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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 0-20045
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WATSON PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
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Nevada 95-3872914
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
311 Bonnie Circle, Corona, CA 91720
(Address of principal executive offices)
(909) 270-1400
(Registrant's telephone number, including area code)
----------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.0033 Par Value
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
Aggregate market value, as of March 15, 1999, of Common Stock held by non-
affiliates of the registrant: $3,717,276,908 based on the last reported sale
price on the New York Stock Exchange.
Number of shares of Common Stock outstanding on March 15, 1999: 95,592,406
DOCUMENTS INCORPORATED BY REFERENCE
The registrant intends to file a definitive Proxy Statement pursuant to
Regulation 14A within 120 days after the close of the fiscal year ended
December 31, 1998. Portions of such Proxy Statement are incorporated by
reference in Part III of this report.
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PART I
ITEM 1. BUSINESS
Unless otherwise specified, reference to "Watson" or the "Company" refers to
Watson Pharmaceuticals, Inc. and its subsidiaries as of December 31, 1998, and
unless otherwise indicated excludes TheraTech, Inc., which was acquired in
January 1999 (as discussed below). Eldepryl(R) and Zarontin(R) are registered
trademarks of Somerset Pharmaceuticals, Inc. ("Somerset") and Warner-Lambert
Company, respectively. All other marks are trademarks of the Company. For full
prescribing information for any Watson Product, please contact the Company at
(800) 272-5525.
CAUTIONARY STATEMENT FOR PURPOSES OF THE SAFE HARBOR PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
This report contains forward-looking statements. The Company desires to take
advantage of the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995 and is including this statement for the express purpose of
availing itself of the protections of the safe harbor with respect to all
forward-looking statements. Several important factors, in addition to the
specific factors discussed in connection with such forward-looking statements
individually, could affect the future results of the Company and could cause
those results to differ materially from those expressed in the forward-looking
statements contained herein.
The Company's estimated or anticipated future results, product performance
or other non-historical facts are forward-looking and reflect Watson's current
perspective of existing trends and information. These statements involve risks
and uncertainties that cannot be predicted or quantified and, consequently,
actual results may differ materially from those expressed or implied by such
forward-looking statements. Such risks and uncertainties include, among
others, the success of Watson's product development activities and the
timeliness with which regulatory authorizations and product roll-out may be
achieved, market acceptance of Watson's products and the impact of competitive
products and pricing, the availability on commercially reasonable terms of raw
materials and other third party sourced products, dependence on sole source
suppliers, successful compliance with extensive, costly, complex and evolving
governmental regulations and restrictions, the ability to timely and cost
effectively integrate acquisitions, exposure to product liability and other
lawsuits and contingencies, the successful and timely implementation of the
Company's Year 2000 Compliance Program, and other risks and uncertainties
detailed in this report and from time to time in Watson's other Securities and
Exchange Commission ("SEC") filings.
Therefore, the Company wishes to caution each reader of this report to
consider carefully these factors as well as the specific factors that may be
discussed with each forward-looking statement in this report or disclosed in
the Company's filings with the SEC as such factors, in some cases, could
affect the ability of the Company to implement its business strategy and may
cause actual results to differ materially from those contemplated by the
statements expressed herein.
OVERVIEW
Watson Pharmaceuticals, Inc., incorporated in 1985, is engaged in the
development, production, marketing and distribution of branded and off-patent
pharmaceutical products. The Company's products include therapeutic and
preventive agents generally sold by prescription or over-the-counter (OTC) for
the treatment of human diseases and disorders.
Branded Pharmaceutical Products
New pharmaceutical products are often patented and, as a result, generally
are offered by a single provider when first introduced to the market. In
addition to patented products, certain trademarked off-patent products which
are promoted directly to healthcare professionals are treated by Watson as
branded pharmaceutical products.
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The Company's branded pharmaceutical business operates primarily in the
following specialty areas: Dermatology, Women's Health, Neurology/Psychiatry
and Primary Care. Watson has strategically focused on these markets due to
their anticipated growth opportunities. The Company believes that the nature
of these markets and the identifiable base of physician prescribers provide it
with the opportunity to achieve significant market penetration through its
specialized sales forces. The Company believes its branded pharmaceutical
products tend to generate more stable earnings over a longer period, in large
part through higher margins. The Company intends to continue to expand its
branded product portfolio through internal product development and acquisition
or may also choose to enter into collaborative or licensing agreements with
third parties at various stages of product development.
Off-Patent Pharmaceutical Products
When the relevant patents no longer protect a branded product (either due to
the patent's expiration or otherwise), opportunities exist for third parties
to introduce generic counterparts to the branded product. Such generic or off-
patent pharmaceutical products are therapeutically equivalent to their brand-
name counterparts and are generally sold at prices significantly less than the
branded product. Accordingly, off-patent pharmaceuticals provide a safe,
effective and cost-efficient alternative to users of branded products.
The Company is recognized as a leader in the development, manufacture and
sale of off-patent pharmaceutical products. With respect to off-patent
products, the Company's strategy is to enter markets where it enjoys
competitive advantages. In this regard, the Company targets for development
drugs that are difficult to formulate or manufacture, or that will complement
its existing portfolio, or that will otherwise assist it in making its product
line more complete.
Revenues From Pharmaceutical Sales
Company revenues for the last three fiscal years were derived as follows:
<TABLE>
<CAPTION>
For the Years Ended December 31,
----------------------------------------------
1998 1997 1996
------------ --------------- ---------------
$ % $ % $ %
-------- --- -------- --- -------- ---
($ in thousands)
<S> <C> <C> <C> <C> <C> <C>
Off-patent product sales... $329,805 59% $200,890 59% $189,275 75%
Branded product sales...... 226,343 41 123,125 37 34,364 14
Royalty income from branded
sales..................... 0 0 14,249(1) 4 27,162(1) 11
-------- --- -------- --- -------- ---
Total revenues........... $556,148 100% $338,264 100% $250,801 100%
======== === ======== === ======== ===
</TABLE>
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(1) Following Watson's acquisition of the U.S. rights to Dilacor XR(R) from
Rhone-Poulenc Rorer Pharmaceuticals, Inc. ("RPR") as of June 30, 1997, no
further royalty income was earned.
SUMMARY OF RECENT TRANSACTIONS
Several acquisitions have contributed to the Company's growth over the past
year. In February 1998, the Company acquired from Hoechst Marion Roussel, Inc.
("HMR") The Rugby Group, Inc. ("Rugby"), a developer and marketer of off-
patent pharmaceutical products, for approximately $67.5 million in cash
(exclusive of certain contingent payments). The Company also entered into a
supply agreement with HMR under which Watson currently purchases certain off-
patent products.
In November 1998, the Company acquired three branded oral contraceptive
products from G. D. Searle & Co. ("Searle"), Norinyl(R), Brevicon(R), and Tri-
Norinyl(R), for $120.0 million cash. The Company and Searle also entered into
a supply agreement under which the Company is currently purchasing these
products. Under the supply agreement with Searle, the Company has the right to
purchase these products from Searle for three years; the first two years in
finished packaged form and the third year in bulk tablet form.
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In January 1999, Watson acquired TheraTech, Inc. ("TheraTech"), a leading
drug-delivery company, in a share for share exchange for approximately 5.8
million Watson common shares. 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-released 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.
The U.S. Food and Drug Administration ("FDA") has approved 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 approval within one year of their respective initial
submissions.
As of March 15, 1999, TheraTech had 208 full-time and 9 part-time employees.
Of the total number, 92 employees were engaged in research and development
activities, 59 employees were in manufacturing, and 66 employees were in
administrative capacities. TheraTech's management team consists of
pharmaceutical industry specialists, including individuals with experience
ranging from project conception and design to regulatory approval process and
commercial production.
TheraTech's principal facilities are located in Salt Lake City, Utah. These
facilities include approximately 76,000 square feet of research and
development, pilot manufacturing and packaging, and administrative space under
one lease. The lease expires in May 1999 and has two, one-year renewal
options. TheraTech has also entered into a 40-year lease, with an option to
renew for an additional ten years, on approximately seven acres of land
located in the University of Utah Research Park for its commercial
manufacturing facility. TheraTech also maintains approximately 3,000 square
feet of leased space for business development and related purposes in Tokyo,
Japan.
The Rugby, Searle and TheraTech transactions are more fully described in
Note 2 to the consolidated financial statements.
PRODUCTS
Branded pharmaceutical products
The Company markets its branded products to physicians through its four
principal sales groups: Dermatology, Women's Health, Neurology/Psychiatry and
Primary Care. As of March 15, 1999, the Company marketed the following branded
products:
Dermatology
Watson markets several products for the prevention and treatment of skin
diseases. These products include Monodox(R) (doxycycline monohydrate), for the
treatment of severe acne; Cordran(R) (flurandrenolide) and Cormax(TM)
(clobetasol propionate), for the treatment of dermatoses; Condylox(R)
(podofilox), for the treatment of genital warts; and Cinobac(R) (cinoxacin),
for the treatment of urinary tract infections.
Women's Health
The Company markets a variety of oral contraceptive products. These products
include Zovia(TM) (ethynodiol diacetate & ethinyl estradiol), Levora(R)
(levonorgestrel), Nor QD(R) (norethindrone), Trivora(R) (levonorgestrel and
ethinyl estradiol tablets, USP--Triphasic Regimen), Norinyl(R) (norethindrone
and ethinyl estradiol), Brevicon(R) (norethindrone and ethinyl estradiol), and
Tri-Norinyl(R) (norethindrone and ethinyl estradiol).
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Neurology/Psychiatry
Watson markets three central nervous system products: Loxitane(R) (loxapine
succinate), for the treatment of psychotic disorders, Zarontin(R)
(ethosuximide), for the treatment of pediatric epilepsy and Eldepryl(R)
(selegiline), a product of Somerset, for the treatment of Parkinson's disease.
These products are sold into this growing specialty market, exclusively to
psychiatrists and neurologists.
Primary Care
The Company markets three products directly to primary care physicians.
These products are Norco(TM) (hydrocodone bitartrate & acetaminophen), a
branded off-patent analgesic; and Microzide(R) (hydrochlorothiazide) and
Dilacor XR(R), which are both used in the treatment of hypertension and
angina. In 1997, sales of Dilacor XR(R) accounted for approximately 19% of
total revenues following Watson's June 1997 purchase of Dilacor XR(R). In
1998, sales of Dilacor XR(R) accounted for approximately 15% of total
revenues. The Company expects that the significance of Dilacor XR(R) as a
percentage of total revenues will continue to decline as a result of new
product introductions and acquisitions, increased revenues from existing
products and increased competition; and that Dilacor XR(R) will not represent
a significant portion of Watson's revenues in 1999.
Off-patent pharmaceutical products
Watson manufactures and markets more than 85 off-patent prescription
products in capsule or tablet forms in approximately 166 dosage strengths. The
Company markets its off-patent products to drug wholesalers, distributors and
retailers, including chain drug stores, hospitals, clinics, governmental
agencies, and managed healthcare providers such as health maintenance
organizations and other institutions.
Watson's sales of off-patent drugs have increased significantly in recent
years. The Company believes that this growth is attributable to a number of
factors, including (a) acquisitions by the Company in 1997 and 1998, (b)
modification of certain federal and state laws to permit or mandate
substitution of off-patent drugs by pharmacists, (c) the enactment of
abbreviated procedures for obtaining FDA approval to manufacture off-patent
prescription drugs, (d) changes in government and third-party payor
reimbursement policies to encourage cost containment by health care providers
and consumers, (e) increased acceptance of off-patent drugs by physicians,
pharmacists and consumers, and (f) an increasing number of products which have
lost patent protection.
During 1998, the hydrocodone bitartrate & acetaminophen off-patent product
group accounted for approximately 13% of total revenues. In 1997, the
hydrocodone bitartrate & acetaminophen off-patent product group accounted for
approximately 21% of total revenues and in 1996 this same product group
accounted for 29% of total revenues.
JOINT VENTURES
Watson has made substantial investments in pharmaceutical joint ventures and
may utilize this method of investment in the future. The Company does not
control these joint ventures or the commercial exploitation of the branded and
off-patent products they develop, manufacture and/or market, although Watson
does market Somerset's Eldepryl(R). Further, there is no assurance that such
joint ventures will be profitable, or if profitable currently, will continue
to be profitable.
The Company owns a 50% interest in Somerset, a joint venture with Mylan
Laboratories, Inc. Currently, Somerset's only marketed product is Eldepryl(R).
Somerset, however, is actively involved in research projects regarding
additional indications for Eldepryl(R) and other chemical compounds. In
addition, the Company owns a 50% interest in ANCIRC, a joint venture with
Andrx Corporation ("Andrx"), that is developing off-patent pharmaceutical
products utilizing Andrx's controlled-release technology. In 1998, ANCIRC
received one abbreviated new drug application ("ANDA") product approval from
the FDA and as of March 15, 1999, ANCIRC had one ANDA under review with the
FDA. At December 31, 1998, Watson owned approximately 17.7% of the outstanding
common stock of Andrx. The Company also has a warrant to purchase 337,079
shares of Andrx common stock (which represented approximately 2.2% of the
outstanding shares of Andrx common stock at December 31, 1998) at an exercise
price of $8.90 per share.
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PRODUCT DEVELOPMENT
The Company devotes significant resources to the research and development of
branded and off-patent products. During the three years ended December 31,
1998, the Company incurred research and development expenditures of $30.8
million, $18.1 million and $22.9 million, respectively. There can be no
assurance that any of the products currently in development will receive the
required regulatory approvals from the FDA or be commercially successful if
ultimately approved.
Watson's research and development strategy focuses on the following product
development areas: (a) expansion of its existing oral immediate-release
products with respect to additional dosage strengths, (b) off-patent drugs
that are technically difficult to develop or make because of unusual factors
that affect their shelf life or bioequivalence or are sold in smaller
specialized markets, (c) the development of sustained-release technologies and
the application of these technologies to existing products, (d) the
application of proprietary drug-delivery technology for new product
development in specialty areas, and (e) medium-to-late stage new drug
opportunities.
Watson maintains research and development facilities in Corona, California,
Miami, Florida and Cincinnati, Ohio.
Branded product development
Watson continues to develop certain branded products, some of which utilize
novel drug-delivery systems. Such branded products generally require FDA
approval of a New Drug Application ("NDA") prior to marketing. The Company is
also developing proprietary products through a combination of internal and
collaborative programs, including joint ventures. Watson's proprietary product
development continues to emphasize mid-to-late-stage new drug opportunities
that can quickly be brought to market.
The Company is focusing its proprietary drug development efforts in the
three specialty areas where Watson has existing sales and marketing presence,
namely Women's Health, Neurology/Psychiatry and Dermatology. Products
currently in development include: a hormone replacement therapy, a dermatology
product, a central nervous system product, and an analgesic product.
In recent years, Somerset has increased its research and development
spending in order to (a) develop additional indications for selegiline (the
parent compound of Eldepryl(R)), using a transdermal delivery system and (b)
develop and evaluate different therapeutic areas using selegiline and other
compounds. Clinical studies using the selegiline transdermal system (STS) in
major depression were completed in 1998.
Off-patent product development
Watson intends to continue to concentrate its development activities in
areas that offer significant opportunity and that allow Watson to develop
competitive advantages. For instance, the Company has focused its development
efforts on technically difficult-to-formulate products, or products that
require advanced manufacturing technology. By so doing, the Company seeks to
secure a competitive advantage and increased profitability with these
products. In addition, when evaluating which drug development projects to
undertake, Watson considers whether the product, once developed, will
complement other products in its portfolio, or will otherwise assist in making
the Company's product line more complete.
The Company's acquisition of Royce Laboratories, Inc. ("Royce") in 1997 and
Rugby in 1998 has increased its resources in the area of off-patent product
development. The Company presently has submissions for approval pending before
the FDA representing 17 separate products of varying dosage strengths. During
1998 and through March 15, 1999, Watson received 10 off-patent product
approvals from the FDA.
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As of March 15, 1999, the Company believed that it received the first ANDA
approval for approximately 40 products and/or dosage strengths. Also as of
March 15, 1999, the Company believed that it received the sole ANDA approval
for approximately 13 products and/or dosage strengths.
Over the next few years, patent protection on a relatively large number of
branded drugs will expire, thereby providing additional off-patent product
opportunities. The branded products targeted for off-patent development
include those with specialized or growing markets as well as those products
with U.S. sales exceeding $50 million.
SALES AND MARKETING
The Company sells its pharmaceutical products to drug wholesalers, retailers
and distributors, including large chain drug stores, hospitals, clinics,
government agencies and managed healthcare providers such as health
maintenance organizations and other institutions.
Branded products
The Company markets its branded products through its specialty sales groups:
Dermatology, Women's Health, Neurology/Psychiatry and Primary Care. Each of
these sales groups focuses on physicians who specialize in the diagnosis and
treatment of different medical conditions and each offers products to satisfy
the needs of these specialty physicians. The Company believes that this
focused marketing approach enables it to develop highly knowledgeable and
dedicated sales representatives and to foster close professional relationships
with physicians.
During 1998, the Company continued to develop the sales forces for each
therapeutic area as well as the marketing infrastructure to support sales
efforts in these specialty areas. The Company's branded products sales group
had grown to include more than 350 sales representatives by the end of 1998.
Off-patent products
Customer service activities are an integral part of the Company's sales and
marketing operations. The Company endeavors to maintain adequate inventories,
make timely delivery of its products and provide technical and other service
support to its customers. During 1998, Rugby's telemarketing organization and
other sales and marketing personnel were integrated into the Company's
existing infrastructure, enhancing its sales and marketing efforts in the off-
patent product area.
Customers
The Company markets its products primarily to pharmaceutical wholesalers,
drug distributors, and chain drug stores that in turn market to retailers,
managed care entities, hospitals and government agencies. Watson sells its
dermatology products under the "Oclassen Pharmaceuticals" label. Watson has
witnessed a consolidation of its customers, as chain drug stores and
wholesalers merge or consolidate. In addition, a number of the Company's
customers have instituted source programs that limit the number of suppliers
of off-patent pharmaceutical products carried by that customer. As a result of
these developments, there is heightened competition among off-patent drug
producers for the business of this smaller and more selective customer base.
The Company ships products pursuant to purchase orders. In 1998, two
customers accounted for 17% and 12%, individually, of the Company's product
sales. In 1997, these same two customers accounted for 12% and 11%,
individually, of the Company's product sales. In 1996, one customer accounted
for 10% of product sales.
Competition
The pharmaceutical industry is highly competitive, and in many cases, highly
regulated. Watson's competitors vary depending upon 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
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pharmaceuticals, especially those doing business in the United States. Many
competitors have been in business for a longer period of time than Watson,
have a greater number of products on the market and have greater financial and
other resources. Watson competes principally through its targeted product
development strategies. In addition to product development, other competitive
factors in the pharmaceutical industry include product quality and price,
reputation and access to technical information.
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 depends, in part, on the Company's ability to maintain
efficient production capabilities and to develop and introduce new products in
a timely and cost-effective manner.
Revenues and gross profit derived from the sales of off-patent
pharmaceutical products tend to follow a pattern based on certain regulatory
and competitive factors. As patents for brand name products and related
exclusivity periods mandated by regulatory authorities expire, the first off-
patent manufacturer to receive regulatory approval for off-patent equivalents
of such products is generally able to achieve a relatively high market share.
As competing off-patent manufacturers receive regulatory approvals on similar
products, market share, revenues and gross profit typically decline.
Accordingly, the level of market share, revenues and gross profit attributable
to a particular off-patent product is normally related to (a) the number of
competitors in that product's market and (b) the timing of that product's
regulatory approval, in relation to competing approvals. In addition to
competition from other off-patent drug manufacturers, the Company faces
competition from brand name companies as they increasingly sell their products
into the off-patent market by establishing, acquiring or forming licensing or
business arrangements with other off-patent pharmaceutical companies.
With respect to its branded products, the competitive environment requires
an intensive search for technological innovations and the Company's ability to
market the products effectively, including its ability to communicate the
effectiveness, safety and value of the Company's branded products to
healthcare professionals in private practice, group practices and managed care
organizations.
SUPPLIERS AND MATERIALS
The principal components used in the Company's products are active and
inactive pharmaceutical ingredients and packaging materials. The Company
maintains its own manufacturing capabilities but also contracts with third
parties for the manufacture of a number of its finished products. Certain
third-party components and finished products (including certain products that
have historically accounted for a significant portion of Watson's revenues)
are currently available only from sole or limited suppliers. The FDA (and in
some cases, other regulatory agencies) must approve suppliers for the
Company's products. The Company's third-party suppliers are required by the
Federal Food, Drug and Cosmetic Act and by FDA regulations to follow current
Good Manufacturing Practices ("cGMP"). Accordingly, the Company is dependent
upon its suppliers to comply with such requirements or similar standards
imposed by foreign regulators. Arrangements with foreign suppliers are subject
to certain additional risks, including the availability of governmental
clearances, export duties, political instability, currency fluctuations and
restrictions on the transfer of funds. If any of the components or finished
products were no longer available from an existing approved source, a
qualified alternative would have to be located. This process could delay the
manufacture and sale of such products. In addition, there can be no assurance
that the Company will continue to be able to obtain such items on a timely
basis or at commercially reasonable prices. Any extended inability to timely
obtain components or finished products, or any significant price increases
that cannot be passed on to customers, could have a material adverse effect on
the Company. From time to time, certain outside suppliers have experienced
regulatory difficulties that have inhibited their ability to deliver products
to the Company. To the extent such regulatory difficulties cannot be resolved
within a reasonable time, the resulting delay could have a material adverse
effect on the Company.
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PATENTS AND PROPRIETARY RIGHTS
Watson believes that protection of its patents, proprietary products,
technologies, processes and know-how is important to its business. The Company
maintains an active patent program and has numerous issued and pending United
States patents. The Company also seeks patent protection in major foreign
pharmaceutical markets, and has a number of foreign patents that are issued
and pending.
There can be no assurance that Watson's patents or those of its competitors
will be held valid by a court of competent jurisdiction. There also can be no
assurance that pending patents will result in issued patents, that patents
issued to or licensed by the Company will not be challenged or circumvented by
competitors, or that such patents will be found to be valid or sufficiently
broad to protect the Company's technology or to provide the Company with a
competitive advantage. Watson relies on non-disclosure agreements with certain
employees, consultants and other parties to protect, in part, trade secrets
and other proprietary technology. There can be no assurance that these
agreements will not be breached, that the Company will have adequate remedies
for any breach, or that others will not independently develop equivalent
proprietary information or that third parties will not otherwise gain access
to the Company's trade secrets and proprietary knowledge.
Watson may find it necessary to initiate litigation to enforce its patent
rights, to protect its trade secrets or know-how and to determine the scope
and validity of the proprietary rights of others. In addition, any time the
Company files an ANDA in which it certifies that its product is not infringing
or that the patent covering the NDA patent is invalid, the patent holder may
file suit against the Company for patent infringement. Patent litigation can
be costly and time-consuming, and there can be no assurance that the Company's
litigation expenses will not be significant in the future or that the outcome
of such litigation will ultimately be favorable to the Company.
GOVERNMENT REGULATION
All pharmaceutical manufacturers are subject to extensive regulation by the
federal government, principally the FDA and, to a lesser extent, by state and
local governments. The Federal Food, Drug and Cosmetic Act and other federal
statutes and regulations govern or influence the testing, manufacture, safety,
labeling, storage, record keeping, approval, advertising, promotion, sale and
distribution of pharmaceutical products. Noncompliance with applicable
requirements can result in fines, recall or seizure of products, total or
partial suspension of production and/or distribution, refusal of the
government to enter into supply contracts or to approve NDAs or ANDAs, civil
sanctions and criminal prosecution. The FDA also has the authority to revoke
previously granted drug approvals. From time to time, the FDA issues notices
and warning letters to pharmaceutical manufacturers that request or require
the manufacturer to modify certain activities with which the FDA finds fault.
To facilitate compliance, the Company from time to time may institute
voluntary compliance programs.
The FDA's cGMP standards have become more complex in recent years. The ANDA
drug development and approval process now averages approximately two to five
years. FDA approval is required before each dosage form of any new drug can be
marketed. Applications for FDA approval must contain information relating to
bioequivalency, product formulation, raw material suppliers, stability,
manufacturing processes, packaging, labeling and quality control. FDA
procedures require full-scale manufacturing equipment to be used to produce
test batches for FDA approval. Validation of manufacturing processes by the
FDA also is required before a Company can market new products. The FDA
conducts pre-approval and post-approval reviews and plant inspections to
enforce these rules. Supplemental filings are required for approval to
transfer products from one manufacturing site to another and may be under
review for a year or more. In addition, certain products may only be approved
for transfer once new bioequivalency studies are conducted.
The Company's manufacturing operations are required to comply with cGMP
standards as interpreted by the FDA. This concept encompasses all aspects of
the production process, including validation and record keeping, and involves
changing and evolving standards. In recent years, the FDA has increased the
number of
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regular inspections to determine compliance with its cGMP standards. The
evolving and complex nature of regulatory requirements, the broad authority
and discretion of the FDA and the generally high level of regulatory oversight
results in a continuing possibility that from time to time the Company will be
adversely affected by regulatory actions despite its ongoing efforts and
commitment to achieve and maintain full compliance with all regulatory
requirements.
The Hatch-Waxman Act of 1984 extended the established ANDA application
procedure for obtaining FDA approval of generic forms of brand-name drugs,
which were originally marketed before 1962 or whose market exclusivity has
expired. Upon filing an ANDA application with the FDA, the Company must make
one of five certifications with respect to patents. If the Company certifies
that its product is not infringing or that the NDA patent is invalid, then a
NDA patent holder can file suit against the ANDA applicant. Once a suit is
filed, the FDA is prohibited from approving the ANDA for thirty months or
until the suit is litigated. The Hatch-Waxman Act also provides market
exclusivity provisions that could preclude the submission or delay the
approval of a competing ANDA. One such provision allows a five-year market
exclusivity period for NDAs involving new chemical compounds and a three-year
market exclusivity period for NDAs (including different dosage forms)
containing new clinical investigations essential to the approval of the
application. The market exclusivity provisions apply equally to patented and
non-patented products. Another provision of the Hatch-Waxman Act may extend
patents for up to five years as compensation for reduction of the effective
life of the patent as a result of time spent by the FDA reviewing a drug
application. In addition, recent changes to the patent law resulting from
passage of the Uruguay Round Agreements Act ("URAA") will lengthen the term of
some granted patents. Generally, patents have terms that are the longer of 17
years from patent grant or 20 years from patent application.
The Generic Drug Enforcement Act of 1992 establishes penalties for
wrongdoing in connection with the development or submission of an ANDA by
authorizing the FDA to permanently or temporarily debar companies or
individuals from submitting or assisting in the submission of an ANDA, and to
temporarily deny approval and suspend applications to market off-patent drugs.
The FDA may also suspend the distribution of all drugs approved or developed
in connection with certain wrongful conduct and/or withdraw approval of an
ANDA and seek civil penalties. The FDA can also significantly delay the
approval of any pending NDA or ANDA under the Fraud, Untrue Statements of
Material Facts, Bribery and Illegal Gratuities Policy Act.
Medicaid, Medicare and other reimbursement legislation or programs govern
reimbursement levels, including requiring that all pharmaceutical
manufacturers rebate to individual states a percentage of their revenues
arising from Medicaid-reimbursed drug sales. The required rebate is currently
11% of the average wholesale price for sales of Medicaid-reimbursed products
marketed under ANDAs. For sales of medicaid-reimbursed products marketed under
NDAs, manufacturers are required to rebate the greater of approximately 15.1%
of the average wholesale price or, the difference between the average net
sales price and the lowest net sales price during a specified period. The
federal and/or state governments may continue to enact measures in the future
aimed at reducing the cost of drugs to the public. The Company cannot predict
the nature of such measures or their impact on the Company's profitability.
Federal, state and local laws of general applicability, such as laws
regulating working conditions also govern Watson. In addition, the Company is
subject, as are all manufacturers generally, to various federal, state and
local environmental protection laws and regulations, including those governing
the discharge of material into the environment. Compliance with such
environmental provisions is not expected to have a material effect on the
earnings, cash requirements or competitive position of the Company in the
foreseeable future. However, no assurance can be given that changes to, or
compliance with, such environmental provisions will not have a material effect
on the Company's earnings, cash requirements or competitive position.
Continuing studies of the proper utilization, safety, and efficacy of
pharmaceuticals and other health care products are being conducted by
industry, government agencies and others. Such studies, which increasingly
employ sophisticated methods and techniques, can call into question the
utilization, safety and efficacy of
10
<PAGE>
previously marketed products and in some cases have resulted, and may in the
future result, in the discontinuance of their marketing. In certain countries,
these studies gave rise to claims for damages from persons who believe they
have been injured through the use of particular pharmaceutical products.
It is impossible for the Company to predict the extent to which its
operations will be affected under regulations discussed above or any new
regulations that may be adopted by regulatory agencies.
SEASONALITY
The Company's business, taken as a whole, is not materially affected by
seasonal factors.
PERSONNEL
As of December 31, 1998, the Company had 1,510 full-time employees. Of the
Company's employees, 164 are engaged in research and development, 479 in
manufacturing, 214 in quality assurance and quality control, 498 in sales and
marketing, and 155 in administration. Employees are not represented by unions
and the Company believes its relations with its employees are good.
BUSINESS--RISK FACTORS
In addition to the other information in this Annual Report on Form 10-K, you
should carefully consider the following risk factors in evaluating Watson's
business.
Risks Associated with Investing in Watson Common Stock
Watson is dependent on product development and commercialization for continued
growth and development.
Watson's future results of operations will depend to a significant extent
upon its 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
currently in development by the Company may or may not receive the regulatory
approvals necessary for marketing by 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 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 to obtain regulatory approval for its products, including
failure to maintain its manufacturing facilities in compliance with all
applicable regulatory requirements, could adversely affect Watson's operating
results.
The 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 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 could possibly have an adverse
impact upon the market price of Watson common stock. In connection with the
TheraTech merger, Watson expects to record merger-related expenses of
11
<PAGE>
approximately $20 million in the first quarter of 1999. 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 stock price has experienced substantial volatility. Watson has not
paid and does not intend to pay dividends.
The market prices for securities of companies engaged primarily in the
pharmaceutical industry have been volatile, and the market price of Watson
common stock has been and may continue to be volatile. For example, the market
price of Watson common stock fluctuated during the past twelve months between
$30.50 per share and $63.00 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:
(a) new product introductions,
(b) the purchasing practices of the Company's customers,
(c) changes in the degree of competition for a company's products,
(d) the announcement of technological innovations or new commercial
products by a company or its competitors,
(e) governmental regulation,
(f) regulatory approvals or regulatory issues,
(g) developments relating to patents or proprietary rights,
(h) publicity regarding actual or potential clinical results with respect
to products under development by a company or others and
(i) 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 Watson's common stock.
The Company has not paid any cash dividends since inception, although
certain of its wholly-owned subsidiaries may have paid dividends prior to a
combination with Watson. Watson does not anticipate paying cash dividends in
the foreseeable future.
The Company's issued common stock could experience dilution as a result of
future transactions.
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, (a) Watson may engage in future
transactions, including the acquisition of technologies, products, product
rights and businesses, which could involve the issuance of its securities and
(b) 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. The issuance of any securities for these or
other reasons could result in dilution of existing shareholders' 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. 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.
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<PAGE>
Risks Associated with Investing in the Business of Watson
The pharmaceutical industry is extensively regulated by various government
agencies.
All pharmaceutical manufacturers are subject to extensive, complex, costly
and evolving governmental regulations and restrictions administered by the
FDA, other federal and state agencies, and numerous governmental authorities
in other countries. Moreover, Watson and certain of its 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. In
connection with such an inspection by FDA of the Company's Corona, California
facility, the FDA issued to the Company a Warning Letter in January 1999. The
Warning Letter related to the Company's cGMP compliance in areas such as
documentation, training and laboratory controls. The Company has responded to
the FDA and has adopted certain improvements to its procedures. Watson intends
to implement certain additional corrective improvements and anticipates that
these activities will be substantially completed within the next few months.
The Company does not expect that expenditures for these improvements will be
material. Product production at Watson's Corona facility has not been
interrupted, and the Company expects that production will continue, while it
implements the improvements.
Failure to comply with governmental regulations could result in fines,
unanticipated compliance expenditures, interruption of production and criminal
prosecution. Although Watson has 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.
The process for obtaining governmental approval to manufacture and market
pharmaceutical products is rigorous, time-consuming and costly, and Watson
cannot predict the extent to which it may be affected by legislative and
regulatory developments. Watson is dependent on receiving FDA and other
governmental approvals prior to manufacturing, marketing and shipping its
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 product introduction plans or
results of operations. The 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.
Watson is dependent on key personnel for its continued growth and development.
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
Company. Watson has entered into employment agreements with certain of its
executive officers, including Dr. Chao. Watson does not carry key-man life
insurance on any of its officers. Watson's success also will depend upon its
ability to attract and retain other highly qualified scientific, managerial,
sales and manufacturing personnel. However, there is a risk of departure of
employees due to certain factors, including factors relating to the
integration process following mergers. Competition for such personnel is
intense. In this respect, Watson competes with numerous pharmaceutical and
healthcare companies, as well as universities and nonprofit research
organizations. We cannot assure you that Watson will continue to attract and
retain qualified personnel.
Watson may not be able to obtain patent coverage or otherwise protect
proprietary technology.
Watson's success with its proprietary products will depend in part on its
ability to obtain patent protection for its products. Watson has a number of
U.S. and foreign patents issued and pending. However, we cannot assure you
that Watson'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.
13
<PAGE>
Watson also relies on trade secrets and proprietary know-how which it seeks
to protect, in part, through confidentiality agreements with its 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 will not have adequate remedies for any such breach. It is also
possible that Watson's trade secrets will become known or independently
developed by competitors.
Watson 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 Watson 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. Watson'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
Watson's business, financial condition or results of operations.
Increased competition may cause reduced revenues and gross margins.
Due to introduction of products from time to time that may compete with
Watson's products, Watson may continue to experience increased price
competition. Consequently, Watson may experience a reduction in future sales
or gross margin of such products which, absent additional offsetting revenues,
could have a material adverse effect on the financial condition and results of
operations of Watson.
Watson is dependent on certain suppliers that in some cases may be the only
source of finished products or raw materials.
Some materials used in Watson's manufactured products, and some products
sold by Watson, are currently available only from sole or limited suppliers.
This includes products that have historically accounted for a significant
portion of Watson's revenues. In addition, sources for materials for Watson's
products must be approved by the FDA, the DEA and/or other governmental
agencies or bodies. For some products sold by Watson, only one or very few
suppliers have been approved for certain materials or products used in
Watson'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
Watson's business.
The Year 2000 issue may affect Watson's operations.
Watson 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. Watson 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 fails to successfully complete its Year 2000
initiative, it could be adversely affected in the future. For a discussion of
the Company's Year 2000 readiness see Item 7--Management's Discussion and
Analysis of Financial Condition and Results of Operations.
Watson may not receive anticipated income from its existing or future joint
ventures.
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 TheraTech merger was primarily
14
<PAGE>
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 its operations. Watson's earnings may be negatively impacted
if existing collaborative or joint venture partners withdraw or if these
products are not timely developed, approved or successfully commercialized.
Product liability claims are a risk and insurance is expensive.
The design, development and manufacture of Watson's products involve an
inherent risk of product liability claims and associated adverse publicity.
Insurance coverage is expensive and may be difficult to obtain, and may not be
available in the future on acceptable terms, or at all. Although Watson
currently maintains product liability insurance for its products in the
amounts Watson believes to be commercially reasonable, we cannot assure you
that the coverage limits of Watson's insurance policies will be adequate. A
claim brought against Watson, whether fully covered by insurance or not, could
have a material adverse effect upon Watson.
Risks Associated With Investing in the Pharmaceutical Industry
The pharmaceutical industry is highly competitive.
The pharmaceutical industry is intensely competitive. Watson'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 time than Watson, 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 Watson's 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 products or technologies noncompetitive or obsolete.
15
<PAGE>
ITEM 2. PROPERTIES
Watson conducts its operations using a combination of owned and leased
properties. The Company believes that its facilities are well maintained and
in good condition. Properties owned by the Company consist of research and
development, manufacturing, warehouse, distribution and administrative
facilities, containing approximately 697,000 square feet in Corona,
California, Copiague, New York, Salt Lake City, Utah and Dayton, Ohio. In
addition, the Company has a majority interest in a 90,000 square foot
manufacturing plant in Changzhou City, People's Republic of China.
Leased properties are located throughout the U.S. and include a distribution
center, research and development, manufacturing, administrative and sales and
marketing facilities. The facilities currently leased by the Company contain
approximately 484,000 square feet and are subject to lease terms that expire,
subject to renewal options, between 1999 and 2005. In addition, the Company
has leased through 2001, a 32,000 square foot manufacturing facility in
Corona, California from a trust in which Watson's Chairman, Chief Executive
Officer and President and the Company's Senior Vice President, Scientific
Affairs have a beneficial interest. 1998 rent expense under this related party
lease was $345,000.
The Company believes that while it currently has sufficient facilities to
conduct its operations during 1999, it will continue to acquire and lease
additional properties as its business requires.
ITEM 3. LEGAL PROCEEDINGS
In November 1997, a suit was filed against Royce and Watson naming them as
defendants, along with five other corporations, in an action captioned Michael
D. Hardy, Individually and Michael D. Hardy as Executor of the Estate of
Judith Marie Hardy v. Royce Laboratories, Inc., et al. in the Western District
of Kentucky at Louisville. The plaintiff alleges that his wife suffered
personal injuries due to her ingestion of the drug quinine for leg cramps in
June 1995, and personal injuries leading to death due to its ingestion in
April 1997. The plaintiff seeks actual damages in the amount of six million
dollars for personal injuries suffered by his wife, actual damages in the
amount of ten million dollars for wrongful death and additional punitive
damages. In June 1998, the Federal District Court for the Western District of
Kentucky dismissed all claims against Watson in this action. Royce remains a
defendant in the action and has filed its response denying all relevant
claims. The case is still in discovery. It is contemplated that any material
liability and defense costs will be covered by the Company's product liability
insurance.
Beginning in late 1997, a number of product liability suits were filed
against Rugby and numerous manufacturing defendants for personal injuries
arising out of the use of phentermine hydrochloride. The plaintiffs allege
various injuries, ranging from memory loss and anxiety to heart damage and
death. As of March 15, 1999, 517 cases have been filed against Rugby in state
and federal courts in twenty-one different states. Most of the cases involve
multiple plaintiffs, and six of the complaints were filed as class actions.
The Company believes that it will be fully indemnified by Hoechst Marion
Roussel, Inc. for the defense of all such cases and for any liability which
may arise out of these cases. HMR is currently controlling the defense of all
these matters as the indemnifying party under its agreements with Rugby.
Additionally, it is Rugby's position that it has recourse for liability from
the manufacturing defendants in these cases.
The Company is involved in various other disputes, governmental and/or
regulatory inspections, investigations and proceedings, and litigation matters
that arise from time to time in the ordinary course of business. The process
of resolving matters through litigation or other means is inherently uncertain
and it is possible that the resolution of these matters may adversely affect
the Company. In management's opinion, however, Watson is not currently
involved in any legal proceedings which, individually or in the aggregate,
would likely have a material adverse effect on the Company.
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<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the Company's fiscal year ended December 31, 1998.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
Below are the Company's executive officers as of March 31, 1999.
<TABLE>
<CAPTION>
Name Age Principal Position with Registrant
---- --- ----------------------------------
<S> <C> <C>
Michael E. Boxer........ 37 Chief Financial Officer
Allen Y. Chao, Ph.D..... 53 Chairman, President and Chief Executive Officer
Robert C. Funsten....... 39 Vice President, General Counsel and Secretary
David C. Hsia, Ph.D..... 54 Senior Vice President, Scientific Affairs.
G. Frederick Wilkinson.. 42 Vice President
</TABLE>
Michael E. Boxer
Michael E. Boxer, age 37, has served as Chief Financial Officer of the
Company since July 1998. Before joining Watson, Mr. Boxer was President of The
Enterprise Group, a financial advisory firm, which provided consulting
services to the Company. From 1991 to 1997, he was Vice President of the
Health Care Group at Furman Selz, LLC, a New-York-based investment bank. While
at Furman Selz, Mr. Boxer participated in Watson's public financings and its
acquisition of Oclassen Pharmaceuticals, Inc. Mr. Boxer received a M.B.A. from
the University of Chicago in 1991.
Allen Y. Chao, Ph.D.
Allen Chao, age 53, a co-founder of the Company, has been Chief Executive
Officer of the Company since 1985, Chairman of the Company since May 1996 and
President of the Company since February 1, 1998. Dr. Chao also serves on the
Board of Directors of Somerset. Dr. Chao served as Director of Pharmaceutical
Technology and Packaging Development at Searle Laboratories, Inc. from
September 1979 to August 1983, where he had overall responsibility for new
product implementation and new pharmaceutical technology development. He
received a Ph.D. in industrial and physical pharmacy from Purdue University in
1973.
Robert C. Funsten
Robert C. Funsten, age 39, has served as Vice President, General Counsel and
Secretary of the Company since December 1998. Mr. Funsten was the Vice
President, Legal Affairs of the Company from July 1998 to December 1998.
Before joining the Company, Mr. Funsten was the Vice President and General
Counsel of Chiron Vision Corporation, an ophthalmic surgical device company,
from August 1995 to June 1998 and previously served as its Vice President and
Corporate Counsel from November 1993 to August 1995. Prior to joining Chiron
Vision Corporation, Mr. Funsten was in private practice at Stradling, Yocca,
Carlson & Rauth. Mr. Funsten received a J.D. from Stanford School of Law in
1986.
David C. Hsia
David Hsia, age 54, has served as Watson's Senior Vice President of
Scientific Affairs since May 1995 and has been a Vice President of Watson
since 1985. Dr. Hsia is also co-founder of the Company. He has been involved
in the development of pharmaceutical formulations for oral contraceptives,
sustained-release products and novel dosage forms. Dr. Hsia received a Ph.D.
in industrial and physical pharmacy from Purdue University in 1975. Dr. Hsia
is Dr. Chao's brother-in-law.
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<PAGE>
G. Frederick Wilkinson
G. Frederick Wilkinson, age 42, has been Vice President of Watson
Pharmaceuticals, Inc. since July, 1997 and Executive Vice President Sales &
Marketing of Watson Laboratories, Inc. since July 1996. Mr. Wilkinson also
serves as a director of Somerset. Prior to his employment with Watson, Mr.
Wilkinson was the President and General Manager of Creighton Pharmaceuticals,
a wholly owned subsidiary of Sandoz Pharmaceuticals, Inc. ("Sandoz") from 1994
to 1996. Prior to that, he held various marketing management positions at
Sandoz since 1980. Mr. Wilkinson received his M.B.A. from Capital University
in 1984 and his B.S. in Pharmacy from Ohio Northern University in 1979.
The executive officers of the Company are appointed annually by the Board of
Directors, hold office until their successors are chosen and qualify, and may
be removed at any time by the affirmative vote of a majority of the Board. The
Company has employment agreements with each of the executive officers except
Mr. Wilkinson. David C. Hsia is the brother-in-law of Allen Chao. There are no
other family relationships between any director and executive officer of the
Company.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock began trading on the New York Stock Exchange on
September 17, 1997 under the symbol "WPI". Previously, the Company's common
stock traded on the Nasdaq National Market under the symbol "WATS". The
following table sets forth the quarterly high and low share price information
for the years ended December 31, 1997 and 1998, as adjusted to retroactively
reflect the October 1997 two-for-one stock split in the form of a 100% stock
dividend:
<TABLE>
<CAPTION>
1997, by quarter High Low
---------------- ------ ------
<S> <C> <C>
First...................................................... $23.06 $17.69
Second..................................................... $22.25 $16.00
Third...................................................... $30.38 $21.63
Fourth..................................................... $34.13 $27.00
<CAPTION>
1998, by quarter
----------------
<S> <C> <C>
First...................................................... $42.94 $30.50
Second..................................................... $49.50 $36.25
Third...................................................... $52.88 $40.25
Fourth..................................................... $63.00 $42.00
</TABLE>
As of March 15, 1999, there were approximately 11,000 holders of record of
the Company's common stock, which does not include those who held in street or
nominee name.
Since its initial public offering in February 1993, the Company has not paid
a cash dividend on its common stock and does not anticipate paying dividends
in the foreseeable future.
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<PAGE>
PART II
ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA(1)
<TABLE>
<CAPTION>
For the Years Ended December 31,
--------------------------------------------------
1998 1997 1996 1995 1994
---------- -------- -------- -------- --------
(In Thousands, Except Earnings Per Share)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED INCOME
STATEMENT DATA:
Product sales, net......... $ 556,148 $324,015 $223,639 $170,227 $127,894
Cost of sales.............. 208,657 125,057 101,921 81,417 62,495
---------- -------- -------- -------- --------
Gross profit............ 347,491 198,958 121,718 88,810 65,399
---------- -------- -------- -------- --------
Royalty income............. -- 14,249 27,162 22,247 1,209
---------- -------- -------- -------- --------
Operating expenses:
Research and
development............. 30,825 18,055 22,895 24,562 23,525
Selling, general and
administrative.......... 88,435 50,937 38,891 34,873 30,368
Amortization of product
rights and goodwill..... 22,469 7,213 386 306 --
Charge for acquired in-
process research and
development(2).......... 13,000 -- -- -- --
Merger expenses(3)....... -- 14,718 -- 13,939 --
---------- -------- -------- -------- --------
Total operating
expenses............... 154,729 90,923 62,172 73,680 53,893
---------- -------- -------- -------- --------
Operating income........ 192,762 122,284 86,708 37,377 12,715
---------- -------- -------- -------- --------
Other income (expense):
Equity in earnings of
joint ventures.......... 6,789 10,694 17,909 22,766 24,968
Investment and other
income(4)............... 6,588 11,967 10,282 13,387 8,421
Interest expense......... (7,063) (347) (421) (482) (525)
Gain from legal
settlement(5)........... -- -- -- -- 2,299
---------- -------- -------- -------- --------
Total other income,
net.................... 6,314 22,314 27,770 35,671 35,163
---------- -------- -------- -------- --------
Income before income tax
provision.............. 199,076 144,598 114,478 73,048 47,878
Provision for income
taxes..................... 78,247 54,414 35,916 24,867 10,853
---------- -------- -------- -------- --------
Net income.............. $ 120,829 $ 90,184 $ 78,562 $ 48,181 $ 37,025
========== ======== ======== ======== ========
Basic earnings per
share.................. $ 1.36 $ 1.04 $ 0.92 $ 0.58 $ 0.45
========== ======== ======== ======== ========
Diluted earnings per
share.................. $ 1.32 $ 1.01 $ 0.89 $ 0.56 $ 0.44
========== ======== ======== ======== ========
Weighted average shares
outstanding, no dilution.. 89,078 86,991 85,028 83,317 81,849
========== ======== ======== ======== ========
Weighted average shares
outstanding, diluted
basis..................... 91,593 89,325 88,081 85,515 83,563
========== ======== ======== ======== ========
<CAPTION>
AS OF DECEMBER 31,
--------------------------------------------------
1998 1997 1996 1995 1994
---------- -------- -------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET
DATA:
Current assets............. $ 293,255 $246,789 $326,930 $235,398 $207,467
Working capital............ 198,474 146,949 293,675 195,735 179,132
Total assets............... 1,070,043 755,005 473,581 364,879 299,121
Long-term debt and other... 149,872 2,385 3,864 4,464 20,782
Liability from acquisition
of product rights......... 50,000 95,000 -- -- --
Deferred tax liabilities... 54,512 36,887 12,226 -- --
Total stockholders'
equity.................... 750,478 565,034 423,835 320,752 250,004
</TABLE>
19
<PAGE>
- --------
(1) The Company merged with Circa Pharmaceuticals, Inc. ("Circa"), in July
1995, with Oclassen Pharmaceuticals, Inc. ("Oclassen"), in February 1997,
and with Royce, in April 1997. These transactions were accounted for as
poolings of interests, and accordingly, the consolidated financial data
include Circa, Oclassen, and Royce for all periods presented.
In October 1997, the Company effected a two-for-one stock split in the form
of a 100% stock dividend. Share and per share amounts for all reported
periods have been restated to reflect the stock split.
(2) The charge for acquired in-process research and development relates to
the Company's February 1998 acquisition of Rugby. This charge is
discussed further in Note 2 to the consolidated financial statements.
(3) Merger expenses of $13.9 million in 1995 and $14.7 million in 1997 relate
to the Company's acquisitions of Circa in 1995 and Oclassen and Royce in
1997.
(4) Included in investment and other income for the years ended December 31,
1995 and 1994 were gains from the sale of common stock of Marsam
Pharmaceuticals, Inc. ("Marsam") of $6.2 million and $3.2 million,
respectively. The Company has no remaining investment in Marsam.
(5) The gain from legal settlement resulted from the settlement of certain
lawsuits which Circa was a defendant. All of these lawsuits were settled
by the first quarter of 1996.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Except for the historical information contained herein, this report,
including the following discussion, contains forward-looking statements that
involve risks and uncertainties. Such risks and uncertainties are discussed in
this report and in the cautionary statement on page 2 of this Form 10-K.
GENERAL
The Company derives its revenues from the development, manufacture and sale
of pharmaceutical products. From the Company's founding in 1983 until 1996,
revenues were generated primarily from sales of off-patent versions of branded
pharmaceutical products. Since 1997, Watson has made significant investments
in branded pharmaceutical businesses and products. The Company believes that
branded pharmaceutical products generally offer stronger proprietary positions
and provide more consistent profit margins than off-patent pharmaceutical
products. Although the Company has diversified its product portfolio with
branded products, off-patent products remain an integral component of its
overall business strategy. Through internal product development and
acquisitions, the Company continues to expand its off-patent product
offerings. Watson will continue to consider acquisitions of complementary
products and businesses as a means of broadening its off-patent and branded
product portfolio.
ACQUISITIONS IN 1999 AND 1998
Acquisition of TheraTech, Inc. ("TheraTech")--Watson completed its
acquisition of TheraTech in January 1999. TheraTech is a leading drug-delivery
company that developed, manufactured and marketed innovative products based on
its patented and proprietary technologies and systems. Under the terms of the
TheraTech merger agreement, each share of TheraTech common stock was converted
into the right to receive 0.2663 of a share of the Company's common stock.
Accordingly, the Company issued approximately 5.8 million common shares with a
market value on the date of acquisition of approximately $329.0 million in
exchange for all of the outstanding common shares of TheraTech. The
acquisition qualified as a tax-free merger for federal income tax purposes and
will be accounted for as a pooling of interests. The Company's 1998
consolidated financial statements do not reflect the 1999 acquisition of
TheraTech. In the first quarter of 1999, Watson expects to incur a one-time
charge related to this acquisition of approximately $20.0 million. This charge
will include investment banking fees, professional fees and other acquisition
and consolidation-related costs.
20
<PAGE>
1998 acquisition of oral contraceptive products from Searle--In November
1998, Watson acquired from Searle the U.S. rights to three oral contraceptive
products, Tri-Norinyl(R), Norinyl(R) and Brevicon(R), for $120.0 million in
cash. In connection with the acquisition, Watson and Searle entered into a
supply agreement whereby Watson has the right to purchase the products from
Searle in finished form for two years and in bulk form for an additional one-
year period.
Acquisition of Rugby--In February 1998, Watson acquired Rugby from Hoechst
Marion Roussel, Inc. Rugby developed, manufactured, and marketed a wide array
of off-patent pharmaceutical products. Under the terms of the acquisition
agreement, the Company acquired Rugby and its abbreviated new drug
applications, which included several licensed products, plus Rugby's sales and
marketing operations for U.S. off-patent and over-the-counter pharmaceutical
products. Rugby's product development group and product development pipeline
were also acquired in the transaction. The Company paid approximately $67.5
million in cash at closing and agreed to contingent payments based on future
sales and operating results. The acquisition was accounted for as a purchase
and Rugby's results of operations have been recorded in the Company's
consolidated financial statements since the date of acquisition. A charge of
$13.0 million for acquired in-process research and development was recorded in
the Rugby acquisition. This charge is discussed further in Note 2 to the
consolidated financial statements.
ACQUISITIONS IN 1997 AND EARLIER YEARS
1997 acquisition of oral contraceptive products from Searle--In October
1997, the Company acquired the U.S. rights to certain existing and future
Searle branded off-patent oral contraceptive products. In accordance with this
agreement, cash payments of $51.5 million and $85.0 million were made to
Searle in 1998 and 1997, respectively. Watson and Searle entered into a supply
agreement whereby Watson has the right to purchase the products for two years
from the date of acquisition and, at the Company's election, for an additional
two-year period. Payment for future products is contingent and due upon
receipt of FDA approval. If the FDA approves these future products, the
maximum aggregate acquisition cost for the remaining future products will be
approximately $33.8 million plus certain contingent payments based on the
technology transfer and net aggregate annual sales of certain acquired
products.
Acquisition of product rights to Dilacor XR(R)--In June 1997, the Company
acquired from Rhone-Poulenc Rorer Pharmaceuticals, Inc. ("RPR") the exclusive
U.S. and certain worldwide marketing, sales, and distribution rights to
Dilacor XR(R) for $190.0 million in cash and future royalties. Watson and RPR
entered into a supply agreement whereby Watson has the right to purchase
finished products from RPR through June 1999 and for an additional one-year
period under certain conditions. Prior to the acquisition of the rights to
Dilacor XR(R), the Company earned royalties from RPR sales of Dilacor XR(R).
The Company earned royalties from this product of $14.2 million for the first
six months of 1997 and $27.2 million for the full year of 1996. Dilacor XR(R)
has been available in the U.S. for the treatment of hypertension since June
1992 and was approved for the treatment of chronic stable angina in March
1995. Due to off-patent competition, the Company's product sales and gross
profit from Dilacor XR(R) are likely to continue to decline in future periods.
Acquisition of Royce--In April 1997, the Company acquired Royce for
approximately 5.2 million shares of its common stock having a market value of
approximately $98.0 million at the date of acquisition. Royce developed and
manufactured off-patent prescription drugs in solid dosage forms (tablets and
capsules). The acquisition was accounted for as a pooling of interests and
qualified as a tax-free merger for federal income tax purposes.
Acquisition of Oclassen--In February 1997, the Company acquired Oclassen for
approximately 6.6 million shares of its common stock having a market value of
approximately $135.0 million at the date of acquisition. The acquisition was
accounted for as a pooling of interests for accounting purposes and qualifies
as a tax-free merger for federal income tax purposes. Oclassen marketed
dermatology products used to prevent and treat skin diseases. In connection
with the acquisition, the Company obtained the rights to the following five
Oclassen products: Monodox(R) (doxycycline monohydrate), Condylox(R)
(podofilox 0.5%), Cordran(R) (flurandrenolide), Cinobac(R) (cinoxacin) and
Cormax(TM) (clobetasol propionate).
21
<PAGE>
Acquisition of Circa--In July 1995, the Company acquired Circa for
approximately 37.4 million shares of its common stock having a market value of
approximately $698.0 million at the date of acquisition. Circa manufactured
off-patent pharmaceutical products and held investments in Somerset
Pharmaceuticals, Inc. ("Somerset") and Andrx Corporation ("Andrx"). The
acquisition qualified as a tax-free merger for federal income tax purposes and
was accounted for as a pooling of interests.
OTHER SIGNIFICANT INVESTMENTS AND JOINT VENTURES
Somerset joint venture--The Company owns 50% of the outstanding shares of
Somerset, which markets the product Eldepryl(R) used for the treatment of
Parkinson's disease. Somerset is also developing additional indications for
selegiline (the active compound of Eldepryl(R)), using a transdermal delivery
system. The Company recorded equity in earnings from this joint venture of
$7.4 million in 1998, $12.7 million in 1997 and $20.1 million in 1996. The
introduction of off-patent competition and Somerset's increased research and
development spending in support of various clinical trials have significantly
reduced Somerset's earnings. Management expects the Company's earnings from
Somerset to continue to decline.
Investment in Andrx--In 1994, the Company acquired a 7.5% interest in Andrx
(Nasdaq:ADRX), a drug-delivery company utilizing controlled-release
technologies to develop oral pharmaceutical products. Watson increased its
ownership of Andrx in October 1995 and in June 1997. At December 31, 1998, the
Company owned 2.7 million common shares of Andrx, which represented
approximately 17.7% of the total Andrx common shares outstanding. The Company
also has a warrant to acquire 337,100 shares of Andrx, exercisable in whole or
in part until July 8, 1999 at an exercise price of $8.90 per share. Watson
accounts for its investment in Andrx using the cost method, adjusted to fair
value. See Item 7A--Quantitative and Qualitative Disclosures About Market Risk
and Note 4 to the consolidated financial statements for further discussion.
QUARTERLY FLUCTUATIONS
Watson's quarterly earnings have fluctuated in the past, and may continue to
fluctuate. The Company believes such fluctuations are primarily due to new-
product introductions and to a variety of additional factors including, but
not limited to, purchasing practices of the Company's customers, market
acceptance of Watson's products, the impact of competitive products and
pricing and the timeliness with which regulatory authorizations and product
roll-out may be achieved.
22
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
The following table presents the Company's consolidated statements of income
for each of the three years ended December 31, 1998, 1997 and 1996, in
thousands of dollars and as percentages of product sales:
<TABLE>
<CAPTION>
For the Years Ended December 31,
-------------------------------------------------
1998 1997 1996
--------------- --------------- ---------------
$ % $ % $ %
-------- ----- -------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Product sales, net $556,148 100.0% $324,015 100.0% $223,639 100.0%
Cost of sales............... 208,657 37.5 125,057 38.6 101,921 45.6
-------- ----- -------- ----- -------- -----
Gross profit.............. 347,491 62.5 198,958 61.4 121,718 54.4
-------- ----- -------- ----- -------- -----
Royalty income.............. -- -- 14,249 4.4 27,162 12.1
-------- ----- -------- ----- -------- -----
Operating expenses:
Research and development... 30,825 5.6 18,055 5.6 22,895 10.2
Selling, general and
administrative............ 88,435 15.9 50,937 15.8 38,891 17.3
Amortization............... 22,469 4.0 7,213 2.2 386 0.2
Charge for acquired in-
process
research and development.. 13,000 2.3 -- -- -- --
Merger expenses............ -- -- 14,718 4.5 -- --
-------- ----- -------- ----- -------- -----
Total operating expenses.. 154,729 27.8 90,923 28.1 62,172 27.7
-------- ----- -------- ----- -------- -----
Operating income.......... 192,762 34.7 122,284 37.7 86,708 38.8
-------- ----- -------- ----- -------- -----
Other income (expense):
Equity in earnings of joint
ventures.................. 6,789 1.2 10,694 3.3 17,909 8.0
Investment and other
income.................... 6,588 1.2 11,967 3.7 10,282 4.6
Interest expense........... (7,063) (1.3) (347) (0.1) (421) (0.2)
-------- ----- -------- ----- -------- -----
Total other income, net... 6,314 1.1 22,314 6.9 27,770 12.4
-------- ----- -------- ----- -------- -----
Income before income tax
provision................ 199,076 35.8 144,598 44.6 114,478 51.2
Provision for income taxes.. 78,247 14.1 54,414 16.8 35,916 16.1
-------- ----- -------- ----- -------- -----
Net income................ $120,829 21.7% $ 90,184 27.8% $ 78,562 35.1%
======== ===== ======== ===== ======== =====
</TABLE>
YEARS ENDED DECEMBER 31, 1998 AND 1997
Product sales for the year ended December 31, 1998 were $556.1 million
compared to $324.0 million for the year ended December 31, 1997, an increase
of $232.1 million or 72%. This sales increase was due primarily to i)
increased sales of certain core off-patent and branded products, ii) increased
sales of off-patent products obtained through the Rugby acquisition, and iii)
increased sales of branded products, primarily as a result of the Dilacor
XR(R) acquisition in June 1997 and the Searle oral contraceptive products
which were purchased in October 1997.
The Company earned royalties of $14.2 million in 1997 from RPR sales of
Dilacor XR(R). Subsequent to Watson's June 1997 purchase of the Dilacor XR(R)
product rights, no further royalties were earned.
Research and development expenses increased to $30.8 million in 1998 from
$18.1 million in 1997. This increase was due primarily to the 1998 acquisition
of Rugby's off-patent product development group and increased spending by the
Company's existing development groups.
Selling, general and administrative expenses increased to $88.4 million in
1998 from $50.9 million in 1997. The increase consists of a $30.6 million
increase in sales and marketing expenses and a $6.9 million increase in
general and administrative costs. The increased sales and marketing expenses
were primarily the result of increased sales force personnel costs,
advertising and other promotional expenses incurred in support of the
Company's branded products. General and administrative costs increased during
1998 as a result of increased staffing in certain administrative areas to
support the Company's growth. However, as a percentage of net sales, general
and administrative costs decreased to 3.6% in 1998 from 4.1% in 1997.
23
<PAGE>
Amortization expense increased to $22.5 million in 1998 from $7.2 million in
1997 due to the product right acquisitions (Dilacor XR(R) and Searle oral
contraceptive products) and goodwill recorded in the Rugby acquisition.
In connection with the acquisition of Rugby during the first quarter of
1998, the Company recorded a special charge of $13.0 million for the write-off
of in-process research and development associated with Rugby's wholly owned
subsidiary, Chelsea Laboratories, Inc. Watson, in conjunction with an
independent valuation firm, based this charge on an assessment of the value of
purchased research and development at Rugby. This charge is discussed further
in Note 2 to the consolidated financial statements. No such charge was
incurred in 1997.
In 1997, the Company recorded one-time charges of $14.7 million for costs
incurred in connection with the mergers of Royce and Oclassen. These costs
included investment banking fees and other merger-related expenses.
Equity in earnings from joint ventures decreased $3.9 million to $6.8
million in 1998 from $10.7 million in 1997, due primarily to lower earnings
from Somerset. The decrease in Somerset earnings is due in part to increased
competition with respect to Eldepryl(R) (Somerset's sole product) and
increased research and development spending in support of various clinical
trials. Management expects the Company's earnings from Somerset to continue to
decline.
Investment and other income decreased to $6.6 million in 1998 from $12.0
million in 1997 due to lower average cash and marketable securities balances
in 1998. The lower average cash and marketable securities balances in 1998
were due to the Company's acquisition-related activities.
Interest expense during 1998 increased to $7.1 million from $347,000 in 1997
as a result of the Company's $150.0 million senior debt issuance in May 1998.
These notes have a stated annual interest rate of 7 1/8% and were sold at a
discount to yield an effective annual interest rate of 7 1/4% to the Company.
The provision for income taxes increased to $78.2 million in 1998, compared
to $54.4 million in 1997. The effective income tax rate was 39% and 38% for
the years ended December 31, 1998 and 1997, respectively. The increase in the
Company's effective income tax rate was due primarily to the non-deductibility
for income tax purposes of the $13.0 million in-process research and
development charge incurred as a result of Watson's acquisition of Rugby.
YEARS ENDED DECEMBER 31, 1997 AND 1996
Revenues for the year ended December 31, 1997 were $338.3 million compared
to $250.8 million for the year ended December 31, 1996, an increase of $87.5
million or 34.9%. The increase in revenues was composed of a $100.4 million
increase in product sales, partially offset by a $12.9 million decrease in
royalty income. The increase in product sales was largely due to sales of
Dilacor XR(R), which was purchased from RPR in June 1997. The Company also
experienced increased sales of dermatology products, oral contraceptives, core
off-patent products and new products approved or acquired during the year.
These sales increases were partially offset by decreased sales of certain
strengths in the Company's hydrocodone product line.
Royalty income decreased $12.9 million or 47.5% in 1997 as compared with
1996 due to the Company's June 1997 acquisition from RPR of the Dilacor XR(R)
product rights. Following this acquisition, no further royalties were earned.
Gross profit margins increased to 61.4% in 1997 from 54.4% in 1996. The
increase in gross profit margins was due largely to sales of Dilacor XR(R),
higher sales of branded dermatology products and sales of products introduced
in 1997. The increased gross profit margins from these products was partially
offset by reduced gross profit margins of certain core off-patent products.
Research and development expenses decreased to $18.1 million in 1997 from
$22.9 million in 1996. Following the mergers with Royce and Oclassen, the
Company consolidated certain research and development functions and eliminated
duplicate programs.
24
<PAGE>
Selling, general and administrative expenses increased to $50.9 million in
1997 from $38.9 million in 1996. The increase consists of a $16.8 million
increase in sales and marketing expenses and a $4.8 million decrease in
general and administrative costs. The Company incurred increased sales and
marketing costs as it expanded its marketing efforts for branded products. The
Company increased its sales force from approximately 20 representatives in
late 1996 to more than 300 at December 31, 1997.
As a result of the mergers of Royce and Oclassen with Watson, and the
subsequent consolidation of many of the administrative functions, the Company
has experienced a decrease in its general and administrative expenses. As a
percentage of net sales, general and administrative costs decreased from 8.1%
in 1996 to 4.1% in 1997. This decrease reflects efficiencies achieved
following the mergers and the fact that the Company's sales growth outpaced
the growth in administrative costs.
Amortization expense in 1997 increased to $7.2 million from $386,000 due to
several significant product right acquisitions during the year. The Company
amortizes these acquired product rights over 17 years.
In 1997, the Company recorded one-time charges of $14.7 million for costs
incurred in connection with the mergers with Royce and Oclassen. These costs
included investment banking fees and other merger-related expenses. No such
expenses were incurred in 1996.
Equity in earnings from joint ventures decreased $7.2 million or 40.2% to
$10.7 million in 1997 compared to $17.9 million in 1996, due primarily to
lower earnings from Somerset. The decrease in Somerset earnings is due in part
to the loss of exclusivity for Eldepryl(R) in June 1996. During 1997 and 1996,
a number of competitors introduced off-patent tablets to compete with
Eldepryl(R) capsules. Increased competition and research and development
spending in support of various clinical trials have significantly reduced
Somerset's contribution to the Company's operating results.
Investment and other income increased 16.5% to $12.0 million in 1997 from
$10.3 million in 1996 due to higher average cash and marketable securities
balances in 1997.
The provision for income taxes increased to $54.4 million in 1997, compared
to $35.9 million in 1996. The effective income tax rate was 38% and 31% for
the years ended December 31, 1997 and 1996, respectively. The increase in the
Company's effective income tax rate was due primarily to the non-deductibility
of a significant portion of merger expenses incurred in 1997 and lower
earnings from Somerset which are partially exempt from tax.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital increased to $198.5 million at December 31,
1998 from $146.9 million at December 31, 1997. This $51.6 million increase was
primarily due to cash flows from operations ($117.7 million) and proceeds from
the offering of senior notes ($148.4 million), offset by the acquisition of
women's health products ($120.0 million), the acquisition of Rugby ($67.5
million) and capital expenditures ($26.5 million). The Company's $26.5 million
of capital investment in 1998 consisted primarily of additions to land,
buildings and manufacturing and laboratory equipment. Watson expects to invest
approximately $40.0 million in capital expenditures during 1999.
In April 1998, the Company filed a registration statement with the
Securities and Exchange Commission which allows Watson to raise up to $300.0
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. In May 1998, pursuant to this
registration statement, the Company issued $150.0 million of 7 1/8% senior
unsecured notes (the "Senior Notes"). The Company had notes payable
outstanding of approximately $150.9 million at December 31, 1998. These notes
consist of the Senior Notes and other notes payable of approximately $2.4
million. The Senior Notes are due May 2008, with interest-only payments due
semi-annually in November and May.
25
<PAGE>
In January 1999, the Company made a scheduled payment of $30.0 million
pursuant to the purchase of the product rights to Dilacor XR(R). Additional
payments of $15.0 million and $5.0 million will be due in January 2000 and
January 2001, respectively.
The Company's cash and marketable securities totaled $72.7 million at
December 31, 1998. Management believes that the Company's cash and marketable
securities, plus cash flow from operations will be sufficient to meet its
normal operating requirements during the coming year.
The Company continues to review additional opportunities to acquire or
invest in companies, technologies, product rights and other investments that
are compatible with its existing business. Watson could use sources other than
cash, such as offerings under the registration statement discussed herein or
other such registration statements, to fund additional acquisitions or
investments. If any such acquisition or investment is completed, the Company's
operating results and financial condition could change materially in future
periods.
Management believes inflation does not have, and has not had, a significant
impact on the Company's revenues or operations.
YEAR 2000 COMPLIANCE PROGRAM
Watson has instituted a multi-phase program to (a) evaluate whether its
computerized information systems are able to interpret dates beyond the year
1999, (b) to respond to and remedy any inadequacies which may emerge from the
evaluation process, (c) to investigate the Year 2000 readiness of third
parties having material relationships with the Company and (d) to develop a
contingency plan for any Year 2000 date sensitive systems of the Company,
which may not be immediately remedied (the "Year 2000 Compliance Program"). An
inability to interpret dates beyond 1999 could cause computer system errors or
system failure, potentially leading to disruptions in operations. The
aggregate cost of Watson's Year 2000 Compliance Program is expected to be
approximately $500,000. The scope of the Company's Year 2000 Compliance
Program was initially focused on Watson's primary business application
systems, including manufacturing, sales, distribution and finance. The
evaluation and remedy phases have been completed for these business units and
management believes that these systems are currently Year 2000 compliant.
Additionally, the Company is evaluating all internal network systems, personal
computers and telecommunications systems. These systems are expected to be
Year 2000 compliant by approximately April 1999. In the third quarter of 1998,
Watson began the third phase in its Year 2000 Compliance Program, which is a
review of external entities having material relationships with the Company.
Communications with these entities is underway and the Company expects this
phase to be completed by June 1999.
Watson is developing a contingency plan for unanticipated Year 2000 exposure
as part of its overall efforts to ensure that its systems are Year 2000
compliant on a timely basis. This contingency plan includes the procurement of
additional raw material, packaging material and finished goods inventory, the
installation of back-up power generation systems and the implementation of
parallel procedures in key operating areas, among other measures.
The Company's management believes that an adequate program is in place in
order to be Year 2000 compliant, however, there can be no assurance that this
program ultimately will be successful. Any unanticipated failure in the
Company's internal systems to be Year 2000 compliant, or any failure by a
material third party to bring its own systems into compliance, could have a
material adverse effect on Watson's business, its financial position and its
results of operations.
The foregoing represents a Year 2000 readiness disclosure entitled to
protection as provided in the Year 2000 Information and Readiness Disclosure
Act.
26
<PAGE>
NEW ACCOUNTING PRONOUNCEMENTS
In 1998, the Company adopted Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information," (FAS
131). FAS 131 supercedes FAS 14, "Financial Reporting for Segments of a
Business Enterprise," and replaces the "industry segment" approach with the
"management" approach. The management approach designates the internal
organization that is used by management for making operating decisions and
assessing performance as the source of the Company's reportable segments.
Watson has one reportable segment, pharmaceutical products.
In 1998, the Company adopted Financial Accounting Standards No. 130,
"Reporting Comprehensive Income," (FAS 130). FAS 130 established new rules for
the reporting and display of comprehensive income and its components in the
financial statements. Comprehensive income includes all changes in equity
during a period except those resulting from investments by and distributions
to the Company's stockholders. Watson's comprehensive income is comprised of
net income and the unrealized gain on equity securities. The adoption of FAS
130 had no effect on the Company's consolidated results of operations,
financial position or cash flows.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." This SOP provides guidance
on accounting for certain costs in connection with obtaining or developing
computer software for internal use and requires that entities capitalize such
costs once certain criteria are met. The Company is required to adopt SOP 98-1
as of January 1, 1999.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Substantially all of the Company's cash equivalents and marketable
securities are at fixed interest rates and, as such, the fair value of these
instruments is affected by changes in market interest rates. However, all of
the Company's cash equivalents and marketable securities mature within one
year. As a result, the Company believes that the market risk arising from its
holding of these financial instruments is minimal.
The Company's investment in Andrx, which was stated on Watson's balance
sheet at a fair value of $138.0 million at December 31, 1998, is composed of
2.7 million shares of Andrx common stock. Andrx' common stock is a publicly
traded equity security, and therefore, has exposure to price risk. The
following table sets forth the Andrx quarterly high and low share price
information for 1997 and 1998:
<TABLE>
<CAPTION>
1997, by quarter High Low
---------------- ------ ------
<S> <C> <C>
First...................................................... $26.75 $15.25
Second..................................................... $38.75 $20.50
Third...................................................... $45.63 $31.75
Fourth..................................................... $47.00 $28.75
<CAPTION>
1998, by quarter
----------------
<S> <C> <C>
First...................................................... $38.25 $24.50
Second..................................................... $42.63 $28.13
Third...................................................... $43.00 $25.88
Fourth..................................................... $51.69 $24.63
</TABLE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is contained in the financial
statements set forth in Item 14(a) under the caption "Consolidated Financial
Statements" as a part of this report.
27
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no changes in or disagreements with accountants on
accounting or financial disclosure matters during the Company's fiscal years
ended December 31, 1998, 1997 and 1996.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors
The information concerning directors of the Company required under this Item
is incorporated herein by reference to the Company's definitive proxy
statement pursuant to Regulation 14A, to be filed with the Commission not
later than 120 days after the close of the Company's fiscal year ended
December 31, 1998.
Executive Officers
The information concerning executive officers of the Company required under
this Item is provided under Item 4A.
ITEM 11. EXECUTIVE COMPENSATION
The information required under this Item is incorporated herein by reference
to the Company's definitive proxy statement pursuant to Regulation 14A, to be
filed with the Commission not later than 120 days after the close of the
Company's fiscal year ended December 31, 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required under this Item is incorporated herein by reference
to the Company's definitive proxy statement pursuant to Regulation 14A, to be
filed with the Commission not later than 120 days after the close of the
Company's fiscal year ended December 31, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required under this Item is incorporated herein by reference
to the Company's definitive proxy statement pursuant to Regulation 14A, filed
with the Commission within 120 days after the close of the Company's fiscal
year ended December 31, 1998.
28
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Consolidated Financial Statements
The following are included herein under Item 8:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Reports of Independent Accountants....................................... F-2
Consolidated Balance Sheets as of December 31, 1998 and 1997............. F-5
Consolidated Statements of Income for each of the three years in the
period ended December 31, 1998.......................................... F-6
Consolidated Statements of Stockholders' Equity for each of the three
years in the period ended December 31, 1998............................. F-7
Consolidated Statements of Cash Flows for each of the three years in the
period ended December 31, 1998.......................................... F-8
Notes to Consolidated Financial Statements............................... F-10
</TABLE>
(a)(2) Financial Statement Schedules
None.
All financial statement schedules are omitted because they are not
applicable or the required information is included in the Consolidated
Financial Statements or notes thereto.
(a)(3) Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
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 the
Registration Statement on Form S-4 (Reg. No. 333-68007) dated November 25, 1998,
and hereby incorporated by reference.
3.1 Articles of Incorporation of the Company and all amendments thereto, filed as
Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1995 and Exhibit 3.1(A) to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1996 and hereby incorporated by reference.
3.2 Registrant's By-laws, as amended as of December 11, 1998, filed as Exhibit 3.2 to
the Registrant's Registration Statement on Form S-8 (Reg. No. 333-70933) on
January 19, 1999 and hereby incorporated by reference.
4.1 Trust Indenture dated May 18, 1998 between the Company and First Union National
Bank, as Trustee for the issuance of the Company's Senior Unsecured Notes, filed
as Exhibit 4.1 to the Company's Registration Statement on Form S-3/A (Reg. No.
333-49079) on April 30, 1999 and hereby incorporated by reference.
4.2 Credit Agreement dated February 3, 1999 between Watson Pharmaceuticals, Inc. and
Mellon Bank N.A.
10.1 Lease between Westgate Associates and the Company dated October 1991 and
addendums thereto, filed as Exhibit 10.5 to the Company's Registration Statement
on Form S-1, Reg. No. 33-46229 ("33-46229") and hereby incorporated by
reference.
10.2 Industrial Real Estate Lease, as amended, dated August 8, 1995, between Hsi-
Hsiung Hsu Hwa Chao (Chao Family) Trust I and the Company, filed as Exhibit 10.1
to the Company's Quarterly Report on Form 10-Q for the quarter ended September
30, 1995 and hereby incorporated by reference.
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
10.3 Third Amendment to Industrial Real Estate Lease dated August 31, 1998, between
Hsi-Hsiung and Hsu Hwa Chao (Chao Family) Trust 1 and the Company.
10.4 Lease Agreement dated January 4, 1984 between LaSalle National Bank, as Trustee
under Trust Agreement dated March 2, 1997 and Modern Wholesale Drug Midwest,
Inc. d/b/a Rugby Laboratories, as amended.
10.5 Lease Agreement dated April 27, 1995 between Palmetto Lakes Realty Associates,
Inc. and Royce Laboratories, Inc., filed as Exhibit 10.7 to Royce Laboratories,
Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1995
and hereby incorporated by reference.
*10.6 1991 Stock Option Plan of the Company as revised, filed as Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995 and
hereby incorporated by reference.
*10.6(a) Amendment to the 1991 Stock Option Plan of the Company, filed as Exhibit 10.6(a)
to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
1996 and hereby incorporated by reference.
*10.6(b) Amendment to the 1991 Stock Option Plan of the Company, filed as Exhibit 10.6(a)
to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31,
1997 and hereby incorporated by reference.
*10.7 1995 Non-Employee Directors' Stock Option Plan, as amended, filed as Exhibit 10.2
to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
1995 and hereby incorporated by reference.
*10.8 Senior Executive Employment Agreement dated as of May 29, 1995 between the
Company and Allen Chao, filed as Exhibit 10.1 to 33-60211 and hereby
incorporated by reference.
*10.9 Senior Executive Employment Agreement dated as of May 29, 1995 between the
Company and David C. Hsia, filed as Exhibit 10.2 to 33-60211 and hereby
incorporated by reference.
*10.10 Employment Agreement dated as of July 27, 1998 between the Company and Michael E.
Boxer.
10.11 Release, Exit and Consulting Agreement between Alec D. Keith Ph.D. and the
Company, dated July 18, 1996, filed as Exhibit 10.15 to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1996 and hereby
incorporated by reference.
10.12 Intellectual Property Agreement between Alec D. Keith, Ph.D. and the Company
dated as of July 18, 1996, filed as Exhibit 10.15 to the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1996 and hereby incorporated
by reference.
*10.13 Consulting Agreement between Patrick J. McEnany and the Company dated January 31,
1998, and filed as Exhibit 10.20(a) to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1997 and hereby incorporated by
reference.
*10.14s Amendment to Stock Option Agreement between Patrick J. McEnany and the Company
dated January 29, 1998, and filed as Exhibit 10.20(b) to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1997 and hereby
incorporated by reference.
10.15 License Agreement between the Company and Rorer Pharmaceutical Products, Inc.,
dated June 30, 1997, filed as Exhibit 10.1 to the Company's Current Report 8-K
dated June 30, 1997 and hereby incorporated by reference.
10.16 Inventory Purchase Agreement between the Company and Rhone-Poulenc Rorer
Pharmaceuticals, Inc., dated June 30, 1997, filed as Exhibit 10.2 to the
Company's Current Report 8-K dated June 30, 1997 and hereby incorporated by
reference.
10.17 Manufacturing and Supply Agreement between the Company and Rhone-Poulenc Rorer
Pharmaceuticals, Inc., dated June 30, 1997, filed as Exhibit 10.3 to the
Company's Current Report on Form 8-K dated June 30, 1997 and hereby incorporated
by reference.
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
10.18 Agreement Regarding Partnership Termination by and among Rhone-
Poulenc Rorer Inc., Rhone-Poulenc Rorer Pharmaceuticals, Inc.,
Watson Pharmaceuticals, Inc., Circa Pharmaceuticals, Inc., and
BOL, Inc., dated June 30, 1997, filed as Exhibit 10.4 to the
Company's Current Report on Form 8-K dated June 30, 1997 and
hereby incorporated by reference.
10.19 Asset Purchase Agreement among the Company, G. D. Searle & Co. and
SCS Pharmaceuticals, dated September 30, 1997, filed as Exhibit
10.1 to the Company's Current Report on Form 8-K dated October
16, 1997 and hereby incorporated by reference.
10.20 Supply Agreement between the Company and G. D. Searle & Co., dated
October 16, 1997, filed as Exhibit 10.2 to the Company's Current
Report on Form 8-K dated October 16, 1997 and hereby incorporated
by reference.
10.21 Stock Purchase Agreement among the Company, Hoechst Marion
Roussel, Inc. and Marisub, Inc. dated August 25, 1997, filed as
Exhibit 10.27.
10.21(a) Amendment to Stock Purchase Agreement among the Company, Hoechst
Marion Roussel, Inc. and Marisub, Inc. dated November 26, 1997,
filed as Exhibit 10.27(a) to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1997 are hereby
incorporated by reference.
10.21(b) Second Amendment to Stock Purchase Agreement by and among the
Company, Hoechst Marion Roussel, Inc. and Marisub, Inc. dated
February 27, 1998, filed as Exhibit 10.27(b) to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
1997 are hereby incorporated by reference.
10.22 Supply and License Agreement by and between Hoechst Marion
Roussel, Inc. and The Rugby Group, Inc. dated February 27, 1998,
filed as Exhibit 10.28 to the Company's Annual Report on Form 10-
K for the fiscal year ended December 31, 1997 are hereby
incorporated by reference.
10.23 Contract Manufacturing Agreement by and between Hoechst Marion
Roussel, Inc. and The Rugby Group, Inc., dated February 27, 1998,
filed as Exhibit 10.29 to the Company's Annual Report on Form 10-
K for the fiscal year ended December 31, 1997, and hereby
incorporated by reference.
10.24 Asset Purchase Agreement by and between Watson Laboratories, Inc.
and G. D. Searle & Co. dated September 18, 1998 and filed as
Exhibit 10.1 to the Company's Report on Form 8-K dated November
18, 1998.
10.25 Supply Agreement by and between the Company and G. D. Searle & Co.
dated November 18, 1998 filed as Exhibit 10.2 to the Company's
Report on Form 8-K dated November 18, 1998.
22.1 Subsidiaries of the Company
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of Deloitte & Touche LLP.
23.3 Consent of Arthur Andersen LLP.
27.1 Financial Data Schedule (EDGAR version only).
</TABLE>
- --------
* Compensation Plan or Agreement
(b)Reports on Form 8-K:
1. On December 3, 1998, the Company filed a Form 8-K Report dated
November 18, 1998 to disclose its acquisition from G. D. Searle & Co. of
the U.S. rights to three branded oral contraceptives, Tri-Norinyl(R),
Brevicon(R) and Norinyl(R) for $120 million cash.
2. Subsequent to the end of the fiscal year, on January 29, 1999 the
Company filed a Form 8-K Report dated January 15, 1999 to announce
consummation of the Company's merger with TheraTech, Inc.
31
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
WATSON PHARMACEUTICALS, INC.
(Registrant)
/s/ Allen Y. Chao
By: _________________________________
Allen Y. Chao, Ph.D.
Chairman, President and Chief
Executive Officer
(Principal Executive Officer)
/s/ Michael E. Boxer
By: _________________________________
Michael E. Boxer
Chief Financial Officer
(Principal Financial Officer)
/s/ R. Chato Abad
By: _________________________________
R. Chato Abad
Vice President-Finance
(Principal Accounting Officer)
Date: March 30, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Allen Y. Chao Chairman, President and March 30, 1999
____________________________________ Chief Executive Officer
Allen Y. Chao, Ph.D.
/s/ Michael J. Fedida Director March 30, 1999
____________________________________
Michael J. Fedida
/s/ Michel J. Feldman Director March 30, 1999
____________________________________
Michel J. Feldman
/s/ Albert F. Hummel Director March 30, 1999
____________________________________
Albert F. Hummel
/s/ Alec D. Keith Director March 30, 1999
____________________________________
Alec D. Keith, Ph.D.
/s/ Ronald R. Taylor Director March 30, 1999
____________________________________
Ronald R. Taylor
/s/ Andrew L. Turner Director March 30, 1999
____________________________________
Andrew L. Turner
</TABLE>
32
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Reports Of Independent Accountants........................................ F-2
Consolidated Balance Sheets as of December 31, 1998 and 1997.............. F-5
Consolidated Statements of Income for each of the three years in the
period ended
December 31, 1998........................................................ F-6
Consolidated Statements of Stockholders' Equity for each of the three
years in the period
ended December 31, 1998.................................................. F-7
Consolidated Statements of Cash Flows for each of the three years in the
period ended
December 31, 1998........................................................ F-8
Notes to Consolidated Financial Statements................................ F-10
</TABLE>
All financial statement schedules are omitted because they are not applicable
or the required information is included in the Consolidated Financial
Statements or notes thereto.
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Watson Pharmaceuticals, Inc.
In our opinion, based upon our audits and the reports of other auditors, the
consolidated financial statements listed in the accompanying index on page F-1
present fairly, in all material respects, the financial position of Watson
Pharmaceuticals, Inc. and its subsidiaries at December 31, 1998 and 1997, and
the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We did not audit
the financial statements of Somerset Pharmaceuticals, Inc. (Somerset), an
entity which is 50% owned by the Company, as of December 31, 1997 and for the
years ended December 31, 1997 and 1996. The Company's investment in Somerset
aggregated $27,643,000 at December 31, 1997, and its equity in the earnings of
Somerset totaled $12,672,000 and $20,100,000 for the years ended December 31,
1997 and 1996, respectively. In addition, we did not audit the financial
statements of Oclassen Pharmaceuticals, Inc. (Oclassen), a wholly owned
subsidiary, for the year ended December 31, 1996, which statements reflect
total revenues of $34,421,000 for the year ended December 31, 1996. Those
statements were audited by other auditors whose reports thereon have been
furnished to us, and our opinion expressed herein, insofar as it relates to
the amounts included for Somerset and Oclassen, is based solely on the reports
of each of the respective other auditors. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits and the
respective reports of other auditors provide a reasonable basis for the
opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Los Angeles, California
February 17, 1999
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Somerset Pharmaceuticals, Inc.:
We have audited the accompanying consolidated balance sheets of Somerset
Pharmaceuticals, Inc. and subsidiaries as of December 31, 1997 and 1996, and
the related consolidated statements of income, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1997 (not
presented separately herein). These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Somerset Pharmaceuticals,
Inc. and subsidiaries as of December 31, 1997 and 1996, and the results of
their operations and their cash flows for each of the years in the period
ended December 31, 1997 in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Pittsburgh, Pennsylvania
February 4, 1998
F-3
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Oclassen Pharmaceuticals, Inc.:
We have audited the balance sheet of Oclassen Pharmaceuticals, Inc. (a
Delaware corporation) as of December 31, 1996, and the related statements of
income, stockholders' equity (deficit) and cash flows for the year then ended
(not presented herein). These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Oclassen Pharmaceuticals,
Inc. as of December 31, 1996, and the results of its operations and its cash
flows for the year then ended in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Oakland California
January 17, 1997
F-4
<PAGE>
WATSON PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
December 31,
-------------------
1998 1997
---------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................. $ 45,728 $ 82,837
Marketable securities...................................... 26,923 32,102
Accounts receivable, net of allowances for doubtful
accounts of $3,902 and $2,140............................. 97,227 65,068
Inventories................................................ 78,781 46,967
Prepaid expenses and other current assets.................. 14,962 416
Deferred tax assets........................................ 29,634 19,399
---------- --------
Total current assets...................................... 293,255 246,789
Property and equipment, net................................. 109,136 88,004
Investments and other assets................................ 193,151 131,083
Product rights and other intangibles, net................... 474,501 289,129
---------- --------
$1,070,043 $755,005
========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses...................... $ 63,792 $ 44,423
Income taxes payable....................................... -- 9,553
Current portion of long-term debt.......................... 989 864
Current liability from acquisition of product rights....... 30,000 45,000
---------- --------
Total current liabilities................................. 94,781 99,840
Long-term debt.............................................. 149,872 2,385
Long-term liability from acquisition of product rights...... 20,000 50,000
Deferred tax liabilities.................................... 54,512 36,887
---------- --------
Total liabilities......................................... 319,165 189,112
---------- --------
Commitments and contingencies
Minority interest........................................... 400 859
---------- --------
Stockholders' equity:
Preferred stock; no par value per share, 2,500,000 shares
authorized; none outstanding
Common stock; par value of $0.0033 per share, 500,000,000
shares authorized; issued: 89,508,079 shares in 1998 and
87,882,233 shares in 1997.................................. 295 290
Additional paid-in capital.................................. 293,672 256,682
Retained earnings........................................... 395,866 275,037
Accumulated other comprehensive income...................... 60,645 33,025
---------- --------
Total stockholders' equity................................ 750,478 565,034
---------- --------
$1,070,043 $755,005
========== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
WATSON PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Earnings per Share)
<TABLE>
<CAPTION>
For The Years Ended
December 31,
----------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Product sales, net............................... $556,148 $324,015 $223,639
Cost of sales.................................... 208,657 125,057 101,921
-------- -------- --------
Gross profit................................. 347,491 198,958 121,718
-------- -------- --------
Royalty income................................... -- 14,249 27,162
-------- -------- --------
Operating expenses:
Research & development......................... 30,825 18,055 22,895
Selling, general & administrative.............. 88,435 50,937 38,891
Amortization................................... 22,469 7,213 386
Charge for acquired in-process research and
development................................... 13,000 -- --
Merger expenses................................ -- 14,718 --
-------- -------- --------
Total operating expenses..................... 154,729 90,923 62,172
-------- -------- --------
Operating income............................. 192,762 122,284 86,708
-------- -------- --------
Other income (expense):
Equity in earnings of joint ventures........... 6,789 10,694 17,909
Investment and other income.................... 6,588 11,967 10,282
Interest expense............................... (7,063) (347) (421)
-------- -------- --------
Total other income, net...................... 6,314 22,314 27,770
-------- -------- --------
Income before income tax provision........... 199,076 144,598 114,478
Provision for income taxes....................... 78,247 54,414 35,916
-------- -------- --------
Net income................................... $120,829 $ 90,184 $ 78,562
======== ======== ========
Basic earnings per share..................... $ 1.36 $ 1.04 $ 0.92
======== ======== ========
Diluted earnings per share................... $ 1.32 $ 1.01 $ 0.89
======== ======== ========
Weighted average shares outstanding, no
dilution........................................ 89,078 86,991 85,028
======== ======== ========
Weighted average shares outstanding, diluted
basis........................................... 91,593 89,325 88,081
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
WATSON PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In Thousands)
<TABLE>
<CAPTION>
Accumulated
Additional Other Total
Common Stock Paid-in Comprehensive Retained Comprehensive Stockholders'
Shares Amount Capital Income Earnings Income Equity
------ ------ ---------- ------------- -------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1995................... 84,174 $278 $214,418 $ -- $106,291 $ (235) $320,752
Exercise of
options/warrants....... 1,259 4 9,331 -- -- -- 9,335
Tax benefits related to
exercise of options.... -- -- 7,762 -- -- -- 7,762
Net income.............. -- -- -- 78,562 78,562 -- 78,562
Other comprehensive
income:
Amortization of
unearned
compensation.......... -- -- -- 856 -- -- --
Unrealized gains on
securities............ -- -- -- 6,568 -- -- --
-------
Other comprehensive
income................ -- -- -- 7,424 -- 7,424 7,424
-------
Comprehensive income... -- -- -- 85,986 -- -- --
------ ---- -------- ------- -------- ------- --------
Balance at December 31,
1996................... 85,433 282 231,511 -- 184,853 7,189 423,835
Exercise of
options/warrants....... 2,449 8 14,289 -- -- -- 14,297
Tax benefits related to
exercise of options.... -- -- 10,882 -- -- -- 10,882
Net income.............. -- -- -- 90,184 90,184 -- 90,184
Unrealized gains on
securities............ -- -- -- 25,836 -- 25,836 25,836
-------
Comprehensive income... -- -- -- 116,020 -- -- --
------ ---- -------- ------- -------- ------- --------
Balance at December 31,
1997................... 87,882 290 256,682 -- 275,037 33,025 565,034
Exercise of
options/warrants....... 1,626 5 23,397 -- -- -- 23,402
Tax benefits related to
exercise of options.... -- -- 13,593 -- -- -- 13,593
Net income.............. -- -- -- 120,829 120,829 -- 120,829
Unrealized gains on
securities............ -- -- -- 27,620 -- 27,620 27,620
-------
Comprehensive income... -- -- -- 148,449 -- -- --
------ ---- -------- ------- -------- ------- --------
Balance at December 31,
1998................... 89,508 $295 $293,672 $ -- $395,866 $60,645 $750,478
====== ==== ======== ======= ======== ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
WATSON PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
For The Years Ended December
31,
------------------------------
1998 1997 1996
--------- --------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................... $ 120,829 $ 90,184 $ 78,562
--------- --------- --------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation............................... 8,848 7,381 7,283
Amortization............................... 22,469 7,213 1,342
Charge for acquired in-process research and
development............................... 13,000 -- --
Deferred income tax provision (benefit).... 1,593 (1,948) 20,399
Dividends received from Somerset........... -- 8,000 18,000
Equity in earnings of joint ventures....... (5,706) (9,012) (14,684)
Provision for (recovery of) doubtful
accounts and allowances................... 762 (66) 604
Tax benefits related to exercise of
options................................... 13,593 10,882 7,752
Changes in assets and liabilities, net of
acquisitions:
Accounts receivable....................... (16,955) (32,133) (1,857)
Royalty receivable........................ -- 5,554 2,651
Inventories............................... (18,311) (14,538) (2,332)
Prepaid expenses and other current
assets................................... (10,848) 5,965 (1,053)
Other assets.............................. (1,855) (2,155) (2,386)
Accounts payable and accrued expenses..... (133) 12,665 (4,867)
Income taxes payable...................... (9,553) 9,081 (2,512)
--------- --------- --------
Total adjustments....................... (3,096) 6,889 28,340
--------- --------- --------
Net cash provided by operating
activities........................... 117,733 97,073 106,902
--------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment.......... (26,467) (13,640) (12,375)
Purchase of marketable securities............ (69,000) (130,321) (840,969)
Proceeds from maturities of marketable
securities.................................. 73,192 179,118 801,179
Acquisitions of product rights............... (177,322) (144,171) --
Acquisitions of businesses................... (71,559) -- --
Investment in Andrx.......................... -- (15,307) --
Additions to investment in joint ventures.... (9,701) (6,496) ( 3,090)
--------- --------- --------
Net cash used in investing
activities........................... $(280,857) $(130,817) $(55,255)
--------- --------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
WATSON PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(In Thousands)
<TABLE>
<CAPTION>
For the Years Ended
December 31,
-----------------------------
1998 1997 1996
-------- --------- --------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt..... $148,418 $ -- $ 743
Principal payments on long-term debt......... (806) (1,640) (886)
Payments on liability for acquisition of
product rights.............................. (45,000) (55,000) --
Proceeds from exercises of stock options and
warrants.................................... 23,403 15,000 9,210
-------- --------- --------
Net cash provided by (used in) financing
activities................................ 126,015 (41,640) 9,067
-------- --------- --------
Net (decrease) increase in cash and cash
equivalents................................... (37,109) (75,384) 60,714
Cash and cash equivalents at beginning of
year.......................................... 82,837 158,221 97,507
-------- --------- --------
Cash and cash equivalents at end of year....... $ 45,728 $ 82,837 $158,221
======== ========= ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the years for:
Interest................................... $ 5,493 $ 336 $ 422
Income taxes............................... $ 82,917 $ 36,734 $ 10,376
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Acquisitions of product rights:
Fair value of assets acquired.............. $ -- $(294,171) $ --
Fair value of liabilities assumed.......... -- 150,000 --
-------- --------- --------
Net cash paid............................ $ -- $(144,171) $ --
-------- --------- --------
Acquisitions of businesses:
Fair value of assets acquired.............. $(97,323) $ -- $ --
Fair value of liabilities assumed.......... 25,764 -- --
-------- --------- --------
Net cash paid............................ $(71,559) $ -- $ --
-------- --------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
F-9
<PAGE>
WATSON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business and Significant Accounting Policies
Description of business and principles of consolidation
Watson Pharmaceuticals, Inc. ("Watson" or the "Company") is engaged in the
development, production, marketing and distribution of branded and off-patent
pharmaceutical products. The consolidated financial statements include the
accounts of wholly owned and majority-owned subsidiaries after elimination of
intercompany accounts and transactions. The preparation of consolidated
financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect
the reported amounts in the financial statements and accompanying notes.
Actual results could differ from those estimates.
The Company's significant wholly owned subsidiaries include Watson
Laboratories, Inc., Circa Pharmaceuticals, Inc. ("Circa"), Oclassen
Pharmaceuticals, Inc. ("Oclassen"), Royce Laboratories, Inc. ("Royce") and The
Rugby Group, Inc. ("Rugby"). Watson acquired certain of these subsidiaries
through acquisitions in 1998 and earlier years. See Note 2 for further
information on the Company's merger and acquisition activities.
Investments are accounted for under the equity method where the Company can
exert significant influence and ownership does not exceed 50% (primarily
Somerset Pharmaceuticals, Inc.) Investments in which the Company holds less
than a 20% interest and does not exert significant influence are accounted for
under the cost method, adjusted to fair value. The Company's investment in
Andrx Corporation ("Andrx") is accounted for under the cost method.
Cash equivalents and marketable securities
Cash equivalents are highly liquid investments with original maturities of
three months or less at the date of acquisition. Marketable securities consist
primarily of time deposits, commercial paper, U.S. and state and local
government debt with original maturities between three and twelve months.
The Company accounts for investments in accordance with Financial Accounting
Standards No. 115 (FAS 115), "Accounting for Certain Investments in Debt and
Equity Securities." Under FAS 115, debt securities that the Company does not
have the positive intent and ability to hold to maturity and all marketable
equity securities are carried at fair market value and are classified as
either trading or available-for-sale securities. All of the Company's cash
equivalents and marketable securities are classified as available-for-sale
securities. Unrealized gains or losses on these securities are excluded from
earnings and are reported as a separate component of stockholders' equity, net
of applicable income taxes, until realized. Realized gains and losses are
determined on the specific identification method and are reported in
investment and other income. Realized gains and losses were not material for
the years ended December 31, 1998, 1997 and 1996.
The fair value of cash, cash equivalents and marketable securities is
summarized as follows:
<TABLE>
<CAPTION>
December 31,
-----------------
1998 1997
-------- --------
(in thousands)
<S> <C> <C>
U.S. government debt..................................... $ 14,824 $ 27,996
State and local government debt.......................... 23,143 2,300
Corporate and other non-government debt.................. 7,317 45,972
Equity securities........................................ -- 3,006
Money market funds and cash.............................. 27,367 35,665
-------- --------
$ 72,651 $114,939
======== ========
</TABLE>
F-10
<PAGE>
WATSON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Fair value of financial instruments
The carrying amounts of cash and cash equivalents, marketable securities,
accounts receivable, accounts payable and accrued expenses approximate fair
value. The fair value of cash equivalents, marketable securities and the
Company's investment in Andrx is based on quoted market prices at December 31,
1998 and 1997.
Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or
market.
Property and equipment
Property and equipment are stated at cost, less accumulated depreciation.
Major renewals and improvements are capitalized, while routine maintenance and
repairs are expensed as incurred. At the time properties are retired from
service, the cost and accumulated depreciation are removed from the respective
accounts and the related gains or losses are reflected in income.
Depreciation expense is computed principally on the straight-line basis,
over estimated useful lives of two to ten years for furniture, fixtures and
equipment and thirty years for buildings and building improvements. Leasehold
improvements are amortized on the straight-line basis over the shorter of the
respective lease terms or the estimated useful life of the assets, and
generally range from five to thirty years.
Product rights and other intangible assets
Product rights are stated at cost, less accumulated amortization, and are
amortized on the straight-line basis over their estimated useful lives ranging
from seventeen to twenty five years. Goodwill is amortized on the straight-
line basis over twenty years or less and is primarily related to the Company's
acquisition of Rugby (Note 2). Accumulated amortization was $39.1 million and
$15.6 million at December 31, 1998 and 1997, respectively.
Potential impairment of long-lived assets
The Company annually evaluates its long-lived assets, including product
rights, for potential impairment. When circumstances indicate that the
carrying amount of the asset may not be recoverable, as demonstrated by
estimated future cash flows, an impairment loss would be recorded based on
fair value.
Revenue recognition
The Company recognizes revenue, net of sales discounts and allowances, from
the sale of its pharmaceutical products upon shipment.
Product sales to major customers
In 1998, two customers accounted for 17% and 12%, individually, of the
Company's product sales. In 1997, two customers accounted for 12% and 11%,
individually, of the Company's product sales. In 1996, one customer accounted
for 10% of product sales.
Research and development activities
The costs associated with the development, testing and approval of
pharmaceutical products are expensed as incurred.
F-11
<PAGE>
WATSON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Income taxes
Income taxes are accounted for using an asset and liability approach that
requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of temporary differences between the
financial statement and tax bases of assets and liabilities at the applicable
tax rates. A valuation allowance is provided when it is more likely than not
that some portion or all of the deferred tax assets will not be realized.
Earnings per share ("EPS")
Basic earnings per share is computed by dividing net income by the weighted
average number of common shares outstanding in each year. Diluted earnings per
share is computed by dividing net income by the weighted average number of
common shares outstanding plus any potential dilution that could occur if
options and warrants were converted into common stock in each year.
In 1997, the Company adopted Financial Accounting Standards No. 128,
"Earnings per Share," (FAS 128). In accordance with the implementation
provisions of FAS 128, the Company has restated earnings per share in its
consolidated statements of income for the year ended December 31, 1996. The
unaudited quarterly data for the first three quarters of 1997 presented in
Note 10 have also been restated to comply with the provisions ofFAS 128. A
reconciliation of the numerators and the denominators of basic and diluted
earnings per share for the years ended December 31, 1998, 1997, and 1996 is as
follows (in thousands, except for EPS):
<TABLE>
<CAPTION>
For the Years Ended
December 31,
------------------------
1998 1997 1996
-------- ------- -------
Basic EPS Computation:
- ----------------------
<S> <C> <C> <C> <C> <C>
Net income........................ (numerator) $120,829 $90,184 $78,562
Weighted average shares
outstanding...................... (denominator) 89,078 86,991 85,028
Basic EPS................... $ 1.36 $ 1.04 $ 0.92
======== ======= =======
<CAPTION>
Diluted EPS Computation:
- ------------------------
<S> <C> <C> <C> <C> <C>
Net income........................ (numerator) $120,829 $90,184 $78,562
Weighted average shares
outstanding...................... 89,078 86,991 85,028
Assumed exercise of outstanding
stock options and warrants....... 2,515 2,334 3,053
-------- ------- -------
Weighted average shares
outstanding, diluted basis....... (denominator) 91,593 89,325 88,081
Diluted EPS................. $ 1.32 $ 1.01 $ 0.89
======== ======= =======
</TABLE>
In October 1997, the Company effected a two-for-one stock split in the form
of a 100% stock dividend. All share and per share amounts for the reported
periods have been restated to reflect the stock split.
Concentration of credit risk
The Company is subject to a concentration of credit risk with respect to its
accounts receivable balance, all of which is due from service providers,
distributors, wholesalers and chain drug stores in the health care and
pharmaceutical industries throughout the United States. At December 31, 1998
and 1997, approximately 57% and 27%, respectively, of the trade receivable
balances represented amounts due from four customers in 1998 and two customers
in 1997. The Company performs ongoing credit evaluations of its customers and
maintains reserves for potential uncollectible accounts. Actual losses from
uncollectible accounts have been minimal.
F-12
<PAGE>
WATSON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Recent accounting pronouncements
In 1998, the Company adopted Financial Accounting Standards No.131,
"Disclosures about Segments of an Enterprise and Related Information," (FAS
131). FAS 131 supercedes FAS 14, "Financial Reporting for Segments of a
Business Enterprise," and replaces the "industry segment" approach with the
"management" approach. The management approach designates the internal
organization that is used by management for making operating decisions and
assessing performance as the source of the Company's reportable segments.
Watson has one reportable segment, pharmaceutical products.
In 1998, the Company adopted Financial Accounting Standards No. 130,
"Reporting Comprehensive Income," (FAS 130). FAS 130 established new rules for
the reporting and display of comprehensive income and its components in the
financial statements. Comprehensive income includes all changes in equity
during a period except those resulting from investments by and distributions
to the Company's stockholders. Watson's comprehensive income is comprised of
net income and the unrealized gain on equity securities. The adoption of FAS
130 had no effect on the Company's consolidated results of operations,
financial position or cash flows.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." This SOP provides guidance
on accounting for certain costs in connection with obtaining or developing
computer software for internal use and requires that entities capitalize such
costs once certain criteria are met. The Company is required to adopt SOP 98-1
as of January 1, 1999.
Reclassifications
Certain amounts in the 1996 and 1997 financial statements have been
reclassified to conform with the 1998 presentation. These reclassifications
had no effect on net income or retained earnings.
2. Mergers and Acquisitions
Subsequent event--acquisition of TheraTech
In January 1999, Watson's acquisition of TheraTech was completed. TheraTech
is a leading drug-delivery company that developed, manufactured and marketed
innovative products based on its patented and proprietary technologies and
systems. Under the terms of the TheraTech merger agreement, each share of
TheraTech common stock was converted into the right to receive 0.2663 of a
share of the Company's common stock. Accordingly, the Company issued
approximately 5.8 million common shares having a market value of approximately
$329 million on the date of acquisition in exchange for all of the outstanding
common shares of TheraTech. The acquisition qualified as a tax-free merger for
federal income tax purposes and will be accounted for as a pooling of
interests. The Company's 1998 consolidated financial statements do not reflect
the 1999 acquisition of TheraTech. In the first quarter of 1999, Watson
expects to incur a one-time charge related to this acquisition of
approximately $20.0 million. This charge will include investment banking fees,
professional fees and other costs related to consolidating the operations of
the two companies.
1998 acquisition of oral contraceptive products from Searle
In November 1998, Watson acquired the U.S. rights to three Searle oral
contraceptive products for $120.0 million in cash. Watson and Searle have
entered into a supply agreement whereby Watson has the right to purchase from
Searle the products in finished form for two years and in bulk form for an
additional one year period.
F-13
<PAGE>
WATSON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Acquisition of Rugby
In February 1998, Watson completed its acquisition of Rugby from Hoechst
Marion Roussel, Inc. Rugby developed, manufactured and marketed a wide array
of off-patent pharmaceutical products. Under the terms of the agreement, the
Company acquired Rugby and its abbreviated new drug applications, which
included several licensed products, plus Rugby's sales and marketing
operations for U.S. off-patent and over-the-counter pharmaceutical products.
The transaction also included Rugby's product development group and product
development pipeline. Under the terms of the acquisition agreement, the
Company paid approximately $67.5 million in cash at closing and agreed to
contingent payments based on future sales and operating results. The
acquisition was accounted for as a purchase and Rugby's results of operations
have been recorded in the Company's consolidated financial statements since
the date of acquisition. The excess of the aggregate purchase price over the
fair value of the assets acquired was approximately $30.9 million and is being
amortized over 20 years.
Under the purchase method of accounting, the purchase price is generally
allocated to the acquired assets and liabilities based on their estimated fair
values at the date of acquisition. However, the portion of the purchase price
that is allocated to in-process research and development (IPR&D) is not an
asset, but instead, represents the valuation of acquired, to-be-completed
research projects. As such, the amount that is determined to be IPR&D is
charged to expense at the date of acquisition. In the first quarter of 1998,
in connection with the Rugby acquisition, the Company charged $18.8 million to
IPR&D. This amount was subsequently adjusted to $13.0 million to reflect a
recently revised Securities and Exchange Commission-preferred methodology for
valuing IPR&D.
Watson acquired 13 separate IPR&D projects from Rugby, none of which were
material on an individual basis to the Company. Rugby commenced work on these
projects, all of which relate to the development of off-patent pharmaceutical
drugs, at various dates beginning in late 1994. The Company, in conjunction
with an independent valuation firm, determined the allocation of purchase
price to acquired IPR&D. At the acquisition date, it was estimated that the
acquired projects, on an overall basis, were approximately 70% complete and
would require approximately $8.8 million to complete. The primary factor
considered in determining the amount charged to IPR&D was the estimated future
cash flows of each project. Discount rates that ranged from 16% to 20% were
assigned to each project based on identified risk factor assumptions. The
discounted cash flows were then adjusted by the completion percentages of each
project, as of the acquisition date. The individual project completion
percentages were estimated by dividing project costs incurred through the
acquisition date by the costs expected to complete each project.
The development of pharmaceutical products is subject to numerous risks and
uncertainties including formulation and manufacturing issues, the FDA approval
and monitoring process and competitive risks in the marketplace, among others.
There can be no assurance that any of these projects will achieve full
development, receive the required regulatory approvals or contribute in any
significant manner to Watson's future sales.
Significant acquisitions in 1997 and earlier years are summarized below:
1997 acquisition of oral contraceptive products from Searle
In October 1997, the Company acquired the U.S. rights to certain existing
and future Searle branded off-patent oral contraceptive products. In
accordance with this agreement, cash payments of $51.5 million and
$85.0 million were made to Searle in 1998 and 1997, respectively. Watson and
Searle entered into a supply agreement whereby Watson has the right to
purchase the products for two years from the date of acquisition and,
F-14
<PAGE>
WATSON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
at the Company's election, for an additional two-year period. Payment for
future products is contingent and due upon receipt of FDA approval. If the FDA
approves these future products, the maximum aggregate acquisition cost for the
remaining future products will be approximately $33.8 million plus certain
contingent payments based on the technology transfer and net aggregate annual
sales of certain of the acquired products.
1997 acquisition of product rights to Dilacor XR(R)
In June 1997, the Company acquired from Rhone-Poulenc Rorer Pharmaceuticals,
Inc. ("RPR") the exclusive U.S. and certain worldwide marketing, sales, and
distribution rights to Dilacor XR(R) for $190.0 million in cash and future
royalties. Watson and RPR entered into a supply agreement whereby Watson has
the right to purchase finished product from RPR through June 1999 and for an
additional one-year period under certain conditions. Prior to the acquisition
of the rights to Dilacor XR(R), the Company earned royalties from RPR sales of
Dilacor XR(R). The Company earned royalties from this product of $14.2 million
for the first six months of 1997 and $27.2 million for the full year of 1996.
Dilacor XR(R) has been available in the U.S. for the treatment of hypertension
since June 1992 and was approved for the treatment of chronic stable angina in
March 1995.
1997 acquisition of Royce
In April 1997, the Company acquired Royce for approximately 5.2 million
shares of its common stock having a market value of approximately $98.0
million at the date of acquisition. Royce developed and manufactured off-
patent prescription drugs in solid dosage forms (tablets and capsules). The
acquisition was accounted for as a pooling of interests and the transaction
qualified as a tax-free merger.
1997 acquisition of Oclassen
In February 1997, the Company acquired Oclassen for approximately 6.6
million shares of its common stock having a market value of approximately
$135.0 million at the date of acquisition. The acquisition was accounted for
as a pooling of interests for accounting purposes and qualified as a tax-free
merger for federal income tax purposes. Oclassen marketed dermatology products
used to prevent and treat skin diseases. In connection with the acquisition,
the Company obtained the rights to the following five Oclassen products:
Monodox(R) (doxycycline monohydrate), Condylox(R) (podofilox 0.5%), Cordran(R)
(flurandrenolide), Cinobac(R) (cinoxacin) and Cormax(TM) (clobetasol
propionate).
1995 acquisition of Circa
In July 1995, the Company acquired Circa for approximately 37.4 million
shares of its common stock having a market value of approximately $698.0
million at the date of acquisition. Circa manufactured off-patent
pharmaceutical products and held investments in Somerset and Andrx. The
acquisition qualified as a tax-free merger for federal income tax purposes and
was accounted for as a pooling of interests.
F-15
<PAGE>
WATSON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3. Balance Sheet Components
Selected balance sheet components consisted of the following:
<TABLE>
<CAPTION>
December 31,
-----------------
1998 1997
-------- -------
(in thousands)
<S> <C> <C>
Inventories
Raw materials........................................... $ 23,937 $16,905
Work-in-progress........................................ 12,408 9,303
Finished goods.......................................... 42,436 20,759
-------- -------
$ 78,781 $46,967
======== =======
Property and equipment
Buildings and improvements.............................. $ 48,181 $48,206
Leasehold improvements.................................. 12,814 8,722
Land and land improvements.............................. 9,674 5,261
Machinery and equipment................................. 64,294 50,449
Research and laboratory equipment....................... 14,515 9,707
Furniture and fixtures.................................. 3,802 3,183
-------- -------
153,280 125,528
Less accumulated depreciation and amortization.......... (56,368) (47,681)
-------- -------
96,912 77,847
Construction in progress................................ 12,224 10,157
-------- -------
$109,136 $88,004
======== =======
Accounts payable and accrued expenses
Trade accounts payable.................................. $ 33,467 $22,754
Royalties payable....................................... 8,227 6,420
Accrued payroll and benefits............................ 7,120 5,755
Other accrued liabilities............................... 14,978 9,494
-------- -------
$ 63,792 $44,423
======== =======
</TABLE>
4. Investments and Other Assets
Investments and other assets consisted of the following:
<TABLE>
<CAPTION>
December 31,
-----------------
1998 1997
-------- --------
(in thousands)
<S> <C> <C>
Long-term investments..................................... $138,514 $ 92,233
Investments in joint ventures............................. 46,232 31,626
Other assets.............................................. 8,405 7,224
-------- --------
$193,151 $131,083
======== ========
</TABLE>
Long-term investments
Long-term investments consist primarily of the Company's investment in
Andrx. Andrx is a drug-delivery company utilizing controlled-release
technologies to develop oral pharmaceutical products. Andrx' common
F-16
<PAGE>
WATSON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
stock trades on the Nasdaq Stock Market under the symbol ADRX. At December 31,
1998, the Company owned 2.7 million common shares of Andrx, which represents
approximately 17.7% of the total Andrx common shares outstanding. The Company
also has a warrant to acquire 337,100 shares of Andrx, exercisable in whole or
in part until July 8, 1999 at an exercise price of $8.90 per share. The
Company's unrealized gain on this investment was $60.6 million and $33.1
million (net of income taxes of $40.4 million and $22.1 million), at December
31, 1998 and 1997, respectively. The unrealized gain on Andrx is the primary
component of accumulated other comprehensive income in the stockholders'
equity section of Watson's consolidated balance sheets.
Investment in Somerset joint venture
The Company owns 50% of the outstanding common stock of Somerset and
utilizes the equity method to account for this investment. Somerset
manufactures and markets the product Eldepryl(R), which is used in the
treatment of Parkinson's disease. Earnings from Somerset were approximately
$7.4 million, $12.7 million, and $20.1 million in 1998, 1997, and 1996,
respectively. The Somerset joint venture earnings reported by Watson are
comprised of 50% of Somerset's earnings and management fees, offset by
amortization of goodwill. The net excess of the cost of this investment over
the fair value of net assets acquired was $5.4 million and $6.4 million at
December 31, 1998 and 1997, respectively. Such goodwill is amortized on the
straight-line basis over 15 years.
The Internal Revenue Service ("IRS") has notified Somerset that it may be
subject to additional income taxes and interest for its 1993, 1994, and 1995
tax years. The IRS has proposed adjustments relating to tax credits claimed
under Internal Revenue Code Section 936. The proposed adjustments amount to
approximately $14.0 million of additional income tax and interest charges, 50%
of which would be Watson's share. Management of Somerset believes that it has
met all of the requirements to qualify for the tax credits claimed and intends
to vigorously defend its position on this matter.
Combined results for unconsolidated investments in joint ventures
The following aggregate financial information is provided for unconsolidated
investments in joint ventures accounted for using the equity method:
<TABLE>
<CAPTION>
For the Years Ended
December 31,
------------------------
1998 1997 1996
------- ------- --------
(in thousands)
<S> <C> <C> <C>
Net revenues...................................... $51,564 $73,489 $101,512
======= ======= ========
Gross profit...................................... $43,108 $63,858 $ 88,840
======= ======= ========
Net income........................................ $13,108 $20,925 $ 31,564
======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
December 31,
---------------
1998 1997
------- -------
(in thousands)
<S> <C> <C>
Current assets............................................ $79,155 $60,604
Other assets.............................................. 7,092 8,508
------- -------
Total assets............................................ $86,247 $69,112
======= =======
Current liabilities....................................... $20,893 $18,300
Other liabilities......................................... 723 1,309
Stockholders' equity...................................... 64,631 49,503
------- -------
Total liabilities and stockholders' equity.............. $86,247 $69,112
======= =======
</TABLE>
F-17
<PAGE>
WATSON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. Debt
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
December 31,
----------------
1998 1997
-------- ------
(in thousands)
<S> <C> <C>
Senior unsecured notes, 7.125%, face amount of $150.0
million, due 2008 (effective rate of 7.25%).......... $148,489 $ --
Unsecured note, 8.1%, due August 2001................. 2,174 2,904
Other notes payable................................... 198 345
-------- ------
150,861 3,249
Less current portion.................................. (989) (864)
-------- ------
$149,872 $2,385
======== ======
</TABLE>
In May 1998, the Company issued $150.0 million of 7.125% senior unsecured
notes. These notes are due in May 2008, with interest-only payments due semi-
annually in November and May. The Company must maintain specified financial
ratios and comply with certain restrictive covenants.
Annual maturities of notes payable, other than the senior unsecured notes,
are as follows: $1.0 million in 1999, $0.9 million in 2000 and $0.5 million in
2001.
6. Income Taxes
The provision for income taxes is summarized as follows:
<TABLE>
<CAPTION>
For the Years Ended
December 31,
------------------------
1998 1997 1996
------- ------- -------
(in thousands)
<S> <C> <C> <C>
Current provision:
Federal........................................ $67,314 $46,990 $11,059
State.......................................... 9,340 9,372 4,458
------- ------- -------
76,654 56,362 15,517
------- ------- -------
Deferred provision (benefit):
Federal........................................ 958 (2,228) 17,364
State.......................................... 635 280 3,035
------- ------- -------
1,593 (1,948) 20,399
------- ------- -------
Provision for income taxes..................... $78,247 $54,414 $35,916
======= ======= =======
</TABLE>
The exercise of stock options represents a tax benefit and has been
reflected as a reduction of income taxes payable and an increase to additional
paid-in capital. Such benefits recorded were $13.6 million, $10.9 million and
$7.8 million for the years ended December 31, 1998, 1997 and 1996,
respectively. Income taxes of $2.3 million have been provided for the possible
distribution of approximately $29.0 million of undistributed earnings related
to the Company's investments in joint ventures.
F-18
<PAGE>
WATSON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Reconciliations between the statutory federal income tax rate and the
Company's effective income tax rate were as follows:
<TABLE>
<CAPTION>
For the Years
Ended
December 31,
----------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Expected tax at federal statutory rate................... 35% 35% 35%
State income taxes, net of federal benefit............... 3 4 5
Research tax credits and other credits................... -- -- (1)
Dividends received deduction............................. -- (2) (4)
Non-deductible merger expenses........................... -- 2 --
Non-deductible IPR&D charge.............................. 2 -- --
Other.................................................... (1) (1) (4)
--- --- ---
39% 38% 31%
=== === ===
</TABLE>
Deferred tax assets and liabilities are measured based on the difference
between the financial statement and tax bases of assets and liabilities at the
applicable tax rates. The significant components of the Company's net deferred
tax assets and liabilities were:
<TABLE>
<CAPTION>
December 31,
------------------
1998 1997
-------- --------
(in thousands)
<S> <C> <C>
Benefits from NOL carryforwards........................ $ 3,085 $ 5,319
Differences in financial statement and tax accounting
for:
Inventory and receivables............................ 21,633 8,900
Research and development............................. 1,732 746
Property, equipment and intangible assets............ (11,487) (7,351)
Investments in joint ventures........................ (2,241) (1,590)
Unrealized gains--FAS 115.............................. (40,605) (22,093)
Valuation allowance.................................... (3,295) (5,529)
Other.................................................. 6,300 4,110
-------- --------
$(24,878) $(17,488)
======== ========
</TABLE>
The Company had net operating loss ("NOL") carryforwards at December 31,
1998 of approximately $9.0 million and $6.0 million for federal and Florida
state income tax purposes, respectively. During 1998, the Company utilized NOL
carryforwards of approximately $7.0 million to offset federal income. Due to
restrictions imposed as a result of ownership changes to acquired
subsidiaries, the amount of the NOL carryforward available to offset future
taxable income is subject to limitation. The annual NOL utilization may be
further limited if additional changes in ownership occur. The Company's NOL
carryforwards will begin to expire in 2003.
7. Stockholders' Equity
Preferred stock
In 1992, the Company authorized 2.5 million shares of no par preferred
stock. The Board of Directors has the authority to fix the rights,
preferences, privileges and restrictions, including dividend rates, conversion
and voting rights, terms and prices of redemptions and liquidation preferences
without vote or action by the stockholders. At December 31, 1998, no preferred
stock was issued.
F-19
<PAGE>
WATSON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Stock option plans
The Company has adopted several stock option plans that authorize the
granting of options to purchase the Company's common stock subject to certain
conditions. At December 31, 1998, the Company had reserved 9.9 million shares
of its common stock for issuance upon exercise of options granted or to be
granted under these plans. The options are granted at the fair market value of
the shares underlying the options at the date of the grant, generally become
exercisable over a five-year period and expire in ten years. In conjunction
with certain of the Company's acquisitions, Watson assumed stock option and
warrant plans from the acquired companies. The options and warrants in these
plans were adjusted by the individual exchange ratios specified in each
transaction. No additional options or warrants will be granted under any of
the assumed plans.
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25), and related
interpretations, which require compensation expense for options to be
recognized when the market price of the underlying stock exceeds the exercise
price on the date of the grant. Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (FAS 123), permits companies to
apply existing accounting rules under APB 25 and provide pro forma disclosures
of net income and earnings per share as if the fair value method (as defined
in FAS 123) had been applied. Had compensation cost been determined using the
fair value method prescribed by FAS 123, the Company's net income and earnings
per share would have been as follows:
<TABLE>
<CAPTION>
For the Years Ended
December 31,
------------------------
1998 1997 1996
-------- ------- -------
(in thousands, except
per share amounts)
<S> <C> <C> <C>
Pro forma net income............................... $109,073 $82,182 $72,472
======== ======= =======
Pro forma basic earnings per share................. $ 1.22 $ 0.94 $ 0.85
======== ======= =======
Pro forma diluted earnings per share............... $ 1.19 $ 0.92 $ 0.82
======== ======= =======
</TABLE>
The weighted average fair value of the options has been estimated on the
date of grant using the Black-Scholes option pricing model with the following
weighted average assumptions used for grants in 1998, 1997 and 1996,
respectively: no dividend yield; expected volatility of 41%, 49% and 51%,
risk-free interest rate of 5.14%, 6.15% and 6.18% per annum; and expected
terms ranging from approximately seven to eight years. Weighted averages are
used because of varying assumed exercise dates.
A summary of the Company's stock option plans as of December 31, 1998, 1997
and 1996, and for the years then ended is presented below (shares in
thousands):
<TABLE>
<CAPTION>
For the Years Ended December 31,
--------------------------------------------------
1998 1997 1996
---------------- ---------------- ----------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding-beginning of
year................... 6,809 $17.77 7,384 $12.39 8,064 $11.24
Granted............... 1,170 $43.06 2,388 $23.25 1,215 $17.88
Exercised............. (1,471) $14.01 (2,399) $ 5.97 (1,150) $ 7.56
Cancelled............. (421) $20.44 (564) $18.49 (745) $16.08
------ ------ ------
Outstanding-end of
year................... 6,087 $22.51 6,809 $17.77 7,384 $12.39
====== ====== ======
Weighted average fair
value
of options granted..... $21.06 $12.28 $ 8.42
====== ====== ======
</TABLE>
F-20
<PAGE>
WATSON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes information about stock options outstanding
at December 31, 1998 (shares in thousands):
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------- -----------------------
Range of Weighted Average
Exercise Remaining Life Weighted Average Weighted Average
Prices Shares in Years Exercise Price Shares Exercise Price
-------- ------ ---------------- ---------------- ------ ----------------
<S> <C> <C> <C> <C> <C>
$ 2.91 to
$12.75.. 1,118 4.4 $ 7.10 986 $ 7.11
$12.88 to
$18.63.. 2,164 7.2 $17.32 1,004 $17.37
$18.94 to
$33.00.. 1,635 8.3 $25.27 351 $24.58
$33.50 to
$56.75.. 1,170 9.5 $43.07 5 $33.50
----- -----
6,087 7.4 $22.51 2,346 $14.17
===== =====
</TABLE>
8. Related Parties
The Company leases a portion of its facilities from a trust in which
Watson's Chairman and Senior Vice President, Scientific Affairs have
beneficial interests. The aggregate rent expense paid to related parties in
1998, 1997 and 1996 was $345,000, $332,000 and $432,000, respectively, and was
allocated to cost of sales, research and development and selling, general and
administrative expenses.
The Company had notes receivable due from executive officers in the amounts
of $600,000 and $2.0 million at December 31, 1998 and 1997, respectively. The
$600,000 note will mature in the third quarter of 1999. The $2.0 million note
was repaid in March 1998.
9. Commitments and Contingencies
Facility and equipment leases
The Company has entered into operating leases for certain facilities and
equipment. The terms of the operating leases for the Company's facilities
require the Company to pay property taxes, normal maintenance expenses and
maintain minimum insurance coverage. Total rental expense for operating leases
in 1998, 1997 and 1996, including rent paid to related parties, was $5.5
million, $2.6 million and $2.1 million, respectively.
At December 31, 1998, future minimum lease payments under all noncancelable
operating leases consisted of the following (in thousands):
<TABLE>
<S> <C>
For the Years Ending December 31,
1999.............................................................. $ 4,729
2000.............................................................. 3,962
2001.............................................................. 1,110
2002.............................................................. 263
2003 and after.................................................... 404
-------
$10,468
=======
</TABLE>
Employee retirement plan
The Company maintains a 401(k) retirement plan covering substantially all
employees. The Company makes contributions to the plan based upon the employee
contributions. Watson contributed approximately $778,000, $398,000 and
$472,000 to the retirement plan for the years ended December 31, 1998, 1997,
and 1996, respectively.
F-21
<PAGE>
WATSON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Legal matters
The Company is involved in various disputes and litigation matters that
arise in the ordinary course of business. The litigation process is inherently
uncertain and it is possible that the resolution of these disputes and
lawsuits may adversely affect the Company. Management believes, however, that
the ultimate resolution of such matters will not have a material adverse
impact on the Company's consolidated financial position or results of
operations.
10. Quarterly Financial Data (Unaudited)
Unaudited quarterly financial and market price information follows (in
thousands, except per share data):
<TABLE>
<CAPTION>
Fourth Third Second First
1998 Quarter Quarter Quarter Quarter
---- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Product sales, net..................... $146,445 $145,946 $141,885 $121,872
Cost of sales.......................... 52,142 56,635 54,780 45,100
Gross profit......................... 94,303 89,311 87,105 76,772
-------- -------- -------- --------
Operating expenses..................... 36,461 37,044 37,202 44,022
Other income (expense), net............ (163) 1,595 2,267 2,615
Provision for income taxes............. 21,053 20,037 19,407 17,750
-------- -------- -------- --------
Net income........................... $ 36,626 $ 33,825 $ 32,763 $ 17,615
======== ======== ======== ========
Basic earnings per share............. $ 0.41 $ 0.38 $ 0.37 $ 0.20
======== ======== ======== ========
Diluted earnings per share........... $ 0.40 $ 0.37 $ 0.36 $ 0.19
======== ======== ======== ========
Market price per share: High......... $ 63.00 $ 52.88 $ 49.50 $ 42.94
Low............................. $ 42.00 $ 40.25 $ 36.25 $ 30.50
<CAPTION>
Fourth Third Second First
1997 Quarter Quarter Quarter Quarter
---- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Product sales, net..................... $109,764 $ 91,817 $ 63,735 $ 58,699
Cost of sales.......................... 38,032 34,525 26,812 25,688
-------- -------- -------- --------
Gross profit......................... 71,732 57,292 36,923 33,011
-------- -------- -------- --------
Royalty income......................... -- -- 7,208 7,041
-------- -------- -------- --------
Operating expenses..................... 28,059 19,087 19,837 23,940
Other income, net...................... 3,058 4,230 7,376 7,650
Provision for income taxes............. 17,308 14,837 12,558 9,711
-------- -------- -------- --------
Net income........................... $ 29,423 $ 27,598 $ 19,112 $ 14,051
======== ======== ======== ========
Basic earnings per share............. $ 0.33 $ 0.32 $ 0.22 $ 0.16
======== ======== ======== ========
Diluted earnings per share........... $ 0.33 $ 0.31 $ 0.22 $ 0.16
======== ======== ======== ========
Market price per share: High......... $ 34.13 $ 30.38 $ 22.25 $ 23.06
Low............................. $ 27.00 $ 21.63 $ 16.00 $ 17.69
</TABLE>
The quarterly data above were restated, as applicable, to reflect the
adoption of FAS 128 and for acquisitions in 1997 accounted for under the
pooling of interests method as further discussed in Note 2. In addition, a
first quarter 1998 charge for acquired in-process research and development
(IPR&D) was restated to reflect a recently revised Securities and Exchange
Commission-preferred methodology for valuing IPR&D. The restated amount is
$13.0 million, as compared to $18.8 million as originally reported, and was
determined in conjunction with an independent valuation firm.
F-22
<PAGE>
EXHIBIT 4.2
CREDIT AGREEMENT
WATSON PHARMACEUTICALS, INC.
and
MELLON BANK, N.A.
February 3, 1999
<PAGE>
CREDIT AGREEMENT
THIS CREDIT AGREEMENT dated as of February 3, 1999, is entered into
between WATSON PHARMACEUTICALS, INC., a Nevada corporation ("Borrower") and
--------
MELLON BANK, N.A. ("Bank"). Borrower and Bank agree as follows:
----
ARTICLE I DEFINITIONS
.1 Defined Terms.
As used in this Agreement, the following terms have the following
meanings:
"Acquisition": The purchase or other acquisition by Borrower or any
-----------
of its Subsidiaries (directly or indirectly) of assets or securities of any
other Person, other than the purchase of inventory, equipment, or other assets
in the ordinary course of business.
"Agreement": This Credit Agreement, as amended, supplemented or
---------
modified from time to time.
"Andrx": Means Andrx Corporation, a Florida corporation.
-----
"Bank": As set forth in the introductory paragraph of this Agreement.
----
"Base Rate": The interest rate per annum announced from time to time
---------
by Bank as its Base Rate. The Base Rate may be greater or less than other
interest rates charged by Bank to other borrowers and is not solely based or
dependent upon the interest rate which Bank may charge any particular borrower
or class of borrowers. Information concerning the Base Rate may be obtained
from Bank.
"Base Rate Option": Has the meaning set forth in Section 2.3(b).
----------------
"Borrower": As set forth in the introductory paragraph of this
--------
Agreement.
"Borrowing": As defined in Section 2.1(a).
---------
"Business Day": Any day on which Bank is open for business at the
------------
location where the Note is payable unless otherwise stated.
"Change of Control": Shall be deemed to have occurred at such times
-----------------
as a "person" or "group" (within the meaning of Sections 13(d) and 14(d)(2) of
the Securities Act of 1934), becomes the "beneficial owner" (as defined in Rule
13d-3 under the Securities Exchange Act of 1934), directly or indirectly, of
more than fifty percent (50%) of the total voting power of all classes of stock
then outstanding of Borrower normally entitled to vote in the election of
directors.
-1-
<PAGE>
"Closing Date": The date on which all of the Conditions Precedent
------------
hereof have been fully satisfied.
"Commercial L/C": Has the meaning set forth in Section 2.4(a).
--------------
"Consolidated": The consolidation in accordance with GAAP of the
------------
accounts or other items as to which such term applies.
"Default": A condition or event which, after notice or lapse of time
-------
or both, would constitute an Event of Default if that condition or event were
not cured or removed within any applicable grace or cure period.
"Dollars and $": Dollars in lawful currency of the United States of
-------------
America.
"EBIT": As of the end of any fiscal quarter, Borrower's consolidated
----
net earnings (or loss) less the amount of any extraordinary gains, and before
interest expense, provision for income taxes, and non-cash extraordinary losses,
for the four fiscal quarter period then ended, including any non-cash write-off
of capitalized research and development costs included in the assets acquired
pursuant to an Acquisition, provided that such write-offs shall be either (a)
--------
expressly approved by Borrower's independent certified public accountants, or
(b) the amount is shown as a separate item in Borrower's financial statements,
all as determined in accordance with GAAP.
"EBITDA": As of the end of any fiscal quarter, Borrower's
------
consolidated net earnings (or loss) less the amount of any extraordinary gains,
and before interest expense, provision for income taxes, non-cash extraordinary
losses, depreciation, and amortization expense for the four fiscal quarter
period then ended, including any non-cash write-off of capitalized research and
development costs included in the assets acquired pursuant to an Acquisition,
provided that such write-offs shall be either (a) expressly approved by
- --------
Borrower's independent certified public accountants, or (b) the amount is shown
as a separate item in Borrower's financial statements, all as determined in
accordance with GAAP.
"End Date": As of any date of determination, the earlier of (a) the
--------
next date of actual delivery of the financial statements that are required to be
delivered pursuant to subsections 6.1(a)(i) and (ii), and (b) the date on which
such financial statements are required to be delivered.
"ERISA": The Employee Retirement Income Security Act of 1974, as
-----
amended to the date hereof and from time to time hereafter and any successor
statute.
"ERISA Affiliate": As applied to any Person, any trade or business
---------------
(whether or not incorporated) which is a member of a group of which that Person
is a member and which is under common control within the meaning of Section
414(b) and (c) of the Internal Revenue Code.
-2-
<PAGE>
"Facility Fee": Has the meaning set forth in Section 2.5.
------------
"Facility Fee Payment Date": Has the meaning set forth in Section 2.5.
-------------------------
"GAAP": Generally accepted accounting principles set forth in the
----
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as may be approved by a significant segment of the accounting
profession or any public commission having regulatory responsibility over
Borrower or any Subsidiary.
"Interest Expense": Means, with respect to any fiscal period,
----------------
Borrower's Consolidated interest expense incurred for such period as determined
in accordance with GAAP.
"Interest Rate Options": Has the meaning set forth in Section 2.3(b).
---------------------
"Internal Revenue Code": The Internal Revenue Code of 1986, as
---------------------
amended to the date hereof and from time to time hereafter and any successor
statute.
"L/C": Has the meaning set forth in Section 2.4(a).
---
"Libor Rate": For any day for any proposed or existing Rate Segment
----------
corresponding to a Rate Period shall mean the rate per annum determined by Bank
to be the rate per annum obtained by dividing (the resulting quotient to be
rounded upward to the nearest 1/16 of 1%) (A) the rate of interest (which shall
be the same for each day in such Rate Period) estimated in good faith by Bank in
accordance with its usual procedures (which determination shall be conclusive)
to be the average of the rates per annum for deposits in United States dollars
offered to major money center banks in the London interbank market at
approximately 11:00 a.m., London time, two London Business Days prior to the
first day of such Rate Period for delivery on the first day of such Rate Period
in amounts comparable to such Rate Segment (or, if there are no such comparable
amounts actively traded, the smallest amounts actively traded) and have
maturities comparable to such Rate Period by (B) a number equal to 1.00 minus
the Libor Rate Reserve Percentage for such day.
The "Libor Rate" also may be expressed by the following formula:
----------
The "Libor Rate" also may be expressed by the following formula:
----------
Libor Rate = (average of rates offered to major
money banks in the London inter-
bank market estimated by Bank)
-------------------------------------
(1.00 Libor Rate Reserve Percentage)
-3-
<PAGE>
"LIBOR Rate Margin": (a) on the Closing Date and until such date as
-----------------
Bank receives Borrower's audited financial statements for the fiscal quarter
ended on December 31, 1998, 0.45%, (b) during any period that clause (a) above
or clause (c) below does not apply 0.90%, and (c) unless clause (a) above
applies, from and after each applicable Start Date to and including each
applicable End Date:
(i) 0.45%, if, as of the applicable Test Date, the ratio of Net
Debt to EBITDA for the fiscal period then ended (including the
quarter with respect to which the certificate referred to below
is being delivered), is less than 1.00:1.00,
(ii) 0.70%, if, as of the applicable Test Date, the ratio of Net
Debt to EBITDA for the fiscal period then ended (including the
quarter with respect to which the certificate referred to below
is being delivered), is greater than or equal to 1.00:1.00 and
less than 2.00:1.00,
(iii) 0.90%, if, as if the applicable Test Date, the ratio of Net
Debt to EBITDA for the fiscal period then ended (including the
quarter with respect to which the certificate referred to below
is being delivered), is greater than or equal to 2.00:1.00.
provided however, that (even if the relevant financial tests set forth above are
- -------- -------
met) if at any time an Event of Default exists, the Libor Rate Margin shall be
0.90% until such Event of Default shall no longer be continuing. The Libor Rate
Margin shall be determined by the delivery of a certificate of Borrower,
certified by its Chief Financial Officer or Vice President - Finance, together
with the financial statements for the fiscal quarter required to be delivered
pursuant to subsections 6.1(a)(i) and (ii), which certificate shall set forth
------------------------------
the Libor Rate Margin arising from the calculation of the ratio of Net Debt to
EBITDA for the four fiscal quarters ending with the fiscal quarter or fiscal
year with respect to which such certificate is being delivered and the basis for
such calculation. The foregoing notwithstanding, if the subsequently issued
audited financial statements for Borrower disclose that the ratio of Net Debt to
EBITDA was not, in fact, as set forth in the certificate, then the interest rate
shall be retroactively readjusted to the rate that would have been in effect if
the adjustment had not been made. The first Test Date shall be the day Bank
receives Borrower's audited financial statements for the fiscal quarter ended on
December 31, 1998. The LIBOR Rate Margin so determined shall apply to the
period beginning on the Start Date with respect to such financial statements and
ending on the End Date applicable to such financial statements.
"LIBOR Rate Option": Has the meaning set forth in Section 2.3(b).
-----------------
"Libor Rate Reserve Percentage": For any day shall mean the
-----------------------------
percentage (rounded upward to the nearest 1/16 of 1%), as determined in good
faith by Bank (which determination shall be conclusive) as representing for such
day the maximum effective
-4-
<PAGE>
reserve requirement (including, without limitation, supplemental, marginal and
emergency requirements ) for member banks of the Federal Reserve System with
respect to eurocurrency funding (currently referred to as "Eurocurrency
Liabilities") of any maturity. Each Libor Rate shall be adjusted automatically
as of the effective date of any change in the Libor Rate Reserve Percentage.
"Lien": Any lien, mortgage, deed of trust, pledge, security interest,
----
charge or encumbrance of any kind (including any conditional sale or other title
retention agreement, any lease in the nature thereof, and any agreement to give
any security interest).
"Loan Documents": This Agreement, the Note, and each other document
--------------
required by Bank in connection with this Agreement and/or the credit extended
hereunder.
"London Business Day": A day for dealing in deposits in United States
-------------------
dollars by and among banks in the London interbank market.
"Material Adverse Change": A material adverse change in the business,
-----------------------
operations, results of operations, assets, liabilities, or condition (financial
or otherwise) of Borrower and its Subsidiaries, taken as a whole.
"Maturity Date": February 2, 2000.
-------------
"Net Debt": Means (a) Total Debt, less (b) unrestricted cash and
--------
marketable securities in excess of $5,000,000.
"Net Issuance Proceeds": Cash proceeds received by Borrower or any of
---------------------
its Subsidiaries in connection with their issuance (other than to Borrower or
any Subsidiary) of equity securities after the date of this Agreement, net of
reasonable out-of-pocket costs and expenses (including, underwriting discounts
and commissions) paid or incurred in connection therewith.
"Net Worth": As of any date of determination, the result of (a)
---------
Borrower's total Consolidated shareholder's equity, minus (b) the aggregate
amount of equity interests, investments or other advances held by Borrower or
its Subsidiaries in affiliates (with the exception of Andrx), shareholders, or
employees of Borrower or of any of its Subsidiaries.
"Note": The Revolving Note.
----
"PBGC": The Pension Benefit Guaranty Corporation established pursuant
----
to Subtitle A of Title IV of ERISA.
"Permitted Acquisition Conditions": (a) no Default or Event of
--------------------------------
Default shall have occurred and be continuing or would result from the
consummation of the proposed Acquisition, (b) the assets being acquired, or the
Person whose securities are being acquired, are useful in or engaged in, as
applicable, the pharmaceutical industry, (c) Borrower has
-5-
<PAGE>
provided Bank with confirmation, supported by reasonably detailed calculations
that on a pro forma basis, including the incurrence of any debt, (adjusted to
--- -----
eliminate expense items that would not have been incurred and include income
items that would have been recognized, in each case, if the combination had been
accomplished at the beginning of the period) created by adding the historical
financial statements of Borrower and its Subsidiaries to the historical
financial statements of the Person to be acquired (or the historical financial
statements related to the assets to be acquired) pursuant to the proposed
Acquisition, Borrower and its Subsidiaries would have been in compliance with
the financial covenants in Sections 6.2(a), 6.2(b), and 6.2(c) of this Agreement
as of the fiscal period ended immediately prior to the proposed date of
consummation of such proposed Acquisition, (d) Borrower has provided Bank with
copies of the definitive purchase and sale documentation, (e) the assets being
acquired, or the Person whose securities are being acquired, are not acquired by
means of a hostile takeover, and (f) in the case of an Acquisition of securities
of a Person, such Person is either (i) merged with and into Borrower or its
applicable Subsidiary or Subsidiaries that is making such Acquisition, with
Borrower or such Subsidiary or Subsidiaries as the survivor of such merger, or
(ii) such acquired Person becomes a direct or indirect Subsidiary of Borrower.
"Permitted Acquisitions": The consummation of Acquisitions by
----------------------
Borrower or its Subsidiaries, so long as the Permitted Acquisition Conditions
are satisfied in connection with each such Acquisition.
"Person": An individual, partnership, corporation, limited liability
------
company, business trust, joint stock company, trust, unincorporated association,
joint venture, governmental authority or other entity of whatever nature.
"Plan": Any employee pension benefit plan maintained or contributed
----
to by Borrower or any ERISA Affiliate of Borrower and insured by the Pension
Benefit Guaranty Corporation under Title IV of ERISA.
"Portion": "Base Rate Portion" shall mean at any time the part,
------- -----------------
including the whole, of the unpaid principal amount of the Note bearing interest
at such time under the Base Rate Option, in accordance with the first sentence
of Section 2.3(d), or in accordance with Section 2.3(f) as applicable. "Libor
-----
Rate Portion" shall mean at any time, the part, including the whole, of the
- ------------
unpaid principal amount of the Note bearing interest at such time under the
Libor Rate Option or in accordance with the second sentence of Section 2.3(d) as
applicable.
"Rate Period": As defined in Section 2.3(c).
-----------
"Rate Segment": Of the Libor Rate Portion at any time shall mean the
------------
entire principal amount of such Portion to which at such time there is
applicable a particular Rate Period beginning on a particular day and ending on
another particular day. (By definition, each Portion is at all times composed
of an integral number of discrete Rate Segments, each
-6-
<PAGE>
corresponding to a particular Rate Period, and the sum of the principal amounts
of all Rate Segments of a particular Portion at any time equals the principal
amount of such Portion at such time).
"Regulation T, U, and X": Regulations T, U, and X, respectively,
----------------------
promulgated by the Board of Governors of the Federal Reserve System, as amended
from time to time, and any successors thereto.
"Revolving Commitment": The amount of $30,000,000, as such amount may
--------------------
be reduced pursuant to Section 2.1(d).
"Revolving Loans": As defined in Section 2.1(a).
---------------
"Revolving Note": As defined in Section 2.1(e).
--------------
"Significant Subsidiary": Any Subsidiary which, as of any date of
----------------------
determination, has assets which, as of the date of the Borrower's most recent
quarterly Consolidated balance sheet, constitutes at least 5% of Borrower's
total Consolidated assets as of such date.
"Solvent": When used with respect to any Person, that as of the date
-------
as to which the Person's solvency is to be measured:
(iv) the fair saleable value of its assets is in excess of the total
amount of its liabilities (including contingent liabilities) as
they become absolute and matured;
(v) it has sufficient capital to conduct its business; and
(vi) it is able to meet its debts as they mature (subject, in the
case of Borrower and its Subsidiaries, to their ability to
refinance their debt to Bank at or before the time of the
maturities thereof).
"Standard Notice": An irrevocable notice provided by Borrower to Bank
---------------
on a Business Day that is:
(vii) received on or prior to the Business Day applicable to the
selection of, conversion to, or renewal of, the Base Rate
Option or prepayment of any Base Rate Portion; and
(viii) at least three London Business Days in advance in the case of
selection of, conversion to, or renewal of, the Libor Rate
Option or prepayment of any Libor Rate Portion.
-7-
<PAGE>
Standard Notice must be provided no later than 11:00 a.m., California time, on
the last day permitted for such notice.
"Standby L/C": Has the meaning set forth in Section 2.4(a).
-----------
"Start Date": The date on which financial statements required to be
----------
delivered pursuant to subsections 6.1(a)(i) and (ii) hereof actually are
delivered.
"Subsidiary": A corporation of which shares of stock having ordinary
----------
voting power (other than stock having such power only by reason of the happening
of a contingency) to elect a majority of the board of directors or other
managers of such corporation are at the time owned, directly, or indirectly
through one or more intermediaries, or both, by Borrower.
"Test Date": The last day of the most recent fiscal quarter ended
---------
immediately prior to the Start Date for which a certificate has been delivered
to Lender pursuant to the provision contained in the definition of Libor Rate
Margin.
"Total Debt": (i) indebtedness arising from the lending of money by
----------
any Person to Borrower or its Subsidiaries, (ii) indebtedness, whether or not in
any such case arising from the lending by any Person of money to Borrower or its
Subsidiaries, (A) which is represented by notes payable (including, but not
limited to, notes (or other monetary obligations) issued to a seller as part of
the purchase price relating to an Acquisition) or drafts accepted that evidence
extensions of credit, (B) which constitutes obligations evidenced by bonds,
debentures, notes, licensing agreements, or similar instruments, or (C) upon
which interest charges are customarily paid (other than accounts payable) or
that was issued or assumed as full or partial payment for property or assets,
(iii) indebtedness that constitutes an obligation with respect to a capital
lease, and (iv) indebtedness that constitutes an obligation with respect to
guaranties and contingent liabilities relating to Acquisitions; provided
--------
however, that, Total Debt specifically shall not include royalty or similar
- -------
payments based on sales or other similar operational criteria or performance
targets.
.2 Other Definitional Provisions.
-- -----------------------------
(a) All terms defined in this Agreement shall have the defined
meanings when used in the Note or any certificate or other document made or
delivered pursuant hereto.
(b) As used herein and in the Note, and any certificate or other
document made or delivered pursuant hereto, accounting terms not defined in
Section 1.1, and accounting terms partly defined in Section 1.1 to the extent
not defined, shall have the respective meanings given to them under GAAP.
(c) The words "hereof", "herein" and "hereunder" and words of similar
import when used in this Agreement shall refer to this Agreement as a whole and
not to any
-8-
<PAGE>
particular provision of this Agreement, and section, subsection, schedule and
exhibit references are to this Agreement unless otherwise specified.
ARTICLE II
THE CREDIT
.1 The Revolving Loans.
-- -------------------
(a) The Revolving Commitment.Bank agrees, on the terms and conditions
hereinafter set forth, to make loans ("Revolving Loans") to Borrower from time
---------------
to time during the period from the date hereof to up to, but not including, the
Maturity Date in an aggregate amount not to exceed, at any time outstanding, the
Revolving Commitment less the available undrawn and unreimbursed amount of all
outstanding L/Cs, as such amount may be reduced pursuant to Section 2.1(d).
Each borrowing (a "Borrowing") of a Revolving Loan shall be in a
---------
minimum amount of $1.00; provided that every selection of, conversion to, or
renewal of, the Libor Rate Option shall be in a minimum principal amount of
$500,000 or an integral multiple of $100,000 above such amount. Within the
limits of the Revolving Commitment and prior to the Maturity Date, Borrower may
borrow, repay pursuant to Section 2.2(b), and reborrow under this Section
2.1(a).
(b) Limitation on Revolving Loans. Bank shall have no obligation to
----------------------------------
make Revolving Loans hereunder to the extent that they would cause the
outstanding amount of Revolving Loans plus the undrawn and unreimbursed amount
of all L/Cs to exceed the Revolving Commitment.
(c) Making the Revolving Loans. Borrower may borrow under the
-------------------------------
Revolving Commitment on any Business Day, provided that Borrower shall give Bank
a Standard Notice specifying (i) the amount of the proposed Borrowing, and (ii)
the requested date of the Borrowing. Upon satisfaction of the applicable
conditions set forth in Article IV, the proceeds of all such Revolving Loans
will then be made available to Borrower by Bank by crediting the account of
Borrower on the books of Bank, or as otherwise directed by Borrower.
The Standard Notice may be given in writing (including facsimile
transmission) signed by an authorized officer of Borrower or orally, but if the
Standard Notice is provided orally, Borrower shall confirm the oral Standard
Notice on the same day in writing (including facsimile transmission) no later
than 1:00 p.m., California time, and any conflict regarding a written or oral
notice and Bank's books and records applicable to the same Borrowing shall be
conclusively determined by Bank's books and records absent manifest error. Bank
shall not incur any liability to Borrower in acting upon any oral or
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<PAGE>
written notice of Borrowing which Bank believes in good faith to have been given
by a Person duly authorized to borrow on behalf of Borrower.
(d) Reduction of the Revolving Commitment. Borrower shall have the
-----------------------------------------
right, upon at least 2 Business Days prior written notice to Bank, to terminate
in whole or reduce in part the unused portion of the Revolving Commitment,
without premium or penalty, provided that each partial reduction shall be in the
aggregate amount of $3,000,000 or an integral multiple thereof and that such
reduction shall not reduce the Revolving Commitment to an amount less than the
amount of the Revolving Loans and all L/Cs outstanding hereunder on the
effective date of the reduction. Such notice shall be irrevocable and such
reduction shall not be reinstated.
(e) Revolving Note. The Revolving Loans made by Bank pursuant hereto
-------------------
shall be evidenced by a promissory note of Borrower, substantially in the form
of Exhibit A, with any appropriate insertions (the "Revolving Note"), payable to
--------- --------------
the order of Bank and representing the obligation of Borrower to pay the
aggregate unpaid principal amount of all Revolving Loans made by Bank, with
interest thereon as prescribed in Section 2.3. Bank hereby is authorized to
record in its books and records and on any schedule annexed to the Revolving
Note, the date and amount of each Revolving Loan made by Bank, and the date and
amount of each payment of principal thereof, and in the case of Libor Rate
Option Revolving Loans, the Libor Rate, the Libor Rate Portion, and the Rate
Period with respect thereto, and any such recordation shall constitute prima
-----
facie evidence of the accuracy of the information so recorded; provided that
- -----
failure by Bank to effect such recordation shall not affect Borrower's
obligations hereunder. Prior to the transfer of a Revolving Note, Bank shall
record such information on any schedule annexed to and forming a part of such
Revolving Note.
.2 Repayment.
-------------
(a) Mandatory Repayments. The aggregate principal amount of the
-------------------------
Revolving Loans outstanding on the Maturity Date, together with accrued interest
thereon, shall be due and payable in full on the Maturity Date. If at any time
the aggregate outstanding Borrowings exceed the Revolving Commitment then in
effect, Borrower immediately shall repay the excess to Bank.
(b) Optional Payment. Borrower shall have the right at its option
---------------------
from time to time to prepay the Base Rate Portion in whole or in part without
premium or penalty. Borrower shall have no right to prepay any part of the Libor
Rate Portion at any time without the prior written consent of Bank except that
(i) Borrower may prepay any part of any Rate Segment at the expiration of the
Rate Period corresponding to such Rate Segment, and (ii) Borrower may prepay any
part of any other Rate Segment so long as Borrower also makes payment to Bank of
any amounts payable under Section 3.6(b) in connection therewith. Prepayments
shall be made by giving Bank written notice thereof (which shall be irrevocable)
by no later than 11:00 a.m. (California time) on the proposed date of
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<PAGE>
prepayment, specifying the date, amount, and type of prepayment, and upon such
date the amount so specified, accrued interest thereon, and any amounts payable
under Section 3.6(b) shall be due and payable.
.3 Interest Rate and Payment Dates.
-----------------------------------
(a) Payment. The principal balance of the Note shall be paid in
------------
accordance with the terms set forth in the Note. Accrued interest on the Base
Rate Portion shall be due and payable on the first Business Day of each month
commencing on March 1, 1999. Interest on each Rate Segment of the Libor Rate
Portion which has a Rate Period of less than three months shall be due and
payable on the last day of the Rate Period. Interest on each Rate Segment of the
Libor Rate Portion which has a Rate Period longer than three months shall be due
and payable on each three month anniversary of the commencement date of the Rate
Period and on the last day of the Rate Period. After maturity of any part of a
Note (by acceleration or otherwise), interest on such part of the Note shall be
due and payable ON DEMAND.
(b) Interest Rate. The unpaid principal amount of the Note shall bear
------------------
interest for each day until due on one or more bases selected by Borrower from
among the interest rate options (the "Interest Rate Options") set forth below.
---------------------
Borrower understands and agrees: (i) that Bank may from time to time determine
that the right of Borrower to select, convert to, or renew the Libor Rate Option
is not available, which availability shall not be unreasonably withheld, (ii)
that Borrower shall not have the right to select, convert to, or renew the Libor
Rate Option at any time that a Default or Event of Default has occurred and is
continuing, and (iii) that subject to the provisions hereof, Borrower may select
any number of options to apply simultaneously to different parts of the unpaid
principal amount of the Note and may select any number of Rate Segments to apply
simultaneously to different parts of the Libor Rate Portion.
Available Interest Rate Options
-------------------------------
Base Rate Option: A rate per annum for each day equal to the Base
----------------
Rate.
Libor Rate Option: A rate per annum for each day equal to the Libor
-----------------
Rate for such day plus the then applicable Libor Rate Margin.
(c) Rate Periods. At any time when Borrower selects, converts to, or
-----------------
renews the Libor Rate Option, Borrower shall fix a period (the "Rate Period")
-----------
which shall be one, two, three, or six months, during which the Libor Rate
Option shall apply to the corresponding Rate Segment; provided, that Borrower
--------
may not elect a Rate Period interest under the Note shall in no way be affected
by the fact that one or more Rate Periods may be in effect.
-11-
<PAGE>
(d) Interest After Maturity. Upon the occurrence and during the
----------------------------
continuation of an Event of Default, the principal amount of any part of the
Base Rate Portion shall bear interest for each day until paid (before and after
judgment) at a rate per annum (based on a year of 365 days and actual days
elapsed) which for each day shall be the greater of (a) 2% above the Base Rate
Option on the day such amount became due, and (b) 2% above the Base Rate Option,
such interest rate to change automatically from time to time effective as of the
effective date of each change in the Base Rate. Upon the occurrence and during
the continuation of an Event of Default, the principal amount of any part of the
Libor Rate Portion shall bear interest for each day until paid (before and after
judgment) (a) until the end of the applicable then current Rate Period at a rate
per annum 2% above the Libor Rate Option otherwise applicable to such part, and
(b) thereafter in accordance with the previous sentence.
(e) Selection, Conversion or Renewal of Rate Options. Subject to the
----------------------------------------------------
other provisions hereof, Borrower may select any Interest Rate Option to apply
to the borrowings evidenced by the Note. Subject to the other provisions hereof,
Borrower may convert any part of the unpaid principal amount of the Note from
any Interest Rate Option to the other Interest Rate Option: (a) at any time with
respect to the conversion from the Base Rate Option to the Libor Rate Option,
and (b) at the expiration of any Rate Period with respect to conversion from or
renewals of the Libor Rate Option as to the Rate Segment corresponding to such
expiring Rate Period (or at any other time, subject to Section 3.6(b)). Whenever
Borrower desires to select, convert, or renew the Libor Rate Option, Borrower
shall give Bank a Standard Notice thereof (which shall be irrevocable),
specifying the date, amount, and type of the proposed new Rate Option. If such
notice has been duly given, and if Bank approves the proposed selection,
conversion, or renewal, on and after the date specified in such notice, interest
shall be calculated upon the unpaid principal amount of the Note taking into
account such selection, conversion or renewal.
(b) Base Rate Fallback. If any Rate Period expires, any part of the
-----------------------
Rate Segment corresponding to such Rate Period which has not been converted or
renewed in accordance with Section 2.3(e) hereof automatically shall be
converted to the Base Rate Option. If Borrower fails to select, or if Bank fails
to approve an Interest Rate Option to apply to the borrowings evidenced by the
Note, such borrowings shall be deemed to be at the Base Rate Option. If at any
time Bank shall have determined in good faith (which determination shall be
conclusive) that the accrual of interest at the Libor Rate Option has been made
unascertainable, impractical, or unlawful by compliance by Bank in good faith
with any law (including common law), constitution, statute, treaty, regulation,
rule, ordinance, order, injunction, writ, decree or award of any government or
political subdivision or any agency, authority, bureau, central bank,
commission, department or instrumentality of either, or any court, tribunal,
grand jury or arbitrator, in each case whether foreign or domestic, or
administration thereof by any official body charged with the interpretation or
administration thereof or with any request or directive of any such event, the
outstanding
-12-
<PAGE>
principal amount of the Note subject to the Libor Rate Option shall
accrue interest at the Base Rate Option and Borrower shall not have the right to
select the Libor Rate Option.
.4 Letters of Credit and Letter of Credit Guarantees.
-----------------------------------------------------
(a) Subject to the terms and conditions of this Agreement, and it
being understood that the letter of credit facility provided for under this
Section 2.4 is a sublimit of the credit facility extended pursuant to Section
2.1, Bank agrees to issue standby letters of credit ("Standby L/Cs") and
commercial letters of credit ("Commercial L/Cs") for the account of Borrower
(collectively, Standby L/Cs and Commercial L/Cs shall be referred to herein as
"L/Cs") in an aggregate face amount at any time outstanding not to exceed
$10,000,000. Each L/C shall have an expiry date no longer than one year, and
all such L/Cs shall be in form and substance reasonably acceptable to Bank. The
expiry date of an L/C may extend to up to 364 days past the Maturity Date. Bank
shall not have any obligation to issue L/Cs to the extent that the available
undrawn amount of all outstanding L/Cs, plus the amount of the Revolving Loans
outstanding pursuant to Section 2.1, would exceed the Revolving Commitment. The
L/Cs issued under this Section 2.4 shall be used by Borrower, consistent with
this Agreement, for its general working capital purposes or other corporate
purposes. If Bank is obligated to advance funds under an L/C, the amount so
advanced immediately shall be deemed to be a Revolving Loan made by Bank to
Borrower pursuant to Section 2.1 and, thereafter, shall bear interest at the
rates then applicable under Section 2.3. Borrower further agrees to execute the
Bank's standard application for standby letters of credit, as required by Bank.
(b) Borrower hereby agrees to indemnify, save, defend, and hold Bank
harmless from any loss, cost, expense, or liability, including payments made by
Bank, expenses, and reasonable attorneys fees incurred by Bank, arising out of
or in connection with any L/Cs, provided that the same does not arise out of
Bank's gross negligence or willful misconduct or the violation of this Agreement
by Bank. Borrower agrees to be bound by the Bank's regulations and
interpretations of any L/C issued by Bank to or for Borrower's account, even
though this interpretation may be different from Borrower's own, and Borrower
understands and agrees that Bank shall not be liable for any error, negligence,
or mistakes, whether of omission or commission, in following Borrower's
instructions or those contained in the L/C's or any modifications, amendments,
or supplements thereto, provided that the same does not arise out of Bank's
gross negligence or willful misconduct or the violation of this Agreement by
Bank. The issuance of any L/C and any amendment to any L/C is subject to the
Bank's written approval and must be in form and content satisfactory to Bank and
in favor of a beneficiary acceptable to Bank in its reasonable credit judgement.
(c) Borrower will pay to Bank on or prior to the date of issuance of
any Commercial L/C, a fee equal to Bank's standard issuance fee applicable to
similar commercial letters of credit at the time of such issuances. Borrower
will pay to Bank with respect to each Standby L/C, a per annum fee, payable
quarterly in arrears, on or before the first Business Day after the end of each
such quarter, equal to the average undrawn amount of
-13-
<PAGE>
such L/C during the quarter multiplied by the applicable Libor Rate Margin,
based on a year of 365 days. Service charges, commissions, fees, and costs may
be charged at the Bank's customary rates with respect to routine services
relating to L/Cs and paid by Borrower at the time the service is rendered or the
cost is incurred.
(d) Immediately upon the termination of this Agreement, Borrower
agrees to either: (i) provide cash collateral, if requested by Bank, to be held
by Bank in an amount equal to one hundred percent (100%) of the maximum amount
of Bank's then outstanding obligations under L/Cs, or (ii) cause to be delivered
to Bank releases of all of Bank's then outstanding obligations under its
outstanding L/Cs. Any cash collateral received by Bank pursuant to this Section
2.4(d) shall be held by Bank in an interest bearing account selected by Bank in
its reasonable credit judgment, and interest earned on deposits in such account,
if any, shall be for the account of the Borrower subject to the provisions of
this Agreement. The provisions of this Section 2.4 shall survive the
termination of this Agreement with respect to any L/Cs then outstanding.
.5 Facility Fee. Borrower shall pay to Bank a facility fee, (the "Facility
----------------
Fee"), on (i) March 31, for the fiscal quarter then ended, (ii) May 15, for the
fiscal quarter ended June 30, and (iii) August 15, for the fiscal quarter ended
September 30, and (iv) November 15 for the period from October 1 through the
Maturity Date (in each case, a "Facility Fee Payment Date"). The amount of the
Facility Fee (i) shall be due and payable on each of the above Facility Fee
Payment Dates, (ii) shall be calculated based upon Borrower's financial
statements for its fiscal quarter ended immediately prior to the Facility Fee
Payment Date as stated above, and (iii) shall equal the following percentages of
the product of the Revolving Commitment multiplied by the quotient of the actual
number of days in the measuring fiscal quarter divided by 365:
(i) 0.15%, if, as of the applicable Test Date, the ratio of Net
Debt to EBITDA for the fiscal period then ended in less than
1.00:1.00;
(ii) 0.25%, if, as of the applicable Test Date, the ratio of Net
Debt to EBITDA for the fiscal period then ended is greater than
or equal to 1.00:1.00 and less than 2.00:1.00; or
(iii) 0.35%, if, as of the applicable Test Date, the ratio of Net
Debt to EBITDA for the fiscal period then ended is greater than
or equal to 2.00:1.00;
provided however, if Borrower fails to timely deliver the financial statements
- -------- -------
for the fiscal quarter then ended required to be delivered pursuant to
subsections 6.1(a) (i) and (ii), then the Facility Fee due for the succeeding
fiscal quarter, or other measuring period as the case may be, shall equal 0.35%
of the product of the Revolving Commitment multiplied by the quotient of the
actual number of days in the measuring fiscal quarter divided by 365.
-14-
<PAGE>
ARTICLE III
GENERAL PROVISIONS CONCERNING THE REVOLVING LOANS
.1 Use of Proceeds. The proceeds of the Revolving Loans hereunder shall be
-------------------
used by Borrower and its Subsidiaries for their general working capital and
corporate purposes (including, without limitation, the financing of Permitted
Acquisitions), consistent with the terms and conditions hereof.
.2 Computation of Interest and Fees.
------------------------------------
(a) Calculations. Interest in respect of the Base Rate Option
-----------------
Revolving Loans shall be calculated on the basis of a 365 day year for the
actual days elapsed. Any change in the interest rate on a Base Rate Revolving
Loan resulting from a change in the Base Rate shall become effective as of the
opening of business on the day on which such change in the Base Rate shall
become effective. Interest in respect of the Libor Rate Option Revolving Loans,
and any fees payable hereunder, shall be calculated on the basis of a 365 day
year for the actual days elapsed.
(b) Determination by Bank. Each determination of an interest rate or
--------------------------
fee by Bank pursuant to any provision of this Agreement shall be conclusive and
binding on Borrower in the absence of manifest error.
.3 Payments. Borrower shall make each payment of principal, interest, and
------------
fees hereunder, and under the Note, without setoff, recoupment, deduction, or
counterclaim, except as otherwise required by law, not later than 11:00 a.m.
(California time) on the day when due in lawful money of the United States of
America to Bank at the office of Bank designated in writing in immediately
available funds. Any interest not paid when due shall be compounded and shall
thereafter accrue interest at the rate then applicable to the Base Rate Portion
of Borrowings hereunder (and if no Base Rate Portion of Borrowings is
outstanding, then at the rate applicable to such Borrowings as if outstanding
under the Base Rate Option).
.4 Payment on Non-Business Days. Whenever any payment to be made hereunder
--------------------------------
or under the Note shall be stated to be due on a day which is not a Business
Day, such payment may be made on the next succeeding Business Day, and with
respect to payments of principal, interest thereon shall be payable at the then
applicable rate during such extension.
.5 Reduced Return. If Bank shall have determined that any applicable law,
------------------
regulation, rule or regulatory requirement applicable to Bank (collectively in
this Section 3.5 "Requirement") regarding capital adequacy, or any change
-----------
therein, or any change in the interpretation or administration thereof by any
United States federal or state governmental authority, central bank or
comparable agency charged with the interpretation or administration thereof, or
compliance by Bank with any request or directive regarding capital
-15-
<PAGE>
adequacy (whether or not having the force of law) of any such authority, central
bank or comparable agency, has or would have the effect of reducing the rate of
return on Bank's capital as a consequence of its Revolving Commitment and
obligations hereunder to a level below that which would have been achieved but
for such Requirement, change or compliance (taking into consideration Bank's
policies with respect to capital adequacy) by an amount deemed by Bank to be
material (which amount shall be determined by Bank's reasonable allocation of
the aggregate of such reductions resulting from such events), then from time to
time, within five Business Days after demand by Bank (including a calculation in
reasonable detail of such amount), Borrower shall pay to Bank such additional
amount or amounts as will compensate Bank for such reduction. Bank does not
currently have knowledge of any new Requirement or any pending change in any
existing Requirement that would result in such additional amounts being owed.
.6 Indemnities and Losses.
--------------------------
(a) Indemnities. Whether or not the transactions contemplated hereby
----------------
shall be consummated, Borrower agrees to indemnify, defend, and hold Bank, and
the shareholders, officers, directors, employees and agents of Bank (each, an
"Indemnified Person"), harmless from and against any and all claims,
- --------------------
liabilities, losses, damages, costs and expenses (whether or not any of the
foregoing Indemnified Persons is a party to any litigation), including, without
limitation, reasonable attorneys fees and costs (including, without limitation,
the reasonable estimate of the allocated cost of in-house legal counsel and
staff) and costs of investigation, document production, attendance at a
deposition, or other discovery, prior to the assumption of defense by Borrower,
with respect to or arising out of any proposed acquisition by Borrower or any of
its Subsidiaries of any Person or any securities (including a self-tender), this
Agreement or any use of proceeds hereunder, or any claim, demand, action or
cause of action being asserted against Borrower or any of its Subsidiaries
(collectively, the "Indemnified Liabilities"), provided that Borrower shall have
-----------------------
no obligation hereunder with respect to Indemnified Liabilities arising from the
gross negligence or willful misconduct of, or violations of this Agreement by,
any such Indemnified Persons. If any claim is made, or any action, suit or
proceeding is brought, against any Indemnified Person of the type contemplated
by this Section, the Indemnified Person shall notify Borrower within thirty (30)
days of Bank being notified in writing of the commencement of such action, suit
or proceeding, and Borrower will assume the defense of such action, suit or
proceeding, employing counsel selected by Borrower and reasonably satisfactory
to the Indemnified Person, and pay the fees and expenses of such counsel. This
covenant shall survive termination of this Agreement and payment of the
outstanding Note for a period of five years.
(b) Funding Losses. Borrower agrees to indemnify Bank and to hold
-------------------
Bank harmless from any reasonable loss or expense including, but not limited to,
any such loss or expense arising from interest or fees payable by Bank to
lenders of funds obtained by it in order to maintain its Libor Rate Option
Revolving Loans hereunder, which Bank may sustain
-16-
<PAGE>
or incur as a consequence of (i) payment, prepayment or conversion of any part
of any Rate Segment of the Libor Rate Portion on a day other than the last day
of the corresponding Rate Period (whether or not any such payment is pursuant to
demand by Bank under the Note and whether or not any such payment, prepayment or
conversion is consented to by Bank, unless Bank shall have expressly waived such
indemnity in writing); (ii) default by Borrower in making a conversion or
continuation after Borrower has given a notice thereof, (iii) default by
Borrower in making any payment after Borrower has given a notice of payment,
(iv) attempt by Borrower to revoke in whole or part any irrevocable notice given
pursuant to Section 2.3(e) hereof; or (v) breach of or default by any obligor in
the performance or observance of any covenant or condition in the Note, any
separate security, guarantee or suretyship agreement between Bank and any
obligor, or any other document executed and delivered to Bank by Borrower or any
of its Subsidiaries in connection with the indebtedness evidenced by the Note.
If Bank sustains any such loss or expense, it shall from time to time notify
Borrower of the amount reasonably determined in good faith by Bank (which
determination shall be conclusive) to be necessary to indemnify Bank for such
loss or expense. Such amount shall be due and payable by Borrower ON DEMAND
(provided that Bank shall give Borrower a written calculation of such amount in
reasonable detail). This covenant shall survive termination of this Agreement
and payment of the outstanding Note.
.7 Requirements of Law. In the event that any law, regulation, or
-----------------------
directive applicable to Bank or any change therein or in the interpretation or
application thereof or compliance by Bank with any request or directive (whether
or not having the force of law) from any United States federal or state central
bank or other governmental authority, agency or instrumentality:
(a) does or shall impose, modify or hold applicable any reserve,
assessment rate, special deposit, compulsory loan or other requirement
(collectively in this Section 3.7 "Requirements") against assets held by, or
------------
deposits or other liabilities in or for the account of, advances or loans by, or
other credit extended by, or any other acquisition of funds by, any office of
Bank which are not otherwise included in the determination of any Libor Rate at
the last Borrowing, conversion or continuation date of a Revolving Loan;
(b) does or shall impose, modify, or hold applicable any of the
Requirements against the Revolving Commitment to extend credit;
(c) does or shall impose on Bank any other condition; and the result
of any of the foregoing is to increase the cost to Bank of making, renewing, or
maintaining its Revolving Commitment, or the Libor Rate Option Revolving Loans
or to reduce any amount receivable thereunder (which increase or reduction shall
be determined by Bank's reasonable allocation of the aggregate of such cost
increases or reduced amounts receivable resulting from such events), then, in
any such case, Borrower shall pay to Bank, within five Business Days of its
demand, any additional amounts necessary to compensate Bank for such additional
cost or reduced amount receivable as determined by Bank with respect to Sections
3.5 and 3.6 of this Agreement (provided that Bank shall give Borrower a written
calculation
-17-
<PAGE>
of reasonable detail of such amounts). If Bank becomes entitled to claim any
additional amounts pursuant to this subsection, it shall notify Borrower of the
event by reason of which it has become so entitled. Such notice shall contain a
statement incorporating the calculation as to any additional amounts payable
pursuant to the foregoing sentence, and such statement submitted by Bank to
Borrower shall be conclusive in the absence of manifest error. Bank does not
currently have knowledge of any new Requirement or any pending change in any
existing Requirement that would result in such additional amounts being owed.
ARTICLE IV
CONDITIONS OF LENDING
.1 Conditions Precedent to Initial Revolving Loans and Initial L/Cs.
--------------------------------------------------------------------
The obligation of Bank to make its initial Revolving Loan or to issue
the initial L/C is subject to the conditions precedent that:
(a) Bank shall have received on or before the day of the initial
Borrowing the following, each dated prior to or as of such day, in form and
substance satisfactory to Bank:
(i) The Note issued by Borrower to the order of Bank;
(ii) Copies of the Articles of Incorporation of Borrower,
certified as of a recent date by the Secretary of State of its state of
formation or incorporation;
(iii) Copies of the Bylaws of Borrower, certified by the
Secretary or an Assistant Secretary of Borrower;
(iv) Copies of resolutions of the Board of Directors of
Borrower, in form and substance satisfactory to Bank, approving the Loan
Documents and the Borrowings hereunder;
(v) An incumbency certificate executed by the Secretary or an
Assistant Secretary of Borrower or equivalent document, certifying the names and
signatures of the officers of Borrower or other Persons authorized to sign the
Loan Documents and the other documents to be delivered hereunder;
(vi) Executed originals of all Loan Documents;
(vii) A certificate executed by the Secretary or an Assistant
Secretary of Borrower indicating those officers of Borrower who are authorized
to make requests for Revolving Loans hereunder;
(b) All fees required to be paid on the Closing Date shall have been
paid by Borrower to Bank;
-18-
<PAGE>
(c) All factual information previously furnished by Borrower or its
Subsidiaries to Bank shall be true and correct in all material respects;
(d) No Material Adverse Change has occurred since September 30, 1998;
(e) Bank shall have received an opinion of Borrower's counsel in form
and substance reasonably satisfactory to Bank;
(f) No action, suit, investigation or proceeding shall have been
pending or threatened in any court or before any arbitration or governmental
authority against Borrower or any of its Subsidiaries and that reasonably could
be expected to result in a Material Adverse Change or that is pending against
Bank or Borrower or any of its Subsidiaries and relates to the loans
contemplated hereunder;
(g) Borrower and its Subsidiaries are in compliance, in all material
respects, with any existing material financial obligations;
(h) Bank shall have completed all due diligence of Borrower and its
Subsidiaries, including but not limited to the review of litigation, taxation,
accounting methods or practices, labor issues, insurance, pension liabilities
(actual or contingent), material contracts, debt arrangements, property
ownership, environmental liabilities, contingent liabilities, and the capital
structure of Borrower and its Subsidiaries;
(i) Evidence of compliance of all regulatory filings and applications
as they may relate to the Borrowing and issuance of L/Cs;
(j) Receipt of the Acknowledgement and Agreement to be Bound (as set
forth as Exhibit B) certified by each of Borrower's Significant Subsidiaries, as
of the Closing Date, acknowledging (i) this Agreement, and (ii) that each such
Significant Subsidiary shall be bound by the covenants provided in Section 6.1
and Section 6.2 hereof, as though each such Significant Subsidiary were a party
hereto;
(k) Receipt of a letter certified by Borrower and each of its
Significant Subsidiaries, as of the Closing Date, stating that there exists no
restrictions on each such Significant Subsidiary from upstreaming money to
Borrower, except as otherwise provided by law; and
(l) All corporate and legal proceedings and all instruments and
documents in connection with the transactions contemplated by this Agreement
shall be reasonably satisfactory in content, form and substance to Bank and its
counsel, and Bank and such counsel shall have received any and all further
information and documents which Bank or such counsel may reasonably have
requested in connection therewith, such documents where appropriate to be
certified by proper corporate or governmental authorities.
-19-
<PAGE>
.2 Conditions Precedent to Each Borrowing or Issuance of an L/C. The
----------------------------------------------------------------
obligation of Bank to make a Revolving Loan on the occasion of each Borrowing
(including the initial Borrowing) or to issue an L/C (including the initial
issuance of an L/C) shall be subject to the further conditions precedent that on
the date of such Borrowing or such issuance of an L/C (a) the following
statements shall be true and Bank shall have received the notice required by
Section 2.1(c), which notice shall be deemed to be a certification by Borrower
that:
(i) The representations and warranties contained in Section 5.1 are
correct in all material respects on and as of the date of such Borrowing as
though made on and as of such date,
(ii) No event has occurred and is continuing, or would result from
such Borrowing, which constitutes a Default or an Event of Default, and
(iii) Nothing shall have occurred and Bank shall not have become
aware of any fact or condition not previously known, which Bank shall determine
has, or could reasonably be expected to result in a Material Adverse Change, and
(iv) All Loan Documents are in full force and effect.
ARTICLE V
REPRESENTATIONS AND WARRANTIES
.1 Representations and Warranties. Borrower represents and warrants as
----------------------------------
follows:
(a) Organization. Borrower and its Subsidiaries are duly organized,
-----------------
validly existing and in good standing under the laws of the jurisdiction of its
incorporation. Borrower and its Subsidiaries are (except, in each case, where
failure to comply with the foregoing would not result in a Material Adverse
Change) duly authorized, qualified and licensed in all applicable jurisdictions,
and under all applicable laws, regulations, ordinances or orders of public
authorities, to carry on its business in the locations and in the manner
presently conducted.
(b) Authorization. The execution, delivery and performance by
------------------
Borrower of the Loan Documents, and the making of Borrowings hereunder, are
within Borrower's corporate powers, have been duly authorized by all necessary
corporate action, do not contravene (i) Borrower's charter, by-laws or other
organizational document or (ii) any material law or regulation (including
Regulations T, U, and X) binding on or affecting Borrower or its properties, and
will not constitute an event of default under any material agreement to which
Borrower is a party or by which its assets or properties may be bound.
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<PAGE>
(c) Governmental Consents. No authorization or approval or other
--------------------------
action by, and no notice to or filing with, any governmental authority or
regulatory body (except routine reports required pursuant to the Securities
Exchange Act of 1934, as amended (if such act is applicable to Borrower), which
reports will be made in the ordinary course of business) is required for the due
execution, delivery and performance by Borrower of the Loan Documents.
(d) Validity. The Loan Documents to which they are parties are the
-------------
binding obligations of Borrower, enforceable in accordance with their respective
terms; except in each case as such enforceability may be limited by bankruptcy,
insolvency, reorganization, liquidation, moratorium or other similar laws of
general application and equitable principles relating to or affecting creditors'
rights.
(e) Financial Condition. The balance sheets of Borrower and any of
------------------------
its consolidated Subsidiaries as at September 30, 1998, and the related
statements of income and retained earnings of Borrower and any of its
consolidated Subsidiaries, copies of which have been furnished to Bank, fairly
present the financial condition of Borrower and any of its consolidated
Subsidiaries as at such date and the results of the operations of Borrower and
any of its consolidated Subsidiaries for the period ended on such date, all
determined in accordance with GAAP (subject to the absence of footnotes and
normal year-end audit adjustments), consistently applied, and since September
30, 1998, there has not been a Material Adverse Change.
(f) Litigation. Except as set forth on Schedule 5.1(f) hereto, there
--------------- ---------------
is no known pending or threatened action or proceeding affecting Borrower or any
of its Subsidiaries before any court, governmental agency or arbitrator, which
may materially adversely affect the consolidated financial condition or
operations of Borrower and its Subsidiaries or which may result in a Material
Adverse Change.
(g) Employee Benefit Plans. Borrower and each of its ERISA Affiliates
---------------------------
has fulfilled its obligations, if any, under the minimum funding standards of
ERISA and the Internal Revenue Code with respect to each Plan and is in
compliance in all material respects with the applicable provisions of ERISA and
the Internal Revenue Code, and has not incurred any liability with respect to
any Plan under Title IV of ERISA. No reportable event has occurred under Section
4043(b) of ERISA for which the PBGC requires 30 day notice. No action by
Borrower or of any ERISA Affiliate of Borrower to terminate or withdraw from any
Plan has been taken and no notice of intent to terminate a Plan has been filed
under Section 4041 of ERISA. No proceeding has been commenced with respect to a
Plan under Section 4042 of ERISA, and no event has occurred or condition exists
which might constitute grounds for the commencement of such a proceeding.
(h) Disclosure. No representation or warranty of Borrower contained
---------------
in this Agreement or any other document, certificate or written statement
furnished to Bank by or on behalf of Borrower for use in connection with the
transactions contemplated by this
-21-
<PAGE>
Agreement contains any known untrue statement of a material fact or omits to
state a known material fact (known to Borrower in the case of any document not
furnished by it) necessary in order to make the statements contained herein or
therein not misleading. There is no fact known to Borrower (other than matters
of a general economic nature) which materially adversely affects the business,
operations, property, assets or condition (financial or otherwise) of Borrower
and any of its Subsidiaries, taken as a whole, which has not been disclosed
herein or in such other documents, certificates and statements furnished to Bank
for use in connection with the transactions contemplated hereby.
(i) Environmental Matters. Except as set forth in Schedule 5.1(i)
-------------------------- ---------------
hereto, neither Borrower nor any Subsidiary, nor any of their respective
officers, employees, representatives or agents, nor, to the best of their
knowledge, any other person, has treated, stored, processed, discharged,
spilled, or otherwise disposed of any substance defined as hazardous or toxic by
any applicable federal, state or local law, rule, regulation, order or
directive, or any waste or by-product thereof, at any real property or any other
facility owned, leased or used by Borrower or any Subsidiary, in violation of
any applicable statutes, regulations, ordinances or directives of any
governmental authority or court, which violations reasonably may result in
uninsured liability to Borrower or any Subsidiary or any of their respective
officers, employees, representatives, agents or shareholders in an uninsured
amount exceeding $5,000,000 for all such violations; and the unresolved
violations set forth in said Schedule 5.1(i) will not result in liability to
Borrower or any Subsidiary or any of their respective officers, employees,
representatives, agents or shareholders in an amount exceeding $5,000,000 for
all such unresolved violations. Except as set forth in said Schedule, no
employee or other person has made a claim or demand in writing against Borrower
or any Subsidiary based on alleged damage to health caused by any such hazardous
or toxic substance or by any waste or by-product thereof, other than claims,
demand or charges which have been settled or satisfied; and the unsatisfied
claims or demands against Borrower or any Subsidiary set forth in said Schedule
5.1(i) will not result in uninsured liability to Borrower or any Subsidiary or
any of their respective officers, employees, representatives, agents or
shareholders in an amount exceeding $5,000,000 in excess of reserves on the
books of Borrower for all such unsatisfied claims or demands. Except as set
forth in said Schedule 5.1(i), neither Borrower nor any Subsidiary has been
charged in writing by any governmental authority with improperly using,
handling, storing, discharging or disposing of any such hazardous or toxic
substance or waste or by-product thereof or with causing or permitting any
pollution of any body of water, other than claims, demand or charges which have
been settled or satisfied; and the outstanding related charges set forth in said
Schedule 5.1(i) will not result in uninsured liability to Borrower or any
Subsidiary or any of their respective officers, employees, representatives,
agents or shareholders in an amount exceeding $5,000,000 for all such
outstanding charges.
(j) Employee Matters. There is no known strike or work stoppage in
---------------------
existence or threatened involving Borrower or any of its Subsidiaries that may
materially adversely affect the consolidated financial condition or operations
of Borrower and its
-22-
<PAGE>
Subsidiaries taken as a whole or that reasonably could be expected to result in
a Material Adverse Change.
(k) Solvency. Borrower and its Subsidiaries, taken as a whole, are
-------------
Solvent.
(l) Title to Properties. Borrower and each of its Subsidiaries has
------------------------
good and marketable title to (or a valid leasehold or license in) all of its
material properties and assets subject to no liens, mortgages, pledges, security
interests, encumbrances or charges of any kind, except those as are permitted
under Section 6.2(d) hereof.
(m) Tax Returns. To the best of Borrower's and each of its
----------------
Subsidiary's knowledge, after due inquiry, except as set forth on Schedule
--------
5.1(m) hereto and, from and after the Closing Date, where the failure of
- -------
Borrower or any of its Subsidiaries to file or to cause the filing of any tax
return, report, or declaration shall not result in a Material Adverse Change,
Borrower and each of its Subsidiaries, have filed, or caused to be filed, in a
timely manner all tax returns, reports and declarations which are required to be
filed by each of them (including any automatic or granted extensions). All
information in such tax returns, reports and declarations is complete and
accurate in all material respects. Borrower and each of its Subsidiaries has
paid or caused to be paid all taxes due and payable or claimed due and payable
in any assessment received by it, except taxes the validity of which are being
contested in good faith by appropriate proceedings diligently pursued and
available to Borrower or its Subsidiaries and with respect to which adequate
reserves have been set aside on its books. Adequate provision has been made for
the payment of all accrued and unpaid Federal, State, county, local, foreign and
other taxes whether or not yet due and payable and whether or not disputed.
(n) Compliance with Other Agreements and Applicable Laws. Neither
---------------------------------------------------------
Borrower nor any of its Subsidiaries is in default in any material respect
under, or in violation in any material respect of any of the terms of, any
agreement, contract, instrument, lease or other commitment to which it is a
party or by which it or any of its assets are bound, the loss of which
reasonably could be expected to result in a Material Adverse Change, and
Borrower and each of its Subsidiaries is in compliance in all material respects
with all applicable provisions of laws, rules, regulations, licenses, permits,
approvals and orders of any foreign, Federal, State or local governmental
authority, except for those the failure to comply with which reasonably could
not be expected to result in a Material Adverse Change.
(o) Year 2000 Compliance. Any reprogramming required to address the
-------------------------
Year 2000 problem (i.e., the inability of certain computer applications to
recognize correctly and perform properly date-sensitive functions involving
certain dates prior to and any date after December 31, 1999), of (a) the
Borrower's and its Subsidiaries' critical or material computer systems and (b)
critical or material equipment containing embedded microchips (including, to the
best of Borrower's knowledge, systems and equipment supplied by others or with
which the Borrower's or its Subsidiaries' systems interface) and the testing of
all such systems and equipment, as so reprogrammed, will be completed by October
30, 1999.
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<PAGE>
The cost to the Borrower and its Subsidiaries of such reprogramming and testing
and of the reasonably foreseeable consequences of the Year 2000 problem to the
Borrower and its Subsidiaries (including, without limitation, reprogramming
errors and the failure of others' systems and equipment) will not result in an
Event of Default or cause a Material Adverse Change.
ARTICLE VI
COVENANTS
.1 Affirmative Covenants. So long as any Note shall remain unpaid or Bank
-------------------------
shall have any Revolving Commitment hereunder, Borrower will, unless Bank shall
otherwise consent in writing:
(a) Financial Information. Furnish to Bank:
--------------------------
(i) as soon as available, but in any event within 95 days after
the end of each fiscal year of Borrower, (1) a copy of Borrower's consolidated
balance sheet of itself and its consolidated Subsidiaries as at the end of each
fiscal year and the related consolidated statements of income and retained
earnings (or comparable statement) employed in the business and changes in
financial position and cash flow for such year, setting forth in each case in
comparative form the figures for the previous year, accompanied by an
unqualified report and opinion thereon of independent certified public
accountants acceptable to Bank, and, if prepared, such accountants' letter to
management, and (2) a copy of Borrower prepared consolidating balance sheet and
income statements prepared in connection with the statement provided in subpart
(1) above;
(ii) as soon as available, but in any event within 50 days after
the end of each fiscal quarter, Borrower's unaudited consolidated (and
consolidating balance sheets of itself and any consolidated Subsidiaries) as at
the end of such period and the related unaudited consolidated and consolidating
statements of income and retained earnings, certified by a duly authorized
officer of Borrower as being fairly stated in all material respects subject to
year end adjustments; all such financial statements to be complete and correct
in all material respects and to be prepared in accordance with GAAP applied
consistently throughout the periods reflected therein (except as disclosed
therein);
(iii) together with each delivery of financial statements of
Borrower and any of its Subsidiaries pursuant to subdivision (i) above, a
certificate, executed by Borrower's chairman of the board (if an officer) or its
president or one of its vice presidents or by its chief financial officer
stating that the signers have reviewed the terms of this Agreement and have
made, or caused to be made under their supervision, a review in reasonable
detail of the transactions and condition of Borrower and any of its Subsidiaries
during the accounting period covered by such financial statements and that such
review has not disclosed the existence during or at the end of such accounting
period, and that the
-24-
<PAGE>
signers do not have knowledge of the existence as at the date of such
certificate, of any condition or event that constitutes a Default or an Event of
Default, or, if any such condition or event existed or exists, specifying the
nature and period of existence thereof and what action Borrower has taken, is
taking and proposes to take with respect thereto; and (b) together with each
delivery of financial statements of Borrower and any of its Subsidiaries
pursuant to subdivision (i) and (ii) above, a certificate demonstrating in
reasonable detail compliance during and at the end of the applicable accounting
periods with the restrictions contained in Section 6.2 hereof; and
(iv) Any other report as Bank may reasonably request from time
to time.
(b) Notices and Information. Deliver to Bank:
----------------------------
(i) promptly upon the Chief Executive Officer, the Chief
Financial Officer, or the Vice President-Finance of Borrower obtaining knowledge
(a) of any condition or event which constitutes a Default or an Event of
Default, (b) that any Person has given any notice to Borrower or any Subsidiary
of Borrower or taken any other action with respect to a claimed default or event
or condition of the type referred to in Section 7.1(e), (c) of the institution
of any litigation involving an alleged uninsured liability (including possible
forfeiture of property) of Borrower or any of its Subsidiaries equal to or
greater than $10,000,000 or any adverse determination in any litigation
involving a potential uninsured or unindemnified liability of Borrower or any of
its Subsidiaries equal to or greater than $10,000,000, provided that in the case
of an indemnified liability the indemnitor is financially able to honor the
indemnity if called upon to do so, or (d) of a Material Adverse Change, an
officers' certificate specifying the nature and period of existence of any such
condition or event, or specifying the notice given or action taken by such
holder or Person and the nature of such claimed default, Event of Default,
Default, event or condition, and what action Borrower has taken, is taking and
proposes to take with respect thereto;
(ii) promptly upon becoming aware of the occurrence of or
forthcoming occurrence of (a) any reportable event under Section 4043(b) of
ERISA for which the PBGC requires 30 day notice, (b) any action by Borrower or
any ERISA Affiliate of Borrower to terminate or withdraw from a Plan or the
filing of any notice of intent to terminate under Section 4041 of ERISA, (c) any
notice of noncompliance made with respect to a Plan under Section 4041(b) of
ERISA, and (d) the commencement of any proceeding with respect to a Plan under
Section 4042 of ERISA;
(iii) promptly, and in any event within 10 days after receipt
thereof, a copy of any material notice, summons, citation, directive, letter or
other form of communication from the FDA, the DEA, or any other governmental
authority or court in any way concerning any allegedly unlawful action or
omission on the part of Borrower or its Subsidiaries in connection with the
manufacture, storage, or sale of products or the operation of Borrower's or its
Subsidiaries' businesses; and
-25-
<PAGE>
(iv) promptly upon Bank's request, such other statements,
budgets, forecasts or reports as to Borrower and its Subsidiaries as Bank
reasonably may request.
(c) Corporate Existence, Etc. At all times preserve and keep in full
-----------------------------
force and effect its and its Subsidiaries' corporate existence and rights and
franchises material to its business and those of each of its Subsidiaries;
provided, however, that the corporate existence of any Subsidiary may be
- -------- -------
terminated if such termination is in the best interest of Borrower and is not
materially disadvantageous to the holder of any Note.
(d) Payment of Taxes and Claims. Pay, and cause each of its
--------------------------------
Subsidiaries to pay, all taxes, assessments and other governmental charges
imposed upon it or any of its properties or assets or in respect of any of its
franchises, business, income or property before any penalty or interest accrues
thereon, and all claims (including, without limitation, claims for labor,
services, materials and supplies) for sums which have become due and payable and
which by law have or may become a lien upon any of its properties or assets,
prior to the time when any penalty or fine shall be incurred with respect
thereto; provided that no such charge or claim need be paid if being contested
in good faith by appropriate proceedings promptly instituted and diligently
conducted and if such reserve or other appropriate provision, if any, as shall
be required in conformity with GAAP shall have been made therefor.
(e) Maintenance of Properties; Insurance. Maintain or cause to be
-----------------------------------------
maintained in good repair, working order and condition all material properties
used or useful in the business of Borrower and its Subsidiaries and from time to
time will make or cause to be made all appropriate repairs, renewals and
replacements thereof. Borrower will maintain or cause to be maintained, with
financially sound and reputable insurers, insurance with respect to its
properties and business and the properties and business of its Subsidiaries
against loss or damage of the kinds customarily insured against by corporations
of established reputation engaged in the same or similar businesses and
similarly situated, of such types and in such amounts as are customarily carried
under similar circumstances by such other corporations. Borrower will comply
with any other insurance requirement set forth in any other Loan Document and,
upon the request of Bank, deliver to Bank a copy of each insurance policy, or,
if permitted by Bank, a certificate of insurance listing all insurance in force.
(f) Inspection. Permit any authorized representatives designated by
---------------
Bank to visit and inspect any of the properties of Borrower or any of its
Subsidiaries, including its and their financial and accounting records, and to
make copies and take extracts therefrom, and to discuss its and their affairs,
finances and accounts with its and their officers, all upon prior notice and at
such reasonable times during normal business hours and as often as reasonably
may be requested.
(g) Compliance with Laws Etc. Exercise, and cause each of its
-----------------------------
Subsidiaries to exercise, all due diligence in order to comply with the
requirements of all applicable laws, rules, regulations and orders of any
governmental authority, including,
-26-
<PAGE>
without limitation, all rules and regulations of public utility commissions or
similar regulatory authorities, and all environmental laws, rules, regulations
and orders, noncompliance with which reasonably could be expected to result in a
Material Adverse Change.
(h) Hazardous Waste Studies. Promptly, and in any event within thirty
----------------------------
(30) days after submission, provide Bank with copies of all such investigations,
studies, samplings and testings as may be requested by any governmental or
regulatory authority relative to any substance defined as hazardous or toxic by
any applicable federal, state or local law, rule, regulation, order or
directive, or any waste or by-product thereof, at or affecting any real property
or any facility owned, leased or used by Borrower or any Subsidiary.
(i) Year 2000 Compliance. Complete (i) the reprogramming required to
-------------------------
address the Year 2000 problem (i.e., the inability of certain computer
applications to recognize correctly and perform properly date-sensitive
functions involving certain dates prior to and any date after December 31,
1999), of (a) the Borrower's and its Subsidiaries' critical or material computer
systems and (b) critical or material equipment containing embedded microchips
(including the exercise of reasonable commercial efforts with respect to systems
and equipment supplied by others or with which the Borrower's or its
Subsidiaries' systems interface) and (ii) the testing of all such systems and
equipment, as so reprogrammed, by October 30, 1999.
(j) Significant Subsidiaries. Together with each delivery of
-----------------------------
financial statements of Borrower and any of its Subsidiaries for each fiscal
quarter or fiscal year of Borrower, as applicable, pursuant to Section 7.1(a),
Borrower shall deliver, or cause to be delivered, to Bank, with respect to each
Significant Subsidiary of Borrower as at the end of such fiscal quarter or
fiscal year, as applicable, (i) an Acknowledgement and Agreement to be Bound (as
set forth on Exhibit B) certified by such Significant Subsidiary acknowledging
(A) this Agreement, and (B) that such Significant Subsidiary shall be bound by
the covenants provided in Section 6.1 and Section 6.2 hereof, as though such
Significant Subsidiary were a party hereto; and (ii) a letter certified by
Borrower and such Significant Subsidiary stating that there exists no
restrictions on such Significant Subsidiary from upstreaming money to Borrower,
except as otherwise provided by law; in each case, except with respect to each
Significant Subsidiary of Borrower for which Bank has previously received such
Acknowledgement and Agreement to be Bound or such letter, as applicable.
.2 Negative Covenants. So long as any Note shall remain unpaid or Bank
----------------------
shall have any Revolving Commitment hereunder, Borrower will not, without the
written consent of Bank:
(a) Leverage Ratio. At the end of any fiscal quarter of Borrower,
-------------------
permit the ratio of Total Debt (measured as of the last date of the fiscal
quarter then ended) to
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<PAGE>
EBITDA (measured on the basis of the period of four fiscal quarters then ended),
to be greater than 3.00:1.00.
(b) Minimum Net Worth. At the end of any fiscal quarter of Borrower,
----------------------
permit Net Worth to be less than $580,000,000 plus (i) 75% of Borrower's
Consolidated net income (net loss to have no effect and shall not be a
deduction) for each fiscal quarter ended on or after December 31, 1998, plus
(ii) 100% of any Net Issuance Proceeds received by Borrower or its Subsidiaries
during each such fiscal quarter, and plus (iii) 100% of the net increase in
Borrower's Net Worth attributable to acquisitions accounted for on the basis of
a pooling of interests; provided however, that the Minimum Net Worth required by
-------- -------
this covenant shall be reduced by 100% of the cumulative non-cash write-offs of
capitalized research and development costs included in the assets acquired
pursuant to Acquisitions concluded on or after July 1, 1998, provided that such
--------
write-offs are either (a) expressly approved by Borrower's independent certified
public accountants, or (b) the amount is shown as a separate item on Borrower's
financial statements.
(c) Consolidated Interest Coverage Ratio: At the end of any fiscal
-----------------------------------------
quarter of Borrower, permit the ratio of EBIT to Interest Expense, to be less
than 3.50:1.00 (measured on the basis of the period of four fiscal quarters then
ended).
(d) Liens Etc. Create or suffer to exist, or permit any of its
--------------
wholly-owned Subsidiaries to create or suffer to exist, any Lien upon or with
respect to any of its properties, whether now owned or hereafter acquired, or
assign, or permit any of its wholly-owned Subsidiaries to assign, any right to
receive income, in each case to secure any indebtedness of any Person other than
(i) Liens in favor of Bank; (ii) Liens reflected on Schedule 6.2(d) hereto;
---------------
(iii) purchase money Liens upon or in any personal property acquired or held by
Borrower or any wholly-owned Subsidiary in the ordinary course of business to
secure the purchase price of such property or to secure purchase money financing
incurred solely for the purpose of financing the acquisition of rights in or use
of such property; and (iv) Liens for taxes, assessments or other governmental
charges or levies not yet due or thereafter payable without penalty, or Liens of
carriers, warehousemen, mechanics, materialmen and landlords incurred in the
ordinary course of business for sums not overdue, or any such Liens being
diligently contested in good faith by appropriate proceedings and for which
adequate reserves in accordance with GAAP shall have been set aside on its books
(but only if such Liens do not, individually or in the aggregate, result in a
Materially Adverse Change or materially adversely affect the rights of Bank);
(v) Liens incurred in the ordinary course of business in connection with
workmen's compensation, unemployment insurance or other forms of governmental
insurance or benefits, or to secure performance of statutory obligations, leases
and contracts (other than for borrowed money) entered into in the ordinary
course of business or to secured obligations on surety or appeal bonds; (vi)
judgment Liens in existence less than 30 days after the entry thereof or with
respect to which execution has been stayed or the payment of which is covered in
full (subject to a customary deductible) by insurance, and (vii) Liens, securing
indebtedness, liabilities or obligations of up to $25,000,000 permitted
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<PAGE>
under Section 6.2(e) hereof, in an aggregate amount not to exceed $25,000,000 at
any one time.
(e) Debt. Create, incur, assume or permit to exist, or permit any
---------
Subsidiary to create, incur, assume or permit to exist, any direct or contingent
indebtedness, liabilities or lease obligations (other than those to Bank), or
become liable for the debts of others without Bank's written consent, except for
(i) acquiring goods, supplies or merchandise on normal trade credit, (ii)
endorsing negotiable instruments received in the usual course of business, (iii)
obtaining surety bonds in the usual course of business, (iv) the indebtedness of
Borrower set forth on Schedule 6.2(e)(iv) attached hereto, (v) debt permitted
-------------------
under Section 6.2(g), and (vi) additional indebtedness of Borrower in an
-------------
aggregate amount not to exceed $200,000,000 at any one time outstanding.
(f) Consolidation, Merger or Dissolution. Except for Permitted
-----------------------------------------
Acquisitions, (i) consolidate with or merge into any other corporation or
entity, or (ii) wind up, liquidate or dissolve.
(g) Loans, Investments, Secondary Liabilities. Make or permit to
----------------------------------------------
remain outstanding, or permit any Subsidiary to make or permit to remain
outstanding, any loan or advance to, or guarantee, induce or otherwise become
contingently liable, directly or indirectly (except as permitted by Section
--------
6.2(e)), in connection with the obligations, stock or dividends of, or own,
- ------
purchase or acquire any stock, obligations or securities of or any other
interest in, or make any capital contribution to, any other Person, except that
Borrower and its Subsidiaries may:
(i) own, purchase or acquire certificates of deposit issued by
Bank, or any other commercial bank having combined assets in excess of
$500,000,000 ("Qualified Banks"), repurchase agreements entered into with
Qualified Banks, commercial paper issued by issuers rated Moody's P-1, corporate
bonds issued by issuers rated Moody's A or better, municipal bonds rated Moody's
AA or better, direct obligations of the United States of America or its
agencies, obligations guaranteed by the United States of America, or shares of
mutual funds or other investment funds that invest solely in one or more of the
foregoing;
(ii) continue to own the existing capital stock of Borrower's
Subsidiaries ;
(iii) endorse negotiable instruments for deposit or collection or
similar transactions in the ordinary course of business;
(iv) allow Borrower and Borrower's Subsidiaries to make or
permit to remain outstanding advances from Borrower's Subsidiaries to Borrower,
or visa versa;
(v) make or permit to remain outstanding loans and advances to
any of its officers, employees, directors and shareholders or enter into or
permit to remain
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<PAGE>
outstanding guarantees in connection with the obligations of any of its
officers, directors and shareholders, in an aggregate amount for all such loans,
advances and guarantees not exceeding $5,000,000 outstanding at any one time;
(vi) continue to own those investments existing on the date of
this Agreement that are described on Schedule 6.2(g)(vi);
-------------------
(vii) make the Permitted Acquisitions; and
(viii) make additional investments in an aggregate amount not to
exceed $25,000,000.
(h) Asset Sales. Convey, sell, lease, transfer or otherwise dispose
----------------
of, or permit any Subsidiary to convey, sell, lease, transfer or otherwise
dispose of, in one transaction or a series of transactions, all or any part of
its or any of its Subsidiary's business, property or fixed assets outside the
ordinary course of business, whether now owned or hereafter acquired, in an
aggregate amount during the term hereof in excess of $25,000,000.
(i) [Intentionally Omitted].
---------------------
(j) Transactions with Affiliates. Neither Borrower nor any of its
---------------------------------
Subsidiaries shall enter into any transaction for the purchase, sale or exchange
of property or the rendering of any service to or by any affiliate, except in
the ordinary course of and pursuant to the reasonable requirements of Borrower's
or its Subsidiary's business and upon fair and reasonable terms no less
favorable to Borrower or its Subsidiary than Borrower or its Subsidiary would
obtain in a comparable arm's length transaction with an unaffiliated person.
(k) Books and Records. Borrower will keep proper books of record and
----------------------
account in which full, true and correct entries in conformity with GAAP and all
requirements of applicable law shall be made of all dealings and transactions in
relation to their businesses and activities.
(l) Restructure. Make any change in the principal nature of the
----------------
Borrower or its Subsidiaries business operations (taken as a whole), or the date
of Borrower's fiscal year.
ARTICLE VII
EVENTS OF DEFAULT
.1 Events of Default. If any of the following events ("Events of Default")
--------------------- -----------------
shall occur and be continuing:
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<PAGE>
(a) Borrower shall fail to pay (i) any installment of principal
hereunder when due or declared due, or (ii) any installment of interest or any
other amount payable hereunder within five Business Days of the date when due or
declared due; or
(b) Any representation or warranty made by Borrower herein or by
Borrower (or any of its officers) in connection with the Loan Documents shall
prove to have been incorrect in any material respect when made; or
(c) (i) Borrower shall fail or neglect to perform, keep, or observe
any covenant contained in Section 6.2 on the date that Borrower is required to
perform, keep, or observe such covenant; or (ii) Borrower shall fail or neglect
to perform, keep, or observe any covenant contained in this Agreement (exclusive
of a default covered by another subsection of this Section 7.1) on the date that
Borrower is required to perform, keep, or observe such covenant, and the breach
of such covenant is not cured to Bank's satisfaction within thirty (30) days of
such breach; or
(d) Borrower or any of its Subsidiaries shall default in the
performance of or compliance with any term contained in any Loan Document other
than this Agreement and such default shall not have been remedied or waived
within any applicable grace period; or
(e) (i) Borrower shall (A) fail to pay any principal of, or premium or
interest on, any indebtedness, the aggregate outstanding principal amount of
which is at least $5,000,000 (excluding indebtedness evidenced by the Note),
when due (whether by scheduled maturity, required prepayment, acceleration,
demand or otherwise) and such failure shall continue after the applicable grace
period, if any, specified in the agreement or instrument relating to such
indebtedness, or (B) fail to perform or observe any term, covenant or condition
on its part to be performed or observed under any agreement or instrument
relating to any such indebtedness or material to the performance, business,
property, assets, condition (financing or otherwise) or prospects of Borrower
and its Subsidiaries taken as a whole, when required to be performed or
observed, and such failure shall continue after the applicable grace period, if
any, specified in such agreement or instrument, and such action or inaction can
reasonably be expected to result in the acceleration or demand of such
indebtedness; or
(f) (i) Borrower shall commence any case, proceeding or other action
(A) under any existing or future law of any jurisdiction, domestic or foreign,
relating to bankruptcy, insolvency, reorganization or relief of debtors, seeking
to have an order for relief entered with respect to it, or seeking to adjudicate
it a bankrupt or insolvent, or seeking reorganization, arrangement, adjustment,
winding-up, liquidation, dissolution, composition or other relief with respect
to it or its debts, or (B) seeking appointment of a receiver, trustee, custodian
or other similar official for it or for all or any substantial part of its
assets, or Borrower or any of its Subsidiaries shall make a general assignment
for the benefit of its creditors; or (ii) there shall be commenced against
Borrower any case, proceeding or other action of a nature referred to in clause
(i) above which (A) results in the entry of an order for
-31-
<PAGE>
relief or any such adjudication or appointment or (B) remains undismissed,
undischarged or unhanded for a period of forty five days; or (iii) there shall
be commenced against Borrower or any of its Subsidiaries any case, proceeding or
other action seeking issuance of a warrant of attachment, execution, distraint
or similar process against all or any substantial part of its assets which
results in the entry of an order for any such relief which shall not have been
vacated, discharged, or stayed or bonded pending appeal within sixty days from
the entry thereof; or (iv) Borrower shall take any action in furtherance of, or
indicating its consent to, approval of, or acquiescence in, any of the acts set
forth in clause (i), (ii) and (iii) above; or (v) Borrower shall generally not,
or shall be unable to, or shall admit in writing its inability to, pay its debts
as they become due; or
(g) One or more judgments or decrees shall be entered against Borrower
involving in the aggregate a liability (not paid or fully covered by insurance
or reserves or by an indemnity from an indemnitor financially able to honor the
indemnity if called upon to do so) equal to or greater than $10,000,000 and all
such judgments or decrees shall not have been vacated, discharged, or stayed or
bonded pending appeal within sixty days from the entry thereof; or
(h) Any guaranty, if any, for any reason other than satisfaction in
full of all obligations of Borrower under the Loan Documents, ceases to be in
full force and effect or is declared null and void, or any guarantor denies that
it has any further liability under such guaranty or gives notice to such effect
and any such cessation, declaration or denial shall not have been rescinded, and
such guarantee reaffirmed, to the satisfaction of Bank within thirty (30) days
after Borrower knows of such development; or
(i) The occurrence of any one or more of the following events with
respect to Borrower or any ERISA Affiliate of Borrower provided such event or
events could reasonably be expected, in the judgment of Bank, to subject
Borrower or any ERISA Affiliate of Borrower to any tax, penalty or liability (or
any combination of the foregoing) which, in the aggregate, could have a material
adverse effect on the financial condition of Borrower with respect to a Plan:
(A) a reportable event shall occur with respect to a Plan which is, in the
reasonable judgment of Bank, likely to result in the termination of such Plan
for purposes of Title IV of ERISA, or (B) any Plan termination (or commencement
of proceedings to terminate a Plan) or the full or partial withdrawal from a
Plan by Borrower or any ERISA Affiliate of Borrower; or
(j) There shall be instituted against Borrower or any of its
Subsidiaries, any one or more proceedings for which forfeiture of any property
valued in an aggregate amount equal to or greater than $1,000,000 is a potential
penalty in such proceedings, and such proceedings remain undismissed,
undischarged or unbonded for a period of thirty (30) days from the date Borrower
knows of such proceedings; or
(k) A Change of Control in Borrower shall have occurred; or
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<PAGE>
(l) There shall have occurred any Material Adverse Change; or
(m) Any governmental authority takes action that Bank reasonably
believes materially adversely affects Borrower's or its Subsidiaries' financial
condition taken as a whole or ability to perform obligations under the Loan
Documents.
Then, (i) upon the occurrence of any Event of Default described in
clause (f) above, the Revolving Commitment immediately shall terminate and all
Revolving Loans hereunder with accrued interest thereon, and all other amounts
owing under the Loan Documents automatically shall become due and payable, and
(ii) upon the occurrence of any other Event of Default, Bank may, by notice to
Borrower, declare the Revolving Commitment to be terminated forthwith, whereupon
the Revolving Commitment shall immediately terminate; and, by notice to
Borrower, declare the Revolving Loans hereunder, with accrued interest thereon,
and all other amounts owing under the Loan Documents to be due and payable
forthwith, whereupon the same shall immediately become due and payable. Bank
shall have all rights, powers and remedies available under each of the Loan
Documents, or accorded by law. All rights, powers and remedies of Bank in
connection with each of the Loan Documents may be exercised at any time by Bank
and from time to time after the occurrence of an Event of Default, are
cumulative and not exclusive, and shall be in addition to any other rights,
powers or remedies provided by law or equity. Except as expressly provided
above in this Section, presentment, demand, protest and all other notices of any
kind are hereby expressly waived. Notwithstanding any other provision of this
Agreement, including Section 8.2, notices to Borrower under this Section shall
be communicated in writing (including facsimile transmissions).
ARTICLE VIII
MISCELLANEOUS
.1 Amendments, Etc. No amendment or waiver of any provision of the Loan
-------------------
Documents nor consent to any departure by Borrower therefrom, shall in any event
be effective unless the same shall be in writing and signed by Bank and
Borrower, and then such waiver or consent shall be effective only in the
specific instance and for the specific purpose for which given.
.2 Notices, Etc. Except as otherwise set forth in this Agreement, all
----------------
notices and other communications provided for hereunder shall be in writing
(including facsimile communication) and mailed or sent by facsimile or
delivered, if to Borrower, at its address set forth on the signature page
hereof; and if to Bank, at its address set forth on the signature page hereof;
or, as to each party, at such other address as shall be designated by such party
in a written notice to the other party. All such notices and communications
shall be effective when sent by facsimile, or three days after such notice or
communication is deposited in the mails, except that notices and communications
to Bank pursuant to Article II or VII shall not be effective until received by
Bank.
-33-
<PAGE>
.3 No Waiver; Remedies. No failure on the part of either party hereto to
-----------------------
exercise, and no delay in exercising, any right under any of the Loan Documents
shall operate as a waiver thereof; nor shall any single or partial exercise of
any right under any of the Loan Documents preclude any other or further exercise
thereof or the exercise of any other right. The remedies herein provided are
cumulative and not exclusive of any remedies provided by law or in equity.
Nothing contained in this Agreement is, or shall in the future be deemed to
constitute, a waiver of any right, remedy, power, or protection available to
Bank in any law (including without limitation the common law), or in equity, now
or in the future, whether or not such right, remedy, power, or protection is
express herein.
.4 Costs and Expenses. Borrower shall pay to Bank immediately upon demand
----------------------
the full amount of all reasonable costs and expenses, including reasonable
attorneys fees (to include outside counsel fees and all allocated costs of
Bank's in-house counsel), incurred by Bank in connection with (a) the
negotiation and preparation of this Agreement and each other of the Loan
Documents, and the preparation of any amendments and waivers hereto and thereto,
(b) the enforcement of Bank's rights and/or the collection of any amounts which
become due to Bank under any of the Loan Documents (including, without
limitation, in appellate, bankruptcy, insolvency, liquidation, reorganization,
moratorium or other similar proceedings) or the restructuring of the Loan
Documents, and (c) the prosecution or defense of any action in any way related
to any of the Loan Documents, including, without limitation, any action for
declaratory relief.
.5 Participations. Bank may sell, assign, transfer, negotiate or grant
------------------
participations to other financial institutions in all or part of the obligations
of Borrower outstanding under the Loan Documents, provided that any such sale,
assignment, transfer, negotiation or participation shall be in compliance with
the applicable federal and state securities laws and shall not increase the
liability of Borrower hereunder; and provided further that any assignee or
transferee agrees to be bound by the terms and conditions of this Agreement.
Bank may, in connection with any actual or proposed assignment or participation,
disclose to the actual or proposed assignee or participant, any information
relating to Borrower or any of its Subsidiaries so long as the proposed
participant is bound by a confidentiality agreement reasonably acceptable to
Borrower.
.6 Effectiveness: Binding Effect. This Agreement shall become effective
---------------------------------
when it shall have been executed and delivered by Borrower and Bank and
thereafter shall be binding upon and inure to the benefit of Borrower, Bank and
their respective successors and assigns, except that Borrower shall not have the
right to assign its rights hereunder or any interest herein without the prior
written consent of Bank. Effective as of the Closing Date, (i) that certain
guaranty dated December 17, 1997, executed and delivered by Watson Laboratories,
Inc., Circa Pharmaceuticals, Inc., Oclassen Pharmaceuticals, Inc., Royce
Laboratories, Inc., and the Rugby Group, Inc. in favor of Bank, and all
obligations thereunder, shall terminate; (ii) that certain credit agreement
dated December 17, 1997, as amended prior to the date hereof, between Bank and
Watson
-34-
<PAGE>
Pharmaceuticals, Inc., and all obligations thereunder, shall terminate; (iii)
any cash collateral held by Bank as additional security for outstanding letters
of credit shall be released to Borrower on the Closing Date, and (iv) that
certain Letter of Credit Agreement dated as of June 17, 1998, as amended prior
to the date hereof, between Bank and Watson Pharmaceuticals, Inc., and all
obligations thereunder, shall terminate.
.7 Governing Law; Choice of Forum; Service of Process; Jury Trial Waiver.
-------------------------------------------------------------------------
(a) The validity, interpretation and enforcement of this Agreement and
the other Loan Documents and any dispute arising out of the relationship between
the parties hereto, whether in contract, tort, equity or otherwise, shall be
governed by the laws of the State of California.
(b) Borrower and Bank irrevocably consent and submit to the non-
exclusive jurisdiction of the state courts of the County of Los Angeles and the
United States District Court for the Central District of California and waive
any objection based on venue or forum non conveniens with respect to any action
----- --- ----------
instituted therein arising under this Agreement or any of the other Loan
Documents or in any way connected with or related or incidental to the dealings
of the parties hereto in respect of this Agreement or any of the other Loan
Documents or the transactions related hereto or thereto, in each case whether
now existing or hereafter arising, and whether in contract, tort, equity or
otherwise, and agree that any dispute with respect to any such matters shall be
heard only in the courts described above.
(c) Borrower hereby waives personal service of any and all process
upon it and consents that all such service of process may be made by certified
mail (return receipt requested) directed to its address set forth on the
signature pages hereof and service so made shall be deemed to be completed five
days after the same shall have been so deposited in the U.S. mails, or, at
Bank's option, by service upon Borrower in any other manner provided under the
rules of any such courts. Within thirty (30) days after such service, Borrower
shall appear in answer to such process, failing which Borrower shall be deemed
in default and judgment may be entered by Bank against Borrower for the amount
of the claim and other relief requested.
(d) BORROWER AND BANK EACH HEREBY WAIVES ANY RIGHT TO TRIAL BY JURY OF
ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION (1) ARISING UNDER THIS AGREEMENT OR
ANY OF THE OTHER LOAN DOCUMENTS OR (2) IN ANY WAY CONNECTED WITH OR RELATED OR
INCIDENTAL TO THE DEALINGS OF THE PARTIES HERETO IN RESPECT OF THIS AGREEMENT OR
ANY OF THE OTHER LOAN DOCUMENTS OR THE TRANSACTIONS RELATED HERETO OR THERETO IN
EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING, AND WHETHER IN CONTRACT,
TORT, EQUITY OR OTHERWISE. BORROWER AND BANK EACH HEREBY AGREES AND
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<PAGE>
CONSENTS THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED
BY COURT TRIAL WITHOUT A JURY AND THAT BORROWER OR BANK MAY FILE AN ORIGINAL
COUNTERPART OF A COPY OF THIS AGREEMENT WITH ANY COURT AS WRITTEN EVIDENCE OF
THE CONSENT OF THE PARTIES HERETO TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY.
(e) Bank shall not have any liability to Borrower (whether in tort,
contract, equity or otherwise) for losses suffered by Borrower in connection
with, arising out of, or in any way related to the transactions or relationships
contemplated by this Agreement, or any act, omission or event occurring in
connection herewith, unless it is determined by a final and non-appealable
judgment or court order binding on Bank, that the losses were the result of acts
or omissions constituting gross negligence or willful misconduct. In any such
litigation, Bank shall be entitled to the benefit of the rebuttable presumption
that it acted in good faith and with the exercise of ordinary care in the
performance by it of the terms of this Agreement.
.8 Waiver of Notices. Borrower hereby expressly waives demand,
---------------------
presentment, protest and notice of protest and notice of dishonor with respect
to any and all instruments and commercial paper, included in or evidencing any
of the obligations, and any and all other demands and notices of any kind or
nature whatsoever with respect to the obligations and this Agreement, except
such as are expressly provided for herein. No notice to or demand on Borrower
which Bank may elect to give shall entitle Borrower to any other or further
notice or demand in the same, similar or other circumstances.
.9 Entire Agreement. This Agreement with Exhibits and Schedules and the
--------------------
other Loan Documents embody the entire agreement and understanding between the
parties hereto and supersedes all prior agreements and understandings relating
to the subject matter hereof.
.10 Separability of Provisions. In case any one or more of the provisions
-------------------------------
contained in this Agreement should be invalid, illegal or unenforceable in any
respect, the validity, legality and enforceability of the remaining provisions
contained herein shall not in any way be affected or impaired thereby.
.11 Execution in Counterparts. This Agreement may be executed in any
------------------------------
number of counterparts and by different parties hereto in separate counterparts,
each of which when so executed shall be deemed to be an original and all of
which taken together shall constitute one and the same agreement.
[Remainder of page left intentionally blank]
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed by their respective officers thereunto duly authorized, as of the
date first above written.
MELLON BANK, N.A. WATSON PHARMACEUTICALS, INC.
By: /s/ KEVIN D. KELLY By: /s/ ALLEN CHAO
---------------------------- -------------------------------
Name: Kevin D. Kelly Name: Allen Chao, Ph.D.
Title: Vice President Title: President, Chief Executive
Officer and Chairman
Address: Address:
Western Region 311 Bonnie Circle
Middle Market Banking Corona, California 91720
400 South Hope Street Attention: Allen Chao, Ph.D.
Los Angeles, California 90071 President, Chief Executive
Attention: Kevin D. Kelly Officer and Chairman
Vice President
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<PAGE>
EXHIBIT 10.3
THIRD AMENDMENT TO LEASE
------------------------
This Third Amendment to Lease ("Amendment") to made as of August 31, 1998, by
and between RICHARD Y. CHAO, as Trustee of HSI-HSIUNG AND HSU HWA CHAO TRUST I,
hereinafter referred to as "Lessor," and WATSON PHARMACEUTICALS, INC., a Nevada
corporation, successor in interest to Watson Laboratories, Inc., hereinafter
referred to as "Lessee."
Recitals:
--------
A. Lessor and Lessee have previously entered into a certain Lease dated
December 23, 1985, as amended by an Addendum, an Addendum dated
August 11, 1992, and Second Amendment to Lessee dated August 8, 1995
(the "Lease"), providing for the lease of that certain improved real
property, hereinafter referred to as the "Premises," in the City of
Corona, County of Riverside, State of California, commonly known as
100 Business Center Drive, Corona, California, consisting of building
containing approximately 30,108 gross square, feet.
B. Lessor and Lessee wish to extend the term of the Lease for an
additional one year period, upon the terms and conditions set forth
hereinafter.
Agreement:
---------
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Lessor and Lessee agree as
follows:
1. Paragraph 3.1 of the Lease is hereby replaced with the following:
"The term of this Lease shall be for sixteen (16) years commencing
on January 1, 1986 and ending on December 31, 2001, unless sooner
terminated pursuant to any provision hereof."
2. Lessee hereby consents to Lessor's disposition of the Premises
(subject to Lessee's rights under the Lease) to Dr. Allen Chao,
Richard Chao, Agnes Kung and Phylis Hsia, each to have upon such
disposition an equal undivided interest in the Premises. Lessor
agrees that, upon such disposition, Richard Chao shall hold powers
of attorney on behalf of Dr. Allen Chao, Agnes Kung and Phylis Hsia
granting Richard Chao the authority (with the power to legally bind
the above interest holders in the Premises) over all matters related
to the Premises and the Lease, such power of attorney to be
acknowledged and agreed to by each of Dr. Allen Chao, Agnes Kung and
Phylis Hsia.
3. Except as modified hereby, the Lease remains in full force and
effect.
<PAGE>
IN WITNESS WHEREOF, Lessor and Lessee have executed this Third Amendment as
of the date first above written.
LESSOR: LESSEE:
RICHARD Y. CHAO, AS TRUSTEE OF HSI- WATSON PHARMACEUTICALS, INC.
HSIUNG AND HSU-HWA CHAO TRUST I a Nevada corporation
successor in interest to Watson
Laboratories, Inc.
By: /s/ RICHARD Y. CHAO By:
Richard Y. Chao, Trustee _______________________________
Its:
_______________________________
Dated: Dated:
______________________________ _______________________________
<PAGE>
ADDENDUM
THIS ADDENDUM IS ATTACHED TO AND MADE A PART OF THE LEASE AGREEMENT DATED
DECEMBER 23RD, 1985, BY AND BETWEEN HSI-HSIUNG & HSU-HWA CHAO TRUST I, AS
LESSOR, AND WATSON LABORATORIES, INC., AS LESSEE.
48. RENT SCHEDULE:
The monthly rental beginning January 1, 1986 to December 31, 1987 is
composed of a BASE RENT of $13,026.00 plus a LEASHOLD IMPROVEMENT RENT OF
$6,456.00 for a total monthly rental of $19,482.00. (The LEASEHOLD IMPROVEMENT
RENT shall remain fixed for the duration of the Lease Term).
The BASE RENT shall be increased every TWO (2) Years beginning on January
1, 1988 in proportion to the increase in the INDEX* which has occurred between
the first month of the last increase and the month in which the rent is to be
further increased or by FIVE PERCENT (5%), which ever is greater. (INDEX* =
United States Department of Labor, Bureau of Labor Statistics, Consumer Price
Index for Urban Wage Earners and Clerical Workers. All items for the Los
Angeles-Riverside County Statistical Area on the basis of 1967 = 100).
49. During the term of this Lease Agreement, should Lessor decide to sell the
premises leased by Lessee located at 100 Business Center Drive, Corona,
California 91720, Lessor hereby grants Lessee the Right of First Refusal to
Purchase the said property.
50. This Agreement shall extend to and be binding upon the heirs,
administrator, successors, and assignees of the Lessor and Lessee.
CONSENTED TO AND AGREED BY: CONSENTED TO AND AGREED BY:
WATSON LABORATORIES, INC. HSI-HSIUNG & HSU-HWA CHAO TRUST I
132 A BUSINESS CENTER DRIVE #5 NINOS CORONA, CALIFORNIA 91720
IRVINE, CALIFORNIA 92714
/s/ ALLEN Y. CHAO /s/ RICHARD Y. CHAO
- ----------------- -------------------
ALLEN Y. CHAO - PRESIDENT RICHARD Y. CHAO - TRUSTEE
<PAGE>
EXHIBIT 10.4
STANDARD COMMERCIAL LEASED -----------------------
(EXISTING BUILDING) 3400 W. Lake Avenue
IL 1/80 -----------------------
Drafted January 4, 1984
-----------------------
LEASE AGREEMENT
THIS LEASE AGREEMENT, made and entered into by and between LASALLE NATIONAL
----------------
BANK, Not Personally but as Trustee Under Trust Agreement dated March 2, 1977
- -----------------------------------------------------------------------------
and known as Trust No. 52157
- -----------------------------------------------------------------------------
hereinafter referred to as "Landlord" and
------------------------------------
MODERN WHOLESALE DRUG MIDWEST, INC. hereinafter
- -----------------------------------------------------------
referred to as "Tenant":
W I T N E S S E T H:
1. Premises and Term. In consideration of the obligation of Tenant to pay
rent as herein provided, and in consideration of the other terms, provisions and
covenants hereof, Landlord hereby demises and leases to Tenant and Tenant hereby
accepts and leases from Landlord, all that portion (hereinafter referred to as
the "premises") of certain real property, buildings and improvements situated
within the County of Cook , State of Illinois ,
-------------------------------- ------------
legally described in Exhibit "A", said premises being as outlined on the site
plan contained in Exhibit "B", and including any parking areas and truck loading
areas specifically marked in red on said Exhibit B for the exclusive use of
Tenant, said Exhibits being attached hereto and incorporated herein by
reference, and all rights, privileges, easements, appurtenances and immunities
belonging to or in any way pertaining to the premises.
TO HAVE AND TO HOLD the same for a term commencing on March 1, 1984
--------------------
and ending February 28, 1989 sixty (60) months thereafter,
-------------------------------------------------
unless terminated pursuant to any provision hereof. Tenant acknowledges that it
has inspected the premises, knows the condition thereof, and accepts such
premises, and specifically the buildings and improvements comprising the same,
in their present condition, as suitable for the purposes for which the premises
are leased. Taking of possession by Tenant shall be deemed conclusively to
establish that said buildings and other improvements are in good and
satisfactory condition as of when possession was taken. Tenant further
acknowledges that no representations as to the repair of the premises, nor
promises to alter, remodel of improve the premises have been made by Landlord,
unless such are expressly set forth in this lease. If this lease is executed
before the premises become vacant or otherwise available and ready for
occupancy, or if any present tenant or occupant of the premises holds over and
Landlord cannot, using good faith efforts, acquire possession of the premises
prior to the date above recited as the commencement date of this lease, Landlord
shall not be deemed to be in default hereunder, nor in any way liable to Tenant
because of such failure. and Tenant agrees to accept possession of the premises
at such time as Landlord is able to tender the same, which date shall
thenceforth be deemed the "commencement date"; and the term of this tease shall
automatically be extended so as to include the full number of months
hereinbefore provided for, except that if the commencement date is other than
the first day of a calendar month. such
1
<PAGE>
term shall also be extended for the remainder of the calendar month in which
possession is tendered. Landlord hereby waives payment of rent covering any
period prior to such tendering of possession. After the commencement date,
Tenant shall, upon demand, execute and deliver to Landlord a letter of
acceptance of delivery of the premises.
2. Base Rent and Security Deposit.
A. Tenant agrees to pay to Landlord for the premises in lawful money of the
United States rent for the entire term hereof at the rate of See Paragraph 27
----------------
Dollars ($
- ------------------------------------------------------------ ---------
) per month, in advance, except that the monthly installment which
- ---------
otherwise shall be due on the commencement date recited above, shall be due and
payable on the date hereof. Thereafter, one such monthly installment shall be
due and payable without demand on or before the first day of each calendar month
succeeding the commencement date recited above during the demised term; further
provided, that the rental payment for any fractional calendar month at the
commencement or end of the lease term shall be prorated.
B. In addition, Tenant agrees to deposit with Landlord on the date hereof
the sum of Twenty Five Thousand Three Hundred Eighty-Two and 81/100---Dollars
-----------------------------------------------------------
($25,382.81), which sum shall be held by Landlord, without obligation for
---------
interest, as security for the full, timely and faithful performance of Tenant's
covenants and obligations under this lease, it being expressly understood and
agreed that such deposit is not an advance rental deposit or a measure of
Landlord's damages in case of Tenant's default. Upon the occurrence of any
event of default by Tenant, Landlord may, from time to time, without prejudice
to any other remedy provided herein or provided by law, use such fund to the
extent necessary to make good any arrears of rent or other payments due Landlord
hereunder, and any other damage, injury, expense or liability caused by any
event of Tenant's default; and Tenant shall pay to Landlord on demand the amount
so applied in order to restore the security deposit to its original amount.
Although the security deposit shall be deemed the property of Landlord, any
remaining balance of such deposit shall be returned by Landlord to Tenant at
such time after termination of this lease when Landlord shall have determined
that all Tenant's obligations under this lease have been fulfilled. Subject to
the other terms and conditions contained in this lease, if the premises are
conveyed by Landlord. said deposit may be turned over to Landlord's. or its
successor's, grantee. and if so, Tenant hereby releases Landlord, or its
successor, as the case may be, from any and all liability with respect to said
deposit and its application or return.
3. Use. The demised premises shall be continuously used by Tenant, but only
for the purpose of receiving, storing. shipping and selling (other than at
retail) products, materials and merchandise made and/or distributed by Tenant
and for such other lawful purposes as may be incidental thereto. Tenant shall at
its own cost and expense obtain any and all licenses and permits necessary for
any such use. The parking of automobiles, trucks or other vehicles in the areas
not specifically designated on Exhibit B (unless such other areas are designated
by Landlord to be common parking areas) and the outside storage of any property
(including, without limitation, over-night parking of trucks and other vehicles)
are prohibited without Landlord's prior written consent. Tenant shall comply
with all governmental laws. ordinances and regulations applicable to the use of
the premises and its occupancy thereof, and shall promptly comply with all
governmental orders and directives for the correction, prevention and abatement
of any violations or nuisances in of upon, or connected with, the premises, all
at
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Tenant's sole expense. If, as a result of any change in the governmental
laws, ordinances and regulations, the premises must be altered to lawfully
accommodate Tenant's use and occupancy thereof, such alterations shall be made
only with the consent of Landlord, but the entire cost thereof shall be borne by
Tenant; provided, that, the necessity of Landlord's consent shall in no way
create any liability against Landlord for failure of Tenant to comply. or alter
the premises to comply, with such laws. ordinances and regulations. Tenant
shall not permit any objectionable or unpleasant odors, smoke, dust, gas, noise
or vibrations to emanate from the premises, nor take any other action which
would constitute a nuisance or would disturb or endanger any other tenants of
the building in which the premises are situated or unreasonably interfere with
such tenants' use of their respective premises or permit any use which would
adversely affect the reputation of the building in which the premises are
situated. Without Landlord's prior written consent, Tenant shall not receive,
store or otherwise handle any product, material or merchandise which is
explosive or highly flammable. Tenant will not permit the premises to be used
for any purpose (including, without limitation, the storage of merchandise) in
any manner which would render the insurance thereon void or increase the
insurance rite thereof, and Tenant shall immediately cease and desist from such
use, paying all cost and expense resulting from such improper use.
4. Taxes.
A. Landlord agrees to pay all general and special taxes, assessments and
governmental charges of any kind and nature whatsoever (hereinafter collectively
referred to as "taxes") lawfully levied against the real property described in
Exhibit A, the building situated thereon and the grounds, parking areas,
driveways and alleys around the building. If for any real estate tax year
applicable to the term hereof (or any renewal or extension of such term)
Tenant's proportionate share of such taxes levied for such tax year shall exceed
the sum of Sixty Nine Thousand Seven Hundred Thirty-One and 81/100 Dollars
---------------------------------------------------------
($ 69,731.81 ) - ("Landlord's share"), Tenant shall pay to Landlord as
-------------
additional rent upon demand at the time the bill for each installment for such
tax year issues, the amount of such excess applicable to each installment less
any monthly payments paid by Tenant as provided below for such tax year. Upon
the issuance of the actual bills (as distinguished from any estimated bill) for
taxes to be paid in the calendar year in which the commencement date falls and
upon tile issuance of such actual bills in each succeeding calendar year during
the term hereof. Tenant shall, upon Landlord's request, commencing with the
first day of the month next succeeding the date of which the taxes covered by
such term are due without penalty and on the first day of each of the next
eleven months, pay as additional rent, and not as a deposit, one-twelfth
(1/12th) of the amount by which the taxes paid in such calendar year exceeded
Landlord's share. In addition, Tenant shall pay upon demand its proportionate
share of any fees, expenses and costs incurred by Landlord in protesting any
assessments, levies or the tax rate.
B. If at any time during the term of this lease, the present method of
taxation shall be changed so that in lieu of the whole or any part of any taxes,
assessments or governmental charges levied, assessed or imposed on real estate
and the improvements thereon, thereto shall be levied, assessed or imposed on
Landlord a capital levy or other tax directly on the rents received therefrom
and/or a franchise tax, assessment, levy or charge measured by or based, in
whole or in part, upon such rents for the present or any future building or
buildings on the premises, then all such taxes, assessments, levies or charges,
or the part thereof so measured or based, shall be deemed to be included within
the term "taxes" for the purposes hereof.
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C. Any payment to be made pursuant to this Paragraph 4 with respect to the
real estate tax year in which this lease commences or terminates shall be
prorated.
5. Landlord's Repairs. Landlord shall at its expense maintain in good
repair, reasonable wear and tear excepted, only the foundation and the
structural soundness of the exterior walls of the building. Tenant shall
immediately give Landlord written notice of any defect or need for repairs in
the foundation and exterior walls, after which Landlord shall have reasonable
opportunity to repair same of cure such defect. Landlord's liability with
respect to any defects, repairs or maintenance for which Landlord is responsible
under any of the provisions of this lease shall be limited to the cost of such
repairs or maintenance or the curing of such defect. The term "walls" as used
herein shall not include windows, glass or plate glass, doors, special store
fronts or office entries.
6. Tenant's Repairs.
A. Tenant shall at its own cost and expense keep and maintain all parts of
the premises and the real estate on which the building is located, including any
areas shared in common with other tenants of the building, for which Landlord is
not expressly responsible under the terms of this lease, in good condition,
promptly making all necessary repairs and replacements, whether ordinary or
extraordinary, or structural or nonstructural, with materials and workmanship of
the same character, kind and quality as the original, including but not limited
to, windows, glass and plate glass, doors, skylights, any special office
entries, interior walls and finish work, floors and floor coverings, downspouts,
gutters, heating and air conditioning systems, electrical systems and fixtures,
sprinkler systems, dock boards, truck doors, dock bumpers, paving, plumbing work
and fixtures, termite and pest extermination, regular removal of trash and
debris, regular mowing of any grass, trimming, weed removal and general
landscape maintenance, including the rail spur areas. Tenant as part of its
obligations hereunder shall (i) keep the parking areas, driveways, alleys and
the whole of the premises in a clean and sanitary condition, (ii) if the
premises are served by a railroad switch or spur track, maintain (or reimburse
the railroad company for maintaining) any railway switch or spur track and
related facilities serving the real estate of which the premises are a part
(Tenant hereby agreeing to sign a joint maintenance agreement with the railroad
company servicing the premises, if requested by the Landlord or railroad
company), and (iii) without injury to the roof, other horizontal surfaces of the
building, downspouts, parking areas, driveways and sidewalks, remove all snow
and ice from same. Tenant will, as far as possible, keep all such parts of the
premises and the real estate on which the building is located from deterioration
due to ordinary wear and from falling temporarily out of repair, and upon
termination of this lease in any way Tenant will yield up the premises to
Landlord in good condition and repair, loss by fire or other casualty covered by
insurance to be maintained by Landlord pursuant to paragraph 12A hereof excepted
(but not excepting any damage to glass).
B. Tenant shall not damage any demising wall or disturb the integrity and
support provided by any demising wall and shall, at its sole cost and expense,
promptly repair any damage or injury to any demising wall caused by Tenant or
its employees, agents or invitees.
C. Tenant and its employees, customers and licensees shall have the
nonexclusive right to use, in common with the other parties occupying said
building, common parking areas, if any, (exclusive of any parking or work load
areas designated or to be designated by Landlord for the
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exclusive use of Tenant or other tenants occupying or to be occupying other
portions of the building), driveways and alleys adjacent to said building,
subject to such reasonable rules and regulations as Landlord may from time to
time prescribe. Further, Landlord reserves the right to perform the paving and
landscape maintenance for the grounds around the building, including, but not
limited to, the mowing of the grass, care of shrubs, general landscaping and
maintenance of common parking areas, if any, driveways and alleys, exterior
painting, common sewage line plumbing, and repair and maintenance of any other
items, the obligations for which are shared by other tenants in the building and
other improvements of which the premises are a part, all of which are otherwise
Tenant's obligations under subparagraph A above, and Tenant shall, in lieu of
the obligations set forth under subparagraph A above with respect to such items,
be liable for its proportionate share (as defined in subparagraph 24J) of the
cost and expense thereof unless Landlord in its sole discretion determines that
such cost and expense is properly allocable in another proportion or solely to
either Tenant or the other tenants occupying said building. Tenant shall pay to
Landlord its share, determined as aforesaid, of such costs and expenses, upon
demand, as additional rent, in the event Landlord elects to perform or cause to
be performed such work.
D. Landlord shall have the right to coordinate any repairs and other
maintenance of any rail tracks serving or to serve the building, and if Tenant
uses such rail tracks, Tenant shall reimburse Landlord or the railroad company
from time to time upon demand, as additional rent, for a share of the costs of
such repairs and maintenance and any other sums specified in any agreement to
which Landlord or Tenant is a party respecting such tracks, such costs to be
borne proportionately by all tenants in the building of which the premises are a
part using such rail tracks, based upon the actual number of rail cars shipped
and received by each tenant during each calendar year in which the lease term
falls.
E. Tenant shall, at its own cost and expense, enter into a regularly
scheduled preventive maintenance/service contract with a maintenance contractor
approved by Landlord, for servicing all heating and air conditioning systems and
equipment within the premises. The service contract must include all services
suggested by the equipment manufacturer within the operation/maintenance manual
and must become effective within thirty (30) days of the date Tenant takes
possession of the premises.
F. Tenant shall, at its own cost and expense, repair any damage to the
premises resulting from and/or caused in whole or in part by the negligence or
misconduct of Tenant, its agents, servants, employees, patrons, customers, or
any other person entering upon the premises as a result of Tenant's business
activities or caused by Tenant's default hereunder.
7. Alterations. Tenant shall not make any alterations, additions or
improvements to the premises (including, without limitation, the roof and wall
penetrations) without the prior written consent of Landlord, which consent may
in Landlord's sole discretion be withheld. Tenant may, without the consent of
Landlord, but at its own cost and expense and in a good workmanlike manner,
erect such shelves, bins, machinery and other trade fixtures as it may deem
advisable, without altering the basic character of the building or improvements
and without overloading or damaging such building or improvements, and in each
case after complying with all applicable governmental laws, ordinances,
regulations and other requirements. All alterations, additions, improvements
and partitions erected by Tenant shall be and remain the property of Tenant
during
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the term of this lease and Tenant shall, unless Landlord otherwise elects
as hereinafter provided, remove all alterations, additions, improvements and
partitions erected by Tenant and restore the premises to their original
condition by the date of termination of this lease or upon earlier vacating of
the premises; provided, however, that if at such time Landlord so elects such
alterations, additions, improvements and partitions shall become the property of
Landlord as of the date of termination of this lease or upon earlier vacating of
the premises, and title shall pass to Landlord under this lease as by a bill of
sale. All shelves, bins, machinery and trade fixtures installed by Tenant may
be removed by Tenant prior to the termination of this lease if Tenant so elects,
and shall be removed by the date of termination of this lease or upon earlier
vacating of the premises it required by Landlord; upon any such removal Tenant
shall restore the premises to their original condition. All such removals and
restoration shall be accomplished in a good workmanlike manner so as not to
damage the primary structure or structural qualities of the buildings and other
improvements within which the premises are situated. If Landlord shall, in its
sole discretion, consent to any alterations, additions or improvements proposed
by Tenant, Tenant shall construct the same in accordance with all governmental
laws, ordinances, rules and regulations and shall, prior to construction,
provide such assurances to Landlord, (including but not limited to, waivers of
lien, surety company performance bonds and personal guaranties of individuals of
substance) as Landlord shall require to protect Landlord against any loss from
any mechanics', laborers' or materialmen's liens, or other liens.
8. Signs. Tenant shall not install any signs upon the exterior of said
buildings, except that Landlord will provide, at Tenant's request and cost,
Landlord's standard identification sign, which sign shall be removed by Tenant
upon termination of this lease.
9. Inspections. Landlord and Landlord's agents and representatives shall
have the right to enter and inspect the premises at any reasonable time during
business hours, for the following purposes: (i) to ascertain the condition of
the premises; (ii) to determine whether Tenant is diligently fulfilling Tenant's
responsibilities under this lease; (iii) to make such repairs as may be required
or permitted to be made by Landlord under the terms of this lease; or (iv) to do
any other act or thing which Landlord deems reasonable to preserve the premises
and the building and improvements of which the premises are a part. During the
period that is six (6) months prior to the end of the term hereof and at any
time Tenant is in default hereunder and such default has remained uncured for at
least thirty (30) days, Landlord and Landlord's agents and representatives shall
have the right to enter the premises at any reasonable time during business
hours for the purpose of showing the premises and shall have the right to erect
on the premises suitable signs indicating that the premises are available for
lease. Tenant shall give written notice to Landlord at least thirty (30) days
prior to vacating the premises and shall arrange to meet with Landlord for a
joint inspection of the premises prior to vacating. In the event of Tenant's
failure to give such notice or arrange such joint inspection, Landlord's
inspection at or after Tenant's vacating the premises shall be conclusively
deemed correct for purposes of determining Tenant's responsibility for repairs
and restoration.
10. Utilities. Landlord agrees to provide, at its cost, water, electricity
and telephone service connections into the premises; but Tenant shall pay for
all water, gas, heat, light, power, telephone, sewer, sprinkler system charges
and other utilities and services used on or from the premises, including without
limitation, Tenant's proportionate share as determined by Landlord of any
central station signaling system installed in the premises or the building of
which the
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premises are a part, together with any taxes, penalties, and surcharges or the
like pertaining thereto and any maintenance charges for utilities. Tenant shall
furnish all electric light bulbs, tubes and ballasts. If any such services are
not separately metered to Tenant, Tenant shall pay such proportion of all
charges jointly metered with other premises as determined by Landlord, in its
sole discretion, to be reasonable. Any such charges paid by Landlord and
assessed against Tenant shall be immediately payable to Landlord on demand and
shall be additional rent hereunder. Landlord shall in no event be liable for any
interruption or failure of utility services on or to the premises.
11. Assignment and Subletting.
A. Tenant shall not have the right to assign or pledge this lease or to
sublet the whole or any part of the premises, whether voluntarily or by
operation of law, or permit the use or occupancy of the premises by anyone other
than Tenant, without the prior written consent of Landlord, and such
restrictions shall be binding upon any assignee or subtenant to which Landlord
has consented. In the event Tenant desires to sublet the premises, or any
portion thereof, or assign this lease, Tenant shall give written notice thereof
to Landlord within a reasonable time prior to the proposed commencement date of
such subletting or assignment, which notice shall set forth the name of the
proposed subtenant or assignee, the relevant terms of any sublease and copies of
financial reports and other relevant financial information of the proposed
subtenant or assignee. Notwithstanding any permitted assignment or subletting,
Tenant shall at all times remain directly, primarily and fully responsible and
liable for the payment of the rent herein specified and for compliance with all
of its other obligations under the terms, provisions and covenants of this
lease. Upon the occurrence of an "event of default" (as hereinafter defined), if
the premises or any part thereof are then assigned or sublet, Landlord, in
addition to any other remedies herein provided, or provided by law, may, at its
option collect directly from such assignee or subtenant all rents due and
becoming due to Tenant under such assignment or sublease and apply such rent
against any sums due to Landlord from Tenant hereunder, and no such collection
shall be construed to constitute a novation or a release of Tenant from the
further performance of Tenant's obligations hereunder.
B. In addition to, but not in limitation of, Landlord's right to approve of
any subtenant or assignee, Landlord shall have the option, in its sole
discretion, in the event of any proposed subletting or assignment, to terminate
this lease, or in the case of a proposed subletting of less than the entire
premises, to recapture the portion of the premises to be sublet, as of the date
the subletting or assignment is to be effective. The option shall be exercised,
if at all, by Landlord giving Tenant written notice thereof within sixty (60)
days following Landlord's receipt of Tenant's written notice as required above.
If this lease shall be terminated with respect to the entire demised premises
pursuant to this paragraph, the term of this lease shall end on the date stated
in Tenant's notice as the effective date of the sublease or assignment as if
that date had been originally fixed in this lease for the expiration of the term
hereof; provided, however, that effective on such date Tenant shall pay Landlord
all amounts, as estimated by Landlord, payable by Tenant to such date, with
respect to taxes, insurance, repairs, maintenance, restoration and other
obligations, costs or charges which are the responsibility of Tenant hereunder.
Further, upon any such cancellation Landlord and Tenant shall have no further
obligations or liabilities to each other under this lease, except with respect
to obligations or liabilities which accrued hereunder as of such cancellation
date (in the same manner as if such cancellation date were the date originally
fixed in this lease for the expiration of the term hereof). If Landlord
recaptures
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under this paragraph only a portion of the demised premises, the rent
during the unexpired term hereof shall abate proportionately based on the rent
per square foot contained in this lease as of the date immediately prior to such
recapture. Tenant shall, at Tenant's own cost and expense, discharge in full
any outstanding commission obligation on the part of Landlord with respect to
this lease, and any commissions which may be due and owing as a result of any
proposed assignment or subletting, whether or not the premises are recaptured
pursuant hereto and rented by Landlord to the proposed tenant or any other
tenant.
C. Notwithstanding the provisions of the foregoing paragraphs, Tenant may,
without Landlord's consent, assign this lease to any corporation succeeding to
substantially all the business and assets of Tenant by merger, consolidation,
purchase of assets or otherwise or to any corporation or entity which is a
subsidiary or division of Tenant, provided that the following conditions are
satisfied: (i) the total assets and net worth of such assignee shall be equal to
or more than that of Tenant immediately prior to such transaction; (ii) Tenant
is not then in default hereunder; and (iii) such successor shall execute and
deliver to Landlord an instrument in writing fully assuming all the obligations
and liabilities imposed upon Tenant hereunder. Upon satisfaction of the
foregoing, Landlord agrees to discharge Tenant from any further liability
hereunder.
D. If Tenant is a corporation, the shares of which at the time of execution
of this lease, are held by fewer than fifty (50) persons, and if at any time
during the term of this lease persons, firms or corporations who own at least
one-third (1/3) of its shares at the time of the execution of this lease, or
following Landlord's consent to a transfer of such shares, cease to own such
shares (other than as a result of transfer by bequest or inheritance) and such
transfer shall not first have been approved in writing by Landlord, such
transfer shall, at the option of Landlord, be deemed a default by Tenant under
this lease and Landlord shall have all the rights and remedies granted to it
hereunder and by law in case of defaults. Tenant may transfer stock under the
terms of this lease to members of the immediate family of shareholders of the
parent corporation.
12. Fire and Casualty Damage.
A. Landlord agrees to maintain standard fire and extended coverage
insurance covering the building of which the premises are a part in an amount
not less than ninety percent (90%) (or such greater percentage as may be
necessary to comply with the provisions of any co-insurance clauses of the
policy) of the "replacement cost" thereof as such term is defined in the
Replacement Cost Endorsement to be attached thereto, insuring against the perils
of fire and lightning and including extended coverage, or at Landlord's option
all risk coverage, such coverages and endorsements to be as defined, provided
and limited in the standard bureau forms prescribed by the insurance regulatory
authority for the state in which the premises are situated for use by insurance
companies admitted in such state for the writing of such insurance on risks
located within such state. Subject to the provisions of subparagraphs 12C, 12D
and 12F below, such insurance shall be for the sole benefit of Landlord and
under its sole control. If during the second full lease year after the
commencement date of this lease, or during any subsequent year of the primary
term or any renewal or extension, Landlord's cost of maintaining such insurance
shall exceed Landlord's cost of maintaining such insurance for the first full
lease year of the term hereof, Tenant agrees to pay to Landlord, as additional
rental, Tenant's full proportionate share (as defined in subparagraph 24J) of
such excess. Said payments shall be made to Landlord within ten (10) days after
presentation to Tenant of Landlord's statement setting forth the amount
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due, and the failure to pay such excess shall be treated in the same manner as a
default in the payment of rent hereunder when due. Any payment to be made
pursuant to this subparagraph 12A with respect to the year in which this lease
commences or terminates shall bear the same ratio to the payment which would be
required to be made for the full year as the part of such year covered by the
term of this lease bears to a full year. Tenant shall not take out separate
insurance concurrent in form or contributing in the event of loss with that
required to be maintained by Landlord hereunder unless Landlord is included as
an additional insured thereon. Tenant shall immediately notify Landlord whenever
any such separate insurance is taken out and shall promptly deliver to Landlord
the policy or policies of such insurance.
B. If the buildings situated upon the premises should be damaged or
destroyed by fire, tornado or other casualty, Tenant shall give immediate
written notice thereof to Landlord.
C. If the buildings situated upon the premises should be damaged by any
peril covered by the insurance to be provided by Landlord under subparagraph 12A
above, but only to such extent that rebuilding or repairs can in Landlord's
estimation be completed within one hundred fifty (150) days after the date upon
which Landlord is notified by Tenant of such damage, (except that Landlord may
elect not to rebuild if such damage occurs during the last year of the term
hereof), this lease shall not terminate, and Landlord shall at its sole cost and
expense thereupon proceed with reasonable diligence to rebuild and repair such
buildings to substantially the condition in which they existed prior to such
damage, except Landlord shall not be required to rebuild, repair or replace any
part of the partitions, fixtures, additions and other improvements which may
have been placed in, on or about the premises by Tenant. If the premises are
untenantable in whole or in part following such damage, the rent payable
hereunder during the period in which the premises are untenantable shall be
reduced to such extent as may be fair and reasonable under all of the
circumstances. In the event that Landlord should fail to complete such repairs
and rebuilding within one hundred fifty (150) days after the date upon which
Landlord is notified by Tenant of such damage, Tenant may at its option
terminate this lease by delivering written notice of termination to Landlord as
Tenant's exclusive remedy, whereupon all rights and obligations hereunder shall
cease and terminate; provided, however, that if construction is delayed because
of changes, deletions, or additions in construction requested by Tenant,
strikes, lockouts, casualties, acts of God, war, material or labor shortages,
Governmental regulation or control or other causes beyond the reasonable control
of Landlord, the period for restoration, repair or rebuilding shall be extended
for the amount of time Landlord is so delayed.
D. If the buildings situated upon the premises should be damaged or
destroyed by fire, tornado or other casualty and Landlord is not required to
rebuild pursuant to the provisions of subparagraph 12C hereof, this lease shall
at the option of Landlord, upon notice to Tenant, given within thirty (30) days
after Landlord is notified by Tenant of such damage, terminate and the rent
shall be abated during the unexpired portion of this lease, effective upon the
date of the occurrence of such damage.
E. Tenant covenants and agrees to maintain insurance on all alterations,
additions, partitions and improvements erected by or on behalf of Tenant in, on
or about the premises in an amount not less than ninety percent (90%) (or such
greater percentage as may be necessary to comply with the provisions of any co-
insurance clause of the policy) of the "replacement cost" thereof, as such term
is defined in the Replacement Cost Endorsement to be attached thereto. Such
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insurance shall insure against the perils and be in form, including stipulated
endorsements, as provided in subparagraph 12A hereof. Such insurance shall be
for the sole benefit of Tenant and under its sole control provided that Tenant
shall be obligated to immediately commence the rebuilding of the improvements
erected by Tenant and to apply such proceeds in payment of the cost thereof.
All such policies shall be procured by Tenant from responsible insurance
companies satisfactory to Landlord. Certified copies of policies of such
insurance, together with receipt evidencing payment of the premiums therefor,
shall be delivered to Landlord prior to the commencement date of this lease.
Not less than fifteen (15) days prior to the expiration date of any such
policies, certified copies of renewals thereof (bearing notations evidencing the
payment of renewal premiums) shall be delivered to Landlord. Such policies
shall further provide that not less than thirty (30) days written notice shall
be given to Landlord before such policy may be cancelled or changed to reduce
insurance provided thereby.
F. Notwithstanding anything herein to the contrary, in the event the holder
of any indebtedness secured by a mortgage or deed of trust covering the premises
or the building of which the premises are a part requires that the insurance
proceeds be applied to such indebtedness, then Landlord shall have the right to
terminate this lease by delivering written notice of termination to Tenant
within fifteen (15) days after such requirement is made by any such holder,
whereupon all rights and obligations hereunder shall cease and terminate.
G. Each of Landlord and Tenant hereby releases the other from any and all
liability or responsibility to the other or anyone claiming through or under
them by way of subrogation or otherwise for any loss or damage to property
caused by fire or any other perils insured in policies of insurance covering
such property, even if such loss or damage shall have been caused by the fault
or negligence of the other party, or anyone for whom such party may be
responsible, including any other tenants or occupants of the remainder of the
building in which the premises are located; provided, however, that this release
shall be applicable and in force and effect only to the extent that such release
shall be lawful at that time and in any event only with respect to loss or
damage occurring during such times as the releasor's policies shall contain a
clause or endorsement to the effect that any such release shall not adversely
affect or impair said policies or prejudice the right of the releasor to recover
thereunder and then only to the extent of the insurance proceeds payable under
such policies. Each of Landlord and Tenant agrees that it will request its
insurance carriers to include in its policies such a clause or endorsement. If
extra cost shall be charged therefor, each party shall advise the other thereof
and of the amount of the extra cost, and the other party, at its election, may
pay the same, but shall not be obligated to do so. If such other party fails to
pay such extra cost, the release provisions of this paragraph shall be
inoperative against such other party to the extent necessary to avoid
invalidation of such releasor's insurance.
H. In the event of any damage or destruction to the premises by any peril
covered by the provisions of this Paragraph 12, Tenant shall, upon notice from
Landlord, forthwith remove, at its sole cost and expense, such portion or all of
Tenant's shelves, bins, machinery and other trade fixtures and all other
property belonging to Tenant or his licensees from such portion or all of the
premises as Landlord shall request and Tenant hereby indemnifies and holds
harmless the property. Landlord (including without limitation the trustee and
beneficiaries if Landlord is a trust). Landlord's agents and employees from any
loss, liability, claims, suits, costs, expenses, including attorney's fees and
damages, both real and alleged, arising out of any damage or injury
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as a result of the failure to properly secure the premises prior to such removal
and/or as a result of such removal.
13. Liability. Landlord shall not be liable to Tenant or Tenant's
employees, agents, patrons or visitors, or to any other person whomsoever, for
any injury to person or damage to property on or about the premises, resulting
from and/or caused in part or whole by the negligence or misconduct of Tenant,
its agents, servants or employees, or of any other person entering upon the
premises, or caused by the buildings and improvements located on the promises
becoming out of repair, or caused by leakage of gas, oil, water or steam or by
electricity emanating from the premises, or due to any cause whatsoever, and
Tenant hereby covenants and agrees that it will at all times indemnify and hold
safe and harmless the property, the Landlord (including without limitation the
trustee and beneficiaries if Landlord is a trust), Landlord's agents and
employees from any loss, liability, claims, suits, costs, expenses, including
attorney's fees and damages, both real and alleged, arising out of any such
damage or injury; except injury to persons or damage to property the sole cause
of which is the negligence of Landlord or the failure of Landlord to repair any
part of the premises which Landlord is obligated to repair and maintain
hereunder within a reasonable time after the receipt of written notice from
Tenant of needed repairs. Tenant shall procure and maintain throughout the term
of this lease a policy or policies of insurance, in form and substance
satisfactory to Landlord, at Tenant's sole cost and expense, insuring both
Landlord (and if Landlord is a trust, the trustee, beneficiaries and their
agents) and Tenant against all claims, demands or actions arising out of or in
connection with: (i) the premises; (ii) the condition of the premises; (iii)
Tenant's operations in and maintenance and use of the premises; and (iv)
Tenant's liability assumed under this lease; the limits of such policy or
policies to be in the amount of not less than $2,000,000 per occurrence in
respect of injury to persons (including death), and in the amount of not less
than $250,000 per occurrence in respect of property damage or destruction,
including loss of use thereof. All such policies shall be procured by Tenant
from responsible insurance companies satisfactory to Landlord. Certified copies
of such policies, together with receipt evidencing payment of premiums therefor,
shall be delivered to Landlord prior to the commencement date of this lease. Not
less than fifteen (15) days prior to the expiration date of any such policies,
certified copies of the renewals thereof (bearing notations evidencing the
payment of renewal premiums) shall be delivered to Landlord. Such policies shall
further provide that not less than thirty (30) days written notice shall be
given to Landlord before such policy may be cancelled or changed to reduce the
insurance coverage provided thereby.
14. Condemnation.
A. If the whole or any substantial part of the premises should be taken for
any public or quasi-public use under governmental law, ordinance or regulation,
or by right of eminent domain, or by private purchase in lieu thereof and the
taking would prevent or materially interfere with the use of the premises for
the purpose for which they are then being used, this lease shall terminate and
the rent shall be abated during the unexpired portion of this lease, effective
when the physical taking of said premises shall occur.
B. If part of the premises shall be taken for any public or quasi-public
use under any governmental law, ordinance or regulation, or by right of eminent
domain, or by private purchase in lieu thereof, and this lease is not terminated
as provided in the subparagraph above, this lease shall not terminate but the
rent payable hereunder during the unexpired portion of this lease shall
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be reduced to such extent as may be fair and reasonable under all of the
circumstances and Landlord shall undertake to restore the premises to a
condition suitable for Tenant's use, as near to the condition thereof
immediately prior to such taking as is reasonably feasible under all the
circumstances.
C. In the event of any such taking or private purchase in lieu thereof,
Landlord and Tenant shall each be entitled to receive and retain such separate
awards and/or portion of lump sum awards as may be allocated to their respective
interests in any condemnation proceedings; provided that Tenant shall not be
entitled to receive any award for Tenant's loss of its leasehold interest, the
right to such award being hereby assigned by Tenant to Landlord.
15. Holding Over. Tenant will, at the termination of this lease by lapse of
time or otherwise, yield up immediate possession to Landlord. If Tenant retains
possession of the premises or any part thereof after such termination, then
Landlord may, at its option, serve written notice upon Tenant that such holding
over constitutes any one of (i) creation of a month to month tenancy, upon the
terms and conditions set forth in this lease, or (ii) creation of a tenancy at
sufferance, in any case upon the terms and conditions set forth in this lease;
provided, however, that the monthly rental (or daily rental under (ii)) shall,
in addition to all other sums which are to be paid by Tenant hereunder, whether
or not as additional rent, be equal to double the rental being paid monthly to
Landlord under this lease immediately prior to such termination (prorated in the
case of (ii) on the basis of a 365 day year for each day Tenant remains in
possession). If no such notice is served, then a tenancy at sufferance shall be
deemed to be created at the rent in the preceding sentence. Tenant shall also
pay to Landlord all damages sustained by Landlord resulting from retention of
possession by Tenant, including the loss of any proposed subsequent tenant for
any portion of the premises. The provisions of this paragraph shall not
constitute a waiver by Landlord of any right of re-entry as herein set forth;
nor shall receipt of any rent or any other act in apparent affirmance of the
tenancy operate as a waiver of the right to terminate this lease for a breach of
any of the terms, covenants, or obligations herein on Tenant's part to be
performed.
16. Quiet Enjoyment. Landlord covenants that it now has, or will acquire
before Tenant takes possession of the premises, good title to the premises, free
and clear of all liens and encumbrances, excepting only the lien for current
taxes not yet due, such mortgage or mortgages as are permitted by the terms of
this lease, zoning ordinances and other building and fire ordinances and
governmental regulations relating to the use of such property, and easements,
restrictions and other conditions of record. In the event this lease is a
sublease, then Tenant agrees to take the premises subject to the provisions of
the prior leases. Landlord represents and warrants that it has full right and
authority to enter into this lease and that Tenant, upon paying the rental
herein set forth and performing its other covenants and agreements herein set
forth, shall peaceably and quietly have, hold and enjoy the premises for the
term hereof without hindrance or molestation from Landlord, subject to the terms
and provisions of this lease. Landlord agrees to make reasonable efforts to
protect Tenant from interference or disturbance by other tenants or third
persons; however, Landlord shall not be liable for any such interference or
disturbance, nor shall Tenant be released from any of the obligations of this
lease because of such interference or disturbance.
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17. Events of Default. The following events shall be deemed to be events of
default by Tenant under this lease:
(a) Tenant shall fail to pay when or before due any sum of money
becoming due to be paid to Landlord hereunder, whether such sum be any
installment of the rent herein reserved, any other amount treated as
additional rent hereunder, or any other payment or reimbursement to
Landlord required herein, whether or not treated as additional rent
hereunder, and such failure shall continue for a period of five (5) days
from the date such payment was due; or
(b) Tenant shall fail to comply with any term, provision or covenant
of this lease other than by failing to pay when of before due any sum of
money becoming due to be paid to Landlord hereunder, and shall not cure
such failure within twenty (20) days (forthwith, if the default involves a
hazardous condition) after written notice thereof to Tenant; or
(c) Tenant shall abandon or vacate any substantial portion of the
premises; or
(d) Tenant shall fail to immediately vacate the premises upon
termination of this lease, by lapse of time or otherwise, or upon
termination of Tenant's right to possession only; or
(e) The leasehold interest of Tenant shall be levied upon under
execution or be attached by process of law or Tenant shall fail to contest
diligently the validity of any lien or claimed lien and give sufficient
security to Landlord to insure payment thereof or shall fail to satisfy any
judgment rendered thereon and have the same released, and such default
shall continue for ten (10) days after written notice thereof to Tenant; or
(f) Tenant shall become insolvent, admit in writing its inability to
pay its debts generally as they become due, file a petition in bankruptcy
or a petition to take advantage of any insolvency statute, make an
assignment for the benefit of creditors, make a transfer in fraud of
creditors, apply for or consent to the appointment of a receiver of itself
or of the whole or any substantial part of its property, or file a petition
or answer seeking reorganization or arrangement under the federal
bankruptcy laws, as now in effect or hereafter amended, or any other
applicable law or statute of the United States or any state thereof; or
(g) A court of competent jurisdiction shall enter an order, judgment
or decree adjudicating Tenant a bankrupt, or appointing a receiver of
Tenant, or of the whole or any substantial part of its property, without
the consent of Tenant, or approving a petition filed against Tenant seeking
reorganization or arrangement of Tenant under the bankruptcy laws of the
United States, as now in effect or hereafter amended, or any state thereof,
and such order, judgment or decree shall not be vacated or set aside or
stayed within thirty (30) days from the date of entry thereof.
18. Remedies. Upon the occurrence of any of such events of default
described in Paragraph 17 hereof or elsewhere in this lease, Landlord shall have
the option to pursue any one or more of the following remedies without any
notice or demand whatsoever:
(a) Landlord may, at its election, terminate this lease or terminate
Tenant's right to possession only, without terminating the lease;
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(b) Upon any termination of this lease, whether by lapse of time or
otherwise, or upon any termination of Tenant's right to possession without
termination of the lease, Tenant shall surrender possession and vacate the
premises immediately, and deliver possession thereof to Landlord, and
Tenant hereby grants to Landlord full and free license to enter into and
upon the premises in such event with or without process of law and to
repossess Landlord of the premises as of Landlord's former estate and to
expel or remove Tenant and any others who may be occupying or within the
premises and to remove any and all property therefrom without being deemed
in any manner guilty of trespass, eviction or forcible entry or detainer,
and without incurring any liability for any damage resulting therefrom,
Tenant hereby waiving any right to claim damage for such re-entry and
expulsion, and without relinquishing Landlord's right to rent or any other
right given to Landlord hereunder or by operation of law ;
(c) Upon any termination of this lease, whether by lapse of time or
otherwise, Landlord shall be entitled to recover as damages, all rent,
including any amounts treated as additional rent hereunder, and other sums
due and payable by Tenant on the date of termination, plus the sum of (i)
an amount equal to the then present value of the rent, including any
amounts treated as additional rent hereunder, and other sums provided
herein to be paid by Tenant for the residue of the stated term hereof, less
the fair rental value of the premises for such residue (taking into account
the time and expense necessary to obtain a replacement tenant or tenants,
including expenses hereinafter described in subparagraph (d) relating to
recovery of the premises, preparation for relettling and for reletting
itself), and (ii) the cost of performing any other covenants which would
have otherwise been performed by Tenant .
(d) (i) Upon any termination of Tenant's right to possession only
without termination of the lease, Landlord may, at Landlord's option, enter
into the premises, remove Tenant's signs and other evidences of tenancy,
and take and hold possession thereof as provided in subparagraph (b) above,
without such entry and possession terminating the lease or releasing
Tenant, in whole or in part, from any obligation, including Tenant's
obligation to pay the rent, including any amounts treated as additional
rent, hereunder for the full term. In any such case Tenant shall pay
forthwith to Landlord, if Landlord so elects, a sum equal to the entire
amount of the rent, including any amounts treated as additional rent
hereunder, for the residue of the stated term hereof plus any other sums
provided herein to be paid by Tenant for the remainder of the lease term.
(ii) Landlord may, but need not, relet the premises or any part
thereof for such rent and upon such terms as Landlord in its sole
discretion shall determine (including the right to relet the premises for a
greater or lesser term than that remaining under this lease, the right to
relet the premises as a part of a larger area, and the right to change the
character or use made of the premises) and Landlord shall not be required
to accept any tenant offered by Tenant or to observe any instructions given
by Tenant about such reletting. In any such case, Landlord may make
repairs, alterations and additions in or to the premises, and redecorate
the same to the extent Landlord deems necessary or desirable, and Tenant
shall, upon demand, pay the cost thereof, together with Landlord's expenses
of retelling, including, without limitation, any broker's commission
incurred by Landlord. If the consideration collected by Landlord upon any
such reletting plus any sums previously collected front Tenant are not
sufficient to pay the full amount of all rent, including any
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amounts treated as additional rent hereunder and other sums reserved in
this lease for the remaining term hereof, together with the costs of
repairs, alterations, additions, redecorating, and Lessor's expenses of
reletting and the collection of the rent accruing therefrom (including
attorney's tees and broker's commissions), Tenant shall pay to Landlord the
amount of such deficiency upon demand and Tenant agrees that Landlord may
file suit to recover any sums falling due under this section from time to
time;
(e) Landlord may, at Landlord's option, enter into and upon the
premises, with or without process of law, it Landlord determines in its
sole discretion that Tenant is not acting within a commercially reasonable
time to maintain, repair or replace anything for which Tenant is
responsible hereunder and correct the same, without being deemed in my
manner guilty of trespass, eviction or forcible entry and detainer and
without incurring any liability for any damage resulting therefrom and
Tenant agrees to reimburse Landlord, on demand, as additional rent, for any
expenses which Landlord may incur in thus effecting compliance with
Tenant's obligations under this lease;
(f) Any and all property which may be removed from the premises
by Landlord pursuant to the authority of the lease or of law, to which
Tenant is or may be entitled, may be handled, removed and stored, as the
case may be, by or at the direction of Landlord at the risk, cost and
expense of Tenant, and Landlord shall in no event be responsible for the
value, preservation or safekeeping thereof. Tenant shall pay to Landlord,
upon demand, any and all expenses incurred in such removal and all storage
charges against such property so long as the same shall be in Landlord's
possession or under Landlord's control. Any such property of Tenant not
retaken by Tenant from storage within thirty (30) days after removal from
the premises shall conclusively be presumed to have been conveyed by Tenant
to Landlord under this lease as a bill of sale without further payment or
credit by Landlord to Tenant.
In the event Tenant fails to pay any installment of rent, including any
amount treated as additional rent hereunder, or other sums hereunder as and when
such installment or other charge is due, Tenant shall pay to Landlord on demand
a late charge in an amount equal to five percent (5%) of such installment or
other charge overdue in any month and five percent (5%) each month thereafter
until paid in full to help defray the additional cost to Landlord for processing
such late payments, and such late charge shall be additional rent hereunder and
the failure to pay such late charge within ten (10) days alter demand therefor
shall be an additional event of default hereunder. The provision for such late
charge shall be in addition to all of Landlord's other rights and remedies
hereunder or at law and shall not be construed as liquidated damages or as
limiting Landlord's remedies in any manner.
Pursuit of any of the foregoing remedies shall not preclude pursuit of any
of the other remedies herein provided or any other remedies provided by law (all
such remedies being cumulative), nor shall pursuit of any remedy herein provided
constitute a forfeiture or waiver of any rent due to Landlord hereunder or of
any damages accruing to Landlord by reason of the violation of any of the terms,
provisions and covenants herein contained. No act or thing done by Landlord or
its agents during the term hereby granted shall be deemed a termination of this
lease or an acceptance of the surrender of the premises, and no agreement to
terminate this lease or accept a surrender of said premises shall be valid
unless in writing signed by Landlord. No
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waiver by Landlord of any violation or breach of any of the terms, provisions
and covenants herein contained shall be deemed or construed to constitute a
waiver of any other violation or breach of any of the terms, provisions and
covenants herein contained. Landlord's acceptance of the payment of rental or
other payments hereunder alter the occurrence of an event of default shall not
be construed as a waiver of such default, unless Landlord so notifies Tenant in
writing. Forbearance by Landlord to enforce one or more of the remedies herein
provided upon an event of default shall not be deemed or construed to constitute
a waiver of such default or of Landlord's right to enforce any such remedies
with respect to such default or a subsequent default. If, on account of any
breach or default by Tenant in Tenant's obligations under the terms and
conditions of this Lease, it shall become necessary or appropriate for Landlord
to employ or consult with an attorney concerning or to enforce or defend any of
Landlord's rights or remedies hereunder, Tenant agrees to pay any attorney's
fees so incurred.
Without limiting the foregoing, Tenant hereby: (i) appoints and designates
C T Corporation System, 208 South LaSalle Street, Chicago, Illinois, or any
other party Landlord may from time to time hereinafter designate, by notice to
Tenant, as Tenant's true and lawful agent for service of process only, and
agrees that such service of process upon such party shall constitute personal
service of such process upon Tenant (provided, however, Landlord does not hereby
waive the right to serve Tenant with process by any other lawful means); (ii)
expressly waives any right to trial by jury; and (iii) expressly waives the
service of any notice under any existing or future law of the State of Illinois
applicable to landlords and tenants.
Tenant hereby constitutes and irrevocably appoints any attorney of any
court to be the true and lawful attorney of Tenant, and, in the name. place and
stead of Tenant, to appear for and on behalf of Tenant in any court of record at
any time in any suit or suits brought against Tenant for the enforcement of any
right hereunder by Landlord, to waive the issuance and service of process and
trial or jury, and, from time to time, to confess judgment or judgments in favor
of Landlord and against Tenant for any rent, including any amounts treated as
additional rent hereunder, other charges, and interest thereon due hereunder by
Tenant to Landlord and not paid and for costs of suit and for a reasonable
attorney's fee in favor of Landlord to be fixed by the court, and to release all
errors that may occur or intervene in such proceedings, including the issuance
of execution upon any such judgment, and to stipulate that no appeal shall be
prosecuted from such judgment or judgments, or that no proceedings in chancery
or otherwise shall be filed or prosecuted to interfere in any way with the
operation of such judgment or judgments or of any execution issued thereon or
with any supplemental proceedings taken by Landlord to collect the amount of any
such judgment or judgments, and to consent that execution on any judgment or
decree in favor of Landlord and against Tenant may issue to forthwith.
19. [Intentionally Omitted]
Mortgages. Tenant accepts this lease subject and subordinate to any mortgage(s)
and/or deed(s) of trust now or at any time hereafter constituting a lien or
charge upon the premises or the improvements situated thereon, provided,
however, that if the mortgagee, trustee, or holder of any such mortgage or deed
of trust elects to have Tenant's interest in this lease superior to any such
instrument, then by notice to Tenant from such mortgagee, trustee or holder,
this lease shall be deemed superior to such lien, whether this lease was
executed before or after said mortgage or deed of trust. Tenant shall at any
time hereafter on demand execute any instruments, releases or
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other documents which may be required by any mortgagee for the purpose of
subjecting and subordinating this lease to the lien of any such mortgage or for
the purpose of evidencing the superiority of this lease to the lien of any such
mortgage, as may be the case.
21. Landlord's Liability. In no event shall Landlord's liability for any
breach of this lease exceed the amount of rental then remaining unpaid for the
then current term (exclusive of any renewal periods which have not then actually
commenced). This provision is not intended to be a measure or agreed amount of
Landlord's liability with respect to any particular breach, and shall not be
utilized by any court or otherwise for the purpose of determining any liability
of Landlord hereunder, except only as a maximum amount not to be exceeded in any
event.
22. Mechanic's and Other Liens. Tenant shall have no authority, express or
implied, to create or place any lien or encumbrance of any kind or nature
whatsoever upon, or in any manner to bind, the interest of Landlord in the
premises or to charge the rentals payable hereunder for any claim in favor of
any person dealing with Tenant, including those who may furnish materials or
perform labor for any construction or repairs, and each such claim shall affect
and each such lien shall attach to, if at all, only the leasehold interest
granted to Tenant by this instrument. Tenant covenants and agrees that it will
pay or cause to be paid all sums legally due and payable by it on account of any
labor performed or materials furnished in connection with any work performed on
the premises on which any lien is or can be validly and legally asserted against
its leasehold interest in the premises or the improvements thereon and that it
will save and hold Landlord harmless from any and all loss, cost or expense
based on or arising out of asserted claims or liens against the leasehold estate
or against the right, title and interest of the Landlord in the premises or
under the terms of this lease. Tenant will not permit any mechanic's lien or
liens or any other liens which may be imposed by law affecting Landlord's or its
mortgagees' interest in the premises or any building or other improvement of
which the premises are a part to be placed upon the premises or any building or
improvement thereon during the term hereof, and in case of the filing of any
such lien Tenant will promptly pay same. If any such lien shall remain in force
and effect thirty (30) days after written notice thereof from Landlord to
Tenant, Landlord shall have the right and privilege at Landlord's option of
paying and discharging the same or any portion thereof without inquiry as to the
validity thereof, and any amounts so paid, including expenses and interest,
shall be so much additional indebtedness hereunder due from Tenant to Landlord
and shall be repaid to Landlord immediately on rendition of a bill therefor.
Notwithstanding the foregoing, Tenant shall have the right to contest any such
lien in good faith and with all due diligence so long as any such contest, or
action taken in connection therewith, protects the interest of Landlord and
Landlord's mortgagee in the premises and Landlord and any such mortgagee are, by
the expiration of said thirty (30) day period, furnished such protection, and
indemnification against any loss, cost or expense related to any such lien and
the contest thereof as are satisfactory to Landlord and any such mortgagee.
23. Notices. Each provision of this instrument or of any applicable
governmental laws, ordinances, regulations and other requirements with reference
to the sending, mailing or delivery of any notice or the making of any payment
by Landlord to Tenant or with reference to the sending, mailing or delivery of
any notice or the making of any payment by Tenant to Landlord shall be deemed to
be complied with when and if the following steps are taken:
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(a) All rent and other payments required to be made by Tenant to
Landlord hereunder shall be payable to Glen Grove Joint Venture or to such
------------------------
other entity at such other address as Landlord may specify from time to
time by written notice delivered in accordance herewith.
(b) All payments required to be made by Landlord to Tenant hereunder
shall be payable to Tenant at the address hereinbelow set forth, or at such
other address within the continental United States as Tenant may specify
from time to time by written notice delivered in accordance herewith.
(c) Any notice or document required or permitted to be delivered
hereunder shall be deemed to be delivered, whether actually received or
not, when deposited in the United States Mail, postage prepaid, Certified
or Registered Mail, addressed to the parties hereto at the respective
addresses set out below, or at such other address as they have theretofore
specified by written notice delivered in accordance herewith:
LANDLORD: TENANT:
LaSalle National Bank Trust #52157 MODERN WHOLESALE DRUG MIDWEST, INC.
c/o Trammell Crow Company 3400 W. Lake Avenue
500 Park Boulevard Glenview, Illinois 60025
Itasca, Illinois 60143 c/o Raymond S. Pagels
If and when included within the term "Landlord", as used in this instrument,
there are more than one person, firm or corporation, all shall jointly arrange
among themselves for their joint execution of such a notice specifying some
individual at some specific address for the receipt of notices and payments to
Landlord; if and when included within the term "Tenant", as used in this
instrument, there are more than one person, firm or corporation, all shall
jointly arrange among themselves for their joint execution of such a notice
specifying some individual at some specific address within the continental
United States for the receipt of notices and payments to Tenant. All parties
included within the terms "Landlord" and "Tenant", respectively, shall be bound
by notices given in accordance with the provisions of this paragraph to the same
effect as if each had received such notice.
24. Miscellaneous.
A. Words of any gender used in this lease shall be held and construed to
include any other gender, and words in the singular number shall be held to
include the plural, unless the context otherwise requires.
B. The terms, provisions and covenants and conditions contained in this
lease shall apply to, inure to the benefit of, and be binding upon, the parties
hereto and upon their respective heirs, legal representatives, successors and
permitted assigns, except as otherwise herein expressly provided Landlord shall
have the right to assign any of its rights and obligations under this lease and
Landlord's grantee or Landlord's successor, as the case may be, shall upon such
assignment,
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become Landlord hereunder, thereby freeing and relieving the grantor or
assignor, as the case may be, of all covenants and obligations of Landlord
hereunder. Each party agrees to furnish to the other, promptly upon demand, a
corporate resolution, proof of due authorization by partners, or other
appropriate documentation evidencing the due authorization of such party to
enter into this lease. Nothing herein contained shall give any other tenant in
the building of which the premises are a part any enforceable rights either
against Landlord or Tenant as a result of the covenants and obligations of
either party set forth herein.
C. The captions inserted in this lease are for convenience only and in no
way define, limit or otherwise describe the scope or intent of this lease, or
any provision hereof, or in any way affect the interpretation of this lease.
D. Tenant shall at any time and from time to time within ten (10) days
after written request from Landlord execute and deliver to the Landlord or any
prospective Landlord or mortgagee or prospective mortgagee a sworn and
acknowledged estoppel certificate, in form reasonably satisfactory to Landlord
and/or Landlord's mortgagee or prospective mortgagee certifying and stating as
follows: (i) this lease has not been modified or amended (or if modified or
amended, setting forth such modifications or amendments); (ii) this lease as so
modified or amended is in full force and effect (or if not in full force and
effect, the reasons therefor); (iii) the Tenant has no offsets or defenses to
its performance of the terms and provisions of this lease, including the payment
of rent, of it there are any such defenses or offsets, specifying the same; (iv)
Tenant is in possession of the premises, if such be the case; (v) if an
assignment of rents or leases has been served upon Tenant by a mortgagee or
prospective mortgagee, Tenant has received such assignment and agrees to be
bound by the provisions thereof; and (vi) any other accurate statements
reasonably required by Landlord or its mortgagee or prospective mortgagee. It is
intended that any such statement delivered pursuant to this subsection may be
relied upon by any prospective purchaser or mortgagee and their respective
successors and assigns and Tenant shall be liable for all loss, cost or expense
resulting from the failure of any sale or funding of any loan caused by any
misstatement contained in such estoppel certificate. Tenant hereby irrevocably
appoints Landlord or if Landlord is a trust, Landlord's beneficiary, as
attorney-in-fact for the Tenant with full power and authority to execute and
deliver in the name of Tenant such estoppel certificate if Tenant fails to
deliver the same within such ten (10) day period and such certificate as signed
by Landlord or Landlord's beneficiary, as the case may be, shall be fully
binding on Tenant, if Tenant fails to deliver a contrary certificate within five
(5) days after receipt by Tenant of a copy of the certificate executed by
Landlord or Landlord's beneficiary, as the case may be, on behalf of Tenant. In
addition to any other remedy Landlord may have hereunder, Landlord may, at its
option, if Tenant does not deliver to Landlord an estoppel certificate as set
forth above within fifteen (15) days after Tenant is requested so to do, cancel
this lease effective the last day of the then current month, without incurring
any liability on account thereof, and the term hereby granted is expressly
limited accordingly.
E. This lease may not be altered, changed or amended except by an
instrument in writing signed by both parties hereto.
F. All obligations of Tenant hereunder not fully performed as of the
expiration or earlier termination of the term of this lease shall survive the
expiration or earlier termination of the term hereof, including without
limitation, all payment obligations with respect to taxes and insurance
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and all obligations concerning the condition of the premises. Upon the
expiration or earlier termination of the term hereof, and prior to Tenant
vacating the premises, Landlord and Tenant shall jointly inspect the premises
and Tenant shall pay to Landlord any amount estimated by Landlord as necessary
to put the premises, including without limitation heating and air conditioning
systems and equipment therein, in good condition and repair. Any work required
to be done by Tenant prior to its vacation of the premises which has not been
completed upon such vacation, shall be completed by Landlord and billed to
Tenant. Tenant shall also, prior to vacating the premises, pay to Landlord the
amount, as estimated by Landlord, of Tenant's obligation hereunder for unpaid
real estate taxes for the years during the term of this lease for which such
taxes are a lien against the premises, and insurance premiums for the year in
which the lease expires or terminates. All such amounts shall be used and held
by Landlord for payment of such obligations of Tenant hereunder, with Tenant
being liable for any additional costs therefor upon demand by Landlord, or with
any excess to be returned to Tenant after all such obligations have been
determined and satisfied, as the case may be. Any security deposit held by
Landlord shall be credited against the amount payable by Tenant under this
subparagraph 24F.
G. If any clause, phrase, provision or portion of this lease or the
application thereof to any person or circumstance shall be invalid or
unenforceable under applicable law, such event shall not affect, impair or
render invalid or unenforceable the remainder of this lease nor any other
clause, phrase, provision or portion hereof, nor shall it affect the application
of any clause, phrase, provision or portion hereof to other persons or
circumstances, and if is also the intention of the parties to this lease that in
lieu of each such clause, phrase, provision or portion of this lease that is
invalid or unenforceable, there be added as a part of this lease contract a
clause, phrase, provision or portion as similar in terms to such invalid or
unenforceable clause, phrase, provision or portion as may be possible and be
valid and enforceable.
H. Submission of this lease shall not be deemed to be a reservation of the
premises. Landlord shall not be bound hereby until its delivery to Tenant of an
executed copy hereof signed by Landlord, already having been signed by Tenant,
and until such delivery Landlord reserves the right to exhibit and lease the
premises to other prospective tenants. Notwithstanding anything contained herein
to the contrary Landlord may withhold delivery of possession of the premises
from Tenant until such time as Tenant has paid to Landlord the security deposit
required by subparagraph 2B hereof and the first month's rent as set forth in
subparagraph 2A hereof.
I. All references in this lease to "the date hereof" or similar references
shall be deemed to refer to the last date in point of time, on which all parties
hereto have executed this lease.
J. Tenant's "proportionate share" as used in this lease shall mean a
fraction, the numerator of which is the rentable area (other than any designated
parking or loading areas) contained in the premises and the denominator of which
is the rentable area contained in the building, in each case, as determined by
Landlord. For purposes hereof the numerator is 81,225 and the denominator is
-------
121,225 and Tenant's proportionate share is sixty seven and 00/100 percent ( %)
- ------- ----------------------
(67.0%).
20
<PAGE>
25. Land Trustee's Exculpation. If the Landlord executing this lease is a
trust, the following paragraph is hereby made a part hereof:
This lease is executed by LaSalle National Bank not personally but as
---------------------
Trustee as aforesaid, in the exercise of the power and authority conferred upon
and vested in it as such Trustee, and under the express direction of the
beneficiaries of a certain Trust Agreement dated March 2, 1977 and known as
-------------
Trust No. 52157, at to all provisions of which Trust
----- ---------------------------
Agreement this lease is expressly made subject. It is expressly understood and
agreed that nothing in the Trust Agreement or in this lease contained shall be
construed as creating any liability whatsoever against said Trustee personally.
and in particular without limiting the generality of the foregoing, there shall
be no personal liability to pay any indebtedness accruing hereunder or to
perform any covenant, either express or implied, herein contained, or to keep,
preserve or sequester any property of said Trust, or to manage or control such
property or to be responsible for the upkeep, inspection, maintenance or repair
of such property or for the collection of rents or rental of property or for the
conduct of any business which is carried on upon such premises, and that all
personal liability of said Trustee of every sort, if any, is hereby expressly
waived by Tenant, and by every person now or hereafter claiming any right or
security hereunder; and that so far as said Trustee is concerned the owner of
any indebtedness or liability accruing hereunder shall look solely to the
premises hereby leased for the payment thereof.
26. Special Provisions. See Paragraph 27 through 34.
EXECUTED the day of , 19
------------------ --------------------------- --
ATTEST/WITNESS LANDLORD
- ---------------------------------- LASALLE NATIONAL BANK, Not Personally
But as Trustee as Aforesaid
- ----------------------------------
Title
By:
--------------------------------
ATTEST/WITNESS Title
------------------------------
- ---------------------------------- TENANT
Title MODERN WHOLESALE DRUG MIDWEST, INC.
----------------------------- -----------------------------------
By: /s/ Michael Ashkin
--------------------------------
Title
------------------------------
21
<PAGE>
27. Monthly rental payments for the first nine months of this Lease shall
be Fifteen Thousand Three Hundred Forty Five and 31/100 Dollars ($15,345.31).
Monthly rental payments for the next twenty-seven (27) months of this Lease
shall be Twenty Five Thousand Three Hundred Eighty-Two and 81/100 Dollars
($25,382.81). Monthly rental payments for the final twenty-four (24) months of
this Lease shall be Twenty Nine Thousand One Hundred Seventy Three and 31/100
Dollars ($29,173.31).
28. Provided this Lease is in full force and effect and the Tenant shall
not be in default hereunder, Tenant may renew and extend this Lease for three
(3) years from the fifth (5th) anniversary date of the commencement date of the
original term of this Lease by notice in writing delivered to Landlord not less
than one hundred eighty (180) days prior to the expiration date of the then
current term of the Lease. All of the covenants, conditions and provisions of
this Lease shall thereupon be applicable during said additional three (3) year
term except that the amount of rental to be paid by the Tenant to Landlord shall
be Thirty Two Thousand Eighty-Three and 88/100 Dollars ($32,083.88) per month.
29. In the event that during the Lease term Tenant shall require a larger
warehouse space which shall be at least one hundred fifty percent (150%) larger
than the current leased space and Landlord is successful in negotiating a new
lease for this larger warehouse space with Tenant, Landlord would cancel this
lease and allow Tenant a period in which to move into the new warehouse space.
During the move-in period, Tenant would not be obligated to pay rent on the old
space, but would only pay rent on the new area which is leased. Such a period
shall not exceed one month and such period shall be negotiated at the time a new
lease is prepared.
30. [intentionally omitted]
31. Both Landlord and Tenant warrant that Arthur Rubloff and Co. has acted
as the procuring real estate broker and that no other broker is entitled to a
real estate commission as a result of this lease agreement entered into by
Landlord and Tenant.
32. Landlord hereby agrees to provide Tenant with the right of first offer
of 40,000 square feet of space immediately adjacent to Tenant's existing
facility. Landlord shall make Tenant aware of the availability of said space.
The obligation of response, after notification by Landlord to Tenant, shall then
rest with the Tenant, Landlord having fulfilled its obligation under this
paragraph.
33. In each case where the Lease provides that the consent or approval of
Landlord is required, Landlord agrees that it shall not unreasonable withhold or
delay such consent or approval.
34. Notwithstanding the provisions of Paragraph 18 and provided this Lease
is otherwise in full force and effect, Tenant shall have a ten (10) day period
of grace after written notice given by Landlord before being in default for
failure to pay rent, but such period of grace can not be utilized by Tenant more
than twice in any successive twelve (12) month period.
22
<PAGE>
LEGAL DESCRIPTION
That part of PARCEL 1
A tract of land consisting of a part of each of lots 1 and 2 in the subdivision
of the east half of the northwest quarter and the northeast quarter of the
southwest quarter, of section 28, township 42 north, range 12 east of the third
principal meridian. (except railroad); said tract of land being bounded and
described as follows:
Beginning at the point of intersection of the southeasterly line of the right of
way, 100 feet wide, of the Chicago & Northwestern railway, with the south line
of said lot 2, (said south lot line also being the south line of the northwest
quarter of said section 28), and running thence east along the south line of
said lot 2, a distance of 592.85 feet; Thence north along a line which is
parallel with the east line of said lot 1, a distance of 269.49 feet; Thence
northeastwardly along the arc of a circle, convex to the northwest and having a
radius of 169.40 feet, a distance of 103.70 feet to a point which is 300 feet,
measured perpendicularly, southeasterly from said southeasterly line of the
right of way of the Chicago and Northwestern railway; Thence northeastwardly
along a line which is 300 feet, measured perpendicularly, southeasterly from and
parallel with said southeasterly right of way line, a distance of 448.47 feet;
Thence northwesterly along a line perpendicular to said-parallel line said
distance of 300 feet to its intersection with said southeasterly right of way
line, and Thence southwestwardly along said southeasterly right of way line, a
distance of 1106.43 feet to the point of beginning, all in Cook County,
Illinois, and as outlined in red on Exhibit "B".
Containing 337,299 square feet of land, more or less.
EXHIBIT "A"
23
<PAGE>
3400 W. Lake
Drafted: February 28 1994
LEASE AMENDMENT AGREEMENT
This Lease Amendment Agreement dated 7 March 1994 executed by and between
MERIDIAN POINT REALTY TRUST VI CO., a Missouri corporation d/b/a: Meridian Point
Realty VI Co., as successor in interest to Sierra Capital Realty VI d/b/a Sierra
Capital Realty VI Co., as Landlord, and MODERN WHOLESALE DRUG MIDWEST, INC.
d/b/a Rugby Laboratories, as Tenant, is hereby amended as follows:
Whereas Landlord and Tenant have previously entered into a Lease drafted January
4, 1984, as amended May 11, 1989 ("hereafter called the "Lease") covering 81,225
square feet of space in the building commonly known as 3400 W. Lake in Glenview,
Illinois, and
Whereas, Landlord and Tenant hereby desire to amend that lease agreement as
follows:
35. The lease term in Paragraph 1. shall terminate on June 30, 1999.
36. Effective July 1, 1994, the following shall be amended:
A. The rental in Paragraphs 2.A and 27 shall be:
July 1, 1994 through June 30, 1997 - $36,216.31 per month
July 1, 1997 through June 30, 1999 - $37,998.77 per month
B. The real estate taxes in Paragraph 4.A. shall be $83,613.50.
C. The numerator in Paragraph 23.J. shall be amended to 97,225 and the
proportionate share percent shall be 80.20%.
3. Landlord shall provide Tenant with a rent credit of (7/l/94 - 10/2/94) One
Hundred Eleven Thousand Nine Hundred Twenty-Two and 98/100 Dollars
($111,922.98). This credit shall be applied by Tenant to the cost of
remodeling their office area. Tenant shall utilize a contractor reasonably
approved by Landlord and shall also submit final alteration plans to
Landlord for reasonable approval prior to commencement of construction.
4. Landlord shall be amended to Meridian Point Realty Trust VI Co., a Missouri
corporation d/b/a: Meridian Pointy Realty VI Co.
5. HAZARDOUS SUBSTANCES
--------------------
(a) Tenant shall not use, store, dispose, handle, transport, release,
discharge or generate any Hazardous Substances (as defined in subparagraph
(f) below), in, on, to, under, from or about the Premises or Building without
Landlord's prior written consent, which consent may be granted on conditions
or withheld in Landlord's sole and absolute discretion. Tenant warrants and
agrees that if Landlord grants its consent to Tenant's use, storage,
disposal, handling, release, discharge, generation or transport shall be
conducted in strict accordance with all Environmental Laws (as defined in
subparagraph (f) below). Any consent or approval by Landlord of Tenant's
use, storage, disposal, transport, handling, discharge, release or generation
of Hazardous Substances shall not constitute an assumption of risk respecting
the same nor a warranty or certification by Landlord that Tenant's proposed
use, storage, disposal, handling, release, discharge, generation or transport
of any such Hazardous Substances is safe or reasonable or in compliance with
Environmental Laws. Tenant shall maintain current all permits required for
its operations, including, without limitation, those for the use, storage,
handling, transport, discharge, release, generation and/or disposal of
Hazardous Substances.
(b) Release or discharge of Hazardous Substances into the soil or into
ground water shall constitute a material default under this Lease. Tenant
acknowledges that a Tenant of nonresidential property who knows
24
<PAGE>
or has reason to know that a material amount of a hazardous substance has
been released on or beneath its premises is to promptly notify the
Landlord. Failure to provide such notice to Landlord shall constitute a
material default under this Lease. In the event of such default, Landlord
shall have the right to (i) terminate this Lease and collect damages,
inclusive of the cost of cleanup of any Hazardous Substances released into
the soil or groundwater; or (ii) require the cleanup of contamination while
still enforcing the remaining terms of this Lease.
(c) Tenant expressly agrees that Landlord shall have the right to
enter the Premises to inspect the Premises and/or perform an environmental
investigation and assessment of the Premises (the "Environmental
Assessment") upon reasonable notice to Tenant (not less than 72 hours), and
that this right of entry shall include the right to test for soil and
groundwater contamination. If Landlord so reasonably requires, Tenant shall
comply, at its sole cost and expense, with all recommendations contained in
any Environmental Assessment, including, without limitation, any
recommendation with respect to the precautions that should be taken with
respect to activities on the Premises or Building or any recommendations
for additional testing and studies to detect the presence of Hazardous
Substances.
(d) Tenant shall indemnify, defend, (by counsel reasonably acceptable
to Landlord), protect and hold Landlord, and each of Landlord's officers,
directors, shareholders, employees, agents, attorneys, successors and
assigns, free and harmless from and against any and all claims,
liabilities, penalties, forfeitures, losses or expenses (including, without
limitation, attorney's fees and costs and court costs) or death of or
injury to any person or damage to any property whatsoever, arising from or
caused in whole or in part, directly or indirectly, by Tenant's use,
storage, handling, transportation, disposal, release, threatened release,
discharge or generation of Hazardous Substances to, in, on, under, about or
from the Premises or Building or Tenant's failure to comply with any
Environmental Law. For purposes of the indemnity provisions hereof any acts
or omissions of Tenant, or by employees, agents, assignees, contractors or
subcontractors of Tenant or others acting for or on behalf of Tenant
(whether or not they are negligent, intentional, willful or unlawful) shall
be strictly attributable to Tenant. This indemnification shall include
without limitation (a) personal injury claims, (b) the payment of liens,
(c) diminution in the value of the Premises or Building or the property on
which they are located, (d) damages for the loss or restriction on use of
the Premises or Building, (e) sums paid in settlement of claims, (f)
reasonable attorneys' fees and costs, consulting fees and costs and expert
fees and costs, (g) the cost of any investigation of site conditions, and
(h) the cost of any repair, clean-up health or other Environmental
Assessments, remedial, closure, removal, or restoration work,
decontamination or detoxification if required by any governmental or quasi-
governmental agency or body having jurisdiction or deemed necessary in
Landlord's reasonable judgment. The indemnification contained herein shall
survive the expiration of earlier termination of this Lease. This
indemnification is intended to constitute an indemnity agreement within the
meaning of Section 9607 (e) (1) of the Comprehensive Environmental
Response, Compensation and Liability Act of 1980 (42 USC 9607 (e) (1).
(e) Upon expiration or earlier termination of this Lease, Tenant shall
remove from the Premises any trade fixtures, furnishings and/or equipment,
including those associated with the use, storage, handling, transport,
discharge, release, generation or disposal of Hazardous Substances and
perform any closure work, investigation and environmental remedial work
required by any Environmental Laws or by any other applicable laws,
ordinances, regulations, or permits by any governmental authority having
jurisdiction. Removal and disposal of any and all such equipment or
fixtures shall be performed in strict accordance with all Environmental
Laws and all other applicable laws, regulations and government orders.
(f) As used in this Lease, the term "Hazardous Substances" shall mean
hazardous wastes, hazardous chemicals, flammable or explosive materials,
radioactive materials, toxic materials or related materials (whether
potentially injurious to persons or property and whether potentially
injurious by themselves or in combination with other materials), including,
but not limited to, any waste, chemical, substance or material now or
hereafter determined by any federal, state or local governmental agency of
authority having jurisdiction to be hazardous to human health or the
environment or that is or becomes regulated by such agency or authority
(including, but not limited to, those materials listed in the United States
Department of Transportation Hazardous Materials Table [49 CFR 172.101] as
amended from time to time), that were released to the environment,
including, without limitation, the soil, groundwater and/or air, at the
Premises or Building. As used in this Lease, the term "Environmental Laws"
shall mean any and all present and future
25
<PAGE>
federal, state and local laws (whether under common law, statute, rule,
regulation or otherwise), requirements under permits issued with respect
thereto, and other requirements of governmental authorities relating to the
environment or to any Hazardous Substance (including, without limitation,
to the Comprehensive Environmental Response, Compensation, and Liability
Act of 1980 (42 U.S.C. 9601, et seq.) as heretofore or hereafter amended
------
from time to time.
(g) Tenant shall immediately advise Landlord in writing of, and
provide Landlord with a copy of: (i) any notices of violation or potential
or alleged violation of any Environmental Law that are received by Tenant
from any governmental agency; (ii) any and all inquiry, investigation,
enforcement, clean-up, removal or other governmental or regulatory actions
instituted or threatened relating to Tenant or the Premises or Building;
and (iii) all claims made or threatened by any third-party against Tenant
or the Premises or Building relating to any Hazardous Substances.
(h) With reference to Paragraph 11 of this Lease, if the proposed
assignee's or subtenant's activities in, on, or about the Premises or
Building involve the use, handling, storage, transport, discharge, release,
generation or disposal of any Hazardous Substances other than those used by
Tenant or in quantities and processes different from Tenant's uses
permitted hereunder, it shall be reasonable for Landlord to withhold its
consent to such assignment or sublease in light of the risk of
contamination posed by such activities unless Tenant established beyond a
reasonable doubt that such assignee's or subtenant's activities pose no
greater risk of contamination to the Premises and Building than Tenant's
permitted activities and use of the Premises and Building in view of the
(a) quantities, toxicity and other properties of the Hazardous Substances
to be used by such assignee or subtenant, (b) the precautions against a
release of Hazardous Substances such assignee or subtenant agrees to
implement, (c) such assignee's or subtenant's financial condition as it
relates to its ability to pay for the cost to clean up a major release of
Hazardous Substances, and (d) such assignee's or subtenant's policy and
historical record respecting its willingness to respond to and clean up a
release of Hazardous Substances.
6. Paragraphs 27., 31., and 32. are deleted.
7. Landlord at its sole cost and expense shall provide the following
improvements to the new space as shown on Exhibit "B":
a. Demolish the existing office area
b. Cap existing plumbing within the space
c. Obtain necessary permits for completing the work
d. Demolish the wall block that divides the space in half
e. Provide two 12'x 14' knock-out openings in the wall between existing
facility and additional storage facility
f. Demolish the electrical conduit and switches in the new warehouse and
connect the warehouse lighting to Rugby Laboratories' power panel
g. Clean and re-seal the warehouse floor in the new area with two coats of
polyurethane floor sealant or equivalent floor sealant
8. Exhibit "B" is attached hereto and made a part hereof.
9. Provided this Lease is in full force and effect and the Tenant shall not be
in default hereunder, Tenant may renew and extend this Lease for three (3) years
from the fifth (5th) anniversary of the commencement date of the original term
of this Lease Amendment, by notice in writing delivered to Landlord not less
than one hundred eighty (180) days prior to the expiration date of the then
current term of this Lease. All of the covenants, conditions and
26
<PAGE>
provisions of this Lease shall thereupon be applicable during each such
additional three (3) year term, except that the amount of the monthly rental to
be paid by Tenant to Landlord shall be adjusted by multiplying the monthly
rental during the Lease Amendment term by the Consumer Price Index--United
States, All Items for all Urban Consumers, published by the Bureau of Labor
Statistics of the Department of Labor, for the month of April 1999 (third month
prior to the last month of the then current term), and dividing the product by
such Consumer Price Index for the month of April 1994 (third month prior to
commencement of Lease Amendment term), adjusted, however, to reflect any change
in the base year of such Index which may have been made by said Bureau of Labor
Statistics between said monthly periods. For purposes of this provision, this
Lease Amendment shall be deemed to commence on July 1, 1994, and the first five
(5) year term of this Lease Amendment shall terminate on June 30, 1999. In no
event shall the amount of the rental during the option (renewal) term be less
than during the Lease Amendment term. In no event shall this renewal be in
effect if the premises are subleased or available for sublease under any of the
provisions of this lease agreement.
This renewal is personal to the Tenant named in the Lease or any Tenant's
Affiliate as defined in Paragraph 11C. If Tenant subleases any portion of the
property or assigns or otherwise transfers any interest under the Lease to any
entity other than a Tenant Affiliate prior to the exercise of the renewal
(whether with or without Landlord's consent), such renewal and any succeeding
renewal shall lapse. If Tenant subleases any portion of the property or assigns
or otherwise transfers any interest of Tenant under the Lease to any entity
other than a Tenant Affiliate after the exercise of renewal but prior to the
commencement of the respective extension (whether with or without Landlord's
consent), such renewal and any succeeding renewals shall lapse and the lease
term shall expire as if such renewal was not exercised.
10. Landlord hereby agrees to provide Tenant with the right to lease additional
space in the building commonly known as 3450 W. Lake, Glenview, Illinois, when
and if such additional space should become available during the term of this
Lease. Said right to lease shall be junior to any options for extensions held
by adjacent tenants, but shall be superior to any leases not in effect or
proposed. In the event this right to lease is exercised by Tenant, Tenant shall
have the right to lease the entire additional space consisting of 24,000 square
feet, but shall specifically not have the right to lease only part of said
additional space under the provisions of this paragraph.
In the event Tenant desires to exercise the right to lease said additional
space, Tenant shall so notify Landlord in writing not less than two hundred
seventy (270) days prior to the availability of such additional space, and shall
return an executed lease containing the same terms and conditions as does this
Lease for any such additional space within thirty (30) days after Landlord
submits said Lease to Tenant. The rental for any such additional space shall be
based on rental rates prevailing in the open market for similar properties at
the time of notice by Tenant of Tenant's desire to exercise the right granted
under this paragraph.
Landlord specifically shall not be obligated to notify Tenant of the
availability of said additional space unless Tenant has advised Landlord of
Tenant's intention to lease said additional space as provided for hereinabove.
In no event shall this right to lease additional space be in effect if the
premises are subleased or available for sublease under any of the provisions of
this Lease Agreement.
All the terms and provisions of the Lease not modified expressly or by necessary
implication herein shall be and remain in full force and effect.
Meridian Point Realty Trust VI Co. MODERN WHOLESALE DRUG
a Missouri Corporation MIDWEST, INC. d/b/a Rugby
d/b/a: Meridian Point Realty VI Co. Laboratories
By: Meridian Point Properties, Inc.,
as agent
By: /s/ Al E. Andrews By: /s/ Raymond Pagels
--------------------------- -----------------------------
Title: AL E. ANDREWS, JR. Title: Senior Vice President
--------------------------- -----------------------------
Senior Vice President
Meridian Point Properties, Inc.
27
<PAGE>
LEGAL DESCRIPTION
That part of
PARCEL 1
A tract of land consisting of a part of each of lots 1 and 2 in the subdivision
of the east half of the northwest quarter and the northeast quarter of the
southwest quarter, of section 28, township 42 north, range 12 east of the third
principal meridian, (except railroad); said tract of land being bounded and
described as follow:
Beginning at the point of intersection of the southeasterly line of the right of
way, 100 feet wide, of the Chicago & Northwestern railway, with the south line
of said lot 2, (said south lot line also being the south line of the northwest
quarter of said section 28), and running thence east along the south line of
said lot 2, a distance of 592.85 feet; Thence north along a line which is
parallel with the east line of said lot 1, a distance of 269.49 feet; Thence
northeastwardly along the arc of a circle, convex to the northwest and having a
radius of 169.40 feet, a distance of 103.70 feet to a point which is 300 feet,
measured perpendicularly, southeasterly from said southeasterly line of the
right of way of the Chicago and Northwestern railway; Thence northeastwardly
along a line which is 300 feet, measured perpendicularly, southeasterly from and
parallel with said southeasterly right of way line, a distance of 448.47 feet;
Thence northwesterly along a line perpendicular to said parallel line said
distance of 300 feet to its intersection with said southeasterly right of way
line, and Thence southwestwardly along said southeasterly right of way line, a
distance of 1106.43 feet to the point of beginning, all in Cook County,
Illinois, and as outlined in red on Exhibit "B".
Containing 337,299 square feet of land, more or less.
EXHIBIT "A"
28
<PAGE>
EXHIBIT 10.10
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT (the "Agreement") dated as of July 27, 1998 by
and between Michael E. Boxer ("Employee") and Watson Pharmaceuticals, Inc.
("Company"). In consideration of the mutual covenants contained in this
Agreement, the parties, intending to be legally bound, hereby agree as follows:
1. Employment. Company hereby agrees to employ Employee on the terms and
----------
conditions set forth below for a term commencing effective as of July 27, 1998,
and Employee accepts such employment. Subject to the provisions of paragraphs 5
through 7 below, there is no employment term and such employment shall be at
will. Nothing in this Agreement shall constitute a guaranteed term of
employment.
2. Position. Subject to the control and direction of Company's Board of
--------
Directors ("Board") and Company's President ("President"), Employee shall
perform all reasonable duties and services incident to his position as Chief
Financial Officer of Company, and such other reasonable duties and services of
an executive nature as may from time to time be assigned to him by the Board and
the President for the Company or any affiliated entity.
3. Loyalty. Employee agrees that during the period of his employment he
-------
will devote his full time and attention during regular business hours to the
business and affairs of Company and its affiliated companies and will not,
without the prior permission of the Board or President, engage in any other
business enterprise which requires the personal time or attention of Employee.
The foregoing shall not prevent the purchase, ownership or sale by Employee of
investments or securities of any business which is not competitive and does not
have any business relations with Company or any affiliate of Company or up to
two percent of the outstanding publicly traded stock of any company, provided
the time or attention devoted to such activities does not interfere with the
performance of his duties hereunder. Employee further agrees that during the
period of his employment he agrees to accept such directorships, executive
offices and committee memberships in Company and its affiliated companies to
which he may from time to time be elected and will perform and render the duties
and the services incidental thereto. The Company acknowledges that Employee is
winding up the affairs of his consulting firm and during the six months from the
date of this Agreement may devote limited time to such activities, provided that
such activities do not interfere with Employee's duties hereunder.
4. Compensation. For the full, prompt and faithful performance of all of
------------
the duties and services to be performed by Employee hereunder, Company agrees to
pay, and Employee agrees to accept, the amounts set forth below:
(a) Base Salary. Employee shall receive a salary in the gross amount of
-----------
$16,666 per month, subject to such increases as the President may, in its sole
discretion, from time to time determine ("Base Salary"). Employee's Base Salary
shall be payable (minus all lawful deductions) in accordance with Company's
policies regarding payment of salary to executive employees generally.
<PAGE>
(b) Benefits. Employee shall also receive such other fringe benefits as
--------
are made available to Company's executives generally. In addition, Employee may
participate in any retirement, profit sharing, incentive, insurance, major
medical, health and hospitalization or similar benefits which may at any time be
available to Company's executives and employees. Employee's participation,
including eligibility and level of benefits, in all benefit programs shall be
controlled by plan documents, where applicable, or Company's policies, practices
and procedures where no plan documents exist.
(c) Expenses. Company agrees to reimburse Employee for all reasonable
--------
expenses incurred by him in providing services under this Agreement in
accordance with its policies and practices regarding expense reimbursement then
in effect.
(d) Vacation. Employee shall be entitled to such annual vacation as
--------
provided by the Company's vacation policy applicable to its executives
generally, which shall be taken at such time or times as shall be mutually
determined by Company and Employee.
(e) Bonus. Employee may receive a bonus, the amount of which is to be
-----
determined at the end of each calendar year during the Term in the sole
discretion of the President ("Bonus"), but such amount to be up to 30 percent of
Employee's Base Salary. Such Bonus shall be based upon Company's, Employee's,
and Employee's department's performance. Employee's Bonus, if any, shall be
payable (minus all lawful deductions) in accordance with Company's policies
regarding payment of bonuses to executive employees generally.
(f) Stock Options. Employee shall receive a stock option grant under the
-------------
Watson Pharmaceuticals, Inc. 1991 Stock Option Plan ("Plan") of 100,000 shares,
such grant to be made on the effective date of this Agreement, at a price equal
to the fair market value of Company's stock on the date of the grant. In
addition, if Employee is still employed by the Company on the date nine months
after the date of this Agreement, Employee shall receive an additional stock
option grant under the Plan of 50,000 shares, at a price equal to the fair
market value of Company's stock on the date of the grant. Such options shall be
subject to the Plan and an option agreement between the parties. Such options
shall vest ratably over a five-year period, subject to certain change-of-control
provisions contained in the option agreement(s). Employee may receive any such
additional stock option grants as are determined by the Compensation Committee
of the Board in accordance with its policies regarding stock option grants to
executive employees generally.
(g) Relocation Expenses. Company shall reimburse Employee for the
-------------------
reasonable costs which Employee incurs related to his relocation from the San
Francisco metropolitan area to the Corona, California metropolitan area, up to a
maximum amount of $60,000. Such reimburse will be in accordance with the
Company's expense reimbursement policy and practices.
(h) Loan. At Employee's request and if at such time Employee has not sold
----
his residence at 156 Birch Avenue, Corte Madera, California ("Birch Residence"),
Company will loan Employee up to $600,000 for the purpose of Employee's purchase
of a residence in the
<PAGE>
Corona, California metropolitan area ("Loan"). The Loan will be evidenced by a
promissory note acceptable to the parties and shall be payable on the date one
year after the Loan is made. The Loan will be without interest so long as
Employee is not in default.
5. Termination for Death, Disability or Cause. Company may terminate this
------------------------------------------
Agreement and Employee's employment as follows:
(a) Death. In the event of the death of Employee, this Agreement shall
-----
terminate as of the date of death, and Company's sole obligation will be to pay
to the estate of Employee Employee's Base Salary then unpaid through his last
day worked.
(b) Disability. In the event that Employee shall, because of physical or
----------
mental illness or incapacity, be unable to perform the duties and services to be
performed by him under this Agreement for a consecutive period of three months
or such shorter periods aggregating three months in any 12-month period
("Disability"), Company shall not be obligated to pay to Employee any
compensation or benefits beyond the date of Disability or may, in its sole
discretion, terminate this Agreement without any further obligation other than
to pay Base Salary through the date of Disability.
(c) Termination for Cause. Company may terminate Employee's employment for
---------------------
Cause. In the event Company elects to terminate Employee's employment for
Cause, Company will pay Employee only him then current Base Salary then unpaid,
computed to the last day worked. "Cause" shall mean:
(i) willful or gross failure by Employee to substantially perform his
reasonable duties as assigned by Company;
(ii) willful misconduct by Employee which is materially injurious to
Company, monetarily or otherwise; or
(iii) The material violation of a federal or state law or regulation
applicable to the business of Company.
(d) Other Termination. In the event Company terminates Employee for
-----------------
reasons other than death, Disability or Cause, and such termination is not
related to a Change in Control (as defined below), Company will provide to
Employee severance pay by continuing his Base Salary as of his last day worked
for a period of 52 weeks, to be paid minus all lawful deductions.
6. Termination by Employee. Employee may voluntarily terminate this
-----------------------
Agreement and his employment as follows:
(a) Retirement. Termination of Employee's employment based on "Retirement"
----------
shall mean termination in accordance with Company's retirement policy, including
early retirement, generally applicable to its salaried employees.
(b) Resignation. In the event Employee resigns his employment other than
-----------
for "Good Reason" as defined below, Company shall only be responsible for paying
Employee Base Salary and fringe benefits through Employee's last day worked.
<PAGE>
(c) Constructive Termination. Company will provide to Employee severance
------------------------
pay by continuing his Base Salary as of his last day worked for a period of 52
weeks, to be paid minus all lawful deductions, in the event that Employee
resigns his employment hereunder within 60 days following the occurrence of any
of the following events which occur without Employee's written consent:
(i) Any reduction by Company in Employee' Base Salary below the
amount set forth in Section 4(a) hereof;
(ii) The termination or modification of any bonus, benefit or
compensation plan or arrangement, stock ownership plan, stock purchase plan,
stock option plan, life insurance plan, medical, health, dental, accident and
disability plan in which Employee is participating, or the taking of any
action by Company which would adversely affect Employee's participation in or
materially reduce Employee's benefits under any of such plans; provided that
the termination, modification or action has a material affect on Employee's
overall compensation and does not effect participants in such plan generally;
or
(iii) Any material breach by Company of any provision of this
Agreement.
7. Termination Relating To A Change in Control. In the event that
-------------------------------------------
Employee's employment is terminated due to a Change in Control (as defined
below) or if Employee terminates his employment for Good Reason (as defined
below), Company shall pay Employee the Change in Control Payment (as defined
below).
(a) Termination for Good Reason. Termination by Employee of his employment
---------------------------
for "Good Reason" shall mean a termination by Employee, within twelve (12)
months after a Change in Control, based on the occurrence, without Employee's
express written consent, of any of the following events:
(i) Any reduction by Company in Employee's Base Salary as in effect
immediately prior to the Change in Control;
(ii) The failure by Company to continue in effect any bonus, benefit
or compensation plan or arrangement, stock ownership plan, stock purchase
plan, stock option plan, life insurance plan, medical, health, dental,
accident and disability plan in which Employee is participating at the time
of the Change in Control, or plans providing Employee with substantially
similar benefits (collectively, the "Benefit Plans"), or the taking of any
action by Company which would adversely affect Employee's participation in or
materially reduce Employee's benefits under any of such Benefit Plans;
provided, however, that the amendment, modification or termination of any
Benefit Plan as in effect at the time of a Change in Control on a basis which
does not discriminate against Employee, or a class of employees of which
Employee is a member (as opposed to all participants in such Benefit Plan),
shall not constitute "Good Reason" for the termination by Employee of his
employment pursuant to the terms of this paragraph 7(c);
(iii) Any material breach by Company of any provision of this
Agreement; or
<PAGE>
(iv) The failure by Company to obtain the assumption of this Agreement
by any successor or assign of Company.
(b) Change in Control. For purposes of this Agreement, a "Change in
-----------------
Control" shall mean the occurrence of any of the following events:
(i) The acquisition by any individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the securities Exchange Act of
1934, as amended [the "Exchange Act"]) (collectively, a "person") of
Beneficial ownership (as such term is defined in Rule 13d-3 promulgated under
the Exchange Act), directly or indirectly, of twenty (20%) percent or more of
the then outstanding shares of common stock of Company (collectively, the
"Outstanding Common Stock"); provided, however, that the following shall not
constitute a Change of Control:
(A) Any acquisition directly from Company (excluding an acquisition
by virtue of the exercise of a conversion privilege);
(B) Any acquisition by an Underwriter (as such term is defined in
Section 2(11) of the Securities Act of 1933, as amended) for the purpose
of making a public offering;
(C) Any acquisition by Company; or
(D) Any acquisition by any employee benefit plan (or related trust)
sponsored or maintained by Company or any corporation controlled by
Company;
(ii) The liquidation of all or substantially all of the assets of
Company; or
(iii) If within two (2) years of:
(A) The completion of a tender offer or exchange offer for the
voting stock of Company (other than a tender offer or exchange offer by
Company) or a proxy contest in connection with the election of members
of the Board;
(B) A merger, consolidation, transfer or sale of twenty percent
(20%) of the book value of the gross assets of Company measured at the
time of such merger, consolidation, transfer or sale in one (1) or more
transactions;
(C) The acquisition by any person, directly or indirectly, of the
Beneficial Ownership of securities of Company representing twenty
percent (20%) of the Outstanding Common Stock; or
(D) Any combination of the foregoing;
Dr. Allen Chao is not a member of the Board and a majority of the Board shall
not consist of:
(I) Persons who were directors of Company on the date hereof;
or
<PAGE>
(II) Persons who were elected or nominated for election as
directors with the approval of a majority of the persons referred
to in paragraph 7(e)(iii)(D)(I) above or persons theretofore
elected in accordance with this paragraph 7(e)(iii)(D)(II).
(c) Change in Control Payment. If Employee's employment shall be
-------------------------
terminated by Company (other than for Cause, Disability, Retirement or death)
due to a Change in Control or by Employee for Good Reason, then Employee shall
be entitled to a lump sum payment in a gross amount equal to Employee's Base
Salary for a period of 12 months (minus all lawful deductions).
(d) No Mitigation. Employee shall not be required to mitigate the amount
-------------
of any payment contemplated by this paragraph 7 (whether by seeking new
employment or in any other manner), nor shall any such payment be reduced by any
earnings that Employee may receive from any other source.
8. Inventions. Employee will, during the period of his employment,
----------
disclose to Company promptly and fully all Inventions made or conceived by him
(either solely or jointly with others) including but not limited to Inventions
which relate to the business of Company or Company's actual or anticipated
research or development, or result from any work performed by him for Company.
All Inventions and all records related to Inventions, whether or not patentable,
shall be and remain the sole and exclusive property of Company. "Inventions"
means all inventions, discoveries, processes, improvements, developments and
ideas, and all know-how related hereto. Employee hereby assigns and agrees to
assign to Company all his rights to Inventions and any patents, trademarks, or
copyrights which may be issued in respect to Inventions. Employee acknowledges
that all work shall be work made for hire. During and after his employment,
Employee will assist Company, without charge to Company but at its request and
expense, to obtain and retain rights in Inventions, and will execute all
appropriate documents at the request of Company.
Employee understands that this paragraph 8 shall not apply to any invention
for which no equipment, supplies, facilities, trade secret, or other
confidential information of Company was used and which was developed entirely on
his own time, and does not relate to the business of Company, its actual or
anticipated research, and does not result from any work performed by him for
Company.
9. Non-Solicitation. Employee agrees that during the Term of his
----------------
employment under this Agreement, and for a period commencing on the termination
of his employment for any reason and ending one (1) year after the termination
of his employment with Company, he will not, directly or indirectly:
(i) Employ, hire, engage or be associated with any employee or other
person then or during any part of the preceding twelve (12) months connected
with Company or any of its affiliates;
(ii) Induce any person connected with or employed by Company or any of
its affiliates to leave the employ of such entities; or
<PAGE>
(iii) Solicit the employment of any such person on his own behalf or on
behalf of any other business enterprise.
The provisions of this paragraph 9 shall survive the termination or
expiration of this Agreement.
10. Confidential Information. Employee recognizes and acknowledges that
------------------------
various kinds of confidential and proprietary information and trade secrets,
including but not limited to product specifications and lists of Company's
customers and vendors, as they may exist from time to time, are valuable,
special and unique assets of Company's business. Employee will not, during or
after his employment, except in accordance with his employment by Company,
disclose or cause or permit to be disclosed any confidential or proprietary
information or trade secrets of Company to any person, firm, corporation,
association or other entity for any reason or purpose whatsoever without the
prior written consent of Company or as otherwise be required by law or legal
process. The provisions of this paragraph 10 shall survive the termination of
this Agreement.
11. Remedies. In the event that Employee shall violate any provision of
--------
paragraphs 9 and 10 above, then Employee hereby agrees that Company shall be
entitled to a temporary or permanent injunction against him by any court of
competent jurisdiction prohibiting him from violating such provision. In any
proceeding for an injunction and upon any motion for a temporary or permanent
injunction, Employee agrees that his ability to answer in damages shall not be a
bar or interposed as a defense to the granting of such temporary or permanent
injunction against Employee. Employee further agrees that Company will not have
an adequate remedy at law in the event of any breach by Employee hereunder and
that Company will suffer irreparable damage and injury if Employee breaches any
of the provisions of paragraphs 8 through 10 above. The provisions of this
paragraph 11 shall survive the termination or expiration of this Agreement.
12. Notices. Notices and all other communications contemplated by this
-------
Agreement shall be in writing and shall be deemed to have been duly given when
received at the address specified herein. In the case of Employee, notices
shall be delivered to him personally or at the home address which he has most
recently communicated to Company in writing. In the case of Company, notices
shall be delivered to its corporate headquarters, and all notices shall be
directed to the attention of its President.
13. Modification and Waiver. No provision of this Agreement shall be
-----------------------
modified, waived or discharged unless the modification, waiver or discharge is
agreed to in writing and signed by Employee and by an authorized officer of
Company (other than Employee). No waiver by either party of any breach of, or
of compliance with, any condition or provision of this Agreement by the other
party shall be considered a waiver of any other condition or provision or of the
same condition or provision at another time.
14. Complete Agreement. This Agreement supersedes all previous agreements
------------------
between Company and Employee. No agreements, representations or understandings
(whether oral or written and whether expressed or implied) which are not
expressly set forth in this
<PAGE>
Agreement have been made or entered into by either party with respect to the
subject matter hereof.
15. No Assignment. No right, benefit or interest hereunder, shall be
-------------
subject to anticipation, alienation, sale, assignment, encumbrance, charge,
pledge, hypothecation, or set-off in respect of any claim, debt or obligation,
or to execution, attachment, levy or similar process, or assignment by operation
of law. Any attempt, voluntary or involuntary, to effect any action specified
in the immediately preceding sentence shall, to the full extent permitted by
law, be null, void and of no effect.
16. Governing Law. This Agreement shall be governed by, and construed and
-------------
enforced in accordance with and subject to, the laws of the State of California
applicable to Agreements made and to be performed entirely within such State, as
to all matters governed by state law or, if controlling, by applicable federal
law.
17. Severability. The invalidity or unenforceability of any provision or
------------
provisions of this Agreement shall not affect the validity or enforceability of
any other provision hereof, which shall remain in full force and effect.
18. Arbitration. Except as otherwise provided above, any dispute or
-----------
controversy arising under or in connection with this Agreement shall be settled
exclusively by arbitration in Orange County, California. Selection of the
arbitrator and conduct of the arbitration shall be in accordance with the
commercial arbitration rules of the American Arbitration Association then in
effect. Judgment may be entered on the arbitrator's award in any court having
jurisdiction. Punitive damages shall not be awarded. Each party shall bear its
own costs and legal fees in any arbitration. The cost of the arbitrator and
related expenses shall be shared equally by the parties.
19. Withholding. All payments made pursuant to this Agreement will be
-----------
subject to withholding of applicable taxes, unless specifically set forth herein
to the contrary.
20. Counterparts. This Agreement may be executed in one (1) or more
------------
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one (1) and the same instrument.
IN WITNESS WHEREOF, each of the parties has executed this Agreement, in the
case of Company by its duly authorized officer, as of the day and year first
above written.
WATSON LABORATORIES, INC.
By: /s/ MICHAEL E. BOXER
--------------------
Michael E. Boxer
Title: ___________________________
<PAGE>
EXHIBIT 22.1
Watson Pharmaceuticals, Inc.
Subsidiaries of the Company
as of March 15, 1999
Name Jurisdiction of Incorporation
Chelsea Laboratories, Inc. New York
Chelsea Laboratories Caribe, Inc. Delaware
Circa Pharmaceuticals, Inc. New York
Natrapac, Inc. Utah
Nicobrand Limited Northern Ireland
Nihon TheraTech Kabushiki Kaisha Japan
(a/k/a TheraTech Japan)
Oclassen Pharmaceuticals, Inc. Delaware
Royce Laboratories, Inc. Florida
Rugby Laboratories, Inc. New York
The Rugby Group, Inc. New York
TheraTech, Inc. Delaware
Watson Laboratories, Inc. Nevada
WatsonPharma, Inc. Delaware
Watson Pharmaceuticals (Asia) Ltd. Territory of the British Virgin Islands
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in each of the seven
Registration Statements on Form S-8 (No. 33-70878, No. 33-94350, No. 333-05737,
No. 333-20029-02, No. 333-24577, No. 333-37733 and No. 333-70933) and in each
of the three Prospectuses constituting part of the Registration Statements on
Form S-3 (No. 333-20029-01, No. 333-49079 and No. 333-70943) of Watson
Pharmaceuticals, Inc. of our report dated February 17, 1999 appearing on page
F-2 of this Form 10-K.
/s/ PRICEWATERHOUSECOOPERS LLP
Los Angeles, California
March 26, 1999
<PAGE>
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos. 33-
70878, 33-94350, 333-20029-02, 333-05737, 333-24577, 333-37733 and 333-70933 on
Form S-8 and 333-20029-01, 333-49079 and 333-70943 on Form S-3 of Watson
Pharmaceuticals, Inc. of our report dated February 4, 1998 (relating to the
consolidated financial statements of Somerset Pharmaceuticals, Inc. and
subsidiaries) appearing in this Annual Report on Form 10-K of Watson
Pharmaceuticals, Inc. for the year ended December 31, 1998.
/s/ DELOITTE & TOUCHE LLP
Pittsburgh, Pennsylvania
March 26, 1999
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the inclusion in the
Form 10-K of Watson Pharmaceuticals, Inc. for the year ended December 31, 1998
of our report dated January 17, 1997, relating to the financial statements of
Oclassen Pharmaceuticals, Inc. as of December 31, 1996 and for the year then
ended, incorporated by reference. It should be noted that we have not audited
any financial statements of Oclassen Pharmaceuticals, Inc. subsequent to
December 31, 1996 or performed any audit procedures subsequent to the date of
our report.
/s/ ARTHUR ANDERSEN LLP
March 26, 1999
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<PERIOD-START> JAN-01-1998
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0
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