watson Common Stock to be reserved for issuance upon exercise of Company Stock
Options to be approved for listing on the NYSE, subject to official notice of
issuance.
5.9. Indemnification. (a) From and after the Effective Time, Watson agrees
that it will, and will cause the Surviving Corporation to, indemnify and hold
harmless each present and former director and officer of the Company (the
"Indemnified Parties"), against any costs or expenses (including attorneys'
fees), judgments, fines, losses, claims, damages, liabilities or amounts paid
in settlement (collectively, "Costs") incurred in connection with any claim,
action, suit, proceeding or investigation, whether civil, criminal,
administrative or investigative, arising out of or pertaining to matters
existing or occurring at or prior to the Effective Time, whether asserted or
claimed prior to, at or after the Effective Time, to the fullest extent that
the Company would have been permitted under Delaware law and its certificate of
incorporation or bylaws in effect on the date hereof to indemnify such
Indemnified Party (and Watson and the Surviving Corporation shall also advance
expenses as incurred to the fullest extent permitted under applicable law,
provided the Indemnified Party to whom expenses are advanced provides an
undertaking to repay such advances if it is ultimately determined that such
Indemnified Party is not entitled to indemnification.
(b) For a period of two (2) years after the Effective Time, Watson shall
cause the Surviving Corporation to maintain (to the extent available in the
market) in effect a directors' and officer's liability insurance policy
covering those persons who are currently covered by the Company's directors'
and officers' liability insurance policy (a copy of which has been heretofore
delivered to Watson) with coverage in amount and scope at least as favorable as
the Company's existing coverage; provided however that Watson shall not be
required to pay an annual premium for such insurance in excess of 150% of the
last annual premium paid prior to the date hereof, but in such case shall
purchase as much coverage as possible for such amount.
(c) The provisions of this Section 5.9 are intended to be an addition to the
rights otherwise available to the current officers and directors of the Company
by law, charter, statute or by-law, and
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shall operate for the benefit of, and shall be enforceable by, each of the
Indemnified Parties, their heirs and their representatives.
5.10. Affiliate Letters. At least 30 days prior to the Closing Date, the
Company shall deliver to Watson a list of names and addresses of those persons
who were or will be, in the Company's reasonable judgment, at the record date
for its Stockholders' meeting to approve the Merger, "affiliates" (each such
person, an "Affiliate") of the Company within the meaning of Rule 145 of the
rules and regulations promulgated under the Securities Act. The Company shall
provide Watson such information and documents as Watson shall reasonably
request for purposes of reviewing such list. The Company shall use commercially
reasonable efforts to deliver or cause to be delivered to Watson, prior to the
Closing Date, from each of the Affiliates of the Company identified in the
foregoing list, an Affiliate Letter in substantially the form attached hereto
as Exhibit A. Watson shall be entitled to place legends as specified in such
Affiliate Letters on the certificates evidencing any Watson Common Stock to be
received by such Affiliates pursuant to the terms of this Agreement, and to
issue appropriate stop transfer instructions to the transfer agent for the
Watson Common Stock, consistent with the terms of such Affiliate Letters.
5.11. Expenses. Whether or not the Merger is consummated, all costs and
expenses incurred in connection with this Agreement and the transactions
contemplated hereby shall be paid by the party incurring such expenses, except
(a) as otherwise expressly provided for herein; and (b) the expenses incurred
in connection with printing and mailing the Form S-4 and the Proxy Statement
shall be shared equally by the Company and Watson.
5.12. Tax Treatment of Merger. From and after the date hereof and until the
Effective Time, neither Watson nor the Company nor any of their respective
Subsidiaries or other affiliates shall (a) knowingly take any action, or
knowingly fail to take any action, that would jeopardize qualification of the
Merger as (i) a reorganization within the meaning of Section 368(a) of the
Code; or (ii) a "pooling of interests" for accounting purposes; or (b) enter
into any contract, agreement, commitment or arrangement with respect to the
foregoing. After the Effective Time, Watson shall not take or fail to take (and
shall cause the Surviving Corporation not to take or fail to take) any action
that is reasonably likely to jeopardize qualification of the Merger as a
reorganization within the meaning of Section 368(a) of the Code, including, but
not limited to, (i) a failure to satisfy the continuity of business enterprise
requirements of Treas. Reg. Section 1.368-1(d)(1) and (ii) a failure to satisfy
the continuity of interest requirements of Treas. Reg. Section 1.368-1(e)(1).
5.13. Company Options. As soon as reasonably practicable after the Closing
Date, but in any event, no later than sixty (60) days after the Closing Date,
Watson shall register the shares of Watson Common Stock issuable upon exercise
of the Company Options with the SEC on Form S-8, to the extent that such
Company Options may be registered on such form. To the extent that all or any
portion of the Company Options may not be registered on Form S-8 (the "Non-
Employee Options"), Watson and the Company shall cooperate and promptly prepare
and Watson shall file with the SEC as soon as reasonably practicable after the
Closing Date, but in any event, no later than sixty (60) days after the Closing
Date, a Registration Statement on Form S-3 (the "Form S-3") under the
Securities Act, with respect to the Watson Common Stock issuable upon exercise
of the Non-Employee Options. Watson shall use all reasonable efforts, and the
Company will cooperate with
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Watson, to have the Form S-3 declared effective by the SEC as soon as
practicable after the filing thereof and to keep such Registration Statement
effective until such time as all such Non-employee Options (or the underlying
Watson Common Stock) has been sold into the public market or is eligible to be
so sold pursuant to Rule 145(d) promulgated under the Securities Act. Watson
will advise holders of such Non-Employee Options, promptly after it receives
notice thereof, of the time when the Form S-3 has become effective, the
issuance of any stop order or the suspension of the qualification of the Watson
Common Stock issuable in connection with the exercise of the Non-Employee
Options for offering or sale in any jurisdiction and Watson shall use
reasonable commercial efforts to promptly resolve any such stop order,
suspension or qualification.
5.14. Supplement to Watson Disclosure Statement and the Disclosure Statement.
Each of Watson and the Company shall promptly supplement or amend the Watson
Disclosure Statement and the Disclosure Statement, respectively, with respect
to any matter hereafter arising that, if existing or occurring at the date of
this Agreement, would have been required to be set forth or described in the
Watson Disclosure Statement or the Disclosure Statement, as the case may be. No
supplement or amendment to the Watson Disclosure Statement or the Disclosure
Statement will have any effect for the purpose of determining satisfaction of
the conditions set forth in Article VI hereof.
5.15. Report to Watson. The Company will promptly advise Watson in writing of
all actions taken by the directors and stockholders of the Company at meetings
or in connection with written consents filed with the Company and will furnish
Watson with copies of all monthly and other interim financial information of
the Company and its Subsidiaries as they become available to the officers
and/or the directors of the Company or its Subsidiaries.
5.16. Delivery of Stockholder List. The Company shall arrange to have its
transfer agent deliver to Watson or its designee, immediately prior to the
Closing Date, a true and complete list setting forth the names and addresses of
the Stockholders. From time to time prior to the Closing Date, the Company
shall deliver to Watson such information as Watson may request regarding the
holdings of stock of Persons who may be affiliates of the Company and such
other stockholder information as Watson may reasonably request.
5.17. Letter of the Company's Accountant. At the request of Watson, the
Company shall use commercially reasonable efforts to cause to be delivered to
Watson "cold comfort" letters of Ernst & Young, LLP, the Company's independent
public accountant, dated as of the date of which the Registration Statement
shall become effective and the Effective Time, respectively, and addressed to
Watson, reasonably customary in form, scope, and substance for letters
delivered by independent public accountants in connection with the procedures
undertaken by them with respect to the financial statements and other financial
information of the Company and its Subsidiaries contained in registration
statements similar to the Registration Statement and other matters contemplated
by AICPA Statement No. 72 and customarily included in comfort letters relating
to transactions similar to transactions such as those contemplated by the
Agreement.
5.18. Employee Benefit Plans. Watson covenants and agrees that to the extent
the existing benefit plans and arrangements provided by the Company to its
employees are terminated after the Effective Date, all employees of the
Surviving Corporation shall be entitled to participate in all benefit plans and
arrangements that are available and subsequently become available to Watson's
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employees on the same basis as Watson's employees in similar positions are
eligible to participate so long as such employees remain employees of the
Surviving Corporation. For purposes of satisfying the terms and conditions of
such plans, Watson shall give full credit for eligibility, vesting or benefit
accrual for each participant's period of service with the Company prior to the
Effective Time. To the extent Watson's benefit plans provide medical or dental
welfare benefits after the Closing Date, Watson shall cause all pre-existing
condition exclusions and actively at work requirements to be waived and Watson
shall provide that any expenses incurred on or before the Closing Date shall be
taken into account under Watson's benefit plans for purposes of satisfying the
applicable deductible, coinsurance and maximum out-of-pocket provisions for
such employees and their covered dependents.
ARTICLE VI
CONDITIONS
6.1. Conditions to Each Party's Obligation to Effect the Merger. The
respective obligations of each party to effect the Merger shall be subject to
the fulfillment at or prior to the Closing Date of each of the following
conditions (unless waived by each of the parties hereto in accordance with the
provisions of Section 7.3 hereof):
(a) This Agreement and the Merger and other transactions contemplated
hereby shall have been approved and adopted by the requisite vote of the
Stockholders.
(b) The waiting period applicable to the consummation of the Merger under
the HSR Act shall have expired or been terminated.
(c) No preliminary or permanent injunction or other order or decree by
any federal or state court which prevents the consummation of the Merger or
materially changes the terms or conditions of this Agreement shall have
been issued and remain in effect. In the event any such order or injunction
shall have been issued, each party agrees to use its reasonable efforts to
have any such injunction lifted.
(d) The Form S-4 shall have been declared effective by the SEC and shall
be effective at the Effective Time, and no stop order suspending the
effectiveness of the Form S-4 shall have been issued, no action, suit,
proceeding or investigation by the SEC to suspend the effectiveness thereof
shall have been initiated and be continuing, and all necessary approvals
under state securities laws relating to the issuance or trading of the
Watson Common Stock to be issued to the Stockholders in connection with the
Merger shall have been received.
(e) All material consents, authorizations, orders and approvals of (or
filings or registrations with) any governmental commission, board or other
regulatory body required in connection with the execution, delivery and
performance of this Agreement shall have been obtained or made, except for
filings in connection with the Merger and any other documents required to
be filed after the Effective Time.
(f) The Watson Common Stock to be issued to the Stockholders in
connection with the Merger shall have been authorized for trading on the
New York Stock Exchange subject only to official notice of issuance.
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(g) Watson shall have received the opinion of Price Waterhouse LLP, dated
the Closing Date, to the effect that the Merger will be treated as a
"pooling of interests" for accounting purposes.
(h) The Company shall have received from Ernst & Young, LLP a letter,
dated the Closing Date, indicating that the Company has not taken any
action that would preclude it from entering into a transaction that would
be treated as a "pooling of interests" for accounting purposes.
6.2. Conditions to Obligation of the Company to Effect the Merger. The
obligation of the Company to effect the Merger shall be subject to the
fulfillment at or prior to the Closing Date of the following conditions (unless
waived by the Company in accordance with the provisions of Section 7.3 hereof):
(a) Watson shall have performed, in all material respects, all of its
agreements contained herein that are required to be performed by Watson on
or prior to the Closing Date, and the Company shall have received a
certificate of an executive officer of Watson, dated the Closing Date,
certifying to such effect.
(b) As of the date hereof, the representations and warranties of Watson
and Watson Sub contained in this Agreement shall be true and correct, in
all material respects (or to the extent representations or warranties
contain materiality modifiers, true and correct as modified), and the
Company shall have received a certificate of an executive officer of Watson
and Watson Sub, dated as of the Closing Date, certifying to such effect. As
of the Closing Date, the representations and warranties of Watson and
Watson Sub contained in this Agreement shall be true and correct, except as
would not reasonably be expected to have a Watson Material Adverse Effect,
and the Company shall have received a certificate of an executive officer
of Watson and Watson Sub, dated as of the Closing Date, certifying to such
effect.
(c) The Company shall have received from Watson certified copies of the
resolutions of Watson's and Watson Sub's Boards of Directors and from the
sole stockholder of Watson Sub approving and adopting this Agreement, the
Watson Ancillary Documents and the transactions contemplated hereby and
thereby.
(d) The Company shall have received the opinion of D'Ancona & Pflaum
covering customary opinions in a form reasonably acceptable to Watson and
its counsel.
(e) The Company shall have received the opinion of D'Ancona & Pflaum,
counsel to Watson, dated the Closing Date, to the effect that the Merger
will be treated for federal income tax purposes as a reorganization within
the meaning of Section 368(a) of the Code, and that the Company and Watson
will each be a party to that reorganization within the meaning of Section
368(b) of the Code. In rendering such opinion, counsel shall be entitled to
rely upon, among other things, reasonable assumptions as well as
representations and covenants of Watson, Watson Sub and the Company.
(f) From the date of this Agreement through the Effective Time, there
shall not have occurred any event that has had, would have or would be
reasonably likely to have a Watson Material Adverse Effect; provided, that
such an event will not be deemed to have occurred solely as a result of
fluctuations in the value of Watson Common Stock.
6.3. Conditions to Obligation of Watson and Watson Sub to Effect the Merger.
The obligations of Watson and Watson Sub to effect the Merger shall be subject
to the fulfillment at or prior to the
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Closing Date of the following conditions (unless waived by the Company in
accordance with the provisions of Section 7.3 hereof):
(a) The Company shall have performed, in all material respects, all of
its agreements contained herein that are required to be performed by the
Company on or prior to the Closing Date, and Watson shall have received a
certificate of an executive officer of the Company, dated the Closing Date,
certifying to such effect.
(b) As of the date hereof, the representations and warranties of the
Company contained in this Agreement shall be true and correct, in all
material respects (or to the extent representations or warranties contain
materiality modifiers, true and correct as modified), and Watson shall have
received a certificate of an executive officer of the Company, dated as of
the Closing Date, certifying to such effect. As of the Closing Date, the
representations and warranties of the Company contained in this Agreement
shall be true and correct, except as would not reasonably be expected to
have a Company Material Adverse Effect, and Watson shall have received a
certificate of an executive officer of the Company, dated as of the Closing
Date, certifying to such effect.
(c) Watson shall have received from the Company certified copies of the
resolutions of the Company's Board of Directors and Stockholders approving
and adopting this Agreement, the Company Ancillary Documents and the
transactions contemplated hereby and thereby.
(d) Watson shall have received the opinion of Kirkland & Ellis covering
customary opinions in a form reasonably acceptable to the Company and its
counsel.
(e) From the date of this Agreement through the Effective Time, there
shall not have occurred any event that has had, would have or would be
reasonably likely to have a Company Material Adverse Effect.
(f) The Company shall have received the consents from the Persons listed
on Schedule 6.3(f).
(g) Watson shall have received the opinion of Kirkland & Ellis, counsel
to the Company, dated the Closing Date, to the effect that the Merger will
be treated for federal income tax purposes as a reorganization within the
meaning of Section 368(a) of the Code, and that the Company and Watson will
each be a party to that reorganization within the meaning of Section 368(b)
of the Code. In rendering such opinion, counsel shall be entitled to rely
upon, among other things, reasonable assumptions as well as representations
and covenants of Watson, Watson Sub and the Company.
(h) Dinesh C. Patel, Ph.D. and Charles D. Ebert shall have entered into
an amendment to their respective Employment Agreements in substantially the
form attached hereto as Exhibit B and C, respectively.
(i) Dinesh C. Patel, Ph.D. and Charles D. Ebert shall have entered into
Non-Competition Agreements in substantially the form attached hereto as
Exhibit D and E, respectively.
(j) Watson shall have received the written resignations effective as of
the Closing Date of such of the directors and officers of the Company's
Subsidiaries as are designated by Watson to resign.
(k) The Company shall have delivered to Watson, Affiliate Letters
executed by each of the Affiliates of the Company.
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ARTICLE VII
TERMINATION
7.1. Termination. This Agreement may be terminated and the Merger may be
abandoned at any time before the Closing Date notwithstanding the approval or
adoption of this Agreement by the Stockholders and subject to the payment
obligations contained in Section 7.2 hereof:
(a) By the mutual written consent of Watson and the Company.
(b) By written notice from the Board of Directors of either Watson or the
Company if (i) the Merger shall not have been consummated by March 31,
1999; provided, however, that the right to terminate this Agreement under
this Section 7.1(b)(i) will not be available to any party whose failure to
fulfill any obligation under this Agreement has been the cause of, or
resulted in, the failure of the Merger to occur on or before such date;
(ii) the approval of the Stockholders required by Section 6.1(a) shall not
have been obtained at a meeting duly convened therefor or at any
adjournment thereof; provided, however, that the Company shall not have the
right to terminate this Agreement under this Section 7.1(b)(ii) if the
Company withdrew, modified, or amended in any adverse respect its
recommendation that the Stockholders vote in favor of this Agreement; or
(iii) a court of competent jurisdiction or a governmental, regulatory or
administrative agency or commission shall have issued an order, decree or
ruling or taken any other action either (A) permanently restraining,
enjoining or otherwise prohibiting the transactions contemplated by this
Agreement; or (B) compelling Watson, Watson Sub or the Surviving
Corporation to dispose of or hold separate all or a material portion of the
respective businesses or assets of Watson, the Company or any of their
respective Subsidiaries, or sell or license any material product of Watson,
the Company or any of their respective Subsidiaries, and such order,
decree, ruling or other action shall have become final and non-appealable.
(c) By written notice from the Board of Directors of Watson, if without
the prior written approval of Watson, (i) the Company (A) shall have
withdrawn, modified, or amended in any adverse respect its approval or
recommendation of this Agreement or the transactions contemplated hereby,
(B) shall not have recommended or shall have withdrawn, modified, or
amended in any respect its recommendation that the Stockholders vote in
favor of this Agreement, or (C) shall not have included such recommendation
in the Proxy Statement; (ii) the Board of Directors of the Company shall
have resolved to do any of the foregoing; or (iii) any director of the
Company shall take any action inconsistent with such approval or
recommendation and such action has not been renounced by the Board of
Directors of the Company; provided that, in each of subparagraphs (i), (ii)
or (iii) above, other than upon the happening of an event described in
Section 7.1(f).
(d) By written notice from the Board of Directors of Watson if (A) there
is an Alternative Proposal initiated or made by or relating to the Company
which is approved of or agreed to by the Board of Directors of the Company;
or (B) any Person shall have solicited proxies in opposition to the
approval of the Merger, and the Board of Directors of the Company has taken
action or a public position consistent with approving such Persons proxy
solicitation.
(e) By written notice from the Board of Directors of the Company, if the
Board of Directors of the Company shall have reasonably determined, after
consultation with its legal and financial advisors, that a proposal for an
Alternative Proposal constitutes a Superior Proposal
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and shall have decided to accept such Superior Proposal pursuant to its
fiduciary duties under applicable law; provided, however, that the Company
may not have the right to terminate this Agreement pursuant to this
subparagraph (e) unless (i) five (5) business days shall have elapsed after
delivery to Watson of a written notice of such determination by the Board
of Directors of the Company and, during such five (5) business day period,
the Company shall have informed Watson of the material terms and conditions
and financing arrangements of such proposal for an Alternative Proposal and
the identity of the Person or group making such proposal for an Alternative
Proposal and (ii) at the end of such five (5) business day period, such
board shall continue to reasonably believe that such proposal for an
Alternative Proposal constitutes a Superior Proposal and promptly
thereafter the Company shall enter into a definitive acquisition, merger or
similar agreement to effect such Superior Proposal. Notwithstanding the
foregoing, the Company shall not have the right to terminate this Agreement
pursuant to this subsection (e) unless it has simultaneously or previously
paid the $5,000,000 fee owed to Watson pursuant to Section 7.2.
(f) By written notice from the Board of Directors of the Company, if (i)
as of the date hereof, the representations and warranties made by Watson
and Watson Sub are not true and correct, in all material respects; (ii)
there has been a breach by Watson or Watson Sub of any representation or
warranty contained in this Agreement which would reasonably be expected to
have a Watson Material Adverse Effect; or (iii) there has been a material
breach of any of the material covenants or agreements set forth in this
Agreement on the part of Watson, which breach is not curable or, if
curable, is not cured within thirty (30) days after written notice of such
breach is given by the Company to Watson.
(g) By written notice from the Board of Directors of Watson, if (i) as of
the date hereof, the representations and warranties made by the Company are
not true and correct, in all material respects; (ii) there has been a
breach by the Company of any representation or warranty contained in this
Agreement which would reasonably be expected to have a Company Material
Adverse Effect; or (iii) there has been a material breach of any of the
material covenants or agreements set forth in this Agreement on the part of
the Company, which breach is not curable or, if curable, is not cured
within thirty (30) days after written notice of such breach is given by
Watson to the Company.
Any termination notice delivered pursuant to the provisions of this Section
7.1 shall specify the particular section of this Agreement under which this
Agreement is being terminated.
7.2. Effect of Termination and Abandonment. (a) If this Agreement or the
transactions contemplated hereby are terminated and if any one of the following
conditions has been satisfied, then the Company shall pay to Watson, no later
than five (5) business days after the date on which one of the following
conditions is satisfied (except as otherwise provided in Section 7.1(e)
hereof), a fee equal to $5,000,000: (i) this Agreement is terminated by the
Company pursuant to Section 7.1(e); (ii) this Agreement is terminated by Watson
pursuant to Section 7.1(d); (iii)(A) this Agreement is terminated by the
Company pursuant to Section 7.1(b)(i) or by Watson pursuant to Section 7.1(g);
and (B) within four months after the termination of this Agreement, the Company
enters into an agreement or an understanding with respect to an Alternative
Proposal or consummates a transaction with respect to an Alternative Proposal;
and (iv)(A) this Agreement is terminated by Watson pursuant
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to Section 7.1(c); and (B) within one (1) year after the termination of this
Agreement, the Company enters into an agreement or an understanding with
respect to an Alternative Proposal or consummates a transaction with respect to
an Alternative Proposal. In the event of and upon payment of the full Five
Million Dollar ($5,000,000) termination fee pursuant to this Section 7.2(a),
the Company shall have no further liability to Watson in connection with this
Agreement or the transactions contemplated hereby.
(b) If the Company terminates this Agreement pursuant to Section 7.1(f),
Watson shall reimburse the Company for all actual out-of-pocket costs and
expenses incurred by the Company in connection with this Agreement and the
consummation and negotiation of the transactions contemplated hereby,
including, without limitation, reasonable legal, professional and service fees
and expenses, which amount shall be payable by wire transfer of same day funds
no later than ten (10) business days after receiving detailed documentation
detailing such costs and expenses.
(c) If Watson terminates this Agreement pursuant to Section 7.1(c) or 7.1(g),
the Company shall reimburse Watson for all actual out-of-pocket costs and
expenses incurred by Watson and Watson Sub in connection with this Agreement
and the consummation and negotiation of the transactions contemplated hereby,
including, without limitation, reasonable legal, professional and service fees
and expenses, which amount shall be payable by wire transfer of same day funds
no later than ten (10) business days after receiving detailed documentation
detailing such costs and expenses.
(d) If this Agreement is terminated for any reason other than the reasons set
forth in Sections 7.2(a), (b) or (c), no amounts shall be payable pursuant to
this Section 7.2 by either party and neither party shall have any further
liability to the other in connection with this Agreement and the transactions
contemplated hereby.
(e) The parties acknowledge that the agreements contained in this Section 7.2
are an integral part of the transactions contemplated by this Agreement, and
that, without these agreements, they would not enter into this Agreement.
Accordingly, if any party fails to promptly pay the amounts due pursuant to
this Section 7.2, and, in order to obtain such payment, the other party
commences a suit which results in a final, non-appealable judgment for the
amounts or fees set forth in this Section 7.2, such party shall pay to the
other its costs and expenses (including attorneys' fees) incurred in connection
with such suit, together with interest on the amount of the fee at the rate of
10% per annum.
(f) In the event of termination of this Agreement and the abandonment of the
Merger pursuant to this Article VII, all obligations of the parties hereto
shall terminate, except the obligations of the parties pursuant to this Section
7.2 and the provisions of Sections 5.6 and 5.10, which obligations shall
survive the termination of this Agreement.
7.3. Extension; Waiver. At any time prior to the Effective Time, any party
hereto, by action taken by its Board of Directors, may, to the extent legally
allowed, (a) extend the time for the performance of any of the obligations or
other acts of the other parties hereto; (b) waive any inaccuracies in the
representations and warranties made to such party contained herein or in any
document delivered pursuant hereto; and (c) waive compliance with any of the
agreements or conditions for the benefit of such party contained herein. Any
agreement on the part of a party hereto
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to any such extension or waiver shall be valid only if set forth in an
instrument in writing signed on behalf of such party.
ARTICLE VIII
GENERAL PROVISIONS
8.1. Nonsurvival of Representations, Warranties and Agreements. All
representations, warranties and agreements in this Agreement or in any
instrument delivered pursuant to this Agreement between Watson and the Company
shall be conditions to the Merger and shall not survive the Merger, provided,
however, that the agreements contained in Sections 1.4, 1.5, 1.6, 1.7, 1.9,
5.6, 5.8, 5.9, 5.10, 5.11, 5.12 and 5.17, and Articles 2 and 8 (except Section
8.11) and the agreements delivered pursuant to this Agreement shall survive the
Merger. No director, officer, shareholder, employee or agent of the Company,
Watson or any of their respective Subsidiaries shall have any personal
liability to any other party for any breach of any representation, warranty or
obligation contained in this Agreement.
8.2. Notices. All notices required or permitted to be given hereunder shall
be in writing and may be delivered by hand, by facsimile, by nationally
recognized private courier, or by United States mail. Notices delivered by mail
shall be deemed given three (3) business days after being deposited in the
United States mail, postage prepaid, registered or certified mail. Notices
delivered by hand by facsimile, or by nationally recognized private carrier
shall be deemed given on the day following receipt; provided, however, that a
notice delivered by facsimile shall only be effective if such notice is also
delivered by hand, or deposited in the United States mail, postage prepaid,
registered or certified mail, on or before two (2) business days after its
delivery by facsimile. All notices shall be addressed as follows:
If to Watson or Watson Sub:
Watson Pharmaceuticals, Inc.
311 Bonnie Circle
Corona, California 91720
Fax: (909) 270-1429
Attn: Chairman & CEO
With copies to:
Watson Pharmaceuticals, Inc.
311 Bonnie Circle
Corona, California 91720
Fax: (909) 270-1429
Attn: Legal Department
If to the Company:
TheraTech, Inc.
417 Wakara Way
Salt Lake City, Utah 84108
Fax: (801) 588-6200
Attn: Chairman & CEO
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With copies to:
Kirkland & Ellis
153 East 53rd Street
New York, NY 10022-4675
Fax: (212) 446-4900
Attn: Stephen P.H. Johnson
or to such other address as any party shall specify by written notice so given,
and such notice shall be deemed to have been delivered as of the date so
telecommunicated, personally delivered or mailed.
8.3. Assignment, Binding Effect. Neither this Agreement nor any of the
rights, interests or obligations hereunder shall be assigned by any of the
parties hereto (whether by operation of law or otherwise) without the prior
written consent of the other parties. Subject to the preceding sentence, this
Agreement shall be binding upon and shall inure to the benefit of the parties
hereto and their respective permitted successors and assigns. Notwithstanding
anything contained in this Agreement to the contrary, except for the provisions
of Sections 1.4, 1.5, 1.6, 1.7, 5.9, 5.13 and 5.18, nothing in this Agreement,
expressed or implied, is intended to confer on any person other than the
parties hereto or their respective heirs, successors, executors, administrators
and assigns any rights, remedies, obligations or liabilities under or by reason
of this Agreement.
8.4. Entire Agreement. This Agreement, the Exhibits, the Disclosure
Statement, the Watson Disclosure Statement, the Confidentiality Agreement, the
Company Ancillary Documents, the Watson Ancillary Agreements, and any other
documents delivered by the parties in connection herewith constitute the entire
agreement among the parties with respect to the subject matter hereof and
supersede all prior agreements and understandings among the parties with
respect thereto. No addition to or modification of any provision of this
Agreement shall be binding upon any party hereto unless made in writing and
signed by all parties hereto.
8.5. Amendment. This Agreement may be amended by the parties hereto, by
action taken by their respective Boards of Directors, at any time before or
after approval of matters presented in connection with the Merger by the
Stockholders, but after any such Stockholder approval, no amendment shall be
made which by law requires the further approval of Stockholders without
obtaining such further approval. This Agreement may not be amended except by an
instrument in writing signed on behalf of each of the parties hereto.
8.6. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware without regard to its rules
of conflict of laws.
8.7. Counterparts. This Agreement may be executed by the parties hereto in
separate counterparts, each of which when so executed and delivered shall be an
original, but all such counterparts shall together constitute one and the same
instrument.
8.8. Headings. Headings of the Articles and Sections of this Agreement are
for the convenience of the parties only and shall be given no substantive or
interpretive effect whatsoever.
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8.9. Interpretation. In this Agreement, unless the context otherwise
requires, words describing the singular number shall include the plural and
vice versa, and words denoting any gender shall include all genders and words
denoting natural persons shall include corporations and partnerships and vice
versa.
8.10. Waivers. Except as provided in this Agreement, no action taken pursuant
to this Agreement, including, without limitation, any investigation by or on
behalf of any party, shall be deemed to constitute a waiver by the party taking
such action of compliance with any representations, warranties, covenants or
agreements contained in this Agreement. The waiver by any party hereto of a
breach of any provision hereunder shall not operate or be construed as a waiver
of any prior or subsequent breach of the same or any other provision hereunder.
8.11. Incorporation of Exhibits. The Disclosure Statement, the Watson
Disclosure Statement and all Exhibits attached hereto and referred to herein
are hereby incorporated herein and made a part hereof for all purposes as if
fully set forth herein.
8.12. Severability. Any term or provision of this Agreement which is invalid
or unenforceable in any jurisdiction shall, as to that jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. If any provision of
this Agreement is so broad as to be unenforceable, the provision shall be
interpreted to be only so broad as is enforceable.
8.13. Enforcement of Agreement. The parties hereto agree that irreparable
damage would occur in the event that any of the provisions of this Agreement
was not performed in accordance with its specific terms or was otherwise
breached. It is accordingly agreed that the parties shall be entitled to an
injunction or injunctions to prevent breaches of this Agreement and to enforce
specifically the terms and provisions hereof in any court of competent
jurisdiction, this being in addition to any other remedy to which they are
entitled at law or in equity.
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IN WITNESS WHEREOF, the parties have executed this Agreement and caused the
same to be duly delivered on their behalf on the day and year first written
above.
Watson Pharmaceuticals, Inc.
/s/ Allen Chao
By: _________________________________
Allen Chao
Chairman, President and
Chief Executive Officer
Jazz Merger Corp.
/s/ Allen Chao
By: _________________________________
Allen Chao
Chairman, President and
Chief Executive Officer
Theratech, Inc.
/s/ Dinesh C. Patel
By: _________________________________
Dinesh C. Patel
Chairman, President and CEO
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APPENDIX B
October 23, 1998
The Board of Directors
TheraTech, Inc.
417 Wakara Way
Salt Lake City, UT 84108
Gentlemen:
You have asked CIBC Oppenheimer Corp. ("CIBC Oppenheimer") to render an
opinion (the "Opinion") as to the fairness, from a financial point of view, to
the stockholders of TheraTech, Inc. ("TheraTech") of the Exchange Ratio (as
defined below) to be received by TheraTech stockholders in connection with
proposed merger (the "Merger") of Watson Pharmaceuticals, Inc. ("Watson") and
TheraTech pursuant to the terms and conditions set forth in the Agreement and
Plan of Merger by and among TheraTech, a wholly-owned subsidiary of Watson and
Watson dated October 23, 1998 (the "Merger Agreement").
Pursuant to the Merger Agreement, as more fully described therein, each share
of TheraTech Common Stock shall be converted into the right to receive the
following portion of a share of Watson Common Stock (the "Exchange Ratio"): 12
divided by the average of the per share last daily closing price (the "Average
Closing Price") of a share of Watson Common Stock as reported on the New York
Stock Exchange during ten consecutive trading days ending on the second trading
day immediately preceding the effective date of the Merger (the "Effective
Date") providing that, the Exchange Ratio shall not exceed 0.29589 or less than
0.2663. For purposes of this Opinion, the aggregate number of shares of Watson
Common Stock to be issued in the Merger, as determined pursuant to the Exchange
Ratio calculated on the basis set forth in this paragraph and based on the
existing capitalization of TheraTech, is referred to herein as the Merger
Consideration.
In arriving at our Opinion we:
(i) reviewed the Merger Agreement;
(ii) reviewed TheraTech's annual reports to stockholders and its annual
reports on Form 10-K for fiscal years ended December 31, 1995, 1996
and 1997 and its quarterly report on Form 10-Q for the six months
ended June 30, 1998;
(iii) reviewed Watson's annual reports to stockholders and its annual
reports on Form 10-K for fiscal years ended December 31, 1995, 1996
and 1997 and its quarterly report on Form 10-Q for six months ended
June 30, 1998;
(iv) reviewed the Certificates of Incorporation for both TheraTech and
Watson;
(v) reviewed certain financial projections prepared by management of Watson
and TheraTech;
(vi) held discussions with the senior management of each of TheraTech and
Watson to review historical and current operations and financial
conditions as well as projections and strategies of the respective
companies and visited certain of their respective facilities;
(vii) reviewed current and historical market prices and trading data of the
TheraTech Common Stock and the Watson Common Stock;
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(viii) reviewed financial and market data for certain public companies we
deemed comparable to TheraTech and Watson;
(ix) reviewed and analyzed recent mergers and acquisitions of companies in
lines of business we deemed comparable to TheraTech and Watson;
(x) analyzed the financial impact of the Merger on the combined company;
(xi) prepared a discounted cash flow valuation of TheraTech and Watson;
(xii) reviewed the relative contributions to the combined company of
TheraTech and Watson with respect to certain historical and projected
financial parameters; and
(xiii) performed such other analyses and reviewed such other documents and
information as were deemed appropriate.
In rendering our Opinion, we relied upon and assumed, without independent
verification or investigation, the accuracy and completeness of all of the
financial and other information available to us from public sources and
provided to us by TheraTech and Watson and their respective representatives. We
have also relied upon the managements of TheraTech and Watson as to the
reasonableness and achievability of the financial and operating projections and
the assumptions and bases therefor provided to us and, with your consent, we
have assumed, without independent verification or investigation, that such
projections, including and without limitation projected cost savings and
operating synergies from the Merger, were reasonably prepared on bases
reflecting the best available information, estimates and judgment of such
respective managements of TheraTech and Watson and that such projections will
be realized in the amounts and time periods currently estimated by the
managements of TheraTech and Watson. We have not been engaged to assess the
achievability of such projections or assumptions on which they were based and
express no view as to the projections or assumptions. We have neither made,
obtained nor reviewed any independent valuation or appraisal of the assets or
liabilities of TheraTech or Watson.
Our Opinion is based upon our analyses of the foregoing factors and
information in light of our assessment of general economic, financial and
market conditions as of the date hereof that could be evaluated by us as of
such date.
Our Opinion is limited to a determination of the fairness, from a financial
point of view, of the Exchange Ratio. We have not examined the merits or
fairness of the Merger in any other respect or on the merits or fairness of any
other transactions contemplated by TheraTech including, without limitation, the
Merger as compared to any other transaction or business strategy of TheraTech.
In addition, we assume that the factual circumstances and terms, as they exist
as of the date of our Opinion, will remain substantially unchanged through the
time the Merger is completed. CIBC Oppenheimer also assumed, without
independent verification, the accuracy of the advice and conclusions of
TheraTech's legal counsel and accountants with respect to the tax and
accounting matters as provided to CIBC Oppenheimer by TheraTech's management,
including, without limitation, the treatment of the Merger as a tax free
reorganization for federal income tax purposes and a pooling of interests for
financial reporting purposes. We assume that the Merger will be consummated in
accordance with the terms of the Merger Agreement, that all conditions to the
closing of the Merger will be satisfied without waiver or modification and that
Merger would be consummated on a timely basis in the manner contemplated in the
Merger Agreement.
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CIBC Oppenheimer, as part of its investment banking services, is regularly
engaged in the valuation of businesses and securities in connection with
mergers, acquisitions, underwritings, sales and distributions of listed and
unlisted securities and private placements. CIBC Oppenheimer has been engaged
by the Board of Directors of TheraTech to render financial advisory services to
TheraTech in connection with the Merger and will receive a fee for its
services, including a fee upon the delivery of this Opinion. In ordinary course
of business, CIBC Oppenheimer serves as a market maker in the Common Stock of
both TheraTech and Watson and may actively trade the securities of the
companies for its own account or for the account of its customers and
accordingly may at any time hold a long or short position in each company's
Common Stock. CIBC Oppenheimer also provides equity research coverage of both
TheraTech and Watson.
It is understood that our Opinion is intended for the benefit and use of the
Board of Directors of TheraTech in its evaluation of the Merger, and our
Opinion is not intended to be and does not constitute a recommendation to the
Board of Directors or any stockholder with respect to whether to vote in favor
of the Merger. We understand that this Opinion will be included in the
registration statement filed with the Securities and Exchange Commission and
proxy statement/prospectus therein distributed to TheraTech stockholders in
connection with the approval of the Merger. We hereby consent to the foregoing
use of the Opinion in its entirety. Otherwise, our Opinion may not be published
or otherwise used or referred to without our written consent.
Based upon and subject to the foregoing, it is our Opinion that, as of the
date hereof, the Exchange Ratio to be received by TheraTech stockholders in
connection with the Merger is fair, from a financial point of view, to the
stockholders of TheraTech.
Very truly yours,
/s/ CIBC Oppenheimer Corp.
-------------------------------------
CIBC Oppenheimer Corp.
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 78.751 of the Nevada Revised Statutes authorizes a corporation,
under certain circumstances, to indemnify its directors and officers (including
reimbursement for expenses incurred). The Registrant has provided for
indemnification to the fullest extent permitted by the provisions of the Nevada
statute in its Articles of Incorporation and Bylaws.
The Registrant maintains a directors' and officers' liability insurance
policy that, subject to the terms and conditions of the policy, provides
coverage up to $15,000,000 in the aggregate (subject to a $250,000 retention per
loss) arising from any wrongful act (as defined by the policy) in his or her
capacity as a director or officer. The policy reimburses the Registrant for
amounts which lawfully indemnifies the Registrant or as required or permitted by
law to indemnify its directors and officers.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
a. Exhibits
2.1 Agreement and Plan of Merger, among Watson Pharmaceuticals, Inc.,
TheraTech, Inc. and The Jazz Merger Corp. dated as of October 23, 1998
(incorporated by reference to Appendix A of the Proxy Statement/Prospectus
included in this Registration Statement).
3.1 Articles of Incorporation of Watson and all amendments thereto, filed as
Exhibit 3.1 to Watson's Quarterly Reports on Form 10-Q for the quarter
ended June 30, 1995 and Exhibit 3.1 (A) to Watson's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1996 and hereby incorporated by
reference.
3.2 Bylaws of Watson, as amended as of July 18, 1995, filed as Exhibit 3.2 to
Watson's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995
and hereby incorporated by reference.
4.1 Articles of Incorporation and Bylaws as amended, of the Registrant
(included in exhibits 3.1 and 3.2).
5.1 Opinion of D'Ancona & Pflaum as to the legality of the common stock being
offered.
5.2 Opinion of Kummer, Kaempfer, Bonner and Renshaw as to the legality of the
common stock being offered.
8.1 Opinion of D'Ancona & Pflaum regarding certain federal income tax matters
related to the transaction.
8.2 Opinion of Kirkland & Ellis regarding certain federal income tax matters
related to the transaction.
10.1 Form of Affiliate Letter
10.2 Form of Amendment to the Employment Agreement of Dr. Patel.
10.3 Form of Amendment to the Employment Agreement of Dr. Ebert.
10.4 Form of Non-Competition Agreement between Watson and Dr. Patel.
10.5 Form of Non-Competition Agreement between Watson and Dr. Ebert.
10.6 Voting Agreement dated as of October 24, 1998, between Watson and Dr.
Patel.
10.7 Voting Agreement dated as of October 24, 1998, between Watson and Dr.
Higuchi.
10.8 TheraTech 1992 Amended and Restated Employees' Stock Option Plan,
incorporated by reference to TheraTech's Proxy Statement filed in
connection with its 1996 Annual Meeting of Stockholders, and hereby
incorporated by reference.
<PAGE>
10.9 TheraTech 1992 Amended and Restated Directors' Stock Option Plan,
incorporated by reference to TheraTech's Proxy Statement filed in
connection with its 1994 Annual Meeting of Stockholders, and hereby
incorporated by reference.
21.1 List of Subsidiaries of Watson.
23.1 Consent of D'Ancona & Pflaum (included in exhibits 5.1 and 8.1).
23.2 Consent of Kummer, Kaempfer, Bonner and Renshaw (included in exhibit 5.2).
23.3 Consent of Kirkland & Ellis (included in exhibit 8.2).
23.4 Consent of PricewaterhouseCoopers LLP.
23.5 Consent of Ernst & Young LLP.
23.6 Consent of Arthur Andersen LLP.
23.7 Consent of Deloitte & Touche LLP.
24.1 Powers of Attorney (included on signature page of this Registration
Statement).
99.1 Form of proxy card for TheraTech, Inc.
99.2 Opinion of CIBC Oppenheimer (incorporated by reference to Appendix B to
the Proxy Statement/Prospectus included in this Registration Statement).
b. Financial Statement Schedules
None.
ITEM 22. UNDERTAKINGS
1. The undersigned registrant hereby undertakes:
a. To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or
in the aggregate, represent a fundamental change in the
information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered)
and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if,
in the aggregate, the changes in volume and price represent no
more than a 20 percent change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table
in the effective registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement;
b. That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona
<PAGE>
fide offering thereof.
c. To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the
termination of the offering.
2. The undersigned registrant hereby undertakes:
a. That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this
registration statement, by any person or party who is deemed to be an
underwriter within the meaning of Rule 145(c), the issuer undertakes
that such reoffering prospectus will contain the information called
for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information
called for by the other items of the applicable form.
b. That every prospectus (i) that is filed pursuant to paragraph (1)
immediately preceding, or (ii) that purports to meet the requirements
of Section 10(a)(3) of the Act and is used in connection with an
offering of securities subject to Rule 415, will be filed as a part of
an amendment to the registration statement and will not be used until
such amendment is effective and that, for purposes of determining any
liability under the Securities Act of 1933, each such post-effective
amendment shall be deemed to be a new registration statement relating
to the securities offered therein and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
3. The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant
to Items 4, 10(b), 11 or 13 of this Form, within one business day of
receipt of such request and to send the incorporated documents by first
class mail or other equally prompt means. This includes information
contained in documents filed subsequent to the effective date of the
registration statement through the date of responding to the request.
4. The undersigned registrant hereby undertakes to supply by means of a post-
effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
5. The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of
the registrant's annual report pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.
6. Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person thereof in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Corona, State of
California, on the 24th day of November, 1998.
WATSON PHARMACEUTICALS, INC.
(Registrant)
By:/s/ Allen Chao
-----------------------------------------------
Allen Chao, Ph.D.
Chairman, Chief Executive Officer and President
(Principal Executive Officer)
Each person whose signature appears below appoints Allen Chao, Ph.D.,
as his true and lawful attorney-in-fact and agent, with full power of
substitution and resubstitution, for him and in his stead, in any capacities to
sign any and all amendments, including post-effective amendments to this
Registration Statement and to file the same, with all exhibits thereto and all
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney-in-fact and agent full power and
authority to do and perform each and every act and thing requisite and necessary
to be done, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and agent
or his substitute or substitutes may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act, this Registration
Statement has been duly signed on November 24, 1998 by the following persons in
the capacities indicated:
<TABLE>
<CAPTION>
SIGNATURES TITLES DATE
--------- ------ ----
<S> <C> <C>
/s/ Allen Chao
- ------------------------ Chairman, Chief Executive Officer and President November 24, 1998
Allen Chao, Ph.D. (Principal Executive Officer)
/s/ Michael Boxer
- ------------------------ Chief Financial Officer (Principal Financial November 24, 1998
Michael Boxer Officer)
/s/ Chato Abad
- ------------------------ Vice President-Finance (Principal Accounting November 24, 1998
Chato Abad Officer)
/s/ Michel J. Feldman
- ------------------------ Secretary and Director November 24, 1998
Michel J. Feldman
/s/ Michael Fedida
- ------------------------ Director November 24, 1998
Michael Fedida
/s/ Alec D. Keith, Ph.D.
- ------------------------ Director November 24, 1998
Alec D. Keith, Ph.D.
/s/ Albert F. Hummel
- ------------------------ Director November 24, 1998
Albert F. Hummel
/s/ Ronald R. Taylor
- ------------------------ Director November 24, 1998
Ronald R. Taylor
/s/ Andrew L. Turner
- ------------------------ Director November 24, 1998
Andrew L. Turner
</TABLE>
<PAGE>
EXHIBIT INDEX
-------------
EXHIBIT
- -------
NUMBER
- ------
2.1 Agreement and Plan of Merger, among Watson Pharmaceuticals, Inc.,
TheraTech Inc. and The Jazz Merger Corp. dated as of October 23, 1998
(incorporated by reference to Appendix A of the Proxy Statement Prospectus
included in this Registration Statement).
3.1 Articles of Incorporation of Watson and all amendments thereto, filed as
Exhibit 3.1 to Watson's Quarterly Reports on Form 10-Q for the quarter
ended June 30, 1995 and Exhibit 3.1 (A) to Watson's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1996 and hereby incorporated by
reference.
3.2 Bylaws of Watson, as amended as of July 18, 1995, filed as Exhibit 3.2 to
Watson's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995
and hereby incorporated by reference.
4.1 Articles of Incorporation and Bylaws as amended, of the Registrant
(included in exhibits 3.1 and 3.2).
5.1 Opinion of D'Ancona & Pflaum as to the legality of the common stock being
offered.
5.2 Opinion of Kummer, Kaempfer, Bonner and Renshaw as to the legality of the
common stock being offered.
8.1 Opinion of D'Ancona & Pflaum regarding certain federal income tax matters,
related to the transaction.
8.2 Opinion of Kirkland & Ellis regarding certain federal income tax matters
related to the transaction.
10.1 Form of Affiliate Letter.
10.2 Form of Amendment to the Employment Agreement of Dr. Patel.
10.3 Form of Amendment to the Employment Agreement of Dr. Ebert.
10.4 Form of Non-Competition Agreement between Watson and Dr. Patel.
10.5 Form of Non-Competition Agreement between Watson and Dr. Ebert.
10.6 Voting Agreement dated as of October 24, 1998, between Watson and Dr.
Patel.
10.7 Voting Agreement dated as of October 24, 1998, between Watson and Dr.
Higuchi.
10.8 TheraTech 1992 Amended and Restated Employees' Stock Option Plan,
incorporated by reference to TheraTech's Proxy Statement filed in
connection with its 1996 Annual Meeting of Stockholders, and hereby
incorporated by reference.
10.9 TheraTech 1992 Amended and Restated Directors' Stock Option Plan,
incorporated by reference to TheraTech's Proxy Statement filed in
connection with its 1994 Annual Meeting of Stockholders, and hereby
incorporated by reference.
21.1 List of Subsidiaries of Watson.
23.1 Consent of D'Ancona & Pflaum (included in exhibit 5.1 and 8.1).
23.2 Consent of Kummer, Kaempfer, Bonner and Renshaw (included in exhibit 5.2).
<PAGE>
23.3 Consent of Kirkland & Ellis (included in exhibit 8.2).
23.4 Consent of PricewaterhouseCoopers LLP.
23.5 Consent of Ernst & Young LLP.
23.6 Consent of Arthur Andersen LLP.
23.7 Consent of Deloitte & Touche LLP.
24.1 Powers of Attorney (included on signature page of this Registration
Statement).
99.1 Form of Proxy card for TheraTech.
99.2 Opinion of CIBC Oppenheimer (incorporated by reference to Appendix B to
the Proxy Statement/Prospectus included in this Registration Statement).
<PAGE>
EXHIBIT 5.1
[D'Ancona & Pflaum Letterhead]
November 23, 1998
Watson Pharmaceuticals, Inc.
311 Bonnie Circle
Corona, CA 91720
Gentlemen:
In connection with the proposed registration under the Securities Act of
1933, by Watson Pharmaceuticals, Inc., a Nevada corporation (the "Company"), of
up to 6,300,612 shares of Common Stock of the Company (the "Shares") described
in the Company's registration statement on Form S-4 (the "Registration
Statement"), we hereby advise you that as counsel for the Company we have
examined the original or certified copies of the Articles of Incorporation of
the Company and all amendments thereto, the Bylaws of the Company, the minute
books of the Company and such other documents, records and opinions of Nevada
counsel as we have deemed necessary for the purposes of this opinion.
Based upon such examination, it is our opinion that the Shares of the
Company are duly authorized and, when issued pursuant to the terms of the
Agreement and Plan of Merger dated as of October 23, 1998 to be included as an
exhibit to the Registration Statement, will be legally issued, fully paid and
nonassessable.
We hereby consent to the references to our firm under the heading "Legal
Matters" in the proxy statement/prospectus included in the Registration
Statement, and to the filing of this opinion as an exhibit to the Registration
Statement, and any and all amendments thereto (including pre-effective and post-
effective amendments).
Very truly yours,
D'ANCONA & PFLAUM
By: /s/ Mark S. Albert
------------------
Mark S. Albert, a Partner
<PAGE>
EXHIBIT 5.2
[Kummer Kaempfer Bonner & Renshaw Letterhead]
November 23, 1998
D'Ancona & Pflaum
30 North LaSalle Street
Suite 2900
Chicago, Illinois 60602
RE: WATSON PHARMACEUTICALS, INC.
Ladies and Gentlemen:
You have requested our opinion as special Nevada counsel for Watson
Pharmaceuticals, Inc., a Nevada corporation ("Watson"), in connection with the
filing of a Registration Statement on Form S-4 relating to the merger of Jazz
Merger Corp., a Delaware corporation and a wholly-owned subsidiary of Watson
(the "Sub"), and TheraTech, Inc., a Delaware corporation ("TheraTech"), pursuant
to an Agreement and Plan of Merger dated as of October 23, 1998, by and among
Watson, the Sub and TheraTech (the "Merger Agreement"). As consideration for the
merger, the TheraTech stockholders will receive an aggregate amount of up to
6,300,612 of Watson's common stock, par value $0.0033 ("Watson Common Stock").
We are not general counsel to Watson, and we have been retained specially to
represent Watson in this transaction for the purpose of rendering this opinion
to you. Any opinions expressed herein shall be limited to the extent that we
have been retained as special Nevada counsel.
In connection with this opinion, we have examined the following documents
(collectively, the "Documents"):
1. Articles of Incorporation of Watson as filed with the Nevada Secretary
of State on January 2, 1985, as amended on September 28, 1987, as
amended on August 27, 1991, as amended on February 20, 1992, as
amended on July 18, 1995, and as amended on May 30, 1996.
2. Bylaws of Watson certified by Watson to be currently in full force and
effect as of January 15, 1997.
3. A mechanically executed copy of the Merger Agreement.
4. Certificate of the Secretary of Watson dated as of November 23, 1998.
5. Draft of Registration Statement on Form S-4 for Watson, to be filed
with the Securities and Exchange Commission (the "Registration
Statement").
In our examination of the Documents, we have assumed the genuineness of all
signatures, the legal capacity of natural persons who signed the Documents, the
authenticity of all Documents submitted to us as originals, the conformity to
the originals of all Documents submitted to us as copies and the authenticity of
the originals of such latter Documents. We assume the due authorization of each
Document by each party thereto. We assume the Merger Agreement represents legal,
valid, binding and enforceable obligations of each party thereto. We assume that
the Documents have not been rescinded, modified, or altered in any manner
whatsoever as of the date hereof.
In rendering the following opinions, we have relied without investigation
on the certificates of officers of Watson, and we have not independently
verified any of the factual matters set forth in any other Documents upon which
we have relied. Furthermore, we have been provided with a copy of the
Registration Statement, and we have relied without investigation upon the
representations contained therein. We have not been asked, nor have we
endeavored, to review, revise or in any manner comment upon the contents of the
Registration Statement.
We are admitted to the Bar of the state of Nevada. In rendering our
opinions hereinafter stated, we have relied upon the applicable laws of the
state of Nevada as those laws presently exist and as they have been applied and
interpreted by courts having jurisdiction within the state of Nevada. We express
no opinion as to the laws of any other jurisdiction or of the United States of
America.
Based on such examination and subject to the limitations and assumptions
herein provided, we are of the opinion that Watson has the full power and
authority under the laws of the State of Nevada, and under its Articles of
Incorporation and Bylaws, as amended, to issue Watson Common Stock in accordance
with the Merger Agreement and that such Watson
<PAGE>
Common Stock are validly authorized shares of Watson Common Stock, and when
issued, will be legally issued, fully paid and nonassessable and not subject to
any preemptive or similar rights.
These opinions are effective as of the date hereof. No extensions of our
opinion may be made by implication or otherwise. We express no opinion other
than as herein expressly set forth. We understand that you will rely on our
opinion in rendering your separate opinion addressed to the Securities and
Exchange Commission in connection with the previously referred to Registration
Statement. Our opinions are not to be otherwise quoted in whole or in part
without the express written consent of this firm.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement, and any and all amendments thereto (including pre-
effective and post-effective amendments).
Very truly yours,
/s/ Kummer Kaempfer Bonner & Renshaw
------------------------------------
KUMMER KAEMPFER BONNER & RENSHAW
<PAGE>
EXHIBIT 8.1
[D'ANCONA & PFLAUM LETTERHEAD]
November 23, 1998
Board of Directors
TheraTech, Inc.
417 Wakara Way
Salt Lake City, Utah 84108
Re: Merger of TheraTech Inc. into Jazz Merger Corp.
Ladies and Gentlemen:
You have requested our opinion regarding the federal income tax
consequences to TheraTech, Inc., a Delaware corporation ("TheraTech"), of the
merger with and into TheraTech of Jazz Merger Corp. (the "Sub"), a Delaware
corporation and wholly-owned subsidiary of Watson Pharmaceuticals, Inc., a
Nevada corporation ("Watson"), pursuant to that certain Agreement and Plan of
Merger by and among the Company, Watson Sub and Watson, dated October 23, 1998
(the "Merger Agreement", and such transaction, the "Merger"). Defined terms used
herein shall have the meaning ascribed to such terms in the Merger Agreement,
unless otherwise specified.
In connection with rendering our opinion, we have examined the Merger
Agreement and such other documents as we have determined to be necessary for
purposes of this opinion. In addition, with your permission, we have examined
and relied upon certain representation letters of TheraTech and Watson, copies
of which are attached hereto as Exhibits A and B (the "Representation Letters").
Our opinion is conditioned on, among other things, the initial and continuing
accuracy of the facts, information, covenants and representations set forth in
the documents referred to above. We have assumed the genuineness of all
signatures, the legal capacity of natural persons, and that the person who
affixed such signature to such documents had authority to do so. Moreover, we
have assumed the accuracy of all information contained in the documents
described above, but have not made any independent inquiry with regard thereto.
We have assumed the authenticity of all documents submitted to us as originals,
and the conformity to original documents of all documents submitted to us as
certified, telecopied or photostatic copies. We also have assumed that the
Merger will be structured as a reverse-subsidiary merger of the Sub with and
into TheraTech, with TheraTech surviving, and will be consummated in the manner
contemplated by the Merger Agreement.
In rendering our opinion, we have considered the current provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), Treasury regulations
(proposed, temporary and final) promulgated thereunder, judicial decisions and
Internal Revenue Service (the "IRS") rulings, all of which are subject to
change, which changes may be retroactively applied. A change in the authorities
upon which our opinion is based could affect our conclusions. Moreover, there
can be no assurances that any of the opinions expressed herein will be accepted
by the IRS or, if challenged, by a court.
Based solely upon the foregoing, we are of the opinion that:
(1) The Merger will qualify as a tax-free reorganization for federal
income tax purposes under Section 368(a)(1) of the Code, and will
therefore be tax-free to each of Watson, the Sub and TheraTech; and
(2) each of TheraTech, Watson and the Sub will be a "party to a
reorganization" within the meaning of Section 368(b) of the Code.
<PAGE>
Except as set forth above, we express no opinion to any party as to the tax
consequences, whether federal, state, local or foreign, of the Merger or of any
other transaction contemplated by the Merger Agreement. This opinion is solely
for your benefit.
We hereby consent to the references to our firm under the heading "Legal
Matters" in the proxy statement/prospectus included in the Registration
Statement on Form S-4 ("Registration Statement") and to the filing of this
opinion as an exhibit to the Registration Statement, and any and all amendments
thereto (including pre-effective and post-effective amendments).
Very truly yours,
D'Ancona & Pflaum
/s/ Fred M. Ackerson
-------------------------------
By: Fred M. Ackerson, a Partner
FMA/jh
<PAGE>
Exhibit 8.2
Kirkland & Ellis
153 East 53rd St.
New York, N.Y. 10022
To Call Writer Direct:
212 446-4800
November 23, 1998
Watson Pharmaceuticals, Inc.
311 Bonnie Circle
Corona, CA 91720
Re: Merger of Jazz Merger Corp. with and into TheraTech, Inc.
Ladies and Gentlemen:
You have requested our opinion regarding the federal income tax
consequences to TheraTech, Inc. ("TheraTech") of the merger with and into
TheraTech of Jazz Merger Corp. (the "Sub"), a Delaware corporation and wholly-
owned subsidiary of Watson Pharmaceuticals, Inc., a Nevada corporation
("Watson"), pursuant to that certain Agreement and Plan of Merger by and among
TheraTech, Watson Sub and Watson, dated October 23, 1998 (the "Merger
Agreement", and such transaction, the "Merger"). Defined terms used herein
shall have the meaning ascribed to such terms in the Merger Agreement, unless
otherwise specified.
In connection with rendering our opinion, we have examined the Merger
Agreement and such other documents as we have determined to be necessary for
purposes of this opinion. In addition, with your permission, we have examined
and relied upon certain representation letters of the Company and Watson, copies
of which are attached hereto as Exhibits A and B (the "Representation Letters").
Our opinion is conditioned on, among other things, the initial and continuing
accuracy of the facts, information, covenants and representations set forth in
the documents referred to above. We have assumed the genuineness of all
signatures, the legal capacity of natural persons, and that the person who
affixed such signature to such documents had authority to do so. Moreover, we
have assumed the accuracy of all information contained in the documents
described above, but have not made any independent inquiry with regard thereto.
We have assumed the authenticity of all documents submitted to us as originals,
and the conformity to original documents of all documents submitted to us as
certified, telecopied or photostatic copies. We also have assumed that the
Merger will be structured as a reverse-subsidiary merger of the Watson Sub with
and into the Company, with the Company surviving, and will be consummated in the
manner contemplated by the Merger Agreement.
In rendering our opinion, we have considered the current provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), Treasury regulations
(proposed, temporary and final) promulgated thereunder, judicial decisions and
Internal Revenue Service (the "IRS") rulings, all of which are subject to
change, which changes may be retroactively applied. A change in the authorities
upon which our opinion is based could affect our conclusions. Moreover, there
can be no assurances that any of the opinions expressed herein will be accepted
by the IRS or, if challenged, by a court.
Based solely upon the foregoing, we are of the opinion that:
(1) the Merger will qualify as a tax-free reorganization for federal
income tax purposes under Section 368(a)(1) of the Code, and will
therefore be tax-free to each of Watson, the Sub and TheraTech; and
<PAGE>
(2) each of TheraTech, Watson and the Sub will be a "party to a
reorganization" within the meaning of Section 368(b) of the Code.
Except as set forth above, we express no opinion to any party as to the tax
consequences, whether federal, state, local or foreign, of the Merger or of any
other transaction contemplated by the Merger Agreement. This opinion is solely
for your benefit.
We hereby consent to the filing of this opinion with the Commission as
Exhibit 8.2 to the Registration Statement on Form S-4 relating to the Merger. We
also consent to the reference to our firm under the heading "Legal Matters" in
such Registration Statement. In giving this consent, we do not thereby admit
that we are in the category of persons whose consent is required under Section 7
of the Securities Act of 1933, as amended, or the rules and regulations of the
Securities and Exchange Commission.
Very Truly Yours,
/s/ Kirkland & Ellis
---------------------------
Kirkland & Ellis
<PAGE>
Exhibit 10.1
December __, 1998
Watson Pharmaceuticals, Inc.
311 Bonnie Circle
Corona, California 91720
Gentlemen:
The undersigned, a holder of shares of common stock, $0.01 par value per
share ("TheraTech Common Stock") of TheraTech, Inc., a Delaware corporation
("TheraTech"), is entitled, in connection with the merger (the "Merger") of Jazz
Merger Corp., a Delaware corporation ("Merger Corp."), with TheraTech, to
receive common stock, par value $0.0033 per share (the "Watson Common Stock"),
of Watson Pharmaceuticals, Inc. ("Watson"). The undersigned acknowledges that
the undersigned may be deemed to be an "affiliate" of TheraTech (a) for
application of the pooling of interests requirements set forth herein, and (b)
within the meaning of Rule 145 ("Rule 145") promulgated under the Securities Act
of 1933, as amended (the "Act"), although nothing contained herein should be
construed as an admission of either such fact.
If in fact the undersigned were an affiliate under the Act, the
undersigned's ability to sell, assign or transfer the Watson Common Stock
received by him in exchange for any shares of TheraTech Common Stock pursuant to
the Merger may be restricted unless such transaction is registered under the Act
or an exemption from such registration is available. The undersigned
understands that such exemptions are limited and the undersigned has obtained
advice of counsel as to the nature and conditions of such exemptions, including
information with respect to the applicability to the sale of such securities of
Rules 144 and 145(d) promulgated under the Act.
The undersigned hereby represents to and covenants with Watson that he will
not sell, assign or transfer any of the shares of Watson Common Stock received
by him in exchange for shares of TheraTech Common Stock pursuant to the Merger
except (i) pursuant to an effective registration statement under the Act, (ii)
in conformity with the limitations of Rule 145 or (iii) in a transaction which,
in the opinion of counsel to the undersigned, which counsel and opinion shall be
reasonably satisfactory to Watson (the reasonable fees of which counsel will be
paid by Watson) or as described in a "no-action" or interpretive letter from the
Staff of the Securities and Exchange Commission (the "Commission"), is not
required to be registered under the Act.
The undersigned further represents to and covenants with Watson that he has
not, within the preceding thirty (30) days, sold, transferred or otherwise
disposed of any shares of TheraTech Common Stock held by him and that he will
not sell, transfer or otherwise dispose of any shares of Watson Common Stock
received by him in the Merger until after such time as results covering at least
thirty (30) days of combined operations of TheraTech and Watson have been
published by Watson in the form of a quarterly earnings report, an effective
registration statement filed with the Commission, a report to the Commission on
Form 10-K, Form 10-Q, or Form 8-K, or any other public filing or announcement
which includes such combined results of operations. Watson shall publish such
results in a manner consistent with its prior practices.
In the event of a sale or other disposition pursuant to Rule 145, the
undersigned will supply Watson with a legal opinion evidencing compliance with
such Rule. The undersigned understands that Watson may instruct its transfer
agent to withhold the transfer of any securities disposed of by him, but that
upon receipt of such opinion the transfer agent shall effectuate the transfer of
the shares indicated as sold in the letter.
The undersigned acknowledges and agrees that appropriate legends will be
placed on certificates representing Watson Common Stock received by the
undersigned in the Merger or held by a transferee thereof, which legends will be
removed by delivery of substitute certificates upon receipt of an opinion of
counsel to the undersigned, which counsel and opinion shall be reasonably
satisfactory to Watson (the reasonable fees of which counsel will be paid by
Watson) to the effect that such legends are no longer required for purposes of
the Act.
<PAGE>
This Agreement shall be terminated and shall be of no further force and
effect upon the termination of the Agreement and Plan of Merger between
TheraTech, Jazz Merger Corp. and Watson dated as of October 23, 1998 (the
"Merger Agreement").
This Agreement may not be modified or amended except by an instrument or
instruments in writing signed by Watson and the undersigned. Any party hereto
may, by an instrument in writing, waive compliance by the other party with any
term or provision of this Agreement on the part of such party to be performed or
complied with. No action taken pursuant to this Agreement, including any
investigation by or on behalf of any party, shall be deemed to constitute a
waiver by the party taking such action of compliance with any representation,
warranty, covenant or agreement contained or contemplated herein. The waiver by
any party hereto of a breach of any term or provision of this Agreement shall
not be construed as a waiver of any subsequent breach.
The undersigned acknowledges that he has carefully read this letter and
understands the requirements hereof and the limitations imposed upon the
distribution, sale, transfer or other disposition of shares of Watson Common
Stock.
In this Agreement, unless the context otherwise requires, words describing
the singular number shall include the plural and vice versa, and words denoting
any gender shall include all genders and words denoting natural persons shall
include corporations and partnerships and vice versa.
This agreement shall be binding on the undersigned's successors and
assigns, including his heirs, executors and administrators.
Very truly yours,
By: ________________________________
Name: ______________________________
Title: _______________________________
Accepted as of ________________, 1998
WATSON PHARMACEUTICALS, INC.
By: _____________________________
Name: ___________________________
Title: ___________________________
<PAGE>
EXHIBIT 10.2
___________ ___, 19__
Dinesh C. Patel, Ph.D.
5080 So. Mile High Drive
Salt Lake City, Utah 84124
Re: Side letter regarding employment agreement
Dear Sir:
Reference is hereby made to (a) that certain Employment Agreement (the
"Employment Agreement"), dated as of May 1, 1998, by and between TheraTech,
Inc., a Delaware corporation ("Employer"), and Dinesh C. Patel ("Employee"), and
(b) that certain Agreement and Plan of Merger (the "Merger Agreement"), dated as
of October 23, 1998, by and among Employer, Watson Pharmaceuticals, Inc., a
Nevada corporation ("Watson"), and Jazz Merger Corp., a Delaware corporation
("Watson Sub"), pursuant to which Employer will merge with and into Watson Sub
(the "Merger"), with Employer surviving the Merger.
WHEREAS, as a condition to the willingness of Watson to enter into the
Merger Agreement, Watson has required that Employee agree, and in order to
induce Watson to enter into the Merger Agreement, Employee has agreed, to enter
into this side letter which shall clarify and amend certain provisions of the
Employment Agreement ("Amendment"); and
WHEREAS, all capitalized terms used herein and not otherwise defined herein
shall have the meanings ascribed to them in the Employment Agreement; and
NOW THEREFORE, BE IT RESOLVED, THAT, in consideration of the foregoing, and
the consummation of the Merger by Watson, and for other good and valuable
consideration, the receipt and sufficiency of which Employee hereby
acknowledges, Employee, Employer and Watson agree as follows:
1. Status of Employment Agreement. Except as specifically set forth
herein, the Employment Agreement and each of the appendices attached thereto
shall remain in full force and effect and shall not be waived, modified,
superseded or otherwise affected by this Amendment. This Amendment is not to be
construed as a release, waiver or modification of any of the terms, conditions,
representations, warranties, covenants, rights or remedies set forth in the
Employment Agreement, except as specifically set forth herein.
2. Amendments to the Employment Agreement.
2.1 Section 1.1 of the Employment Agreement. The first sentence of
Section 1.1 of the Employment Agreement is hereby deleted in its entirety and
replaced with the following:
"Employer hereby agrees to employ Employee as the Chairman, Chief Executive
Officer and President of Employer, with such duties as are assigned to him
by the Chief Executive Officer ("CEO") of Watson Pharmaceuticals, Inc.
("Watson"), the parent of Employer. Employee shall also hold the title of
Senior Vice President of Watson."
2.2 CEO. Employee acknowledges that he reports solely to the CEO. As a
result, the Employment Agreement is hereby amended so that
references to the term "Board" contained in the Employment Agreement
are deemed to refer to the "CEO."
2.3 Watson. Employee agrees to work to maximize the profitability and
business of Watson and its subsidiaries (including, without
limitation, the profitability and business of Employer) and agrees
to perform such duties from time to time as are requested by the
CEO, notwithstanding any inconsistent terms contained
<PAGE>
in the Employment Agreement. In performing his duties under the
Employment Agreement, Employee agrees to comply with all written
policies and procedures of Watson.
2.4 Section 3.1 of the Employment Agreement. The first sentence of
Section 3.1 of the Employment Agreement is hereby deleted in its
entirety and replaced with the following sentence:
"During the term of this Agreement, Employer shall pay to Employee for
services which Employee may render to Employer the annual salary set forth
on Appendix A attached hereto, which may be increased by the Board of
Directors of Employer in its sole discretion."
2.5 Section 3.3 of the Employment Agreement. Section 3.3 of the
Employment Agreement is hereby deleted in its entirety and replaced with the
following:
"Employee's Base Salary, Bonus, and Benefits are set forth in Appendix "A"
to this Agreement."
2.6 Appendix A of the Employment Agreement. Section C of Appendix A of
the Employment Agreement is hereby deleted in its entirety and replaced with the
following:
"C. Options. Upon consummation of the Merger, Employee shall receive
eighty thousand (80,000) options to purchase common stock, $0.0033 par
value per share, of Watson ("Watson Common"). On each of the first, second
and third year anniversaries of the Merger, Employee shall receive ten
thousand (10,000) options to purchase Watson Common so long as Employee is
an employee of Watson or one of its majority-owned subsidiaries upon the
date of grant. Employee may receive additional option grants as determined
in the sole discretion of Watson's Board of Directors. All options will be
granted pursuant to the terms of Watson's then existing employee stock
option plan. Options will be granted at the fair market value of the
underlying shares upon the date of grant. Such options shall vest over a
five year period, with the first twenty percent (20%) vesting on the
anniversary date of the grant and 20% on each anniversary thereafter."
3. Severance Benefits. Pursuant to Section 6.4 of the Employment
Agreement, Employee hereby waives his right to the severance benefits listed in
Appendix B of the Employment Agreement as a result of the Merger, but otherwise
retains his rights to severance under this Agreement, in connection with the
occurrence of other events that happen after the date hereof.
4. Merger. This Amendment shall be null and void ab initio in the event
the Merger is not consummated on or before March 31, 1999.
<PAGE>
Please acknowledge your agreement by signing and returning the enclosed
duplicate of this letter.
Very truly yours,
THERATECH, INC.
By:________________________________
Name:_______________________________
Title:___________________________________
WATSON PHARMACEUTICALS, INC.
By:________________________________
Name:_______________________________
Title:_________________________
Agreed and Acknowledged:
Dinesh C. Patel, Ph.D.
_________________________
Date:_____________________
<PAGE>
EXHIBIT 10.3
__________, 19__
Charles D. Ebert, Ph.D.
1515 So. Canterbury Drive
Salt Lake City, Utah 84108
Re: Side letter regarding employment agreement
Dear Sir:
Reference is hereby made to (a) that certain Employment Agreement (the
"Employment Agreement"), dated as of May 1, 1998, by and between TheraTech,
Inc., a Delaware corporation ("Employer"), and Charles D. Ebert ("Employee"),
and (b) that certain Agreement and Plan of Merger (the "Merger Agreement"),
dated as of October 23, 1998, by and among Employer, Watson Pharmaceuticals,
Inc., a Nevada corporation ("Watson"), and Jazz Merger Corp., a Delaware
corporation ("Watson Sub"), pursuant to which Employer will merge with and into
Watson Sub (the "Merger"), with Employer surviving the Merger.
WHEREAS, as a condition to the willingness of Watson to enter into the
Merger Agreement, Watson has required that Employee agree, and in order to
induce Watson to enter into the Merger Agreement, Employee has agreed, to enter
into this side letter which shall clarify and amend certain provisions of the
Employment Agreement ("Amendment"); and
WHEREAS, all capitalized terms used herein and not otherwise defined herein
shall have the meanings ascribed to them in the Employment Agreement; and
NOW THEREFORE, BE IT RESOLVED, THAT, in consideration of the foregoing, and
the consummation of the Merger by Watson, and for other good and valuable
consideration, the receipt and sufficiency of which Employee hereby
acknowledges, Employee, Employer and Watson agree as follows:
1. Status of Employment Agreement. Except as specifically set forth
herein, the Employment Agreement and each of the appendices attached thereto
shall remain in full force and effect and shall not be waived, modified,
superseded or otherwise affected by this Amendment. This Amendment is not to be
construed as a release, waiver or modification of any of the terms, conditions,
representations, warranties, covenants, rights or remedies set forth in the
Employment Agreement, except as specifically set forth herein.
2. Amendments to the Employment Agreement.
2.1 Section 1.1 of the Employment Agreement. The first sentence of Section
1.1 of the Employment Agreement is hereby deleted in its entirety and replaced
with the following:
"Employer hereby agrees to employ Employee as the Senior Vice President of
Research and Development of Employer. Employee shall report to the Chief
Executive Officer of Employer, or such other person as is designated by the
CEO of Watson Pharmaceuticals, Inc., the Employer's parent ("Watson"),
which person shall either be at a comparable level to the CEO of Employer
or an executive officer of Watson ("Designated Officer"). Employee shall
perform the responsibilities and duties that are commensurate with his
position with Employer and those other duties as are reasonably assigned to
him by the Designated Officer from time to time."
<PAGE>
2.2 Designated Officer. Employee acknowledges that he reports solely to
the Designated Officer. The Employment Agreement is hereby amended so that
references to the terms "CEO" and "Board" contained in the Employment Agreement
are deemed to refer to the "Designated Officer."
2.3 Watson. Employee agrees to work to maximize the profitability and
business of Watson and its subsidiaries (including, without limitation, the
profitability and business of Employer) and agrees to perform such duties from
time to time as are requested by the Designated Officer, notwithstanding any
inconsistent terms contained in the Employment Agreement. In performing his
duties under the Employment Agreement, Employee agrees to comply with all
written policies and procedures of Watson.
2.4 Section 3.1 of the Employment Agreement. The first sentence of Section
3.1 of the Employment Agreement is hereby deleted in its entirety and replaced
with the following sentence:
"During the term of this Agreement, Employer shall pay to Employee for
services which Employee may render to Employer the annual salary set forth
on Appendix A attached hereto, which may be increased by the Board of
Directors of Employer in its sole discretion."
2.5 Section 3.3 of the Employment Agreement. Section 3.3 of the Employment
Agreement is hereby deleted in its entirety and replaced with the following:
"Employee's Base Salary, Bonus, and Benefits are set forth in Appendix "A"
to this Agreement."
2.6 Appendix A of the Employment Agreement. Appendix A of the Employment
Agreement is hereby amended by adding the following Section I to the end of such
Appendix:
"I. Options. Upon consummation of the Merger, Employee shall receive forty
thousand (40,000) options to purchase common stock, $0.0033 par value per
share, of Watson ("Watson Common"). On each of the first, second and third
year anniversaries of the Merger, Employee shall receive five thousand
(5,000) options to purchase Watson Common so long as Employee is an
employee of Watson or one of its majority-owned subsidiaries upon the date
of grant. Employee may receive additional option grants as determined in
the sole discretion of Watson's Board of Directors. All options will be
granted pursuant to the terms of Watson's then existing employee stock
option plan. Options will be granted at the fair market value of the
underlying shares upon the date of grant. Such options shall vest over a
five year period, with the first twenty percent (20%) vesting on the
anniversary date of the grant and 20% on each anniversary thereafter."
5. Severance Benefits. Pursuant to Section 6.4 of the
Employment Agreement, Employee hereby waives his right to the severance
benefits listed in Appendix B of the Employment Agreement as a result
of the Merger, but otherwise retains his rights to severance under this
Agreement, in connection with the occurrence of other events that
happen after the date hereof.
6. Merger. This Amendment shall be null and void ab initio in
the event the Merger is not consummated on or before March 31, 1999.
<PAGE>
Please acknowledge your agreement by signing and returning the enclosed
duplicate of this letter.
Very truly yours,
THERATECH, INC.
By:_________________________________
Name:_______________________________
Title:______________________________
WATSON PHARMACEUTICALS, INC.
By:_________________________________
Name:_______________________________
Title:______________________________
Agreed and Acknowledged:
Charles D. Ebert
__________________________
Date:_____________________
<PAGE>
EXHIBIT 10.4
NON-COMPETITION AGREEMENT
-------------------------
This Agreement (the "Agreement") is entered into this ___ day of
__________, 19__, by Dinesh C. Patel, Ph.D. ("Stockholder") in favor of Watson
Pharmaceuticals, Inc., a Nevada corporation (the "Company"). For purposes of
this Agreement, all references to the Company shall include each of its
Affiliates. As used in this Agreement, a corporation, partnership, limited
liability company or other business entity shall be deemed to be an "Affiliate"
of the Company if (i) the Company directly or indirectly owns in excess of fifty
percent (50%) of the voting securities or interests of such entity, or (ii) such
entity directly or indirectly owns in excess of fifty percent (50%) of the
voting securities or interests of the Company.
WHEREAS, the Company, Jazz Merger Corp., a Delaware corporation ("Watson
Sub") and TheraTech, Inc., a Delaware corporation ("TheraTech"), are parties to
an Agreement and Plan of Merger dated as of October 21, 1998 (the "Merger
Agreement"), pursuant to which TheraTech will merge with and into Watson Sub
(the "Merger"), with TheraTech surviving the Merger; and
WHEREAS, as a condition to the willingness of the Company to enter into the
Merger Agreement, the Company has required that Stockholder agree, and in order
to induce the Company to enter into the Merger Agreement, Stockholder has agreed
to enter into this Agreement.
AGREEMENTS:
NOW, THEREFORE, in consideration of the foregoing, the consummation of the
Merger by the Company and for other good and valuable consideration, the receipt
and sufficiency of which Stockholder hereby acknowledges, Stockholder agrees as
follows:
1. Non-Solicitation Covenants. Stockholder covenants that he will not,
for a period of three (3) years after the date hereof, directly or indirectly,
on his own behalf or on behalf of any other person or entity, without the
express written permission of the Company: (a) solicit, hire or attempt to hire
or employ any employee of the Company or its Affiliates on behalf of an
individual or other entity which provides the same or similar services,
processes or products as the Company or its Affiliates; (b) induce or attempt to
induce any employee of the Company or its Affiliates to leave his or her employ
with the Company or its Affiliates; (c) induce or attempt to induce any
customer, supplier, vendor, joint venture partner or any other person to curtail
or cease doing business with the Company or its Affiliates; or (d) solicit or
attempt to solicit any customer of the Company on behalf of an individual or
other entity which provides the same or similar services, processes or products
as the Company or its Affiliates.
<PAGE>
2. Non-Competition. Stockholder further agrees as follows
a. Except as otherwise provided herein, or for and on behalf of the
Company, Stockholder agrees that for a period of three (3) years from the date
hereof, he will not, without the express written consent of the Company, either
directly or indirectly, own, manage, operate, control, be employed or retained
by, or in any way engage in or be connected with any Business Enterprise (as
defined below), in any capacity whatsoever, including, but not limited to, as a
partner, owner, creditor, director, officer, employee, agent or independent
contractor, in the geographic territories served by TheraTech. For purposes of
this Agreement, the term Business Enterprise shall mean (i) any entity primarily
engaged in the the sale, distribution, manufacture, and/or development of
alternative drug delivery products; or (ii) any business segment of any entity
engaged in the sale, distribution, manufacture, and/or development of
alternative drug delivery products or any other business in which TheraTech is
currently engaged, but, in the case of subsection (ii) the definition of
Business Enterprise shall not include the portion of any business entity not
engaged in any of the foregoing activities.
b. Stockholder's ownership of less than one percent of the
outstanding equity securities of a firm which is listed on a national or
regional securities exchange market shall not, in itself, constitute a violation
of this Section 2.
3. General Terms.
a. Stockholder acknowledges that any breach of any obligation
contained in this Agreement is not adequately compensable by monetary damages,
and Stockholder agrees that any such breach shall cause the Company irreparable
harm for which the Company shall be entitled to a temporary restraining order
and preliminary injunction without prior notice to Stockholder. Any and all
attorneys' fees, costs and expenses incurred by the Company in enforcing the
terms of this Agreement shall be reimbursed to the Company by Stockholder.
b. In the event that any body of competent jurisdiction shall
determine that any of the restrictive covenants in this Agreement are
inequitably broad, it is the intention and agreement of the parties that the
decision-maker shall equitably adjust the obligations of Stockholder under this
Agreement to include the maximum reasonable restriction allowed by law rather
than entirely eliminate any such obligations. In the event that the decision-
maker shall equitably adjust or eliminate any of the restrictive covenants in
this Agreement all other aspects of this Agreement shall remain in full force
and effect.
c. In the event that any provision of this Agreement is determined by
any body of competent jurisdiction to be unenforceable, illegal or contrary to
public policy, that body shall modify such provision to conform to public
policy, or to interpret it in such a way as to render it enforceable and legal,
in accordance with the intent of the parties as expressed herein. In the event
that a body of competent jurisdiction decides that any provision of this
Agreement is unenforceable, illegal or contrary to public policy and cannot be
reformed, only such provision shall be affected and all other provisions of this
Agreement shall remain in full force and effect.
d. This Agreement shall be binding upon Stockholder and inure to the
benefit of the Company and its successors and assigns.
e. This instrument contains the entire agreement of the Company and
Stockholder with respect to the subject matter hereof and supersedes all prior
understandings and agreements of the Company and Stockholder with respect to the
subject matter hereof.
<PAGE>
f. This Agreement shall be governed by and construed in accordance
with the laws of the State of Delaware applicable to contracts made and to be
performed therein.
g. The rights and remedies enumerated herein, are in addition to any
rights or remedies the Company may have under any other agreement, and shall not
be construed as a release, waiver or modification of any of the terms,
conditions, representations, warranties, covenants, rights or remedies set forth
in any other agreement, including without limitation, any rights or remedies the
Company has under the employment agreement dated May 1, 1998, as amended,
between TheraTech and Stockholder.
IN WITNESS WHEREOF, Stockholder has caused this Agreement to be duly
executed as of the day and year first above written.
___________________________________
Dinesh C. Patel, Ph.D.
<PAGE>
Exhibit 10.5
NON-COMPETITION AGREEMENT
-------------------------
This Agreement (the "Agreement") is entered into this ___ day of
__________, 19__, by Charles D. Ebert, Ph.D. ("Stockholder") in favor of Watson
Pharmaceuticals, Inc., a Nevada corporation (the "Company"). For purposes of
this Agreement, all references to the Company shall include each of its
Affiliates. As used in this Agreement, a corporation, partnership, limited
liability company or other business entity shall be deemed to be an "Affiliate"
of the Company if (i) the Company directly or indirectly owns in excess of fifty
percent (50%) of the voting securities or interests of such entity, or (ii) such
entity directly or indirectly owns in excess of fifty percent (50%) of the
voting securities or interests of the Company.
WHEREAS, the Company, Jazz Merger Corp., a Delaware corporation ("Watson
Sub") and TheraTech, Inc., a Delaware corporation ("TheraTech"), are parties to
an Agreement and Plan of Merger dated as of October 21, 1998 (the "Merger
Agreement"), pursuant to which TheraTech will merge with and into Watson Sub
(the "Merger"), with TheraTech surviving the Merger; and
WHEREAS, as a condition to the willingness of the Company to enter into the
Merger Agreement, the Company has required that Stockholder agree, and in order
to induce the Company to enter into the Merger Agreement, Stockholder has agreed
to enter into this Agreement.
AGREEMENTS:
NOW, THEREFORE, in consideration of the foregoing, the consummation of the
Merger by the Company and for other good and valuable consideration, the receipt
and sufficiency of which Stockholder hereby acknowledges, Stockholder agrees as
follows:
1. Non-Solicitation Covenants. Stockholder covenants that he will not, for
a period of three (3) years after the date hereof, directly or indirectly, on
his own behalf or on behalf of any other person or entity, without the express
written permission of the Company: (a) solicit, hire or attempt to hire or
employ any employee of the Company or its Affiliates on behalf of an individual
or other entity which provides the same or similar services, processes or
products as the Company or its Affiliates; (b) induce or attempt to induce any
employee of the Company or its Affiliates to leave his or her employ with the
Company or its Affiliates; (c) induce or attempt to induce any customer,
supplier, vendor, joint venture partner or any other person to curtail or cease
doing business with the Company or its Affiliates; or (d) solicit or attempt to
solicit any customer of the Company on behalf of an individual or other entity
which provides the same or similar services, processes or products as the
Company or its Affiliates.
2. Non-Competition. Stockholder further agrees as follows
a. Except as otherwise provided herein, or for and on behalf of the
Company, Stockholder agrees that for a period of two (2) years from the date
hereof, he will not, without the express written consent of the Company, either
directly or indirectly, own, manage, operate, control, be employed or retained
by, or in any way engage in or be connected with any Business Enterprise (as
defined below), in any capacity whatsoever, including, but not limited to, as a
partner, owner, creditor, director, officer, employee, agent or independent
contractor, in the geographic territories served by TheraTech. For purposes of
this Agreement, the term Business Enterprise shall mean (i) any entity primarily
engaged in the the sale, distribution, manufacture, and/or development of
alternative drug delivery products; or (ii) any business segment of any entity
engaged in the sale, distribution, manufacture, and/or development of
alternative drug delivery products or any other business in which TheraTech is
currently engaged, but, in the case of subsection (ii) the definition of
Business Enterprise shall not include the portion of any business entity not
engaged in any of the foregoing activities.
b. Stockholder's ownership of less than one percent of the
outstanding equity securities of a firm which is listed on a national or
regional securities exchange market shall not, in itself, constitute a violation
of this Section 2.
<PAGE>
3. General Terms.
a. Stockholder acknowledges that any breach of any obligation
contained in this Agreement is not adequately compensable by monetary damages,
and Stockholder agrees that any such breach shall cause the Company irreparable
harm for which the Company shall be entitled to a temporary restraining order
and preliminary injunction without prior notice to Stockholder. Any and all
attorneys' fees, costs and expenses incurred by the Company in enforcing the
terms of this Agreement shall be reimbursed to the Company by Stockholder.
b. In the event that any body of competent jurisdiction shall
determine that any of the restrictive covenants in this Agreement are
inequitably broad, it is the intention and agreement of the parties that the
decision-maker shall equitably adjust the obligations of Stockholder under this
Agreement to include the maximum reasonable restriction allowed by law rather
than entirely eliminate any such obligations. In the event that the decision-
maker shall equitably adjust or eliminate any of the restrictive covenants in
this Agreement all other aspects of this Agreement shall remain in full force
and effect.
c. In the event that any provision of this Agreement is determined by
any body of competent jurisdiction to be unenforceable, illegal or contrary to
public policy, that body shall modify such provision to conform to public
policy, or to interpret it in such a way as to render it enforceable and legal,
in accordance with the intent of the parties as expressed herein. In the event
that a body of competent jurisdiction decides that any provision of this
Agreement is unenforceable, illegal or contrary to public policy and cannot be
reformed, only such provision shall be affected and all other provisions of this
Agreement shall remain in full force and effect.
d. This Agreement shall be binding upon Stockholder and inure to the
benefit of the Company and its successors and assigns.
e. This instrument contains the entire agreement of the Company and
Stockholder with respect to the subject matter hereof and supersedes all prior
understandings and agreements of the Company and Stockholder with respect to the
subject matter hereof.
f. This Agreement shall be governed by and construed in accordance
with the laws of the State of Delaware applicable to contracts made and to be
performed therein.
g. The rights and remedies enumerated herein, are in addition to any
rights or remedies the Company may have under any other agreement, and shall not
be construed as a release, waiver or modification of any of the terms,
conditions, representations, warranties, covenants, rights or remedies set forth
in any other agreement, including without limitation, any rights or remedies the
Company has under the employment agreement dated May 1, 1998, as amended,
between TheraTech and Stockholder.
IN WITNESS WHEREOF, Stockholder has caused this Agreement to be duly
executed as of the day and year first above written.
___________________________________
Charles D. Ebert, Ph.D.
<PAGE>
Exhibit 10.6
VOTING AGREEMENT
VOTING AGREEMENT, dated as of October 24, 1998, between Watson
Pharmaceuticals, Inc., a Nevada corporation ("Parent"), and Dinesh C. Patel,
Ph.D. (the "Stockholder").
WHEREAS, Parent and Theratech, Inc., a Delaware corporation (the
"Company"), propose to enter into an Agreement and Plan of Merger, dated the
date hereof (as the same may be amended or supplemented, the "Merger Agreement")
providing for the merger of Jazz Merger Corp., a Delaware corporation and
wholly-owned subsidiary of Parent ("Subsidiary"), with the Company (the
"Merger");
WHEREAS, Stockholder is the record and beneficial owner of 2,687,926*
shares of common stock, par value $.01 per share, of the Company (the "Company
Common Stock"); such securities, as they may be adjusted by stock dividend,
stock split, recapitalization, combination or exchange of shares, merger,
consolidation, reorganization or other change or transaction of or by the
Company, together with securities that may be acquired after the date hereof by
Stockholder, including Company Common Stock issuable upon the exercise of
options to purchase Company Common Stock (as the same may be adjusted as
aforesaid), being collectively referred to herein as the "Securities"; and
WHEREAS, as a condition to their willingness to enter into the Merger
Agreement, Parent and Subsidiary have requested that the Stockholder enter into
this Agreement. Capitalized terms not otherwise defined herein shall have the
meanings ascribed to them in the Merger Agreement;
NOW, THEREFORE, to induce Parent and Subsidiary to enter into, and in
consideration of them entering into, the Merger Agreement, and in consideration
of the premises and the representations, warranties and agreements contained
herein and intending to be legally bound hereby, the parties hereby agree as
follows:
1. Covenants of the Stockholder. Stockholder agrees as follows:
(a) Stockholder shall not, except as contemplated by the terms of this
Agreement, (i) sell, transfer, pledge, assign or otherwise dispose of,
or enter into any agreement, option or other arrangement (including
any profit sharing arrangement) or understanding with respect to the
sale, transfer, pledge, assignment or other disposition of, the
Securities to any person other than Parent or Parent's designee; (ii)
enter into any voting arrangement, whether by proxy, voting agreement,
voting trust, power-of-attorney or otherwise, with respect to the
Securities or (iii) take any other action that would in any way
restrict, limit or interfere with the performance of its obligations
hereunder or the transactions contemplated hereby; provided, however,
that any Stockholder that is an individual may transfer all or any
part of his or her Securities to any sibling or any other member of
his or her immediate family, any of his or her lineal descendants or
any trust for the benefit of any of them, if the recipient of the
Securities agrees in advance in writing delivered to Parent to be
bound by this Agreement.
(b) Subject to Section 9 hereof, except as specifically provided in the
Merger Agreement, until the Merger is consummated or the Merger
Agreement is terminated, the Stockholder shall not, nor shall the
Stockholder permit any investment banker, financial adviser, attorney,
accountant or other representative or agent acting on behalf of or at
the direction of the Stockholder (a "Stockholder Representative") to,
directly or indirectly (i) solicit, initiate or encourage (including
by way of furnishing information), or take any other action designed
or reasonably likely to facilitate, any inquiries or the making of any
proposal which constitutes, or may reasonably be expected to lead to,
any Alternative Proposal (as defined in the Merger Agreement) or (ii)
participate in any discussions or negotiations regarding any
Alternative Proposal. Without limiting the foregoing, it is
understood that any violation of the restrictions set forth in the
preceding sentence by a Stockholder Representative shall be deemed to
be a violation of this Section 1(b) by the Stockholder.
- --------------------
* A portion of these shares are pledged to secure borrowings by Dr.
Patel. Dr. Patel has retained voting rights on the pledged shares. In
addition, Dr. Patel holds options to purchase 175,002 shares.
<PAGE>
(c) At any meeting of stockholders of the Company called to vote upon the
Merger and the Merger Agreement or at any adjournment thereof or in
any other circumstances upon which a vote, consent or other approval
(including by written consent) with respect to the Merger and the
Merger Agreement is sought from the stockholders of the Company, the
Stockholder shall vote (or cause to be voted) Stockholder's Securities
in favor of approving the Merger, the adoption of the Merger Agreement
and the approval of the other transactions contemplated by the Merger
Agreement and the calling of a special meeting of the stockholders of
the Company to consider any of the foregoing. At any meeting of
stockholders of the Company or at any adjournment thereof or in any
other circumstances upon which the Stockholder's vote, consent or
other approval is sought, Stockholder shall vote (or cause to be
voted) Stockholder's Securities against (i) any Alternative Proposal,
or (ii) any amendment of the Company's Certificate of Incorporation or
by-laws or other proposal or transaction involving the Company or any
of its subsidiaries or any motion at a meeting of stockholders of the
Company, which amendment or other proposal or transaction or motion
would in any manner impede, frustrate, prevent or nullify, the Merger,
the Merger Agreement or any of the other transactions contemplated by
the Merger Agreement (collectively, "Frustrating Transactions").
2. Grant of Irrevocable Proxy Coupled with an Interest; Appointment of Proxy.
(a) Stockholder hereby irrevocably grants to, and appoints, any individual
who shall be designated by Parent, and each of them, Stockholder's
proxy and attorney-in-fact (with full power of substitution), for and
in the name, place and stead of such Stockholder, to vote
Stockholder's Securities, or grant a consent or approval in respect of
such Securities, at any meeting of stockholders of the Company or at
any adjournment thereof or in any other circumstances upon which their
vote, consent or other approval is sought, (i) in favor of the Merger,
the adoption by the Company of the Merger Agreement and the approval
of the other transactions contemplated by the Merger Agreement and the
calling of a special meeting of the stockholders of the Company to
consider any of the foregoing, and (ii) against any Alternative
Proposal or Frustrating Transaction.
(b) Stockholder represents that any proxies heretofore given in respect of
Stockholder's Securities are not irrevocable, and that any such
proxies are hereby revoked.
(c) STOCKHOLDER HEREBY AFFIRMS THAT THE PROXY SET FORTH IN THIS SECTION 2
IS COUPLED WITH AN INTEREST AND IS IRREVOCABLE UNTIL THE TIME SET
FORTH IN THE LAST SENTENCE OF THIS SECTION. Stockholder hereby further
affirms that such irrevocable proxy is given in connection with the
execution of the Merger Agreement, and that such irrevocable proxy is
given to secure the performance of the duties of Stockholder under
this Agreement. Stockholder hereby ratifies and confirms all that the
individual voting such irrevocable proxy may lawfully do or cause to
be done by virtue hereof. Such irrevocable proxy is executed and
intended to be irrevocable in accordance with the provisions of
Section 212 of the Delaware General Corporate Law ("DGCL"). Such
irrevocable proxy shall be valid until the earlier to occur of (i) one
year from the date hereof or (ii) the termination of this Agreement in
accordance with its terms.
3. Representations and Warranties of the Stockholder. Stockholder hereby
represents and warrants to Parent as follows:
(a) Authorization. The Stockholder has the legal capacity to execute,
deliver and perform this Agreement. This Agreement constitutes a valid
and binding obligation of the Stockholder enforceable against the
Stockholder in accordance with its terms. If the Stockholder is
married and the Securities constitute community property under
applicable law, this Agreement has been duly authorized, executed and
delivered by, and constitutes the valid and binding agreement of, the
Stockholder's spouse enforceable against such spouse in accordance
with its terms.
(b) No Conflict. The execution, delivery and performance by the
Stockholder of this Agreement and the consummation of the transactions
contemplated hereby do not and will not (i) result in any breach or
violation of or be in conflict with or constitute a default under any
law or agreement or arrangement to which the Stockholder is a party or
by which the Stockholder is bound, (ii) require any filing by the
Stockholder with or authorization by any governmental entity (other
than 13 D/G amendments) or (iii)
<PAGE>
require any consent or other action by any person under, constitute a
default under, or give rise to any right of termination, cancellation
or acceleration of a loss of any benefit to which the Stockholder is
entitled under any provision of any agreement or other instrument
binding on the Stockholder.
(c) Ownership of Securities. Stockholder's Securities and the certificates
representing such Securities are now held by Stockholder, or by a
nominee or custodian for the benefit of Stockholder, and the
Stockholder has good and marketable title to such Securities, free and
clear of any (i) liens, proxies, voting trusts or agreements,
understandings or arrangements and (ii) pledges, restrictions, charges
or other adverse claims of any kind or nature. Stockholder owns of
record or beneficially no securities of the Company, or any options,
warrants or rights exercisable for securities of the Company, other
than the Securities set forth opposite the Stockholder's name on
Schedule A hereto.**
(d) Merger Agreement. Stockholder understands and acknowledges that Parent
and Subsidiary are entering into the Merger Agreement in reliance upon
the Stockholder's execution and delivery of this Agreement.
4. Further Assurances. Stockholder will, from time to time, execute and
deliver, or cause to be executed and delivered, such additional or further
transfers, assignments, endorsements, consents and other instruments as
Parent may reasonably request for the purpose of effectively carrying out
the transactions contemplated by this Agreement and to vest the power to
vote Stockholder's Securities as contemplated by Section 2.
5. Assignment; Binding Effect. Except as set forth herein, neither this
Agreement nor any of the rights, interests or obligations hereunder shall
be assigned by any of the parties hereto (whether by operation of law or
otherwise) without the prior written consent of the other parties. Subject
to the preceding sentence, this Agreement shall be binding upon, inure to
the benefit of, and be enforceable by, the parties hereto and their
respective successors and assigns. Notwithstanding anything contained in
this Agreement to the contrary, nothing in this Agreement, expressed or
implied, is intended to confer on any person other than the parties hereto
or their respective heirs, successors, executors, administrators and
assigns any rights, remedies, obligations or liabilities under or by reason
of this Agreement.
6. Termination. This Agreement, and all rights and obligations of the parties
hereunder, shall terminate upon the earliest to occur of the Effective Time
or the termination of the Merger Agreement in accordance with its terms.
Nothing in this Section 6 shall relieve any party from liability for
willful breach of this Agreement.
7. Stop Transfer. The Company agrees with, and covenants to, Parent that the
Company shall not register the transfer of any certificate representing
Stockholder's Securities unless such transfer is made in accordance with
the terms of this Agreement.
8. General Provisions.
(a) Expenses. All costs and expenses incurred by Parent in connection with
this Agreement and the transactions contemplated hereby shall be paid
by Parent. All costs and expenses incurred by the Stockholder in
connection with this Agreement and the transactions contemplated
hereby shall be paid by the Company; provided, however, that Parent
shall reimburse Stockholder, or pay for directly if practicable, any
expenses incurred in connection with actions requested by Parent.
(b) Amendments. This Agreement may not be amended except by an instrument
in writing signed by each of the parties hereto.
(c) Notice. All notices and other communications hereunder shall be in
writing and shall be deemed given upon receipt to the parties at the
following addresses (or at such other address for a party as shall be
specified by like notice):
- --------------------
** See page 1.
<PAGE>
(i) if to Parent, to:
Watson Pharmaceuticals, Inc.
311 Bonnie Circle
Corona, California 91720
Fax: (909) 270-1429
Attn: Chairman & CEO
with a copy to:
Watson Pharmaceuticals, Inc.
311 Bonnie Circle
Corona, California 91720
Fax: (909) 270-1429
Attn: Legal Department
; and
(ii)if to Stockholder, to the address set forth under the name of
Stockholder on Schedule A attached hereto;
with a copy to:
Kirkland & Ellis
153 East 53rd Street
New York, New York 10022
Fax: (212) 446-4900
Attn: Stephen P. H. Johnson
(d) Interpretation. When a reference is made in this Agreement to a
Section, such reference shall be to a Section of this Agreement unless
otherwise indicated. The headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. Wherever the words "include",
"includes" or "including" are used in this Agreement, they shall be
deemed to be followed by the words "without limitation".
(e) Counterparts. This Agreement may be executed in two or more
counterparts, all of which shall be considered one and the same
agreement and shall become effective when two or more counterparts
have been signed by each of the parties and delivered to the other
parties, it being understood that all parties need not sign the same
counterpart.
(f) Entire Agreement; No Third-party Beneficiaries. This Agreement
(including the documents and instruments referred to herein) (i)
constitutes the entire agreement and supersedes all prior agreements
and understandings, both written and oral, among the parties with
respect to the subject matter hereof and (ii) is not intended to
confer upon any person other than the parties hereto any rights or
remedies hereunder.
(g) Governing Law. This Agreement shall be governed and construed in
accordance with the laws of the State of Delaware without regard to
any applicable conflicts of law.
9. Stockholder Capacity. Stockholder signs solely in his capacity as the
record holder and beneficial owner of, or the trustee of a trust whose
beneficiaries are the beneficial owners of, Stockholder's Securities and
nothing herein shall limit or affect any actions taken by Stockholder in
his capacity as an officer or director, if applicable, of the Company to
the extent specifically permitted by the Merger Agreement.
10. Enforcement. The parties agree that irreparable damage would occur in the
event that any of the provisions of this Agreement were not performed in
accordance with their specific terms or were otherwise breached. It is
accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce
specifically the terms and provisions of this Agreement in a court of the
United States.
<PAGE>
This being in addition to any other remedy to which they are entitled at
law or in equity. In addition, each of the parties hereto waives any right
to trial by jury with respect to any claim or proceeding related to or
arising out of this Agreement or any of the transactions contemplated
hereby.
STOCKHOLDER AGREES THAT, IN CONNECTION WITH ANY LEGAL SUIT OR PROCEEDING
ARISING WITH RESPECT TO THIS AGREEMENT, IT SHALL SUBMIT TO THE JURISDICTION
OF THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF DELAWARE AND AGREES
TO VENUE IN SUCH COURTS. STOCKHOLDER HEREBY APPOINTS THE SECRETARY OF THE
COMPANY AS HIS AGENT FOR SERVICE OF PROCESS FOR PURPOSES OF THE FOREGOING
SENTENCE ONLY. EACH PARTY HERETO WAIVES ANY RIGHT TO JURY TRIAL IN
CONNECTION WITH ANY SUCH SUIT OR PROCEEDING.
********
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first written above.
WATSON PHARMACEUTICALS, INC.
By: /s/ Robert C. Funsten
----------------------------------
Name: Robert C. Funsten
--------------------------------
Title: Vice President, Legal Affairs
-------------------------------
STOCKHOLDER
/s/ Dinesh C. Patel, Ph.D.
--------------------------------------
Dinesh C. Patel, Ph.D.
<PAGE>
SCHEDULE A
STOCKHOLDER SECURITIES HELD
Dinesh C. Patel, Ph.D. 2,687,926***
- --------------------
*** A portion of these shares are pledged to secure borrowings by Dr. Patel.
Dr. Patel has retained voting rights on the pledged shares. In addition,
Dr. Patel holds options to purchase 175,002 shares.
<PAGE>
EXHIBIT 10.7
VOTING AGREEMENT
VOTING AGREEMENT, dated as of October 24, 1998, between Watson
Pharmaceuticals, Inc., a Nevada corporation ("Parent"), and William I. Higuchi
(the "Stockholder").
WHEREAS, Parent and Theratech, Inc., a Delaware corporation (the
"Company"), propose to enter into an Agreement and Plan of Merger, dated the
date hereof (as the same may be amended or supplemented, the "Merger Agreement")
providing for the merger of Jazz Merger Corp., a Delaware corporation and
wholly-owned subsidiary of Parent ("Subsidiary"), with the Company (the
"Merger");
WHEREAS, Stockholder is the record and beneficial owner of 2,299,034 shares
of common stock, par value $.01 per share, of the Company (the "Company Common
Stock"); such securities, as they may be adjusted by stock dividend, stock
split, recapitalization, combination or exchange of shares, merger,
consolidation, reorganization or other change or transaction of or by the
Company, together with securities that may be acquired after the date hereof by
Stockholder, including Company Common Stock issuable upon the exercise of
options to purchase Company Common Stock (as the same may be adjusted as
aforesaid), being collectively referred to herein as the "Securities"; and
WHEREAS, as a condition to their willingness to enter into the Merger
Agreement, Parent and Subsidiary have requested that the Stockholder enter into
this Agreement. Capitalized terms not otherwise defined herein shall have the
meanings ascribed to them in the Merger Agreement;
NOW, THEREFORE, to induce Parent and Subsidiary to enter into, and in
consideration of them entering into, the Merger Agreement, and in consideration
of the premises and the representations, warranties and agreements contained
herein and intending to be legally bound hereby, the parties hereby agree as
follows:
11. Covenants of the Stockholder. Stockholder agrees as follows:
(a) Stockholder shall not, except as contemplated by the terms of this
Agreement, (i) sell, transfer, pledge, assign or otherwise dispose of,
or enter into any agreement, option or other arrangement (including
any profit sharing arrangement) or understanding with respect to the
sale, transfer, pledge, assignment or other disposition of, the
Securities to any person other than Parent or Parent's designee; (ii)
enter into any voting arrangement, whether by proxy, voting agreement,
voting trust, power-of-attorney or otherwise, with respect to the
Securities or (iii) take any other action that would in any way
restrict, limit or interfere with the performance of its obligations
hereunder or the transactions contemplated hereby; provided, however,
that any Stockholder that is an individual may transfer all or any
part of his or her Securities to any sibling or any other member of
his or her immediate family, any of his or her lineal descendants or
any trust for the benefit of any of them, if the recipient of the
Securities agrees in advance in writing delivered to Parent to be
bound by this Agreement. Notwithstanding subsection (i) above,
Stockholder may sell up to 65,000 shares of Company Common Stock for
the limited purpose of satisfying any cash settlement of, or the
unwinding of, his "zero-cost collar" arrangement which expires on
March 9, 1999, as identified on Stockholder's Form 4 for March, 1998,
filed with the Securities and Exchange Commission on April 10, 1998,
if Stockholder has complied with the following: (x) Stockholder has
complied with all legal obligations in order to sell such shares,
including without limitation, compliance with all applicable
securities laws and regulations, compliance with all insider trading
legislation and policies and receipt of an opinion of counsel
authorizing such sale, if necessary, and (y) Stockholder has provided
Parent with at least ten (10) days prior written notice of his
intention to sell such shares, with appropriate documentation
evidencing compliance with (x) above, such documentation to be
reasonably acceptable to Parent, and (z) such sale does not in any way
jeopardize or otherwise alter the pooling of interest accounting
treatment of the Merger, as determined in the sole discretion of
Parent.
(b) Except as specifically provided in the Merger Agreement, until the
Merger is consummated or the Merger Agreement is terminated, the
Stockholder shall not, nor shall the Stockholder permit any investment
banker, financial adviser, attorney, accountant or other
representative or agent acting on behalf of or at the direction of the
Stockholder (a "Stockholder Representative") to, directly or
<PAGE>
indirectly (i) solicit, initiate or encourage (including by way of
furnishing information), or take any other action designed or
reasonably likely to facilitate, any inquiries or the making of any
proposal which constitutes, or may reasonably be expected to lead to,
any Alternative Proposal (as defined in the Merger Agreement) or (ii)
participate in any discussions or negotiations regarding any
Alternative Proposal. Without limiting the foregoing, it is
understood that any violation of the restrictions set forth in the
preceding sentence by a Stockholder Representative shall be deemed to
be a violation of this Section 1(b) by the Stockholder.
(c) At any meeting of stockholders of the Company called to vote upon the
Merger and the Merger Agreement or at any adjournment thereof or in
any other circumstances upon which a vote, consent or other approval
(including by written consent) with respect to the Merger and the
Merger Agreement is sought from the stockholders of the Company, the
Stockholder shall vote (or cause to be voted) Stockholder's Securities
in favor of approving the Merger, the adoption of the Merger Agreement
and the approval of the other transactions contemplated by the Merger
Agreement and the calling of a special meeting of the stockholders of
the Company to consider any of the foregoing. At any meeting of
stockholders of the Company or at any adjournment thereof or in any
other circumstances upon which the Stockholder's vote, consent or
other approval is sought, Stockholder shall vote (or cause to be
voted) Stockholder's Securities against (i) any Alternative Proposal,
or (ii) any amendment of the Company's Certificate of Incorporation or
by-laws or other proposal or transaction involving the Company or any
of its subsidiaries or any motion at a meeting of stockholders of the
Company, which amendment or other proposal or transaction or motion
would in any manner impede, frustrate, prevent or nullify, the Merger,
the Merger Agreement or any of the other transactions contemplated by
the Merger Agreement (collectively, "Frustrating Transactions").
12. Grant of Irrevocable Proxy Coupled with an Interest; Appointment of Proxy.
(a) Stockholder hereby irrevocably grants to, and appoints, any individual
who shall be designated by Parent, and each of them, Stockholder's
proxy and attorney-in-fact (with full power of substitution), for and
in the name, place and stead of such Stockholder, to vote
Stockholder's Securities, or grant a consent or approval in respect of
such Securities, at any meeting of stockholders of the Company or at
any adjournment thereof or in any other circumstances upon which their
vote, consent or other approval is sought, (i) in favor of the Merger,
the adoption by the Company of the Merger Agreement and the approval
of the other transactions contemplated by the Merger Agreement and the
calling of a special meeting of the stockholders of the Company to
consider any of the foregoing, and (ii) against any Alternative
Proposal or Frustrating Transaction.
(b) Stockholder represents that any proxies heretofore given in respect of
Stockholder's Securities are not irrevocable, and that any such
proxies are hereby revoked.
(c) STOCKHOLDER HEREBY AFFIRMS THAT THE PROXY SET FORTH IN THIS SECTION 2
IS COUPLED WITH AN INTEREST AND IS IRREVOCABLE UNTIL THE TIME SET
FORTH IN THE LAST SENTENCE OF THIS SECTION. Stockholder hereby
further affirms that such irrevocable proxy is given in connection
with the execution of the Merger Agreement, and that such irrevocable
proxy is given to secure the performance of the duties of Stockholder
under this Agreement. Stockholder hereby ratifies and confirms all
that the individual voting such irrevocable proxy may lawfully do or
cause to be done by virtue hereof. Such irrevocable proxy is executed
and intended to be irrevocable in accordance with the provisions of
Section 212 of the Delaware General Corporate Law ("DGCL"). Such
irrevocable proxy shall be valid until the earlier to occur of (i) one
year from the date hereof or (ii) the termination of this Agreement in
accordance with its terms.
13. Representations and Warranties of the Stockholder. Stockholder hereby
represents and warrants to Parent as follows:
(a) Authorization. The Stockholder has the legal capacity to execute,
deliver and perform this Agreement. This Agreement constitutes a
valid and binding obligation of the Stockholder enforceable against
the Stockholder in accordance with its terms. If the Stockholder is
married and the Securities constitute community property under
applicable law, this Agreement has been duly authorized, executed and
<PAGE>
delivered by, and constitutes the valid and binding agreement of, the
Stockholder's spouse enforceable against such spouse in accordance
with its terms.
(b) No Conflict. The execution, delivery and performance by the
Stockholder of this Agreement and the consummation of the transactions
contemplated hereby do not and will not (i) result in any breach or
violation of or be in conflict with or constitute a default under any
law or agreement or arrangement to which the Stockholder is a party or
by which the Stockholder is bound, (ii) require any filing by the
Stockholder with or authorization by any governmental entity (other
than 13 D/G amendments) or (iii) require any consent or other action
by any person under, constitute a default under, or give rise to any
right of termination, cancellation or acceleration of a loss of any
benefit to which the Stockholder is entitled under any provision of
any agreement or other instrument binding on the Stockholder.
(c) Ownership of Securities. Stockholder's Securities and the
certificates representing such Securities are now held by Stockholder,
or by a nominee or custodian for the benefit of Stockholder, and the
Stockholder has good and marketable title to such Securities, free and
clear of any (i) liens, proxies, voting trusts or agreements,
understandings or arrangements and (ii) pledges, restrictions, charges
or other adverse claims of any kind or nature (other than the "zero-
cost collar" arrangement described in Section 1(a) above).
Stockholder owns of record or beneficially no securities of the
Company, or any options, warrants or rights exercisable for securities
of the Company, other than the Securities set forth opposite the
Stockholder's name on Schedule A hereto.
(d) Merger Agreement. Stockholder understands and acknowledges that
Parent and Subsidiary are entering into the Merger Agreement in
reliance upon the Stockholder's execution and delivery of this
Agreement.
14. Further Assurances. Stockholder will, from time to time, execute and
deliver, or cause to be executed and delivered, such additional or further
transfers, assignments, endorsements, consents and other instruments as
Parent may reasonably request for the purpose of effectively carrying out
the transactions contemplated by this Agreement and to vest the power to
vote Stockholder's Securities as contemplated by Section 2.
15. Assignment; Binding Effect. Except as set forth herein, neither this
Agreement nor any of the rights, interests or obligations hereunder shall
be assigned by any of the parties hereto (whether by operation of law or
otherwise) without the prior written consent of the other parties. Subject
to the preceding sentence, this Agreement shall be binding upon, inure to
the benefit of, and be enforceable by, the parties hereto and their
respective successors and assigns. Notwithstanding anything contained in
this Agreement to the contrary, nothing in this Agreement, expressed or
implied, is intended to confer on any person other than the parties hereto
or their respective heirs, successors, executors, administrators and
assigns any rights, remedies, obligations or liabilities under or by reason
of this Agreement.
16. Termination. This Agreement, and all rights and obligations of the parties
hereunder, shall terminate upon the earliest to occur of the Effective Time
or the termination of the Merger Agreement in accordance with its terms.
Nothing in this Section 6 shall relieve any party from liability for
willful breach of this Agreement.
17. Stop Transfer. The Company agrees with, and covenants to, Parent that the
Company shall not register the transfer of any certificate representing
Stockholder's Securities unless such transfer is made in accordance with
the terms of this Agreement.
18. General Provisions.
(a) Expenses. All costs and expenses incurred by Parent in connection
with this Agreement and the transactions contemplated hereby shall be
paid by Parent. All costs and expenses incurred by the Stockholder in
connection with this Agreement and the transactions contemplated
hereby shall be paid by the Company; provided, however, that Parent
shall reimburse Stockholder, or pay for directly if practicable, any
expenses incurred in connection with actions requested by Parent.
(b) Amendments. This Agreement may not be amended except by an instrument
in writing signed by each of the parties hereto.
<PAGE>
(c) Notice. All notices and other communications hereunder shall be in
writing and shall be deemed given upon receipt to the parties at the
following addresses (or at such other address for a party as shall be
specified by like notice):
(i) if to Parent, to:
Watson Pharmaceuticals, Inc.
311 Bonnie Circle
Corona, California 91720
Fax: (909) 270-1429
Attn: Chairman & CEO
with a copy to:
Watson Pharmaceuticals, Inc.
311 Bonnie Circle
Corona, California 91720
Fax: (909) 270-1429
Attn: Legal Department
; and
(ii) if to Stockholder, to the address set forth under the name of
Stockholder on Schedule A attached hereto;
with a copy to:
Kirkland & Ellis
153 East 53rd Street
New York, New York 10022
Fax: (212) 446-4900
Attn: Stephen P. H. Johnson
(d) Interpretation. When a reference is made in this Agreement to a
Section, such reference shall be to a Section of this Agreement unless
otherwise indicated. The headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. Wherever the words "include",
"includes" or "including" are used in this Agreement, they shall be
deemed to be followed by the words "without limitation".
(e) Counterparts. This Agreement may be executed in two or more
counterparts, all of which shall be considered one and the same
agreement and shall become effective when two or more counterparts
have been signed by each of the parties and delivered to the other
parties, it being understood that all parties need not sign the same
counterpart.
(f) Entire Agreement; No Third-party Beneficiaries. This Agreement
(including the documents and instruments referred to herein) (i)
constitutes the entire agreement and supersedes all prior agreements
and understandings, both written and oral, among the parties with
respect to the subject matter hereof and (ii) is not intended to
confer upon any person other than the parties hereto any rights or
remedies hereunder.
(g) Governing Law. This Agreement shall be governed and construed in
accordance with the laws of the State of Delaware without regard to
any applicable conflicts of law.
19. Stockholder Capacity. Stockholder signs solely in his capacity as the
record holder and beneficial owner of, or the trustee of a trust whose
beneficiaries are the beneficial owners of, Stockholder's Securities and
nothing herein
<PAGE>
shall limit or affect any actions taken by Stockholder in his capacity as
an officer or director, if applicable, of the Company to the extent
specifically permitted by the Merger Agreement.
20. Enforcement. The parties agree that irreparable damage would occur in the
event that any of the provisions of this Agreement were not performed in
accordance with their specific terms or were otherwise breached. It is
accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce
specifically the terms and provisions of this Agreement in a court of the
United States. This being in addition to any other remedy to which they are
entitled at law or in equity. In addition, each of the parties hereto
waives any right to trial by jury with respect to any claim or proceeding
related to or arising out of this Agreement or any of the transactions
contemplated hereby.
STOCKHOLDER AGREES THAT, IN CONNECTION WITH ANY LEGAL SUIT OR PROCEEDING
ARISING WITH RESPECT TO THIS AGREEMENT, IT SHALL SUBMIT TO THE JURISDICTION
OF THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF DELAWARE AND AGREES
TO VENUE IN SUCH COURTS. STOCKHOLDER HEREBY APPOINTS THE SECRETARY OF THE
COMPANY AS HIS AGENT FOR SERVICE OF PROCESS FOR PURPOSES OF THE FOREGOING
SENTENCE ONLY. EACH PARTY HERETO WAIVES ANY RIGHT TO JURY TRIAL IN
CONNECTION WITH ANY SUCH SUIT OR PROCEEDING.
********
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first written above.
WATSON PHARMACEUTICALS, INC.
By: /s/ Robert C. Funsten
----------------------------------
Name: Robert C. Funsten
------------------------------
Title: Vice President, Legal Affairs
------------------------------
STOCKHOLDER
/s/ William I. Higuchi
--------------------------------------
William I. Higuchi
<PAGE>
SCHEDULE A
STOCKHOLDER SECURITIES HELD
William I. Higuchi 2,299,034
<PAGE>
Exhibit 21.1
List of Subsidiaries of Watson
Name Jurisdiction of Incorporation
- ----- -----------------------------
Bears Acquisition Corp k/n/a Jazz Merger Corp. Delaware
Chelsea Laboratories, Inc. New York
Chelsea Laboratories Caribe, Inc. Delaware
Circa Pharmaceuticals, Inc. New York
Nicobrand Limited Northern Ireland
Oclassen Pharmaceuticals, Inc. Delaware
Royce Laboratories, Inc. Florida
Rugby Laboratories, Inc. New York
The Rugby Group, Inc. New York
Watson Laboratories, Inc. Nevada
Watson Pharmaceuticals (Asia) Ltd. Territory of the
British Virgin
Island
<PAGE>
Exhibit 23.4
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of this Registration Statement on Form S-4 of our report dated
February 2, 1998, except as to Note 2, which is as of February 27, 1998
appearing on page F-2 of Watson Pharmaceuticals, Inc.'s Annual Report on Form
10-K for the year ended December 31, 1997. We also consent to the reference to
us under the heading "Experts" in such Prospectus.
/s/ PricewaterhouseCoopers LLP
PRICEWATERHOUSECOOPERS LLP
Costa Mesa, California
November 23, 1998
<PAGE>
Exhibit 23.5
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement Form S-4 and related Prospectus of Watson
Pharmaceuticals, Inc. for the registration of 6,300,612 shares of its
common stock and to the incorporation by reference therein of our report
dated February 6, 1998, with respect to the consolidated financial
statements of TheraTech, Inc. incorporated by reference in its Annual
Report (Form 10-K) for the year ended December 31, 1997, filed with the
Securities and Exchange Commission.
/s/ Ernst & Young LLP
Salt Lake City, Utah
November 24, 1998
<PAGE>
Exhibit 23.6
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this registration statement of our report dated January 17, 1997
and to all references to our Firm included in this Registration Statement on
Form S-4.
/s/ Arthur Andersen LLP
November 20, 1998
<PAGE>
Exhibit 23.7
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Registration Statement of
Watson Pharmaceuticals, Inc. on Form S-4 of our report dated February 4, 1998
relating to 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, appearing in the Annual
Report on Form 10-K/A of Watson Pharmaceuticals, Inc. for the year ended
December 31, 1997 and to the reference to us under the heading "Experts" in the
Prospectus, which is part of this Registration Statement.
/s/ DELOITTE & TOUCHE LLP
Pittsburgh, Pennsylvania
November 23, 1998
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Exhibit 99.1
THERATECH, INC.
Revocable Proxy
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS.
The undersigned hereby appoints each of Dr. Dinesh C. Patel and Dr.
Charles D. Ebert, with full power of substitution, to act as proxies for the
undersigned and to vote all shares of Common Stock of TheraTech, Inc.
("TheraTech") which the undersigned is entitled to vote at the Special Meeting
of Stockholders to be held on January 7, 1999, at 9:00 a.m., local time, at 417
Wakara Way, Salt Lake City, Utah, 84108, and at any and all adjournments
thereof.
THIS PROXY MAY BE REVOKED AT ANY TIME BEFORE IT IS EXERCISED.
This proxy, when properly executed, will be voted as directed on the
reverse side. If no direction is made, this proxy will be voted FOR each of the
proposals listed. If any other business is properly presented at the Special
Meeting, this proxy will be voted by the proxies in their discretion.
(Continued, and to be marked, signed and dated, on the reverse side)
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(Proxy Card, reverse side)
1. The approval and adoption of the Agreement and Plan of Merger dated as of
October 23, 1998 (the "Agreement"), by and between TheraTech, Watson
Pharmaceuticals, Inc. ("Watson") and Jazz Merger Corp. ("Sub"), providing
for the merger of Sub with and into TheraTech (the "Merger") as more
fully described in the accompanying Proxy Statement/Prospectus pursuant
to which each share of Common Stock of TheraTech outstanding as of the
effective date of the Merger will be converted into and become a right to
receive the number of shares of Common Stock of Watson as determined in
the manner specified in the accompanying Proxy Statement/Prospectus and
the Agreement.
FOR AGAINST ABSTAIN
[_] [_] [_]
2. In their discretion, the proxies are authorized to vote upon such other
business as may properly come before the Special Meeting or any
adjournments or postponements thereof.
The undersigned acknowledges receipt prior to the execution of this proxy
of a Notice of Special Meeting of Shareholders and of a Proxy
Statement/Prospectus dated December 7, 1998.
Please sign exactly as your name appears on card. When signing as
attorney, executor, administrator, trustee or guardian, please give your full
title, if shares are held jointly, each holder may sign, but only one signature
is required.
Dated December 7, 1998 -------------------------------------
Signature
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Printed Name
