WATSON PHARMACEUTICALS INC
S-4/A, 2000-07-27
PHARMACEUTICAL PREPARATIONS
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<PAGE>   1


     AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 27, 2000


                                                      REGISTRATION NO. 333-41466

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                            ------------------------


                                AMENDMENT NO. 1


                                       TO


                                    FORM S-4
                             REGISTRATION STATEMENT
                                     UNDER
                           THE SECURITIES ACT OF 1933
                            ------------------------

                          WATSON PHARMACEUTICALS, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S>                              <C>                               <C>
             NEVADA                            2834                           95-3872914
(STATE OR OTHER JURISDICTION OF    (PRIMARY STANDARD INDUSTRIAL            (I.R.S. EMPLOYER
 INCORPORATION OR ORGANIZATION)    CLASSIFICATION CODE NUMBER)          IDENTIFICATION NUMBER)
</TABLE>

                          WATSON PHARMACEUTICALS, INC.
                      311 BONNIE CIRCLE, CORONA, CA 92880
                                 (909) 270-1400
  (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
                   REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)

                               ROBERT C. FUNSTEN
              SENIOR VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY
                          WATSON PHARMACEUTICALS, INC.
                      311 BONNIE CIRCLE, CORONA, CA 92880
                                 (909) 270-1400
 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
                             OF AGENT FOR SERVICE)

                                   COPIES TO:

<TABLE>
<S>                                               <C>
              KEITH A. FLAUM, ESQ.                           RICHARD L. GOLDBERG, ESQ.
              JAMES R. JONES, ESQ.                            ALLAN R. WILLIAMS, ESQ.
              JAIMEE R. KING, ESQ.                               PROSKAUER ROSE LLP
               COOLEY GODWARD LLP                                  1585 BROADWAY
             FIVE PALO ALTO SQUARE                            NEW YORK, NY 10036-8299
              3000 EL CAMINO REAL                                  (212) 969-2901
            PALO ALTO, CA 94306-2155
                 (650) 843-5000
</TABLE>

   APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
                                    PUBLIC:
    As soon as practicable following the effectiveness of this Registration
                                   Statement.

    If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box.  [ ]

    If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier
registration statement for the same offering.  [ ]  __________

    If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier registration statement for the same
offering.  [ ]  __________

    THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.

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--------------------------------------------------------------------------------
<PAGE>   2

[SCHEIN LOGO]

                        SPECIAL MEETING OF STOCKHOLDERS

                 MERGER PROPOSED -- YOUR VOTE IS VERY IMPORTANT

     The boards of directors of Watson Pharmaceuticals, Inc. and Schein
Pharmaceutical, Inc. have unanimously approved a merger combining Watson and
Schein.

     If the merger is completed, each outstanding share of Schein common stock,
other than ineligible and dissenting shares (if applicable), will be converted
into the right to receive a fraction of a share of Watson common stock. The
fraction of a share of Watson common stock into which each share of Schein
common stock will be converted will be based on the average closing price of a
share of Watson common stock on the New York Stock Exchange for a ten trading
day period. The ten trading day period will end on the trading day two trading
days prior to the date of the special meeting of the Schein stockholders called
to approve and adopt the merger agreement.

     If the average closing price of a share of Watson common stock is between
$44.61 and $54.52, the value of the merger consideration per share of Schein
common stock will be $23.00. The value of the merger consideration per share of
Schein common stock will be increased proportionately above $23.00, if the
average closing price of a share of Watson common stock is greater than $54.52
per share, up to a maximum value of $26.50 per share of Schein common stock
where the average closing price of a share of Watson common stock is $62.82 or
higher. Conversely, the value of the merger consideration will be decreased
proportionately below $23.00, if the average closing price of a share of Watson
common stock is less than $44.61 down to a minimum value of $19.50 per share of
Schein common stock where the average closing price of a share of Watson common
stock is $37.82 or lower. At this minimum value of $19.50 per share of Schein
common stock, Watson would have the option to pay the entire merger
consideration in cash, in stock or in a mix of cash and stock.

     The Watson common stock is listed on the New York Stock Exchange under the
symbol "WPI."


     Stockholders will be asked to vote upon the merger at a special meeting of
Schein stockholders to be held on August 28, 2000 at 9:00 a.m., local time, at
Schein's headquarters, located at 100 Campus Drive, Florham Park, New Jersey.
The holders of a majority of the outstanding shares of Schein common stock must
approve the merger. Only stockholders who held shares of Schein common stock at
the close of business on July 25, 2000 are entitled to vote at the special
meeting.


     The board of directors of Schein has determined that the merger and the
merger agreement are in the best interests of Schein stockholders and recommends
that Schein stockholders vote "FOR" approval and adoption of the merger
agreement.


     Watson's subsidiary, WS Acquisition Corp., currently owns 75.7% of the
outstanding shares of Schein common stock and will vote its shares for approval
and adoption of the merger agreement.


     The proxy statement/prospectus attached to this letter provides you with
information about Watson, Schein and the proposed merger. PLEASE GIVE ALL OF
THIS INFORMATION YOUR CAREFUL ATTENTION, INCLUDING THE SECTION ENTITLED "RISK
FACTORS" BEGINNING ON PAGE 14 OF THIS PROXY STATEMENT/PROSPECTUS. In addition,
you may obtain other information about Watson and Schein from documents filed
with the Securities and Exchange Commission. We encourage you to read the entire
proxy statement/prospectus carefully.
<PAGE>   3

     YOUR VOTE IS VERY IMPORTANT REGARDLESS OF THE NUMBER OF SHARES YOU OWN. To
vote your shares, you may use the enclosed proxy card or attend the special
stockholders' meeting. To vote in favor of the merger agreement, you MUST vote
"FOR" the proposal by following the instructions stated on the enclosed proxy
card. If you do not vote at all, it will, in effect, count as a vote against the
merger. We urge you to vote "FOR" this proposal, a necessary step in the merger
of Watson and Schein.

                                                      /s/ Allen Chao
                                          --------------------------------------
                                                    Allen Chao, Ph.D.
                                          Chairman, Chief Executive Officer and
                                                        President
                                               Schein Pharmaceutical, Inc.


     The proxy statement/prospectus is dated July 26, 2000, and is first being
mailed to stockholders of Schein on or about July 31, 2000.


     NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
REGULATORS HAVE APPROVED THE WATSON COMMON STOCK TO BE ISSUED IN THE MERGER OR
DETERMINED WHETHER THE PROXY STATEMENT/ PROSPECTUS IS ACCURATE OR ADEQUATE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

     THE INFORMATION IN THE PROXY STATEMENT/PROSPECTUS IS NOT COMPLETE AND MAY
BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THE PROXY
STATEMENT/PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT
SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE
IS NOT PERMITTED.

     THE PROXY STATEMENT/PROSPECTUS INCORPORATES IMPORTANT BUSINESS AND
FINANCIAL INFORMATION ABOUT WATSON AND SCHEIN THAT IS NOT INCLUDED IN OR
DELIVERED WITH THIS DOCUMENT. THIS INFORMATION IS AVAILABLE WITHOUT CHARGE TO
SCHEIN STOCKHOLDERS UPON WRITTEN OR ORAL REQUEST. STOCKHOLDERS SHOULD CONTACT
SCHEIN AT 100 CAMPUS DRIVE, FLORHAM PARK, NJ 07932, ATTN: INVESTOR RELATIONS,
TELEPHONE (973) 593-5500.


     TO OBTAIN TIMELY DELIVERY OF REQUESTED DOCUMENTS BEFORE THE SPECIAL
MEETING, YOU MUST REQUEST THEM NO LATER THAN AUGUST 21, 2000, WHICH IS FIVE
BUSINESS DAYS BEFORE THE DATE OF THE SPECIAL MEETING.


     Also see "Where You Can Find More Information" in the proxy
statement/prospectus.

                                        2
<PAGE>   4

                          SCHEIN PHARMACEUTICAL, INC.
                                100 CAMPUS DRIVE
                         FLORHAM PARK, NEW JERSEY 07932
                                 (973) 593-5500
                            ------------------------

                   NOTICE OF SPECIAL MEETING OF STOCKHOLDERS

                         TO BE HELD ON AUGUST 28, 2000


To the Stockholders of Schein Pharmaceutical, Inc.:


     A special meeting of stockholders of Schein Pharmaceutical, Inc., a
Delaware corporation, will be held on August 28, 2000 at 9:00 a.m., local time,
at the principal executive offices of Schein located at 100 Campus Drive,
Florham Park, New Jersey 07932, for the following purposes:


     1. To consider and vote upon a proposal to approve and adopt the Agreement
        and Plan of Merger, dated as of May 24, 2000, among Watson
        Pharmaceuticals, Inc., a Nevada corporation, WS Acquisition Corp., a
        Delaware corporation and a wholly owned subsidiary of Watson, and
        Schein; and

     2. To transact such other business as may properly come before the special
        meeting or any adjournment or postponement thereof.


     The board of directors of Schein has fixed the close of business on July
25, 2000 as the record date for the determination of stockholders entitled to
notice of, and to vote at, the special meeting and any adjournment or
postponement thereof. Only holders of record of shares of Schein common stock at
the close of business on the record date are entitled to notice of, and to vote
at, the special meeting. At the close of business on the record date, Schein had
outstanding and entitled to vote 34,428,486 shares of common stock.


     SCHEIN'S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT SCHEIN STOCKHOLDERS
VOTE "FOR" APPROVAL AND ADOPTION OF THE MERGER AGREEMENT.

     If any cash is paid in the merger (other than for fractional shares),
Schein stockholders will have appraisal rights under the provisions of Section
262 of the Delaware General Corporation Law. Otherwise, Schein stockholders will
not have appraisal rights.

     YOUR VOTE IS IMPORTANT. THE AFFIRMATIVE VOTE OF THE HOLDERS OF A MAJORITY
OF THE OUTSTANDING SHARES OF SCHEIN COMMON STOCK IS REQUIRED FOR APPROVAL AND
ADOPTION OF THE MERGER AGREEMENT. EVEN IF YOU PLAN TO ATTEND THE SPECIAL MEETING
IN PERSON, WE REQUEST THAT YOU SIGN AND RETURN THE ENCLOSED PROXY AND THUS
ENSURE THAT YOUR SHARES WILL BE REPRESENTED AT THE SPECIAL MEETING IF YOU ARE
UNABLE TO ATTEND. IF YOU DO ATTEND THE SPECIAL MEETING AND WISH TO VOTE IN
PERSON, YOU MAY WITHDRAW YOUR PROXY AND VOTE IN PERSON.

                                        By Order of the Board of Directors,

                                        /s/ ROBERT C. FUNSTEN
                                        Robert C. Funsten
                                        Secretary

Florham Park, New Jersey

July 26, 2000

<PAGE>   5

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
QUESTIONS AND ANSWERS ABOUT THE MERGER......................    1
SUMMARY.....................................................    3
RISK FACTORS................................................   14
  Risks Relating to the Merger..............................   14
  Risks Relating to Investing in the Pharmaceutical
     Industry...............................................   16
  Risks Relating to Watson..................................   19
  Risks Relating to Schein..................................   24
THE COMPANIES...............................................   28
  Watson....................................................   28
  WS Acquisition Corp.......................................   28
  Schein....................................................   28
THE SPECIAL MEETING OF SCHEIN STOCKHOLDERS..................   29
  Date, Time and Place......................................   29
  Purpose of the Special Meeting............................   29
  Recommendation of Schein's Board of Directors.............   29
  Record Date and Voting Power..............................   29
  Voting and Revocation of Proxies..........................   29
  Required Vote.............................................   29
  Solicitation of Proxies...................................   30
  Other Matters.............................................   30
THE MERGER..................................................   31
  General Description of the Merger.........................   31
  Background................................................   31
  Reasons for the Merger....................................   37
  Watson's Reasons for the Merger...........................   38
  Schein's Reasons for the Merger...........................   39
  Opinion of Schein's Financial Advisor.....................   40
  Interests of Schein's Officers and Directors in the
     Merger.................................................   46
  Material Federal Income Tax Consequences..................   48
  Anticipated Accounting Treatment..........................   49
  Restrictions on Resales by Affiliates.....................   49
CERTAIN TERMS OF THE MERGER AGREEMENT.......................   51
  The Tender Offer..........................................   51
  The Merger................................................   51
  Effective Time of the Merger..............................   51
  Conversion of Securities..................................   51
  Schein Stock Options......................................   53
  Stock Purchase Plan.......................................   53
  Representations and Warranties............................   54
  Stockholder Meetings; Registration Statement..............   55
  No Solicitation...........................................   55
  Indemnification and Insurance.............................   56
  Interim Financing.........................................   57
  Conditions to the Merger..................................   57
  Termination of the Merger Agreement.......................   57
  Effect of Termination.....................................   57
  Fees and Expenses.........................................   58
  Extension; Waiver.........................................   58
  Amendment.................................................   58
</TABLE>

                                        i
<PAGE>   6

<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
  STATEMENTS................................................   59
  Unaudited Pro Forma Condensed Combined Statement of
     Operations.............................................   61
  Unaudited Pro Forma Condensed Combined Balance Sheet......   63
  Notes to Unaudited Pro Forma Condensed Combined Financial
     Statements.............................................   64
APPRAISAL RIGHTS............................................   68
COMPARATIVE RIGHTS OF WATSON STOCKHOLDERS AND SCHEIN
  STOCKHOLDERS..............................................   69
  Size of the Board of Directors............................   69
  Removal of Directors......................................   69
  Filling New Seats or Vacancies on the Board of
     Directors..............................................   70
  Limitation of Personal Liability..........................   70
  Indemnification...........................................   70
  Transactions Involving Directors and Officers.............   71
  Advance Notice of Stockholder Business....................   72
  Power to Call Special Meeting of Stockholders.............   72
  Distributions.............................................   73
  Stockholder Approval of Certain Business Combinations.....   73
  Mergers...................................................   76
  Dissolution...............................................   76
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS....................   77
LEGAL MATTERS...............................................   77
EXPERTS.....................................................   77
STOCKHOLDER PROPOSALS.......................................   77
WHERE YOU CAN FIND MORE INFORMATION.........................   78
</TABLE>

Annexes:

A  Agreement and Plan of Merger

B  Opinion of CIBC World Markets Corp.

C  Delaware General Corporation Law, Section 262

                                       ii
<PAGE>   7

                     QUESTIONS AND ANSWERS ABOUT THE MERGER

Q: WHY ARE THE TWO COMPANIES PROPOSING TO MERGE?


A: Watson and Schein are proposing to merge WS Acquisition Corp. with and into
   Schein because we believe the resulting combination will create a stronger,
   more competitive company capable of achieving greater financial strength,
   operational efficiencies, technology development, earning power and growth
   potential than either company would have on its own. In a tender offer,
   Watson's subsidiary, WS Acquisition Corp., acquired 75.7% of the outstanding
   shares of Schein common stock, as of the record date of the special meeting.


Q: WHAT WILL SCHEIN STOCKHOLDERS RECEIVE IN THE MERGER?

A: As a result of the merger, each outstanding share of Schein common stock,
   other than ineligible and dissenting shares, will be converted into the right
   to receive a fraction of a share of Watson common stock. The fraction of a
   share of Watson common stock into which each share of Schein common stock
   will be converted will be based on the average closing price of a share of
   Watson common stock on the New York Stock Exchange for a ten trading day
   period. The ten trading day period will end on the trading day two trading
   days prior to the date of the special meeting of the Schein stockholders
   called to approve and adopt the merger agreement.

   If the average closing price of a share of Watson common stock is between
   $44.61 and $54.52, the value of the merger consideration per share of Schein
   common stock will be $23.00. The value of the merger consideration per share
   of Schein common stock will be increased proportionately above $23.00, if the
   average closing price of a share of Watson common stock is greater than
   $54.52 per share, up to a maximum value of $26.50 per share of Schein common
   stock where the average closing price of a share of Watson common stock is
   $62.82 or higher. Conversely, the value of the merger consideration will be
   decreased proportionately below $23.00, if the average closing price of a
   share of Watson common stock is less than $44.61 down to a minimum value of
   $19.50 per share of Schein common stock where the average closing price of a
   share of Watson common stock is $37.82 or lower. At this minimum value of
   $19.50 per share of Schein common stock, Watson would have the option to pay
   the entire merger consideration in cash, in stock or in a mix of cash and
   stock.

Q: WHAT DO I NEED TO DO NOW?

A: We urge you to read this proxy statement/prospectus carefully, including its
   annexes, and to consider how the merger affects you. Then, just mail your
   completed and signed proxy card in the enclosed return envelope as soon as
   possible so that your shares can be voted at the special meeting of Schein
   stockholders.

Q: WHAT HAPPENS IF I DO NOT RETURN A PROXY CARD?

A: If you are a Schein stockholder, the failure to return your proxy card will
   have the same effect as voting against the merger.

Q: MAY I VOTE IN PERSON?

A: Yes. You may attend the special meeting of Schein stockholders and vote your
   shares in person, rather than signing and returning your proxy card.

Q: MAY I CHANGE MY VOTE AFTER I HAVE MAILED MY SIGNED PROXY CARD?

A: Yes. You may change your vote at any time before your proxy card is voted at
   the special meeting. You can do this in one of three ways. First, you can
   send a written notice stating that you would like to revoke your proxy.
   Second, you can complete and submit a new, later dated proxy card. Third, you
   can attend the meeting and vote in person. Your attendance alone will not
   revoke your proxy. If you

                                        1
<PAGE>   8

   have instructed a broker to vote your shares, you must follow directions
   received from your broker to change those instructions.

Q: IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER VOTE MY
SHARES FOR ME?

A: Your broker will not be able to vote your shares without instructions from
   you. You should instruct your broker how to vote your shares, following the
   procedure provided by your broker.

Q: SHOULD I SEND IN MY STOCK CERTIFICATES NOW?

A: No. If you are a Schein stockholder, after the merger is completed, you will
   receive written instructions for exchanging your shares of Schein common
   stock for shares of Watson common stock. You will also receive a cash payment
   for any fractional shares.

Q: AM I ENTITLED TO APPRAISAL RIGHTS?

A: Schein stockholders will be entitled to appraisal rights only if cash, other
   than for fractional shares, is paid in the merger.

Q: IS THE MERGER A TAXABLE TRANSACTION?

A: The merger is a taxable transaction for Schein stockholders for federal
   income tax purposes and may also be taxable under applicable state, local,
   foreign and other tax laws.

Q: WHO CAN HELP ANSWER MY QUESTIONS?

A: If you are a Schein stockholder, and would like additional copies, without
   charge, of this proxy statement/prospectus or if you have questions about the
   merger, including questions about the procedures for voting your shares, you
   should contact:

     SCHEIN PHARMACEUTICAL, INC.
     Attn: Investor Relations
     100 Campus Drive
     Florham Park, NJ 07932
     Telephone: (973) 593-5500

     Or

     D.F. KING & CO., INC.
     Attn: Thomas Long
     77 Water Street
     New York, NY 10005
     Telephone: (800) 628-8509

                                        2
<PAGE>   9

                                    SUMMARY


     This summary highlights selected information from this document and may not
contain all of the information that is important to you. To understand the
merger fully and for a more complete description of the legal terms of the
merger, you should read carefully this entire document and the documents we
refer to. See "Where You Can Find More Information" on page 78. The merger
agreement is attached as Annex A to this proxy statement/prospectus. We
encourage you to read the merger agreement as it is the legal document that
governs the merger. We have included page references in parentheses to direct
you to a more complete description of the topics presented in this summary.


FORWARD-LOOKING INFORMATION

     Certain of the information relating to Watson Pharmaceuticals, Inc.
("Watson"), Schein Pharmaceutical, Inc. ("Schein") and the combined company
contained or incorporated by reference in this proxy statement/prospectus is
forward-looking in nature. All statements included or incorporated by reference
in this proxy statement/prospectus or made by management of Watson or Schein
other than statements of historical fact regarding Watson, Schein or the
combined company are forward-looking statements. Examples of forward-looking
statements include statements regarding Watson's, Schein's or the combined
company's future financial results, operating results, product successes,
business strategies, projected costs, future products, competitive positions and
plans and objectives of management for future operations. In some cases, you can
identify forward-looking statements by terminology, such as "may," "will,"
"should," "would," "expects," "plans," "anticipates," "believes," "estimates,"
"predicts," "potential," or "continue" or the negative of these terms or other
comparable terminology. Any expectations based on these forward-looking
statements are subject to risks and uncertainties and other important factors,
including those discussed in the "Risk Factors" section of this proxy
statement/prospectus. These and many other factors could affect the future
financial and operating results of Watson, Schein or the combined company. These
factors could cause actual results to differ materially from expectations based
on forward-looking statements made in this document or elsewhere by or on behalf
of Watson, Schein or the combined company.


THE COMPANIES (PAGE 28)


WATSON PHARMACEUTICALS, INC.
311 Bonnie Circle
Corona, California 92880
(909) 270-1400

     Watson is a corporation organized and existing under the laws of the State
of Nevada. Its principal offices are located at 311 Bonnie Circle, Corona,
California 92880. Watson is a pharmaceutical company primarily engaged in the
development, production, marketing and distribution of both branded and off-
patent pharmaceutical products. It was incorporated in January 1985, and has
grown, through internal product development and synergistic acquisitions of
products and businesses, into a diversified specialty pharmaceutical company
that currently markets over 100 branded and off-patent products. Watson is also
engaged, both internally and under collaborative agreements with other parties,
in the development of advanced drug delivery systems primarily designed to
enhance therapeutic benefits of pharmaceutical products.

SCHEIN PHARMACEUTICAL, INC.
100 Campus Drive
Florham Park, New Jersey 07932
(973) 593-5500

     Schein is a corporation organized and existing under the laws of the State
of Delaware with its principal executive offices located at 100 Campus Drive,
Florham Park, New Jersey 07932. Schein develops, manufactures and markets a
broad line of generic products and has a significant branded
                                        3
<PAGE>   10

business. The Schein product line includes both solid dosage and sterile dosage
generic products, and Schein is also developing a line of specialty branded
pharmaceuticals. The branded products group at Schein is focused on developing
and commercializing proprietary pharmaceutical products in niche therapeutic
areas, and has developed an expertise in the management of iron deficiency and
pharmaceutical products related to the management of anemia in nephrology.


THE MERGER (PAGE 31)


     Pursuant to the merger agreement among Watson, Schein and WS Acquisition
Corp., a wholly owned subsidiary of Watson, WS Acquisition Corp. conducted a
tender offer to purchase any or all of the outstanding shares of Schein common
stock for $19.50 per share in cash. On July 3, 2000, the tender offer expired
and thereafter WS Acquisition Corp. purchased 26,068,469 shares of common stock
of Schein, constituting 77.8% of the outstanding shares of Schein common stock.
Now Schein is seeking stockholder approval of the merger contemplated by the
merger agreement. Upon completion of the merger, under the terms and subject to
the conditions set forth in the merger agreement, WS Acquisition Corp. will be
merged into Schein, the separate corporate existence of WS Acquisition Corp.
will cease and Schein will continue as the surviving corporation and wholly
owned subsidiary of Watson. WS Acquisition Corp. will vote its shares of Schein
common stock for approval and adoption of the merger agreement.


CONVERSION OF SECURITIES (PAGE 51)


     Under the terms of the merger agreement, each outstanding share of Schein
common stock, other than ineligible and dissenting shares, will be converted
into the right to receive a fraction of a share of Watson common stock. The
fraction of a share of Watson common stock into which each share of Schein
common stock will be converted will be based on the average closing price of a
share of Watson common stock on the New York Stock Exchange for a ten trading
day period. The ten trading day period will end on the trading day two trading
days prior to the date of the special meeting of the Schein stockholders called
to approve and adopt the merger agreement.

     If the average closing price of a share of Watson common stock is between
$44.61 and $54.52, the value of the merger consideration per share of Schein
common stock will be $23.00. The value of the merger consideration per share of
Schein common stock will be increased proportionately above $23.00, if the
average closing price of a share of Watson common stock is greater than $54.52
per share, up to a maximum value of $26.50 per share of Schein common stock
where the average closing price of a share of Watson common stock is $62.82 or
higher. Conversely, the value of the merger consideration will be decreased
proportionately below $23.00, if the average closing price of a share of Watson
common stock is less than $44.61 down to a minimum value of $19.50 per share of
Schein common stock where the average closing price of a share of Watson common
stock is $37.82 or lower. At this minimum value of $19.50 per share of Schein
common stock, Watson would have the option to pay the entire merger
consideration in cash, in stock or in a mix of cash and stock. We sometimes
refer in this document to this range of adjustments to the merger consideration
as the "collar."

     The above dollar values for the merger consideration are based upon the
Watson average closing price. The price of a share of Watson common stock on the
day of the special meeting or the day of the merger could be less than the
Watson average closing price. If this occurs, then the value of the shares of
Watson common stock issued in the merger will be less than the above dollar
values.

MARKET PRICE AND DIVIDEND DATA (PAGE 8)


     Schein and Watson common stock are both listed on the New York Stock
Exchange. On May 24, 2000, the last full trading day prior to the public
announcement of the proposed merger, Schein common stock closed at $16.81 per
share, and Watson common stock closed at $48.75 per share. On July 25, 2000,
Schein common stock closed at $23.50 per share, and Watson common stock closed
at $58.72 per share.


                                        4
<PAGE>   11


MATERIAL FEDERAL INCOME TAX CONSEQUENCES (PAGE 48)



     Because the merger was preceded by a tender offer pursuant to which WS
Acquisition Corp. purchased for cash 75.7% of the outstanding shares of Schein
common stock, the exchange of shares of Schein common stock for shares of Watson
common stock in the merger is a taxable transaction to Schein stockholders for
federal income tax purposes, and may also be taxable under applicable state,
local, foreign and other tax laws. In general, you will recognize a gain or loss
equal to the difference between the value of Watson common stock and/or cash
that you receive from us for your shares and the tax basis of your shares.


     TAX MATTERS CAN BE COMPLICATED, AND THE TAX CONSEQUENCES OF THE MERGER TO
YOU WILL DEPEND ON THE FACTS OF YOUR OWN SITUATION. YOU SHOULD CONSULT YOUR OWN
TAX ADVISORS TO FULLY UNDERSTAND THE TAX CONSEQUENCES OF THE MERGER TO YOU.


REASONS FOR THE MERGER (PAGE 37)



WATSON'S REASONS FOR THE MERGER (PAGE 38)


     The Watson board of directors has identified several potential benefits of
the merger that it believes will contribute to the success of the combined
company, including the following:

     - the merger offers the opportunity for Watson to expand into an additional
       therapeutic area, nephrology, and to expand its branded products
       business;

     - through the merger, Watson will have the opportunity to leverage its
       existing sales and marketing capabilities over additional branded
       products;

     - in the merger, Watson will add a sizeable, established, generic business
       that will enhance Watson's position in the consolidating generic drug
       industry;

     - the merger will permit Watson to expand its pipeline for future generic
       drugs, both through the addition of Schein's development partnerships and
       through the inclusion of Schein's internal development efforts; and

     - the merger will provide Watson with the opportunity to exploit potential
       cost-related synergies through the elimination of duplicative
       manufacturing facilities and the rationalization of the combined
       company's sales and marketing and administrative organizations.


SCHEIN'S REASONS FOR THE MERGER (PAGE 39)


     The Schein board of directors believes that the merger is in the best
interest of the Schein stockholders because of several potential benefits for
Schein stockholders, employees and customers that it believes would result from
the merger, including:

     - the ability of the combined company to offer complementary product lines,
       which presents the opportunity to increase the breadth of products
       offered;

     - the ability of the two companies to combine their technological resources
       to develop new products with increased functionality and bring them to
       market faster; and

     - the availability of greater resources for product marketing and
       distribution.


RECOMMENDATION OF SCHEIN'S BOARD OF DIRECTORS (PAGE 29)


     The Schein board of directors believes that the merger is advisable and
fair to you and in your best interests. The Schein board of directors
unanimously recommends that you vote "FOR" approval and adoption of the merger
agreement.

     The recommendation was made by the directors in office at the time of the
signing of the merger agreement on May 24, 2000. On July 6, 2000, following the
completion of the tender offer, a majority of

                                        5
<PAGE>   12

the directors resigned. They were replaced by representatives of Watson who now
constitute a majority of the directors.


OPINION OF SCHEIN'S FINANCIAL ADVISOR (PAGE 40)


     In connection with the tender offer and the merger, the Schein board of
directors received an opinion of CIBC World Markets Corp. as to the fairness,
from a financial point of view, to the holders of Schein common stock, other
than Watson, the stockholders of Schein who executed stockholder agreements
concurrent with the signing of the merger agreement and each of their
affiliates, of the consideration to be received by stockholders in the tender
offer and the merger, taken together. The full text of CIBC World Markets'
written opinion dated May 24, 2000 is attached to the back of this document as
Annex B. We encourage you to read this opinion carefully in its entirety for a
description of the assumptions made, matters considered and limitations on the
review undertaken. CIBC WORLD MARKETS' OPINION IS ADDRESSED TO THE SCHEIN BOARD
OF DIRECTORS AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY STOCKHOLDER AS TO
ANY MATTERS RELATING TO THE PROPOSED MERGER.


THE SPECIAL MEETING OF SCHEIN STOCKHOLDERS (PAGE 29)



     Time, Date and Place. A special meeting of the stockholders of Schein will
be held on Monday, August 28, 2000, at the principal executive offices of Schein
located at 100 Campus Drive, Florham Park, New Jersey 07932 at 9:00 a.m., local
time, to approve and adopt the merger agreement.



     Record Date and Voting Power for Schein.  You are entitled to vote at the
special meeting if you owned shares of Schein common stock at the close of
business on July 25, 2000, the record date for the special meeting. You will
have one vote at the special meeting for each share of Schein common stock you
owned at the close of business on the record date. There are 34,428,486 shares
of Schein common stock entitled to be voted at the special meeting.


     Schein Required Vote. The approval and adoption of the merger agreement
requires the affirmative vote of a majority of the shares of Schein common stock
outstanding at the close of business on the record date.


     Schein Shares Owned by WS Acquisition Corp. As of the record date for the
special meeting, Watson, indirectly through WS Acquisition Corp., owned
26,068,469 of the outstanding shares of common stock of Schein, constituting
75.7% of the shares entitled to vote at the special meeting. THEREFORE, WATSON
HAS SUFFICIENT VOTING POWER TO CONSTITUTE A QUORUM AND TO APPROVE ALL MATTERS TO
BE CONSIDERED AT THE SPECIAL MEETING, REGARDLESS OF THE VOTE OF ANY OTHER
STOCKHOLDER. WATSON HAS AGREED TO VOTE ALL SHARES OF SCHEIN COMMON STOCK OWNED
BY IT OR ITS AFFILIATES FOR APPROVAL AND ADOPTION OF THE MERGER AGREEMENT.



     Share Ownership Of Management. The persons who were directors and executive
officers of Schein at the time of the approval and signing of the merger
agreement own approximately 2.8% of the shares entitled to vote at the special
meeting.



INTERESTS OF SCHEIN'S OFFICERS AND DIRECTORS IN THE MERGER (PAGE 46)


     When considering the recommendation by the Schein board of directors, you
should be aware that a number of persons who were Schein's officers and
directors at the time of the approval and signing of the merger agreement have
interests in the merger that are in addition to the interests of other Schein
stockholders generally. Those interests are described below. In determining the
fairness of the merger to the Schein stockholders, the Schein board of directors
took into account those interests.


CONDITIONS TO THE MERGER (PAGE 57)


     The obligations of Watson and Schein to complete the merger are subject to
the satisfaction of certain conditions described below.

                                        6
<PAGE>   13


TERMINATION OF THE MERGER AGREEMENT (PAGE 57)


     Watson and Schein can terminate the merger agreement by mutual written
consent and for various other reasons described below.


ANTICIPATED ACCOUNTING TREATMENT (PAGE 49)


     The merger is expected to be accounted for as a "purchase" transaction
under generally accepted accounting principles.


APPRAISAL RIGHTS (PAGE 68)


     Schein stockholders will not have appraisal rights unless cash is paid in
the merger (other than for fractional shares). If such cash is paid, holders of
shares of Schein common stock will have rights under the provisions of Section
262 of the Delaware General Corporation Law to dissent and demand appraisal of,
and to receive payment in cash of the fair market value of, their shares.

                                        7
<PAGE>   14

                         MARKET PRICE AND DIVIDEND DATA

     Watson common stock and Schein common stock are listed on the New York
Stock Exchange and designated under the symbols "WPI" and "SHP," respectively.
This table sets forth, for the periods indicated, the range of high and low per
share sales prices for Watson common stock and Schein common stock as reported
on the New York Stock Exchange.


<TABLE>
<CAPTION>
                                                               WATSON              SCHEIN
                                                            COMMON STOCK        COMMON STOCK
                                                          ----------------    ----------------
                                                           LOW       HIGH      LOW       HIGH
                                                          ------    ------    ------    ------
<S>                                                       <C>       <C>       <C>       <C>
FISCAL YEAR 1998*
  First quarter.........................................  $30.50    $42.94    $   --    $   --
  Second quarter........................................   36.25     49.50     20.50**   32.44**
  Third quarter.........................................   40.25     52.88     11.69     31.75
  Fourth quarter........................................   42.00     63.00      6.00     16.75
FISCAL YEAR 1999*
  First quarter.........................................   37.06     62.94     10.00     14.63
  Second quarter........................................   30.50     47.50     10.88     16.00
  Third quarter.........................................   28.00     40.31     11.50     17.00
  Fourth quarter........................................   26.50     43.31      8.19     12.00
FISCAL YEAR 2000*
  First quarter.........................................   33.69     45.75      7.63     16.94
  Second quarter........................................   37.50     54.69     13.75     21.81
  Third quarter (through July 25, 2000).................   51.19     59.56     20.56     24.06
</TABLE>


-------------------------
 * Respective fiscal quarters. Watson's fiscal year ends on December 31 and
   Schein's fiscal year ends on the last Saturday of December.

** Beginning April 9, 1998.


     The following table sets forth the closing per share sales price of Watson
common stock and Schein common stock, as reported on the New York Stock
Exchange, and the estimated equivalent per share price (as explained below) of
Schein common stock on May 24, 2000, the last full trading day before the public
announcement of the proposed merger, and on July 25, 2000:



<TABLE>
<CAPTION>
                                                                       ESTIMATED EQUIVALENT
                                      WATSON COMMON       SCHEIN              SCHEIN
                                          STOCK        COMMON STOCK      PER SHARE PRICE
                                      -------------    ------------    --------------------
<S>                                   <C>              <C>             <C>
May 24, 2000........................     $48.75           $16.81              $22.65
July 25, 2000.......................     $58.72           $23.50              $24.77
</TABLE>



     The estimated equivalent per share price of a share of Schein common stock
equals the exchange ratio applicable if the special meeting had occurred on such
date multiplied by the price of a share of Watson common stock on such date. If
the special meeting and the merger had occurred on July 25, 2000, the estimated
exchange ratio would have been 0.42187 and you would have received a fraction of
a share of Watson common stock worth $24.77 for each share of Schein common
stock you owned. The actual equivalent per share price of a share of Schein
common stock that you will receive if the merger closes may be different from
this price because the per share price of Watson common stock on the New York
Stock Exchange fluctuates continuously and the actual exchange ratio depends on
the price of Watson common stock during the days prior to the special meeting.


     Neither Watson nor Schein has ever declared or paid cash dividends on its
respective common stock. The policies of Watson and Schein are to retain
earnings for use in their respective businesses. Following the merger, Watson
common stock will continue to be listed on the New York Stock Exchange, and
there will be no further market for the Schein common stock.

                                        8
<PAGE>   15

                SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA

     The following selected consolidated financial data has been derived from,
and should be read in conjunction with, the consolidated financial statements
and Management's Discussion and Analysis of Financial Condition and Results of
Operations of each of Watson and Schein, which are incorporated by reference in
this proxy statement/prospectus. The condensed consolidated financial data of
each of Watson and Schein as of March 31, 2000 and March 25, 2000 and for the
periods then ended, respectively, are unaudited; however, in the respective
managements' opinions, they reflect all adjustments, consisting only of normal,
recurring adjustments, necessary for a fair presentation of the financial
position and results of operations for such periods. The interim financial
statements are not necessarily indicative of full year operating results or
year-end financial position of the companies. See also "Questions and Answers
About the Merger" beginning on page 1.

                          WATSON PHARMACEUTICALS, INC.

<TABLE>
<CAPTION>
                                           QUARTER
                                       ENDED MARCH 31,                 YEARS ENDED DECEMBER 31,(1)
                                     -------------------   ----------------------------------------------------
                                       2000       1999       1999       1998       1997       1996       1995
                                     --------   --------   --------   --------   --------   --------   --------
                                                     (IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
<S>                                  <C>        <C>        <C>        <C>        <C>        <C>        <C>
INCOME STATEMENTS:
Net revenues.......................  $179,632   $159,243   $689,232   $596,193   $362,221   $258,347   $193,258
Cost of sales......................    63,078     49,997    230,633    210,405    131,037    107,157     84,003
                                     --------   --------   --------   --------   --------   --------   --------
  Gross profit.....................   116,554    109,246    458,599    385,788    231,184    151,190    109,255
                                     --------   --------   --------   --------   --------   --------   --------
Royalty income.....................        --         --         --         --     14,249     27,162     22,247
                                     --------   --------   --------   --------   --------   --------   --------
Operating expenses:
  Research and development.........    12,025     10,142     49,270     50,706     35,007     40,981     44,521
  Selling, general and
    administrative.................    30,457     27,472    121,444    109,347     60,967     46,599     43,692
  Amortization.....................     8,669      6,690     29,986     22,469      7,213        386        306
  Merger and related expenses(2)...        --     20,467     20,467         --     14,718         --     13,939
Charge for acquired in-process
  research and development(3)......        --         --         --     13,000         --         --         --
                                     --------   --------   --------   --------   --------   --------   --------
Total operating expenses...........    51,151     64,771    221,167    195,522    117,905     87,966    102,458
                                     --------   --------   --------   --------   --------   --------   --------
Operating income...................    65,403     44,475    237,432    190,266    127,528     90,386     29,044
                                     --------   --------   --------   --------   --------   --------   --------
Other income (expense):
  Equity in earnings (loss) of
    joint..........................    (2,053)        31     (2,591)     6,788     10,694     17,909     22,766
  ventures Gain on sales of
    securities(4)..................   166,930         --     44,275         --         --         --      6,243
  Interest and other income........     2,933        959      4,549      8,011     13,511     11,935      8,634
  Interest expense.................    (2,768)    (2,818)   (11,121)    (8,136)    (1,284)    (1,527)    (1,480)
                                     --------   --------   --------   --------   --------   --------   --------
Total other income, net............   165,042     (1,828)    35,112      6,663     22,921     28,317     36,163
                                     --------   --------   --------   --------   --------   --------   --------
Income before income tax
  provision........................   230,445     42,647    272,544    196,929    150,449    118,703     65,207
Provision for income taxes.........    85,725     19,676     93,663     78,247     54,799     35,521     21,267
                                     --------   --------   --------   --------   --------   --------   --------
Net income.........................  $144,720   $ 22,971   $178,881   $118,682   $ 95,650   $ 83,182   $ 43,940
                                     ========   ========   ========   ========   ========   ========   ========
Basic earnings per share...........  $   1.50   $   0.24   $   1.87   $   1.25   $   1.03   $   0.92   $   0.50
                                     ========   ========   ========   ========   ========   ========   ========
Diluted earnings per share.........  $   1.48   $   0.23   $   1.83   $   1.22   $   1.01   $   0.89   $   0.48
                                     ========   ========   ========   ========   ========   ========   ========
Basic weighted average shares
  outstanding......................    96,290     95,520     95,760     94,745     92,525     90,430     88,585
                                     ========   ========   ========   ========   ========   ========   ========
Diluted weighted average shares
  outstanding......................    97,905     98,160     97,780     97,425     95,115     93,830     91,135
                                     ========   ========   ========   ========   ========   ========   ========
</TABLE>

                                        9
<PAGE>   16

<TABLE>
<CAPTION>
                                                                            AT DECEMBER 31,
                                         AT MARCH 31,   --------------------------------------------------------
                                             2000          1999         1998        1997       1996       1995
                                         ------------   ----------   ----------   --------   --------   --------
                                                                     (IN THOUSANDS)
<S>                                      <C>            <C>          <C>          <C>        <C>        <C>
BALANCE SHEET DATA:
Current assets.........................   $  627,508    $  434,711   $  322,794   $278,910   $357,184   $258,841
Working capital........................      472,799       305,525      219,841    171,659    315,977    210,265
Total assets...........................    1,751,479     1,438,750    1,131,343    820,476    531,423    419,315
Long-term debt.........................      149,346       149,503      151,083      9,857      8,725     10,278
Liabilities-acquired rights and
  businesses...........................       13,049        55,507       53,420     98,800      3,800      3,800
Deferred tax liabilities...............      143,601        87,060       54,512     36,887     12,226         --
Total stockholders' equity.............    1,290,774     1,054,552      799,355    612,202    463,852    354,743
</TABLE>

-------------------------
(1) Watson merged with Circa Pharmaceuticals, Inc. in 1995, with Oclassen
    Pharmaceuticals, Inc. and Royce Laboratories, Inc. in 1997 and with
    TheraTech, Inc. in 1999. These transactions were all accounted for under the
    pooling of interests accounting method, and accordingly, the consolidated
    financial data includes the results of these businesses for all periods
    presented. In October 1997, Watson effected a two-for-one stock split in the
    form of a 100% stock dividend. Share and per share amounts for all prior
    periods have been restated to reflect the stock split.

(2) Merger expenses of $13.9 million in 1995, $14.7 million in 1997, and $20.5
    million in 1999 relate to Watson's acquisitions of Circa, Oclassen, Royce
    and TheraTech, as discussed in (1) above.

(3) The charge for acquired in-process research and development relates to
    Watson's February 1998 acquisition of The Rugby Group, Inc.

(4) In November 1999, Watson sold 2.2 million shares of Andrx Corporation
    (adjusted to reflect Andrx' April 2000 two-for-one stock split) and recorded
    a gain of $44.3 million from this sale. During the first quarter of 2000,
    Watson sold an additional 4.2 million shares of Andrx' stock, as adjusted to
    reflect the stock split, recording a pre-tax gain of $166.9 million. In
    1995, Watson recorded a gain of $6.2 million from sales of common stock of
    Marsam Pharmaceuticals, Inc. Watson has had no investment in Marsam since
    1995.

                                       10
<PAGE>   17

                SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA

                          SCHEIN PHARMACEUTICAL, INC.

<TABLE>
<CAPTION>
                                     THREE        THREE
                                    MONTHS       MONTHS
                                     ENDED        ENDED                        YEARS ENDED DECEMBER
                                   MARCH 25,    MARCH 27,    ---------------------------------------------------------
                                     2000         1999         1999        1998         1997        1996        1995
                                   ---------    ---------    --------    ---------    --------    --------    --------
                                                        (IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
<S>                                <C>          <C>          <C>         <C>          <C>         <C>         <C>
STATEMENT OF OPERATIONS DATA:
Net revenues.....................  $ 87,898     $105,863     $477,161    $ 523,229    $490,170    $476,295    $391,846
Cost of sales....................    68,782       69,580      306,019      349,140     329,761     320,675     250,507
                                   --------     --------     --------    ---------    --------    --------    --------
  Gross profit...................    19,116       36,283      171,142      174,089     160,409     155,620     141,339
Costs and expenses:
  Selling, general and
    administrative...............    16,836       20,905       92,157       87,162      81,809      87,329      75,274
  Research and development.......     8,066        5,168       27,951       29,245      29,387      27,030      28,324
  Amortization of goodwill and
    other intangibles............       334        1,591        6,303        8,754      10,196      10,195       3,399
  Non-recurring charges(1).......     3,500           --       86,971      161,200          --          --      30,000
                                   --------     --------     --------    ---------    --------    --------    --------
Operating income (loss)..........    (9,620)       8,619      (42,240)    (112,272)     39,017      31,066       4,342
Interest expense, net............     4,538        4,652       18,661       20,626      26,578      23,285      10,005
Other expenses (income),
  net(2).........................       712          321        1,268       (2,246)     (9,318)      1,193      (1,245)
                                   --------     --------     --------    ---------    --------    --------    --------
Income (loss) before provision
  (benefit) for income taxes and
  extraordinary item.............  $(14,870)    $  3,646     $(62,169)   $(130,652)   $ 21,757    $  6,588    $ (4,418)
                                   ========     ========     ========    =========    ========    ========    ========
Income (loss) before
  extraordinary item.............  $ (8,922)    $  2,224     $(34,388)   $(116,366)   $ 11,102    $  1,397    $(14,900)
                                   ========     ========     ========    =========    ========    ========    ========
Net income (loss)................  $ (8,922)    $  2,224     $(34,388)   $(118,026)   $ 11,102    $  1,397    $(14,900)
                                   ========     ========     ========    =========    ========    ========    ========
Earnings (loss) per share, basic
  and diluted:
  Income (loss) before
    extraordinary item...........  $  (0.27)    $   0.07     $  (1.05)   $   (3.72)   $   0.39    $   0.05    $  (0.52)
                                   ========     ========     ========    =========    ========    ========    ========
  Net income (loss)..............  $  (0.27)    $   0.07     $  (1.05)   $   (3.77)   $   0.39    $   0.05    $  (0.52)
                                   ========     ========     ========    =========    ========    ========    ========
</TABLE>

<TABLE>
<CAPTION>
                                                                                   AT DECEMBER
                                             AT MARCH 25,    --------------------------------------------------------
                                                 2000          1999        1998        1997        1996        1995
                                             ------------    --------    --------    --------    --------    --------
                                                                          (IN THOUSANDS)
<S>                                          <C>             <C>         <C>         <C>         <C>         <C>
BALANCE SHEET DATA:
Working capital (deficit)..................    $(32,762)     $(16,819)   $  8,287    $ 73,249    $ 99,111    $ 92,021
Total assets...............................     381,884       403,501     452,996     534,126     544,312     522,410
Short-term debt............................     136,142       128,631     103,975      56,440      41,090      40,078
Long-term debt.............................      84,428        92,738     124,482     198,705     245,390     240,480
Total debt.................................     220,570       221,369     228,457     255,145     286,480     280,558
Stockholders' equity.......................      45,083        57,118      78,485     139,715     129,980     125,692
</TABLE>

-------------------------
(1) Non-recurring charges include: (i) a pre-tax severance charge of $3.5
    million in the first quarter of 2000 as a result of a reduction in work
    force, as part of an evaluation of its sterile business plan and to reduce
    operating costs; (ii) the 1999 restructuring charge as a result of FDA
    actions at Schein's Marsam facility; (iii) the 1998 restructuring charge as
    a result of FDA actions at Schein's Steris facility and the consent
    agreement and (iv) the 1995 acquired in-process research and development
    charge of $30.0 million in connection with the purchase of Marsam (Schein's
    results of operations include Marsam from September 1995, the date of
    purchase).

(2) Other expenses (income), net, includes equity in losses of unconsolidated
    international ventures of $1.1 million, $1.9 million, $3.4 million, $3.4
    million and $0.4 million in 1999, 1998, 1997, 1996 and 1995, respectively,
    and gains on sales of marketable securities of $0.7 million, $4.4 million
    and $12.7 million in 1999, 1998 and 1997, respectively.

                                       11
<PAGE>   18

     SELECTED UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

     The following selected unaudited pro forma condensed combined financial
information has been derived from, or prepared on a basis consistent with, the
unaudited pro forma condensed combined financial statements included elsewhere
in this proxy statement/prospectus. It has been prepared to give effect to the
merger using the purchase method of accounting for business combinations and
should be read in conjunction with the unaudited pro forma condensed combined
financial statements referred to above. Such pro forma information assumes the
merger had been effective as of the beginning of each period presented for
purposes of the income statement information and as of March 31, 2000 for the
balance sheet information.

     The pro forma information in the table below does not purport to project
Watson's future results of operations or to represent what Watson's financial
position or results of operations would have been had the merger occurred as of
the date and for the periods indicated. This information should be read in
conjunction with the respective audited and unaudited consolidated financial
statements and related notes of Watson and Schein, which are incorporated by
reference in this proxy statement/prospectus and the unaudited pro forma
condensed combined financial information and related notes included elsewhere in
this proxy statement/prospectus.

<TABLE>
<CAPTION>
                                                               THREE MONTHS
                                                                  ENDED            YEAR ENDED
                                                              MARCH 31, 2000    DECEMBER 31, 1999
                                                              --------------    -----------------
                                                                     (IN THOUSANDS EXCEPT
                                                                        PER SHARE DATA)
<S>                                                           <C>               <C>
COMBINED INCOME STATEMENT DATA:
Net revenues................................................    $  267,530         $1,166,393
Gross profit................................................       135,670            629,741
Total operating expenses....................................        87,478            464,913
Operating income............................................        48,192            164,828
Other income (expense), net.................................       148,007            (31,450)
Net income..................................................       120,783             84,750
PER SHARE DATA:
Basic earnings per share....................................    $     1.18         $     0.83
Diluted earnings per share..................................          1.15               0.81
COMBINED BALANCE SHEET DATA (AT END OF PERIOD):
Current assets..............................................    $  670,878
Long-term assets............................................     1,913,913
Total assets................................................     2,584,791
Current liabilities.........................................       284,456
Long-term debt..............................................       639,346
Other long-term liabilities.................................       165,653
Total stockholders' equity..................................     1,495,336
Book value per share........................................    $    14.62
</TABLE>

                                       12
<PAGE>   19

                           COMPARATIVE PER SHARE DATA

     The following table sets forth certain historical per share data of Watson
and Schein and Watson/ Schein combined per share data on an unaudited pro forma
basis. This combined information has been prepared to give effect to the merger
using the purchase method of accounting for business combinations and assumes
the merger had been effective as of the beginning of each period presented. The
Schein pro forma equivalent amounts are calculated by multiplying the pro forma
combined per share amounts by the assumed exchange ratio of 0.50661. Pro forma
book value per share has been adjusted to reflect the assumed number of Watson
shares to be issued in the merger and assumes the merger had been effective at
the end of the period presented.

     The pro forma information in the table below does not purport to project
Watson's financial position or results of operations for any future date or
period or to represent what Watson's financial position or results of operations
would have been had the merger occurred at the beginning of the earliest period
presented. This information should be read in conjunction with the respective
audited and unaudited consolidated financial statements and related notes of
Watson and Schein, which are incorporated by reference in this proxy
statement/prospectus and the unaudited pro forma condensed combined financial
information and related notes included elsewhere in this proxy
statement/prospectus.

<TABLE>
<CAPTION>
                                                               THREE MONTHS      YEAR ENDED
                                                                  ENDED         DECEMBER 31,
                                                              MARCH 31, 2000        1999
                                                              --------------    ------------
<S>                                                           <C>               <C>
WATSON:
Net income:
  Historical basic earnings per share.......................      $ 1.50           $ 1.87
  Historical diluted earnings per share.....................        1.48             1.83
  Pro forma basic earnings per share........................        1.18             0.83
  Pro forma diluted earnings per share......................        1.15             0.81
Book value per share:
  Historical................................................      $13.38           $10.97
  Pro forma.................................................       14.62               --
SCHEIN:
Net income (loss):
  Historical basic (loss) per share.........................      $(0.27)          $(1.05)
  Historical diluted (loss) per share.......................       (0.27)           (1.05)
  Equivalent pro forma basic earnings per share.............        0.60             0.42
  Equivalent pro forma diluted earnings per share...........        0.58             0.41
Book value per share:
  Historical................................................      $ 1.37           $ 1.73
  Equivalent pro forma......................................        7.41               --
</TABLE>

                                       13
<PAGE>   20

                                  RISK FACTORS

     You should consider the following factors in evaluating whether to approve
and adopt the merger agreement. These factors should be considered in
conjunction with the other information included or incorporated by reference in
this proxy statement/prospectus.

RISKS RELATING TO THE MERGER

FAILURE TO REALIZE THE BENEFITS OF INTEGRATING WATSON'S AND SCHEIN'S BUSINESSES,
OPERATIONS, PRODUCTS AND PERSONNEL COULD DIMINISH THE EXPECTED BENEFITS OF THE
MERGER.

     Achieving the expected benefits of the merger will depend in large part on
the successful integration of Watson's and Schein's businesses, operations,
products and personnel in a timely and efficient manner. Watson will need to
integrate the product lines, information systems and product development,
manufacturing, marketing and sales, administration and other organizations of
the two companies. This will be difficult and unpredictable because of possible
cultural conflicts and different opinions on technical, operational and other
integration decisions. Further, there is some overlap between the products or
customers of Watson and Schein that may create conflicts in relationships or
other commitments detrimental to the integrated businesses. Watson will also
need to integrate the employees of the two companies. Watson or Schein may
experience disruption in its business or employee base as a result of
uncertainty in connection with the merger. There is also a risk that key
employees of Schein may seek employment elsewhere, including with competitors.
The operations, management and personnel of the two companies may not be
compatible, and Watson or Schein may also experience the loss of key personnel
for that reason.

     The diversion of management attention and any difficulties or delays
encountered in the transition and integration process could have a material
adverse effect on the combined company's business, financial condition and
operating results.

     Watson expects to incur costs from integrating Schein's operations,
products and personnel. These costs may be substantial and may include costs
for:

     - employee redeployment, relocation or severance;

     - conversion of information systems; and

     - reorganization or closures of facilities.

     We cannot assure you that Watson will be successful in these integration
efforts or that Watson will realize the expected benefits of the merger.

THE MERGER WILL RESULT IN MATERIAL COSTS OF INTEGRATION AND TRANSACTION EXPENSES
THAT COULD ADVERSELY AFFECT THE COMBINED COMPANY'S FINANCIAL RESULTS.

     If the benefits of the merger do not exceed the costs associated with the
merger, the combined company's financial results could be adversely affected.
Watson and Schein estimate that they will incur total transaction fees,
including fees for investment bankers, attorneys, accountants and financial
printing costs, of approximately $20 million associated with the merger. If the
merger closes in September 2000, as expected, the combined company will incur a
charge currently estimated to be in the range of $60 to $80 million in the third
quarter of 2000, to reflect the combined company's write-off of Schein's
in-process research and development efforts. It is also expected that the
combined company will incur an additional charge, in an amount that cannot
presently be reasonably estimated, during the third quarter of 2000 to accrue
for significant closure costs associated with integrating the operations of
Watson and Schein. These costs may include employee termination costs associated
with the elimination of duplicate operations and consolidation of
administration, support and research and development functions, non-cash
facility shutdown and asset impairment costs, and lease and contact termination
costs. Actual costs may substantially exceed the parties' estimates. In
addition, unanticipated expenses associated with integrating

                                       14
<PAGE>   21

the two companies may arise. Watson may also incur additional charges in
subsequent quarters to reflect costs associated with the merger.

WATSON'S INCURRENCE OF ADDITIONAL DEBT TO PURCHASE SHARES IN THE TENDER OFFER
WILL SIGNIFICANTLY INCREASE THE COMBINED COMPANY'S INTEREST EXPENSE, LEVERAGE
AND DEBT SERVICE REQUIREMENTS.

     Watson borrowed $500 million in July 2000 to purchase Schein shares in the
tender offer and may borrow an additional $50 million to refinance outstanding
Schein debt in the third quarter of 2000. Incurrence of this new debt will
increase interest expense in the first year by approximately $47 million and has
significantly increased the combined company's leverage. While management
believes the combined company's cash flows will be more than adequate to service
this debt, there may be circumstances in which required payments of principal
and/or interest on this new debt could adversely affect the combined company's
cash flows and operating results.

SCHEIN STOCKHOLDERS COULD BE ADVERSELY AFFECTED BY THE MOVEMENT OF WATSON STOCK
PRICE PRIOR TO CLOSING.

     The number of shares of Watson common stock that will be issued to the
holders of Schein common stock depends upon the average closing price of a share
of Watson common stock for the ten trading day period ending two trading days
prior to the date of the special meeting of Schein stockholders called to
approve and adopt the merger agreement. The value of the Watson common stock
that will be issued could equal, exceed or be less than $23.00 per share of
Schein common stock, depending on the closing price of a share of Watson common
stock in the days leading up to the special meeting.

     The value of the Watson common stock that will be issued will equal $23.00
per share of Schein common stock so long as the average closing price of Watson
common stock over the ten consecutive trading days ending two trading days
before the special meeting is $44.61 or greater, up to $54.52. If the Watson
average closing price is greater than $54.52, the value of the consideration
will exceed $23.00, up to a maximum value of $26.50 per share of Schein common
stock if the Watson average closing price is equal to or greater than $62.82 per
share. If the Watson average closing price is greater than $37.82 but less than
$44.61, the value of the consideration will be less than $23.00 per share of
Schein common stock, down to a minimum value of $19.50 if the average closing
price of Watson common stock is $37.82 or lower.

     If the average closing price of the Watson common stock for the ten trading
day period is above $62.82, then Watson will issue a smaller fraction of a share
of Watson common stock so that the stock consideration issued equals $26.50 per
share of Schein common stock. Conversely, if the average closing price of Watson
common stock is below $37.82, then Watson will issue a larger fraction of a
share of Watson common stock so that the stock consideration issued equals
$19.50 per share of Schein common stock. Watson has the right to pay all cash,
all stock, or a mix of stock and cash if the value of the consideration to be
paid is $19.50 per share of Schein common stock, and as a result, Watson can
limit the number of shares of Watson common stock to be issued in that
circumstance.

     The price of Watson common stock on the day of the special meeting or the
day of the merger could be below the Watson average closing price used to
determine the exchange ratio, resulting in Schein stockholders receiving less in
value than would be implied by the exchange ratio calculation. For example if
the Watson average closing price is $50.00 then each share of Schein common
stock will convert into 0.46 shares of Watson common stock, resulting in an
implied value of $23.00. However, if on the day of the special meeting or the
day of the merger Watson common stock trades at $45.00 per share then the value
of 0.46 shares of Watson common stock at that time will be $20.70.

                                       15
<PAGE>   22

RISKS RELATING TO INVESTING IN THE PHARMACEUTICAL INDUSTRY

EXTENSIVE INDUSTRY REGULATION HAS HAD, AND WILL CONTINUE TO HAVE, A SIGNIFICANT
IMPACT ON THE COMBINED COMPANY'S BUSINESS, ESPECIALLY ITS PRODUCT DEVELOPMENT
AND MANUFACTURING CAPABILITIES.

     All pharmaceutical manufacturers, including Watson and Schein, are subject
to extensive, complex, costly and evolving regulation by the federal government,
principally the U.S. Food and Drug Administration and to a lesser extent by the
U.S. Drug Enforcement Agency and state government agencies. The Federal Food,
Drug and Cosmetic Act, the Controlled Substances Act and other federal statutes
and regulations govern or influence the testing, manufacturing, packing,
labeling, storing, record keeping, safety, approval, advertising, promotion,
sale and distribution of Watson's and Schein's products.

     Watson and Schein are subject to periodic inspection of their facilities,
procedures and operations and/or the testing of their products by the FDA, the
DEA and other authorities, which conduct periodic inspections to confirm that
Watson and Schein are in compliance with all applicable regulations. In
addition, the FDA conducts pre-approval and post-approval reviews and plant
inspections to determine whether systems and processes of Watson and Schein are
in compliance with current good manufacturing practices, or cGMP, and other FDA
regulations.

     Following such inspections, the FDA may issue notices on Form 483 and
warning letters that could cause the combined company to modify certain
activities identified during the inspection. A Form 483 notice is generally
issued at the conclusion of an FDA inspection and lists conditions the FDA
inspectors believe may violate cGMP or other FDA regulations. FDA guidelines
specify that a warning letter is issued only for violations of "regulatory
significance" for which the failure to adequately and promptly achieve
correction may be expected to result in an enforcement action.

     Failure to comply with FDA and other governmental regulations can result in
fines, unanticipated compliance expenditures, recall, or seizure of products,
total or partial suspension of production and/or distribution, suspension of the
FDA's review of new drug applications, or NDAs, abbreviated new drug
applications, or ANDAs, or other product applications, enforcement actions,
injunctions and criminal prosecution. Under certain circumstances, the FDA also
has the authority to revoke previously granted drug approvals. Although both
Watson and Schein have instituted internal compliance programs, if these
programs do not meet regulatory agency standards or if compliance is deemed
deficient in any significant way, it could have a material adverse effect on the
combined company. Certain of our vendors are subject to similar regulation and
periodic inspections.

     In connection with an FDA inspection of Watson's Corona, California
facility in December 1998, the FDA issued to the company a warning letter in
January 1999. The warning letter related to the company's quality systems and
cGMP compliance, including areas such as documentation, training and laboratory
controls. The FDA conducted additional inspections of the company's Corona
facility in the first and fourth quarters of 1999. At the close of each of these
inspections, the FDA issued to Watson a Form 483 notice listing observations
made during those inspections. The observations from the first quarter
inspection generally related to the company's quality systems and cGMP
compliance including areas such as laboratory controls, documentation,
investigations, training, data review, and validation. The observations from the
fourth quarter inspection generally related to the company's quality systems and
cGMP compliance including areas such as training and documentation.


     Watson has initiated and continues to implement quality improvements at its
Corona facility. Among other things, these quality improvements seek to address
deficiencies noted by the FDA in the warning letter and the Form 483 notices.
However, to date, matters with the agency concerning Watson's Corona facility
continue to be unresolved. Watson cannot predict what the ultimate outcome will
be or when the agency will approve additional pending applications from its
Corona facility. Watson did receive approval of one ANDA from its Corona
facility in July 2000.


     In connection with a January 1999 inspection of Watson's Miami, Florida
facility, the FDA issued a warning letter in April 1999. In that warning letter,
the agency commented that observations about inadequate investigations,
documentation and training had appeared in past inspection reports (although the
FDA acknowledged that a number of these had occurred prior to Watson's purchase
of the Miami

                                       16
<PAGE>   23

facility in 1997). The FDA conducted a follow-up inspection of Watson's Miami
facility in the first quarter of 2000. At the close of this inspection, the FDA
issued a Form 483 notice listing observations that related to Watson quality
systems and cGMP compliance, including areas such as validation and
investigations. Watson has initiated and continues to implement quality
improvements at its Miami facility.

     Based on a follow-up inspection conducted in the first quarter of 2000, the
Florida District Office of the FDA recommended to the FDA's Center for Drug
Evaluation and Research, or CDER, approval of pending ANDAs from the Miami
facility. The Florida district office found that sufficient corrections have
been made to now recommend approval of Watson's ANDAs. The recommendation of the
Florida district office is not binding on CDER since final action on product
applications is the responsibility of CDER. Watson cannot predict whether or
when CDER will approve the pending applications from its Miami facility.
However, CDER has approved one ANDA from Watson's Miami facility since the time
the Florida district office made its approval recommendation.

     Over the last several years, the FDA has inspected Schein's facilities and
in certain instances has reported inspection observations that include
significant cGMP and application reporting deficiencies. From time to time,
certain Schein facilities have been ineligible to receive new product approvals
and Schein's Marsam Pharmaceuticals Inc. (Marsam) and Steris Laboratories, Inc.
(Steris) sterile manufacturing facilities are currently ineligible.

     On July 29, 1999, the FDA concluded an inspection of Schein's Marsam
sterile manufacturing facility, located in Cherry Hill, N.J. At the close of the
inspection, Marsam received a Form 483 detailing the FDA's inspectional
observations and noting a number of significant deficiencies in current good
manufacturing practices. During the inspection, Marsam initiated actions to
address a number of the FDA's inspectional observations by voluntarily recalling
all Marsam products within expiry and suspending manufacturing and testing
activities. In September 1999, Marsam submitted its response to the FDA's
inspectional observations, together with its proposed corrective action plan
(Marsam corrective action plan). A corrective action plan is a systematic
approach to assure that processes, quality assurance and quality control
programs, validation programs, employee training, and management controls comply
with cGMP regulations. The Marsam corrective action plan contemplates resumption
of manufacturing on a product-by-product basis. On March 3, 2000 Marsam received
a warning letter from the FDA relating to the observations made during the
inspection. This FDA warning letter also acknowledged the commitments Schein
made under the Marsam corrective action plan. Schein has confirmed in meetings
with FDA representatives its approach to addressing current cGMP deficiencies at
Marsam on a voluntary basis. Marsam is currently ineligible to receive new
product approvals, and Schein cannot predict when Marsam will resume
manufacturing specific products.

     As a result of the actions discussed above, in 1999, Schein recorded a
restructuring charge of approximately $87.0 million, or $52.2 million net of tax
benefit. Costs of restructuring consist largely of costs incurred at the Marsam
facility and relate to the impairment of intangible assets, product recalls,
inventory write-offs and severance. Recall costs and inventory write-offs are
those costs that Schein incurred related to the Marsam corrective action plan
costs.

     On September 10, 1998, the United States, on behalf of the FDA, based on
actions it filed in Federal court in the Southern District of New York on
September 9, 1998 and the District of Arizona on September 10, 1998, initiated
seizures of drugs and drug related products manufactured by Schein's Steris
facility. The action alleged certain instances in which the Steris facility,
located in Phoenix, Arizona, was not operating in conformity with cGMP
regulations. The actions resulted in the seizure of all drugs and drug related
products in Schein's possession manufactured at the Steris facility and halted
the manufacture and distribution of Steris manufactured products.

     On October 16, 1998, Steris and certain of its officers, without admitting
any allegations of the complaints and disclaiming any liability in connection
therewith, entered into a consent agreement with the FDA. Under the terms of the
consent agreement, Steris is required, among other things, to demonstrate
through independent certification that Steris' processes, quality assurance and
quality control programs, and management controls comply with cGMP regulations.
The consent agreement also provides for
                                       17
<PAGE>   24

independent certification of Steris' management controls, quality assurance and
quality control programs, and employee cGMP training. It further requires that
Steris develop a timeline and corrective action plan for implementing these
actions and for expert certification with respect to matters covered in previous
FDA inspections of the facility. Steris has submitted to the FDA the corrective
action plan provided for under the consent agreement (Steris corrective action
plan) and is implementing the Steris corrective action plan.

     As a result of the consent agreement, Steris has divided its product line
into three categories: products that it will seek to manufacture under expedited
certification procedures under the consent agreement, products that it will seek
to manufacture once it satisfies all conditions under the consent agreement and
products it has decided not to manufacture in the near term. Expedited
certification procedures apply for certain products that are particularly
important to the medical community because they are primarily or exclusively
available from Schein or that are particularly significant to Schein.

     In October 1998, Schein resumed commercial distribution of INFeD, its
branded injectable iron product, from existing inventory. In the second quarter
of 1999, Schein began distribution of newly manufactured lots of INFeD under the
consent agreement and in the fourth quarter of 1999, Schein resumed the
manufacture of one other product deemed medically necessary under the expedited
certification procedures in the consent agreement. On February 11, 2000 the FDA
concluded an inspection at Steris.

     Steris is currently ineligible to receive new product approvals, and Schein
cannot predict when Steris will resume manufacturing additional products. In
March 2000, Schein resumed the manufacture and commercial distribution of
vecuronium under the expedited certification procedures provided in the consent
agreement. Newly manufactured products must undergo certification by independent
experts and review by the FDA prior to commercial distribution.

     Steris accounted for approximately 40% of Schein's net sales and 50% of its
gross profits for the first six months of 1998. The Steris products that Schein
has decided not to manufacture contributed approximately $65 million in revenue
in the 12-month period ended June 1998. Schein recorded a restructuring charge
in 1998 of $161.2 million pretax, or $135.0 million, net of tax benefit,
relating to the effects of the consent agreement.

     There can be no assurance that the FDA will determine that Schein has
adequately corrected the deficiencies at its operating sites, that subsequent
inspectional observations will not result in additional deficiencies, that
approval of any of the pending or subsequently submitted ANDAs by Schein will be
granted or that the FDA will not seek to impose additional sanctions against
Schein or any of its subsidiaries. The range of possible sanctions includes FDA
issuance of adverse publicity, product recalls or seizures, injunctions, and
civil or criminal prosecution. Any such sanctions, if imposed, could have a
material adverse effect on Schein's business. Additionally, significant delays
in the review or approval of applications for new products or in complying with
the requirements of the Marsam corrective action plan, the Steris corrective
action plan or the consent agreement could have a material adverse effect on
Schein's business, results of operation and financial condition.

     The process for obtaining governmental approval to manufacture and market
pharmaceutical products is rigorous, time-consuming and costly, and neither
Watson nor Schein can predict the extent to which the combined company may be
affected by legislative and regulatory developments. Each of Watson and Schein
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 the combined company's product introduction plans or results of
operations.

THE PHARMACEUTICAL INDUSTRY IS HIGHLY COMPETITIVE.

     The competitors of Watson and Schein vary depending upon categories, and
within each product category, upon dosage strengths and drug-delivery systems.
Such competitors include the major brand

                                       18
<PAGE>   25

name and off-patent manufacturers of pharmaceuticals, especially those doing
business in the United States. In addition to product development, other
competitive factors in the pharmaceutical industry include product quality and
price, reputation, service, and access to technical information. It is possible
that developments by others will make the combined company's products or
technologies noncompetitive or obsolete.

BECAUSE THE COMBINED COMPANY WILL BE SMALLER THAN MANY OF ITS NATIONAL
COMPETITORS IN THE BRANDED PHARMACEUTICAL PRODUCTS SECTOR, THE COMBINED COMPANY
MAY LACK THE FINANCIAL AND OTHER RESOURCES NEEDED TO MAINTAIN ITS PROFIT MARGINS
AND TO CAPTURE INCREASED MARKET SHARE IN THIS SECTOR.

     The intensely competitive environment of the branded product business
requires an ongoing, extensive search for technological innovations and the
ability to market products effectively, including the ability to communicate the
effectiveness, safety and value of branded products to healthcare professionals
in private practice, group practices and managed care organizations. The
combined company's branded pharmaceutical business will operate primarily in the
following divisional areas: Dermatology, Women's Health, General Products and
Nephrology. The combined company'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
manufacturers of pharmaceuticals such as Johnson & Johnson and American Home
Products. Based on total assets, annual revenues, and market capitalization,
Watson is, and the combined company will be, smaller than these and other
national competitors in the branded product arena. For example, in early July
2000, Watson's market capitalization was approximately $5 billion compared to
Johnson & Johnson ($140 billion) and American Home Products ($75 billion). These
competitors, as well as others, have been in business for a longer period of
time than the combined company, have a greater number of products on the market
and have greater financial and other resources. If the combined company directly
competes with them for the same markets and or products, their financial
strength could prevent it from capturing a profitable share of those markets.

SALES OF THE COMBINED COMPANY'S PRODUCTS MAY CONTINUE TO BE ADVERSELY AFFECTED
BY THE CONTINUING CONSOLIDATION OF ITS DISTRIBUTION NETWORK AND CONCENTRATION OF
ITS CUSTOMER BASE.

     The principal customers of Watson and Schein are wholesale drug
distributors and major retail drug store chains. These customers comprise a
significant part of the distribution network for pharmaceutical products in the
United States. This distribution network is continuing to undergo significant
consolidation marked by mergers and acquisitions among wholesale distributors
and the growth of large retail drug store chains. As a result, a small number of
large wholesale distributors control a significant share of the market, and the
number of independent drug stores and small drug store chains has decreased.
Watson and Schein expect that consolidation of drug wholesalers and retailers
will increase pricing and other competitive pressures on drug manufacturers,
including the combined company. For the year ended, December 1999, the three
largest customers of each of Watson and Schein accounted for 20%, 12% and 12%,
respectively, of Watson's net revenues and 22%, 17% and 12%, respectively, of
Schein's net revenues. The loss of any of these customers could materially and
adversely affect the combined company's business, results of operations or
financial condition.

RISKS RELATING TO WATSON

     In addition to other information in this proxy statement/prospectus, you
should carefully consider the following risk factors in evaluating Watson's
business.

RISKS ASSOCIATED WITH INVESTING IN WATSON COMMON STOCK

AS PART OF WATSON'S BUSINESS STRATEGY, WATSON INTENDS TO PURSUE TRANSACTIONS
THAT MAY CAUSE IT TO EXPERIENCE SIGNIFICANT CHARGES TO EARNINGS THAT MAY
ADVERSELY AFFECT ITS STOCK PRICE AND FINANCIAL CONDITION.

     Watson regularly reviews potential transactions related to technologies,
products or product rights and businesses complementary to Watson's business.
Such transactions could include, but are not limited to,

                                       19
<PAGE>   26

mergers, acquisitions, strategic alliances, licensing agreements or co-promotion
agreements. In the future, Watson may choose to enter into such transactions at
any time. Depending upon the nature of any transaction, Watson may experience
significant charges to earnings, which could be material, and could possibly
have an adverse impact upon the market price of Watson's common stock. For
example, in connection with the TheraTech merger in January 1999, Watson
recorded merger-related expenses of $20.5 million in the first quarter of 1999
and, as described on page 14, expects to record a significant charge for
expenses related to the Schein merger in third quarter 2000.

WATSON'S STOCK PRICE HAS EXPERIENCED SUBSTANTIAL VOLATILITY, WHICH MAY AFFECT
YOUR ABILITY TO SELL THE STOCK YOU RECEIVE IN THE MERGER AT AN ADVANTAGEOUS
PRICE.


     The market price of Watson common stock has been and may continue to be
particularly volatile. For example, the market price of Watson common stock has
fluctuated during the past twelve months between $26.50 per share and $59.56 per
share and may continue to fluctuate. Therefore, especially if you have a
short-term investment horizon, the volatility may affect your ability to sell
your Watson stock at an advantageous price. Market price fluctuations in
Watson's stock may be due to acquisitions or other material public
announcements, along with a variety of additional factors including, without
limitation:


     - new product introductions,

     - the purchasing practices of Watson's customers,

     - changes in the degree of competition for Watson's products,

     - the announcement of technological innovations or new commercial products
       by Watson or its competitors,

     - changes in governmental regulation affecting Watson's business
       environment,

     - regulatory issues, including but not limited to, receipt of new drug
       approvals from the FDA, compliance with FDA or other agency regulations,
       or the lack or failure of either of the foregoing,

     - the issuance of new patents or other proprietary rights,

     - the announcement of earnings,

     - the loss of key personnel,

     - the inability to acquire sufficient supplies of finished products or raw
       materials,

     - litigation and/or threats of litigation,

     - failure or delay in meeting milestones in collaborative arrangements
       expected to result in revenues,

     - unanticipated expenses from joint ventures not under the control of
       Watson,

     - publicity regarding actual or potential clinical results with respect to
       products Watson has under development, and

     - political developments or proposed legislation in the pharmaceutical or
       healthcare industry.

     These and similar factors have had and could in the future have a
significant impact on the market price of Watson's common stock. Some companies
that have had volatile market prices for their securities have been subject to
securities class action suits filed against them. If a suit were to be filed
against Watson, regardless of the outcome or the merits of the action, it could
result in substantial costs and a diversion of Watson's management's attention
and resources. This could have a material adverse effect on Watson's business,
results of operations and financial condition.

                                       20
<PAGE>   27

INVESTORS SHOULD NOT LOOK TO DIVIDENDS AS A SOURCE OF INCOME.

     Watson has not paid any cash dividends since inception. In addition, Watson
does not anticipate paying cash dividends in the foreseeable future.
Consequently, any economic return to a stockholder will be derived, if at all,
from appreciation in the price of Watson's stock, and not as a result of
dividend payments.

WATSON MAY ISSUE ADDITIONAL EQUITY SECURITIES, WHICH WOULD LEAD TO DILUTION OF
YOUR OWNERSHIP INTEREST.

     In April 1998, Watson filed a shelf registration statement with the SEC
which allows it 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. These securities may be used to acquire technology,
products, product rights and businesses, among other purposes. The issuance of
additional equity securities or securities convertible into equity securities
for these or other purposes would result in dilution of existing stockholders'
equity interests in Watson.

WATSON IS AUTHORIZED TO ISSUE, WITHOUT STOCKHOLDER APPROVAL, ONE OR MORE
PREFERRED SERIES OF STOCK, WHICH MAY GIVE OTHER STOCKHOLDERS DIVIDEND,
CONVERSION, VOTING, AND LIQUIDATION RIGHTS, AMONG OTHER RIGHTS, WHICH MAY BE
SUPERIOR TO THE RIGHTS OF HOLDERS OF WATSON COMMON STOCK.

     The Watson Board of Directors has the authority to issue, without vote or
action of stockholders, shares of preferred stock in one or more series, and has
the ability to fix the rights, preferences, privileges and restrictions of any
such series. 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.

RISKS ASSOCIATED WITH INVESTING IN THE BUSINESS OF WATSON

IN ORDER TO REMAIN PROFITABLE AND CONTINUE TO GROW AND DEVELOP WATSON'S
BUSINESS, WATSON IS DEPENDENT ON SUCCESSFUL PRODUCT DEVELOPMENT AND
COMMERCIALIZATION OF NEWLY DEVELOPED PRODUCTS. IF WATSON IS UNABLE TO
SUCCESSFULLY DEVELOP OR COMMERCIALIZE NEW PRODUCTS, ITS OPERATING RESULTS WILL
SUFFER.

     Watson's future results of operations will depend to a significant extent
upon its ability to successfully commercialize new branded and off-patent
pharmaceutical products in a timely manner. These new products must be
continually developed, tested and manufactured and, in addition, must meet
regulatory standards and receive requisite regulatory approvals in a timely
manner. 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. If any of Watson's products, if and when acquired or
developed and approved, cannot be successfully or timely commercialized,
Watson's operating results could be adversely affected. This risk particularly
exists with respect to the development of proprietary products because of the
uncertainties, higher costs and lengthy time frames associated with research and
development of such products and the inherent unproven market acceptance 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. Watson cannot guarantee any investment it makes in developing products
will be recouped, even if Watson is successful in commercializing those
products.

WATSON IS DEPENDENT ON KEY PERSONNEL FOR ITS CONTINUED GROWTH AND DEVELOPMENT.
LOSS OF SUCH KEY PERSONNEL COULD HAVE A MATERIAL ADVERSE EFFECT ON WATSON.

     The success of Watson's present and future operations will depend, to a
significant extent, upon the experience, abilities and continued services of
certain of its executive officers. In this regard, Allen Chao, Ph.D., Chairman,
Chief Executive Officer and President of Watson, was diagnosed with very early
stage

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<PAGE>   28

stomach cancer in 1999. Subsequently, he underwent successful surgery and has
completed a course of chemotherapy which he elected to undertake to better
ensure a complete and thorough recovery. Although Watson has other senior
management personnel, a significant loss of the services of Dr. Chao or other
key personnel could have a material adverse effect on the company. Watson has
entered into employment agreements with all of its senior executive officers,
including Dr. Chao. Watson does not carry key-man life insurance on any of its
officers.

IF WATSON IS UNABLE TO ADEQUATELY PROTECT ITS TECHNOLOGY OR ENFORCE ITS PATENTS,
WATSON MAY BE LESS ABLE TO SUCCESSFULLY EXPLOIT SUCH TECHNOLOGY OR USE SUCH
PATENTS TO SECURE AN ADVANTAGE OVER ITS COMPETITORS.

     Although Watson has not experienced significant problems to date, Watson's
success with the patented brand name products that Watson has developed may
depend in part on its ability to obtain patent protection for such products.
Watson currently has a number of U.S. and foreign patents issued and pending.
However, if Watson's patent applications are not approved, or, if approved, if
such patents are not upheld in a court of law, it may reduce Watson's ability to
competitively exploit its patented products. Also, such patents may or may not
provide competitive advantages for their respective products or they may be
challenged or circumvented by competitors, in which case the company's ability
to commercially exploit these products may be diminished.

     Watson also relies on trade secrets and proprietary know-how that Watson
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.

FROM TIME TO TIME WATSON MAY NEED TO RELY ON LICENSES TO PROPRIETARY
TECHNOLOGIES, WHICH MAY BE DIFFICULT OR EXPENSIVE TO OBTAIN.

     Watson may need to obtain licenses to patents and other proprietary rights
held by third parties to develop, manufacture and market products. If Watson is
unable to timely obtain these licenses on commercially reasonable terms,
Watson's ability to commercially exploit its products may be inhibited or
prevented.

PATENT, TRADEMARK AND COPYRIGHT LITIGATION IS BECOMING MORE WIDESPREAD AND CAN
BE EXPENSIVE AND MAY DELAY OR PREVENT ENTRY OF WATSON'S PRODUCTS, ESPECIALLY
GENERICS, INTO THE MARKET.

     Litigation concerning patents, trademarks, copyrights and proprietary
technologies can be protracted and expensive. Additionally, pharmaceutical
companies with patented brand products are increasingly suing companies that
produce off-patent generic forms of their patented brand name products for
alleged patent and/or copyright infringement or other violations of intellectual
property rights which may delay or prevent the entry of such a generic product
into the market. Since a large part of Watson's business involves the marketing
and development of off-patent products, there is a risk that such a brand
company may sue us for alleged patent, trademark and/or copyright infringement
or other violations of intellectual property rights. For example, upon Watson's
August 1999 launch of its Nicotine Polacrilex Gum, which is the generic
equivalent to SmithKline Beecham Consumer Healthcare's Nicorette(R) Gum, which
is used as an aid to smoking cessation, SmithKline Beecham served Watson with a
lawsuit alleging that the user guide and audiocassette included with Watson's
gum product infringed SmithKline Beecham's copyrights. Following the filing of
the lawsuit by SmithKline Beecham, the U.S. District Court for the Southern
District of New York issued a preliminary injunction enjoining Watson, during
the pendency of the lawsuit, from selling or shipping its Nicotine Polacrilex
Gum with a user guide or audiocassette that is "strikingly or substantially"
similar to SmithKline Beecham's User Guide and Audiocassette. The Court also
ordered Watson to recall any such product it had previously shipped to
customers. Subsequently, the District Court dissolved the preliminary injunction
to allow Watson to ship and sell its nicotine gum products with a revised user's
guide and audiotape. SmithKline Beecham appealed the decision of the District
Court to the U.S. Court of Appeals for the Second Circuit. On April 4, 2000, the
Court of
                                       22
<PAGE>   29

Appeals issued its decision, affirming the District Court's decision dissolving
the injunction. The Court of Appeals also held that Smithkline Beecham's
copyright claim was meritless, and directed dismissal of the complaint.
Smithkline Beecham has filed a petition seeking review of the Court of Appeal's
decision by the U.S. Supreme Court. Such litigation or other similar litigation
may be costly and time consuming, and could result in a substantial delay or
prevention of the introduction of Watson's products, any of which could have a
material adverse effect on its business, financial condition or results of
operations.

AS A PART OF ITS BUSINESS STRATEGY WATSON PLANS TO CONTINUE MAKING ACQUISITIONS
OF BUSINESSES. INHERENT IN THIS PRACTICE IS A RISK THAT WATSON MAY EXPERIENCE
DIFFICULTY INTEGRATING THE BUSINESSES OF COMPANIES THAT IT HAS ACQUIRED INTO ITS
OPERATIONS, WHICH WOULD BE DISRUPTIVE TO ITS MANAGEMENT AND OPERATIONS.

     The merger of two companies involves the integration of two businesses that
have previously operated independently. Difficulties encountered in integrating
two businesses could have a material adverse effect on the operating results or
financial condition of the combined company's business. As a result of
uncertainty following a merger and during the integration process, Watson could
experience disruption in its business or employee base. There is also a risk
that key employees of a merged company may seek employment elsewhere, including
with competitors. If Watson and a merger partner are not able to successfully
blend their products and technology to create the advantages that the merger is
intended to create, it may affect Watson's results of operations, its ability to
develop and introduce new products and the market price of Watson's shares.
Further, there may be overlap between the products or customers of Watson and
the merged company that may create conflicts in relationships or other
commitments detrimental to the integrated businesses.

     In addition, as a result of acquiring businesses or entering into other
significant transactions, Watson has experienced, and will likely continue to
experience, significant charges to earnings for merger and related expenses that
may include transaction costs, closure costs or acquired in-process research and
development charges. These costs may include substantial fees for investment
bankers, attorneys, accountants and financial printing costs and severance and
other closure costs associated with the elimination of duplicate or discontinued
products, operations and facilities. These charges could have a material adverse
effect on the results of operations for particular quarterly or annual periods,
however Watson would not expect such charges to have a material adverse effect
upon its financial condition.

IF WATSON IS UNABLE TO OBTAIN SUFFICIENT SUPPLIES FROM KEY SUPPLIERS THAT IN
SOME CASES MAY BE THE ONLY SOURCE OF FINISHED PRODUCTS OR RAW MATERIALS, THEN
WATSON'S ABILITY TO DELIVER ITS PRODUCTS TO THE MARKET MAY BE IMPEDED.

     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 the event an existing supplier should lose its
regulatory status as an approved source, Watson would attempt to locate a
qualified alternative; however, it may be unable to obtain the required
components or products on a timely basis or at commercially reasonable prices.
From time to time, certain of Watson's outside suppliers have experienced
regulatory or supply-related difficulties that have inhibited their ability to
deliver products to Watson. To the extent such difficulties cannot be resolved
within a reasonable time, and at reasonable cost, the resulting delay could have
a material adverse effect on Watson. Watson's arrangements with foreign
suppliers are subject to certain additional risks, including the availability of
government clearances, export duties, political instability, currency
fluctuations and restrictions on the transfer of funds.

     For example, Rhone-Poulenc Rorer, Inc. and its affiliates, or RPR, were
Watson's sole supplier of Dilacor XR(R) and its generic equivalent, diltiazem.
In this regard, RPR agreed to supply Watson with all of its requirements for
Dilacor XR(R) and its generic equivalent through June 2000. For this purpose,
RPR designated as its contract manufacturer Centeon LLC. In August 1998, Centeon
ceased its manufacturing operations after an FDA inspection. Since that time,
Centeon has not manufactured any Dilacor XR(R) or its generic equivalent. RPR's
failure to provide Watson with an adequate and reliable supply of generic
diltiazem caused Watson's customers to seek generic diltiazem from its
competitors. It is generally
                                       23
<PAGE>   30

commercially impracticable to regain lost market share for a generic product.
Although Watson has subsequently negotiated a new supply agreement for Dilacor
XR(R) with a new supplier, under the pricing structure in that agreement, it is
not commercially practicable to obtain generic diltiazem from that manufacturer.
As a result, Watson does not anticipate any further sales of generic diltiazem.
On August 4, 1999, Watson filed suit against RPR and certain of its affiliates
for their failure to fulfill supply obligations to the company for Dilacor XR(R)
and its generic equivalent, among other claims. In late 1999, RPR and its
affiliates merged with Hoechst Marion Roussel, Inc. and its affiliates to form
Aventis. Watson is unable to predict the likelihood of the outcome of the
litigation against RPR.

THE TESTING, MARKETING AND SALE OF WATSON'S PRODUCTS INVOLVES THE RISK OF
PRODUCT LIABILITY CLAIMS BY CONSUMERS AND OTHER THIRD PARTIES, AND INSURANCE
AGAINST SUCH POTENTIAL CLAIMS 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
it believes to be commercially reasonable, if the coverage limits of these
insurance policies are not adequate, a claim brought against Watson, whether
covered by insurance or not, could have a material adverse effect upon Watson's
financial condition and/or results of operations.

RISKS RELATING TO SCHEIN

SCHEIN MAY EXPERIENCE SIGNIFICANT FLUCTUATIONS IN ITS OPERATING RESULTS.

     During the past three years, Schein's results of operations have fluctuated
materially on both an annual and a quarterly basis. These fluctuations have
resulted from several factors, including, among others, the timing of
introductions of new products by Schein and its competitors, the timing of
receipt of patent settlement revenues, Schein's dependence on a limited number
of products, the impact of regulatory compliance initiatives, including the use
of independent experts, and the restructuring charges associated with the Steris
and Marsam facilities. Schein believes that it will continue to experience
fluctuations in net revenues, gross profit and net income as a result of, among
other things, the timing of regulatory approvals and market introduction of new
products by Schein and its competitors, downward pressure on pricing for generic
products available from multiple approved sources, Schein's compliance with the
consent agreement and the implementation of the Steris corrective action plan
and the Marsam corrective action plan.

SCHEIN IS VERY DEPENDENT ON THE COMMERCIAL SUCCESS OF ITS BRANDED BUSINESS.

     Schein derives and is expected to continue to derive a significant portion
of its revenues and gross profit from its branded business, which is currently
comprised of two branded products that it is marketing, INFeD (iron dextran
injection, USP) and Ferrlecit (sodium ferric gluconate complex in sucrose
injection). INFeD, Schein's first branded product, was introduced in 1992.
Ferrlecit is a next generation injectable iron product that was launched in June
1999. Schein is currently migrating its INFeD customers to Ferrlecit.

     Net revenues from the branded business in 1999 were $137.3 million, or 29%,
of Schein's total net revenues, with gross profit from its branded products as a
percentage of total gross profit being greater than gross profit from its
generic products. INFeD is manufactured at Schein's Steris facility, which is
operating under the consent agreement. Schein resumed shipment of newly
manufactured lots of INFeD in March 1999. These lots must undergo certification
by independent experts prior to commercial distribution. Schein's future results
of operations depend upon its ability to continue the manufacturing of INFeD and
the implementation of the Steris corrective action plan. Any material decline in
revenues or gross profit from its branded business could have a material adverse
effect on Schein's business, results of operations and financial condition.

                                       24
<PAGE>   31

SALES OF INFED AND FERRLECIT ARE DEPENDENT ON THIRD-PARTY REIMBURSEMENT.

     INFeD and Ferrlecit are drugs indicated for use in hemodialysis patients
receiving erythropoetin. Pharmaceuticals for this patient population are covered
under a special federal reimbursement program administered by the Health Care
Financing Administration, or HCFA. The use of pharmaceuticals in hemodialysis
patients is highly dependent on reimbursement by HCFA. Currently, HCFA has
authorized national reimbursement coverage for INFeD. Schein continues to work
with HCFA and HCFA's regional intermediaries to establish national and interim
reimbursement coverage for Ferrlecit. Under a new HCFA review process, Schein
received a decision memorandum supporting national coverage in May 2000. There
can be no assurance that HCFA will authorize reimbursement for utilization of
Ferrlecit or the timing of HCFA's reimbursement decision. Currently, several of
HCFA's regional intermediaries provide reimbursement for either full or
restricted utilization of Ferrlecit.

IF SCHEIN IS UNSUCCESSFUL IN DEVELOPING AND COMMERCIALIZING ITS PRODUCTS, ITS
BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS COULD BE MATERIALLY
ADVERSELY AFFECTED.

     Schein's results of operations depend, to a significant extent, upon its
ability to develop and commercialize new pharmaceutical products in response to
the competitive dynamics within the pharmaceutical industry. Generally,
following the expiration of patents and any other market exclusivity periods for
branded drugs, the first pharmaceutical manufacturers to successfully market
generic equivalents of such drugs achieve higher revenues and gross profits from
the sale of such generic drugs than do later market entrants. As competing
generic equivalents reach the market, selling price, unit sales volume and
profit margin of the earliest generic versions often decline significantly. For
these reasons, Schein's ability to achieve overall growth in revenues and
profitability depends on its being among the first companies to introduce new
generic products. No assurance can be given that any of the drugs in its
pipeline will be successfully developed or approved by the FDA, will be among
the first to the market or will achieve significant revenues and profitability.

GOVERNMENT ACTIONS IN CONNECTION WITH THIRD-PARTY REIMBURSEMENT PROGRAMS MAY
ADVERSELY AFFECT SCHEIN'S BUSINESS.


     Recently, there has been enhanced political attention and governmental
scrutiny at the federal and state levels of the prices paid or reimbursed for
pharmaceutical products under Medicaid, Medicare and other government programs.
In November 1999, Schein was informed by the U.S. Department of Justice that it,
along with several other pharmaceutical companies, is a defendant in a qui tam
action brought in 1995 under the U.S. False Claims Act currently pending in the
Federal District Court for the Southern District of Florida. As of July 10,
2000, Schein has not been served in this action. A qui tam action is a civil
lawsuit brought by an individual for an alleged violation of a federal statute,
in which the Department of Justice has the right to intervene and take over the
prosecution of the lawsuit at its option. The Department of Justice has not yet
intervened in that action. Pursuant to applicable federal law, the qui tam
action is under seal and no details are available concerning the name of the
plaintiff, the various theories of liability or the amount of damages sought
from any of the defendants. Based on industry information, Schein believes that
the matter relates to whether allegedly improper price reporting by
pharmaceutical manufacturers led to increased payments by Medicare and/or
Medicaid. The qui tam action may seek to recover damages from Schein based on
its price reporting practices and, if successful, could adversely affect Schein.
Schein has also received notices or subpoenas from the attorneys general of
various states including Florida, Nevada, New York and Texas indicating
investigations and possible lawsuits relating to pharmaceutical pricing issues
and whether allegedly improper efforts by pharmaceutical manufactures led to
increased payments by Medicare and/or Medicaid. Other state and federal
inquiries regarding pricing and reimbursements issues are anticipated. Any
actions which may be instituted to recover damages from Schein based on its
price reporting practices, if successful, could adversely affect Schein. Any
significant limitation in government or third party reimbursement practices
could adversely affect Schein.


                                       25
<PAGE>   32

SCHEIN IS DEPENDENT ON THE SUCCESS OF ITS PATENT LITIGATION.

     A significant portion of Schein's revenues and gross profit has been
derived from generic versions of branded drug products covered by patents Schein
has challenged under the Drug Price Competition and Patent Restoration Act of
1984, or the Waxman-Hatch Act. In several successful proceedings, Schein had
been advised and represented by an independent patent attorney, whose
involvement has been substantial, and who no longer is involved in Schein's
patent challenge efforts. Recently, the Federal Trade Commission has increased
its investigation of, and, under certain circumstances, enforcement actions
against, settlements of patent litigation between makers of branded and generic
pharmaceuticals. There can be no assurance Schein will successfully complete the
development of any additional products involving patent challenges, succeed in
any pending or future patent challenges or, if successful, receive significant
revenues and gross profit from the products covered by successfully challenged
patents.

SCHEIN IS DEPENDENT ON COLLABORATIONS WITH THIRD PARTIES.

     Schein actively pursues strategic collaborations with other companies
through which it gains access to dosage forms, proprietary drug delivery
technology, specialized formulation capabilities and active pharmaceutical
ingredients. Schein relies on its collaborative partners for a number of
functions, including product formulation, approval and supply. There can be no
assurance these products will be successfully developed or that Schein's
partners will perform their obligations under these collaborative arrangements.
Further, there can be no assurance that Schein will be able to enter into future
collaborative arrangements on favorable terms, or at all. Even if Schein enters
into such collaborative arrangements, there can be no assurance that any such
arrangement will be successful.

SCHEIN DOES NOT MANUFACTURE THE ACTIVE PHARMACEUTICAL INGREDIENTS USED IN THE
PREPARATION OF ITS PRODUCTS AND IS DEPENDENT ON ONE SUPPLIER FOR THE ACTIVE
INGREDIENT USED IN THE MANUFACTURE OF INFED.

     The principal components of Schein's products are active and inactive
pharmaceutical ingredients. Schein does not manufacture the active
pharmaceutical ingredients used in the preparation of its products. Instead,
Schein purchases these active pharmaceutical ingredients from both domestic and
international sources. The FDA requires pharmaceutical manufacturers to identify
in their drug applications the supplier(s) of all the raw materials for its
products. If raw materials for a particular product become unavailable from an
approved supplier specified in a drug application, any delay in the required FDA
approval of a substitute supplier could interrupt manufacture of the product.
The qualification of a new supplier could materially and adversely affect
Schein's profit margins and market share for the product, as well as delay
Schein's development and marketing efforts. To the extent practicable, Schein
attempts to identify more than one supplier in each drug application. However,
many raw materials are available only from a single source and, in many of
Schein's drug applications, only one supplier of raw materials has been
identified, even in instances where multiple sources exist. For example,
currently, Schein has only one source for the active ingredient used in the
manufacture of INFeD. Any interruption of supply could have a material adverse
effect on Schein's ability to manufacture its products. In addition, Schein
obtains a significant portion of its raw materials from foreign suppliers.
Arrangements with international raw material suppliers are subject to, among
other things, FDA regulation, various import duties and other government
clearances. Acts of governments outside the United States may affect the price
or availability of raw materials needed for the development or manufacture of
generic drugs. In addition, recent changes in patent laws in jurisdictions
outside the United States may make it increasingly difficult to obtain raw
materials for research and development prior to the expiration of the applicable
U.S. patents. There can be no assurance that Schein will establish or, if
established, maintain good relationships with its suppliers or that such
suppliers will continue to supply ingredients in conformity with legal or
regulatory requirements.

SCHEIN FACES A RISK OF PRODUCT LIABILITY CLAIMS AND MAY NOT BE ABLE TO OBTAIN
ADEQUATE INSURANCE.

     The testing, manufacture and distribution of pharmaceutical products
involve a risk of product liability claims and the adverse publicity that may
accompany such claims. Schein is a defendant in a number of product liability
cases, the outcome of which Schein believes should not have a material adverse
effect on
                                       26
<PAGE>   33

Schein's business, results of operations or financial condition. Although Schein
maintains what it believes to be an adequate amount of product liability
insurance coverage, there can be no assurance that Schein's existing product
liability insurance will cover all current and future claims or that Schein will
be able to maintain existing coverage or obtain, if it determines to do so,
insurance providing additional coverage at reasonable rates. No assurance can be
given that one or more of the claims arising under any pending or future product
liability cases, whether or not covered by insurance, will not have a material
adverse effect on Schein's business, results of operations or financial
condition.

                                       27
<PAGE>   34

                                 THE COMPANIES

WATSON

     Watson is a corporation organized and existing under the laws of the State
of Nevada. Its principal offices are located at 311 Bonnie Circle, Corona,
California 92880. Watson is a pharmaceutical company primarily engaged in the
development, production, marketing and distribution of both branded and off-
patent pharmaceutical products. It was incorporated in January 1985, and has
grown, through internal product development and synergistic acquisitions of
products and businesses, into a diversified specialty pharmaceutical company
that currently markets over 100 branded and off-patent products. Watson is also
engaged, both internally and under collaborative agreements with other parties,
in the development of advanced drug delivery systems primarily designed to
enhance therapeutic benefits of pharmaceutical products.

WS ACQUISITION CORP.

     WS Acquisition Corp. is a newly incorporated corporation organized and
existing under the laws of the State of Delaware. WS Acquisition Corp. was
organized in connection with the tender offer and the merger and has not carried
out any activities other than in connection with the tender offer and the
merger. The principal offices of WS Acquisition Corp. are located at 311 Bonnie
Circle, Corona, California 92880. WS Acquisition Corp. is a wholly owned
subsidiary of Watson.

SCHEIN

     Schein is a corporation organized and existing under the laws of the State
of Delaware with its principal executive offices located at 100 Campus Drive,
Florham Park, New Jersey 07932. Schein develops, manufactures and markets a
broad line of generic products and has a significant branded business. The
Schein product line includes both solid dosage and sterile dosage generic
products, and Schein is also developing a line of specialty branded
pharmaceuticals. The brand products group at Schein is focused on developing and
commercializing proprietary pharmaceutical products in niche therapeutic areas,
and has developed an expertise in the management of iron deficiency and
pharmaceutical products related to the management of anemia in nephrology.

                                       28
<PAGE>   35

                   THE SPECIAL MEETING OF SCHEIN STOCKHOLDERS

DATE, TIME AND PLACE


     The special meeting of Schein stockholders will be held on August 28, 2000,
at the principal executive offices of Schein located at 100 Campus Drive,
Florham Park, New Jersey 07932 commencing at 9:00 A.M. local time. We are
sending this proxy statement/prospectus to you in connection with the
solicitation of proxies by the Schein board of directors for use at the Schein
special meeting and any adjournments or postponements of the special meeting.


PURPOSE OF THE SPECIAL MEETING

     The purpose of the special meeting is to consider and vote upon a proposal
to approve and adopt the merger agreement and to transact such other business as
may properly come before the special meeting or any adjournments or
postponements of the special meeting.

RECOMMENDATION OF SCHEIN'S BOARD OF DIRECTORS

     THE SCHEIN BOARD OF DIRECTORS HAS CONCLUDED THAT THE PROPOSAL TO ADOPT THE
MERGER AGREEMENT IS ADVISABLE AND IN THE BEST INTERESTS OF SCHEIN AND ITS
STOCKHOLDERS AND HAS UNANIMOUSLY APPROVED AND ADOPTED THE PROPOSAL. ACCORDINGLY,
THE SCHEIN BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT ALL SCHEIN
STOCKHOLDERS VOTE "FOR" APPROVAL AND ADOPTION OF THE MERGER AGREEMENT.

RECORD DATE AND VOTING POWER


     Only holders of record of Schein common stock at the close of business on
the record date, July 25, 2000, are entitled to notice of, and to vote at, the
special meeting. There were approximately 107 holders of record of Schein common
stock at the close of business on the record date, with 34,428,486 shares of
Schein common stock issued and outstanding. Each share of Schein common stock
entitles the holder thereof to one vote on each matter submitted for stockholder
approval.


VOTING AND REVOCATION OF PROXIES

     All properly executed proxies that are not revoked will be voted at the
special meeting and at any adjournments or postponements of the special meeting
in accordance with the instructions contained in the proxy. If a holder of
Schein common stock executes and returns a proxy and does not specify otherwise,
the shares represented by the proxy will be voted "for" adoption of the merger
agreement in accordance with the recommendation of the Schein board of
directors. A Schein stockholder who has executed and returned a proxy may revoke
it at any time before it is voted at the special meeting by executing and
returning a proxy bearing a later date, filing written notice of revocation with
the Secretary of Schein stating that the proxy is revoked or attending the
special meeting and voting in person.

REQUIRED VOTE

     The presence, in person or by proxy, at the special meeting of the holders
of a majority of the shares of Schein common stock outstanding and entitled to
vote at the special meeting is necessary to constitute a quorum at the meeting.
The affirmative vote of the holders of a majority of the shares of Schein common
stock outstanding as of the record date is required to approve and adopt the
merger agreement. In determining whether the merger agreement has received the
requisite number of affirmative votes, abstentions and broker non-votes will
have the same effect as a vote against the approval and adoption of the merger
agreement.


     As of the record date of the special meeting, Watson, through its
subsidiary WS Acquisition Corp., owned approximately 26,068,469 of the
outstanding shares of common stock of Schein, which comprised approximately
75.7% of the shares entitled to vote. Therefore, Watson has sufficient voting
power to constitute a quorum and to approve all matters to be considered at the
special meeting of Schein


                                       29
<PAGE>   36

stockholders, regardless of the vote of any other stockholder. Watson has agreed
to vote all shares of Schein common stock owned by it or its affiliates in favor
of adoption of the merger agreement.

SOLICITATION OF PROXIES

     In addition to solicitation by mail, the directors, officers, employees and
agents of Schein may solicit proxies from Schein stockholders by personal
interview, telephone, telegram or otherwise. Schein will bear the costs of the
solicitation of proxies from its stockholders. Arrangements will also be made
with brokerage firms and other custodians, nominees and fiduciaries who are
record holders of Schein common stock for the forwarding of solicitation
materials to the beneficial owners of Schein common stock. Schein will reimburse
these brokers, custodians, nominees and fiduciaries for the reasonable
out-of-pocket expenses they incur in connection with the forwarding of
solicitation materials. D. F. King & Co., Inc. will assist in the solicitation
of proxies from Schein stockholders for a fee of approximately $7,500 plus
reasonable out-of-pocket expenses.

OTHER MATTERS

     At the date of this proxy statement/prospectus, the Schein board of
directors does not know of any business to be presented at the special meeting
other than as set forth in the notice accompanying this proxy
statement/prospectus. If any other matters should properly come before the
special meeting, it is intended that the shares represented by proxies will be
voted with respect to such matters in accordance with the judgment of the
persons voting such proxies.

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<PAGE>   37

                                   THE MERGER

GENERAL DESCRIPTION OF THE MERGER

     Subject to the conditions set forth in the merger agreement, WS Acquisition
Corp. will be merged into Schein, the separate corporate existence of WS
Acquisition Corp. will cease and Schein will continue as the surviving
corporation.

     The merger will become effective when a certificate of merger is duly filed
with the Secretary of State of the State of Delaware, or at such other time
specified in the certificate of merger as Watson and Schein shall agree.

     The merger agreement provides that the directors of WS Acquisition Corp.
immediately prior to the effective time of the merger will be the initial
directors of the surviving corporation and that the officers of Schein
immediately prior to the effective time of the merger will be the initial
officers of the surviving corporation. The merger agreement also provides that
the certificate of incorporation of Schein as in effect immediately prior to the
effective time of the merger, as amended to change the authorized number of
shares of capital stock to 1,000 shares of common stock, shall be the
certificate of incorporation of the surviving corporation. The merger agreement
further provides that the bylaws of Schein as in effect immediately prior to the
effective time of the merger will be the bylaws of the surviving corporation.

BACKGROUND

     The terms and conditions of the merger agreement, the tender offer and the
merger are the result of arm's length negotiations between Watson and Schein.
Set forth below is a summary of the background of these negotiations and certain
related matters preceding these negotiations.

     During the course of the Schein board of directors fiscal 1999 strategic
review of Schein's operating and financial performance and future prospects, the
Schein board of directors discussed with Schein's senior management possible
courses of action for Schein to achieve growth in revenues and profitability and
to maximize stockholder value. During the first half of 1999, Schein had
preliminary discussions with other companies regarding possible combinations
with or acquisitions by Schein.

     In July 1999, Schein engaged Evercore Healthcare Capital, LLC, or Evercore,
as a financial advisor to assist Schein in the analysis, consideration and
execution of various financial and strategic alternatives for Schein as a whole
or its branded or generic businesses independently. Evercore assisted Schein in
its evaluation of several potential acquisition and business combination
transactions, including exploring potential sources of financing for the
transactions. None of these transactions were completed, having been terminated
or abandoned at different stages in their consideration.

     In September 1999, Schein was contacted by a major pharmaceutical company
inquiring whether Schein would consider selling its injectable iron branded
business. Following a November 18, 1999 board of directors meeting at which the
Schein board of directors discussed, among other things, strategic alternatives
for Schein, Schein began providing information concerning its injectable iron
branded business to several major pharmaceutical companies pursuant to
confidentiality agreements. In late December 1999 and mid-January 2000, two of
these companies expressed preliminary interest in acquiring Schein's injectable
iron branded business.

     In early December 1999, Schein's senior management met with representatives
of two stockholders of Schein, Marvin Schein and Irving Shafran. These two
stockholders, who together control approximately 50% of the outstanding shares
of Schein common stock, communicated their desire to see Schein sold in its
entirety to a third party, and expressed a preference for a cash transaction.

     In mid-January 2000, Schein retained CIBC World Markets, together with
Evercore, to assist Schein in evaluating, structuring and negotiating a possible
sale of, or business combination or similar transaction involving, Schein or its
branded or generic businesses. At a meeting held on January 18, 2000, the Schein
board of directors reviewed with Evercore and CIBC World Markets a process for
exploring alternatives to

                                       31
<PAGE>   38

enhance stockholder value, including a possible sale of, or business combination
or similar transaction involving, Schein or its branded or generic businesses.
At that meeting, the Schein board of directors was advised that Bayer
Corporation, which controlled approximately 24.6% of the outstanding shares of
Schein common stock, had indicated a willingness to sell its interest in Schein
at an appropriate price.

     In January and February 2000, Schein, assisted by CIBC World Markets and
Evercore, identified and contacted parties that might be interested in
considering either acquiring or entering into a business combination or similar
transaction with Schein. As part of this initial phase of contacts, Watson was
contacted in February 2000. During January and February 2000, Schein entered
into confidentiality agreements with sixteen parties, including Watson, that
expressed interest in pursuing a possible transaction with Schein. The
confidentiality agreements signed by these parties contained customary
"standstill" provisions prohibiting these parties from acquiring securities of
Schein, engaging in a proxy contest with respect to representation on the Schein
board of directors and taking similar actions without the prior consent of
Schein.

     Beginning in January and continuing through early March 2000, Schein
permitted twelve of the interested parties that had entered into confidentiality
agreements, including Watson and the two companies that had previously expressed
a preliminary interest in acquiring Schein's injectable iron branded business,
to conduct preliminary due diligence investigations of Schein. The due diligence
investigations included reviewing documents and other written materials relating
to Schein's business and attending business presentations by Schein's senior
management. At various meetings of the Schein board of directors held from
January through March 2000, Schein's senior management and financial advisors
met with the Schein board to discuss the status of the ongoing process of
exploring alternatives for Schein.

     On March 9, 2000, a letter was sent on behalf of Schein to each of the
twelve interested parties that had signed a confidentiality agreement with
Schein, including Watson, seeking from each of them by March 20, 2000 a proposal
for acquiring Schein or one or more of its businesses. The letter, which was
accompanied by a form of merger agreement that provided for a two-step
acquisition of Schein pursuant to a cash tender offer for all of the shares of
Schein common stock followed by a second-step cash merger for any shares of
Schein common stock not tendered in the tender offer, stated that Schein would
evaluate any competing proposals received from the interested parties on the
basis of not only purchase price but also on the possible effect that revisions
to the form of merger agreement proposed by each interested party would have on
the timing and likelihood of completing a transaction.

     Between March 10 and March 21, 2000, Schein received proposals from eight
interested parties, including a proposal from Watson dated March 20, 2000, with
respect to acquiring Schein or one of Schein's businesses. Watson's initial
proposal provided for the acquisition of all outstanding shares of Schein common
stock for $20.00 per share of Schein common stock in a cash tender offer
followed by a second-step cash merger, also at $20.00 per share of Schein common
stock. Watson's proposal was subject to certain conditions, including
satisfactory completion of Watson's ongoing due diligence investigation of
Schein and a condition that Watson would not be obligated to complete the
transaction unless 75% of the outstanding shares of Schein common stock on a
fully diluted basis were tendered. As an expression of Watson's desire to
complete an acquisition of Schein, Watson's proposal also indicated that Watson
would be willing to extend to Schein a credit facility of up to $20 million to
meet Schein's immediate working capital needs during the period prior to the
completion of the acquisition.

     On March 25, 2000, the Schein board of directors met with Schein's senior
management and financial advisors to review the proposals received and to
discuss negotiation strategies, possible transaction structures and timing.

     Thereafter, interested parties were requested to submit final proposals for
a possible transaction with Schein by April 10, 2000. From late March through
early April 2000, Schein provided additional due diligence materials to, and had
ongoing discussions related to due diligence matters with, the eight interested
parties, including Watson. During this period, Watson's senior management
continued to evaluate the merits of a proposed acquisition of Schein.

                                       32
<PAGE>   39

     Between April 6 and April 13, 2000, Schein received proposals from five of
the remaining eight interested parties. Four of the proposals were for the
acquisition of the entire company, while the fifth proposal was for the
acquisition of only a portion of the company. Two of the four proposals for the
acquisition of the entire company contemplated the acquisition of the company
for cash pursuant to a cash tender offer, followed by a second-step cash merger,
one of the proposals contemplated a cash merger and the other proposal
contemplated a stock-for-stock merger.

     The Watson proposal provided for the acquisition of all outstanding shares
of Schein common stock for $21.50 per share of Schein common stock in a cash
tender offer followed by a second-step cash merger, also for $21.50 per share of
Schein common stock, and again provided for the extension of a $20 million
interim credit facility to Schein. Watson's proposal was subject to certain
conditions, including that a number of significant stockholders of Schein sign
agreements under which such significant stockholders would be obligated to
tender their shares of Schein common stock and satisfactory completion by Watson
of its ongoing due diligence investigation of Schein.

     The other tender offer proposal provided for the acquisition of all
outstanding shares of Schein common stock for $22.00 per share of Schein common
stock in a cash tender offer followed by a second-step cash merger, also for
$22.00 per share of Schein common stock. Both Watson and the other tender offer
bidder also provided Schein with proposed revisions to the form of merger
agreement provided to them on March 9, 2000.

     The cash merger bidder's proposal provided for a merger in which each share
of Schein common stock would be converted into the right to receive $20.50.
Furthermore, the cash merger bidder's proposal was subject to a financing
contingency.

     The stock-for-stock bidder's proposal provided for a merger in which each
share of Schein common stock would be converted into stock of such bidder having
a value of $25.00 per share of Schein common stock, assuming the merger would be
accounted for as a pooling of interests. This proposal also provided for a
collar, which would have the effect of protecting the stock-for-stock bidder and
the Schein stockholders, within certain limits, from market risks associated
with change in the price of the stock-for-stock bidder's stock during the period
between the signing of a definitive merger agreement and the completion of the
merger. If, however, the bidder's stock price exceeded the upper limits of the
collar, the value of the consideration to be received by the Schein stockholders
would be increased by a portion of the increase in the value of the bidder's
stock, but if the other bidder's stock price exceeded the upper limits of the
collar by more than a specified amount, the value of the consideration to be
received by the Schein stockholders would be capped. If the other bidder's stock
price fell below the lower limit of the collar, the value of the consideration
to be received by the Schein stockholders would be decreased by a portion of the
decrease in value of the bidder's stock until a certain threshold was reached,
after which the value of the consideration to be received by the Schein
stockholders would decrease in direct proportion to the decrease in the stock
price.

     On April 14, 2000, the Schein board of directors again met with Schein's
senior management, financial advisors and legal counsel to review the five
acquisition proposals received and to discuss transaction structures and timing.
Of these five proposals, the Schein board of directors, based on an analysis of
a number of factors, including the proposed amount and form (e.g., cash, stock,
etc.) of purchase price being offered, the likelihood that the proposed
transaction would actually be completed, and the speed at which a proposed
transaction would be completed, considered most favorably, and focused its
attention on, the cash tender offer proposals made by Watson and one of the
other four bidders.

     During the week of April 17, 2000, Schein sent a revised form of merger
agreement to Watson and the other cash tender offer bidder reflecting Schein's
response to their comments on the March 9 form of merger agreement. Schein's
response included a request that bidders provide a $40 million interim credit
facility to Schein. Watson's senior management reviewed the revised form of
merger agreement with Bear Stearns & Co. Inc., Watson's financial advisor, and
Cooley Godward LLP, Watson's outside legal counsel, and thereafter informed
Schein that Watson desired to remain in the bidding process while Watson
conducted further due diligence.
                                       33
<PAGE>   40

     On April 24, 2000, Marvin Schein, Irving Shafran and related parties
commenced litigation against Schein and certain of its directors and officers
seeking, among other things, to gain a number of seats on Schein's board of
directors. The action was settled on May 2, 2000, with, among other things,
Messrs. Schein and Shafran being elected to Schein's board of directors.

     In early May 2000, the other cash tender offer bidder indicated that it was
no longer interested in acquiring Schein. Schein continued making due diligence
materials available to Watson and the bidder that had proposed to acquire Schein
pursuant to a stock-for-stock merger. Schein, through its senior management,
financial advisors and legal counsel, separately commenced negotiations of
definitive merger agreements with Watson and the other bidder, which
negotiations continued through the first three weeks of May 2000.

     On May 5, 2000, at the request of the stock-for stock bidder and in order
to induce such bidder to continue negotiations with Schein, Schein agreed with
such bidder not to enter into a definitive merger agreement with another party
before the close of business on May 12, 2000, although Schein was not prohibited
from continuing its negotiations with other parties. During the week of May 8,
2000, Schein sent a revised form of merger agreement to such bidder, reflecting
Schein's response to such bidder's comments to the form of merger agreement
previously provided.

     On May 10, 2000, Schein's senior management, financial advisors and legal
counsel met with Watson's senior management, financial advisor and legal counsel
to discuss open due diligence items and to negotiate a definitive form of merger
agreement. During the course of such negotiations, Schein indicated to Watson
that the Watson proposal, which included several conditions to the completion of
the transaction, did not provide sufficient certainty that the transaction would
be completed. At the conclusion of the meeting, Watson advised Schein that
Watson would provide Schein with a revised proposal.

     On May 11, 2000, as a result of information obtained by Watson during its
ongoing due diligence investigation and after consultation with its financial
advisor, Watson delivered a revised proposal of $17.00 per share of Schein
common stock in a cash tender offer followed by a second-step cash merger, also
at $17.00 per share of Schein common stock.

     Watson's revised proposal indicated that it was contingent upon, among
other things, Watson getting greater comfort with regard to certain aspects of
Watson's due diligence review. Watson also provided Schein with a revised form
of merger agreement that attempted to address some of the concerns expressed by
Schein relating to the conditions to the completion of the acquisition set forth
in Watson's prior proposal.

     On May 11 and May 12, 2000, Schein's senior management, financial advisors
and legal counsel met with the stock-for-stock bidder's management, financial
advisor and legal counsel to discuss open due diligence items and to negotiate a
form of merger agreement. The stock-for-stock bidder revised its proposal to
provide for a merger in which each share of Schein common stock would be
converted into stock of such bidder having a value of between $18.00 and $20.00
per share of Schein common stock if the merger was accounted for as a purchase,
and $25.00 per share of Schein common stock if the merger was accounted for as a
pooling of interests. The stock-for-stock bidder's revised proposal was subject
to a collar similar to the one presented in its prior proposal; however, the
revised proposal also provided that if such bidder's stock price fell to a
certain level below the collar, Schein could terminate the merger agreement,
unless the other bidder increased the aggregate value of the stock offered to
Schein's stockholders so that the value was greater than the aggregate value at
which Schein would have had the right to terminate the merger agreement.

     On May 12, 2000, the stock-for-stock bidder revised its proposal to $21.00
per share of Schein common stock in such bidder's stock if the merger was
accounted for as a purchase, and $24.00 per share of Schein common stock in such
bidder's stock if the merger was accounted for as a pooling of interests. This
proposal contained collar provisions similar to those presented in such bidder's
May 11 proposal, but eliminated the potential increase in the value per share
that would have accrued to Schein's stockholders if

                                       34
<PAGE>   41

the value of such bidder's stock increased between signing of a merger agreement
and the completion of the merger.

     On May 13, 2000, legal counsel for Schein met with legal counsel for the
stock-for-stock bidder to continue to negotiate a form of merger agreement.

     On May 15, 2000, Watson, after further review of available due diligence
materials and consultation with Watson's financial advisor and legal counsel,
revised its proposal to $19.00 per share of Schein common stock in a cash tender
offer followed by a second-step cash merger, also at $19.00 per share of Schein
common stock, and eliminated many of the remaining conditions to the completion
of the acquisition. The Schein board of directors viewed the revised Watson
proposal as providing certain advantages over the proposal of the
stock-for-stock bidder. These advantages included the cash tender offer element
of the proposal, which would enable those Schein stockholders who desired to do
so to receive cash for their shares of Schein common stock in a relatively short
period of time as compared with the longer period of time associated with the
merger structure contemplated by the stock-for-stock bidder's proposal.

     Notwithstanding these advantages, however, the Schein board of directors
concluded that the purchase price proposed by Watson was not acceptable.

     On May 19, 2000, Watson notified Schein that Watson would restructure its
proposal to provide for $19.00 per share of Schein common stock in a cash tender
offer for all shares of Schein common stock, followed by a second-step merger
involving up to $23.00 per share of Schein common stock in Watson stock. The
revised proposal was structured such that if less than 80% of the outstanding
capital stock of Schein, assuming that stock options and warrants were exercised
on a "net exercise" basis, was tendered for cash, the value of the Watson stock
in the second-step merger would be reduced below $23.00 per share of Schein
common stock. The revised proposal also contemplated that (i) there would be a
collar on Watson's stock price, similar to the collar that was ultimately
included in the final merger agreement, (ii) in the second-step merger, Watson
would provide Schein stockholders with consideration having a value of at least
$19.00 per share of Schein common stock, and (iii) promptly after the signing of
a definitive merger agreement, Watson would, as requested by Schein, increase to
$40 million the amount of the credit facility Watson had previously offered to
provide to Schein to assist it in meeting its immediate working capital needs.

     During the period beginning on May 17 and continuing through May 24, 2000,
representatives of Schein and representatives of Watson, together with their
respective financial advisors and legal counsel, held extensive negotiations
regarding the purchase price of the proposed transaction as well as the terms
and conditions of the merger agreement. In addition, during this period,
Watson's legal counsel, Schein's legal counsel and legal counsel for certain
significant stockholders of Schein, held extensive negotiations regarding the
stockholder agreements that Watson was requiring be signed by certain
significant stockholders of Schein.

     During the period beginning May 17 and continuing through May 22, 2000,
negotiations regarding purchase price and the terms and conditions of a proposed
merger agreement and stockholder agreements continued between Schein and the
stock-for-stock bidder.

     On May 20, 2000, the Watson board of directors held a meeting to discuss
the proposed terms and conditions of the merger agreement and to evaluate the
strategic opportunities presented by the proposed merger. Members of Watson's
senior management, Watson's financial advisor and Watson's legal counsel were
present at that meeting. Members of the Watson board of directors inquired as to
the results of the due diligence efforts undertaken by Watson's senior
management as well as the potential benefits and risks to Watson of the proposed
transaction. Watson's financial advisor discussed with the board its financial
analysis of the proposed transaction and Watson's legal counsel discussed with
the board certain legal matters relating to the proposed transaction. At the
conclusion of the board meeting, the Watson board of directors authorized
Watson's senior management to continue to negotiate the merger agreement and
related agreements with Schein.

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<PAGE>   42

     The Watson board of directors held a further meeting with Watson's senior
management, financial advisor and legal counsel on May 21 to continue to discuss
the proposed transaction. At the May 21 meeting, after extensive discussion of
the proposed transaction, Bear Stearns & Co. Inc. provided the Watson board of
directors with an oral opinion that, based upon certain assumptions and
qualifications, the proposed consideration being offered by Watson to Schein's
stockholders was fair, from a financial point of view, to Watson. The Watson
board of directors then voted unanimously to approve the merger agreement at the
$19.00/$23.00 price structure described above and the transactions contemplated
by the merger agreement, subject to the satisfactory completion of final
negotiations on the other terms of the merger agreement.

     On May 21, 2000, the stock-for-stock bidder revised its proposal to $24.00
per share of Schein common stock in such bidder's stock, regardless of the
accounting treatment of the proposed merger. This proposal preserved many of the
features of the collar provisions presented in such bidder's May 12 proposal, as
well as Schein's termination right if the value of such bidder's stock declined
substantially.

     In addition, on May 22, 2000, the stock-for-stock bidder advised Schein
that it would not continue negotiations unless Schein agreed to negotiate
exclusively with it. Schein's board of directors determined that it would not be
advisable to do so given the continued interest expressed by Watson in
negotiating a transaction along the lines of Watson's then-current proposal.
After May 22, 2000, Schein had no further discussions with the stock-for-stock
bidder regarding its proposal.

     At a meeting of the Schein board of directors held on May 22, 2000,
representatives of holders of approximately 74% of the outstanding shares of
Schein common stock indicated their preference, as stockholders, for the form of
transaction proposed by Watson and their disfavor of the other bidder's
proposal. The representatives of these stockholders indicated that they
preferred Watson's proposal for a number of reasons, including, among other
reasons, because it (i) included a substantial cash component as compared with
the all-stock transaction proposed by the other bidder and (ii) contemplated a
tender offer that was likely to be completed much more quickly than the merger
proposed by the stock-for-stock bidder.

     On May 22, 2000, Schein informed Watson that the Schein board of directors
did not approve the amount and structure of the price previously proposed by
Watson. Throughout the day and evening on May 22 numerous discussions between
Watson and Schein and their respective financial advisors relating to the amount
and structure of the proposed price being offered by Watson occurred.

     On May 23, 2000, Watson presented a revised proposal of $19.50 per share of
Schein common stock in a cash tender offer for all shares of Schein common
stock, followed by a second-step merger involving $23.00 per share of Schein
common stock in Watson stock. The second-step of the revised proposal was
different than the second-step in Watson's previous proposal because the revised
proposal was structured such that even if less than 80% of the outstanding
capital stock of Schein (assuming that stock options and warrants were exercised
on a "net exercise" basis) was tendered for cash, the value of the Watson stock
in the second-step merger would remain at $23.00 per share of Schein common
stock, subject to a collar on Watson's stock price. Watson indicated to Schein
that the revised proposal was subject to approval of the Watson board of
directors.

     On May 23, 2000, the Watson board of directors held a meeting to consider
the revised proposal and to review further the principal terms and conditions of
the proposed transaction. At the meeting, representatives of Bear, Stearns & Co.
Inc. presented additional financial analysis and representatives of Watson's
legal counsel discussed legal aspects of the transaction. At the May 23 meeting,
after extensive discussion of the proposed transaction, Bear Stearns & Co. Inc.
again provided the Watson board of directors with an oral opinion, subsequently
confirmed in writing, that, based upon certain assumptions and qualifications,
the proposed consideration being offered to Schein's stockholders was fair, from
a financial point of view, to Watson. After further discussion, the directors
voted unanimously to approve the proposed acquisition based on the revised
proposal described in the merger agreement, subject to successful completion of
negotiations, and authorized the officers of Watson to complete negotiations and
finalize and execute the merger agreement and the related agreements. Following
the meeting of the Watson board of
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<PAGE>   43

directors, Watson contacted Schein to inform it that the Watson board of
directors had approved the revised proposal.

     Schein's board of directors held six meetings from May 21 through May 23,
2000, during which it held extensive discussions with Schein's financial
advisors and legal counsel regarding the revised proposals Schein had received
from Watson and the stock-for-stock bidder. At these meetings, the Schein board
of directors considered not only the purchase price offered by Watson and the
stock-for-stock bidder, but also the timing of each of the proposed
transactions, the likelihood that each of the proposed transactions would close,
and the terms and condition of each of the proposed forms of merger agreement.

     At a meeting held on May 23, 2000, the Schein board of directors reviewed
the revised Watson proposal, including the latest draft form of merger agreement
negotiated with Watson. At this meeting, CIBC World Markets reviewed with the
Schein board of directors, among other things, the history and status of
negotiations, the financial terms of the proposed merger agreement, historical
market prices of Watson's common stock, including its public float and trading
activity, and a financial analysis of the consideration to be paid by Watson in
the proposed transaction. Following this review, Schein's legal counsel reviewed
the terms and conditions of the proposed merger agreement, including the
termination provisions as modified through negotiations and the provisions of
the $40 million credit facility. The Schein board of directors was also advised
that Watson had entered into a commitment letter with Societe Generale to
provide funds for the acquisition, and the intention of a number of significant
stockholders of Schein to enter into the stockholder agreements. CIBC World
Markets then delivered to the Schein board of directors CIBC World Markets' oral
opinion, which opinion was subsequently confirmed by delivery of a written
opinion dated May 24, 2000, the date of the execution of the merger agreement,
to the effect that, as of the date of the opinion and based upon and subject to
the matters described in the opinion, the consideration to be received by the
holders of Schein common stock in the tender offer and the merger was fair from
a financial point of view to such holders, other than Watson, the significant
stockholders of Schein and each of their affiliates, as to which CIBC World
Markets expressed no opinion. After full discussion, the Schein board of
directors, among other things, unanimously authorized its officers to execute
the merger agreement on behalf of Schein substantially in the form presented to
the board of directors and recommended that the stockholders tender their shares
in the tender offer and/or vote to adopt the merger agreement.

     On the evening of May 24, 2000, Schein, Watson and WS Acquisition Corp.
executed the merger agreement and a number of significant stockholders of Schein
entered into the stockholder agreements with Watson. Before the opening of
trading on the New York Stock Exchange on May 25, 2000, Watson and Schein issued
a joint press release announcing the transaction.


     On June 6, 2000, WS Acquisition Corp. commenced the tender offer. In the
tender offer 26,068,469 shares of Schein common stock were tendered. In July
2000, WS Acquisition Corp. purchased those shares resulting in it owning 75.7%
of the outstanding shares of common stock of Schein, as of the record date of
the special meeting. On July 6, 2000, designees of Watson constituting a
majority of the members of the Schein board of directors became directors of
Schein.


REASONS FOR THE MERGER

     The following discussion of the parties' reasons for the merger contains a
number of forward-looking statements that reflect the current views of Watson
and/or Schein with respect to future events that may have an effect on their
future financial performance. Forward-looking statements are subject to risks
and uncertainties. Actual results and outcomes may differ materially from the
results and outcomes discussed in the forward-looking statements. Cautionary
statements that identify important factors that could cause or contribute to
differences in results and outcomes include those discussed in
"Summary -- Forward Looking Information" and "Risk Factors."

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<PAGE>   44

WATSON'S REASONS FOR THE MERGER

     The board of directors of Watson has unanimously approved the merger and
the merger agreement and has identified several potential benefits of the merger
that it believes will contribute to the success of the combined company,
including the following:

     - the merger offers the opportunity for Watson to expand into an additional
       therapeutic area, nephrology, and to expand its branded products
       business;

     - through the merger, Watson will have the opportunity to leverage its
       existing sales and marketing capabilities over additional branded
       products;

     - in the merger, Watson will add a sizeable, established, generic business
       that will enhance Watson's position in the consolidating generic drug
       industry;

     - the merger will permit Watson to expand its pipeline for future generic
       drugs, both through the addition of Schein's development partnerships and
       through the inclusion of Schein's internal development efforts; and

     - the merger will provide Watson with the opportunity to exploit potential
       cost-related synergies through the elimination of duplicative
       manufacturing facilities and the rationalization of the combined
       company's sales and marketing and administrative organizations.

     The Watson board of directors also considered certain potentially negative
factors that may result from the merger, including the following:

     - the expectation that the merger would be dilutive to earnings per share
       in the near term;

     - the potential adverse effect on Watson's common stock price if revenue
       and profitability expectations for the combined company are not met;

     - the potential loss of key Schein employees critical to the ongoing
       success of the Schein products and to the successful integration of both
       companies' product lines;

     - the general difficulties of integrating the products, marketing, research
       and development, and manufacturing of the two companies;

     - the possibility of cultural conflicts;

     - the risk that the combined company might not achieve the expected
       operating synergies;

     - the adverse effects of one-time charges expected to be incurred in
       connection with the costs of the merger and the subsequent integration of
       the companies, including write-offs for in-process research and
       development expenses;

     - the potential adverse effects on the combined company's results of
       operations of amortizing the goodwill and other intangible assets that
       would be recorded in connection with the merger;

     - the risk that other benefits sought to be achieved by the merger would
       not be obtained; and

     - the other risks described above under "Risk Factors."

     The Watson board of directors concluded that these negative factors are
outweighed by the potential benefits of the merger. While this list of the
negative factors and potential benefits of the merger is not exhaustive, it
represents the material factors that the Watson board of directors considered.

     In reaching its decision to approve the merger, the Watson board of
directors did not assign any relative or specific weights to the factors
considered, and individual directors may have given different weights to
different factors. Watson's board of directors based its position and
recommendation upon the information as a whole presented to it.

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<PAGE>   45

SCHEIN'S REASONS FOR THE MERGER

     The Schein board of directors believes that, despite Schein's success to
date, increasing competition and industry consolidation would make it
increasingly important for Schein to grow and gain critical mass in order to
compete with larger companies with substantially greater resources and broader,
product offerings. Schein' management has considered a number of alternatives
for enhancing its competitive position, including by growing through the
acquisition of smaller companies that could extend Schein's product offering and
enhance the distribution of Schein's products and services, or merging with a
larger company. In the pharmaceutical industry environment referred to above,
the Schein board of directors identified several potential benefits for the
Schein stockholders, employees and customers that it believes would result from
the merger. These potential benefits include:

     - the ability of the combined company to increase the breadth of products
       offered;

     - the ability of the two companies to combine their technological resources
       to develop new products and bring them to market faster; and

     - the availability of greater resources for product marketing and
       distribution.

     The Schein board of directors has determined that the merger is in the best
interests of Schein and its stockholders. In reaching its determination, the
Schein board of directors considered a number of factors, including the factors
discussed above and listed below. The Schein board of directors' conclusions
with respect to each of these factors supported its determination that the
merger was fair to, and in the best interests of, Schein and its stockholders:

     - The possible alternatives to the tender offer and the merger, including
       continuing to operate Schein as an independent entity and the risks
       associated therewith.

     - The fact that Schein had undergone a lengthy process of soliciting
       potential acquisition proposals.

     - The financial and other terms and conditions of the merger agreement,
       including the fact that the merger agreement provides for a prompt cash
       tender offer for all shares of Schein common stock to be followed by the
       merger for the merger consideration per share of Schein common stock,
       thereby enabling all of Schein's stockholders, at the earliest possible
       time, to obtain the benefits of the transaction in exchange for their
       shares of Schein common stock, and permitting stockholders to determine
       whether to tender their shares of Schein common stock for cash in the
       tender offer or to exchange their shares of Schein common stock for the
       merger consideration in the merger.

     - The historical market price of, and recent trading activity in, the
       shares of Schein common stock, and particularly the fact that the $19.50
       per share of Schein common stock cash price received by Schein's
       stockholders in the tender offer and the $23.00 per share of Schein
       common stock in Watson common stock (subject to adjustment) to be
       received by Schein's stockholders in the merger represent premiums of
       approximately 13.9% and 34.3%, respectively, to the closing price of
       $17.125 per share of Schein common stock on the New York Stock Exchange
       on May 23, 2000, the last trading day prior to the Schein board of
       directors' approval of the merger, the tender offer and the merger
       agreement, and premiums of approximately 79.3% and 116.1%, respectively,
       to the closing price of $10.875 per share of Schein common stock on the
       New York Stock Exchange on January 24, 2000, the last trading day prior
       to Schein's public announcement that it had retained CIBC World Markets
       and Evercore to assist Schein in exploring strategic alternatives.

     - The opinion to the Schein board of directors of CIBC World Markets as to
       the fairness, from a financial point of view and as of the date of the
       opinion, of the consideration to be received in the tender offer and the
       merger, taken together, by the holders of Schein common stock, other than
       Watson, the stockholders of Schein who executed stockholder agreements
       concurrent with the merger agreement and each of their affiliates, as to
       which CIBC World Markets expressed no opinion.

                                       39
<PAGE>   46

     - The fact that holders of approximately 24,500,000, or 74%, of the then
       outstanding shares of Schein common stock indicated their preference for
       a cash transaction and their disfavor of a merger transaction providing
       solely for a share for share exchange, based on market considerations and
       the additional risk to which such stockholders would be subjected as a
       result of the longer period required to effect a sale on those terms.

     The Schein board of directors also considered a number of potentially
negative factors in its deliberations concerning the merger. The negative
factors considered by the Schein board of directors included:

     - the risk that, because the exchange ratio will not be adjusted for
       changes in the market price of either Watson common stock (outside a
       specified range) or Schein common stock, the per share value of the
       consideration to be received by Schein stockholders might be less than
       $23.00 per share of Schein common stock due to fluctuations in the market
       value of Watson common stock;

     - the risk that the merger might not be completed in a timely manner or at
       all;

     - the negative impact of any customer or supplier confusion after
       announcement of the proposed merger;

     - the challenges relating to the integration of the two companies;

     - the loss of control over the future operations of Schein following the
       merger;

     - the possibility of management and employee disruption associated with the
       potential merger and integrating the operations of the companies, and the
       risk that, despite the efforts of the combined company, key management,
       marketing, technical and administrative personnel of Schein might not
       continue with the combined company;

     - certain terms of the merger agreement that prohibit Schein and its
       representatives from soliciting third party bids and from accepting,
       approving or recommending unsolicited third party bids except in very
       limited circumstances, which terms would reduce the likelihood that a
       third party would make a bid for Schein;

     - the risks relating to Watson's business and how they would affect the
       operations of the combined company; and

     - the other risks described above under "Risk Factors."

     Schein's board of directors believed that these risks were outweighed by
the potential benefits of the merger.

     The foregoing discussion of information and factors considered by the
Schein board of directors is not intended to be exhaustive but is believed to
include all material factors considered by the Schein board of directors. In
view of the wide variety of factors considered by the Schein board of directors,
the Schein board of directors did not find it practicable to quantify or
otherwise assign relative weight to the specific factors considered. In
addition, the Schein board did not reach any specific conclusion on each factor
considered, or any aspect of any particular factor, but conducted an overall
analysis of these factors. However, after taking into account all of the factors
set forth above, the Schein board of directors unanimously approved the merger
agreement, the tender offer, the merger and the other transactions contemplated
by the merger agreement, determined that the terms of the tender offer and the
merger were fair to, and in the best interests of, Schein's stockholders and
recommend that Schein's stockholders accept the tender offer and tender their
shares pursuant to the tender offer and/or vote to adopt the merger agreement.

OPINION OF SCHEIN'S FINANCIAL ADVISOR

     Schein engaged CIBC World Markets to act as its financial advisor in
connection with the tender offer and the merger. In connection with this
engagement, Schein requested that CIBC World Markets

                                       40
<PAGE>   47

evaluate the fairness, from a financial point of view, to the holders of Schein
common stock, other than Watson, the stockholders of Schein who executed
stockholder agreements concurrent with the merger and each of their affiliates,
of the consideration to be received in the tender offer and the merger, taken
together. On May 23, 2000, at a meeting of the Schein board of directors held to
evaluate the tender offer and the merger, CIBC World Markets rendered an oral
opinion, which opinion was confirmed by delivery of a written opinion dated May
24, 2000, the date of the merger agreement, to the effect that, as of the date
of the opinion and based on and subject to the matters described in the opinion,
the consideration to be received in the tender offer and the merger, taken
together, was fair, from a financial point of view, to the holders of Schein
common stock, other than Watson, the stockholders of Schein who executed
stockholder agreements concurrent with the merger and each of their affiliates.

     The full text of CIBC World Markets' written opinion dated May 24, 2000,
which describes the assumptions made, matters considered and limitations on the
review undertaken, is attached to the back of this proxy statement/prospectus as
Annex B. CIBC WORLD MARKETS' OPINION IS ADDRESSED TO THE SCHEIN BOARD OF
DIRECTORS AND RELATES ONLY TO THE FAIRNESS OF THE CONSIDERATION FROM A FINANCIAL
POINT OF VIEW TO THE HOLDERS OF SCHEIN COMMON STOCK, OTHER THAN WATSON, THE
STOCKHOLDERS OF SCHEIN WHO EXECUTED STOCKHOLDER AGREEMENTS CONCURRENT WITH THE
MERGER AND EACH OF THEIR AFFILIATES. THE OPINION DOES NOT ADDRESS ANY OTHER
ASPECT OF THE TENDER OFFER, THE MERGER OR ANY RELATED TRANSACTION AND DOES NOT
CONSTITUTE A RECOMMENDATION TO ANY STOCKHOLDER AS TO ANY MATTER RELATING TO THE
TENDER OFFER OR THE MERGER. THE SUMMARY OF CIBC WORLD MARKETS' OPINION DESCRIBED
BELOW IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF ITS OPINION.
HOLDERS OF SCHEIN COMMON STOCK ARE URGED TO READ THE OPINION CAREFULLY IN ITS
ENTIRETY.

     In arriving at its opinion, CIBC World Markets:

     - reviewed the merger agreement and related documents;

     - reviewed audited financial statements of Schein for the fiscal years
       ended December 27, 1997, December 26, 1998 and December 25, 1999 and
       audited financial statements of Watson for the fiscal years ended
       December 31, 1997, December 31, 1998 and December 31, 1999;

     - reviewed unaudited financial statements of Schein for the quarterly
       period ended March 25, 2000 and unaudited financial statements of Watson
       for the quarterly period ended March 31, 2000;

     - reviewed financial projections of Schein prepared by Schein's management
       and research analysts' publicly available financial projections relating
       to Watson;

     - reviewed historical market prices and trading volumes for Schein common
       stock and Watson common stock;

     - held discussions with Schein's and Watson's senior management with
       respect to Schein's and Watson's businesses, capital requirements and
       prospects for future growth;

     - reviewed and analyzed publicly available financial data for companies
       that CIBC World Markets deemed comparable to Schein and Watson;

     - reviewed and analyzed publicly available information for transactions
       that CIBC World Markets deemed comparable to the tender offer and the
       merger;

     - performed discounted cash flow analyses of Schein and Watson using
       assumptions of future performance provided to or discussed with CIBC
       World Markets by Schein's and Watson's management;

     - reviewed public information concerning Schein and Watson;

     - at Schein's request, approached and held discussions with third parties
       to solicit indications of interest in the possible acquisition of Schein;
       and

     - performed other analyses and reviewed other information as CIBC World
       Markets deemed appropriate.
                                       41
<PAGE>   48

     In rendering its opinion, CIBC World Markets relied on and assumed, without
independent verification or investigation, the accuracy and completeness of all
of the financial and other information that Schein, Watson and each of their
employees, representatives and affiliates provided to CIBC World Markets. With
respect to forecasts of Schein's future financial condition and operating
results provided to CIBC World Markets, CIBC World Markets assumed, at the
direction of Schein's management, without independent verification or
investigation, that the forecasts were reasonably prepared on bases reflecting
the best available information, estimates and judgments of Schein's management.
Watson did not provide CIBC World Markets with internal forecasts, but CIBC
World Markets reviewed and discussed with Watson's management publicly available
forecasts relating to Watson, and assumed, with Schein's consent, that the
forecasts represented reasonable estimates and judgments as to Watson's future
financial condition and operating results.

     CIBC World Markets did not make or obtain any independent evaluations or
appraisals of the assets or liabilities, contingent or otherwise, of Schein,
Watson or affiliated entities. CIBC World Markets expressed no opinion as to
Schein's or Watson's underlying valuation, future performance or long-term
viability, or the price at which Watson common stock would trade upon or after
announcement or consummation of the tender offer and the merger. CIBC World
Markets' opinion was necessarily based on the information available to CIBC
World Markets and general economic, financial and stock market conditions and
circumstances as they existed and could be evaluated by CIBC World Markets as of
the date of its opinion. Although subsequent developments may affect its
opinion, CIBC World Markets does not have any obligation to update, revise or
reaffirm its opinion. Schein imposed no other instructions or limitations on
CIBC World Markets with respect to the investigations made or the procedures
followed by it in rendering its opinion.

     This summary is not a complete description of CIBC World Markets' opinion
to the Schein board of directors or the financial analyses performed and factors
considered by CIBC World Markets in connection with its opinion. The preparation
of a fairness opinion is a complex analytical process involving various
determinations as to the most appropriate and relevant methods of financial
analysis and the application of those methods to the particular circumstances
and, therefore, a fairness opinion is not readily susceptible to summary
description. CIBC World Markets believes that its analyses and this summary must
be considered as a whole and that selecting portions of its analyses and factors
or focusing on information presented in tabular format, without considering all
analyses and factors or the narrative description of the analyses, could create
a misleading or incomplete view of the processes underlying CIBC World Markets'
analyses and opinion.

     In performing its analyses, CIBC World Markets considered industry
performance, general business, economic, market and financial conditions and
other matters existing as of the date of its opinion, many of which are beyond
Schein's and Watson's control. No company, transaction or business used in the
analyses as a comparison is identical to Schein, Watson or the tender offer and
the merger, and an evaluation of the results of those analyses is not entirely
mathematical. Rather, the analyses involve complex considerations and judgments
concerning financial and operating characteristics and other factors that could
affect the acquisition, public trading or other values of the companies,
business segments or transactions analyzed.

     The estimates contained in CIBC World Markets' analyses and the ranges of
valuations resulting from any particular analysis are not necessarily indicative
of actual values or future results, which may be significantly more or less
favorable than those suggested by its analyses. In addition, analyses relating
to the value of businesses or securities do not purport to be appraisals or to
reflect the prices at which businesses or securities actually may be sold.
Accordingly, CIBC World Markets' analyses and estimates are inherently subject
to substantial uncertainty.

     The type and amount of consideration payable in the tender offer and the
merger was determined through negotiation between Schein and Watson and the
decision to enter into the tender offer and the merger was solely that of the
Schein board of directors. CIBC World Markets' opinion and financial analyses
were only one of many factors considered by the Schein board of directors in its
evaluation of the

                                       42
<PAGE>   49

tender offer and the merger and should not be viewed as determinative of the
views of the Schein board of directors or management with respect to the tender
offer or merger or the consideration payable in the tender offer and the merger.

     The following is a summary of the material financial analyses underlying
CIBC World Markets' opinion to the Schein board of directors in connection with
the tender offer and the merger. THE FINANCIAL ANALYSES SUMMARIZED BELOW INCLUDE
INFORMATION PRESENTED IN TABULAR FORMAT. IN ORDER TO FULLY UNDERSTAND CIBC WORLD
MARKETS' FINANCIAL ANALYSES, THE TABLES MUST BE READ TOGETHER WITH THE TEXT OF
EACH SUMMARY. THE TABLES ALONE DO NOT CONSTITUTE A COMPLETE DESCRIPTION OF THE
FINANCIAL ANALYSES. CONSIDERING THE DATA IN THE TABLES BELOW WITHOUT CONSIDERING
THE FULL NARRATIVE DESCRIPTION OF THE FINANCIAL ANALYSES, INCLUDING THE
METHODOLOGIES AND ASSUMPTIONS UNDERLYING THE ANALYSES, COULD CREATE A MISLEADING
OR INCOMPLETE VIEW OF CIBC WORLD MARKETS' FINANCIAL ANALYSES.

Selected Companies Analyses

     Schein. CIBC World Markets compared financial and stock market information
for Schein and the following eight selected publicly held companies in the
generic pharmaceuticals industry:

     - Biovail Corporation

     - Alpharma Inc.

     - Barr Laboratories, Inc.

     - IVAX Corporation

     - Mylan Laboratories Inc.

     - Taro Pharmaceutical Industries Ltd.

     - Teva Pharmaceutical Industries Limited

     - Watson

     CIBC World Markets reviewed enterprise values, calculated as equity market
value, plus straight debt, minority interest, straight preferred stock and
convertible securities, less investments in unconsolidated affiliates and cash,
as multiples of estimated calendar years 2000 and 2001 revenues, earnings before
interest and taxes, commonly referred to as EBIT, and earnings before interest,
taxes, depreciation and amortization, commonly referred to as EBITDA. CIBC World
Markets also reviewed equity market values as multiples of estimated calendar
years 2000 and 2001 earnings per share, commonly referred to as EPS. All
multiples were based on closing stock prices on May 22, 2000. Estimated
financial data for the selected companies were based on publicly available
research analysts' estimates and estimated financial data for Schein were based
on internal estimates of Schein's management.

     CIBC World Markets then applied a range of selected multiples of estimated
calendar years 2000 and 2001 revenues, EBIT, EBITDA and EPS derived from the
selected companies to corresponding financial data of Schein in order to derive
an implied equity reference range for Schein. This analysis indicated the
following implied per share equity reference range for Schein, as compared to
the consideration in the tender offer and, based on the midpoint of the collar,
the merger consideration:

<TABLE>
<CAPTION>
           IMPLIED EQUITY             CASH CONSIDERATION       MERGER CONSIDERATION
     REFERENCE RANGE FOR SCHEIN        IN TENDER OFFER      BASED ON MIDPOINT OF COLLAR
     --------------------------       ------------------    ---------------------------
<S>                                   <C>                   <C>
$13.88 - $20.63 per share...........   $19.50 per share          $23.00 per share
</TABLE>

     Watson. CIBC World Markets also compared financial and stock market
information for Watson and the same selected publicly held companies in the
generic pharmaceuticals industry reviewed for Schein

                                       43
<PAGE>   50

described above, excluding Watson. CIBC World Markets reviewed enterprise values
as multiples of estimated calendar years 2000 and 2001 revenues, EBIT and
EBITDA. CIBC World Markets also reviewed equity market values as multiples of
estimated calendar years 2000 and 2001 EPS. All multiples were based on closing
stock prices on May 22, 2000. Estimated financial data for Watson and the
selected companies were based on publicly available research analysts'
estimates.

     CIBC World Markets then applied a range of selected multiples of estimated
calendar years 2000 and 2001 revenues, EBIT, EBITDA and EPS derived from the
selected companies to corresponding financial data of Watson in order to derive
an implied equity reference range for Watson. This analysis indicated the
following implied per share equity reference range for Watson, as compared to
the closing price of Watson common stock on May 22, 2000:

<TABLE>
<CAPTION>
                  IMPLIED EQUITY                       CLOSING PRICE OF WATSON
            REFERENCE RANGE FOR WATSON               COMMON STOCK ON MAY 22, 2000
            --------------------------               ----------------------------
<S>                                                  <C>
$43.22 - $58.24 per share..........................        $50.06 per share
</TABLE>

Precedent Transactions Analysis

     CIBC World Markets reviewed the purchase prices and implied transaction
multiples in the following seven selected transactions in the generic
pharmaceuticals industry:

<TABLE>
<CAPTION>
                        ACQUIROR                                     TARGET
                        --------                                     ------
<S>                                                       <C>
- Teva Pharmaceutical USA, Inc.                           Copley Pharmaceutical, Inc.
- Shire Pharmaceuticals Group plc                         Roberts Pharmaceutical Corp.
- Alpharma Inc.                                           ISIS Pharma GmbH
- Alpharma Inc.                                           Arthur H. Cox & Co.
- Watson                                                  Royce Laboratories, Inc.
- Teva Pharmaceuticals Industries Limited                 Biocraft Laboratories, Inc.
- Schein                                                  Marsam Pharmaceuticals Inc.
</TABLE>

CIBC World Markets reviewed enterprise values in the selected transactions as
multiples of latest 12 months revenues, EBIT and EBITDA. CIBC World Markets also
reviewed the premiums paid in the selected transactions. All multiples and
premiums were based on publicly available information at the time of
announcement of the relevant transaction. In order to derive an implied equity
reference range for Schein, CIBC World Markets then applied a range of selected
multiples of latest 12 months revenues, EBIT and EBITDA derived from the
selected transactions to corresponding financial data of Schein and a range of
selected premiums derived from the selected transactions to the closing price of
Schein common stock on January 24, 2000, which is the date one day prior to
Schein's public announcement of its engagement of CIBC World Markets to assist
Schein in exploring strategic alternatives. This analysis indicated the
following implied per share equity reference range for Schein, as compared to
the consideration in the tender offer and, based on the midpoint of the collar,
the merger consideration:

<TABLE>
<CAPTION>
           IMPLIED EQUITY             CASH CONSIDERATION       MERGER CONSIDERATION
     REFERENCE RANGE FOR SCHEIN        IN TENDER OFFER      BASED ON MIDPOINT OF COLLAR
     --------------------------       ------------------    ---------------------------
<S>                                   <C>                   <C>
$14.05 - $20.35 per share...........   $19.50 per share          $23.00 per share
</TABLE>

Discounted Cash Flow Analyses

     Schein.  CIBC World Markets performed a discounted cash flow analysis of
Schein to estimate the present value of the unlevered, after-tax free cash flows
that Schein could generate for fiscal years 2001 through 2003, based on internal
estimates of Schein's management. CIBC World Markets calculated a range of
estimated terminal values by applying multiples ranging from 6.0x to 7.0x to
Schein's projected fiscal year 2003 EBITDA. The present value of the cash flows
and terminal values were calculated using discount rates ranging from 14.0% to
18.0%. This analysis indicated the following implied per share equity

                                       44
<PAGE>   51

reference range for Schein, as compared to the consideration in the tender offer
and, based on the midpoint of the collar, the merger consideration:

<TABLE>
<CAPTION>
           IMPLIED EQUITY             CASH CONSIDERATION       MERGER CONSIDERATION
     REFERENCE RANGE FOR SCHEIN        IN TENDER OFFER      BASED ON MIDPOINT OF COLLAR
     --------------------------       ------------------    ---------------------------
<S>                                   <C>                   <C>
$20.90 - $28.75 per share...........   $19.50 per share          $23.00 per share
</TABLE>

     Watson. CIBC World Markets also performed a discounted cash flow analysis
of Watson to estimate the present value of the unlevered, after-tax free cash
flows that Watson could generate for fiscal years 2000 through 2005, based on
publicly available research analysts' estimates. CIBC World Markets calculated a
range of estimated terminal values by applying multiples ranging from 8.0x to
12.0x to Watson's projected fiscal year 2005 EBITDA. The present value of the
cash flows and terminal values were calculated using discount rates ranging from
12.0% to 14.0%. This analysis indicated the following implied per share equity
reference range for Watson, as compared to the closing price of Watson common
stock on May 22, 2000:

<TABLE>
<CAPTION>
                  IMPLIED EQUITY                       CLOSING PRICE OF WATSON
            REFERENCE RANGE FOR WATSON               COMMON STOCK ON MAY 22, 2000
            --------------------------               ----------------------------
<S>                                                  <C>
$44.91 - $65.97 per share..........................        $50.06 per share
</TABLE>

Exchange Ratio Analyses

     Implied Exchange Ratio Analysis. CIBC World Markets calculated implied
exchange ratio reference ranges for Schein common stock and Watson common stock
by dividing the results derived for Schein from the "Precedent Transaction
Analysis" described above by the results derived for Watson from the "Selected
Companies Analyses" and "Discounted Cash Flow Analyses" described above. CIBC
World Markets then compared these implied ranges to the exchange ratio implied
in the merger. This analysis indicated the following approximate implied
exchange ratio reference ranges, as compared to the exchange ratio implied in
the merger of 0.4594x, calculated by dividing the midpoint of the collar of the
merger consideration of $23.00 by the closing price of Watson common stock on
May 22, 2000:

<TABLE>
<CAPTION>
                                                             IMPLIED EXCHANGE
                                                                RATIO RANGE
                                                             -----------------
<S>                                                          <C>
Schein Precedent Transactions Analysis/Watson Selected
  Companies Analysis.......................................  0.2413x - 0.4708x
Schein Precedent Transaction Analysis/Watson Discounted
  Cash Flow Analysis.......................................  0.2130x - 0.4531x
Average....................................................  0.2271x - 0.4619x
</TABLE>

     Historical Exchange Ratio Analysis. CIBC World Markets performed an
historical exchange ratio analysis comparing the average daily closing prices of
Schein common stock and Watson common stock for the one month, two months, three
months and six months preceding May 22, 2000. This analysis yielded an implied
exchange ratio range of 0.3152x to 0.3699x, as compared to the exchange ratio
implied in the merger of 0.4594x, calculated by dividing the midpoint of the
collar of the merger consideration of $23.00 by the closing price of Watson
common stock on May 22, 2000:

<TABLE>
<CAPTION>
                                                            IMPLIED
                        PERIOD                           EXCHANGE RATIO
                        ------                           --------------
<S>                                                      <C>
One month..............................................     0.3530x
Two months.............................................     0.3699x
Three months...........................................     0.3682x
Six months.............................................     0.3152x
</TABLE>

                                       45
<PAGE>   52

Pro Forma Merger Analysis

     CIBC World Markets analyzed the potential pro forma effect of the merger on
Watson's cash EPS for estimated calendar years 2001, 2002 and 2003, based, in
the case of Schein, on internal estimates of Schein's management and, in the
case of Watson, on publicly available research analysts' estimates. This
analysis indicated that the merger could be accretive to, or result in an
increase in, Watson's cash EPS in each of the years examined. The actual results
achieved by the combined company may vary from projected results and the
variations may be material.

Other Factors

     In rendering its opinion, CIBC World Markets also reviewed and considered
other factors, including:

     - selected research analysts' reports for Watson, including stock price
       estimates of those analysts;

     - the 52-week historical trading ranges for Schein common stock and Watson
       common stock; and

     - the relationship between movements in Schein common stock, movements in
       the common stock of selected generic pharmaceutical companies, movements
       in the S&P Big Pharma Index and movements in the S&P 500 Index.

Miscellaneous

     Schein also engaged Evercore Healthcare Capital, LLC to act as a financial
advisor with CIBC World Markets, but did not engage it to render an opinion, in
connection with the tender offer and the merger. Schein has agreed to pay CIBC
World Markets and Evercore for their financial advisory services in connection
with the tender offer and the merger an aggregate fee equal to a percentage of
the total consideration, including liabilities assumed, payable in the tender
offer and the merger. It is currently estimated that the aggregate fee payable
to CIBC World Markets and Evercore will be approximately $8.4 million. In
addition, Schein has agreed to reimburse CIBC World Markets and Evercore for
their out-of-pocket expenses, including the fees and expenses of their legal
counsel, and to indemnify CIBC World Markets, Evercore and related parties
against liabilities, including liabilities under the federal securities laws,
relating to, or arising out of, their engagement.

     Schein selected CIBC World Markets and Evercore as its financial advisors
based on their reputation and expertise. CIBC World Markets and Evercore are
internationally recognized investment banking firms and, as a customary part of
their investment banking business, are regularly engaged in valuations of
businesses and securities in connection with acquisitions and mergers,
underwritings, secondary distributions of securities, private placements and
valuations for other purposes. In the ordinary course of business, CIBC World
Markets and its affiliates and Evercore and its affiliates may actively trade
securities of Schein and Watson for their own accounts and for the accounts of
customers and, accordingly, may at any time hold a long or short position in
those securities.

INTERESTS OF SCHEIN'S OFFICERS AND DIRECTORS IN THE MERGER

     In considering the recommendation of the Schein board of directors with
respect to adopting the merger agreement, Schein stockholders should be aware
that certain persons who were members of the board of directors and management
of Schein at the time of approval and signing of the merger agreement have
interests in the merger that are in addition to the interests of stockholders of
Schein generally. The Schein board of directors was aware of these interests and
considered them, among other matters, in approving and adopting the merger and
the merger agreement.


     Indemnification and Insurance. In accordance with the terms of the merger
agreement, Watson has agreed to indemnify each present and former director and
officer of Schein. In addition, Watson has agreed to maintain a directors' and
officers' liability insurance policy for Schein's directors and officers. See
"Indemnification and Insurance" on page 56.


                                       46
<PAGE>   53


     Employment Agreements. Schein has entered into employment agreements with
each of Martin Sperber, Schein's then Chairman of the Board and Chief Executive
Officer, Dariush Ashrafi, Schein's then President and Chief Operating Officer,
Paul Feuerman, Schein's then Executive Vice President, Corporate Affairs and
General Counsel, Paul Kleutghen, Schein's then Senior Vice President, Strategic
Development, and Whitney K. Stearns, Jr., Schein's Senior Vice President and
Chief Financial Officer. In addition, Schein has provided Don A. Britt, Sr.,
Schein's Senior Vice President, Quality, with a binding offer of employment
letter. These agreements provide for benefits upon certain terminations of
employment if there is a change in control of Schein which are in addition to
the full acceleration of the vesting of their stock options that occurs under
the terms of Schein's stock option plans. A change of control occurred upon the
closing of the tender offer and purchase by WS Acquisition Corp. of 26,068,469
shares of Schein common stock.


     Mr. Sperber's change in control benefits state that, upon a change in
control, if Mr. Sperber's employment is terminated for any reason other than his
death or disability or for cause or by Mr. Sperber pursuant to the terms of his
employment agreement, in each case within two years following a change in
control, Mr. Sperber shall be entitled to receive a cash lump sum payment in an
amount equal to twice the sum of his base salary on the termination date plus
$375,000, reduced by any amounts paid or payable to Mr. Sperber pursuant to the
terms of his employment agreement. Mr. Sperber also is entitled to receive a
gross-up payment on any payments made to him that are subject to the excise tax
imposed by Section 4999 of the Internal Revenue Code. If Mr. Sperber's
employment is terminated pursuant to certain terms of his employment agreement
upon his death, disability, retirement at or after age 65, or by the Company
other than for cause, all unvested stock options held by Mr. Sperber on the date
of such termination or retirement shall vest immediately and be fully
exercisable and all stock options held by Mr. Sperber (including those vesting
by reason of the preceding provision), shall remain exercisable (to the extent
not exercised or terminated pursuant to their terms) for three years from the
date of such termination or retirement. Furthermore, if Mr. Sperber's employment
is terminated other than for cause, Mr. Sperber will received a supplemental
retirement payment equal to 45% of his average monthly compensation less amounts
payable to him under Schein's tax-qualified retirement plan and social security.
Such supplemental retirement payment shall be made for the longer of Mr.
Sperber's life or the life of his spouse. Finally, Mr. Sperber and his spouse
shall continue to participate in the health, medical and dental benefits of
Schein for the rest of their lives.

     Mr. Ashrafi's change in control benefits state that, upon a change in
control, if Mr. Ashrafi's employment is terminated without cause or by Mr.
Ashrafi for good reason, Mr. Ashrafi is entitled to receive (A) a severance
payment equal to two times the sum of his salary and bonus but not less than
$1.5 million; (B) continued participation in all welfare plans for the period of
severance payments (without regard to any acceleration of such payments or two
years if a lump sum payment); (C) immediate full vesting of any outstanding
stock options; and (D) payment for up to one year of executive outplacement
services. Mr. Ashrafi also is entitled to receive a gross-up payment on any
payments made to him that are subject to the excise tax imposed by Section 4999
of the Internal Revenue Code.

     Mr. Feuerman's change of control benefits state that, upon a change in
control, if Mr. Feuerman's employment is terminated for any reason other than
for cause, disability or death, or by Mr. Feuerman for good reason, he is
entitled to receive (a) a lump sum payment equal to three times the sum of (i)
his then current base salary, (ii) his target bonus, and (iii) any additional
compensation with respect to the year of termination; (b) any unpaid additional
compensation; and (c) continued participation in all welfare plans for three
years following termination or until his earlier commencement of other full-time
employment providing comparable welfare benefits. Mr. Feuerman also is entitled
to receive a gross-up payment on any payments made to him that are subject to
the excise tax imposed by Section 4999 of the Internal Revenue Code.

     Mr. Kleutghen's change of control benefits state that, upon a change in
control, if Mr. Kleutghen's employment is terminated for any reason other than
for cause, disability or death, or by Mr. Kleutghen for good reason, he is
entitled to receive (a) a lump sum payment equal to two times the sum of (i) his
then
                                       47
<PAGE>   54

current base salary, (ii) his target bonus, and (iii) any additional
compensation with respect to the year of termination; (b) any unpaid additional
compensation; and (c) continued participation in all welfare plans for two years
following termination or until the earlier commencement of other full-time
employment providing comparable welfare benefits. Mr. Kleutghen also is entitled
to receive a gross-up payment on any payments made to him that are subject to
the excise tax imposed by Section 4999 of the Internal Revenue Code.

     Mr. Stearns' change of control benefits state that, upon a change in
control, if Mr. Stearns' employment is terminated for any reason other than for
cause, disability or death, or by Mr. Stearns for good reason, he is entitled to
receive (a) a lump sum payment equal to two times the sum of (i) his then
current base salary, (ii) his target bonus, and (iii) any additional
compensation with respect to the year of termination; (b) any unpaid additional
compensation; and (c) continued participation in all welfare plans for two years
following termination or until the earlier commencement of other full-time
employment providing comparable welfare benefits. Mr. Stearns also is entitled
to receive a gross-up payment on any payments made to him that are subject to
the excise tax imposed by Section 4999 of the Internal Revenue Code.

     Mr. Britt's change of control benefits state that, following a change in
control, if Mr. Britt is terminated or chooses not to remain with the Company,
he would receive a payment equal to two years base salary and target bonus and
all options would vest immediately. In addition, upon a change in control Mr.
Britt will receive an additional payment of $196,000. Mr. Britt also is entitled
to receive a gross-up payment on any payments made to him that are subject to
the excise tax imposed by Section 4999 of the Internal Revenue Code.


     Stock Option Plans; Stock Purchase Plan. Pursuant to the terms of the
merger agreement, at the effective time of the merger, each Schein stock option
granted under Schein's stock option plans (other than options to purchase
approximately 1,000,000 shares of Schein common stock) and stock purchase plan
shall be either terminated or will be converted into a right to receive the
merger consideration. See "Schein Stock Options" on page 53 and "Stock Purchase
Plan" on page 53.


MATERIAL FEDERAL INCOME TAX CONSEQUENCES

     The following discussion summarizes the material federal income tax
consequences relevant to the conversion of shares of Schein common stock into
shares of Watson common stock and/or cash pursuant to the merger that are
generally applicable to holders of Schein common stock. This discussion is based
on currently existing provisions of the Internal Revenue Code of 1986, as
amended (the "Code"), existing and proposed Treasury Regulations thereunder and
current administrative rulings and court decisions, all of which are subject to
change. Any such change, which may or may not be retroactive, could alter the
tax consequences to Schein's stockholders as described herein.

     Schein stockholders should be aware that this discussion does not deal with
all federal income tax considerations that may be relevant to particular Schein
stockholders in light of their particular circumstances, such as stockholders
who are dealers in securities, who are subject to the alternative minimum tax
provisions of the Code, who are foreign persons, who do not hold their Schein
common stock as capital assets or who acquired their shares in connection with
stock option or stock purchase plans or in other compensatory transactions, or
who hold their shares as part of a hedging, straddle, conversion or other risk
reduction transaction. In addition, the following discussion does not address
the tax consequences of the merger under foreign, state or local tax laws or the
tax consequences of transactions effectuated prior or subsequent to, or
concurrently with, the merger (whether or not any such transactions are
undertaken in connection with the merger). ACCORDINGLY, SCHEIN STOCKHOLDERS ARE
URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES TO
THEM OF THE MERGER, INCLUDING THE APPLICABLE FEDERAL, STATE, LOCAL AND FOREIGN
TAX CONSEQUENCES.


     Because the merger was preceded by a tender offer pursuant to which WS
Acquisition Corp. purchased for cash 75.7% of the outstanding Schein common
stock as of the record date of the special meeting, the receipt of Watson common
stock and/or cash by Schein stockholders pursuant to the merger

                                       48
<PAGE>   55

will be taxable transactions for federal income tax purposes under the Code, and
may also be taxable transactions under applicable state, local, foreign and
other tax laws. For federal income tax purposes, a Schein stockholder will
generally recognize gain or loss equal to the difference between the fair market
value of the Watson common stock and/or the amount of cash received pursuant to
the merger and the aggregate tax basis in the Schein shares cancelled pursuant
to the merger. Gain or loss will be calculated separately for each block of
shares cancelled pursuant to the merger.

     If Schein shares are held as capital assets, gain or loss recognized by the
Schein stockholder in the merger will be capital gain or loss, which will be
long-term capital gain or loss if the stockholder's holding period for the
Schein shares exceeds one year. Long-term capital gains recognized by an
individual stockholder will generally be taxed at a maximum federal marginal tax
rate of 20%, and long-term capital gains recognized by a corporate stockholder
will be taxed at a maximum federal marginal tax rate of 35%.

     A Schein stockholder (other than certain exempt stockholders including,
among others, all corporations and certain foreign individuals) may be subject
to 31% backup withholding unless the stockholder provides its taxpayer
identification number ("TIN") and certifies that such number is correct or
properly certifies that it is awaiting a TIN and certifies as to no loss of
exemption from backup withholding and otherwise complies with the applicable
requirements of the backup withholding rules. A Schein stockholder that does not
furnish its correct TIN or that does not otherwise establish a basis for an
exemption from backup withholding may be subject to a penalty imposed by the
Internal Revenue Service. Each Schein stockholder should complete and sign the
Substitute Form W-9 to be included as part of the Letter of Transmittal to be
sent after the merger so as to provide the information and certification
necessary to avoid backup withholding.

     If backup withholding applies to a stockholder, the Exchange Agent is
required to withhold 31% from payments to such stockholder. Backup withholding
is not an additional tax. Rather, the amount of the backup withholding can be
credited against the federal income tax liability of the person subject to the
backup withholding, provided that the required information is given to the
Internal Revenue Service. If backup withholding results in an overpayment of
tax, the stockholder upon filing an income tax return can obtain a refund.

     None of Watson, WS Acquisition Corp. or Schein will recognize any gain
solely as a result of the merger.

ANTICIPATED ACCOUNTING TREATMENT

     The acquisition will be accounted for by the purchase method of accounting
under generally accepted accounting principles. Accordingly, Watson's total cost
to acquire all of the outstanding shares of Schein common stock (the "purchase
consideration"), estimated to be approximately $800 million assuming a Watson
average stock price of $45.40 and including estimated direct transaction costs
of $20 million, will be allocated to the assets acquired and liabilities assumed
according to their respective fair values, with the excess purchase
consideration being allocated to goodwill. The total cost to acquire Schein is
subject to change, to the extent that fluctuations in the market value of Watson
common stock cause the Watson average stock price to change. A change in the
Watson average stock price may result in a change in goodwill and related
amortization expense. The final allocation of the purchase consideration is
dependent upon certain valuations and other studies that have not progressed to
a stage where there is sufficient information to make such an allocation in the
accompanying unaudited pro forma condensed combined financial statements.

RESTRICTIONS ON RESALES BY AFFILIATES

     The shares of Watson common stock to be received by Schein stockholders in
the merger have been registered under the Securities Act and, except as
described in this paragraph, may be freely traded without restriction. The
shares of Watson common stock to be issued in the merger and received by persons
who may be considered to be "affiliates" (as that term is defined in Rule 144
under the Securities Act) of Schein before the merger may be resold by them only
in transactions permitted by the resale
                                       49
<PAGE>   56

provisions of Rule 145 under the Securities Act or as otherwise permitted under
the Securities Act. Accordingly, the merger agreement provides that Schein will
use its reasonable efforts to cause all persons who may be considered to be
their affiliates to execute and deliver to Watson an affiliate agreement. The
affiliate agreements provide that these persons will not sell, transfer or
otherwise dispose of any shares of Watson common stock except in compliance with
the Securities Act and the rules and regulations promulgated under the
Securities Act, including Rule 145.

                                       50
<PAGE>   57

                     CERTAIN TERMS OF THE MERGER AGREEMENT

     The following description of the merger agreement describes the material
terms of the merger agreement. The full text of the merger agreement is attached
as Annex A to this proxy statement/ prospectus and is incorporated herein by
reference. We encourage you to read the entire merger agreement.

THE TENDER OFFER


     Pursuant to the terms of the merger agreement, WS Acquisition Corp.
completed a tender offer for shares of Schein common stock in July 2000. In the
tender offer, WS Acquisition Corp. purchased 26,068,469 shares of Schein common
stock for $19.50 per share. The total number of shares of Schein common stock
acquired by WS Acquisition Corp. in the tender offer constitutes 75.7% of the
total outstanding shares of Schein as of the record date of the special meeting.


THE MERGER

     Upon the terms and subject to the conditions set forth in the merger
agreement, WS Acquisition Corp. will be merged into Schein, the separate
corporate existence of WS Acquisition Corp. will cease and Schein will continue
as the surviving corporation.

EFFECTIVE TIME OF THE MERGER

     The merger will become effective when a certificate of merger is duly filed
with the Secretary of State of the State of Delaware, or at such other time
specified in the certificate of merger as Watson and Schein shall agree.

CONVERSION OF SECURITIES

     The merger agreement provides that as of the effective time of the merger,
by virtue of the merger and without any action on the part of Watson, WS
Acquisition Corp., Schein or holders of any of the securities of Schein:

     - each share of Schein common stock that is held in the treasury of Schein
       and each share of Schein common stock that is owned by Watson or WS
       Acquisition Corp., or any direct or indirect wholly owned subsidiary of
       Schein or Watson, will automatically be canceled without consideration;
       and

     - each issued and outstanding share of Schein common stock, other than
       dissenting shares and shares referred to in the immediately preceding
       bullet point, will be converted into the right to receive the merger
       consideration.

     The merger consideration into which each issued and outstanding share of
Schein common stock, other than dissenting shares of Schein common stock and
other shares of Schein common stock referred to in the first bullet point of
this section, will be converted is based upon the Watson average stock price,
which is defined as the average of the closing price of a share of Watson common
stock on the New York Stock Exchange for the ten consecutive trading days ending
on the trading day two trading days prior to the date of the special meeting of
stockholders relating to the merger.

     If the Watson average stock price is equal to or greater than $37.82, the
merger consideration per share of Schein common stock will be that number of
shares of Watson common stock equal to the exchange ratio. The exchange ratio is
the quotient (rounded to the nearest hundred thousandth) obtained by dividing
$23.00 by the Watson average stock price. However:

     - if the Watson average stock price is greater than or equal to $37.82 but
       less than $44.61, the exchange ratio will be 0.51562;

     - if the Watson average stock price is greater than $54.52 but less than or
       equal to $62.82, the exchange ratio will be 0.42187; and

                                       51
<PAGE>   58

     - if the Watson average stock price is greater than $62.82, the exchange
       ratio will be the quotient (rounded to the nearest hundred thousandth)
       obtained by dividing $26.50 by the Watson average stock price.

     If the Watson average stock price is less than $37.82, the merger
consideration will be one of the following, as determined by Watson in its sole
discretion:

     - the number of shares of Watson common stock equal to the quotient
       (rounded to the nearest hundred thousandth) obtained by dividing $19.50
       by the Watson average stock price; or

     - $19.50 in cash; or

     - 0.51562 shares of Watson common stock and a dollar amount in cash equal
       to $19.50 minus the product of 0.51562 multiplied by the Watson average
       stock price.

     The following table shows the fraction of a share of Watson common stock
that stockholders of Schein would receive for each share of Schein common stock
they own based upon a range of values for the Watson average stock price. The
table also shows the implied value of that fraction of a share of Watson common
stock:

<TABLE>
<CAPTION>
                                                                 AND THE IMPLIED VALUE*
                                 THEN EACH SCHEIN SHARE       OF THE FRACTION OF A SHARE OF
                               WOULD BE CONVERTED INTO THE         WATSON COMMON STOCK
                                  FOLLOWING APPROXIMATE         THAT A SCHEIN STOCKHOLDER
        IF THE WATSON            FRACTION OF A SHARE OF          WOULD RECEIVE FOR EACH
   AVERAGE STOCK PRICE IS:        WATSON COMMON STOCK:           SCHEIN SHARE WOULD BE:
   -----------------------     ---------------------------    -----------------------------
<S>                            <C>                            <C>
$65.00.......................            0.40769                         $26.50
$64.00.......................            0.41406                         $26.50
$63.00.......................            0.42063                         $26.50
$62.82.......................            0.42187                         $26.50
$62.00.......................            0.42187                         $26.16
$61.00.......................            0.42187                         $25.73
$60.00.......................            0.42187                         $25.31
$59.00.......................            0.42187                         $24.89
$58.00.......................            0.42187                         $24.47
$57.00.......................            0.42187                         $24.05
$56.00.......................            0.42187                         $23.62
$55.00.......................            0.42187                         $23.20
$54.52.......................            0.42186                         $23.00
$54.00.......................            0.42593                         $23.00
$53.00.......................            0.43396                         $23.00
$52.00.......................            0.44231                         $23.00
$50.00.......................            0.46000                         $23.00
$49.00.......................            0.46939                         $23.00
$48.00.......................            0.47917                         $23.00
$47.00.......................            0.48936                         $23.00
$46.00.......................            0.50000                         $23.00
$45.00.......................            0.51111                         $23.00
$44.61.......................            0.51558                         $23.00
$44.00.......................            0.51562                         $22.69
$43.00.......................            0.51562                         $22.17
$42.00.......................            0.51562                         $21.66
$41.00.......................            0.51562                         $21.14
$40.00.......................            0.51562                         $20.62
$39.00.......................            0.51562                         $20.11
$38.00.......................            0.51562                         $19.59
</TABLE>

                                       52
<PAGE>   59

<TABLE>
<CAPTION>
                                                                 AND THE IMPLIED VALUE*
                                 THEN EACH SCHEIN SHARE       OF THE FRACTION OF A SHARE OF
                               WOULD BE CONVERTED INTO THE         WATSON COMMON STOCK
                                  FOLLOWING APPROXIMATE         THAT A SCHEIN STOCKHOLDER
        IF THE WATSON            FRACTION OF A SHARE OF          WOULD RECEIVE FOR EACH
   AVERAGE STOCK PRICE IS:        WATSON COMMON STOCK:           SCHEIN SHARE WOULD BE:
   -----------------------     ---------------------------    -----------------------------
<S>                            <C>                            <C>
$37.82.......................            0.51562                         $19.50
$37.00.......................                 **                         $19.50
$36.00.......................                 **                         $19.50
$35.00.......................                 **                         $19.50
</TABLE>

-------------------------
 * The implied value is based on the Watson average stock price. The actual
   value may be significantly greater than or less than the implied value, per
   the table above, determined by reference to the actual trading price of
   Watson common stock at the time of the special meeting of Schein stockholders
   to approve the merger, at the completion of the merger, at the date that
   stockholders of Schein receive shares of Watson common stock or at the date
   Schein stockholders sell Watson common stock.

** At a Watson average stock price of less than $37.82, the minimum value of the
   merger consideration is $19.50 per share of Schein common stock. Watson will
   have the option to pay such minimum merger consideration in cash, in stock or
   in a mix of cash and stock, as described above.

SCHEIN STOCK OPTIONS

     The merger agreement provides that, in accordance with the terms of the
Schein 1999 Stock Option Plan and the Schein 1995 Non-Employee Director Stock
Option Plan, respectively, at the effective time of the merger all rights to
acquire shares of Schein common stock under each option then outstanding under
the Schein 1999 Stock Option Plan and the Schein 1995 Non-Employee Director
Stock Option Plan shall be converted into and become rights to acquire the
merger consideration.

     The merger agreement also provides that all outstanding unexercised options
granted pursuant to the Schein 1993 Stock Option Plan and the Schein 1997 Stock
Option Plan shall be terminated effective as of the effective time of the merger
in accordance with the terms of each such plan, respectively, and Schein shall
deliver a notice of termination to each holder of such option at least 20 days
prior to the effective time of the merger. During the period from the date on
which such notice of termination is delivered to the effective time of the
merger, each holder of a terminating option shall have the right to exercise in
full all of his or her terminating options that are then outstanding (whether
vested or unvested and without regard to limitations on exercise otherwise
contained in the agreement evidencing the terminating option), but contingent on
occurrence of the merger, and provided that, if the merger does not take place
within 180 days after giving such notice for any reason whatsoever, the notice
and exercise shall be null and void.

STOCK PURCHASE PLAN

     Prior to the effective time of the merger, Schein shall take all actions as
are necessary to terminate Schein's stock purchase plan and to cause the
exercise date applicable to the then current offering period to be the last
trading day on which shares of Schein common stock are traded on the New York
Stock Exchange immediately prior to the effective time of the merger. Such
termination and change in the exercise date shall be conditioned upon the
consummation of the merger. On such exercise date, Schein shall apply the funds
credited as of such date under the stock purchase plan within each participant's
payroll withholdings account to the purchase of whole shares of Schein common
stock in accordance with the terms of the stock purchase plan.

                                       53
<PAGE>   60

REPRESENTATIONS AND WARRANTIES

     The merger agreement contains various customary representations and
warranties of the parties thereto, including representations by Schein relating
to:

     - organization, qualification and subsidiaries;

     - certificate of incorporation and bylaws;

     - capitalization;

     - authority relative to the merger agreement;

     - material contracts, no conflict, required filings and consents;

     - compliance, permits;

     - SEC filings, financial statements;

     - absence of certain changes or events;

     - absence of undisclosed liabilities;

     - absence of undisclosed litigation;

     - employee benefit plans, employment agreements;

     - labor matters;

     - restrictions on business activities;

     - title to property;

     - taxes;

     - environmental matters;

     - brokers;

     - intellectual property;

     - warranties;

     - products liability;

     - vote required;

     - takeover statutes; and

     - opinion of financial advisor.

     The merger agreement also contains representations and warranties by Watson
and WS Acquisition Corp., including those relating to:

     - organization and qualification;

     - capitalization;

     - authority relative to the merger agreement;

     - no conflict and required filings and consents;

     - SEC filings; financial statements;

     - absence of certain changes or events; and

     - absence of undisclosed liabilities.

                                       54
<PAGE>   61

STOCKHOLDERS MEETINGS; REGISTRATION STATEMENT

     The merger agreement provides that Schein will, as soon as practicable
following the acceptance for payment of, and payment for, shares of Schein
common stock by WS Acquisition Corp. in the tender offer duly call, give notice
of, convene and hold a special meeting of its stockholders for the purpose of
obtaining the approval and adoption of the merger agreement by Schein's
stockholders.

     The merger agreement provides that Schein and Watson shall prepare and
Watson shall file with SEC a registration statement on Form S-4 relating to the
issuance of Watson common stock in the merger and relating to the adoption of
the merger agreement by the stockholders of Schein, and shall use all reasonable
efforts to cause the registration statement to become effective as soon
thereafter as practicable. Watson shall vote, or cause to be voted, all of the
shares of Schein common stock then beneficially owned by it, WS Acquisition
Corp. or any of its other subsidiaries or affiliates in favor of the adoption of
the merger agreement.

NO SOLICITATION

     The merger agreement provides that:

     - Schein will not, and will not permit or cause any of its subsidiaries to,
       and shall direct its subsidiaries' employees, agents and representatives
       (including any investment banker, attorney or accountant retained by it
       or any of its subsidiaries) not to, directly or indirectly, initiate or
       solicit any inquiries or the making of any proposal or tender offer with
       respect to a merger, reorganization, share exchange, tender offer,
       consolidation or similar transaction involving, or any purchase of assets
       (other than inventory in the ordinary course of business) or outstanding
       shares of capital stock of, Schein or any of its subsidiaries (any such
       proposal or offer being referred to as an acquisition proposal), or
       engage in any negotiations concerning, or provide any confidential
       information or data to, or have any discussions with, any person relating
       to an acquisition proposal, whether made before or after the date of the
       merger agreement, or otherwise facilitate any effort or attempt to make
       or implement an acquisition proposal; provided, however, that nothing
       contained in the merger agreement shall prevent Schein or the board of
       directors from complying with the Exchange Act with regard to an
       acquisition proposal or disclosure obligations under state law or at any
       time prior to the earlier to occur of payment for shares of Schein common
       stock pursuant to the tender offer or the approval of the merger by the
       requisite vote of the stockholders of Schein, providing information in
       response to a request therefor by a person who has made an unsolicited
       bona fide written superior proposal (so long as such proposal did not
       result from a breach of the merger agreement) if the Schein board of
       directors receives from the person so requesting such information an
       executed confidentiality agreement with customary terms (which shall not
       preclude the making of an superior proposal); or engaging in any
       negotiations or discussions with any person who has made an unsolicited
       bona fide written superior proposal, if and only to the extent that in
       each such case the board of directors determines in good faith, after
       consultation with Schein's outside legal counsel, that such action is
       necessary in order for Schein's directors to comply with their fiduciary
       duties under applicable law;

     - Schein will immediately cease and cause to be terminated any existing
       activities, discussions or negotiations with any parties conducted
       heretofore with respect to any of the foregoing;

     - Schein will promptly request each individual or entity that has executed,
       within twelve months prior to the date of the merger agreement, a
       confidentiality agreement in connection with his or its consideration of
       a possible acquisition proposal to return promptly or destroy all
       confidential information heretofore furnished to such individual or
       entity by or on behalf of Schein or any of its subsidiaries;

     - Schein will not release or permit the release or any waiver of any
       provision of, any confidentiality, "standstill" or similar agreement to
       which Schein or any of its subsidiaries is a party, and will enforce or
       cause to be enforced each such agreement at the request of Watson;

                                       55
<PAGE>   62

     - Schein will notify Watson immediately (but in any event within 24 hours)
       if any such inquiries, proposals or offers are received by, any such
       information requested from, or any such discussions or negotiations are
       sought to be initiated or continued with any of its representatives
       indicating, in connection with such notice, the name of such person and
       the material terms and conditions of any proposals or tender offers and
       thereafter shall keep Watson informed, on a current basis, on the status
       and terms of any such proposals or tender offers and the status of any
       such negotiations or discussions;

     - Schein will, through its board of directors, recommend to its
       stockholders that its stockholders accept the tender offer and tender
       their shares of Schein common stock to WS Acquisition Corp. pursuant to
       the tender offer and/or adopt the merger agreement; and

     - neither the board of directors nor any committee thereof shall (i)
       withdraw or modify, or propose to withdraw or modify, in a manner adverse
       to Watson or WS Acquisition Corp., the Schein board of directors
       recommendation, (ii) approve or recommend, or propose to approve or
       recommend, any acquisition proposal by a third party or (iii) terminate
       the merger agreement in order to enter into a definitive agreement with
       respect to any third-party acquisition proposal; provided, however, that
       the Schein board of directors or a committee thereof may take the actions
       described (A) under clause (i) of this paragraph if the Schein board of
       directors shall have determined in good faith, after consultation with
       outside counsel, that such action is necessary in order for its directors
       to comply with their fiduciary duties under applicable law and (B) under
       clause (ii) if the Schein board of directors shall have made the
       determination required in (A) above and also determined in good faith,
       after consultation with its financial advisor, that such acquisition
       proposal is a superior proposal.

     Superior proposal means an unsolicited, bona fide, written acquisition
proposal for all of Schein that the board of directors of Schein determines, in
its reasonable judgment, after consulting with an independent financial advisor
of nationally recognized reputation, to be more favorable to Schein's
stockholders than the terms of the tender offer and the merger; provided,
however, that any such proposal shall not be deemed to be a "superior proposal"
if any financing required to consummate the transaction contemplated by such
proposal is not committed and, in the judgment of the board of directors of
Schein, is not reasonably capable of being obtained by such third party.

INDEMNIFICATION AND INSURANCE

     The merger agreement provides that, from and after the effective time of
the merger:

     - Schein, to the fullest extent permitted under applicable law, shall
       indemnify and hold harmless each present and former director and officer
       of Schein against any costs or expenses (including reasonable attorneys'
       fees), judgments, fines, losses, claims, damages, liabilities and amounts
       paid in settlement in connection with any claim, action, suit, proceeding
       or investigation, arising out of or pertaining to actions taken or
       omitted to be taken by such indemnified parties in their capacity as a
       director, officer, employee or agent of Schein or any of its subsidiaries
       or, while serving at the request of Schein, in their capacity as a
       director, officer, employee or agent of another corporation, partnership,
       joint venture, trust or other enterprise at or prior to the effective
       time of the merger (including the transactions contemplated by the merger
       agreement);

     - Schein shall advance expenses to an indemnified party, as incurred, with
       respect to the foregoing actions or failures to act, to the fullest
       extent permitted under applicable law, if the indemnified party to whom
       expenses are advanced undertakes to repay such advances if it is
       ultimately determined that such indemnified party is not entitled to
       indemnification; and

     - Schein shall not have any obligation under these indemnification
       provisions to any indemnified party when and if a court of competent
       jurisdiction shall ultimately determine (and such determination shall
       have become final) that the indemnification of such indemnified party in
       the manner contemplated hereby is prohibited by applicable law.

                                       56
<PAGE>   63

     Watson has guaranteed these indemnification obligations of Schein.

     In addition, the merger agreement provides that for a period of not less
than six years after the effective time of the merger, the Schein shall cause to
be maintained in effect the current policies of directors' and officers'
liability insurance maintained by Schein (provided that the surviving
corporation may substitute therefor policies with reputable and financially
sound carriers of at least the same coverage and amounts containing terms and
conditions which are no less advantageous) with respect to claims arising from
or related to facts or events existing or occurring at or prior to the effective
time of the merger (including, without limitation, the transactions contemplated
by the merger agreement). Schein shall not be obligated to make annual premium
payments for such insurance to the extent such premiums exceed 150% of the
annual premiums paid as of the date of the merger agreement by Schein for such
insurance.

INTERIM FINANCING

     Under the terms of the merger agreement Watson was required to enter into
agreements with Schein, Schein's current lenders and others, and make funds
available or provided such credit support or other financial accommodation, as
necessary to provide Schein with immediate borrowing availability in the amount
of $40,000,000. On June 2, 2000, Watson entered into certain agreements,
including a guarantee, with certain of Schein's existing lenders. In connection
therewith, $40,000,000 was made available to Schein on terms and conditions
substantially similar to the terms and conditions of Schein's existing bank
facility. On July 6, 2000, the $40,000,000 of interim financing, along with
other debt owed by Schein to its banks, was paid by Watson.

CONDITIONS TO THE MERGER

     The obligations of Watson, WS Acquisition Corp. and Schein to complete the
merger are subject to the satisfaction of certain conditions, including the
absence of any injunctions or restraints on the consummation of the merger by
any governmental entity, and absence of any law entered or enforced by any
governmental entity that makes the consummation of the merger illegal.

     In addition, the obligation of Schein to complete the merger is subject to
the satisfaction of the condition that the shares of Watson common stock to be
issued in the merger shall have been approved for listing on the New York Stock
Exchange.

TERMINATION OF THE MERGER AGREEMENT

     The merger agreement may be terminated and the merger may be abandoned at
any time prior to the effective time of the merger, notwithstanding the adoption
of the merger agreement by the stockholders of Schein:

     - by mutual written consent duly authorized by the board of directors of
       Watson and the board of directors of Schein; or

     - by either Watson or Schein if a governmental entity shall have issued a
       non-appealable final order, decree or ruling, in each case having the
       effect of permanently restraining, enjoining or otherwise prohibiting the
       payment for shares of Schein common stock pursuant to the merger or any
       statute, rule, regulation or order is enacted, entered or enforced by any
       governmental entity which makes the consummation of the merger illegal.

EFFECT OF TERMINATION

     In the event of the termination of the merger agreement and the abandonment
of the merger, the merger agreement shall forthwith become void and there shall
be no liability on the part of any party thereto (or any of its affiliates,
directors, officers, employees, agents, legal and financial advisors or other
representatives), except that nothing set forth in the merger agreement shall
relieve any party from liability or damages resulting from any willful breach of
the merger agreement.
                                       57
<PAGE>   64

FEES AND EXPENSES

     All fees and expenses incurred in connection with the merger agreement and
the transactions contemplated thereby shall be paid by the party incurring such
fees and expenses, whether or not the merger is consummated.

EXTENSION; WAIVER

     The merger agreement provides that at any time prior to the effective time
of the merger, the parties to the merger agreement, may, to the extent legally
allowed, extend the time for the performance of any of the obligations or other
acts of the other parties to the merger agreement, waive any inaccuracies in the
representations and warranties of the other parties to the merger agreement
contained in the merger agreement or in any document delivered pursuant thereto
or waive compliance with any of the agreements or conditions of the other
parties to the merger agreement contained in the merger agreement.

AMENDMENT

     The merger agreement provides that it may be amended by the parties
thereto, by action taken or authorized by their respective boards of directors,
at any time prior to the effective time of the merger.

     After approval of the merger by the stockholders of Schein, no amendment
may be made that by law requires further approval by such stockholders without
obtaining such further approval.

                                       58
<PAGE>   65

          UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

     The following unaudited pro forma condensed combined financial statements
are based on the historical consolidated financial statements of Watson and
Schein, combined and adjusted to give effect to the proposed acquisition of
Schein by Watson. The acquisition is being completed in a two-tiered
transaction, as described below:

     - In the first tier of the transaction, WS Acquisition Corp. purchased for
       cash 26,068,469 shares of Schein common stock for $19.50 per share.


     - Subsequent to the consummation of the first tier of the transaction and
       pursuant to the merger agreement, each remaining outstanding share of
       Schein common stock will be converted into the right to receive a
       fraction of a share of Watson common stock that is based upon the average
       of the closing price of a share of Watson common stock on the New York
       Stock Exchange for the ten consecutive trading days ending on the trading
       day two trading days prior to the date of the special meeting of Schein
       stockholders called to approve and adopt the merger agreement (the Watson
       average stock price). However, if the Watson average stock price is less
       than $37.82, Watson may, at its sole discretion, exchange cash, stock or
       a combination thereof, as set forth in the merger agreement, to acquire
       the remaining outstanding shares of Schein common stock. The second tier
       of the acquisition is expected to close in late August 2000. Since the
       number of shares to be issued in the second tier of the acquisition will
       not be known until the last business day prior to the special meeting,
       the unaudited pro forma condensed combined financial statements have been
       prepared using an exchange ratio of 0.50661 based on the average trading
       price of Watson's common stock for the five business day period from May
       23, 2000 to May 30, 2000 (two business days prior and subsequent to the
       announcement of the acquisition) of $45.40.


     For purposes of the unaudited pro forma condensed combined financial
statements, the term "acquisition" includes both tier one and tier two of the
proposed transaction. The following unaudited pro forma condensed combined
statements of operations for the three months ended March 31, 2000 and the year
ended December 31, 1999 give effect to the acquisition as if it had occurred at
the beginning of each period presented. The unaudited pro forma condensed
combined statement of operations for the three months ended March 31, 2000 was
prepared based upon the unaudited consolidated statements of income of Watson
for the three months ended March 31, 2000 and of Schein for the three months
ended March 25, 2000. The unaudited pro forma condensed combined statement of
operations for the year ended December 31, 1999 was prepared based upon the
consolidated statements of income of Watson for the year ended December 31, 1999
and of Schein for the year ended December 25, 1999.

     The following unaudited pro forma condensed combined balance sheet as of
March 31, 2000 gives effect to the acquisition as if it had occurred on such
date and was prepared based on the consolidated balance sheets of Watson as of
March 31, 2000 and of Schein as of March 25, 2000.

     These unaudited pro forma condensed combined financial statements should be
read in conjunction with the Watson and Schein audited consolidated financial
statements and unaudited interim consolidated financial statements, including
the notes thereto, which are included in Watson's Annual Report on Form 10-K for
the year ended December 31, 1999, Watson's Quarterly Report on Form 10-Q for the
quarter ended March 31, 2000, Schein's Annual Report on Form 10-K for the year
ended December 25, 1999 and Schein's Quarterly Report on Form 10-Q for the
quarter ended March 25, 2000, which are incorporated by reference in this proxy
statement/prospectus.

     The unaudited pro forma adjustments are based upon information set forth in
this proxy statement/prospectus and certain assumptions as described in the
notes to the unaudited pro forma condensed combined financial statements.
Watson's management believes that the pro forma assumptions are reasonable under
the circumstances.

     The unaudited pro forma condensed combined financial statements do not
reflect any incremental direct costs, including a significant restructuring
charge management expects to record in connection with the acquisition, or
potential cost savings which are expected to result from the consolidation of
certain
                                       59
<PAGE>   66

operations of Watson and Schein. Accordingly, the unaudited pro forma condensed
combined financial statements are not necessarily indicative of the results of
operations or financial position of the combined company that would have
occurred had the acquisition occurred at the beginning of each period presented
or on the date indicated, nor are they necessarily indicative of future
operating results or financial position.

     The acquisition will be accounted for by the purchase method of accounting.
Accordingly, Watson's total cost to acquire all of the outstanding shares of
Schein common stock (the "purchase consideration"), estimated to be
approximately $800 million assuming a Watson average stock price of $45.40 and
including estimated direct transaction costs of $20 million, will be allocated
to the assets acquired and liabilities assumed according to their respective
fair values, with the excess purchase consideration being allocated to goodwill.
The total cost to acquire Schein is subject to change, to the extent that
fluctuations in the market value of Watson common stock cause the Watson average
stock price to change. A change in the Watson average stock price may result in
a change in goodwill and related amortization expense. The final allocation of
the purchase consideration is dependent upon certain valuations and other
studies that have not progressed to a stage where there is sufficient
information to make such an allocation in the accompanying unaudited pro forma
condensed combined financial statements.

     Accordingly, the purchase price allocation adjustments made in connection
with the development of the unaudited pro forma condensed combined financial
statements are preliminary and have been made solely for the purpose of
developing such unaudited pro forma condensed combined financial statements.

                                       60
<PAGE>   67

                                 WATSON/SCHEIN

       UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS(E)
                          QUARTER ENDED MARCH 31, 2000
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                               HISTORICAL    HISTORICAL                     PRO FORMA
                                                 WATSON        SCHEIN      ADJUSTMENTS      COMBINED
                                               ----------    ----------    -----------      ---------
<S>                                            <C>           <C>           <C>              <C>
Net revenues.................................   $179,632      $ 87,898      $     --        $267,530
Cost of sales................................     63,078        68,782                       131,860
                                                --------      --------      --------        --------
  Gross profit...............................    116,554        19,116                       135,670
                                                --------      --------      --------        --------
Operating expenses:
  Research and development...................     12,025         8,066                        20,091
  Selling, general and administrative........     30,457        16,836                        47,293
  Amortization...............................      8,669           334         7,591(a)       16,594
  Severance charges..........................                    3,500                         3,500
                                                --------      --------      --------        --------
     Total operating expenses................     51,151        28,736         7,591          87,478
                                                --------      --------      --------        --------
     Operating income (loss).................     65,403        (9,620)       (7,591)         48,192
                                                --------      --------      --------        --------
Other income (expense):
  Equity in loss of joint ventures...........     (2,053)         (265)                       (2,318)
  Gain on sales of Andrx securities..........    166,930                                     166,930
  Interest income and other income
     (expense)...............................      2,933          (447)                        2,486
  Interest expense...........................     (2,768)       (4,538)      (11,785)(b)     (19,091)
                                                --------      --------      --------        --------
     Total other income (expense), net.......    165,042        (5,250)      (11,785)        148,007
                                                --------      --------      --------        --------
Income before income tax provision
  (benefit)..................................    230,445       (14,870)      (19,376)        196,199
Income tax provision (benefit)...............     85,725        (5,948)       (4,361)(c)      75,416
                                                --------      --------      --------        --------
  Net income (loss)..........................   $144,720      $ (8,922)     $(15,015)       $120,783
                                                ========      ========      ========        ========
Per share data:
  Basic earnings (loss) per share............   $   1.50      $  (0.27)     $  (0.05)(d)    $   1.18
                                                ========      ========      ========        ========
  Diluted earnings (loss) per share..........   $   1.48      $  (0.27)     $  (0.06)(d)    $   1.15
                                                ========      ========      ========        ========
Weighted average number of common shares
  outstanding................................     96,290        32,960       (27,135)        102,115
Common stock equivalents.....................      1,615                       1,405           3,020
                                                --------      --------      --------        --------
Diluted weighted average shares..............     97,905        32,960       (25,730)        105,135
                                                ========      ========      ========        ========
</TABLE>

See accompanying notes to the unaudited pro forma condensed combined financial
statements.

                                       61
<PAGE>   68

                                 WATSON/SCHEIN

       UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS(E)
                          YEAR ENDED DECEMBER 31, 1999
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                             HISTORICAL    HISTORICAL                     PRO FORMA
                                               WATSON        SCHEIN      ADJUSTMENTS       COMBINED
                                             ----------    ----------    -----------      ----------
<S>                                          <C>           <C>           <C>              <C>
Net revenues...............................   $689,232      $477,161      $               $1,166,393
Cost of sales..............................    230,633       306,019                         536,652
                                              --------      --------      --------        ----------
  Gross profit.............................    458,599       171,142                         629,741
                                              --------      --------      --------        ----------
Operating expenses:
  Research and development.................     49,270        27,951                          77,221
  Selling, general and administrative......    121,444        92,157                         213,601
  Amortization.............................     29,986         6,303        30,364(a)         66,653
  Restructuring charge.....................                   86,971                          86,971
  Merger and related expenses..............     20,467                                        20,467
                                              --------      --------      --------        ----------
     Total operating expenses..............    221,167       213,382        30,364           464,913
                                              --------      --------      --------        ----------
     Operating income (loss)...............    237,432       (42,240)      (30,364)          164,828
                                              --------      --------      --------        ----------
Other income (expense):
  Equity in loss of joint ventures.........     (2,591)       (1,079)                         (3,670)
  Gain on sales of Andrx securities........     44,275                                        44,275
  Interest income and other income
     (expense).............................      4,549          (189)                          4,360
  Interest expense.........................    (11,121)      (18,661)      (46,633)(b)       (76,415)
                                              --------      --------      --------        ----------
     Total other income (expense), net.....     35,112       (19,929)      (46,633)          (31,450)
                                              --------      --------      --------        ----------
Income before income tax provision
  (benefit)................................    272,544       (62,169)      (76,997)          133,378
Income tax provision (benefit).............     93,663       (27,781)      (17,254)(c)        48,628
                                              --------      --------      --------        ----------
  Net income (loss)........................   $178,881      $(34,388)     $(59,743)       $   84,750
                                              ========      ========      ========        ==========
Per share data:
  Basic earnings (loss) per share..........   $   1.87      $  (1.05)     $   0.01(d)     $     0.83
                                              ========      ========      ========        ==========
  Diluted earnings (loss) per share........   $   1.83      $  (1.05)     $   0.03(d)     $     0.81
                                              ========      ========      ========        ==========
Weighted average number of common shares
  outstanding..............................     95,760        32,640       (26,810)          101,590
Common stock equivalents...................      2,020                       1,405             3,425
                                              --------      --------      --------        ----------
Diluted weighted average shares............     97,780        32,640       (25,405)          105,015
                                              ========      ========      ========        ==========
</TABLE>

See accompanying notes to the unaudited pro forma condensed combined financial
statements.

                                       62
<PAGE>   69

                                 WATSON/SCHEIN

              UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
                              AS OF MARCH 31, 2000
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                                                    PRO
                                          HISTORICAL   HISTORICAL                                                  FORMA
                                            WATSON       SCHEIN     ADJUSTMENTS   ADJUSTMENTS   ADJUSTMENTS       COMBINED
                                          ----------   ----------   -----------   -----------   -----------      ----------
<S>                                       <C>          <C>          <C>           <C>           <C>              <C>
ASSETS
Current assets:
  Cash and cash equivalents.............  $  305,422    $ 18,279     $(250,280)    $  73,042     $        (a)    $  146,463
  Marketable securities.................       9,670                                                                  9,670
  Accounts receivable, net..............     145,254      41,560                                    10,000(d)       196,814
  Inventories...........................     123,387     125,392                                                    248,779
  Prepaid expenses and other current
    assets..............................      12,335      11,306                                                     23,641
  Deferred tax assets...................      31,440      14,071                                                     45,511
                                          ----------    --------     ---------     ---------     ---------       ----------
    Total current assets................     627,508     210,608      (250,280)       73,042        10,000          670,878
Property and equipment, net.............     142,056     100,138                                                    242,194
Excess of Purchase Consideration over
  net tangible assets acquired..........                               607,291                            (b)       607,291
Product rights and other intangibles,
  net...................................     568,945      50,278                                                    619,223
Investments and other assets............     412,970      20,860        11,375                            (c)       445,205
                                          ----------    --------     ---------     ---------     ---------       ----------
                                          $1,751,479    $381,884     $ 368,386     $  73,042     $  10,000       $2,584,791
                                          ==========    ========     =========     =========     =========       ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable and accrued
    expenses............................  $   55,869    $ 99,183     $             $             $ (30,000)(d)   $  125,052
  Current portion of long-term debt.....       1,555     136,142        60,000      (136,142)             (d)        61,555
  Income taxes payable..................      89,627       8,045                      (7,481)             (g)        90,191
  Current liability from acquisitions of
    products and businesses.............       7,658                                                                  7,658
                                          ----------    --------     ---------     ---------     ---------       ----------
    Total current liabilities...........     154,709     243,370        60,000      (143,623)      (30,000)         284,456
Long-term debt..........................     149,346      84,428       229,430       136,142        40,000(d)       639,346
Long-term liability from acquisitions of
  products and businesses...............      13,049                                                                 13,049
Deferred tax liabilities................     143,601       4,402                                                    148,003
Other long-term liabilities.............                   4,601                                                      4,601
                                          ----------    --------     ---------     ---------     ---------       ----------
    Total liabilities...................     460,705     336,801       289,430        (7,481)       10,000        1,089,455
                                          ----------    --------     ---------     ---------     ---------       ----------
Commitments and contingencies
Stockholders' equity:
  Common stock..........................         318         329            19            46          (375)(e,h)        337
  Additional paid-in capital............     405,369     101,817       264,543        80,477      (182,294)(e,h)    669,912
  Retained earnings (deficit)...........     693,720     (61,853)      (60,000)                     61,853(f,h)     633,720
  Accumulated other comprehensive
    income..............................     191,367       7,024                                    (7,024)(h)      191,367
  Subscription receivable...............                  (2,234)                                    2,234(h)
                                          ----------    --------     ---------     ---------     ---------       ----------
    Total stockholders' equity..........   1,290,774      45,083       204,562        80,523      (125,606)       1,495,336
                                          ----------    --------     ---------     ---------     ---------       ----------
                                          $1,751,479    $381,884     $ 493,992     $  73,042     $(115,606)      $2,584,791
                                          ==========    ========     =========     =========     =========       ==========
</TABLE>

See accompanying notes to the unaudited pro forma condensed combined financial
statements.

                                       63
<PAGE>   70

                                 WATSON/SCHEIN

                     NOTES TO UNAUDITED PRO FORMA CONDENSED
                         COMBINED FINANCIAL STATEMENTS

     The unaudited pro forma condensed combined financial statements reflect the
conversion of each outstanding share of Schein common stock, including the
settlement of certain benefit plans, into cash and/or shares of Watson, as
follows (in thousands):

<TABLE>
<S>                                                           <C>
Cash........................................................  $ 508,335
Watson common stock.........................................    264,562(i)
                                                              ---------
Total Purchase Consideration................................    772,897
Add: Non-recurring transaction costs........................     20,000(ii)
Less: Write-off of in-process research and development......    (60,000)(iii)
Less: Schein pro forma net tangible assets at March 25,
  2000......................................................   (125,606)(iv)
                                                              ---------
Excess of purchase consideration over net tangible assets
  acquired..................................................  $ 607,291(iv)
                                                              =========
</TABLE>

-------------------------
(i)   As of March 25, 2000, there were approximately 32,984,000 shares of Schein
      common stock outstanding. Additionally, there were approximately 7,354,000
      stock options outstanding under Schein's existing stock option plans. The
      total purchase consideration in the acquisition will depend upon the
      number of Schein stock options that are exercised prior to the closing of
      the acquisition, as further discussed below.

     The accompanying unaudited pro forma condensed combined financial
     statements take into consideration the purchase of 26,068,469 shares of
     common stock of Schein after completion of the tender offer in July 2000,
     at a cash price of $19.50 per share. It is assumed that as part of the
     second tier of the transaction, approximately 11,500,000 shares of Schein
     common stock (the remaining shares of Schein common stock outstanding as of
     March 25, 2000 and the stock options assumed to be exercised prior to the
     closing date, as further described in the following paragraph) are
     exchanged using the exchange ratio specified in the merger agreement based
     on the average Watson common stock trading price for the five business day
     period from May 23, 2000 to May 30, 2000 (two business days prior and
     subsequent to the announcement of the acquisition) of $45.40, thereby
     resulting in each share of Schein common stock being converted into the
     right to receive a fraction of a share of Watson common stock valued at
     $23.00. The value of the merger consideration per share of Schein common
     stock will be increased proportionately above $23.00 if the Watson average
     stock price is greater than $54.52 per share, up to a maximum value of
     $26.50 where the Watson average stock price is $62.82 per share or higher.

     Conversely, the value of the purchase consideration will be decreased
     proportionately below $23.00, if the Watson average stock price is less
     than $44.61 per share down to a minimum value of $19.50 where the Watson
     average stock price is $37.82 per share or lower. At this minimum value of
     $19.50, Watson would have the option to pay the purchase consideration in
     cash, in stock or a combination thereof.

     As a result of the acquisition, options related to Schein's existing stock
     option plans will either 1) become fully vested and the employees will have
     the ability to exercise the related options prior to the effective time of
     the merger (stock options not exercised prior to the effective time of the
     merger will be terminated); or 2) be exchanged for Watson stock options in
     accordance with the appropriate exchange ratio set forth in the merger
     agreement. For purposes of preparing these unaudited pro forma condensed
     combined financial statements, it is assumed that all employees who hold
     stock options that will terminate if not exercised prior to the effective
     time of the merger, will exercise their stock options. The number of such
     options that are expected to be exercised is 4,587,000. Management
     considers this assumption to be reasonable based on the fact that
     substantially all of the options have a current exercise price which is
     less than the average market price of a share of Schein common stock and
     the options are subject to accelerated vesting terms which are triggered as
     a result of this acquisition.

                                       64
<PAGE>   71

(ii)  Estimated merger transaction costs of $20 million relate principally to
      investment banking fees, legal, accounting, printing and other costs
      associated with the merger.

(iii) The portion of the purchase price allocated to in-process research and
      development ("IPR&D") represents the valuation of acquired,
      to-be-completed research projects. As such, the amount that is determined
      to be IPR&D will be charged to expense at the date of acquisition. The
      independent IPR&D valuation has not been completed as of the date these
      unaudited pro forma condensed combined financial statements were prepared
      and therefore the final amount of IPR&D to be charged to expense as part
      of this acquisition is not known. However, based on a preliminary
      assessment, it is expected that the IPR&D charge will be between $60 - $80
      million. For purposes of preparing these unaudited pro forma condensed
      combined financial statements, an IPR&D charge of $60 million has been
      assumed. If the final IPR&D charge were to increase by $10 million, it
      would have the effect of decreasing annual amortization expense by $0.5
      million.

(iv) For purposes of preparing the unaudited pro forma condensed combined
     financial statements, the estimated excess of purchase consideration over
     net tangible assets acquired as of March 31, 2000 of $607.3 million is
     being amortized on a straight-line basis over an estimated average period
     of 20 years at a rate of $30.4 million per year. Management believes that a
     portion of this amount will be allocated to product rights with estimated
     useful lives up to twenty years. Management believes that the remaining
     balance will be allocated to goodwill with an estimated useful life of
     twenty to twenty-five years. After consummation of the acquisition, Watson
     will utilize the valuations and other studies to make a final allocation of
     the purchase consideration, including allocation to tangible assets and
     liabilities, identifiable intangible assets and goodwill. As a result of
     this final allocation, the amount of the excess of purchase consideration
     over net tangible assets acquired and the average amortization period may
     be different from what has been assumed in the preparation of these
     unaudited pro forma condensed combined financial statements. On an on-going
     basis, Watson will perform periodic reviews of the goodwill and other
     intangible assets arising from the acquisition to ensure that they are
     carried at recoverable amounts in the light of current business conditions.

     The Schein pro forma net tangible assets as of March 25, 2000 include cash
of $73.0 million and an income tax benefit of $7.5 million arising in connection
with the assumed exercise of Schein stock options as discussed in Note (i)
above.

     Certain amounts in the historical consolidated financial statements of
Watson and Schein have been reclassified to conform to the unaudited pro forma
condensed combined financial statement presentation. No adjustments are
necessary to eliminate intercompany transactions and balances in the unaudited
pro forma condensed combined financial statements as there were no intercompany
transactions or balances.

     Pro forma adjustments giving effect to the acquisition in the unaudited pro
forma condensed combined statements of operations reflect the following:

          (a) Amortization of the excess of the purchase consideration over net
     tangible assets acquired on a straight-line basis over 20 years. Refer to
     Note (iv) above.

          (b) The total amount of funds required by Watson is estimated to be
     approximately $800 million to (a) consummate the acquisition (including
     direct transaction costs of $20 million and fees related to the new bank
     facility of $11.4 million); (b) refinance certain existing indebtedness of
     Schein in the total amount of $220.6 million; and (c) finance immediate
     working capital needs of Schein. For purposes of preparing these unaudited
     pro forma condensed combined financial statements, it is assumed that
     Watson would use $250 million of cash on hand and new borrowings to fund
     this

                                       65
<PAGE>   72

     acquisition. The incremental interest expense resulting from the new
     borrowings is as follows (in thousands):

<TABLE>
<CAPTION>
                                                            THREE MONTHS      YEAR ENDED
                                                               ENDED         DECEMBER 31,
                                                           MARCH 31, 2000        1999
                                                           --------------    ------------
<S>                                                        <C>               <C>
Incremental interest on acquisition-related borrowings...     $12,485          $ 49,940
Less: Schein historical interest expense.................      (4,538)          (18,661)
Amortization of deferred financing costs.................         569             2,275
Reduction in interest income from use of cash on hand to
  fund portion of purchase consideration.................       3,129            12,517
Commitment fee on unused bank facility...................         140               562
                                                              -------          --------
Incremental net interest expense.........................     $11,785          $ 46,633
                                                              =======          ========
</TABLE>

          For purposes of preparing the unaudited pro forma condensed combined
     financial statements, it is assumed that Watson will incur $11.4 million of
     deferred financing costs which will be amortized using a method which
     approximates the effective interest method over the expected average term
     of the associated financing agreements or five years. The incremental
     interest expense has been calculated based on an assumed interest rate of
     9.08%. A change of 1/8 of 1% in the assumed interest rate will change
     annual interest expense after tax by $0.4 million.

          (c) Income tax effect of pro forma adjustments.

          (d) Earnings per share calculations are based on the weighted average
     number of shares of Watson common stock and common equivalent shares
     outstanding for each period presented, including the shares of Watson
     assumed to be issued in connection with the acquisition as if they had been
     issued at the beginning of each period presented. In addition, options to
     purchase 2,767,000 shares of Schein common stock are expected to be
     converted into options for Watson common stock and as such have been
     included in the calculation of the diluted weighted average number of
     shares as if they had been outstanding at the beginning of each period
     presented for purposes of calculating the pro forma earnings per share.
     Earnings per share will differ according to the number of Watson shares
     ultimately issued in connection with this acquisition. The earnings per
     share calculations are also subject to change depending on the number of
     Schein stock options exercised as discussed in Note (i) above.

          (e) The historical financial statements of Watson include the
     following significant non-recurring items:

        - During the year ended December 31, 1999 and the three months ended
          March 31, 2000, Watson sold 2.2 million (adjusted to reflect Andrx'
          April 2000 two-for-one stock split) and 4.2 million shares (as
          adjusted to reflect the stock split), respectively, of Andrx
          Corporation stock on the open market for $54.6 million and $182.2
          million, respectively, recording pre-tax gains of $44.3 million and
          $166.9 million, respectively.

     The historical financial statements of Schein include the following
significant non-recurring items:

        - As a result of certain regulatory matters at Schein's sterile dosage
          facilities, Schein recorded a restructuring charge of $87.0 million in
          1999, as further discussed in Schein's audited consolidated financial
          statements for the year ended December 25, 1999 which are incorporated
          by reference in this proxy statement/prospectus.

     Pro forma adjustments giving effect to the acquisition in the unaudited pro
forma condensed combined balance sheet reflect the following:

          (a) The net decrease in cash is comprised of the estimated cash used
     to fund a portion of the purchase consideration offset by the cash proceeds
     from the assumed exercise of the Schein stock options, as further discussed
     in Note (i) above.

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          (b) Excess of purchase consideration over net tangible assets acquired
     as a result of this acquisition (refer to Note (iv) above).

          (c) Estimated deferred financing costs to be amortized using a method
     which approximates the effective interest method over the estimated average
     term of the associated financing agreements or five years.

          (d) New borrowings to (i) finance a portion of the purchase
     consideration; (ii) refinance existing Schein debt as of March 25, 2000;
     (iii) pay for direct transaction costs and fees related to the new bank
     facility; and (iv) provide a working capital loan to Schein in the amount
     of $40 million for the specific purposes set forth in the merger agreement.

          (e) Watson common stock issued in exchange for a portion of the shares
     of Schein common stock acquired.

          (f) To reflect the estimated IPR&D charge, as further discussed in
     Note (iii) above. This charge has been excluded from the unaudited pro
     forma condensed combined statements of operations due to the nonrecurring
     nature of this item.

          (g) To reflect the income tax benefit related to the assumed exercise
     of Schein stock options, as further discussed in Note (i) above.

          (h) Elimination of Schein's stockholders' equity.

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                                APPRAISAL RIGHTS

     Under the Delaware General Corporation Law (Delaware General Corporation
Law), even if the merger is approved by the holders of the requisite number of
shares of Schein common stock, if any cash is paid in the merger (other than for
fractional shares), you are entitled to refuse the merger consideration to which
you would otherwise be entitled under the merger agreement and exercise
appraisal rights and obtain payment of the "fair value" for your shares under
the terms of the Delaware General Corporation Law. In order to effectively
exercise your appraisal rights, if any, you must satisfy each of the following
primary requirements. Cash (other than for fractional shares) will be paid only
if Watson's average stock price is less than $37.82 and, even then, only if
Watson elects to pay cash.

     - You must hold shares in Schein as of the date you make your demand for
       appraisal rights and continue to hold shares in Schein through the
       effective date of the merger.

     - You must deliver to Schein a written notice of your demand of payment of
       the fair value for your shares prior to the taking of the vote at the
       special meeting.

     - You must not have voted in favor of or consented to the merger and the
       merger agreement.

     If you fail to comply with any of the above conditions or otherwise fail to
comply with the requirements of Section 262 of the Delaware General Corporation
Law, you will have no appraisal rights with respect to your shares. See Section
262 of the Delaware General Corporation Law, Annex C.

     The determination of fair value takes into account all relevant factors,
but excludes any appreciation or depreciation in anticipation of the applicable
merger. The costs of the appraisal proceeding may be determined by the Delaware
Court of Chancery and allocated among the parties as the Delaware Court of
Chancery deems equitable under the circumstances. Upon your application for
appraisal, the Delaware Court of Chancery may order all or a portion of the
expenses incurred by you in connection with the appraisal proceeding, including,
without limitation, reasonable attorneys' fees and the fees and expenses of
experts, to be charged pro rata against the value of all shares entitled to
appraisal. In the absence of a determination or assessment, you will bear your
own expenses.

     Written demands, notices or other communications concerning the exercise of
appraisal rights should be addressed to:

                          Schein Pharmaceutical, Inc.
                             c/o Investor Relations
                                100 Campus Drive
                         Florham Park, New Jersey 07932
                                 (973) 593-5500

     All written notices must be executed by, or with the consent of, the holder
of record. The notice must identify you and indicate your intention to demand
payment of the fair value for your shares. In the notice, your name should be
stated as it appears on your stock certificate(s). If your shares are owned of
record in a fiduciary capacity, such as by a trustee, guardian or custodian,
your demand must be executed by or for the fiduciary. If you own the shares with
another person, such as in a joint tenancy or tenancy in common, your demand
must be executed by or for all joint owners. An authorized agent, including an
agent for two or more joint owners, may execute your demand for appraisal.
However, the agent must identify you and any other owners of the shares and
expressly disclose the fact that, in exercising the demand, he or she is acting
as agent for you and any other owners.

     IF YOU ARE CONTEMPLATING THE EXERCISE OF THE RIGHTS SUMMARIZED ABOVE IN
CONNECTION WITH THE MERGER, YOU ARE URGED TO CONSULT WITH YOUR OWN LEGAL
COUNSEL. THE DESCRIPTION OF SECTION 262 CONTAINED IN THIS DOCUMENT IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO ANNEX C ATTACHED TO THIS PROXY
STATEMENT/PROSPECTUS AND THE DELAWARE GENERAL CORPORATION LAW. FAILURE TO FOLLOW
PRECISELY ALL OF THE STEPS REQUIRED BY SECTION 262 OF THE DELAWARE GENERAL
CORPORATION LAW WILL RESULT IN THE LOSS OF YOUR APPRAISAL RIGHTS. ANY DEMANDS,
NOTICES, CERTIFICATES OR OTHER DOCUMENTS REQUIRED TO BE DELIVERED IN CONNECTION
WITH YOUR EXERCISE OF APPRAISAL RIGHTS SHOULD BE SENT TO SCHEIN AT THE ADDRESS
INDICATED ABOVE. THE PROCESS OF
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<PAGE>   75

DISSENTING REQUIRES STRICT COMPLIANCE WITH TECHNICAL PREREQUISITES. THOSE
WISHING TO DISSENT SHOULD CONSULT WITH THEIR OWN LEGAL COUNSEL IN CONNECTION
WITH COMPLIANCE UNDER THE DELAWARE GENERAL CORPORATION LAW.

     IF THE MERGER CONSIDERATION CONSISTS ONLY OF WATSON COMMON STOCK AND CASH
FOR FRACTIONAL SHARES, YOU WILL NOT HAVE ANY APPRAISAL RIGHTS.

                   COMPARATIVE RIGHTS OF WATSON STOCKHOLDERS
                            AND SCHEIN STOCKHOLDERS

     Watson is incorporated under the laws of the State of Nevada. The rights of
Watson stockholders are currently governed by the Nevada Revised Statutes and
the articles of incorporation and bylaws of Watson. Schein is incorporated under
the laws of the State of Delaware. The rights of Schein stockholders are
currently governed by the Delaware General Corporation Law and the certificate
of incorporation and bylaws of Schein. After the merger, Schein's stockholders
will become stockholders of Watson and Schein's stockholders' rights will cease
to be defined and governed by the Delaware General Corporation Law, and instead
will be defined and governed by the Nevada Revised Statutes.

     While the rights and privileges of stockholders of a Delaware corporation
(such as Schein) are, in many instances, comparable to those of stockholders of
a Nevada corporation (such as Watson), there are differences. The following is a
summary of certain material differences between the rights of holders of Watson
common stock and the rights of holders of Schein common stock at the date of
this proxy statement/prospectus. This summary is not intended to be complete and
is qualified in its entirety by reference to the relevant provisions of the
articles of incorporation and bylaws of Watson, the certificate of incorporation
and bylaws of Schein, and Nevada and Delaware law.

     The laws of Nevada and Delaware provide that some of the statutory
provisions as they affect various rights of holders of shares may be modified by
provisions in the articles or certificate of incorporation or bylaws of the
relevant corporation. The following summary of provisions contained in Nevada
law is subject to modification by provisions contained in the articles of
incorporation and bylaws of Watson and the following summary of provisions
contained in Delaware law is subject to modification by provisions contained in
the certificate of incorporation and bylaws of Schein.

SIZE OF THE BOARD OF DIRECTORS

     Watson's bylaws state that the initial number of directors shall be nine
and that the number of directors may be increased or decreased by amending the
bylaws. Such power to amend the bylaws is vested in the board of directors.
Watson currently has seven directors.

     Schein's bylaws state that the board of directors shall consist of five
persons, which number may be increased or decreased by a vote of a majority of
the Schein board of directors. Currently, the number of directors is fixed at
seven.

REMOVAL OF DIRECTORS

     Under Nevada law, any director may be removed by the vote of the holders of
not less than two-thirds of the voting stock. Watson's bylaws provide for the
removal of any director from office, with or without cause, by the vote or
written consent of not less than two-thirds of the voting stock.

     Under Delaware law, stockholders holding a majority of the outstanding
shares entitled to vote for directors may remove a director with or without
cause, except in cases involving classified boards or where cumulative voting is
permitted. The Schein bylaws provide for the removal of any director with cause
by the affirmative vote of a majority of the issued and outstanding voting
stock.

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<PAGE>   76

FILLING NEW SEATS OR VACANCIES ON THE BOARD OF DIRECTORS

     Under Nevada law, all vacancies, including those caused by an increase in
the number of directors, may be filled by a majority of the remaining directors,
even though less than a quorum, unless the articles of incorporation provide
otherwise. Under Watson's bylaws, a vacancy on the board may be filled by the
remaining directors or by the stockholders. Each director elected to fill a
vacancy shall hold office until the next annual meeting of stockholders and
until a successor has been elected.

     Under Delaware law, vacancies and newly created directorships may be filled
by a majority of the directors then in office (even though less than a quorum),
unless otherwise provided in the corporation's certificate of incorporation or
bylaws, or the certificate of incorporation directs that a particular class is
to elect the director, in which case any other directors elected by that class,
or a sole remaining director, must fill the vacancy. The Schein bylaws provide
that newly created directorships and vacancies occurring in the board of
directors may be filled by an affirmative vote of a majority of the directors
present at a meeting. A director elected to fill a vacancy shall be elected to
hold office until the next annual meeting of stockholders and until a successor
has been elected and qualified.

LIMITATION OF PERSONAL LIABILITY

     Under Nevada law, a corporation may include in its articles of
incorporation a provision that would, subject to the limitations described
below, limit or eliminate the personal liability of directors and officers to
the corporation or its stockholders for damages for breaches of their fiduciary
duty as directors and officers. Under Nevada law, a provision in the articles of
incorporation may not, however, eliminate or limit the liability of a director
or officer for acts or omissions that involve intentional misconduct, fraud or a
knowing violation of law or the payment of distributions in violation of Nevada
law. The Watson articles of incorporation state that no director or officer will
be personally liable to Watson or its stockholders for monetary damages for
breach of fiduciary duty as a director or officer, except for (a) acts or
omissions which involve intentional misconduct, fraud or a knowing violation of
law, or (b) the payment of distributions in violation of Nevada law.

     Under Delaware law, a corporation may include in its certificate of
incorporation a provision that would, subject to the limitations described
below, limit or eliminate directors' liability for monetary damages for breaches
of their fiduciary duty of care. Under Delaware law, a director's liability
cannot be limited or eliminated for breaches of the duty of loyalty, for acts or
omissions not in good faith or that involve intentional misconduct or a knowing
violation of law, for the payment of unlawful dividends or expenditure of funds
for unlawful stock purchases or redemptions, or for transactions from which such
director derived an improper personal benefit.

     In addition, the limitation of liability provisions may not limit a
director's liability for violation of, or otherwise relieve Schein or its
directors from the necessity of complying with, federal or state securities
laws, or affect the availability of nonmonetary remedies such as injunctive
relief or rescission. The Schein certificate of incorporation states that a
director will not be personally liable to Schein or its stockholders for
monetary damages for breach of fiduciary duty as a director, subject to the
exceptions referred to above.

INDEMNIFICATION

     Nevada law provides that a corporation may indemnify any person against
expenses, including attorneys' fees, judgments, fines and amounts paid in
settlement, other than in an action by or in the right of the corporation, by
reason of the fact that he or she is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the corporation
in any such capacity for another enterprise; if he or she acted in good faith
and in a manner that he or she reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to a criminal action or
proceeding, had no reasonable cause to believe that his or her conduct was
unlawful. For actions or suits by or in the right of the corporation, Nevada law
provides that a person may be indemnified if he or she acted in good faith and
in a manner that he or she reasonably believed to be in or not opposed to the
best interests of
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<PAGE>   77

the corporation, except that in such an action or suit by or in the right of the
corporation, the corporation may not indemnify a person for any matter as to
which the person has been adjudged by a court, after exhaustion of all appeals,
to be liable to the corporation or for amounts paid in settlement to the
corporation, unless and only to the extent that the court determines that in
view of all of the circumstances of the case, the person is fairly and
reasonably entitled to indemnification and for such expenses as the court deems
proper. To the extent a director, officer, employee or agent of the corporation
has been successful on the merits or otherwise in defense of the matter whether
or not such action is by or in the right of a corporation, the corporation must
indemnify him or her against all expenses, including attorneys' fees actually
and reasonably incurred in the defense. Nevada law provides, unless ordered by a
court or advanced according to Nevada law, that the determination of whether
indemnification is proper (in instances other than an action by or in the right
of the corporation) must be made by the stockholders; the board of directors by
a majority vote of a quorum consisting of directors who were not parties to the
action, suit or proceeding; or by independent legal counsel if a majority of a
quorum of directors who were not parties to the action so orders or if a quorum
of directors who were not parties cannot be obtained.

     Watson's articles of incorporation and bylaws require the corporation to
indemnify all persons whom it shall have the power to indemnify to the fullest
extent permitted by law. The articles of incorporation and bylaws provide that
such right shall not be exclusive of any other rights of indemnification.

     Delaware law contains indemnification provisions that are similar to the
indemnification provisions contained in Nevada law, except that, in certain
instances, Delaware law is possibly less favorable to the indemnitee than Nevada
law. Schein's certificate of incorporation provides that Schein will indemnify
its directors, officers, employees and agents to the fullest extent permitted by
Delaware law.

TRANSACTIONS INVOLVING DIRECTORS AND OFFICERS

     Under Nevada law, there is no specific provision concerning the prohibition
of loans or guarantees made by a corporation for the benefit of a director or
officer of the corporation.

     A contract or transaction between a Nevada corporation and one or more of
its directors or officers, or between a Nevada corporation and any other
corporation, partnership, association, or other organization in which one or
more of its directors or officers are directors or officers, or have a financial
interest, is not void or voidable solely for that reason, or solely because the
common or interested director or officer was present at the board or board
committee meeting that authorizes or approves the contract or transaction or
joins in the execution of the written consent that authorizes the contract or
transaction or because the vote of the common or interested director is counted
for purposes of authorizing the contract or transaction, if any one of the
following circumstances exists:

     - the fact of the common directorship, office or financial interest is
       known to the board or committee, and the board or committee authorizes,
       approves or ratifies the contract or transaction in good faith by a vote
       sufficient for the purpose without counting the vote of the common or
       interested director;

     - the fact of the common directorship, office or financial interest is
       known to the stockholders, and they approve or ratify the contract or
       transaction in good faith by a majority vote of stockholders holding a
       majority of the voting power;

     - the fact of the common directorship, office or financial interest is not
       known to the director or officer as of the time the transaction is
       brought before the board of directors for action; or

     - the contract or transaction is fair as to the corporation at the time
       that it is authorized or approved.

     A Delaware corporation may lend money to, or guarantee any obligation
incurred by, its officers or directors if, in the judgment of the board of
directors, the loan or guarantee may reasonably be expected to benefit the
corporation. Also, under Delaware law, any other contract or transaction between
the corporation and one or more of its directors or officers, or between a
Delaware corporation and any other corporation, partnership, association, or
other organization in which one or more of its directors or officers are
directors or officers, or have a financial interest, is not void or voidable
solely for that reason, or solely

                                       71
<PAGE>   78

because the interested director or officer was present at or participates in the
board or board committee meeting that authorizes the contract or transaction, or
solely because any such director's or officer's votes are counted for such
purpose, if:

     - the material facts as to the director's or officer's relationship or
       interest and as to the contract or transaction are disclosed or known to
       the board of directors or committee, and the board or committee in good
       faith authorizes the contract or transaction by the affirmative votes of
       a majority of the disinterested directors, even though the disinterested
       directors is less than a quorum; or

     - the material facts as to the director's or officer's relationship or
       interest and as to the contract or transaction are disclosed or known to
       the stockholders entitled to vote thereon, and the contract or
       transaction is specifically approved in good faith by vote of the
       stockholders; or

     - the contract or transaction is fair as to the corporation as of the time
       it is authorized, approved or ratified by the board of directors, a
       committee thereof, or the stockholders.

ADVANCE NOTICE OF STOCKHOLDER BUSINESS

     Watson's bylaws provide that for business to be properly brought before the
annual meeting of stockholders by a Watson stockholder, the stockholder must
provide the secretary of the corporation with timely notice in writing. To be
timely, each notice must be given either by personal delivery or by U.S. mail to
the secretary of the corporation and received by the secretary not less than one
hundred and twenty or more than one hundred and fifty days prior to the first
anniversary of Watson's consent solicitation or proxy statement in connection
with the previous year's stockholder meeting or election of directors. However,
if there was no prior annual meeting or the month of meeting was changed from
last year's annual meeting, the proposal must be received within 10 days after
Watson has publicly disclosed the date of the meeting. The notice sent to the
secretary must set forth: a brief description of the business desired to be
brought before the meeting and the reasons for conducting such business at the
meeting; information concerning the stockholder, including the stockholder's
name and address and the class and number of shares beneficially owned by the
stockholders; a description of any arrangement between stockholders in
connection with the proposal; a representation that the stockholder is entitled
to vote at the meeting and intends to appear in person or by proxy at the
meeting to present the matter specified in the notice; and any material interest
of the stockholder in the business specified in the notice. Under Watson's
bylaws, whether or not the proper procedures are followed, no matter which is
not a proper matter for stockholder consideration shall be brought before the
meeting.

     Neither Schein's certificate of incorporation nor bylaws require any
advance notice of stockholder business for an annual meeting, except in
connection with the nomination of persons for election to the board of directors
of Schein, in which case a stockholder making such a nomination must be a
stockholder of record at the time of giving notice and must be entitled to vote
at the election of directors at the meeting. Such nomination by a stockholder
must be made pursuant to written notice to the secretary of Schein, and received
at the principal executive offices of Schein not fewer than 60 days or more than
90 days before the anniversary date of the last annual meeting, unless the
current annual meeting is held more than thirty days from the anniversary of the
last annual meeting, then the stockholder notice must be received no earlier
than 90 days before the annual meeting nor later than 60 days before the annual
meeting. Such notice must include: all information as to each person the
stockholder proposes to nominate that is required to be disclosed for election
of directors; the name and address of the stockholder; the class and number of
shares of Schein stock beneficially owned by the stockholder; and a description
of all arrangements or understandings between the stockholder and other persons
in connection with the nomination.

POWER TO CALL SPECIAL MEETINGS OF STOCKHOLDERS

     Nevada law does not specify who may call special meetings of stockholders
except for an acquiring person who so requests that the directors call such
meeting. Watson's bylaws provide that special meetings of stockholders may be
called by the board of directors, by the chairman of the board, or by the
president,
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or by one or more stockholders holding shares in the aggregate entitled to cast
not less than 10% of the votes at that meeting.

     Under Delaware law, special meetings of stockholders may be called by a
corporation's board of directors or by any other person or persons authorized by
the corporation's certificate of incorporation or bylaws. Schein's bylaws
provide that special meetings of stockholders may be called by the board of
directors or the chairman of the board.

DISTRIBUTIONS

     Under Nevada law, no distribution to or for the benefit of stockholders
with respect to their shares may be made if after giving effect to the
distribution either of the following two conditions are met: the corporation
would not be able to pay its debts as they become due in the usual course of
business; or the sum of the corporation's total assets would be less than the
sum of its total liabilities (unless the articles of incorporation permit
otherwise) plus any amount that would be needed to satisfy the preferential
rights upon dissolution of stockholders whose preferential rights are superior
to those receiving the distribution, if the corporation were to be dissolved at
the time of the distribution. Under Nevada law, a distribution includes the
payment of a dividend, a purchase, a distribution of indebtedness and the
repurchase, redemption or other acquisition of shares.

     Delaware law generally provides that a corporation may declare and pay
dividends out of surplus or, when no surplus exists (and subject to specified
limitations), out of net profits for the fiscal year in which the dividend is
declared and/or for the preceding fiscal year. Surplus is defined as net assets
minus stated capital. Delaware law applies different tests to the payment of
dividends and the repurchase of shares.

     Nevada and Delaware law contain other differences with respect to
distributions, including differences relating to the time at which a
distribution is deemed to have been made.

STOCKHOLDER APPROVAL OF CERTAIN BUSINESS COMBINATIONS

     In recent years, a number of states have adopted special laws designed to
make certain kinds of "unfriendly" corporate takeovers, or other transactions
involving a corporation and one or more of its significant stockholders, more
difficult. Certain of these laws that have been adopted in Nevada and Delaware
are summarized below.

     Sections 78.411 to 78.444 of the Nevada Revised Statutes restrict the
ability of a Nevada corporation having 200 stockholders or more of record to
engage in any "combination" with an "interested stockholder" for three years
after the interested stockholder's date of acquiring the shares that cause the
stockholder to become an interested stockholder, unless the combination or the
purchase of shares by the interested stockholder is approved by the board of
directors before that date. Under these statutes:

     - an "interested stockholder" means the "beneficial owner," as defined in
       the Revised Nevada Statutes, of 10 percent or more of the voting power of
       the corporation, or an affiliate or associate of the corporation who at
       any time within three years immediately before the date in question was
       the beneficial owner, directly or indirectly, of 10 percent or more of
       the voting power of the corporation; and

     - a "combination" is broadly defined to include a merger or consolidation
       of the corporation or any subsidiary of the corporation with the
       interested stockholder; any sale, mortgage, lease, exchange, pledge,
       transfer or other disposition of assets to or with the interested
       stockholder exceeding a specified market value of all assets of the
       corporation, a specified market value of all the outstanding shares of
       the corporation, or a specified amount of the earning power or net income
       of the corporation; amounts; the issuance or transfer of shares of the
       corporation or its subsidiaries to the interested stockholder exceeding a
       specified market value of all the outstanding shares of the corporation;
       the adoption of any plan or proposal for the liquidation or dissolution
       of the corporation proposed by the interested stockholder; transactions
       that would have the effect of increasing the proportionate share of
       outstanding shares of the corporation owned by the interested
       stockholder; or
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<PAGE>   80

       the receipt of any benefit, except proportionately as a stockholder, of
       any loans, advances, guarantees, pledges, or other financial benefits or
       any tax credit or other tax advantage by an interested stockholder. A
       combination also generally includes any of the foregoing transactions
       with an affiliate or associate of the interested stockholder.

     If the combination or purchase of shares was not previously approved by the
board before the interested stockholders' date of acquiring shares, the
interested stockholder may effect the combination after the three-year period
only if the combination is either:

     - approved by the holders of stock representing a majority of the
       outstanding shares not beneficially owned by the interested stockholder
       at a meeting called for that purpose no earlier than three years after
       the date of acquiring shares; or

     - the combination meets statutory fair price criteria.

     The above provisions do not apply to any business combination involving a
corporation:

     - whose original articles of incorporation expressly elect not to be
       governed by such provisions;

     - which does not, as of the date of acquiring shares, have a class of
       voting shares registered with the SEC under Section 12 of the Exchange
       Act, unless the corporation's articles of incorporation provide
       otherwise;

     - whose articles of incorporation were amended to provide that the
       corporation is subject to the above provisions and which did not have a
       class of voting shares registered with the SEC under Section 12 of the
       Exchange Act on the effective date of that amendment, if the combination
       is with an interested stockholder whose date of acquiring shares is
       before the effective date of such amendment; or

     - that amends its articles of incorporation, as approved by a majority of
       the disinterested shares, to expressly elect not to be governed by the
       above provisions. This type of amendment, however, would not become
       effective until 18 months after its passage and would apply only to stock
       acquisitions occurring after the effective date of the amendment.

     In addition, the above provisions will not apply to any combination with
(a) an interested stockholder who became an interested stockholder on January 1,
1991 or (b) who became an interested stockholder inadvertently and satisfies
certain other conditions.

     The Watson articles of incorporation do not exempt Watson from the
restrictions imposed by Sections 78.411 to 78.444 of the Nevada Revised
Statutes.

     Nevada's control share acquisition law, NRS 78.378 through 78.3793,
generally prohibits an acquirer from voting shares of a Nevada corporation's
stock after crossing certain threshold ownership percentages, unless the
acquirer obtains the approval of the corporation's stockholders. The control
share acquisition law only applies to Nevada corporations doing business
directly or through an affiliated corporation in Nevada with at least 200
stockholders of record, at least 100 of whom have addresses in Nevada. Watson
currently has 17 stockholders of record with addresses in Nevada. The ownership
thresholds used to measure "controlling interest" are at least one-fifth but
less than one-third, at least one-third but less than a majority, and a majority
or more of all of the outstanding voting power.

     Once an acquirer crosses one of these thresholds, a special meeting of
stockholders may be called at the acquirer's request to consider the voting
rights of its shares. If the acquirer does not make a request, consideration of
the voting rights must be taken at the next special or annual meeting of
stockholders. If the corporation's articles or bylaws provide, the corporation
may call for redemption certain of the acquirer's shares if the stockholders do
not grant full voting rights or the acquirer fails to timely deliver information
to the corporation. Watson's articles of incorporation and bylaws do not
currently provide for redemption of an acquirer's shares in such circumstances.

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<PAGE>   81

     If an acquirer's shares are accorded full voting rights and the acquirer
has acquired control shares with at least a majority of all the voting power,
any stockholder of record who has not voted for approval of authorizing voting
rights for the control shares is entitled to demand payment for the fair value
of his or her shares, which is generally not less than the highest price per
share paid in the transaction subjecting the acquirer to the control share
acquisition law. The control share acquisition law does not apply if the
articles of incorporation or bylaws in effect on the tenth day following the
crossing the thresholds described above provide that the law does not apply to
the corporation or to the acquisition specifically by types of existing or
future stockholders, whether or not identified. Neither the articles of
incorporation or bylaws of Watson currently includes such a provision.

     Under Section 203 of the Delaware General Corporation Law, certain
"business combinations" with "interested stockholders" of Delaware corporations
are subject to a three-year moratorium unless specified conditions are met.
Under Section 203, certain business combinations with a majority stockholder
require the delivery of a fairness opinion.

     Section 203 prohibits a Delaware corporation from engaging in a business
combination with an interested stockholder for three years following the date
that the person becomes an interested stockholder. With certain exceptions, an
interested stockholder is a person or group who or which owns 15 percent or more
of the corporation's outstanding voting stock (including any rights to acquire
stock under an option, warrant, agreement, arrangement or understanding, or upon
the exercise of conversion or exchange rights, and stock with respect to which
the person has voting rights only), or is an affiliate or associate of the
corporation and was the owner of 15 percent or more of the voting stock at any
time within the previous three years.

     For purposes of Section 203, the term "business combination" is defined
broadly to include mergers with or caused by the interested stockholder; sales
or other dispositions to the interested stockholder (except proportionately with
the corporation's other stockholders) of assets of the corporation or a
subsidiary equal to 10 percent or more of the total market value of the
corporation's consolidated assets or its outstanding stock; the issuance or
transfer by the corporation or a subsidiary of stock of the corporation or the
subsidiary to the interested stockholder (except for transfers in a conversion
or exchange or a pro rata distribution or certain other transactions, none of
which increase the interested stockholder's proportionate ownership of any class
or series of the corporation's or such subsidiary's stock); or receipt by the
interested stockholder of the benefit (except proportionately as a stockholder),
directly or indirectly, of any loans, advances, guarantees, pledges, or other
financial benefits provided by or through the corporation or a subsidiary.

     The three-year moratorium imposed on business combinations by Section 203
does not apply if before the stockholder becomes an interested stockholder, the
board of directors approves either the business combination or the transaction
which resulted in the person becoming an interested stockholder; the interested
stockholder owns 85 percent of the corporation's voting stock upon completion of
the transaction which made him or her an interested stockholder (excluding from
the 85 percent calculation shares owned by directors who are also officers of
the target corporation and shares held by employee stock plans which do not
permit employees to decide confidentially whether to accept a tender or exchange
offer); or after the person becomes an interested stockholder, the board
approves the business combination, and it is also approved at a stockholder
meeting by 66.67 percent of the voting stock not owned by the interested
stockholder.

     Section 203 only applies to Delaware corporations which, like Schein, have
a class of voting stock that is listed on a national securities exchange, such
as the New York Stock Exchange or are quoted on an interdealer quotation system
such as the Nasdaq National Market or are held of record by more than 2,000
stockholders. However, a Delaware corporation may elect not to be governed by
Section 203 by a provision in its original certificate of incorporation or by
certain amendments to its certificate of incorporation or bylaws. Schein has not
elected to not be governed by Section 203; therefore, Section 203 applies to
Schein.

                                       75
<PAGE>   82

MERGERS

     Nevada law requires that certain extraordinary corporate actions, such as
most mergers, share exchanges and sales of all of a corporation's assets be
recommended for approval by the board and be approved by the affirmative vote of
a majority of the corporation's outstanding shares. Nevada law does not require
a stockholder vote of the surviving corporation in a merger if the articles of
incorporation of the surviving corporation will not differ from its articles
before the merger, each stockholder of the surviving corporation whose shares
were outstanding before the merger holds an identical number of shares with
identical characteristics after the merger, and the number of voting shares
(shares that entitle their holders to vote unconditionally in elections of
directors) and participating shares (shares that entitle their holders to
participate without limitation in distributions) to be issued by the surviving
corporation in the merger plus in each case the number of voting or
participating shares issued or issuable, as the case may be, as a result of the
merger either by conversion of securities issued pursuant to the merger or the
exercise of rights or warrants issued pursuant to the merger does not exceed by
more than 20 percent such voting and participating shares outstanding
immediately before the merger.

     Delaware law generally requires that a majority of the outstanding shares
of each of the acquiring and target corporations that are constituent
corporations in a statutory merger approve such merger. Delaware law does not
require a stockholder vote of the surviving corporation in a merger if the
merger agreement does not amend the existing certificate of incorporation, each
share of the surviving corporation outstanding before the merger is an identical
outstanding share after the merger, and the number of shares to be issued by the
surviving corporation in the merger does not exceed 20 percent of the shares
outstanding immediately before the merger. Delaware law also requires that a
sale of all or substantially all of the assets of a corporation be approved by a
majority of the voting shares of the corporation transferring such assets.

DISSOLUTION

     Under Nevada law, the board of directors of a corporation that has issued
stock must recommend a dissolution to the stockholders and at least a majority
of the stockholders entitled to vote must approve a dissolution. Under Delaware
law, a dissolution must be approved by stockholders holding 100 percent of the
total voting power or the dissolution must be initiated by the board of
directors and approved by the holders of a majority of the outstanding voting
shares of the corporation. The procedures contained in Nevada law relating to
the dissolution and liquidation of a corporation differ somewhat from the
procedures contained in Delaware law.

     THIS SUMMARY OF CERTAIN MATERIAL DIFFERENCES IN THE CORPORATION LAWS OF
NEVADA AND DELAWARE, THE WATSON ARTICLES OF INCORPORATION AND THE SCHEIN
CERTIFICATE OF INCORPORATION, AND THE WATSON BYLAWS AND THE SCHEIN BYLAWS DOES
NOT PURPORT TO BE A COMPLETE LISTING OF DIFFERENCES IN THE RIGHTS AND REMEDIES
OF HOLDERS OF SHARES OF NEVADA, AS OPPOSED TO DELAWARE, CORPORATIONS, OR
STOCKHOLDERS OF WATSON AND SCHEIN IN PARTICULAR. THE DIFFERENCES CAN BE
DETERMINED IN FULL BY REFERENCE TO NEVADA LAW AND DELAWARE LAW, TO THE WATSON
ARTICLES OF INCORPORATION AND THE SCHEIN CERTIFICATE OF INCORPORATION, AND TO
THE WATSON BYLAWS AND THE SCHEIN BYLAWS. IN ADDITION, THE LAWS OF NEVADA AND
DELAWARE PROVIDE THAT SOME OF THE STATUTORY PROVISIONS AS THEY AFFECT VARIOUS
RIGHTS OF HOLDERS OF SHARES MAY BE MODIFIED BY PROVISIONS IN THE ARTICLES OF
INCORPORATION OR BYLAWS OF THE CORPORATION.

                                       76
<PAGE>   83

                    INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

     It is expected that representatives of BDO Seidman, LLP will be present at
the special meeting to respond to appropriate questions of stockholders and to
make a statement if they so desire.

                                 LEGAL MATTERS

     The validity of the Watson common stock to be issued in the merger has been
passed upon for Watson by Kummer Kaempfer Bonner & Renshaw. Certain tax
consequences of the merger have been passed upon for Watson by Cooley Godward
LLP.

                                    EXPERTS

     The audited consolidated financial statements of Watson Pharmaceuticals,
Inc. incorporated in this proxy statement/prospectus by reference to the Annual
Report on Form 10-K for the year ended December 31, 1999, except as they relate
to TheraTech, Inc. and Somerset Pharmaceuticals, Inc., have been audited by
PricewaterhouseCoopers LLP, independent accountants, and, insofar as they relate
to TheraTech, Inc. and Somerset Pharmaceuticals, Inc., by Ernst & Young LLP,
independent accountants, and Deloitte & Touche LLP, independent accountants,
respectively, whose reports thereon appear therein. Such financial statements
have been so included in reliance on the reports of such independent accountants
given the authority of such firms as experts in auditing and accounting.

     The consolidated financial statements of TheraTech, Inc. at December 31,
1998, and for the years ended December 31, 1998 and 1997, which are referred to
and made a part of this proxy statement/prospectus, have been audited by Ernst &
Young LLP, independent auditors, as set forth in their report thereon, and are
incorporated by reference in reliance upon such report given on the authority of
such firm as experts in accounting and auditing.

     The consolidated financial statements of Somerset Pharmaceuticals, Inc. at
December 31, 1997, and for the year then ended, incorporated in this proxy
statement/prospectus by reference from Watson Pharmaceuticals, Inc.'s December
31, 1999 Form 10-K, have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report, which is incorporated by reference herein,
and have been so incorporated in reliance upon the report of such firm given
upon their authority as experts in accounting and auditing.

     The consolidated financial statements and schedule of Schein
Pharmaceutical, Inc. incorporated by reference in this proxy
statement/prospectus have been audited by BDO Seidman, LLP, independent
certified public accountants, to the extent and for the periods set forth in
their reports incorporated herein by reference, and are incorporated herein in
reliance upon such reports given upon the authority of said firm as experts in
auditing and accounting.

                             STOCKHOLDER PROPOSALS


     If the merger is not consummated, any proposals of stockholders of Schein
intended to be presented at the Annual Meeting of Stockholders of Schein to be
held in 2000 must have been received by Schein, addressed to the secretary of
Schein at Schein Pharmaceutical, Inc., 100 Campus Drive, Florham Park, New
Jersey 07932, no later than December 14, 1999 to be considered for inclusion in
the proxy statement and form of proxy relating to that meeting. Proxies
solicited by Schein for its 2000 Annual Meeting of Stockholders will be voted in
the discretion of the persons voting them with respect to all proposals
presented by stockholders for consideration at such meeting after March 1, 2000.


                                       77
<PAGE>   84

                      WHERE YOU CAN FIND MORE INFORMATION

     Watson and Schein each file annual, quarterly and current reports, proxy
statements and other information with the SEC. You may read and copy any
reports, statements or other information that the companies file at the SEC's
public reference rooms in Washington, D.C., New York, New York and Chicago,
Illinois. Please call the SEC at 1-800-SEC-0330 for further information on the
public reference rooms. Watson's and Schein's public filings are also available
to the public from commercial document retrieval services and at the Internet
web site maintained by the SEC at http://www.sec.gov. Reports, proxy statements
and other information concerning Watson and Schein also may be inspected at the
offices of the National Association of Securities Dealers, Inc., Listing
Section, 1735 K Street, Washington, D.C. 20006.

     Watson has filed a Form S-4 registration statement to register with the SEC
the offering and sale of the shares of Watson common stock to be issued to
Schein stockholders in the merger. This proxy statement/prospectus is a part of
such registration statement and constitutes a prospectus of Watson and a proxy
statement of Schein for the special meeting.

     As allowed by SEC rules, this proxy statement/prospectus does not contain
all the information that stockholders can find in the registration statement or
the exhibits to the registration statement.

     The SEC allows Watson and Schein to incorporate information into this proxy
statement/prospectus "by reference," which means that the companies can disclose
important information to you by referring you to another document filed
separately with the SEC. The information incorporated by reference is deemed to
be part of this proxy statement/prospectus, except for any information
superseded by information contained directly in this proxy statement/prospectus.
This proxy statement/prospectus incorporates by reference the documents set
forth below that Schein and Watson have previously filed with the SEC. The
documents contain important information about Schein and Watson and their
finances.

     We incorporate by reference Schein's:

     - Definitive proxy statement for its 2000 annual meeting of stockholders,
       filed on April 14, 2000;

     - Annual report on Form 10-K for the year ended December 25, 1999, filed on
       April 7, 2000;

     - Quarterly report on Form 10-Q for the quarter ended March 25, 2000, filed
       on May 9, 2000; and

     - Current reports on Form 8-K filed on May 4, 2000 and May 31, 2000.

     In addition, all of Schein's filings with the SEC after the date of this
proxy statement/prospectus under Section 13(a), 13(c), 14 or 15(d) of the
Securities Exchange Act of 1934 shall be deemed to be incorporated by reference
until the merger becomes effective.

     We also incorporate by reference Watson's:

     - Definitive proxy statement for its 2000 annual meeting of stockholders,
       filed on April 10, 2000;

     - Annual report on Form 10-K for the year ended December 31, 1999, filed
       March 30, 2000;

     - Quarterly report on Form 10-Q for the quarter ended March 31, 2000, filed
       on May 15, 2000;

     - Current reports on Form 8-K filed May 25, 2000, May 31, 2000 and July 7,
       2000; and

     - Common stock description contained in Watson's Registration Statement on
       Form 8-A (File No. 001-13305) filed on August 22, 1997, registering the
       Watson common stock under Section 12(b) of the Securities Exchange Act of
       1934.

     In addition, all of Watson's filings with the SEC after the date of this
proxy statement/prospectus under Section 13(a), 13(c), 14 or 15(d) of the
Securities Exchange Act of 1934 shall be deemed to be incorporated by reference
until the merger becomes effective.

     Any statement contained in this proxy statement/prospectus or in a document
incorporated or deemed to be incorporated by reference herein shall be deemed to
be modified or superseded for purposes of this
                                       78
<PAGE>   85

proxy statement/prospectus to the extent that a statement contained herein or in
any other subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any such
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this proxy statement/prospectus.

     Watson has supplied all information contained or incorporated by reference
in this proxy statement/prospectus relating to Watson or Merger Sub, and Schein
has supplied all such information relating to Schein.

     If you are a stockholder, you may have received some of the documents
incorporated by reference. You may also obtain any of such documents from the
appropriate company or the SEC or the SEC's Internet web site described above.
Documents incorporated by reference are available from the appropriate company
without charge, excluding all exhibits unless specifically incorporated by
reference as an exhibit in this proxy statement/prospectus. Stockholders may
obtain documents incorporated by reference in this proxy statement/prospectus by
requesting them in writing or by telephone from the appropriate company at the
following addresses:
                          WATSON PHARMACEUTICALS, INC.
                               311 Bonnie Circle
                            Corona, California 92880
                              Tel: (909) 270-1400

                          SCHEIN PHARMACEUTICAL, INC.
                                100 Campus Drive
                         Florham Park, New Jersey 07932
                              Tel: (973) 593-5500


     If you would like to request documents, please do so by August 21, 2000 to
receive them before the special meeting. If you request any incorporated
documents, the appropriate company will mail them to you by first-class mail, or
other equally prompt means, within one business day of receipt of your request.



     YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROXY STATEMENT/PROSPECTUS TO VOTE YOUR SHARES AT THE SPECIAL
MEETING. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT
DIFFERS FROM THAT CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS. THIS PROXY
STATEMENT/PROSPECTUS IS DATED JULY 26, 2000. YOU SHOULD NOT ASSUME THAT THE
INFORMATION CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS IS ACCURATE AS OF ANY
DATE OTHER THAN THAT DATE, AND NEITHER THE MAILING OF THIS PROXY
STATEMENT/PROSPECTUS TO STOCKHOLDERS NOR THE ISSUANCE OF SHARES OF WATSON COMMON
STOCK IN THE MERGER SHALL CREATE ANY IMPLICATION TO THE CONTRARY.


     Watson, the Watson logos and all other Watson product and service names
(except DilacorXR, which is licensed from RPR) are registered trademarks or
trademarks of Watson Pharmaceuticals, Inc. in the USA and in other select
countries. Schein, the Schein logos and all other Schein product and service
names are registered trademarks or trademarks of Schein Pharmaceutical, Inc. in
the USA and in other select countries. "(R)" and "(TM)" indicate USA
registration and USA trademark, respectively. Other third party logos and
product/trade names are registered trademarks or trade names of their respective
companies.

                                       79
<PAGE>   86

                                                                         ANNEX A
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

                          AGREEMENT AND PLAN OF MERGER

                                     AMONG:

                         WATSON PHARMACEUTICALS, INC.,
                             A NEVADA CORPORATION;

                             WS ACQUISITION CORP.,
                            A DELAWARE CORPORATION;

                                      AND

                          SCHEIN PHARMACEUTICAL, INC.,
                             A DELAWARE CORPORATION

                            ------------------------

                            DATED AS OF MAY 24, 2000

                            ------------------------

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
                                       A-1
<PAGE>   87

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                PAGE
                                                                                ----
<S>               <C>                                                           <C>
ARTICLE I  THE OFFER..........................................................    4
  SECTION 1.01.   The Offer...................................................    4
  SECTION 1.02.   Company Action..............................................    6
  SECTION 1.03.   Directors...................................................    6
  SECTION 1.04.   Adjustment..................................................    7

ARTICLE II  THE MERGER........................................................    8
  SECTION 2.01.   The Merger..................................................    8
  SECTION 2.02.   Effective Time..............................................    8
  SECTION 2.03.   Effect of the Merger........................................    8
  SECTION 2.04.   Certificate of Incorporation; By-Laws.......................    8
  SECTION 2.05.   Closing.....................................................    8
  SECTION 2.06.   Directors and Officers......................................    8
  SECTION 2.07.   Stockholders Meeting........................................    9
  SECTION 2.08.   Merger Without Meeting of Stockholders......................    9

ARTICLE II  CONVERSION OF SECURITIES..........................................    9
  SECTION 3.01.   Effect on Capital Stock.....................................    9
  SECTION 3.02.   Exchange of Certificates....................................   11
  SECTION 3.03.   Dissenting Shares...........................................   12
  SECTION 3.04.   Lost, Stolen or Destroyed Certificates......................   12
  SECTION 3.05.   Taking of Necessary Action; Further Action..................   12

ARTICLE IV  REPRESENTATIONS AND WARRANTIES OF THE COMPANY.....................   13
  SECTION 4.01.   Organization and Qualification; Subsidiaries................   13
  SECTION 4.02.   Certificate of Incorporation and By-Laws....................   13
  SECTION 4.03.   Capitalization..............................................   13
  SECTION 4.04.   Authority Relative to This Agreement........................   14
  SECTION 4.05.   Material Contracts; No Conflict, Required Filings and
                  Consents....................................................   14
  SECTION 4.06.   Compliance, Permits.........................................   15
  SECTION 4.07.   SEC Filings, Financial Statements...........................   18
  SECTION 4.08.   Absence of Certain Changes or Events........................   18
  SECTION 4.09.   No Undisclosed Liabilities..................................   19
  SECTION 4.10.   Absence of Litigation.......................................   19
  SECTION 4.11.   Employee Benefit Plans; Employment Agreements...............   19
  SECTION 4.12.   Labor Matters...............................................   20
  SECTION 4.13.   Restrictions on Business Activities.........................   20
  SECTION 4.14.   Title to Property...........................................   20
  SECTION 4.15.   Taxes.......................................................   20
  SECTION 4.16.   Environmental Matters.......................................   21
  SECTION 4.17.   Brokers.....................................................   22
  SECTION 4.18.   Intellectual Property.......................................   22
  SECTION 4.19.   Warranties..................................................   22
  SECTION 4.20.   Products Liability..........................................   22
  SECTION 4.21.   Vote Required...............................................   23
  SECTION 4.22.   Takeover Statutes...........................................   23
  SECTION 4.23.   Opinion of Financial Advisor................................   23

ARTICLE V  REPRESENTATIONS AND WARRANTIES OF PARENT AND
                PURCHASER.....................................................   23
  SECTION 5.01.   Organization and Qualification..............................   23
  SECTION 5.02.   Authority Relative to this Agreement........................   23
  SECTION 5.03.   No Conflict, Required Filings and Consents..................   23
  SECTION 5.04.   Capitalization..............................................   24
  SECTION 5.05.   SEC Filings, Financial Statements...........................   24
  SECTION 5.06.   Absence of Certain Changes or Events........................   25
</TABLE>

                                       A-2
<PAGE>   88

<TABLE>
<CAPTION>
                                                                                PAGE
                                                                                ----
<S>               <C>                                                           <C>
  SECTION 5.07.   No Undisclosed Liabilities..................................   25
  SECTION 5.08.   Funds.......................................................   25

ARTICLE VI  CONDUCT OF BUSINESS PENDING THE MERGER............................   25
  SECTION 6.01.   Conduct of Business by the Company Pending the Merger.......   25
  SECTION 6.02.   No Solicitation.............................................   28
  SECTION 6.03.   Information Supplied........................................   29

ARTICLE VII  ADDITIONAL AGREEMENTS............................................   29
  SECTION 7.01.   Filings, Other Actions; Notification........................   29
  SECTION 7.02.   Access to Information; Confidentiality......................   30
  SECTION 7.03.   Stock Options...............................................   30
  SECTION 7.04.   Employee Benefits...........................................   31
  SECTION 7.05.   Indemnification.............................................   32
  SECTION 7.06.   Notification of Certain Matters.............................   34
  SECTION 7.07.   Further Action..............................................   35
  SECTION 7.08.   Public Announcements........................................   35
  SECTION 7.09.   De-listing..................................................   35
  SECTION 7.10.   Expenses....................................................   35
  SECTION 7.11.   Financing...................................................   35
  SECTION 7.12.   Credit Facility.............................................   36
  SECTION 7.13.   Affiliate Agreements........................................   36

ARTICLE VIII  CONDITIONS TO THE MERGER........................................   37
  SECTION 8.01.   Conditions to Obligation of Each Party to Effect the
                  Merger......................................................   37
  SECTION 8.02.   Additional Condition to Obligation of the Company...........   37

ARTICLE IX  TERMINATION.......................................................   37
  SECTION 9.01.   Termination.................................................   37
  SECTION 9.02.   Effect of Termination.......................................   38
  SECTION 9.03.   Fees and Expenses...........................................   39

ARTICLE X  GENERAL PROVISIONS.................................................   39
  SECTION 10.01.  Effectiveness of Representations, Warranties and
                  Agreements..................................................   39
  SECTION 10.02.  Notices.....................................................   40
  SECTION 10.03.  Amendment...................................................   40
  SECTION 10.04.  Waiver......................................................   41
  SECTION 10.05.  Headings....................................................   41
  SECTION 10.06.  Severability................................................   41
  SECTION 10.07.  Entire Agreement............................................   41
  SECTION 10.08.  Assignment, Purchaser.......................................   41
  SECTION 10.09.  Parties in Interest.........................................   41
  SECTION 10.10.  Failure or Indulgence Not Waiver; Remedies Cumulative.......   41
  SECTION 10.11.  Governing Law...............................................   42
  SECTION 10.12.  Counterparts................................................   42
  SECTION 10.13.  Waiver of Jury Trial........................................   42
  SECTION 10.14.  Disclosure Schedule.........................................   42
  SECTION 10.15.  Certain Definitions.........................................   42
</TABLE>

Annex A  Certain Conditions to the Offer

Annex B  Credit Facility Use of Proceeds

Annex C  Preferred Stock Term Sheet

Exhibit A  Form of Affiliate Agreements

                                       A-3
<PAGE>   89

                          AGREEMENT AND PLAN OF MERGER

     AGREEMENT AND PLAN OF MERGER, dated as of May 24, 2000 (the "Agreement"),
by and among Watson Pharmaceuticals, Inc., a Nevada corporation ("Parent"), WS
Acquisition Corp., a Delaware corporation and a wholly-owned, direct or indirect
subsidiary of Parent ("Purchaser"), and Schein Pharmaceutical, Inc., a Delaware
corporation (the "Company"). Certain capitalized terms used in this Agreement
have the meanings ascribed to them in Section 10.15.

     WHEREAS, the Boards of Directors of each of Parent, Purchaser and the
Company have approved and deem it advisable and in the best interests of their
respective stockholders for Parent to enter into a business combination with the
Company upon the terms and subject to the conditions set forth herein;

     WHEREAS, in furtherance of such combination, it is proposed that Purchaser
make a cash tender offer (the "Offer") to acquire all of the outstanding Common
Stock, par value $0.01 per share, of the Company (the "Company Common Stock") at
a price of $19.50 per share, net to the seller in cash, upon the terms and
subject to the conditions set forth herein;

     WHEREAS, the Boards of Directors of each of Parent and the Company have
approved this Agreement and the merger (the "Merger"), following the
consummation of the Offer, of Purchaser with and into the Company in accordance
with the DGCL and upon the terms and subject to the conditions set forth herein;

     WHEREAS, pursuant to the Merger, each outstanding share of Company Common
Stock other than Ineligible Shares (as defined in Section 3.01(a)) and
Dissenting Shares (as defined in Section 3.03) shall be converted into the right
to receive the Merger Consideration (as defined in Section 3.01(b)), consisting
of shares of common stock, par value $0.0033 per share, of Parent ("Parent
Common Stock"), and, if applicable, cash;

     WHEREAS, the Company Board has (i) determined that the consideration to be
paid for each share of Company Common Stock in the Offer and the Merger is fair
to the holders of such shares (the "Shares" and, individually, a "Share"), (ii)
approved the making of the Offer and (iii) resolved and agreed to recommend that
holders of such Shares tender their Shares pursuant to the Offer and/or vote to
adopt this Agreement and each of the Transactions (as defined in Section
1.02(a)) upon the terms and subject to the conditions set forth herein;

     WHEREAS, the Significant Stockholders (as defined in Section 10.15(kkkk)
have executed and delivered to Parent agreements pursuant to which they have
agreed to take certain actions with respect to the Offer (the "Stockholder
Agreements");

     NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements herein contained, and intending to be legally bound hereby,
Parent, Purchaser and the Company hereby agree as follows:

                                   ARTICLE I

                                   THE OFFER

     SECTION 1.01. The Offer. (a) Provided that this Agreement shall not have
been terminated in accordance with Article IX and none of the events set forth
in Annex A hereto shall have occurred and be existing, as promptly as reasonably
practicable, Purchaser shall commence (within the meaning of Rule 14d-2
promulgated under the Exchange Act) the Offer to acquire all the outstanding
Shares at a price of $19.50 per Share, net to the seller in cash, subject to
applicable withholding of taxes, without interest (such price, or such higher
price per Share as may be paid in the Offer, being referred to herein as the
"Offer Price"). Subject to (i) the satisfaction of the Minimum Condition and
(ii) the satisfaction or waiver of the other conditions set forth in Annex A
hereto, Purchaser shall consummate the Offer in accordance with its terms and
accept for payment and pay for Shares validly tendered pursuant to the Offer and
not withdrawn as soon as Purchaser is legally permitted to do so under
applicable law. The Offer

                                       A-4
<PAGE>   90

shall be made by means of an offer to purchase (the "Offer to Purchase") and
shall be subject to the Minimum Condition and the other conditions set forth in
Annex A hereto, and shall reflect, as appropriate, the other terms set forth in
this Agreement. Parent and Purchaser expressly reserve the right, in their sole
discretion, subject to compliance with the Exchange Act, to waive any such
condition and to make any other changes in the terms and conditions of the
Offer; provided, however, that Parent and Purchaser shall not (i) amend or waive
the Minimum Condition, (ii) decrease the Offer Price, (iii) decrease the maximum
number of Shares to be purchased in the Offer or (iv) amend any other term or
condition of the Offer in any manner or impose any term or condition that is
adverse to the holders of the Shares without the written consent of the Company
(such consent to be authorized by the Company Board or a duly authorized
committee thereof). It is agreed that the terms and conditions of the Offer,
including, but not limited to, the conditions set forth in Annex A hereto, are
for the benefit of Parent and Purchaser and may be asserted by Parent and
Purchaser regardless of the circumstances giving rise to any such condition.

     (b) The initial expiration date of the Offer shall be the date which is 20
business days after the commencement date of the Offer. Notwithstanding the
foregoing, in the event that any condition to the Offer set forth in Annex A
hereto shall not have been satisfied or waived at the scheduled or any extended
expiration date of the Offer, Purchaser shall (unless otherwise notified by the
Company), and Purchaser shall otherwise be entitled to, extend the expiration
date of the Offer two times in increments of up to 10 business days each (unless
otherwise agreed by Parent and the Company) until the earliest to occur of (x)
the satisfaction or waiver of each such condition, (y) the termination of this
Agreement in accordance with its terms and (z) either November 13, 2000, if the
condition set forth in clause (i) of the first paragraph of Annex A shall not
have been satisfied, or October 16, 2000 if any other condition set forth in
Annex A hereto shall not have been satisfied; provided, however, that Purchaser
shall not be required to extend the Offer as provided in this sentence unless
each such condition is reasonably capable of being satisfied. In addition,
without limiting the foregoing, Purchaser may, without the consent of the
Company, extend the expiration date of the Offer for up to 10 business days if,
on the scheduled or any extended expiration date of the Offer, the Shares
validly tendered pursuant to the Offer and not withdrawn are sufficient to
satisfy the Minimum Condition but total less than 90% of the outstanding Shares,
notwithstanding that all the conditions to the Offer set forth in Annex A hereto
have been satisfied, so long as Purchaser waives the satisfaction of any of the
conditions to the Offer (other than the conditions set forth in paragraphs (a)
and (c) of Annex A hereto) that subsequently may not be satisfied during any
such extension of the Offer.

     (c) As soon as practicable on the date the Offer is commenced (the "Offer
Commencement Date"), Parent and Purchaser shall file with the SEC a Tender Offer
Statement on Schedule TO (together with all amendments and supplements thereto,
the "Schedule TO") with respect to the Offer. The Schedule TO shall contain or
shall incorporate by reference the Offer to Purchase and forms of the related
letter of transmittal and any related summary advertisement (the Schedule TO,
the Offer to Purchase and such other documents, together with all supplements
and amendments thereto, being referred to herein collectively as the "Offer
Documents"). Parent and Purchaser shall mail the applicable Offer Documents to
the stockholders of the Company as soon as practicable after filing with the
SEC. The Offer Documents shall comply in all material respects with the
provisions of applicable federal securities laws. Each of Parent and Purchaser,
on the one hand, and the Company, on the other hand, shall correct promptly any
information provided by it for use in the Offer Documents which shall have
become false or misleading in any material respect, and Parent and Purchaser
further agree to take all steps necessary to cause the Schedule TO, as so
corrected, to be filed with the SEC and the other Offer Documents, as so
corrected, to be disseminated to holders of the Shares, in each case as and to
the extent required by applicable federal securities laws. Parent and Purchaser
shall give the Company and its counsel reasonable opportunity to review and
comment upon the Offer Documents prior to their being filed with, or sent to,
the SEC. Parent and Purchaser agree to provide the Company and its counsel any
comments Parent, Purchaser or their counsel may receive from the SEC or its
staff with respect to the Offer Documents promptly after the receipt of such
comments.

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     (d) Parent shall provide or cause to be provided to Purchaser on a timely
basis the funds necessary to purchase all the Shares that Purchaser becomes
obligated to purchase pursuant to the Offer.

     (e) Purchaser shall be entitled to deduct and withhold from the
consideration otherwise payable pursuant to the Offer such amounts as may be
required to be deducted and withheld with respect to the making of such payment
under the Code or under any provision of state, local or foreign tax law;
provided, however, that Purchaser shall promptly pay any amounts deducted and
withheld hereunder to the applicable Governmental Entity, shall promptly file
all Tax Returns and reports required to be filed in respect of such deductions
and withholdings subject to extensions permitted by applicable law, and shall
promptly provide to the Company proof of such payment and a copy of all such Tax
Returns and reports.

     SECTION 1.02. Company Action. (a) The Company hereby approves of and
consents to the Offer and represents that the Company Board, at a meeting duly
called and held on May 23, 2000 at which a quorum was present and acting
throughout, by a unanimous vote has (i) determined that this Agreement, the
Offer, the Merger and the other transactions contemplated hereby (the
"Transactions") are fair to and in the best interests of the holders of the
Shares, (ii) authorized, approved, adopted and declared advisable this Agreement
and the Transactions and (iii) resolved to recommend that the stockholders of
the Company accept the Offer and tender their Shares to Purchaser pursuant to
the Offer and/or approve and adopt this Agreement (such recommendation is
hereinafter referred to as the "Company Board Recommendation"). The Company
hereby consents to the inclusion in the Offer Documents of the Company Board
Recommendation, subject to Section 6.02(b).

     (b) Concurrently with the commencement of the Offer, the Company shall file
with the SEC a Solicitation/Recommendation Statement on Schedule 14D-9 (together
with all amendments and supplements thereto, the "Schedule 14D-9") containing
the recommendation of the Company Board described in Section 1.02(a) and shall
disseminate the Schedule 14D-9 to the holders of the Shares to the extent
required by Rule 14d-9 promulgated under the Exchange Act and any other
applicable federal securities laws. The Schedule 14D-9 shall comply in all
material respects with the provisions of applicable federal securities laws.
Each of the Company, on the one hand, and Parent and Purchaser, on the other
hand, shall correct promptly any information provided by it for use in the
Schedule 14D-9 which shall have become false or misleading in any material
respect, and the Company further agrees to take all steps necessary to cause the
Schedule 14D-9, as so corrected, to be filed with the SEC and disseminated to
holders of the Shares, in each case as and to the extent required by applicable
federal securities laws. The Company shall give Parent, Purchaser and their
counsel reasonable opportunity to review and comment upon the Schedule 14D-9
prior to it being filed with, or sent to, the SEC. The Company agrees to provide
Parent, Purchaser and their counsel any comments the Company or its counsel may
receive from the SEC or its staff with respect to the Schedule 14D-9 promptly
after the receipt of such comments.

     (c) The Company shall cause its transfer agent to promptly furnish
Purchaser with mailing labels containing the names and addresses of all record
holders of the Shares and with security position listings of Shares held in
stock depositories, each as of a recent date, together with all other available
listings and computer files containing names, addresses and security position
listings of record holders and beneficial owners of Shares. The Company shall
furnish Purchaser with such additional information, including, without
limitation, updated listings and computer files of stockholders, mailing labels
and security position listings, and such other assistance as Parent, Purchaser
or their agents may reasonably request. Subject to the requirements of
applicable law, and except for such steps as are necessary to disseminate the
Offer Documents and any other documents necessary to consummate the Offer or the
Merger, Parent and Purchaser shall (i) hold in confidence the information
contained in such labels, listings and files, (ii) use such information only in
connection with the Offer and the Merger and (iii) if this Agreement is
terminated in accordance with Article IX, upon request of the Company, promptly
deliver or cause to be delivered to the Company all copies of such information
then in their possession or the possession of their affiliates, agents or
representatives.

     SECTION 1.03. Directors. (a) Promptly upon the acceptance for payment by
Parent or any of its subsidiaries of Shares pursuant to the Offer, Parent shall
be entitled, subject to compliance with

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Section 14(f) of the Exchange Act, to designate such number of directors,
rounded up to the next greatest whole number, on the Company Board as will give
Parent representation on the Company Board equal to that number of directors
which equals the product of the total number of directors on the Company Board
(giving effect to the directors appointed or elected pursuant to this sentence
and including current directors serving as officers of the Company) multiplied
by the percentage that the aggregate number of Shares beneficially owned by
Parent, Purchaser or any of their affiliates (including for purposes of this
Section 1.03, such Shares as are accepted for payment pursuant to the Offer, but
excluding Shares held by the Company or any of its affiliates, which would not
include Parent, Purchaser or any of their respective affiliates) bears to the
number of Shares then outstanding; provided, however, that in the event that
Parent's designees are appointed or elected to the Company Board, until the
Effective Time (as defined in Section 2.02) the Company Board shall have at
least two directors who are directors on the date of this Agreement and who are
not executive officers of the Company (the "Independent Directors"). At such
times, the Company will use its best efforts to cause (i) each committee of the
Company Board, (ii) if requested by Parent, the board of directors of each of
the Company's subsidiaries and (iii) if requested by Parent, each committee of
such subsidiaries' boards to include persons designated by Parent constituting
the same percentage of each such committee or board as Parent's designees are of
the Company Board. The Company shall, upon request by Parent, promptly increase
the size of the Company Board or exercise its best efforts to secure the
resignations of such number of directors, or both, as is necessary to enable
Parent's designees to be elected or appointed to the Company Board pursuant to
this Section 1.03(a) and shall cause Parent's designees to be so elected or
appointed. The Company Board shall approve, and by approving the execution and
delivery of this Agreement by the Company, hereby does approve the taking of
action by stockholders of the Company, by written consent, to amend the By-Laws
of the Company as may be necessary or desirable to effect the provisions of this
Section 1.03.

     (b) Following the election or appointment of Parent's designees pursuant to
this Section 1.03, and prior to the Effective Time, the approval of a majority
of the Independent Directors shall be required to authorize (i) any amendment of
this Agreement or the Restated Certificate of Incorporation or By-Laws of the
Company, (ii) any termination of this Agreement by the Company, (iii) any
consent by the Company to any extension of the time for performance of any of
the obligations or other acts of Parent or Purchaser or (iv) any waiver by the
Company of compliance with any of the covenants or conditions contained in this
Agreement for the benefit of the Company or any other rights of the Company
under this Agreement. Any person who is a director on the date of this
Agreement, but who, in order to carry out the provisions of this Section 1.03,
is not a director at the Effective Time, shall be entitled to receive all
payments (other than attendance fees) at the time such director resigns as he or
she otherwise would have been entitled to receive under policies or programs in
effect on the date hereof if he or she had been a director as of the Effective
Time.

     (c) Subject to applicable law, the Company shall promptly take all action
necessary pursuant to Section 14(f) of the Exchange Act and Rule 14f-1
promulgated thereunder in order to fulfill its obligations under this Section
1.03 and shall include in the Schedule 14D-9 mailed to stockholders promptly
after the commencement of the Offer (or an amendment thereof or an information
statement pursuant to Rule 14f-1 if Parent has not theretofore designated
directors) such information with respect to the Company and its officers and
directors as is required under Section 14(f) and Rule 14f-1 in order to fulfill
its obligations under this Section 1.03. Parent and Purchaser shall furnish to
the Company in a timely manner so as to permit the Company to fulfill its
obligations under this Section 1.03 and be solely responsible for any
information with respect to itself and its nominees, officers, directors and
affiliates required by Section 14(f) and Rule 14f-1. The provisions of this
Section 1.03 are in addition to and shall not limit any rights that Parent,
Purchaser or any of their respective affiliates may have as a holder or
beneficial owner of Shares as a matter of law with respect to the election of
directors or otherwise.

     SECTION 1.04. Adjustment. If, between the date of this Agreement and the
Effective Time, the outstanding shares of Company Common Stock are changed into
a different number or class of shares by reason of any stock split, division or
subdivision of shares, stock dividend, reverse stock split,

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<PAGE>   93

reclassification, recapitalization or other transaction, then the Offer Price
and the Merger Consideration (as hereinafter defined) shall be appropriately
adjusted.

                                   ARTICLE II

                                   THE MERGER

     SECTION 2.01. The Merger. Upon the terms and subject to the conditions set
forth in this Agreement, and in accordance with the DGCL, at the Effective Time
Purchaser shall be merged with and into the Company. As a result of the Merger,
(i) the separate corporate existence of Purchaser shall cease and the Company
shall continue as the surviving corporation of the Merger (the "Surviving
Corporation"), (ii) the Company shall succeed to and assume all the rights and
obligations of Purchaser in accordance with the DGCL and (iii) the separate
corporate existence of the Company with all its rights, privileges, immunities,
powers and franchises shall continue unaffected by the Merger, except as set
forth in Section 2.04.

     SECTION 2.02. Effective Time. As promptly as practicable after the
satisfaction or waiver of the conditions set forth in Article VIII, the parties
hereto shall cause the Merger to be consummated by filing this Agreement or a
certificate of merger (in either case, the "Certificate of Merger") with the
Secretary of State of the State of Delaware in such form as required by, and
executed in accordance with, the relevant provisions of the DGCL. The parties
hereto shall make all other filings, recordings or publications required by the
DGCL in connection with the Merger. The Merger shall become effective at such
time as the Certificate of Merger is duly filed with such Secretary of State, or
at such later time as Parent and the Company shall agree and specify in the
Certificate of Merger (the time the Merger becomes effective being the
"Effective Time").

     SECTION 2.03. Effect of the Merger. At the Effective Time, the effect of
the Merger shall be as provided in this Agreement, the Certificate of Merger and
the applicable provisions of the DGCL. Without limiting the generality of the
foregoing, and subject thereto, at the Effective Time all the property, rights,
privileges, immunities, powers and franchises of the Company and Purchaser shall
vest in the Surviving Corporation, and all debts, liabilities and duties of the
Company and Purchaser shall become the debts, liabilities and duties of the
Surviving Corporation.

     SECTION 2.04. Certificate of Incorporation; By-Laws. At the Effective Time
and without any further action on the part of the Company and Purchaser, the
Restated Certificate of Incorporation of the Company, as in effect immediately
prior to the Effective Time, shall be the Certificate of Incorporation of the
Surviving Corporation (except that such Certificate of Incorporation shall be
amended at the Effective Time so that Article Third, Section A reads in its
entirety as follows: "The aggregate number of shares that the Corporation shall
have the authority to issue is 1,000 shares of Common Stock, par value $0.001
per share") until thereafter amended as provided by the DGCL and such
Certificate of Incorporation. The By-Laws of the Company, as in effect
immediately prior to the Effective Time, shall be the By-Laws of the Surviving
Corporation until thereafter amended as provided by the DGCL, the Certificate of
Incorporation of the Surviving Corporation and such By-Laws.

     SECTION 2.05. Closing. Unless this Agreement has been terminated and the
Transactions have been abandoned pursuant to Article IX, and subject to the
satisfaction or waiver of the conditions set forth in Article VIII, the closing
of the Merger (the "Closing") will take place at 10:00 AM (EST) as promptly as
practicable (and in any event within two business days) after satisfaction or
waiver of the conditions set forth in Article VIII, at the offices of Proskauer
Rose LLP, 1585 Broadway, New York, New York 10036, unless another date, time or
place is agreed to in writing by the parties hereto.

     SECTION 2.06. Directors and Officers. The directors of Purchaser
immediately prior to the Effective Time shall be the initial directors of the
Surviving Corporation, each to hold office in accordance with the Certificate of
Incorporation and By-Laws of the Surviving Corporation, and the officers of the
Company immediately prior to the Effective Time shall be the initial officers of
the Surviving Corporation, in each case until their respective successors are
duly elected or appointed and qualified.
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     SECTION 2.07. Stockholders' Meeting.

     (a) If required by applicable law in order to consummate the Merger:

          (i) the Company, acting through the Company Board, shall, in
     accordance with applicable law duly call, give notice of, convene and hold
     a special meeting of its stockholders (the "Special Meeting") as promptly
     as practicable following the acceptance for payment and purchase of Shares
     by Purchaser pursuant to the Offer for the purpose of considering and
     taking action upon the approval of the Merger and the adoption of this
     Agreement; and

          (ii) the Company and Parent shall prepare and Parent shall file with
     the SEC a registration statement on Form S-4 (or on such other form as
     shall be appropriate) (the "Registration Statement") relating to the
     issuance of Parent Common Stock in the Merger and relating to the adoption
     of this Agreement by the stockholders of the Company and shall use all
     reasonable efforts to cause the Registration Statement to become effective
     as soon thereafter as practicable. The Registration Statement shall include
     the recommendation of the Board in favor of the Merger, subject to Section
     6.02(b).

     (b) Parent shall provide the Company with the information concerning Parent
and Purchaser, and the Company shall provide Parent with information concerning
the Company, required to be included in the Registration Statement. Parent shall
vote, or cause to be voted, all of the Shares then beneficially owned by it,
Purchaser or any of its other subsidiaries or affiliates in favor of the
adoption of this Agreement.

     SECTION 2.08. Merger Without Meeting of Stockholders. Notwithstanding
Section 2.07 hereof, in the event that Parent, Purchaser or any other subsidiary
of Parent shall acquire at least 90 percent of the outstanding Shares pursuant
to the Offer or otherwise, the parties hereto shall, subject to Article VIII,
take all necessary and appropriate action to cause the Merger to become
effective as soon as practicable after such acquisition, without a meeting of
stockholders of the Company, in accordance with Section 253 of the DGCL.

                                  ARTICLE III

                            CONVERSION OF SECURITIES

     SECTION 3.01. Effect on Capital Stock. At the Effective Time, by virtue of
the Merger and without any action on the part of Parent, Purchaser, the Company
or the holders of any of the following securities:

          (a) Cancellation. Each Share held in the treasury of the Company and
     each Share owned by Parent, Purchaser or any direct or indirect
     wholly-owned subsidiary of the Company or Parent immediately prior to the
     Effective Time ("Ineligible Shares") shall, by virtue of the Merger and
     without any action on the part of the holder thereof, cease to be
     outstanding, be canceled and retired without payment of any consideration
     therefor and cease to exist.

          (b) Conversion of Securities. Each Share issued and outstanding
     immediately prior to the Effective Time, other than Dissenting Shares (if
     any) and Ineligible Shares, shall be converted into the right to receive
     the Merger Consideration, upon the surrender of the certificate formerly
     representing such Share in the manner provided in Section 3.02. Each such
     Share, when so converted, shall no longer be outstanding and shall
     automatically be canceled and retired and shall cease to exist, and each
     holder of a certificate representing any such Share shall cease to have any
     rights with respect thereto, except the right to receive the Merger
     Consideration with respect to such Share upon the surrender of such
     certificate in accordance with Section 3.02. For purposes if this Section
     3.01(b), the following terms shall have the following meanings:

             (i) "Merger Consideration" shall mean that number of shares of
        Parent Common Stock equal to the Exchange Ratio; provided, however, that
        if the Parent Average Stock Price is less than $37.82, then Merger
        Consideration shall mean one of the following, as determined by Parent

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<PAGE>   95

        in its sole discretion: (1) that number of shares of Parent Common Stock
        equal to the Exchange Ratio determined in accordance with paragraph
        (ii), clause (3) below; (2) $19.50 in cash; or (3) the aggregate of (x)
        0.51562 of a share of Parent Common Stock and (y) a dollar amount in
        cash equal to $19.50 minus the product of 0.51562 multiplied by the
        Parent Average Stock Price.

             (ii) "Exchange Ratio" shall mean the quotient (rounded to the
        nearest hundred thousandth) obtained by dividing $23.00 by the Parent
        Average Stock Price; provided, however, that:

                (1) if the Parent Average Stock Price is greater than or equal
           to $37.82 but less than $44.61, the Exchange Ratio shall be 0.51562;

                (2) if the Parent Average Stock Price is greater than $54.52 but
           less than or equal to $62.82, the Exchange Ratio shall be 0.42187;

                (3) if the Parent Average Stock Price is less than $37.82, the
           Exchange Ratio shall be the quotient (rounded to the nearest hundred
           thousandth) obtained by dividing $19.50 by the Parent Average Stock
           Price; and

                (4) if the Parent Average Stock Price is greater than $62.82,
           the Exchange Ratio shall be the quotient (rounded to the nearest
           hundred thousandth) obtained by dividing $26.50 by the Parent Average
           Stock Price.

             (iii) "Parent Average Stock Price" shall mean the average of the
        closing price of a share of Parent Common Stock on the NYSE for the ten
        consecutive trading days ending on the trading day two trading days
        prior to the date of the Special Meeting or, if no Special Meeting is
        required under applicable law in order to consummate the Merger, the
        Effective Time.

          (c) Stock Options; Warrants. All options to purchase Company Common
     Stock granted under the Stock Option Plans, Stock Purchase Plan or pursuant
     to any other arrangement adopted by the Company Board to provide options,
     warrants or other rights to purchase capital stock of the Company to
     directors, officers or employees of the Company (in any such case, an
     "Option") and the warrants granted to Evercore Healthcare LLC (the
     "Warrants") then outstanding shall be subject to the provisions of Section
     7.03.

          (d) Capital Stock of Purchaser. Each share of Purchaser Common Stock
     issued and outstanding immediately prior to the Effective Time shall be
     converted into and exchanged for one validly issued, fully paid and
     non-assessable share of common stock, par value $0.01 per share, of the
     Surviving Corporation. Each stock certificate of Purchaser evidencing
     ownership of any such shares shall continue to evidence ownership of such
     shares of capital stock of the Surviving Corporation.

          (e) All Other Capital Stock of the Company. All other capital stock of
     the Company shall be canceled and retired and shall cease to exist, and no
     Merger Consideration or other consideration shall be issued or delivered in
     exchange therefor.

          (f) Adjustments to Exchange Ratio. The Exchange Ratio shall be
     adjusted to reflect fully the effect of any stock split, reverse split,
     stock dividend (including any dividend or distribution of securities
     convertible into Parent Common Stock or Company Common Stock),
     reorganization, recapitalization or other like change with respect to
     Parent Common Stock or Company Common Stock the record date for which shall
     occur after the date hereof and prior to the Effective Time.

          (g) Fractional Shares. No fraction of a share of Parent Common Stock
     will be issued, but in lieu thereof each holder of Company Common Stock who
     would otherwise be entitled to a fraction of a share of Parent Common Stock
     (after aggregating all fractional shares of Parent Common Stock to be
     received by such holder) shall receive from Parent an amount of cash
     (rounded to the nearest whole cent), without interest, equal to the product
     of (i) such fraction, multiplied by (ii) the average of the closing price
     for trades of Parent Common Stock as of each of the thirty (30) consecutive

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<PAGE>   96

     trading days immediately preceding the Effective Time as quoted in the Wall
     Street Journal or other reliable financial newspaper or publication. For
     the purposes of the preceding sentence, a "trading day" means a day on
     which trading generally takes place on the New York Stock Exchange (the
     "NYSE") and on which trading in Parent Common Stock has occurred.

     SECTION 3.02. Exchange of Certificates.

     (a) Exchange Agent. Prior to the Effective Time, Parent shall designate a
bank or trust company to act as agent for holders of the Shares in connection
with the Merger (the "Exchange Agent") to receive in trust for the benefit of
the holders of Company Common Stock, for exchange in accordance with this
Section 3.02, through the Exchange Agent, certificates evidencing the Parent
Common Stock, and, if applicable, the cash portion of the Merger Consideration
issuable pursuant to Section 3.01 in exchange for outstanding Shares. At the
Effective Time, Parent shall take all steps necessary to deposit or cause to be
deposited with the Exchange Agent such funds for timely payment thereunder. Any
net loss resulting from such investments shall be the sole and exclusive
responsibility of Parent and Parent shall promptly deposit additional funds with
the Exchange Agent in an amount equal to any such net loss before the funds are
paid by the Exchange Agent to the holders of the Shares.

     (b) Exchange Procedures. Promptly after the Effective Time, Parent shall
cause the Exchange Agent to mail to each holder of record of a certificate or
certificates, which immediately prior to the Effective Time represented
outstanding Shares (the "Certificates"), whose Shares were converted pursuant to
Section 3.01(b) into the right to receive the Merger Consideration, (i) a letter
of transmittal (which shall specify that delivery shall be effected, and risk of
loss and title to the Certificates shall pass, only upon delivery of the
Certificates to the Exchange Agent and shall be in such form and have such other
provisions as Parent may reasonably specify) and (ii) instructions for use in
effecting the surrender of the Certificates in exchange for the certificates
evidencing shares of Parent Common Stock and, in lieu of any fractional shares
thereof, cash, and if applicable, the cash portion of the Merger Consideration,
payable pursuant to Section 3.01. Upon surrender of a Certificate for
cancellation to the Exchange Agent, together with such letter of transmittal,
duly executed, the holder of such Certificate shall, subject to the immediately
following sentence and Section 3.02(e), be entitled to receive in exchange
therefor the Merger Consideration for each Share formerly represented by such
Certificate and the Certificate so surrendered shall forthwith be canceled. If
payment of the Merger Consideration is to be made to a person other than the
person in whose name the surrendered Certificate is registered, it shall be a
condition to payment that the Certificate so surrendered shall be properly
endorsed or shall be otherwise in proper form for transfer and that the person
requesting such payment shall have paid any transfer and other taxes required by
reason of the payment of the Merger Consideration to a person other than the
registered holder of the Certificate surrendered or shall have established to
the satisfaction of Parent that such tax either has been paid or is not
applicable. Until surrendered as contemplated by this Section 3.02(b), each
Certificate shall be deemed at any time after the Effective Time, for all
corporate purposes, other than the payment of dividends, to evidence the
ownership of the number of full shares of Parent Common Stock into which such
shares of the Company Common Stock shall have been so converted, and the right
to receive an amount in cash in lieu of the issuance of any fractional shares in
accordance with Section 3.01(g).

     (c) Transfer Books; No Further Ownership Rights in Company Common Stock. At
the Effective Time, the stock transfer books of the Company shall be closed and
thereafter there shall be no further registration of transfers of Shares on the
records of the Company. From and after the Effective Time, the holders of
Certificates evidencing ownership of the Shares outstanding immediately prior to
the Effective Time shall cease to have any rights with respect to such Shares,
except as otherwise provided for herein or by applicable law. If, after the
Effective Time, Certificates are presented to the Surviving Corporation for any
reason, they shall be canceled and exchanged as provided in this Article III.

     (d) Termination of Fund; No Liability. At any time following six months
after the Effective Time, Parent shall be entitled to require the Exchange Agent
to deliver to it any Parent Common Stock and cash which had been made available
to the Exchange Agent and which have not been distributed to holders of

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<PAGE>   97

Certificates, and thereafter such holders shall be entitled to look to Parent
(subject to abandoned property, escheat or other similar laws) only as general
creditors thereof with respect to the payment of any Merger Consideration that
may be payable upon surrender of any Certificates such stockholder holds, as
determined pursuant to this Agreement, without any interest thereon.
Notwithstanding the foregoing, none of Parent, the Surviving Corporation or the
Exchange Agent shall be liable to any holder of a Certificate for Merger
Consideration delivered to a public official pursuant to any applicable
abandoned property, escheat or similar law.

     (e) Withholding Rights. Parent, the Surviving Corporation and the Exchange
Agent shall be entitled to deduct and withhold from the Merger Consideration
otherwise payable pursuant to this Agreement to any holder of Shares such
amounts as Parent, the Surviving Corporation or the Exchange Agent is required
to deduct and withhold with respect to the making of such payment under the Code
or any provision of state, local, provincial or foreign tax law. To the extent
that amounts are so withheld, such withheld amounts shall be treated for all
purposes of this Agreement as having been paid to the holder of the Shares in
respect of which such deduction and withholding was made.

     SECTION 3.03. Dissenting Shares. Notwithstanding any provision of this
Agreement to the contrary, if and to the extent required by the DGCL, Dissenting
Shares shall not be converted into the right to receive the Merger
Consideration, and holders of such Dissenting Shares shall be entitled to
receive payment of the appraised value of such Dissenting Shares in accordance
with the provisions of Section 262 of the DGCL unless and until such holders
fail to perfect or effectively withdraw or otherwise lose their rights to
appraisal and payment under the DGCL. If, after the Effective Time, any such
holder fails to perfect or effectively withdraws or otherwise loses such right,
such Dissenting Shares shall thereupon be treated as if they had been converted
into and become exchangeable for, at the Effective Time, the right to receive
the Merger Consideration, without any interest thereon. Notwithstanding anything
to the contrary contained in this Section 3.03, if (i) the Merger is rescinded
or abandoned or (ii) the stockholders of the Company revoke the authority to
effect the Merger, then the right of any stockholder to be paid the fair value
of such stockholder's Dissenting Shares pursuant to Section 262 of the DGCL
shall cease. The Company shall give Parent prompt notice of any demands received
by the Company for appraisals of Dissenting Shares. The Company shall not,
except with the prior written consent of Parent, make any payment with respect
to any demands for appraisals or offer to settle or settle any such demands.

     SECTION 3.04. Lost, Stolen or Destroyed Certificates. If any Certificates
shall have been lost, stolen or destroyed, the Exchange Agent shall issue in
exchange for such lost, stolen or destroyed Certificates, upon the making of an
affidavit of that fact by the holder thereof, such Merger Consideration as may
be required pursuant to Section 3.01(b); provided, however, that Parent may, in
its discretion and as a condition precedent to the issuance and delivery
thereof, require the owner of such lost, stolen or destroyed Certificates to
deliver a bond in such sum as it may reasonably direct as indemnity against any
claim that may be made against Parent or the Exchange Agent with respect to the
Certificates alleged to have been lost, stolen or destroyed.

     SECTION 3.05. Taking of Necessary Action; Further Action. Each of Parent,
Purchaser and the Company in good faith shall take all such commercially
reasonable and lawful action as may be necessary or appropriate in order to
effectuate the Merger in accordance with this Agreement as promptly as possible.
If, at any time after the Effective Time, any such further action is necessary
or desirable to carry out the purposes of this Agreement and to vest the
Surviving Corporation with full right, title and possession to all assets,
property, rights, privileges, powers and franchises of the Company and
Purchaser, the officers and directors of the Company and Purchaser are fully
authorized in the name of their respective corporations or otherwise to take,
and will take, all such lawful and necessary action.

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<PAGE>   98

                                   ARTICLE IV

                 REPRESENTATIONS AND WARRANTIES OF THE COMPANY

     Except as set forth in the Company Disclosure Schedule, the Company hereby
represents and warrants to Parent and Purchaser that:

     SECTION 4.01. Organization and Qualification; Subsidiaries. Each of the
Company and its subsidiaries is a corporation duly organized, validly existing
and in good standing under the laws of the jurisdiction of its incorporation and
has the requisite corporate power and authority and is in possession of all
franchises, grants, authorizations, licenses, permits, easements, consents,
certificates, approvals and orders ("Approvals") necessary to own, lease and
operate the properties it purports to own, operate or lease and to carry on its
business as it is now being conducted, except where the failures to be so
organized, existing and in good standing or to have such power, authority and
Approvals, individually or in the aggregate, have not had and could not
reasonably be expected to have a Company Material Adverse Effect. Each of the
Company and its subsidiaries is duly qualified or licensed as a foreign
corporation to do business, and is in good standing, in each jurisdiction where
the character of the properties owned, leased or operated by it or the nature of
its activities makes such qualification or licensing necessary, except for such
failures to be so duly qualified or licensed and in good standing that,
individually or in the aggregate, have not had and could not reasonably be
expected to have a Company Material Adverse Effect. A true and complete list of
all of the Company's subsidiaries, together with the jurisdiction of
incorporation of each subsidiary and the percentage of each subsidiary's
outstanding capital stock or other ownership interest owned by the Company or
another subsidiary, is set forth in Schedule 4.01 of the Company Disclosure
Schedule. The Company does not directly or indirectly own any equity or similar
interest in, or any interest convertible into or exchangeable or exercisable
for, any equity or similar interest in, any corporation, partnership, joint
venture or other business association or entity.

     SECTION 4.02. Certificate of Incorporation and By-Laws. The Company has
heretofore furnished or made available to Parent a complete and correct copy of
its Restated Certificate of Incorporation and By-Laws, as amended to date, and a
complete and correct copy of the equivalent organizational documents of each of
its subsidiaries. The Certificate of Incorporation, By-Laws and equivalent
organizational documents of each of the Company's subsidiaries are in full force
and effect. The Company is not in violation of any of the provisions of its
Restated Certificate of Incorporation or By-Laws. None of the Company's
subsidiaries is in violation of any of the provisions of its Certificate of
Incorporation or By-Laws or equivalent organizational documents.

     SECTION 4.03. Capitalization. (a) The authorized capital stock of the
Company consists of 100,000,000 shares of Company Common Stock, par value $.01
per share, and 2,000,000 shares of preferred stock, par value $0.01 per share.
As of May 15, 2000 (i) 33,035,784 shares of Company Common Stock were issued and
outstanding, all of which have been duly authorized and validly issued and are
fully paid and non-assessable, (ii) no shares of preferred stock were issued or
outstanding, (iii) no Shares were held in the treasury of the Company, (iv)
7,329,324 Shares were reserved for future issuance pursuant to, or were held
under, the Company's Employee Plans (as defined in Section 4.11(a)) and (v)
150,000 Shares were reserved for future issuance pursuant to the Warrants. No
change in such capitalization has occurred between May 15, 2000 and the date
hereof other than any change associated with the exercise of vested Options or
Warrants. Except as set forth in this Section 4.03 or Section 4.12 hereof or
except as set forth in Schedule 4.03(a) of the Company Disclosure Schedule,
there are no options, warrants or other rights, agreements, arrangements or
commitments of any character relating to the issued or unissued capital stock of
the Company or any of its subsidiaries or obligating the Company or any of its
subsidiaries to issue or sell any shares of capital stock of, or other equity
interests in, the Company or any of its subsidiaries. All shares subject to
issuance as aforesaid, upon issuance on the terms and conditions specified in
the instruments pursuant to which they are issuable, will be duly authorized,
validly issued, fully paid and non-assessable. All outstanding shares of capital
stock of the Company and its subsidiaries were issued in compliance with federal
securities laws. There are no obligations, contingent or otherwise, of the
Company or any of its subsidiaries to repurchase, redeem or otherwise acquire
any shares of capital stock of the Company or the capital stock of any
subsidiary or to provide funds to or

                                      A-13
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make any investment (in the form of a loan, capital contribution or otherwise)
in any such subsidiary or any other entity other than guarantees of bank
obligations of subsidiaries entered into in the ordinary course of business.
Except as set forth in Section 4.03(a) of the Company Disclosure Schedule, all
of the outstanding shares of capital stock of each of the Company's subsidiaries
are duly authorized, validly issued, fully paid and non-assessable and are owned
by the Company or another subsidiary free and clear of all security interests,
liens, claims, pledges, agreements, limitations in the Company's voting rights,
charges or other encumbrances of any nature whatsoever.

     (b) Except as set forth in Schedule 4.03(b) of the Company Disclosure
Schedule, there are no voting trusts or other agreements or understandings to
which the Company or any of its subsidiaries is a party with respect to the
voting of the capital stock of the Company or any of the subsidiaries. None of
the Company or its subsidiaries is required to redeem, repurchase or otherwise
acquire shares of capital stock of the Company or any of its subsidiaries,
respectively, as a result of the Transactions.

     SECTION 4.04. Authority Relative to This Agreement. (a) The Company has all
necessary corporate power and authority to execute and deliver this Agreement
and to perform its obligations hereunder and to consummate the Transactions. The
execution and delivery of this Agreement by the Company and the consummation by
the Company of the Transactions have been duly and validly authorized by all
necessary corporate action on the part of the Company, and no other corporate
proceedings on the part of the Company are necessary to authorize this Agreement
or to consummate the Transactions (other than the adoption of this Agreement by
stockholders as contemplated by Section 2.07). This Agreement has been duly and
validly executed and delivered by the Company and, assuming the due
authorization, execution and delivery of this Agreement by Parent and Purchaser,
constitutes a legal, valid and binding obligation of the Company enforceable
against the Company in accordance with its terms.

     (b) The Company Board, at a meeting duly called and held on May 23, 2000 at
which a quorum was present and acting throughout, by a unanimous vote (i)
determined that this Agreement and the Transactions are fair to and in the best
interests of the holders of the Shares, (ii) authorized, approved, adopted and
declared advisable this Agreement and the Transactions, and (iii) recommended
that the stockholders of the Company accept the Offer and tender their Shares to
Purchaser pursuant to the Offer and/or vote to adopt this Agreement, and as of
the date of this Agreement none of the aforesaid actions by the Company Board
has been amended, rescinded or modified.

     SECTION 4.05. Material Contracts; No Conflict, Required Filings and
Consents. (a) Schedule 4.05(a) of the Company Disclosure Schedule contains a
true, complete and correct list of all Material Contracts of the Company and its
subsidiaries as of the date of this Agreement, complete and correct copies of
which have been provided to Parent. Except as set forth in Schedule 4.05(a) of
the Company Disclosure Schedule or subject to such exceptions that, individually
or in the aggregate, have not had and could not reasonably be expected to have a
Company Material Adverse Effect, all of the Material Contracts are valid,
binding and in full force and effect, and neither the Company nor any of its
subsidiaries is in default (nor has any event occurred that with notice or lapse
of time or both would become a default) of any of its obligations under any of
the Material Contracts. Except as set forth in Schedule 4.05 of the Company
Disclosure Schedule, no contracting party to any Material Contract is in default
(nor has any event occurred that with notice or lapse of time or both would
become a default) of any of its obligations under any of the Material Contracts.
Except as set forth in Schedule 4.05 of the Company Disclosure Schedule, no
contracting party to any Material Contract has notified (whether orally or in
writing) the Company or any of its subsidiaries of its intention to terminate,
cancel or modify such Material Contract or otherwise to reduce or change its
activity thereunder so as to affect adversely the benefits derived, or currently
expected to be derived, by the Company or any of its subsidiaries.

     (b) Except as set forth in Section 4.05(c) hereof and except as set forth
in Schedule 4.05(b) of the Company Disclosure Schedule, the execution and
delivery of this Agreement by the Company do not, and the performance of this
Agreement and the consummation of the Transactions by the Company will not, (i)
conflict with or violate the Restated Certificate of Incorporation or By-Laws or
equivalent organizational documents of the Company or any of its subsidiaries,
(ii) conflict with or violate any law,

                                      A-14
<PAGE>   100

rule, regulation, order, judgment or decree applicable to the Company or any of
its subsidiaries or by which its or any of their respective assets or properties
is bound or affected or (iii) result in any breach of or constitute a default
(or an event that with notice or lapse of time or both would become a default)
under, or impair the Company's or any of its subsidiaries' rights or alter the
rights or obligations of any third party under, or give to others any rights of
termination, amendment, acceleration or cancellation of, any Material Contract,
or result in the creation of a lien or encumbrance on any of the assets or
properties of the Company or any of its subsidiaries pursuant to any note, bond,
mortgage, indenture, contract, agreement, lease, license, permit, franchise or
other instrument or obligation to which the Company or any of its subsidiaries
is a party or by which the Company or any of its subsidiaries or its or any of
their respective assets or properties is bound or affected.

     (c) Except as set forth in Schedule 4.05(c) of the Company Disclosure
Schedule, the execution and delivery of this Agreement by the Company do not,
and the performance of this Agreement and the consummation of the Transactions
by the Company will not, require any consent, approval, authorization or permit
of, or filing with or notification to, any Governmental Entity, except for
applicable requirements, if any, of the Securities Act, the Exchange Act, state
securities laws ("Blue Sky Laws"), state takeover laws, the pre-merger
notification requirements of the HSR Act, any non-United States laws regulating
competition, antitrust, investment or exchange controls and the filing of the
Certificate of Merger or other documents as required by the DCGL.

     SECTION 4.06. Compliance, Permits. Except for such matters that,
individually or in the aggregate, have not had and could not reasonably be
expected to have a Company Material Adverse Effect and except as set forth in
Schedule 4.06(a) of the Company Disclosure Schedule:

          (a) Neither the Company nor any of its subsidiaries is in conflict
     with, or in default or violation of, (i) any law, rule, regulation, order,
     judgment or decree applicable to the Company or any of its subsidiaries or
     by which its or any of their respective assets or properties is bound or
     affected or (ii) any note, bond, mortgage, indenture, contract, agreement,
     lease, license, permit, franchise or other instrument or obligation to
     which the Company or any of its subsidiaries is a party or by which the
     Company or any of its subsidiaries or its or any of their respective assets
     or properties is bound or affected.

          (b) The Company and its subsidiaries hold all permits, licenses,
     easements, variances, exemptions, consents, certificates, orders and
     approvals from Governmental Entities (other than the U.S. Food and Drug
     Administration ("FDA")) (the "Non-FDA Permits") necessary for the operation
     of the business of the Company and its subsidiaries taken as a whole except
     to the extent that the failure to have any such Non-FDA Permit,
     individually or in the aggregate, has not had and could not reasonably be
     expected to have a Company Material Adverse Effect. The Company and its
     subsidiaries hold all new drug applications, abbreviated new drug
     applications ("ANDAs"), product license applications, and investigational
     new drug applications, and product export applications issuable by the FDA
     (the "FDA Permits"), necessary for the conduct of the business as currently
     conducted except to the extent that the failure to have any such FDA
     Permit, individually or in the aggregate, has not had and could not
     reasonably be expected to have a Company Material Adverse Effect. The
     Company and its subsidiaries are in compliance with the terms of the
     Non-FDA Permits, except where the failure so to comply, individually or in
     the aggregate, has not had and could not reasonably be expected to have a
     Company Material Adverse Effect. With respect to products currently being
     manufactured by the Company and its subsidiaries, the Company and its
     subsidiaries are in substantial compliance in all material respects with
     the terms of the FDA Permits. With respect to products being manufactured
     by persons other than the Company or its subsidiaries and currently offered
     for commercial sale by the Company or any of its subsidiaries ("Third Party
     Products"), to the best of the knowledge of the Company and its
     subsidiaries, the holders of any or all FDA Permits necessary for the
     manufacture or sale of such products are in substantial compliance in all
     material respects with the terms of such FDA Permits.

                                      A-15
<PAGE>   101

          (c) With respect to each of the Company's and its subsidiaries'
     products which currently are being manufactured at one of the Company's or
     its subsidiaries' facilities and currently are offered for commercial sale
     (collectively, the "Company Products"):

             (i) the Company and each of its subsidiaries has obtained all
        applicable FDA Permits and Non-FDA Permits required by any U.S. federal
        or state Governmental Entity to permit any manufacturing, distribution,
        sales or marketing with respect to each Company Product in the
        jurisdictions in which such Company Product is developed, manufactured,
        distributed, sold or marketed;

             (ii) the Company and each of its subsidiaries is in substantial
        compliance in all material respects with all applicable legal
        requirements regarding registration, licensure or notification for each
        United States site at which each Company Product is developed,
        manufactured, processed, packed, held for distribution or from which or
        into which it is distributed, in each case by the Company or any of its
        subsidiaries;

             (iii) to the extent any Company Product is intended for export from
        the United States, the Company and its subsidiaries are in substantial
        compliance in all material respects with either (A) all requirements of
        the FDA for marketing or (B) 21 U.S.C. Section 381(e) or (C) 21 U.S.C.
        Section 382;

             (iv) all manufacturing operations performed by or on behalf of the
        Company and each of its subsidiaries are being conducted in substantial
        compliance in all material respects with all applicable GMP regulations;

             (v) all pre-clinical and clinical investigations with respect to
        the Company Products sponsored by or on behalf of the Company or any of
        its subsidiaries have been and are being conducted in substantial
        compliance in all material respects with all applicable laws and
        regulations, including, but not limited to, good laboratory practices,
        investigational new drug requirements, and requirements regarding
        informed consent and institutional review boards designed to ensure the
        protection of the rights and welfare of human subjects, including but
        not limited to the requirements provided in 21 C.F.R. Parts 50, 56, 58
        and 312;

             (vi) the Company and its subsidiaries are in substantial compliance
        in all material respects with all reporting requirements for all FDA
        Permits and Non-FDA Permits, including, but not limited to, the adverse
        event reporting requirements for drugs in 21 C.F.R. Parts 312 and 314;
        and

             (vii) the Company and each of its subsidiaries has included or
        caused to be included in the regulatory application for such Company
        Product, where required, the certification described in 21 U.S.C.
        Section 335a(k)(l) and the list described in 21 U.S.C. Section
        335a(k)(2), and such certification and such list was in each case true
        and accurate, in all material respects, when made and remained true and
        accurate in all material respects thereafter.

          (d) The Company and each of the Company's subsidiaries is in
     substantial compliance in all material respects with, and current in the
     performance of, any obligation arising under any consent decree, consent
     agreement, warning letter, Form 483 issued by or entered into with the FDA
     or other notice, response or commitment made to the FDA or any comparable
     state or Government Entity.

          (e) With respect to each of the Third Party Products, to the knowledge
     of the Company:

             (i) each person engaged in the manufacture, sale or distribution of
        a Third Party Product (a "Third Person") has obtained all applicable FDA
        Permits and Non-FDA Permits required by any U.S. federal or state
        Governmental Entity to permit any manufacturing, distribution, sales or
        marketing with respect to each Third Party Product in the jurisdictions
        in which such Third Party Product is developed, manufacture,
        distributed, sold or marketed;

                                      A-16
<PAGE>   102

             (ii) each Third Person is in substantial compliance in all material
        respects with all applicable legal requirements regarding registration,
        licensure or notification for each site at which each Third Party
        Product is developed, manufactured, processed, packed, held for
        distribution or from which or into which it is distributed;

             (iii) to the extent any Third Party Product is intended for export
        from the United States, each Third Person is in substantial compliance
        in all material respects with either (A) all requirements of the FDA for
        marketing or (B) 21 U.S.C. Section 381(e) or (C) 21 U.S.C. Section 382;

             (iv) all manufacturing operations involved in the production of
        Third Party Products are being conducted in substantial compliance in
        all material respects with all applicable GMP regulations.

             (v) all pre-clinical and clinical investigations with respect to
        the Third Party Products sponsored by or on behalf of a Third Person
        have been and are being conducted insubstantial compliance in all
        material respects with all applicable laws and regulations, including,
        but not limited to, good laboratory practices, investigational new drug
        requirements, and requirements regarding informed consent and
        institutional review boards designed to ensure the protection of the
        rights and welfare of human subjects, including but not limited to the
        requirements provided in 21 C.F.R. Parts 50, 56, 58 and 312;

             (vi) insofar as Third Party Products are concerned, the Company and
        its subsidiaries are in substantial compliance in all material respects
        with all reporting requirements for all FDA Permits and Non-FDA Permits,
        including, but not limited to, the adverse event reporting requirements
        for drugs in 21 C.F.R. Parts 312 and 314; and

             (vii) each Third Person has included or caused to be included in
        the regulatory application for such Third Party Product, where required,
        the certification described in 21 U.S.C. Section 335a(k)(l) and the list
        described in 21 U.S.C.Section 335a(k)(2), and such certification and
        such list was in each case true and accurate, in all material respects,
        when made and remained true and accurate in all material respects
        thereafter.

          (f) The Company has disclosed to Parent any warning letters or
     material Form 483s or similar notices, or other correspondence relating to
     the Company's or any of its subsidiaries' compliance status under
     applicable legal requirements from the FDA within the last three years.

          (g) Except with respect to approved or pending ANDAs pertaining to the
     Marsam facility which ANDAs are to be reviewed under Technical Protocol
     9908001-01, Quality Operations and Manufacturing Corrective Action Plan
     (QOMCAP) Objective Elements and Strategies, to the best of the knowledge of
     the Company, neither the Company nor any of its subsidiaries nor any of
     their officers, employees or agents has knowingly committed any act, made
     any statement, or failed to make any statement, that would reasonably be
     expected to provide a basis for the FDA to invoke its policy respecting
     "Fraud, Untrue Statements of Material Facts, Bribery, and Illegal
     Gratuities," set forth in 56 Fed. Reg. 46191 (September 10, 1991) and any
     amendments thereto;

          (h) To the best of the knowledge of the Company, neither the Company
     nor any of its subsidiaries has violated the anti-kickback provisions of
     the Social Security Act, 42 U.S.C. 1320a-7b(b), the Prescription Drug
     Marketing Act, the Controlled Substances Act and the False Claims Act, 31
     U.S.C. Section 3729.

          (i) Neither the Company nor any of its subsidiaries has been convicted
     of any crime or engaged in any conduct which could result in debarment
     under 21 U.S.C. Section 335a or any similar state law or regulation.

          (j) Neither the Company nor any of its subsidiaries has received any
     written notice or has knowledge that the FDA or the Drug Enforcement
     Administration has commenced or threatened to initiate, any action to seek
     civil penalties, to withdraw its approval or request the recall of any
     product
                                      A-17
<PAGE>   103

     of the Company or any of its subsidiaries or commenced or threatened to
     initiate, any action to enjoin production at any facility owned or operated
     by the Company or any of its subsidiaries or, to the Company's knowledge at
     any other facility at which any of the Company's or its subsidiaries'
     products are manufactured, processed, packaged, labeled, stored,
     distributed, tested or otherwise handled.

          (k) To the best knowledge of the Company, there are no proceedings
     pending with respect to a violation by the Company or any of its
     subsidiaries of the Food, Drug and Cosmetic Act, FDA regulations adopted
     thereunder, the Controlled Substance Act or any other legislation or
     regulation promulgated by any other U.S. federal or state Governmental
     Entity that reasonably might be expected to result in the revocation,
     cancellation, suspension, limitation or adverse modification of any FDA
     Permit or Non-FDA Permit or in criminal liability.

          (l) Nothing contained in this Section 4.06 is intended to address any
     compliance or permit issue concerning environmental matters or under any
     Environmental Law. Environmental matters are covered exclusively by Section
     4.16.

     SECTION 4.07. SEC Filings, Financial Statements. (a) The Company has filed
all forms, reports and documents required to be filed by it with the SEC since
(and including) April 8, 1998. The Company has delivered or made available to
Parent, in the form filed with the SEC, the Company SEC Reports. The Company SEC
Reports (including any financial statements or schedules included therein) (i)
were prepared in accordance with the requirements of the Securities Act or the
Exchange Act, as the case may be, and (ii) did not at the time they were filed
(or if amended or superseded by a filing prior to the date of this Agreement,
then on the date of such filing) contain any untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading. None of the Company's subsidiaries is required
to file any forms, reports or other documents with the SEC.

     (b) Each of the consolidated financial statements (including, in each case,
any related notes thereto) contained in the Company SEC Reports was prepared in
accordance with GAAP applied on a consistent basis throughout the periods
involved (except as may be indicated therein or in the notes thereto) and each
of the consolidated balance sheets (including the related notes and schedules)
included or incorporated in such financial statements fairly presents in all
material respects the consolidated financial position of the Company and its
subsidiaries as at the respective dates thereof and each of the consolidated
statements of income and of cash flows (including the related notes and
schedules) included or incorporated in such financial statements fairly presents
in all material respects the consolidated results of their operations and cash
flows for the periods indicated, except that the unaudited interim financial
statements were or are subject to normal and recurring year-end adjustments and
such statements do not contain notes thereto.

     (c) The Company has heretofore furnished or made available to Parent a
complete and correct copy of any amendments or modifications, which have not yet
been filed with the SEC but which are required to be filed, to agreements,
documents or other instruments which previously had been filed by the Company
with the SEC pursuant to the Securities Act or the Exchange Act.

     SECTION 4.08. Absence of Certain Changes or Events. Except as set forth in
the Company SEC Reports or as expressly contemplated by this Agreement, since
December 25, 1999, the Company and its subsidiaries have conducted their
business in the ordinary course and there has not occurred: (i) any Company
Material Adverse Effect; (ii) any amendments or changes to the Restated
Certificate of Incorporation, By-Laws or equivalent organizational documents of
the Company or any of its subsidiaries; (iii) any damage to, destruction or loss
of any assets of the Company or any of its subsidiaries (whether or not covered
by insurance) that, individually or in the aggregate, has had or could
reasonably be expected to have a Company Material Adverse Effect; (iv) any
declaration, setting aside or payment of any dividend or other distribution with
respect to the capital stock of the Company; (v) any change by the Company in
its accounting methods, principles or practices; (vi) any revaluation by the
Company or any of its subsidiaries of any of its assets, including, without
limitation, writing down the value of capitalized software or inventory or
writing off notes or accounts receivable other than in the ordinary course of
                                      A-18
<PAGE>   104

business; or (vii) except as set forth in Schedule 4.08 of the Company
Disclosure Schedule, any sale of a material amount of assets of the Company or
any of its subsidiaries, except for the sale of inventory in the ordinary course
of business.

     SECTION 4.09. No Undisclosed Liabilities. Except as is disclosed in the
Company SEC Reports, neither the Company nor any of its subsidiaries has any
liabilities (absolute, accrued, contingent or otherwise) of the type that are
required to be disclosed in financial statements, including the notes thereto,
prepared in accordance with GAAP, that are, in the aggregate, material to the
business, operations or financial condition of the Company and its subsidiaries
taken as a whole, except liabilities (i) adequately provided for or referred to
in the Company's balance sheet and the related notes thereto as of December 25,
1999 included in the Company's Form 10-K for the year ended December 25, 1999
(which is part of the Company SEC Reports) or (ii) incurred since December 25,
1999 (A) in the ordinary course of business and consistent with past practice,
or (B) that, individually or in the aggregate, have not had and could not
reasonably be expected to have a Company Material Adverse Effect.

     SECTION 4.10. Absence of Litigation. Except as set forth in the Company SEC
Reports filed prior to the date of this Agreement and except as set forth in
Schedule 4.10 of the Company Disclosure Schedule, there are no claims, actions,
suits, proceedings or investigations pending or, to the best knowledge of the
Company, threatened against the Company or any of its subsidiaries, or any
properties or rights of the Company or any of its subsidiaries, before any
arbitrator or Governmental Entity that, individually or in the aggregate, have
had and could reasonably be expected to have a Company Material Adverse Effect.

     SECTION 4.11. Employee Benefit Plans; Employment Agreements. (a) Schedule
4.11(a) of the Company Disclosure Schedule lists all material employee benefit
plans (as defined in Section 3(3) of ERISA), all plans, programs or arrangements
under which stock or other securities (or options or other rights to acquire
stock or other securities) of the Company or an ERISA Affiliate (as defined
below) may be issued or awarded, and all other material employment agreement,
arrangements, commitments, severance or retention agreements, employee benefit
plans, policies or agreement, (whether written or unwritten, insured or
self-insured, foreign or domestic) for the benefit of, or relating to, any
employee or director (or any of their beneficiaries) of the Company or any
entity that would be deemed a "single employer" with the Company (an "ERISA
Affiliate") under Section 414(b), (c), (m), or (o) of the Code or Section 4001
of ERISA (the "Employee Plans"). True and complete copies of each of the
Employee Plans and all related documents (including, as applicable, summary plan
descriptions, trust agreements, insurance policies, other funding agreements and
the two most recent annual reports filed on Form 5500 with respect to each
Employee Plan) have been provided or made available to Parent.

     (b) Except as set forth in Schedule 4.11(b) of the Company Disclosure
Schedule and except where failures to so comply with each of the following
representations, individually or in the aggregate, have not had and could not
reasonably be expected to have a Company Material Adverse Effect: (i) none of
the Employee Plans provides retiree medical, death or other retiree welfare
benefits (whether or not insured) to any current or future retiree or terminee
(other than under Section 4980B of the Code, the Federal Social Security Act or
a plan qualified under Section 401(a) of the Code); (ii) all Employee Plans are
in compliance with the terms thereof and all applicable laws, including the
requirements prescribed by the Code and ERISA; (iii) none of the Employee Plans,
and neither the Company nor any ERISA Affiliate has during the past six years
sponsored, maintained, contributed to or been required to contribute to, (A) a
plan is subject to Section 412 of the Code, Section 302 of ERISA or Title IV of
ERISA (B) a "multiemployer plan" (within the meaning of Sections 3(37) or
4001(a)(3) of ERISA or Section 414(f) of the Code), (C) a single employer
pension plan (within the meaning of Section 4001(a)(15) of ERISA) which is
subject to Sections 4063 and 4064 of ERISA; (iv) each Employee Plan intended to
be qualified under Section 401(a) of the Code has received a favorable
determination letter from the IRS that the Employee Plan is qualified and that
its related trust has been determined to be exempt from taxation under Section
501(a) of the Code; (v) all contributions required to be made prior to the date
of this Agreement to any Employee Plan under the terms of the Employee Plan, or
as required by law with respect to all periods through the date of this
Agreement, have been made or accrued to the extent
                                      A-19
<PAGE>   105

required by the GAAP; (vi) neither the Company, any ERISA Affiliate nor, to the
knowledge of the Company, any other person has engaged in a "prohibited
transaction," within the meaning of Section 4975 of the Code or Section 406 of
ERISA with respect to any Employee Plan that could reasonably be expected to
subject the Company or ERISA Affiliate to a Tax or penalty; (vii) there are no
pending governmental audits, investigations, litigation or other enforcement
actions against the Company with respect to any of the Employee Plans and no
completed audit, if any, has resulted in the imposition of any Tax or penalty;
and (viii) with respect to each Employee Plan, there are no actions, suits or
claims pending or, to the best knowledge of the Company, threatened against any
such Employee Plan, the Company, any ERISA Affiliate, any director, officer or
employee thereof, or the trustee, assets or fiduciaries of such Employee Plan
(other than non-material routine claims for benefits) and, to the knowledge of
the Company, no set of circumstances or facts exist that could reasonably be
expected to give rise to any such action, suit or claim.

     SECTION 4.12. Labor Matters. Except as set forth in Schedule 4.12 of the
Company Disclosure Schedule, there are no labor disputes pending or, to the best
knowledge of the Company, threatened, between the Company or any of its
subsidiaries and any of their respective employees, which disputes, individually
or in the aggregate, have had or could reasonably be expected to have a Company
Material Adverse Effect. Except as set forth in Schedule 4.12 of the Company
Disclosure Schedule, neither the Company nor any of its subsidiaries is involved
in or, to the best knowledge of the Company, threatened with any labor dispute,
grievance or litigation relating to labor, safety or discrimination matters
involving any persons employed by the Company or any of its subsidiaries,
including, without limitation, charges of unfair labor practices or
discrimination complaints which, individually or in the aggregate, have had or
could reasonably be expected to have a Company Material Adverse Effect. Neither
the Company nor any of its subsidiaries has knowingly engaged in any unfair
labor practices within the meaning of the National Labor Relations Act or
similar such legislation of foreign jurisdictions. Neither the Company nor any
of its subsidiaries is presently or has been in the past a party to, or bound
by, any collective bargaining agreement or union contract with respect to any
persons employed by the Company or any of its subsidiaries and no collective
bargaining agreement is being negotiated by the Company or any of its
subsidiaries. Neither the Company nor any of its subsidiaries has any knowledge
of any strikes, slowdowns, work stoppages or lockouts, or threats thereof, by or
with respect to any employees of the Company or any of its subsidiaries, and
there have been no such strikes, slowdowns, work stoppages or lockouts since
December 1997.

     SECTION 4.13. Restrictions on Business Activities. Other than this
Agreement and except as set forth in Schedule 4.13 of the Company Disclosure
Schedule, there is no material agreement, judgment, injunction, order or decree
binding upon the Company or any of its subsidiaries which has the effect of
prohibiting or impairing any material business operations of the Company or any
of its subsidiaries, as currently conducted.

     SECTION 4.14. Title to Property. Except as set forth in Schedule 4.14 of
the Company Disclosure Schedule, the Company and each of its subsidiaries have
good, marketable and defensible title to all of their properties and assets,
free and clear of all liens, charges and encumbrances, except liens for Taxes
not yet due and payable and such liens or other imperfections of title, if any,
as do not materially detract from the value of or interfere with the present use
of the property affected thereby or which, individually or in the aggregate,
have not had and could not reasonably be expected to have a Company Material
Adverse Effect.

     SECTION 4.15. Taxes. Except as set forth in Schedule 4.15 of the Company
Disclosure Schedule and except which, individually or in the aggregate, have not
had and could not reasonably be expected to have a Company Material Adverse
Effect:

          (a) The Company and each of its subsidiaries have timely filed all
     United States federal income Tax Returns and all other material Tax Returns
     required to be filed by them or any of them (taking into account applicable
     extensions), and have timely paid and discharged all Taxes shown to be due,
     and all other material Taxes due except with respect to Taxes which the
     Company is maintaining

                                      A-20
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     reserves in accordance with GAAP in its financial statements that are
     adequate for their payment. All federal and state income Tax Returns and
     all other material Tax Returns filed by the Company and each of its
     subsidiaries with respect to Taxes were true, complete, correct and in
     compliance in all material respects with all applicable legal requirements
     as of the date on which they were filed or as subsequently amended to the
     date hereof.

          (b)(i) No Tax Return of either the Company or any of its subsidiaries
     is currently being audited by any taxing authority nor are any proceedings
     (whether administrative or judicial) currently being conducted with respect
     to any issues relating to Taxes; (ii) no Tax claim has become a lien on any
     assets of the Company or any subsidiary thereof (ignoring for this purpose
     liens for Taxes not yet due and payable); (iii) no extension of time within
     which to file any Tax Return that relates to the Company or any of its
     subsidiaries has been requested which Tax Return has not since been filed;
     and (iv) there are no waivers or extensions of any applicable statute of
     limitations for the assessment or collection of Taxes with respect to any
     Tax Return that relates to the Company or any of its subsidiaries which
     remain in effect.

          (c) No power of attorney has been granted by the Company or any of its
     subsidiaries with respect to any matter relating to Taxes which is
     currently in force.

          (d) Except as set forth in Schedule 4.15(d) of the Company Disclosure
     Schedule, neither the Company nor any of its subsidiaries is a party to any
     agreement or arrangement (written or oral) providing for the allocation or
     sharing of Taxes.

          (e) The Company and each of its subsidiaries have withheld from each
     payment made to any of their respective past or present employees, officers
     or directors, or any other person, the amount of all Taxes and other
     deductions required to be withheld therefrom and paid the same to the
     proper tax or other receiving officers within the time required by law,
     except where the failure to do so would not result in any deficiency or
     claim for additional Taxes.

          (f) The accruals for deferred Taxes reflected in the financial
     statements of the Company for the year ended December 25, 1999 are adequate
     to cover any deferred Tax liability of the Company and its subsidiaries
     determined in accordance with GAAP through the date thereof.

          (g) Except as set forth in Schedule 4.15(g) of the Company Disclosure
     Schedule, there is no agreement, plan, arrangement or other contract
     covering any employee or independent contractor or former employee or
     independent contractor of the Company or any of its subsidiaries that,
     considered individually or considered collectively with any other such
     contracts, will, or could reasonably be expected to, give rise directly or
     indirectly to the payment of any amount that would not be deductible
     pursuant to Section 280G or Section 162 of the Internal Revenue Code of
     1986, as amended (the "Code") (or any comparable provision under state tax
     laws). Except as set forth in Schedule 4.15(d) of the Company Disclosure
     Schedule, neither the Company nor any subsidiary of the Company is, or has
     ever been, a party to or bound by any tax indemnity agreement, tax sharing
     agreement, tax allocation agreement or similar contract.

     SECTION 4.16. Environmental Matters. This is the exclusive provision
containing representations and warranties governing environmental matters or
arising under Environmental Laws. Except as set forth in Schedule 4.16 of the
Company Disclosure Schedule or which, individually or in the aggregate, have not
had and could not reasonably be expected to have a Company Material Adverse
Effect:

          (a) All of the operations of the Company and each of its subsidiaries
     and their respective assets, businesses and real property currently owned,
     leased or operated by the Company or any of its subsidiaries (collectively,
     the "Real Property"), comply with applicable Environmental Laws.

          (b) None of the Real Property is listed or, to the knowledge of the
     Company or any of its subsidiaries, is proposed for listing, on the
     National Priorities List pursuant to CERCLA or any similar inventory of
     sites requiring investigation or remediation maintained by any state or
     locality. Neither the Company nor any of its subsidiaries has received any
     written notice or claim from any

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     Governmental Entity or third party alleging any Environmental Liabilities
     which remains outstanding or unresolved.

          (c) Each of the Company and its subsidiaries has all the permits,
     licenses, authorizations and approvals necessary for the present conduct of
     their businesses required under applicable Environmental Laws (the
     "Environmental Permits") and they are in compliance with the material terms
     and conditions of all such Environmental Permits.

          (d) The Company and its subsidiaries have provided or made available
     to Parent all material environmental reports, assessments, audits, studies,
     investigations, data and Environmental Permits in their custody or
     possession concerning the Real Property or the assets of the Company or any
     of its subsidiaries.

     SECTION 4.17. Brokers. No broker, finder or investment banker (other than
CIBC World Markets Corp. and EverCore Healthcare Capital LLC) is entitled to any
brokerage, finder's or other fee or commission in connection with the
Transactions based upon arrangements made by or on behalf of the Company. The
Company has heretofore furnished to Parent a complete and correct copy of all
agreements among the Company and CIBC World Markets Corp. and EverCore
Healthcare Capital LLC pursuant to which such firms would be entitled to any
payment relating to the Transactions.

     SECTION 4.18. Intellectual Property. (a) Schedule 4.18 of the Company
Disclosure Schedule sets forth a list of (i) all material patents, patent
applications, registered trademarks, trademark applications, registered
copyrights and copyright applications that are owned by the Company or its
subsidiaries (collectively, "Registered Intellectual Property") and (ii) all
agreements under which the Company or its subsidiaries are licensed or otherwise
permitted, or license or otherwise permit a third party, to use Intellectual
Property Rights that are material to the business of the Company and its
subsidiaries.

     (b) (i) The Company and its subsidiaries directly or indirectly own, or are
licensed or otherwise possess valid rights to use, all Company Intellectual
Property (including, without limitation, in connection with potential products
under development by the Company or any of its subsidiaries), with such
exceptions, individually or in the aggregate, as have not had and could not
reasonably be expected to have a Company Material Adverse Effect, (ii) no person
is challenging or, to the knowledge of the Company, infringing or otherwise
violating the Company Intellectual Property, except in each case for challenges,
infringements or violations which, individually or in the aggregate, have not
had and could not reasonably be expected to have a Company Material Adverse
Effect, and (iii) to the best knowledge of the Company, neither the Company nor
any of its subsidiaries is, or will be as a result of the execution and delivery
of this Agreement or the performance of its obligations hereunder, infringing or
otherwise violating any Intellectual Property Rights that are owned by any third
party (collectively, "Third Party Intellectual Property Rights"), except in each
case for infringements or violations which, individually or in the aggregate,
have not had and could not reasonably be expected to have a Company Material
Adverse Effect.

     (c) The Company Intellectual Property constitutes all the Intellectual
Property Rights necessary for the business of the Company and its subsidiaries
as currently conducted, except such Intellectual Property Rights the absence of
which, individually or in the aggregate, has not had and could not reasonably be
expected to have a Company Material Adverse Effect.

     SECTION 4.19. Warranties. Except as set forth in Schedule 4.19 of the
Company Disclosure Schedule, to the best knowledge of the Company, there are no
material claims pending or threatened against the Company or any of its
subsidiaries with respect to the quality of or absence of defects in its
products that it has sold.

     SECTION 4.20. Products Liability. Except as set forth in Schedule 4.20 of
the Company Disclosure Schedule, neither the Company nor any of its subsidiaries
has received any written notice relating to any material claim involving any
product manufactured, produced, distributed or sold by or on behalf of the
Company or any of its subsidiaries resulting from an alleged defect in design,
manufacture, materials or workmanship, or any alleged failure to warn, or from
any breach of any implied warranties or
                                      A-22
<PAGE>   108

representation, other than notices of claims that have been settled or resolved
by the Company and its subsidiaries prior to the date hereof, except claims
which, individually or in the aggregate, have not had and could not reasonably
be expected to have a Company Material Adverse Effect.

     SECTION 4.21. Vote Required. The affirmative vote of the holders of at
least a majority of the outstanding shares of Company Common Stock is the only
vote of the holders of any class or series of the Company's capital stock
necessary to approve the Merger.

     SECTION 4.22. Takeover Statutes. No "fair price," "moratorium," "control
share acquisition" or other similar antitakeover statute or regulation
(including, without limitation, Section 203 of the DGCL) (each, a "Takeover
Statute") is applicable to the Company, Parent, Purchaser, the Shares, this
Agreement, the Stockholder Agreements or the Transactions.

     SECTION 4.23. Opinion of Financial Advisor. The Company Board has been
advised by the Company's financial advisor, CIBC World Markets Corp., to the
effect that in its opinion, as of the date of this Agreement, the consideration
to be received by the holders of Company Common Stock in the Offer and the
Merger, taken together, is fair from a financial point of view to such holders
(other than Parent, the Significant Stockholders and their respective
affiliates).

                                   ARTICLE V

             REPRESENTATIONS AND WARRANTIES OF PARENT AND PURCHASER

     Parent and Purchaser each hereby represent and warrant to the Company that:

     SECTION 5.01. Organization and Qualification. Each of Parent and Purchaser
is a corporation duly organized, validly existing and in good standing under the
laws of the jurisdiction of its incorporation and has the requisite corporate
power and authority and is in possession of all Approvals necessary to own,
lease and operate the properties it purports to own, operate or lease and to
carry on its business as it is now being conducted, except where the failure to
be so organized, existing and in good standing or to have such power, authority
and Approvals, individually or aggregate, have not had and could not reasonably
be expected to have a Parent Material Adverse Effect. Each of Parent and
Purchaser is duly qualified or licensed as a foreign corporation to do business,
and is in good standing, in each jurisdiction where the character of the
properties owned, leased or operated by it or the nature of its activities makes
such qualification or licensing necessary, except for such failures to be so
duly qualified or licensed and in good standing that, individually or in the
aggregate, have not had and could not reasonably be expected to have a Parent
Material Adverse Effect.

     SECTION 5.02. Authority Relative to this Agreement. Each of Parent and
Purchaser has all necessary corporate power and authority to execute and deliver
this Agreement and to perform its obligations hereunder and to consummate the
Transactions. The execution and delivery of this Agreement by Parent and
Purchaser and the consummation by Parent and Purchaser of the Transactions have
been duly and validly authorized by all necessary corporate action on the part
of Parent and Purchaser, and no other corporate proceedings on the part of
Parent or Purchaser are necessary to authorize this Agreement or to consummate
the Transactions. This Agreement has been duly and validly executed and
delivered by Parent and Purchaser and, assuming the due authorization, execution
and delivery of this Agreement by the Company, constitutes a legal, valid and
binding obligation of Parent and Purchaser, enforceable against Parent and
Purchaser in accordance with its terms.

     SECTION 5.03. No Conflict, Required Filings and Consents. (a) Except as set
forth in Section 5.03(b) hereof, the execution and delivery of this Agreement by
Parent and Purchaser do not, and the performance of this Agreement and the
consummation of the Transactions by Parent and Purchaser will not, (i) conflict
with or violate the Restated Certificate of Incorporation or By-Laws of Parent
or Purchaser, (ii) conflict with or violate any law, rule, regulation, order,
judgment or decree applicable to Parent or Purchaser or by which their
respective assets or properties are bound or affected or (iii) result in any
breach of or constitute a default (or an event that with notice or lapse of time
or both would become

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<PAGE>   109

a default) under, or impair Parent's or Purchaser's rights or alter the rights
or obligations of any third party under, or give to others any rights of
termination, amendment, acceleration or cancellation of, any contracts material
to the business of Parent and Purchaser taken as a whole, or result in the
creation of a lien or encumbrance on any of the assets or properties of Parent
or Purchaser pursuant to any note, bond, mortgage, indenture, contract,
agreement, lease, license, permit, franchise or other instrument or obligation
to which Parent or Purchaser is a party or by which Parent or Purchaser or any
of their respective assets or properties are bound or affected except, in the
case of clauses (ii) and (iii), for such conflicts, breaches, violations,
defaults or other occurrences that, individually or in the aggregate, have not
had and could not reasonably be expected to have a Parent Material Adverse
Effect or otherwise prevent or delay Parent or Purchaser from performing their
respective obligations under this Agreement.

     (b) The execution and delivery of this Agreement by Parent and Purchaser do
not, and the performance of this Agreement and the consummation of the
Transactions by Parent and Purchaser will not, require any consent, approval,
authorization or permit of, or filing with or notification to, any Governmental
Entity, except (i) for applicable requirements, if any, of the Securities Act,
the Exchange Act, Blue Sky Laws, state takeover laws, the pre-merger
notification requirements of the HSR Act, any non-United States laws regulating
competition, antitrust, investment or exchange controls and the filing of the
Certificate of Merger or other documents as required by the DGCL and (ii) where
the failure to obtain such consents, approvals, authorizations or permits, or to
make such filings or notifications, would not prevent or delay consummation of
the Merger, or otherwise prevent or delay Parent or Purchaser from performing
their respective obligations under this Agreement, and, individually or in the
aggregate, has not had and could not reasonably be expected to have a Parent
Material Adverse Effect.

     SECTION 5.04. Capitalization. As of the date of this Agreement, the
authorized capital stock of Parent consists of 500,000,000 shares of Parent
Common Stock, and 2,500,000 shares of preferred stock without par value ("Parent
Preferred Stock"). As of May 19, 2000 (i) 96,622,309 shares of Parent Common
Stock were issued and outstanding, all of which have been duly authorized and
validly issued and are fully paid and non-assessable, (ii) no shares of Parent
Preferred Stock were issued or outstanding, (iii) no shares of Parent Common
Stock were held in the treasury of Parent and (iv) 9,285,731 shares of Parent
Common Stock were reserved for future issuance pursuant to, or were held under,
Parent's stock option plan or other similar employee benefit plans of Parent or
any of its subsidiaries. No material change in such capitalization has occurred
between May 19, 2000 and the date of this Agreement other than any change
associated with the exercise of vested options to purchase Parent Common Stock
granted under any stock option plan, other similar employee benefit plans or
pursuant to any other arrangement adopted by Parent's Board of Directors to
provide options, warrants or other rights to purchase capital stock of Parent to
directors, officers, or employees of Parent or any subsidiary of Parent. All
shares subject to issuance as aforesaid, upon issuance on the terms and
conditions specified in the instruments pursuant to which they are issuable,
will be duly authorized, validly issued, fully paid and non-assessable. All
outstanding shares of capital stock of Parent and its subsidiaries were issued
in compliance with federal securities laws. The issuance of the Parent Common
Stock in connection with the Merger and upon the exercise of Options and
warrants of the Company following the Merger have been duly authorized and, when
issued in connection with the Merger or upon such exercise, will be validly
issued, fully paid and non-assessable.

     SECTION 5.05. SEC Filings, Financial Statements. Parent has filed all
forms, reports and documents required to be filed by it with the SEC since (and
including) January 1, 1999. Parent has delivered or made available to the
Company, in the form filed with the SEC, the Parent SEC Reports. The Parent SEC
Reports (including any financial statements or schedules included therein) (i)
were prepared in accordance with the requirements of the Securities Act or the
Exchange Act, as the case may be, and (ii) did not at the time they were filed
(or if amended or superseded by a filing prior to the date of this Agreement,
then on the date of such filing) contain any untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading. None of Parent's subsidiaries is required to
file any forms, reports or other documents with the SEC.

                                      A-24
<PAGE>   110

          (a) Each of the consolidated financial statements (including, in each
     case, any related notes thereto) contained in the Parent SEC Reports was
     prepared in accordance with GAAP applied on a consistent basis throughout
     the periods involved (except as may be indicated therein or in the notes
     thereto) and each of the consolidated balance sheets (including the related
     notes and schedules) included or incorporated in such financial statements
     fairly presents in all material respects the consolidated financial
     position of Parent and its subsidiaries as at the respective dates thereof
     and each of the consolidated statements of income and of cash flows
     (including the related notes and schedules) included or incorporated in
     such financial statements fairly presents in all material respects the
     consolidated results of their operations and cash flows for the periods
     indicated, except that the unaudited interim financial statements were or
     are subject to normal and recurring year-end adjustments and such
     statements do not contain notes thereto.

          (b) Parent has heretofore furnished or made available to the Company a
     complete and correct copy of any amendments or modifications, which have
     not yet been filed with the SEC but which are required to be filed, to
     agreements, documents or other instruments which previously had been filed
     by Parent with the SEC pursuant to the Securities Act or the Exchange Act.

     SECTION 5.06. Absence of Certain Changes or Events. Except as set forth in
the Parent SEC Reports or as expressly contemplated by this Agreement, between
December 31, 1999 and the date of this Agreement, there has not occurred, nor
has any event occurred which would be reasonably likely to result in, any Parent
Material Adverse Effect.

     SECTION 5.07. No Undisclosed Liabilities. Except as is disclosed in the
Parent SEC Reports, as of the date of this Agreement, neither Parent nor any of
its subsidiaries has any liabilities (absolute, accrued, contingent or
otherwise) of the type that are required to be disclosed in financial
statements, including the notes thereto, prepared in accordance with GAAP, that
are, in the aggregate, material to the business, operations or financial
condition of Parent and its subsidiaries taken as a whole, except liabilities
(i) adequately provided for or referred to in Parent's balance sheet and the
related notes thereto as of December 31, 1999 included in Parent's Form 10-K for
the year ended December 31, 1999 (which is part of the Parent SEC Reports) or
(ii) incurred since December 31, 1999 (A) in the ordinary course of business and
consistent with past practice, or (B) that, individually or in the aggregate,
have not had and could not reasonably be expected to have a Parent Material
Adverse Effect.

     SECTION 5.08. Funds. As of the date of this Agreement, Parent has binding
commitments of institutional lenders to provide all funds necessary to
consummate the Offer and the Merger.

                                   ARTICLE VI

                     CONDUCT OF BUSINESS PENDING THE MERGER

     SECTION 6.01. Conduct of Business by the Company Pending the Merger. During
the period from the date of this Agreement and continuing until the earliest to
occur of (i) the termination of this Agreement, (ii) the time the designees of
Parent constitute a majority of the Company Board or (iii) the Effective Time,
the Company covenants and agrees that, unless Parent shall otherwise approve in
writing (which approval, in respect of requests of the Company (y) pertaining to
any of the actions identified in clauses "(a)" through "(f)," clauses "(g)(i),"
"(g)(iii)" through "(g)(vi)," and clauses "(h)" through "(m)" of this Section
6.01 and (z) sought by the Company more than 40 business days after the Offer
Commencement Date, shall not be unreasonably withheld) and unless otherwise
expressly contemplated hereunder, the Company shall conduct its business and
shall cause the businesses of its subsidiaries to be conducted, and the Company
and its subsidiaries shall not take any action except in the ordinary course of
business; and the Company shall use reasonable commercial efforts to preserve
substantially intact the business organization of the Company and its
subsidiaries, to keep available the services of the present officers, employees
and consultants of the Company and its subsidiaries, and to preserve the present
relationships of the Company and its subsidiaries with customers, suppliers and
other persons with which the Company or any of its subsidiaries has significant
business relations. By way of amplification and not

                                      A-25
<PAGE>   111

limitation, neither the Company nor any of its subsidiaries shall, during the
period from the date of this Agreement and continuing until the earliest to
occur of (i) the termination of this Agreement, (ii) the time the designees of
Parent constitute a majority of the Company Board or (iii) the Effective Time,
directly or indirectly do, or propose to do, any of the following without the
prior written approval of Parent (which approval, in respect of requests of the
Company (y) pertaining to any of the actions identified in clauses "(a)" through
"(f)", clauses "(g)(i)," "(g)(iii)" through "(g)(vi)," and clauses "(h)" through
"(m)" of this Section 6.01 and (z) sought by the Company more than 40 business
days after the Offer Commencement Date, shall not be unreasonably withheld),
unless expressly disclosed in Schedule 6.01 of the Company Disclosure Schedule:

          (a) amend or otherwise change the Company's or any of its
     subsidiaries' Certificates of Incorporation, By-Laws or other equivalent
     organizational documents;

          (b) issue, sell, pledge, dispose of or encumber, or authorize the
     issuance, sale, pledge, disposition or encumbrance of, any shares of
     capital stock of any class, or any options, warrants, convertible
     securities or other rights of any kind to acquire any shares of capital
     stock, or any other ownership interest (including, without limitation, any
     phantom interest) of the Company or any of its subsidiaries or affiliates
     (except for (i) the issuance of Shares pursuant to the exercise of Options
     under the Stock Option Plans and the Warrants, which Options and Warrants
     are outstanding on the date hereof, (ii) the issuance of Shares pursuant to
     the Stock Purchase Plan and (iii) the issuance of preferred stock of the
     Company pursuant to Section 7.12);

          (c) sell, pledge, dispose of or encumber any assets of the Company or
     any of its subsidiaries (except for (i) sales of assets in the ordinary
     course of business and in a manner consistent with past practice, (ii)
     dispositions of obsolete or worthless assets and (iii) as set forth in
     Schedule 6.01(c) of the Company Disclosure Schedule);

          (d) except as provided in Section 7.03, amend or change the period (or
     permit any acceleration, amendment or change) of exercisability of Options
     granted under the Stock Option Plans or the Warrants or authorize cash
     payments in exchange for any such Options or Warrants;

          (e)(i) declare, set aside, make or pay any dividend or other
     distribution (whether in cash, stock or property or any combination
     thereof) in respect of any of its capital stock, except that a wholly-
     owned subsidiary of the Company may declare and pay a dividend to its
     parent, (ii) split, combine or reclassify any of its outstanding capital
     stock or issue or authorize or propose the issuance of any other securities
     in respect of, in lieu of or in substitution for shares of its capital
     stock or (iii) except as provided in Section 7.03, amend the terms of,
     repurchase, redeem or otherwise acquire, or permit any subsidiary to
     repurchase, redeem or otherwise acquire, any of its securities or any
     securities of its subsidiaries, or propose to do any of the foregoing,
     except in connection with the purchase of Shares by the trustees of the
     Company's Retirement Plan;

          (f) sell, transfer, license, sublicense or otherwise dispose of any
     Company Intellectual Property or amend or modify any existing agreements
     with respect to any Company Intellectual Property or Third Party
     Intellectual Property Rights;

          (g)(i) acquire (by merger, consolidation or acquisition of stock or
     assets) any corporation, partnership or other business organization or
     division thereof; (ii) incur any indebtedness for borrowed money, issue any
     debt securities, assume, guarantee, endorse or otherwise as an
     accommodation become responsible for the obligations of any person, or make
     any loans or advances except for the incurrence of indebtedness for
     borrowed money (y) under that certain Amended and Restated Credit
     Agreement, dated as of November 6, 1998, amending and restating the Credit
     Agreement dated as of September 5, 1995 among the Company, the lenders (as
     defined therein), and Chemical Bank as Issuing Bank, Administrative Agent
     and as Collateral for the Lenders, as amended by that certain Waiver and
     First Amendment dated as of February 7, 2000 and that certain Waiver and
     Second Amendment dated as of March 25, 2000 (the "Bank Facility"), and (z)
     up to an aggregate of $40,000,000 of new indebtedness pursuant to the
     credit facility to be provided by Parent as set forth

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<PAGE>   112

     in Section 7.12; (iii) enter into any (x) Material Contract; (y) Contract
     that contemplates or involves the payment or delivery of cash or other
     consideration in an amount or having a value in excess of $750,000
     annually, or that contemplate or involve the performance of services having
     a value in excess of $750,000 or (z) Contract that has a term of more than
     180 days and that may not be terminated by the Company or one of its
     subsidiaries (without payment of penalty or premium of more than $750,000)
     within 180 days after the delivery of a termination notice by the Company
     or such subsidiary (other than, in each of clauses "(x)," "(y)" or "(z),"
     purchase orders for any raw materials or any finished products for resale
     aggregating in any month not in excess of the greater of $250,000 or 10% of
     the aggregate purchase price of such raw material or finished product
     purchased in fiscal 1999, and bid contracts, in each case entered into in
     the ordinary course of business); (iv) authorize or make any capital
     expenditures or purchases of fixed assets that are not currently budgeted;
     (v) terminate any (x) Material Contract, (y) Contract that contemplates or
     involves the payment or delivery of cash or other consideration in an
     amount or having a value in excess of $750,000 annually, or that
     contemplate or involve the performance of services having a value in excess
     of $750,000 or (z) Contract that has a term of more than 180 days and that
     may not be terminated by the Company or one of its subsidiaries (without
     payment of penalty or premium of more than $750,000) within 180 days after
     the delivery of a termination notice by the Company or such subsidiary or
     amend any of its material terms (other than amendments to existing credit
     arrangements with the sole effect of remedying defaults thereunder and that
     do not materially increase the Company's obligations or commitments
     thereunder); or (vi) enter into or amend any contract, agreement,
     commitment or arrangement to effect any of the matters prohibited by this
     Section 6.01(g);

          (h) except for contracts or amendments that serve to reduce the cost
     to the Company of severance arrangements, increase the compensation payable
     or to become payable to its employees, officers or directors or grant any
     severance or termination pay to, or enter into any employment or severance
     agreement with, any managerial employee, director or officer of the Company
     or any of its subsidiaries or establish, adopt, enter into, terminate or
     amend any Employee Plan (except as may otherwise be required by applicable
     law);

          (i) take any action, other than as required by GAAP, to change
     accounting policies or procedures (including, without limitation,
     procedures with respect to revenue recognition, capitalization of
     development costs, payments of accounts payable and collection of accounts
     receivable);

          (j) make any material Tax election inconsistent with past practice or
     settle or compromise any material Tax liability, except to the extent the
     amount of any such settlement or compromise has been reserved for on the
     consolidated financial statements contained in the Company SEC Reports;

          (k) pay, discharge, settle or satisfy any material lawsuits, claims,
     liabilities or obligations (absolute, accrued, asserted or unasserted,
     contingent or otherwise), other than the payment, discharge, settlement or
     satisfaction in the ordinary course of business of liabilities reflected or
     reserved against in the financial statements of the Company or incurred in
     the ordinary course of business; provided that, for the purpose of this
     paragraph (k), (1) all liabilities or obligations of the Company or any of
     its subsidiaries to its directors, officers or affiliates shall be deemed
     to be material and not in the ordinary course, and (2) that any discharge,
     settlement or satisfaction that would result in the imposition of any
     obligation on the Company or any of its subsidiaries other than for the
     payment of money shall be deemed to be not in the ordinary course;

          (l) except as currently budgeted, permit any material increase in the
     number of employees employed by the Company or any of its subsidiaries on
     the date hereof;

          (m) commence any litigation, other than collection actions in the
     ordinary course of business; or

          (n) take or fail to take, or agree in writing or otherwise to take or
     fail to take any of the actions described in Section 6.01(a) through (m)
     above.

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<PAGE>   113

     SECTION 6.02. No Solicitation. (a) The Company will not, and will not
permit or cause any of its subsidiaries to, and shall direct its and its
subsidiaries' employees, agents and representatives (including any investment
banker, attorney or accountant retained by it or any of its subsidiaries) not
to, directly or indirectly, initiate or solicit any inquiries or the making of
any proposal or offer with respect to a merger, reorganization, share exchange,
tender offer, consolidation or similar transaction involving, or any purchase of
assets (other than inventory in the ordinary course of business) or outstanding
shares of capital stock of, the Company or any of its subsidiaries (any such
proposal or offer being hereinafter referred to as an "Acquisition Proposal").
The Company will not, and will not permit or cause any of its subsidiaries or
any of the officers and directors of it or its subsidiaries to, and shall direct
its and its subsidiaries' employees, agents and representatives (including any
investment banker, attorney or accountant retained by it or any of its
subsidiaries) not to, directly or indirectly, engage in any negotiations
concerning, or provide any confidential information or data to, or have any
discussions with, any person relating to an Acquisition Proposal, whether made
before or after the date of this Agreement, or otherwise facilitate any effort
or attempt to make or implement an Acquisition Proposal; provided, however, that
nothing contained in this Agreement shall prevent the Company or the Company
Board from (i) complying with Rules 14d-9 and 14e-2 promulgated under the
Exchange Act with regard to an Acquisition Proposal or disclosure obligations
under state law or (ii) at any time prior to the earlier to occur of (x) payment
for shares of Company Common Stock pursuant to the Offer or (y) the approval of
the Merger by the requisite vote of the stockholders of the Company, (A)
providing information in response to a request therefor by a person who has made
an unsolicited bona fide written Superior Proposal (so long as such proposal did
not result from a breach of this Section 6.02) if the Company Board receives
from the person so requesting such information an executed confidentiality
agreement with customary terms (which shall not preclude the making of an
Superior Proposal); or (B) engaging in any negotiations or discussions with any
person who has made an unsolicited bona fide written Superior Proposal, if and
only to the extent that, in each such case referred to in clause (A) or (B)
above, the Company Board determines in good faith, after consultation with the
Company's outside legal counsel, that such action is necessary in order for the
Company's directors to comply with their fiduciary duties under applicable law;
provided, however, that the Company may not, except as permitted by Section
6.02(b) below, withdraw or modify, or propose to withdraw or modify, the Company
Board Recommendation, or approve or recommend, or propose to approve or
recommend, any Acquisition Proposal, or enter into any agreement with respect to
any Acquisition Proposal. The Company will immediately cease and cause to be
terminated any existing activities, discussions or negotiations with any parties
conducted heretofore with respect to any of the foregoing. The Company agrees
that it will take the necessary steps to inform promptly the individuals or
entities referred to in the first sentence hereof of the obligations undertaken
in this Section 6.02. The Company also will promptly request each individual or
entity that has executed, within twelve months prior to the date of this
Agreement, a confidentiality agreement in connection with his or its
consideration of a possible Acquisition Proposal to return promptly or destroy
all confidential information heretofore furnished to such individual or entity
by or on behalf of the Company or any of its subsidiaries. The Company agrees
not to release or permit the release of any waiver of any provision of, any
confidentiality, "standstill" or similar agreement to which the Company or any
of its subsidiaries is a party, and will enforce or cause to be enforced each
such agreement at the request of Parent. The Company will notify Parent
immediately (but in any event within 24 hours) if any such inquiries, proposals
or offers are received by, any such information requested from, or any such
discussions or negotiations are sought to be initiated or continued with any of
its representatives indicating, in connection with such notice, the name of such
person and the material terms and conditions of any proposals or offers and
thereafter shall keep Parent informed, on a current basis, on the status and
terms of any such proposals or offers and the status of any such negotiations or
discussions. For purposes of this Section 6.02, an Acquisition Proposal will be
considered unsolicited even though the Company, prior to the date of this
Agreement, solicited a proposal from the person making the Acquisition Proposal.

     (b) Neither the Company Board nor any committee thereof shall (i) withdraw
or modify, or propose to withdraw or modify, in a manner adverse to Parent or
Purchaser, the Company Board Recommendation, (ii) approve or recommend, or
propose to approve or recommend, any Acquisition Proposal by a

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<PAGE>   114

third party or (iii) terminate this Agreement in order to enter into a
definitive agreement with respect to any third-party Acquisition Proposal;
provided, however, that the Company Board or a committee thereof may take the
actions described (A) under clause (i) if the Company Board shall have
determined in good faith, after consultation with outside counsel, that such
action is necessary in order for its directors to comply with their fiduciary
duties under applicable law and (B) under clause (ii) if the Company Board shall
have made the determination required in (A) above and also determined in good
faith, after consultation with its financial advisor, that such Acquisition
Proposal is a Superior Proposal.

     SECTION 6.03. Information Supplied. Each of the Company and Parent agrees,
as to itself and its subsidiaries, that none of the information supplied or to
be supplied by it or its subsidiaries for inclusion or incorporation by
reference in (i) the Offer Documents and the Schedule 14D-9 will, at the time of
distribution thereof, contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they were
made, not misleading, (ii) the Registration Statement and related prospectus, if
any, will, at the date of mailing to stockholders of the Company, contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary in order to make the statements therein, in
light of the circumstances under which they were made, not misleading.

                                  ARTICLE VII

                             ADDITIONAL AGREEMENTS

     SECTION 7.01. Filings, Other Actions; Notification. (a) Parent and the
Company shall promptly prepare and file as soon as practicable after the date
hereof all documents required to be filed (i) with the United States Federal
Trade Commission and the Department of Justice in order to comply with the HSR
Act and (ii) any other documents which are required under any non-United States
laws regulating competition, antitrust, investment or exchange controls. Parent
and the Company shall promptly furnish all materials thereafter required in
connection therewith.

     (b) Each of the Company and Parent shall cooperate with each other and use
(and shall cause its subsidiaries to use) all reasonable efforts (i) to cause to
be done all things necessary, proper or advisable on its part under this
Agreement and applicable laws to consummate and make effective the Transactions
as soon as practicable, including preparing and filing as promptly as
practicable all documentation to effect all necessary notices, reports and other
filings and (ii) to obtain as promptly as practicable all consents,
registrations, approvals, permits and authorizations necessary or advisable to
be obtained from any third party and/or any Governmental Entity in connection
with, as a result of or in order to consummate any of the Transactions,
including, without limitation, upon request of Parent, all material consents
required in connection with the consummation of the Offer and the Merger.
Subject to applicable laws relating to the exchange of information, Parent and
the Company shall have the right to review in advance, and to the extent
practicable each will consult the other on, all the information relating to
Parent or the Company, as the case may be, and any of their respective
subsidiaries, that appear in any filing made with, or written materials
submitted to, any third party or any Governmental Entity in connection with the
Transactions; provided, however, that with respect to documents that one party
reasonably believes should not be disclosed to the other party, such party shall
instead furnish those documents to counsel for the other party pursuant to a
mutually satisfactory confidentiality agreement. In exercising the foregoing
right, each of the Company and Parent shall act reasonably and as promptly as
practicable.

     (c) Subject to the provisions of this Section 7.01(c), Parent and the
Company shall promptly respond to any request for additional information
pursuant to Section (e)(1) of the HSR Act (a "Second Request"). Parent shall use
its reasonable efforts to resolve objections, if any, as may be asserted by any
Governmental Entity with respect to the Transactions under any antitrust or
trade or regulatory laws or regulations of any Governmental Entity. In
connection therewith, Parent shall use (and shall cause each of its subsidiaries
to use) all commercially reasonable measures available to it to consummate the
Transactions. Notwithstanding the foregoing, however, Parent will not be
required to agree to the sale,
                                      A-29
<PAGE>   115

license, disposition, holding separate or divestiture of any lines of business
or assets that could reasonably be expected to be material to the business,
taken as a whole, of Parent and its subsidiaries and the Company and its
subsidiaries following the Effective Time. The parties further acknowledge and
agree that: (i) without limiting Parent's obligations under this paragraph,
Parent shall have the right, given the option by the relevant Governmental
Entity, to determine which businesses or assets, or portions thereof, shall be,
if necessary to satisfy each such objection, sold, licensed, disposed of, held
separate or divested, and on what terms and conditions such actions shall be
taken; and (ii) any such sale, license, disposition, separation or divestiture
shall be conditioned upon the closing of the Merger and shall not reduce the
Offer Price. To the extent reasonably practicable, each party shall have the
right to attend and participate in any telephone calls or meetings that the
other party has with any person with respect to the foregoing, and shall
otherwise be promptly informed of the substance of the call or meeting.

     (d) Each of the Company and Parent shall, upon request by the other,
furnish the other with all information concerning itself, its subsidiaries,
directors, officers and stockholders and such other matters as may be reasonably
necessary or advisable in connection with the Offer Documents, the Schedule
14D-9, the Registration Statement or any other statement, filing, notice or
application made by or on behalf of Parent, the Company or any of their
respective subsidiaries to any third party or Governmental Entity in connection
with the Transactions.

     (e) Each of the Company and Parent shall keep the other apprised of the
status of matters relating to completion of the Transactions, including promptly
furnishing the other with copies of notices or other communications received by
Parent or the Company, as the case may be, or any of their respective
subsidiaries, from any third party or any Governmental Entity with respect to
the Transactions.

     (f) If any Takeover Statute shall become applicable to the Transactions,
the Company and the Company Board shall grant such approvals and take such
actions as are necessary so that the Transactions may be consummated as promptly
as practicable on the terms contemplated hereby and shall otherwise act to
eliminate or minimize the effects of such Takeover Statute on the Transactions.

     SECTION 7.02. Access to Information; Confidentiality. The Company shall
(and shall cause each of its subsidiaries to) afford to the officers, employees,
accountants, counsel and other representatives of Parent reasonable access,
consistent with applicable law, at all reasonable times during the period prior
to the Appointment Date, to all its books, contracts, commitments and records,
and, during such period, the Company shall (and shall cause each of its
subsidiaries to) furnish, consistent with applicable law, promptly to Parent all
information concerning the Company's business and personnel as Parent may
reasonably request and shall make available, consistent with applicable law, to
Parent the appropriate individuals (including attorneys, accountants and other
professionals) for discussion of the Company's business and personnel as Parent
may reasonably request to the extent that the Company is not in breach of a
confidentiality agreement with a third party. After the Appointment Date, the
Company shall provide Parent and such persons as Parent shall designate with all
such information, at any time as Parent shall request. Any such information
obtained by Parent or Purchaser shall be governed by the terms of the
Confidentiality Agreement. All requests for information made pursuant to this
Section shall be directed to an executive officer of the Company or such person
as may be designated by any of its officers, as the case may be.

     SECTION 7.03. Stock Options. (a) At the Effective Time, in accordance with
Section 5(c)(ii) of the Company 1999 Stock Option Plan and Section V.C.2. of the
Company 1995 Non-Employee Director Stock Option Plan, respectively, all rights
to acquire Company Common Stock under each Option then outstanding under the
Company 1999 Stock Option Plan and the Company 1995 Non-Employee Director Stock
Option Plan shall be converted into and become rights to receive in lieu of each
share of Company Common Stock then subject to the Option, the number and class
of shares and/or other securities or property (including cash) comprising the
Merger Consideration. With respect to each such Option (an "Assumed Option"),
Parent shall assume the obligation to deliver to each holder of such Option (an
"Optionholder") the amount of Merger Consideration payable upon the exercise of
the Assumed Option. From and after the Effective Time (i) each Assumed Option
may be exercised solely for Merger

                                      A-30
<PAGE>   116

Consideration as provided herein and (ii) in accordance with the terms of the
Company 1999 Stock Option Plan and the Company 1995 Non-Employee Director Stock
Option Plan, any restriction on the exercise of any such Assumed Option shall
continue in full force and effect and the term, exercisability, vesting schedule
and other provisions of such Assumed Option shall otherwise remain unchanged;
provided, however that each Assumed Option shall, in accordance with its terms,
be subject to further adjustment as appropriate to reflect any stock split,
stock dividend, reverse stock split, reclassification, recapitalization or other
similar transaction subsequent to the Effective Time in accordance with and
subject to the 1999 Stock Option Plan and the Company 1995 Non-Employee Director
Stock Option Plan. Within a reasonable time after the Effective Time, Parent
shall issue to each Optionholder a document describing the terms applicable to
Assumed Options. In addition, the Company Board (or a committee thereof
consisting of two or more non-employee directors, each of whom shall be to the
extent required by Rule 16b-3, a "non-employee director" as defined in Rule
16b-3 of the Exchange Act) shall adopt such resolutions and take other actions,
if any, as may be required to provide that upon the Effective Time, all
outstanding unexercised options (whether vested or unvested and without regard
to limitations on exercise otherwise contained in the agreement evidencing the
option) granted pursuant to the Company 1993 Stock Option Plan and the Company
1997 Stock Option Plan ("Terminating Options") shall be terminated effective as
of the Effective Time in accordance with the terms of each such plan,
respectively, and the Company shall deliver a notice of termination to each
holder of a Terminating Option at least 20 days prior to the Effective Time;
provided that, during the period from the date on which such notice of
termination is delivered to the Effective Time, each holder of a Terminating
Option shall have the right to exercise in full all of his or her Terminating
Options that are then outstanding (whether vested or unvested and without regard
to limitations on exercise otherwise contained in the agreement evidencing the
Terminating Option), but contingent on occurrence of the Merger, and provided
that, if the Merger does not take place within 180 days after giving such notice
for any reason whatsoever, the notice and exercise shall be null and void.

     Parent shall register the number and class of shares as comprise the Merger
Consideration issuable upon the exercise of the Assumed Options with the
Securities and Exchange Commission on a Form S-8 not later than 15 days
following the Effective Time.

     (b) Prior to the Effective Time, the Company shall take all actions as are
necessary to terminate the Company's Stock Purchase Plan and to cause the
"Exercise Date" (as such term is used in the Stock Purchase Plan) applicable to
the then current Offering Period (as such term is used in the Stock Purchase
Plan) to be the last trading day on which the Company Common Stock is traded on
the NYSE immediately prior to the Effective Time (the "New Purchase Date");
provided that, such termination and change in the "Exercise Date" shall be
conditioned upon the consummation of the Merger. On the New Purchase Date, the
Company shall apply the funds credited as of such date under the Stock Purchase
Plan within each participant's payroll withholdings account to the purchase of
whole shares of Company Common Stock in accordance with the terms of the Stock
Purchase Plan. The Company shall promptly deliver to Parent prior to the
Effective Time true and complete copies of all documentation relating to or
arising from the termination of the Stock Purchase Plan.

     SECTION 7.04. Employee Benefits. (a) Except as contemplated by this
Agreement, for the period beginning on the Closing Date and ending on the date
on which employees of the Company and its subsidiaries are first eligible to
enroll in the health and welfare plans of the Surviving Corporation, Parent or
its subsidiaries (which date is currently contemplated to be December 2000),
Parent shall maintain or cause the Surviving Corporation to maintain the
Company's health and welfare plans for employees of the Company and its
subsidiaries which are in effect on the date of this Agreement. Parent and the
Surviving Corporation shall ensure that any employee benefit plan or arrangement
established, maintained or contributed to by Parent and the Surviving
Corporation or any of their affiliates grant full credit for all service or
employment with, or recognized by, the Company or any of its affiliates for
purposes of eligibility and vesting with respect to any employee pension benefit
plan, as defined in Section 3(2) of ERISA, and, for purposes of eligibility,
vesting and determining the amount of any benefit with respect to any vacation
program or employee welfare benefit plan, as defined in Section 3(1) of ERISA,
including,

                                      A-31
<PAGE>   117

without limitation, any severance plan or sick plan. As soon as practicable (and
in any event no later than seven days after the date of this Agreement), the
parties agree to jointly communicate the substance of the provisions of this
Section 7.04(a) to the employees of the Company and its subsidiaries.

     (b) Parent shall honor, in accordance with their terms, all employment
agreements, retention programs, severance agreements, severance plans or
severance policies of the Company and its subsidiaries that are previously
disclosed in the Company Disclosure Schedule, unless any employee covered by any
such agreement, plan or policy agrees otherwise.

     (c) The Company shall take (or cause to be taken) all actions necessary or
appropriate to terminate The Retirement Plan of Schein Pharmaceutical, Inc. &
Affiliates (the "Retirement Plan"), and each other pension or retirement plan,
sponsored by the Company or any of its subsidiaries, intended to qualify under
Section 401(a) of the Code, effective on the date immediately prior to the
earlier of: (i) the consummation of the Offer but conditioned on the Company
becoming an ERISA Affiliate of Parent; and (ii) the Effective Time but
conditioned on the Company becoming an ERISA Affiliate of Parent.
Notwithstanding such termination of the Retirement Plan, participants in the
Retirement Plan shall be permitted to continue to make and repay loans under the
Retirement Plan (a "Plan Loan").

     As soon as practicable after the Effective Time, the Surviving Corporation
or Parent shall file with the Internal Revenue Service a request for a
determination regarding the tax-qualified status of the Retirement Plan under
Section 401(a) of the Code. Within 45 days following the receipt of a favorable
determination letter from the Internal Revenue Service or earlier, as determined
by Parent, Parent shall permit any participant in the Retirement Plan to elect
to rollover (whether by direct or indirect rollover, as selected by such
participant) his or her "eligible rollover distribution" (as defined in Section
402(c)(4) of the Code) from the Retirement Plan to a retirement plan maintained
by Parent or its affiliates that contains a cash or deferred arrangement under
Section 401(k) of the Code ("Parent 401(k) Plan"), provided, that such
participant is an employee of the Company or Surviving Corporation at the time
of his or her distribution from the Retirement Plan. None of the Company,
Surviving Corporation, Parent or the Retirement Plan shall place any
participant's Plan Loan into default or declare a default with respect to any
Plan Loan so long as such participant transfers his or her account balance under
the Retirement Plan, together with the note evidencing the Plan Loan, to the
Parent 401(k) Plan through a direct rollover, provided, that the Plan Loan is
not in default at the time the plan administrator for the Retirement Plan
receives such participant's rollover election. Parent shall amend the Parent
401(k) Plan to the extent necessary in order to effectuate the transactions
contemplated under this Section. The Company, the Surviving Corporation and
Parent shall cooperate with each other (and cause the trustees of the Retirement
Plan and the Parent 401(k) to cooperate with each other) with respect to the
rollover of the participants' distributions.

     SECTION 7.05. Indemnification. (a) From and after the Effective Time, the
Surviving Corporation, to the fullest extent permitted under applicable law,
shall indemnify and hold harmless each present and former director and officer
of the Company (collectively, the "Indemnified Parties") against any costs or
expenses (including reasonable attorneys' fees), judgments, fines, losses,
claims, damages, liabilities and amounts paid in settlement in connection with
any claim, action, suit, proceeding or investigation, whether civil, criminal,
administrative or investigative, arising out of or pertaining to actions taken
or omitted to be taken by such Indemnified Parties in their capacity as a
director, officer, employee or agent of the Company or any of its subsidiaries
or, while serving at the request of the Company, in their capacity as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise at or prior to the Effective Time (including,
without limitation, the Transactions). The Surviving Corporation shall advance
expenses to an Indemnified Party, as incurred, with respect to the foregoing
actions or failures to act, to the fullest extent permitted under applicable
law; provided that the Indemnified Party to whom expenses are advanced provides
an undertaking to repay such advances if it is ultimately determined that such
Indemnified Party is not entitled to indemnification. In the event of any such
claim, action, suit, proceeding or investigation (whether arising before or
after the Effective Time), (i) the Indemnified Parties shall promptly notify
Parent and the Surviving Corporation thereof, (ii) any counsel retained by the
Indemnified Parties for any period after the Effective Time must be reasonably
                                      A-32
<PAGE>   118

satisfactory to Parent and the Surviving Corporation, (iii) the Surviving
Corporation shall not be obligated to pay for more than one firm of counsel at
any time for all Indemnified Parties, and (iv) the Surviving Corporation shall
not be liable for any settlement effected without its written consent (which
consent shall not be unreasonably withheld). The Surviving Corporation shall not
have any obligation hereunder to any Indemnified Party when and if a court of
competent jurisdiction shall ultimately determine (and such determination shall
have become final) that the indemnification of such Indemnified Party in the
manner contemplated hereby is prohibited by applicable law. Subject to the
rights afforded and the limitations applicable to the Surviving Corporation (and
any of its successors or assigns) under this Section 7.05(a): (i) Parent hereby
absolutely, unconditionally and irrevocably guarantees the prompt payment and
performance, in each case when due, by the Surviving Corporation (and any of its
successors or assigns) of its obligations (monetary and non-monetary) under this
Section 7.05(a); (ii) Parent agrees that this guarantee is continuing in nature
and shall survive and continue in full force notwithstanding the dissolution or
liquidation of, or the insolvency or bankruptcy of, merger or any other
corporate change or other occurrence whatsoever affecting the obligations and
liabilities of the Surviving Corporation; and (iii) Parent agrees that, with
respect to the monetary obligations of the Surviving Corporation under this
Section 7.05(a), this is a guarantee of performance and payment and not merely
of collection, and that Parent will perform said obligations without offset of
any kind and without first pursuing any rights or remedies that it may have
against the Surviving Corporation regardless of the existence or adequacy of
such rights or remedies. Parent agrees to reimburse each Indemnified Party for
all costs and expenses, including reasonable attorneys' fees and expenses,
incurred by the Indemnified Party in connection with the enforcement of each
Indemnified Party's rights under this Section 7.05(a). With respect to those
matters set forth in this Section 7.05(a), Parent hereby unconditionally and
irrevocably waives, to the extent permitted by applicable law, (i) notice of
acceptance of the guarantee and any notice regarding the performance or
non-performance of the Surviving Corporation with respect to any of its
obligations hereunder, (ii) presentment for payment, notice of non-payment or
non-performance, demand, protest, notice of protest and notice of dishonor or
default to anyone, (iii) defenses to pay or perform based upon any of the
obligations of the Surviving Corporation hereunder not being a valid and binding
obligation of the Surviving Corporation enforceable in accordance with its terms
for any reason whatsoever, (iv) all other notices to which Parent may be
entitled but which may legally be waived, (v) any defense or circumstance which
might otherwise constitute a legal or equitable discharge of Parent and (vi) all
rights under any state or federal statute dealing with or affecting the rights
of creditors.

     (b) For a period of not less than six years after the Effective Time, the
Surviving Corporation shall cause to be maintained in effect the current
policies of directors' and officers' liability insurance maintained by the
Company (provided that the Surviving Corporation may substitute therefor
policies with reputable and financially sound carriers of at least the same
coverage and amounts containing terms and conditions which are no less
advantageous) with respect to claims arising from or related to facts or events
existing or occurring at or prior to the Effective Time (including, without
limitation, the Transactions); provided, however, that the Surviving Corporation
shall not be obligated to make annual premium payments for such insurance to the
extent such premiums exceed 150% of the annual premiums paid as of the date
hereof by the Company for such insurance (such 150% amount, the "Maximum
Premium"). If such insurance coverage cannot be obtained at all, or can only be
obtained at an annual premium in excess of the Maximum Premium, the Surviving
Corporation shall maintain the most advantageous policies of directors' and
officers' insurance obtainable for an annual premium equal to the Maximum
Premium; provided, further, that if such insurance coverage cannot be obtained
at all, the Surviving Corporation shall purchase all available extended
reporting periods with respect to pre-existing insurance in an amount that,
together with all other insurance purchased pursuant to this Section 7.05(b),
does not exceed the Maximum Premium. Parent agrees, and will cause the Surviving
Corporation, not to take any action that would have the effect of limiting the
aggregate amount of insurance coverage required to be maintained for the
individuals referred to in this Section 7.05(b). Subject to the rights afforded
and the limitations applicable to the Surviving Corporation (and any of its
successors or assigns) under this Section 7.05(b): (i) Parent hereby absolutely,
unconditionally and irrevocably guarantees the prompt payment and performance,
in each case when due, by the Surviving Corporation (and any of its successors
or assigns)

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<PAGE>   119

of its obligations (monetary and non-monetary) under this Section 7.05(b);
(b)(ii) Parent agrees that this guarantee is continuing in nature and shall
survive and continue in full force notwithstanding the dissolution or
liquidation of, or the insolvency or bankruptcy of, merger or any other
corporate change or other occurrence whatsoever affecting the obligations and
liabilities of the Surviving Corporation; and (iii) Parent agrees that, with
respect to the monetary obligations of the Surviving Corporation under this
Section 7.05(b), this is a guarantee of performance and payment and not merely
of collection, and that Parent will perform said obligations without offset of
any kind and without first pursuing any rights or remedies that it may have
against the Surviving Corporation regardless of the existence or adequacy of
such rights or remedies. Parent agrees to reimburse each Indemnified Party for
all costs and expenses, including reasonable attorneys' fees and expenses,
incurred by the Indemnified Party in connection with the enforcement of each
Indemnified Party's rights under this Section 7.05(b). With respect to those
matters set forth in this Section 7.05(b), Parent hereby unconditionally and
irrevocably waives, to the extent permitted by applicable law, (i) notice of
acceptance of the guarantee and any notice regarding the performance or
non-performance of the Surviving Corporation with respect to any of its
obligations hereunder, (ii) presentment for payment, notice of non-payment or
non-performance, demand, protest, notice of protest and notice of dishonor or
default to anyone, (iii) defenses to pay or perform based upon any of the
obligations of the Surviving Corporation hereunder not being a valid and binding
obligation of the Surviving Corporation enforceable in accordance with its term
s for any reason whatsoever, (iv) all other notices to which Parent may be
entitled but which may legally be waived, (v) any defense or circumstance which
might otherwise constitute a legal or equitable discharge of Parent and (vi) all
rights under any state or federal statute dealing with or affecting the rights
of creditors.

     (c) If the Surviving Corporation or any of its successors or assigns (i)
shall consolidate with or merge into any other corporation or entity and shall
not be the continuing or the surviving corporation or entity of such
consolidation or merger or (ii) shall transfer all or substantially all of its
properties and assets to any individual, corporation or other entity, then, and
in each such case, proper provision shall be made so that the successors and
assigns of the Surviving Corporation shall assume all of the obligations set
forth in this Section.

     (d) The provisions of this Section 7.05 are intended to be for the benefit
of, and shall be enforceable by, each of the Indemnified Parties, their heirs,
their representatives and assigns.

     SECTION 7.06. Notification of Certain Matters. (a) The Company shall
promptly notify Parent in writing of: (i) the discovery by the Company of any
event, condition, fact or circumstance that occurred or existed on or prior to
the date of this Agreement and that caused or constitutes a material inaccuracy
in any representation or warranty made by the Company in this Agreement; (ii)
any event, condition, fact or circumstance that occurs, arises or exists after
the date of this Agreement and that would cause or constitute a material
inaccuracy in any representation or warranty made by the Company in this
Agreement if (A) such representation or warranty had been made as of the time of
the occurrence, existence or discovery of such event, condition, fact or
circumstance, or (B) such event, condition, fact or circumstance had occurred,
arisen or existed on or prior to the date of this Agreement, (iii) any material
breach of any covenant or obligation of the Company, (iv) any inspection or
written inquiry made by any Governmental Entity (other than the SEC) of the
Company or any of its subsidiaries (and the Company shall provide Parent with
copies of any documents relating to each such inspection and inquiry), (v) any
Form 483s or similar notices, warning letters or other correspondence received
by the Company from the FDA or any comparable state or foreign Governmental
Entity regarding the compliance status of the Company or any of its subsidiaries
under applicable legal requirements (and the Company shall provide Parent with
copies of all relevant correspondence relating thereto), and (vi) any event,
condition, fact or circumstance that would make the timely satisfaction of any
of the conditions set forth in Annex A or Article VIII impossible or unlikely or
that, individually or in the aggregate, has had or could reasonably be expected
to have a Company Material Adverse Effect. Without limiting the generality of
the foregoing, the Company shall promptly advise Parent in writing of any legal
proceeding or material claim commenced or threatened or asserted in writing
against or with respect to the Company or any of its subsidiaries. No

                                      A-34
<PAGE>   120

notification given to Parent pursuant to this Section 7.06(a) shall limit or
otherwise affect any of the representations, warranties, covenants or
obligations of the Company contained in this Agreement.

     (b) Parent shall promptly notify the Company in writing of: (i) the
discovery by Parent of any event, condition, fact or circumstance that occurred
or existed on or prior to the date of this Agreement and that caused or
constitutes a material inaccuracy in any representation or warranty made by
Parent in this Agreement; (ii) any event, condition, fact or circumstance that
occurs, arises or exists after the date of this Agreement and that would cause
or constitute a material inaccuracy in any representation or warranty made by
Parent in this Agreement if (A) such representation or warranty had been made as
of the time of the occurrence, existence or discovery of such event, condition,
fact or circumstance, or (B) such event, condition, fact or circumstance had
occurred, arisen or existed on or prior to the date of this Agreement, (iii) any
material breach of any covenant or obligation of Parent, (iv) any inspection or
written inquiry made by any Governmental entity (other than the SEC) or Parent
or any of its subsidiaries (and Parent shall provide the Company with copies of
any documents relating to each such inspection and inquiry), and (v) any event,
condition, fact or circumstance that would make the timely satisfaction of any
of the conditions set forth in Annex A or Article VIII impossible or unlikely or
that has had or could reasonably be expected to have a Parent Material Adverse
Effect. Without limiting the generality of the foregoing, Parent shall promptly
advise the Company in writing of any legal proceeding or material claim
commenced or threatened or asserted in writing against or with respect to Parent
or any of its subsidiaries. No notification given to the Company pursuant to
this Section 7.06(b) shall limit or otherwise affect any of the representations,
warranties, covenants or obligations of Parent contained in this Agreement.

     SECTION 7.07. Further Action. Upon the terms and subject to the conditions
hereof, each of the parties hereto in good faith shall use their respective
reasonable efforts to take, or cause to be taken, all actions and to do, or
cause to be done, all other things necessary, proper or advisable to consummate
and make effective as promptly as practicable the Transactions, to obtain in a
timely manner all necessary waivers, consents and approvals and to effect all
necessary registrations and filings, and to otherwise satisfy or cause to be
satisfied all conditions precedent to the obligations of the other parties under
this Agreement.

     SECTION 7.08. Public Announcements. The initial press release with respect
to the execution of this Agreement shall be a joint press release acceptable to
Parent and the Company. Thereafter, so long as this Agreement is in effect,
Parent and the Company shall consult with each other before issuing any press
release or otherwise making any public statements with respect to the Offer, the
Merger or this Agreement and, except for press releases and public statements
made by the Company in connection with its upcoming annual meeting of
stockholders and related proxy solicitation which do not discuss or refer to the
Transactions, shall not issue any such press release or make any such public
statement without the prior consent of the other party, which shall not be
unreasonably withheld; provided, however, that a party may, without the prior
consent of the other party, issue such press release or make such public
statement as may upon the advice of counsel be required by law or the NYSE if it
has used all reasonable efforts to consult with the other party.

     SECTION 7.09. De-listing. The Surviving Corporation shall use its best
efforts to cause the Shares to be de-listed from the NYSE and de-registered
under the Exchange Act as soon as practicable following the Effective Time.

     SECTION 7.10. Expenses. The Surviving Corporation shall pay all charges and
expenses, including those of the Exchange Agent, in connection with the
transactions contemplated in Article III. Except as otherwise provided in
Section 9.03, whether or not the Merger is consummated, all other costs and
expenses incurred in connection with this Agreement and the Transactions shall
be paid by the party incurring such costs and expenses.

     SECTION 7.11. Financing. Parent shall put in place the financing described
in the letter dated May 20, 2000 (the "Commitment Letter") from Societe Generale
and SG Cowen Securities to Parent. Parent shall use its best efforts to ensure
that the conditions described in the Commitment Letter are fulfilled in a timely
manner.
                                      A-35
<PAGE>   121

     SECTION 7.12. Credit Facility. (a) Not later than the close of business on
June 5, 2000, Parent shall enter into such agreements with the Company, the
Company's current lenders and others, and shall make funds available or provide
credit support or other financial accommodation, as may be necessary to provide
the Company with immediate borrowing availability in the amount of $40,000,000
less the principal amount of the Unsecured Note (if issued under Section
7.12(b)) and the aggregate purchase price of Company preferred stock (sold to
Parent pursuant to Section 7.12(b)), which shall be in addition to amounts
currently available to the Company under the Bank Facility. Parent will use its
reasonable efforts to make such funds available on terms and conditions not less
favorable to the Company than provided for in the Bank Facility. The Company and
Parent agree to structure such credit facility in a manner that will not (with
or without the giving of notice, the passage of time or both) by the creation
thereof or borrowing thereunder breach, violate or cause an acceleration under
the terms of the Bank Facility (including all collateral and other documents
related thereto), the Company's Senior Floating Rate Notes due 2004 or any other
indebtedness of the Company. The Company agrees to use the proceeds of such
credit facility in the manner provided for in Annex B hereto.

     (b) In the event Parent does not timely comply with Section 7.12(a), it
shall not be a breach of this Agreement provided that Parent shall (i) not later
than the close of business May 30, 2000, loan to the Company an amount specified
in writing by the Company up to $5,000,000 (the "Unsecured Note") on an
unsecured subordinated basis at the interest rate of the Bank Facility in effect
from time to time with a maturity date of December 24, 2004, and (ii) purchase
from the Company not later than the close of business on the dates and for the
purchase prices set forth below, shares of a series of non-voting preferred
stock of the Company with a liquidation value and a redemption value equal to
the purchase price thereof, a mandatory redemption date one year and five days
after the Company's Senior Floating Rate Notes due 2004 are due, and with the
terms set forth on Annex C as well as other customary terms, all as may be
allowable under the Bank Facility and the Senior Floating Rate Notes due 2004.
The Company agrees to use the proceeds of the Unsecured Note and the proceeds of
the sale of preferred stock in the manner provided for in Annex B hereto.

<TABLE>
<CAPTION>
                                                           PURCHASE DATE
                                                           -------------
<S>                                                <C>
June 5, 2000.....................................  $ 7,500,000
June 12, 2000....................................  $ 7,500,000
June 19, 2000....................................  $ 7,500,000
June 26, 2000....................................  $17,500,000 less the principal
                                                    amount of the Unsecured Note,
                                                    if any
</TABLE>

     SECTION 7.13. Affiliate Agreements. The Company shall use its reasonable
efforts to cause each person who may be deemed to be an "affiliate" of the
Company (as defined in Rule 145 under the Securities Act) to execute and deliver
to Parent, within 20 days after the date of this Agreement, an Affiliate
Agreement substantially in the form of Exhibit A. It is acknowledged and agreed
that any certificates representing shares of Parent Common Stock issued in the
Merger to any "affiliate" of the Company shall bear a legend substantially as
follows, and shall be subject to customary Rule 145 stop transfer instructions:

     THE SHARES REPRESENTED BY THIS CERTIFICATE WERE ACQUIRED FROM A PERSON WHO
     RECEIVED SUCH SHARES IN A TRANSACTION TO WHICH RULE 145 PROMULGATED UNDER
     THE SECURITIES ACT OF 1933 APPLIES. THE SHARES REPRESENTED BY THIS
     CERTIFICATE MAY NOT BE SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT
     PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT OR IN ACCORDANCE WITH AN
     EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OF 1933.

                                      A-36
<PAGE>   122

                                  ARTICLE VIII

                            CONDITIONS TO THE MERGER

     SECTION 8.01. Conditions to Obligation of Each Party to Effect the
Merger. The respective obligations of each party to effect the Merger shall be
subject to the satisfaction at or prior to the Effective Time of each of the
following conditions:

          (a) Effectiveness of the Registration Statement. The Registration
     Statement shall have become effective under the Securities Act. No stop
     order suspending the effectiveness of the Registration Statement shall have
     been issued by the SEC and no proceedings for that purpose and no similar
     proceeding in respect of the Prospectus/Proxy Statement shall have been
     initiated or threatened by the SEC;

          (b) Stockholder Approvals. This Agreement shall have been adopted by
     the requisite vote of the stockholders of the Company to the extent
     required by the DGCL and the Restated Certificate of Incorporation of the
     Company;

          (c) No Injunctions or Restraints; Illegality. No temporary restraining
     order, preliminary or permanent injunction or other order issued by any
     Governmental Entity preventing the consummation of the Merger shall be in
     effect, and there shall not be any statute, rule, regulation or order
     enacted, entered or enforced by any Governmental Entity which makes the
     consummation of the Merger illegal; and

          (d) Offer. Parent, Purchaser or their affiliates shall have purchased,
     or caused to be purchased, Shares pursuant to the Offer.

     SECTION 8.02. Additional Condition to Obligation of the Company. The
obligation of the Company to effect the Merger is also subject to the condition
that the shares of Parent Common Stock to be issued in the Merger shall have
been approved for listing, subject to official notice of issuance, on the NYSE.

                                   ARTICLE IX

                                  TERMINATION

     SECTION 9.01. Termination. This Agreement may be terminated and the Merger
may be abandoned at any time prior to the Effective Time, notwithstanding the
adoption of this Agreement by the stockholders of the Company:

          (a) by mutual written consent duly authorized by the board of
     directors of Parent and, subject to Section 1.03(b), the Company Board; or

          (b) by either Parent or the Company if (i) a Governmental Entity shall
     have issued a non-appealable final order, decree or ruling, in each case
     having the effect of permanently restraining, enjoining or otherwise
     prohibiting the acceptance for payment of, or payment for, Shares pursuant
     to the Offer or the Merger or (ii) any statute, rule, regulation or order
     is enacted, entered or enforced by any Governmental Entity which makes the
     consummation of the Offer or the Merger illegal; or

          (c) by either Parent or the Company, if Shares have not been purchased
     pursuant to the Offer prior to November 13, 2000 (the "Termination Date")
     (provided that the right to terminate this Agreement under this Section
     9.01(c) shall not be available to any party whose failure to fulfill any
     obligations under this Agreement has been the cause of or resulted in the
     failure to consummate the Offer prior to such date); or

          (d) as long as Shares have not been purchased pursuant to the Offer,
     by Parent, if any Triggering Event shall have occurred; or

          (e) as long as Shares have not been purchased pursuant to the Offer,
     by Parent, (i) upon a breach in any material respect of any covenant or
     agreement on the part of the Company set forth in

                                      A-37
<PAGE>   123

     this Agreement or (ii) if any representation or warranty of the Company (A)
     shall have been inaccurate or incomplete when made or (B) shall have become
     inaccurate as of a date subsequent to the date of this Agreement (as if
     made on such subsequent date), other than those representations and
     warranties which address matters as of a particular date, which shall have
     been inaccurate as of such date, and in either case under clause (i) or
     (ii) the applicable event would give rise to the failure of a condition set
     forth in paragraphs (g), (h), (i) or (j) of Annex A hereto (a "Company
     Terminating Event"); provided that, in the event of a Company Terminating
     Event arising with respect to clause (i) or (ii)(A) above, if such Company
     Terminating Event is curable prior to the expiration of 20 days from notice
     by Parent to the Company of its occurrence (but in no event later than the
     Termination Date) by the Company through the exercise of its reasonable
     best efforts and for so long as the Company continues to exercise such
     reasonable best efforts, Parent may not terminate this Agreement under this
     Section 9.01(e) until the expiration of such period without such Company
     Terminating Event having been cured; provided, further, that, in the event
     of a Company Terminating Event arising with respect to clause (ii)(B)
     above, if such Company Terminating Event is curable prior to the scheduled
     or any extended expiration date of the Offer (but in no event later than
     the Termination Date) by the Company through the exercise of its reasonable
     best efforts and for so long as the Company continues to exercise such
     reasonable best efforts, Parent may not terminate this Agreement under this
     Section 9.01(e) until the expiration date of the Offer without such Company
     Terminating Event having been cured; or

          (f) by Parent or the Company, if the Offer has expired or has been
     terminated in accordance with the terms set forth in Annex A hereto without
     any Shares having been purchased pursuant to the Offer (provided that the
     right to terminate this Agreement under this Section 9.01(f) shall not be
     available to any party whose failure to fulfill any obligations under this
     Agreement has been the cause of or resulted in the failure to consummate
     the Offer prior to the expiration or termination of the Offer); or

          (g) as long as Shares have not been purchased pursuant to the Offer,
     by the Company, (i) upon a breach in any material respect of any covenant
     or agreement on the part of Parent or Purchaser set forth in this Agreement
     or (ii) if any representation or warranty of Parent or Purchaser (A) shall
     have been inaccurate or incomplete when made or (B) shall have become
     inaccurate as of a date subsequent to the date of this Agreement (as if
     made on such subsequent date), other than those representations and
     warranties which address matters as of a particular date, which shall have
     been inaccurate as of such date, and, in either case, the applicable event
     would materially adversely affect Parent's or Purchaser's ability to
     consummate (or materially delays commencement or consummation of) the Offer
     (a "Parent Terminating Event"); provided that, in the event of a Parent
     Terminating Event arising with respect to clause (i) or (ii)(A) above, if
     such Parent Terminating Event is curable prior to the expiration of 20 days
     from notice by the Company to Parent of its occurrence (but in no event
     later than the Termination Date) by Parent or Purchaser through the
     exercise of its reasonable best efforts and for so long as Parent or
     Purchaser continues to exercise such reasonable best efforts, the Company
     may not terminate this Agreement under this Section 9.01(g) until the
     expiration of such period without such Parent Terminating Event having been
     cured; provided, further, that, in the event of a Parent Terminating Event
     under clause (ii)(B) above, if such Parent Terminating Event is curable
     prior to the scheduled or any extended expiration date of the Offer (but in
     no event later than the Termination Date) by Parent or Purchaser through
     the exercise of its reasonable best efforts and for so long as Parent or
     Purchaser continues to exercise such reasonable best efforts, the Company
     may not terminate this Agreement under this Section 9.01(g) until the
     expiration date of the Offer without such Parent Terminating Event having
     been cured.

     SECTION 9.02. Effect of Termination. In the event of the termination of
this Agreement and the abandonment of the Merger pursuant to Section 9.01, this
Agreement shall forthwith become void and there shall be no liability on the
part of any party hereto (or any of its affiliates, directors, officers,
employees, agents, legal and financial advisors or other representatives),
except (i) as set forth in

                                      A-38
<PAGE>   124

Sections 7.10, 9.03 and 10.01 and (ii) nothing set forth in this Agreement shall
relieve any party from liability or damages resulting from any willful breach of
this Agreement.

     SECTION 9.03. Fees and Expenses. (a) Except as set forth in Section 7.10
and this Section 9.03, all fees and expenses incurred in connection with this
Agreement and the Transactions shall be paid by the party incurring such fees
and expenses, whether or not the Merger is consummated.

     (b) The Company shall pay Parent a fee of $21,300,000 (the "Termination
Fee"), plus actual, documented and reasonable out-of-pocket expenses of Parent
and Purchaser relating to the Transactions not in excess of $2,500,000
(including, but not limited to, fees and expenses of counsel), if this Agreement
is terminated by Parent pursuant to (i) Section 9.01(d) or (ii) Section 9.01(e),
provided, however, that, subject to Section 9.02(ii), in the case of termination
pursuant to Section 9.01(e)(ii)(B), the Company shall only be obligated to pay
to Parent the expense reimbursement; provided, however, that no Termination Fee
or expense reimbursement shall be payable pursuant to this Section 9.03(b) if
Parent or Purchaser shall then be in willful material breach of its obligations
hereunder.

     (c) Parent shall pay the Company a fee of $21,300,000 plus actual,
documented and reasonable out-of-pocket expenses of the Company relating to the
transactions contemplated by this Agreement, not in excess of $2,500,000
(including, but not limited to, fees and expenses of the Company's counsel), if
this Agreement is terminated by the Company pursuant to Section 9.01(g);
provided, however, that no fee or expense reimbursement shall be payable
pursuant to this Section 9.03(c) if the Company shall then be in willful
material breach of its obligations hereunder.

     (d) The fees and expense reimbursement payable pursuant to Sections 9.03(b)
and 9.03(c) shall be paid within two business days after being notified of such
by the other party; provided, however, that the Termination Fee shall not be
payable to Parent pursuant to Section 9.03(b) until the earliest of (i) the date
six months after the termination of this Agreement, (ii) the date of closing of
a debt financing by the Company which increases the Company's aggregate
indebtedness for borrowed money by not less than $30,000,000 and (iii) the
closing of a definitive agreement for any Acquisition Proposal, at which time
the Termination Fee shall be paid immediately.

     (e) Each party acknowledges that the agreements contained in Sections
9.03(b) and 9.03(c) are an integral part of the Transactions and that, without
these agreements, the parties would not enter into this Agreement. Accordingly,
if any party fails to pay any amounts when due pursuant to Section 9.03(b) or
9.03(c) and, in order to obtain such payment, the other party commences a suit
that results in a judgment against the party failing to pay for such amounts,
that party shall pay to the other party its costs and expenses (including
reasonable attorneys' fees) in connection with such suit, together with interest
on such amounts at the prime rate of The Chase Manhattan Bank N.A., from the
date such amounts were required to be paid.

     (f) The payment of any fees and the reimbursement of any expenses pursuant
to this Section 9.03 shall be made by wire transfer of same day funds. Except as
otherwise provided in Section 9.02, such payment and reimbursement by a party
shall be the sole and exclusive remedy of the other parties against that party
and any of its subsidiaries and their respective directors, officers, employees,
agents, advisors or other representatives with respect to a breach of any
representation, warranty, covenant or agreement of that party.

                                   ARTICLE X

                               GENERAL PROVISIONS

     SECTION 10.01. Effectiveness of Representations, Warranties and
Agreements. Except as otherwise provided in this Section 10.01, the
representations, warranties and agreements of each party hereto shall remain
operative and in full force and effect regardless of any investigation made by
or on behalf of any other party hereto, any person controlling any such party or
any of their officers or directors, whether prior to or after the execution of
this Agreement. The representations, warranties and agreements in this

                                      A-39
<PAGE>   125

Agreement shall terminate at the Effective Time or upon the termination of this
Agreement pursuant to Section 9.01, as the case may be, except that the
agreements set forth in Article III and in Sections 7.03 (Stock Options), 7.04
(Employee Benefits), 7.05 (Indemnification) and 7.10 (Expenses), shall survive
the consummation of the Merger and those set forth in Section 7.10 (Expenses),
Section 9.02 (Effect of Termination) and Section 9.03 (Fees and Expenses) shall
survive termination of this Agreement.

     SECTION 10.02. Notices. All notices and other communications given or made
pursuant hereto shall be in writing and shall be deemed to have been duly given
or made (a) as of the date delivered if delivered personally or (b) two business
days after mailed by registered or certified mail (postage prepaid, return
receipt requested) to the parties at the following addresses (or at such other
address for a party as shall be specified by such party by notice given pursuant
to this provision) or sent by electronic transmission, with confirmation
received, to the telecopy number specified below:

          (a) If to Parent or Purchaser:

                    Watson Pharmaceuticals, Inc.
                    311 Bonnie Circle
                    Corona, CA 91718
                    Telecopier No.: 909-270-1429
                    Attention: General Counsel

               With a copy to:

                    Cooley Godward LLP
                    3000 E. Camino Real
                    Five Palo Alto, Square
                    Palo Alto, CA 94306-2155
                    Telecopier No.: 650-849-7400
                    Attention: Keith A. Flaum, Esq.
                               James R. Jones, Esq.
                               Luke J. Bergstrom, Esq.

          (b) If to the Company:

                    Schein Pharmaceutical, Inc.
                    100 Campus Drive
                    Florham Park, NJ 07932
                    Telecopier No.: 973-593-5580
                    Attention: Chairman

               With a copy to:

                    Schein Pharmaceutical, Inc.
                    100 Campus Drive
                    Florham Park, NJ 07932
                    Telecopier No.: 973-593-5820
                    Attention: General Counsel

               and

                    Proskauer Rose LLP
                    1585 Broadway
                    New York, NY 10036
                    Telecopier No.: 212-969-2900
                    Attention: Richard L. Goldberg, Esq.

     SECTION 10.03. Amendment. Subject to Section 1.03(b) and applicable law,
this Agreement may be amended by the parties hereto by action taken by or on
behalf of their respective boards of directors at any time prior to the
Effective Time; provided, however, that, after approval of the Merger by the

                                      A-40
<PAGE>   126

stockholders of the Company, no amendment may be made which by law requires
further approval by such stockholders without such further approval. This
Agreement may not be amended except by an instrument in writing signed by the
parties hereto.

     SECTION 10.04. Waiver. Subject to Section 1.03(b), at any time prior to the
Effective Time, any party hereto may with respect to any other party hereto (a)
extend the time for the performance of any of the obligations or other acts, (b)
waive any inaccuracies in the representations and warranties contained herein or
in any document delivered pursuant hereto or (c) waive compliance with any of
the agreements or conditions contained herein. Any such extension or waiver
shall be valid if set forth in an instrument in writing signed by the party or
parties to be bound thereby.

     SECTION 10.05. Headings. The headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.

     SECTION 10.06. Severability. If any term or other provision of this
Agreement is invalid, illegal or incapable of being enforced by any rule of law
or public policy, all other conditions and provisions of this Agreement shall
nevertheless remain in full force and effect so long as the economic or legal
substance of the Transactions is not affected in any manner adverse to any
party. Upon such determination that any term or other provision is invalid,
illegal or incapable of being enforced, the parties hereto shall negotiate in
good faith to modify this Agreement so as to effect the original intent of the
parties as closely as possible in an acceptable manner to the end that the
Transactions are fulfilled to the fullest extent possible.

     SECTION 10.07. Entire Agreement. This Agreement (including any exhibits
hereto) and the Company Disclosure Schedule, together with the Confidentiality
Agreement, constitute the entire agreement and supersede all prior agreements
and undertakings, both written and oral, among the parties, or any of them, with
respect to the subject matter hereof; provided, however, that (i)
notwithstanding anything to the contrary contained in this Agreement or in the
Confidentiality Agreement, the standstill provision contained in Section 7 of
the Confidentiality Agreement shall cease to have any further force or effect
upon the disclosure, announcement, commencement, submission or making of an
Acquisition Proposal by a person or entity other than Parent or an affiliate of
Parent and (ii) the execution and delivery of this Agreement and the Stockholder
Agreements and the exercise of the rights granted to Parent and Purchaser
hereunder and thereunder shall never constitute a breach or violation of the
Confidentiality Agreement.

     SECTION 10.08. Assignment, Purchaser. This Agreement shall not be assigned
by operation of law or otherwise without the prior written consent of the other
parties hereto; provided, however, that Parent may designate, by written notice
to the Company, another wholly-owned direct or indirect subsidiary to be a
constituent corporation in the Merger in lieu of Purchaser, in the event of
which all references herein to Purchaser shall be deemed references to such
other subsidiary, except that all representations and warranties made herein
with respect to Purchaser as of the date of this Agreement shall be deemed
representations and warranties made with respect to such other subsidiary as of
the date of such designation.

     SECTION 10.09. Parties in Interest. This Agreement shall be binding upon
and inure solely to the benefit of each party hereto and their successors and
assigns, and nothing in this Agreement, express or implied, is intended to or
shall confer upon any other person any right, benefit or remedy of any nature
whatsoever under or by reason of this Agreement, other than Article III and
Section 7.05 (Indemnification).

     SECTION 10.10. Failure or Indulgence Not Waiver; Remedies Cumulative. No
failure or delay on the part of any party hereto in the exercise of any right
hereunder shall impair such right or be construed to be a waiver of, or
acquiescence in, any breach of any representation, warranty or agreement herein,
nor shall any single or partial exercise of any such right preclude other or
further exercise thereof or of any other right. All rights and remedies existing
under this Agreement are cumulative to, and not exclusive of, any rights or
remedies otherwise available.

                                      A-41
<PAGE>   127

     SECTION 10.11. Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF DELAWARE,
WITHOUT REGARD TO THE CONFLICT OF LAW PRINCIPLES THEREOF.

     SECTION 10.12. Counterparts. This Agreement may be executed in one or more
counterparts, and by the different parties hereto in separate counterparts, each
of which when executed shall be deemed to be an original but all of which taken
together shall constitute one and the same agreement.

     SECTION 10.13. Waiver of Jury Trial. EACH OF PARENT, PURCHASER AND THE
COMPANY HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ALL
RIGHTS TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM (WHETHER BASED
UPON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR RELATING TO THIS AGREEMENT
OR ANY OF THE TRANSACTIONS.

     SECTION 10.14. Disclosure Schedule. The Company Disclosure Schedule shall
be arranged in separate parts corresponding to the numbered and lettered
sections contained in Article IV, and the information disclosed in any numbered
or lettered part shall be deemed to relate to and qualify only the particular
representation or warranty set forth in the corresponding numbered or lettered
section in Article IV, and shall not be deemed to relate to or to qualify any
other representation or warranty.

     SECTION 10.15. Certain Definitions. For purposes of this Agreement, the
term:

          (a) "Acquisition Proposal" shall have the meaning set forth in Section
     6.02(a).

          (b) "affiliate" shall mean, with respect to any specified person, any
     person that, directly or indirectly, through one or more intermediaries,
     controls, is controlled by, or is under common control with, the person
     specified, including, without limitation, any partnership or joint venture
     in which the person specified (either alone, or through or together with
     any other subsidiary) has, directly or indirectly, an interest of 10
     percent or more.

          (c) "Agreement" shall have the meaning set forth in the Preamble.

          (d) "ANDAs" shall have the meaning set forth in Section 4.06(b).

          (e) "Appointment Date" shall mean the time the persons designated by
     Parent have been elected to, and shall constitute a majority of, the
     Company Board pursuant to Section 1.03.

          (f) "Approvals" shall have the meaning set forth in Section 4.01.

          (g) "Assumed Options" shall have the meaning set forth in Section
     7.03(a).

          (h) "Bank Facility" shall have the meaning set forth in Section
     6.01(g).

          (i) "Blue Sky Laws" shall have the meaning set forth in Section
     4.05(c).

          (j) "CERCLA" shall mean the Comprehensive Environmental Response,
     Compensation and Liability Act, 42 U.S.C. Section 9601 et seq., as amended.

          (k) "Certificate of Merger" shall have the meaning set forth in
     Section 2.02.

          (l) "Certificates" shall have the meaning set forth in Section
     3.02(b).

          (m) "Closing" shall have the meaning set forth in Section 2.05.

          (n) "Code" shall mean the Internal Revenue Code of 1986, as amended.

          (o) "Commitment Letter" shall have the meaning set forth in Section
     7.11.

          (p) "Company" shall have the meaning set forth in the Preamble.

          (q) "Company Board" shall mean the Board of Directors of the Company.

          (r) "Company Board Recommendation" shall have the meaning set forth in
     Section 1.02(a).

                                      A-42
<PAGE>   128

          (s) "Company Common Stock" shall have the meaning set forth in the
     Preamble.

          (t) "Company Disclosure Schedule" shall mean the written disclosure
     schedule prepared and signed by the Company and previously delivered to
     Parent.

          (u) "Company Intellectual Property" shall mean any and all
     Intellectual Property Rights owned by, licensed to or used by the Company
     and its subsidiaries, including, without limitation, the Registered
     Intellectual Property.

          (v) "Company Material Adverse Effect" shall mean any change,
     condition, event, development or effect that, individually or when taken
     together with all other such changes, conditions, events, developments or
     effects that have occurred prior to the date of such determination, is
     materially adverse to the business, condition, capitalization, assets,
     liabilities, operations or financial performance of the Company and its
     subsidiaries, taken as a whole; provided, however, that in determining
     whether there has been a Company Material Adverse Effect, any adverse
     effect attributable to the following shall be disregarded: (i) general
     economic, business or financial market conditions; (ii) any change in any
     law, rule or regulation or GAAP or interpretations thereof that applies to,
     and any conditions affecting, the pharmaceutical industry generally; (iii)
     the taking of any action required by this Agreement or the announcement of
     this Agreement; (iv) the breach by Parent or Purchaser of this Agreement;
     or (v) the failure of the Company or any of its subsidiaries to obtain any
     approval, consent or waiver which may be required under any agreement to
     which any of them is a party under which the execution and delivery of this
     Agreement, the performance of this Agreement or the consummation of the
     Transactions may result in any breach of or constitute a default (or an
     event that with notice or lapse of time or both would become a default)
     under, or impair the Company's or any of its subsidiaries' rights or alter
     the rights or obligations of any third party under, or give to others any
     rights of termination, amendment, acceleration or cancellation of, any
     Material Contract, or result in the creation of a lien or encumbrance on
     any of the assets or properties of the Company or any of its subsidiaries
     pursuant to any note, bond, mortgage, indenture, contract, agreement,
     lease, license, permit, franchise or other instrument or obligation to
     which the Company or any of its subsidiaries is a party or by which the
     Company or any of its subsidiaries or its or any of their respective assets
     or properties is bound or affected.

          (w) "Company Products" shall have the meaning set forth in Section
     4.06(c).

          (x) "Company SEC Reports" shall mean each form, report, schedule,
     statement and other document filed by the Company since and including April
     8, 1998 under the Exchange Act or the Securities Act, including any
     amendment to such document.

          (y) "Company Terminating Event" shall have the meaning set forth in
     Section 9.01(e).

          (z) "Confidentiality Agreement" shall mean the confidentiality
     agreement, dated February 18, 2000, among Parent, Purchaser and the
     Company.

          (aa) "Consent Agreement" shall mean the consent agreement filed in the
     U.S. District Court for the District of Arizona and entered into among the
     FDA, Steris Laboratories, Inc. and certain of its officers on October 16,
     1998.

          (bb) "control" (including the terms "controlled by" and "under common
     control with") shall mean the possession, directly or indirectly or as
     trustee or executor, of the power to direct or cause the direction of the
     management or policies of a person, whether through the ownership of stock,
     as trustee or executor, by contract or credit arrangement or otherwise;

          (cc) "DGCL" shall mean the Delaware General Corporation Law.

          (dd) "Dissenting Shares" shall mean, in the event holders of Shares
     are entitled to appraisal rights pursuant to Section 262 of the DGCL in
     connection with the Merger, any Shares issued and outstanding immediately
     prior to the Effective Time and held by a holder who has not voted in favor

                                      A-43
<PAGE>   129

     of the Merger or consented thereto in writing and who has demanded properly
     in writing appraisal for such Shares in accordance with Section 262 of the
     DGCL.

          (ee) "Effective Time" shall have the meaning set forth in Section
     2.02.

          (ff) "Employee Plans" shall have the meaning set forth in Section
     4.11(a).

          (gg) "Environment" shall mean any surface or subsurface physical
     medium or natural resources, including air, land, soil, surface waters,
     ground waters, stream and river sediments and biota.

          (hh) "Environmental Laws" shall mean federal, state and local laws,
     rules, regulations, ordinances, codes, written orders and judgments
     (whether judicial or administrative) relating to the injury to, or the
     pollution or protection of, human health and safety or the Environment.

          (ii) "Environmental Liabilities" shall mean any claims, judgments,
     damages (including punitive damages), losses, penalties, fines,
     liabilities, encumbrances, liens, violations, costs and expenses (including
     attorneys' and consultants' fees), including any required investigation,
     remediation or monitoring of the Environment which are incurred as a result
     of (i) the existence of Hazardous Substances in violation of applicable
     Environmental Laws in, on, under, at or emanating from any Real Property,

          (ii) the Company's or any of its subsidiaries' offsite transportation,
     treatment, storage or disposal of Hazardous Substances or (iii) the
     violation of or non-compliance with any Environmental Laws.

          (jj) "Environmental Permits" shall have the meaning set forth in
     Section 4.16(c).

          (kk) "ERISA" shall mean the Employee Retirement Income Security Act of
     1974, as amended.

          (ll) "ERISA Affiliate" shall have the meaning set forth in Section
     4.11.

          (mm) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
     amended.

          (nn) "Exchange Agent" shall have the meaning set forth in Section
     3.02(a).

          (oo) "Exercise Date" shall have the meaning set forth in Section
     7.03(b).

          (pp) "FDA" shall have the meaning set forth in Section 4.06(b).

          (qq) "FDA Permits" shall have the meaning set forth in Section
     4.06(b).

          (rr) "GAAP" shall mean United States Generally Accepted Accounting
     Principles.

          (ss) "Governmental Entity" shall mean any United States, state or
     foreign governmental, administrative or regulatory authority, commission,
     body, agency or other authority, or any court of competent jurisdiction.

          (tt) "GMP" shall mean, with respect to the United States, current Good
     Manufacturing Practices as promulgated by the FDA in 21 C.F.R. Parts 210
     and 211 et seq.

          (uu) "Hazardous Substances" shall mean any regulated quantities of
     petroleum, petroleum products, petroleum-derived substances, radioactive
     materials, hazardous wastes, polychlorinated biphenyls, lead-based paint,
     radon, urea formaldehyde, friable asbestos or any materials containing
     friable asbestos, and any chemicals, contaminants, materials or substances
     regulated or defined as, or included in the definition of, "hazardous
     substances," "extremely hazardous substances," "hazardous wastes,"
     "hazardous materials," "hazardous constituents," "toxic substances,"
     "pollutants" or "contaminants" or regulated by reason of toxicity,
     carcinogenicity, ignitability, corrosivity or reactivity or other
     characteristics under any applicable Environmental Law.

          (vv) "HSR Act" shall mean the Hart-Scott-Rodino Antitrust Improvements
     Act of 1976, as amended.

          (ww) "Indemnified Parties" shall have the meaning set forth in Section
     7.05.

                                      A-44
<PAGE>   130

          (xx) "Independent Directors" shall have the meaning set forth in
     Section 1.03(a).

          (yy) "Ineligible Shares" shall have the meaning set forth in Section
     3.01(a).

          (zz) "Intellectual Property Right" shall mean any: patent, patent
     application, trademark (whether registered or unregistered), trademark
     application, trade name, service mark (whether registered or unregistered),
     service mark application, copyright (whether registered or unregistered),
     copyright application, trade secret, know-how, customer list, computer
     software, invention, design, proprietary right or other intellectual
     property right.

          (aaa) "IRS" shall mean the United States Internal Revenue Service.

          (bbb) "Material Contracts" shall mean any written, oral or other
     agreement, contract, subcontract, lease, understanding, instrument, note,
     option, warranty, purchase order, license, sublicense, insurance policy,
     benefit plan or legally binding commitment or undertaking of any nature of
     or by the Company or any of its subsidiaries (each, a "Contract"):

             (i) relating to the acquisition, transfer, development, sharing or
        license of any material Company Intellectual Property (except for any
        Contract pursuant to which (A) any material Company Intellectual
        Property is licensed to the Company or any of its subsidiaries under any
        third party software license generally available to the public, or (B)
        any material Company Intellectual Property is licensed by the Company or
        any of its subsidiaries to any person on a non-exclusive basis);

             (ii) pursuant to which any person is the sole-source supplier of
        any active ingredient in any material pharmaceutical finished dosage
        product of the Company or any of its subsidiaries;

             (iii) that provides for indemnification by the Company or any of
        its subsidiaries of any officer, director, employee or agent of the
        Company or any of its subsidiaries;

             (iv) imposing any restriction on the right or ability of the
        Company or any of its subsidiaries (A) to compete with any other person,
        (B) to acquire any product or other asset or any services from any other
        person or (C) to develop, sell, supply, distribute, offer, support or
        service any product or any technology or other asset to or for any other
        person;

             (v) relating to any currency hedging;

             (vi) containing "standstill" or similar provisions;

             (vii)(A) to which any Governmental Entity is a party or under which
        any Governmental Entity has any rights or obligations, or (B) directly
        or indirectly benefitting any Governmental Entity (including any
        subcontract or other contract between the Company or any of its
        subsidiaries and any contractor or subcontractor to any Governmental
        Entity other than, in each case, where such Governmental Entity is a
        customer of the Company or any of its subsidiaries;

             (viii) requiring that the Company or any of its subsidiaries give
        any notice or provide any information to any person prior to considering
        or accepting any Acquisition Proposal or similar proposal, or prior to
        entering into any discussions, agreement, arrangement or understanding
        relating to any Acquisition Transaction or similar transaction;

             (ix) that contemplates or involves the payment or delivery of cash
        or other consideration in an amount or having a value in excess of
        $2,000,000 annually, or contemplates or involves the performance of
        services having a value in excess of $2,000,000 annually; and

             (x) that has had or could reasonably be expected to have a Company
        Material Adverse Effect or (B) a material adverse effect the ability to
        the Company to perform any of its obligations under, or to consummate
        any of the transactions contemplated by this Agreement.

          (ccc) "Maximum Premium" shall have the meaning set forth in Section
     7.05(b).

          (ddd) "Merger" shall have the meaning set forth in the Preamble.
                                      A-45
<PAGE>   131

          (eee) "Merger Consideration" shall have the meaning set forth in
     Section 3.01(b).

          (fff) "Minimum Condition" shall mean that at least the number of
     shares of Company Common Stock that added together with the shares of
     Company Common Stock, if any, then owned by Parent, Purchaser or their
     subsidiaries shall constitute at least 24,500,000 shares of Company Common
     Stock.

          (ggg) "New Purchase Date" shall have the meaning set forth in Section
     7.03(b).

          (hhh) "Non-FDA Permits" shall have the meaning set forth in Section
     4.06(b).

          (iii) "NYSE" shall mean the New York Stock Exchange, Inc.

          (jjj) "Offer" shall have the meaning set forth in the Preamble.

          (kkk) "Offer Commencement Date" shall have the meaning set forth in
     Section 1.01(c).

          (lll) "Offer Documents" shall have the meaning set forth in Section
     1.01(c).

          (mmm) "Offer Price" shall have the meaning set forth in Section
     1.01(a).

          (nnn) "Option" shall have the meaning set forth in Section 3.01(c).

          (ooo) "Parent" shall have the meaning set forth in the Preamble.

          (ppp) "Parent Common Stock" shall mean the common stock, par value
     $0.0033 per share, of Parent.

          (qqq) "Parent Material Adverse Effect" shall mean any change,
     condition, event, development or effect that, individually or when taken
     together with all other such changes, conditions, events, developments or
     effects that have occurred prior to the date of such determination, is
     materially adverse to the business, condition, capitalization, assets,
     liabilities, operations or financial performance of Parent and its
     subsidiaries, taken as a whole; provided, however, that in determining
     whether there has been a Parent Material Adverse Effect, any adverse effect
     attributable to the following shall be disregarded: (i) general economic,
     business or financial market conditions; (ii) any change in any law, rule
     or regulation or GAAP or interpretations thereof that applies to, and any
     conditions affecting, the pharmaceutical industry generally; (iii) the
     taking of any action required by this Agreement or the announcement of this
     Agreement; and (iv) the breach by the Company of this Agreement. In
     addition, a decrease in Parent's stock price, in and of itself, shall not
     constitute a Parent Material Adverse Effect.

          (rrr) "Parent SEC Report" shall mean each form, report, schedule,
     statement and other document filed by Parent since and including January 1,
     1999 under the Exchange Act or the Securities Act, including any amendment
     to such document.

          (sss) "Parent Terminating Event" shall have the meaning set forth in
     Section 9.01(g).

          (ttt) "person" shall mean an individual, corporation, partnership,
     association, trust, unincorporated organization, other entity or group (as
     used in Section 13(d)(3) of the Exchange Act);

          (uuu) "Purchaser" shall have the meaning set forth in the Preamble.

          (vvv) "Purchaser Common Stock" shall mean the common stock, par value
     $0.001 per share, of Purchaser.

          (www) "Real Property" shall have the meaning set forth in Section
     4.16(a).

          (xxx) "Registered Intellectual Property" shall have the meaning set
     forth in Section 4.18.

          (yyy) "Schedule 14d-9" shall have the meaning set forth in Section
     1.02(b).

          (zzz) "Schedule TO" shall have the meaning set forth in Section
     1.01(c).

          (aaaa) "SEC" shall mean the United States Securities and Exchange
     Commission.

                                      A-46
<PAGE>   132

          (bbbb) "Second Request" shall have the meaning set forth in Section
     7.01(c).

          (cccc) "Securities Act" shall mean the Securities Act of 1933, as
     amended.

          (dddd) "Shares" shall mean shares of Company Common Stock.

          (eeee) "Significant Stockholders" shall mean Marvin H. Schein,
     individually and as trustee for trusts created by Marvin H. Schein u/t/a
     dated April 9, 1997, October 8, 1998, October 22, 1998 and April 6, 2000;
     Bayer Corporation; Leslie J. Levine, as trustee for trusts created by
     Marvin H. Schein u/t/a dated April 9, 1997, October 8, 1998 and December
     1998; Pamela M. Schein, as grantor of U/A dated October 26, 1994 and of The
     Pamela M. Schein Issue Trust dated September 29, 1994; Irving Shafran, as
     trustee for U/A dated October 26, 1994, Pamela M. Schein as grantor and as
     trustee for The Pamela M. Schein Issue Trust, dated September 29, 1994;
     Judith Shafran, as trustee for U/A dated October 26, 1994, Pamela M. Schein
     as grantor and Robert D. Villency, as trustee for The Pamela M. Schein
     Issue Trust dated September 29, 1994.

          (ffff) "Special Meeting" shall have the meaning set forth in Section
     2.07(a)(i).

          (gggg) "Stockholder Agreements" shall have the meaning set forth in
     the Preamble.

          (hhhh) "Stock Option Plans" shall mean the Company 1993 Stock Option
     Plan, the Company Inc. 1995 Non-Employee Director Stock Option Plan, as
     amended, the Company 1997 Stock Option Plan, and the Company 1999 Stock
     Option Plan.

          (iiii) "Stock Purchase Plan" shall mean the Company 1998 Employee
     Stock Purchase Plan.

          (jjjj) "subsidiary" or "subsidiaries" of any person shall mean any
     corporation, partnership, joint venture or other legal entity of which such
     person (either alone or through or together with any other subsidiary)
     owns, directly or indirectly, more than 50% of the stock or other equity
     interests the holders of which are generally entitled to vote for the
     election of the board of directors or other governing body of such
     corporation or other legal entity;

          (kkkk) "Superior Proposal" shall mean an unsolicited, bona fide,
     written Acquisition Proposal for all of the Company that the Company Board
     determines, in its reasonable judgment, after consulting with an
     independent financial advisor of nationally recognized reputation, to be
     more favorable to the Company's stockholders than the terms of the Offer
     and the Merger; provided, however, that any such proposal shall not be
     deemed to be a "Superior Proposal" if any financing required to consummate
     the transaction contemplated by such proposal is not committed and, in the
     judgment of the Company Board, is not reasonably capable of being obtained
     by such third party.

          (llll) "Surviving Corporation" shall have the meaning set forth in
     Section 2.01.

          (mmmm) "Takeover Statute" shall have the meaning set forth in Section
     4.22.

          (nnnn) "Tax" shall mean taxes, fees, levies, duties, tariffs, imposts
     and governmental impositions or charges of any kind in the nature of (or
     similar to) taxes, payable to any federal, state, provincial, local or
     foreign taxing authority, including, without limitation, (i) income,
     franchise, profits, gross receipts, ad valorem, net worth, value added,
     sales, use, service, real or personal property, special assessments,
     capital stock, license, payroll, withholding, employment, social security,
     workers' compensation, unemployment compensation, utility, severance,
     production, excise, stamp, occupation, premiums, windfall profits, transfer
     and gains taxes and (ii) interest, penalties, additional taxes and
     additions to tax imposed with respect thereto.

          (oooo) "Tax Returns" shall mean returns, reports and information
     statements with respect to Taxes required to be filed with the IRS or any
     other taxing authority, domestic or foreign, including, without limitation,
     consolidated, combined and unitary tax returns.

          (pppp) "Termination Date" shall have the meaning set forth in Section
     9.01(c).

                                      A-47
<PAGE>   133

          (qqqq) "Third Party Intellectual Property Rights" shall have the
     meaning set forth in Section 4.18(b).

          (rrrr) "Third Party Products" shall have the meaning set forth in
     Section 4.06(b).

          (ssss) "Third Person" shall have the meaning set forth in Section
     4.06(e)(i).

          (tttt) "Transactions" shall have the meaning set forth in Section
     1.02(a).

          (uuuu) A "Triggering Event" shall be deemed to have occurred if: (i)
     the Company Board shall have failed to recommend to the Company's
     stockholders that they tender their Shares pursuant to the Offer and/or
     vote to approve and adopt this Agreement or the Merger, or shall have
     withdrawn or modified in a manner adverse to Parent or Purchaser the
     Company Board Recommendation; (ii) the Company shall have failed to include
     in the Schedule 14D-9 (or shall have refused to permit the inclusion in any
     other Offer Document of) the Company Board Recommendation or a statement to
     the effect that the Company Board has determined and believes that the
     Offer, this Agreement, the Merger and the Transactions are in the best
     interests of the Company's stockholders; (iii) the Company Board shall have
     approved, endorsed or recommended any Acquisition Proposal made by a third
     party; (iv) the Company shall have entered into any letter of intent or
     similar document (other than a confidentiality agreement) or any Contract
     relating to any Acquisition Proposal made by a third party; (v) a tender or
     exchange offer relating to securities of the Company shall have been
     commenced by a third party and the Company shall not have sent to its
     securityholders, within ten business days after the commencement of such
     tender or exchange offer, a statement disclosing that the Company
     recommends rejection of such tender or exchange offer; (vi) any Person
     (other than Parent or Purchaser or any Affiliate of Parent or Purchaser) or
     "group" (as defined in the Exchange Act and the rules promulgated
     thereunder) of such Persons directly or indirectly acquires beneficial
     ownership of securities representing more than 20% of the outstanding
     securities of any class of voting securities of the Company or any of its
     subsidiaries; or (vii) the Company shall have materially breached the
     provisions of Section 6.02.

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     IN WITNESS WHEREOF, Parent, Purchaser and the Company have caused this
Agreement to be executed as of the date first written above by their respective
officers thereunto duly authorized.

                                          WATSON PHARMACEUTICALS, INC.

                                          By: /s/ ALLEN Y. CHAO
                                            ------------------------------------
                                              Name: Allen Y. Chao
                                              Title: Chairman, President and
                                                     Chief Executive Officer

                                          WS ACQUISITION CORP.

                                          By: /s/ ALLEN Y. CHAO
                                            ------------------------------------
                                              Name: Allen Y. Chao
                                              Title: Chairman, President and
                                                     Chief Executive Officer

                                          SCHEIN PHARMACEUTICAL, INC.

                                          By: /s/ MARTIN SPERBER
                                            ------------------------------------
                                              Name: Martin Sperber
                                              Title: Chairman and Chief
                                                     Executive Officer

                                      A-49
<PAGE>   135

                                    ANNEX A

                        CERTAIN CONDITIONS TO THE OFFER

     Notwithstanding any other provisions of the Offer and in addition and
subject to (and not in limitation of) Purchaser's rights or obligations to
extend and amend the Offer pursuant to the terms of this Agreement, Purchaser
shall not be required to accept for payment or, subject to any applicable rules
and regulations of the SEC, including Rule 14e-1(c) under the Exchange Act
(relating to Purchaser's obligation to pay for or return tendered Shares
promptly after termination or withdrawal of the Offer), pay for, and may delay
the acceptance for payment of or, subject to the restriction referred to above,
payment for, any tendered Shares, and may terminate the Offer or amend the
Offer, if (i) any applicable waiting period under the HSR Act or any applicable
non-United States laws regulating competition, antitrust, investment or exchange
controls shall not have expired or been terminated prior to the expiration of
the Offer, (ii) the Minimum Condition shall not have been satisfied or waived
(pursuant to this Agreement) prior to the expiration of the Offer or (iii) at
any time on or after the date of this Agreement and before the time of
acceptance of Shares for payment pursuant to the Offer, any of the following
events shall occur:

          a. there shall have been entered any judgment, order or injunction
     applicable to Parent, Purchaser, the Company or any subsidiary or affiliate
     of Parent or the Company, or to the Offer or the Merger, by any
     Governmental Entity that (i) makes illegal or otherwise directly or
     indirectly restrains or prohibits the acceptance for payment of, or payment
     for, some of or all the Shares by Purchaser or any of its affiliates or the
     consummation of the Merger, (ii) imposes material limitations on the
     ability of Purchaser, or renders Purchaser unable, to accept for payment,
     pay for or purchase some or all of the Shares pursuant to the Offer, (iii)
     imposes material limitations on the ability of Parent, Purchaser or any
     other affiliate of Parent effectively to exercise full rights of ownership
     of any Shares, including, without limitation, the right to vote any Shares
     acquired by it pursuant to the Offer or otherwise on all matters properly
     presented to the Company's stockholders, including, without limitation, the
     adoption of this Agreement, (iv) otherwise would materially adversely
     affect the ability of the Company or Parent to consummate the Offer or the
     Merger or to perform any of their respective obligations under this
     Agreement, (v) would materially and adversely affect the ownership of the
     assets or operation of the business of the Company and its subsidiaries
     taken as a whole by Parent, or (vi) compelling Parent or the Company, or
     any subsidiary of Parent or the Company, to dispose of or hold separate any
     material assets, in connection with the Transactions; or

          b. there shall have been instituted and be pending, or be threatened,
     any suit, action or proceeding brought by any U.S. Governmental Entity, (i)
     challenging or seeking to make illegal, materially delay or otherwise
     directly or indirectly restrain or prohibit or make materially more costly
     the making of the Offer, the acceptance for payment of, or payment for, any
     Shares by Parent, Purchaser or any other affiliate of Parent pursuant to
     the Offer, or the consummation of any other Transaction, or seeking to
     obtain from Parent, Purchaser or the Company damages in connection with any
     Transaction that are material in relation to the Company taken as a whole,
     (ii) seeking to impose material limitations on the ability of Purchaser, or
     rendering Purchaser unable, to accept for payment, pay for or purchase some
     or all of the Shares pursuant to the Offer, (iii) seeking to impose
     material limitations on the ability of Parent, Purchaser or any other
     affiliate of Parent effectively to exercise full rights of ownership of any
     Shares, including, without limitation, the right to vote any Shares
     acquired by it pursuant to the Offer or otherwise on all matters properly
     presented to the Company's stockholders, including, without limitation, the
     adoption of this Agreement, (iv) which otherwise would materially adversely
     affect the ability of the Company or Parent to consummate the Offer or the
     Merger or to perform any of their respective obligations under this
     Agreement, (v) which would materially and adversely affect the right of
     Parent, the Company or any subsidiary of Parent or the Company to own the
     assets or operate the business of the Company and its subsidiaries taken as
     a whole, or (vi) subject to Parent's compliance with Section 7.01 of this
     Agreement, compelling, or seeking to compel Parent or the Company, or any
     subsidiary of Parent or the Company, to dispose of or hold separate any
     material assets, in connection with the Transactions; or
                                      A-50
<PAGE>   136

          c. there shall have been any statute, rule, regulation, legislation or
     interpretation enacted, entered, enforced, promulgated, amended, issued or
     deemed applicable to (i) Parent, the Company or any subsidiary or affiliate
     of Parent or the Company or (ii) the Offer or the Merger by any
     Governmental Entity, other than the application to the Offer or the Merger
     of the applicable waiting periods under the HSR Act or any applicable
     non-United States laws regulating competition, antitrust, investment or
     exchange controls, that would result, directly or indirectly, in any of the
     consequences referred to in clauses (i) through (v) of paragraph (b) above;
     or

          d. there shall have occurred (i) any general suspension of trading in,
     or limitation on prices for, securities on the NYSE for a period in excess
     of 24 hours (excluding suspensions or limitations resulting solely from
     physical damage or interference with the NYSE not related to market
     conditions or suspensions or limitations triggered on the NYSE by price
     fluctuations on a trading day), (ii) a declaration of a banking moratorium
     or any suspension of payments in respect of banks in the United States
     (whether or not mandatory) or (iii) in the case of any of the foregoing
     existing at the time of the commencement of the Offer, a material
     acceleration or worsening thereof not contemplated as of the date hereof;
     or

          e. there shall have occurred any changes, conditions, events,
     developments or effects that, individually or in the aggregate, has
     resulted in or could reasonably be expected to result in a Company Material
     Adverse Effect; or

          f. there shall have occurred any Triggering Event; or

          g. the representations and warranties of the Company set forth in this
     Agreement shall not have been accurate in all respects when made, except
     that any inaccuracies in such representations and warranties will be
     disregarded if the circumstances giving rise to all such inaccuracies
     (considered collectively) do not, and could not reasonably be expected to
     constitute, a Company Material Adverse Effect; provided, however, that for
     purposes of determining the accuracy of such representations and
     warranties, (i) all "Material Adverse Effect" qualifications and other
     materiality qualifications, and any similar qualifications, contained in
     such representations and warranties shall be disregarded, and (ii) any
     update of or modification to the Company Disclosure Schedule made or
     purported to have been made after the date of this Agreement shall be
     disregarded; or

          h. the representations and warranties of the Company set forth in
     Section 4.03 of the Agreement shall not have been true and correct as of
     the date when made or Section 6.01(b) shall not have been complied with by
     the Company in all respects, except to the extent that the cost to Parent
     and Purchaser in the aggregate of all inaccuracies in such representations
     and warranties and noncompliance with such covenants does not exceed
     $500,000; or

          i. the representations and warranties of the Company set forth in this
     Agreement shall not be accurate in all respects as if such representations
     and warranties were made at the time of such determination (except for
     those representations and warranties which address matters only as of a
     particular date, which shall be accurate as of such date), except that any
     inaccuracies in such representations and warranties will be disregarded if
     the circumstances giving rise to all such inaccuracies (considered
     collectively) do not constitute, have not had and could not reasonably be
     expected to constitute, a Company Material Adverse Effect; provided,
     however, that for purposes of determining the accuracy of such
     representations and warranties, (i) all "Material Adverse Effect"
     qualifications and other materiality qualifications, and any similar
     qualifications, contained in such representations and warranties shall be
     disregarded, and (ii) any update of or modification to the Company
     Disclosure Schedule made or purported to have been made after the date of
     this Agreement shall be disregarded; or

          j. the Company shall have failed to comply with or perform any
     obligation, agreement or covenant to be complied with or performed by it
     under this Agreement in all material respects; or

          k. all consents and waivers necessary to the consummation of the Offer
     or the Merger from Governmental Entities shall not have been obtained,
     other than consents the failure to obtain which,
                                      A-51
<PAGE>   137

     individually or in the aggregate, has not had and could not reasonably be
     expected to have a Company Material Adverse Effect; or

          l. this Agreement shall have been terminated in accordance with its
     terms;

which in the reasonable good faith judgment of Parent or Purchaser, in any such
case, and regardless of the circumstances (including any action or inaction by
Parent or Purchaser or any of their affiliates) giving rise to such condition,
makes it inadvisable to proceed with the Offer and/or with such acceptance for
payment of or payment for Shares.

     The foregoing conditions are for the sole benefit of Parent and Purchaser,
and may (subject to the terms of the Merger Agreement and except for the Minimum
Condition) be waived by Parent or Purchaser, in whole or in part, at any time
and from time to time in the sole discretion of Parent or Purchaser. The failure
by Parent or Purchaser at any time to exercise any of the foregoing rights shall
not be deemed a waiver of any such right and each such right shall be deemed an
ongoing right which may be asserted at any time and from time to time.

                                      A-52
<PAGE>   138

                                    ANNEX B

                                CREDIT FACILITY

                                USE OF PROCEEDS

     Approximately $30 million -- pay down of past due accounts payable

     Approximately $10 million -- general working capital purposes, including
                                  reducing the acceleration of accounts
                                  receivable collection

                                      A-53
<PAGE>   139

                                    ANNEX C

                          SCHEIN PHARMACEUTICAL, INC.

                                   TERM SHEET

Securities....................   Series A Preferred Stock

Amount........................   Up to $40 Million. as provided in Section
                                 7.12(a)

Closing.......................   As provided in Section 7.12(a)

Voting Rights.................   Non-Voting

Dividend......................   15%, PIK dividend

Use of Proceeds...............   As provided in Annex B

Mandatory Redemption..........   100% of redemption amount plus accrued and
                                 unpaid dividends

                                 At the earliest of (i) one year and five days
                                 after the Company's Senior Floating Rate Notes
                                 scheduled maturity of 2004, (ii) upon
                                 prepayment of the Senior Floating Rate Notes
                                 and (iii) when the terms of the bank credit
                                 agreement and the Senior Floating Rate Notes
                                 permit prepayment.

Optional Redemption...........   Optional by Company at any time

Covenants, Representations
  and Warranties..............   Standard for a security of this nature

                                      A-54
<PAGE>   140

                                    ANNEX B
                    [LETTERHEAD OF CIBC WORLD MARKETS CORP.]

                                                                    May 24, 2000

The Board of Directors
Schein Pharmaceutical, Inc.
100 Campus Drive
Florham Park, New Jersey 07932

Members of the Board:

     You have asked CIBC World Markets Corp. ("CIBC World Markets") to render a
written opinion ("Opinion") to the Board of Directors as to the fairness, from a
financial point of view, to the holders of the common stock of Schein
Pharmaceutical, Inc. ("Schein"), other than Watson Pharmaceuticals, Inc.
("Watson"), those stockholders of Schein who have executed Stockholder
Agreements concurrently with the Merger Agreement (defined below) (the
"Significant Stockholders") and their respective affiliates, of the
Consideration (defined below) provided for in the Agreement and Plan of Merger,
dated as of May 24, 2000 (the "Merger Agreement"), by and among Watson, WS
Acquisition Corp., a wholly owned subsidiary of Watson ("Sub"), and Schein. The
Merger Agreement provides for, among other things, (a) the commencement by Sub
of a tender offer to purchase all of the outstanding shares of the common stock,
par value $0.01 per share, of Schein (the "Schein Common Stock" and, such tender
offer, the "Tender Offer") at a purchase price of $19.50 per share, net to the
seller in cash (the "Tender Offer Consideration") and (b) subsequent to the
Tender Offer, the merger of Sub with and into Schein (the "Merger" and, together
with the Tender Offer, the "Transaction") pursuant to which each outstanding
share of Schein Common Stock not acquired in the Tender Offer will be converted
into the right to receive that number of shares of the common stock, par value
$0.0033 per share, of Watson (the "Watson Common Stock") equal to the quotient
obtained by dividing (i) $23.00 by (ii) the average of the closing price of a
share of Watson Common Stock on the New York Stock Exchange for the 10
consecutive trading days ending on the trading day two trading days prior to the
stockholders' meeting for the Merger or the effective time of the Merger, as
applicable (the "Watson Average Stock Price" and, the number of shares of Watson
Common Stock into which shares of Schein Common Stock will be so converted in
the Merger, the "Merger Consideration" and, together with the Tender Offer
Consideration, the "Consideration"), subject to further adjustment of the Merger
Consideration based on various Watson Average Stock Prices, as more fully
specified in the Merger Agreement.

     In arriving at our Opinion, we:

          (a) reviewed the Merger Agreement and certain related documents;

          (b) reviewed audited financial statements of Schein for the fiscal
     years ended December 27, 1997, December 26, 1998 and December 25, 1999, and
     audited financial statements of Watson for the fiscal years ended December
     31, 1997, December 31, 1998 and December 31, 1999;

          (c) reviewed unaudited financial statements of Schein for the
     quarterly period ended March 25, 2000 and unaudited financial statements of
     Watson for the quarterly period ended March 31, 2000;

          (d) reviewed financial projections relating to Schein prepared by the
     management of Schein and publicly available financial projections relating
     to Watson;

          (e) reviewed the historical market prices and trading volume for
     Schein Common Stock and Watson Common Stock;

                                       B-1
<PAGE>   141


The Board of Directors


Schein Pharmaceutical, Inc.


May 24, 2000


Page 2



          (f) held discussions with the senior managements of Schein and Watson
     with respect to the businesses, capital requirements and prospects for
     future growth of Schein and Watson;


          (g) reviewed and analyzed certain publicly available financial data
     for certain companies we deemed comparable to Schein and Watson;

          (h) reviewed and analyzed certain publicly available information for
     transactions that we deemed comparable to the Transaction;

          (i) performed discounted cash flow analyses of Schein and Watson using
     certain assumptions of future performance provided to or discussed with us
     by the managements of Schein and Watson;

          (j) reviewed public information concerning Schein and Watson;

          (k) at the request of Schein, approached and held discussions with
     certain third parties to solicit indications of interest in the possible
     acquisition of Schein; and

          (l) performed such other analyses and reviewed such other information
     as we deemed appropriate.

     In rendering our Opinion, we relied upon and assumed, without independent
verification or investigation, the accuracy and completeness of all of the
financial and other information provided to or discussed with us by Schein,
Watson and their respective employees, representatives and affiliates. With
respect to forecasts of the future financial condition and operating results of
Schein provided to or discussed with us, we assumed, at the direction of the
management of Schein, without independent verification or investigation, that
such forecasts were reasonably prepared on bases reflecting the best available
information, estimates and judgments of the management of Schein. As you are
aware, Watson has not provided us with internal forecasts, but we have reviewed
and discussed with the management of Watson publicly available forecasts
relating to Watson and have assumed, with your consent, that such forecasts
represent reasonable estimates and judgments as to the future financial
condition and operating results of Watson. We have neither made nor obtained any
independent evaluations or appraisals of the assets or the liabilities
(contingent or otherwise) of Schein, Watson or affiliated entities. We are not
expressing any opinion as to the underlying valuation, future performance or
long-term viability of Schein or Watson, or the price at which Watson Common
Stock will trade upon or subsequent to announcement or consummation of the
Transaction. Our Opinion is necessarily based on the information available to us
and general economic, financial and stock market conditions and circumstances as
they exist and can be evaluated by us on the date hereof. It should be
understood that, although subsequent developments may affect this Opinion, we do
not have any obligation to update, revise or reaffirm the Opinion.

     As part of our investment banking business, we are regularly engaged in
valuations of businesses and securities in connection with acquisitions and
mergers, underwritings, secondary distributions of securities, private
placements and valuations for other purposes.

     We have acted as financial advisor to Schein in connection with the
Transaction and to the Board of Directors of Schein in rendering this Opinion
and will receive a fee for our services, a significant portion of which is
contingent upon consummation of the Transaction. We also will receive a fee upon
the delivery of this Opinion. In the ordinary course of business, CIBC World
Markets and its affiliates may actively trade securities of Schein and Watson
for their own account and for the accounts of customers and, accordingly, may at
any time hold a long or short position in such securities.

     Based upon and subject to the foregoing, and such other factors as we
deemed relevant, it is our opinion that, as of the date hereof, the
Consideration to be received by the holders of Schein Common Stock in the
Transaction is fair from a financial point of view to such holders (other than
Watson, the Significant Stockholders and their respective affiliates). This
Opinion is for the use of the Board of Directors of Schein in its evaluation of
the Transaction and does not constitute a recommendation to any
                                       B-2
<PAGE>   142

stockholder as to whether such stockholder should tender shares of Schein Common
Stock in the Tender Offer or how such stockholder should vote on any matters
relating to the Merger.

                                          Very truly yours,

                                          /s/ CIBC WORLD MARKETS CORP.
                                          --------------------------------------
                                          CIBC WORLD MARKETS CORP.

                                       B-3
<PAGE>   143

                                                                         ANNEX C

              SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW

                             TITLE 8. CORPORATIONS
                       CHAPTER 1. GENERAL CORPORATION LAW
               SUBCHAPTER IX. MERGER, CONSOLIDATION OR CONVERSION
                          8 DEL. C. SECTION 262 (1999)
                         SECTION 262. APPRAISAL RIGHTS

     (a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares through
the effective date of the merger or consolidation, who has otherwise complied
with subsection (d) of this section and who has neither voted in favor of the
merger or consolidation nor consented thereto in writing pursuant to Section 228
of this title shall be entitled to an appraisal by the Court of Chancery of the
fair value of the stockholder's shares of stock under the circumstances
described in subsections (b) and (c) of this section. As used in this section,
the word "stockholder" means a holder of record of stock in a stock corporation
and also a member of record of a nonstock corporation; the words "stock" and
"share" mean and include what is ordinarily meant by those words and also
membership or membership interest of a member of a nonstock corporation; and the
words "depository receipt" mean a receipt or other instrument issued by a
depository representing an interest in one or more shares, or fractions thereof,
solely of stock of a corporation, which stock is deposited with the depository.

     (b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to Section 251 (other than a merger effected pursuant to
Section 251(g) of this title), Section 252, Section 254, Section 257, Section
258, Section 263 or Section 264 of this title:

          (1) Provided, however, that no appraisal rights under this section
     shall be available for the shares of any class or series of stock, which
     stock, or depository receipts in respect thereof, at the record date fixed
     to determine the stockholders entitled to receive notice of and to vote at
     the meeting of stockholders to act upon the agreement of merger or
     consolidation, were either (i) listed on a national securities exchange or
     designated as a national market system security on an interdealer quotation
     system by the National Association of Securities Dealers, Inc. or (ii) held
     of record by more than 2,000 holders; and further provided that no
     appraisal rights shall be available for any shares of stock of the
     constituent corporation surviving a merger if the merger did not require
     for its approval the vote of the stockholders of the surviving corporation
     as provided in subsection (f) of Section 251 of this title.

          (2) Notwithstanding paragraph (1) of this subsection, appraisal rights
     under this section shall be available for the shares of any class or series
     of stock of a constituent corporation if the holders thereof are required
     by the terms of an agreement of merger or consolidation pursuant to
     Sections 251, 252, 254, 257, 258, 263 and 264 of this title to accept for
     such stock anything except:

             a. Shares of stock of the corporation surviving or resulting from
        such merger or consolidation, or depository receipts in respect thereof;

             b. Shares of stock of any other corporation, or depository receipts
        in respect thereof, which shares of stock (or depository receipts in
        respect thereof) or depository receipts at the effective date of the
        merger or consolidation will be either listed on a national securities
        exchange or designated as a national market system security on an
        interdealer quotation system by the National Association of Securities
        Dealers, Inc. or held of record by more than 2,000 holders;

             c. Cash in lieu of fractional shares or fractional depository
        receipts described in the foregoing subparagraphs a. and b. of this
        paragraph; or

                                       C-1
<PAGE>   144

             d. Any combination of the shares of stock, depository receipts and
        cash in lieu of fractional shares or fractional depository receipts
        described in the foregoing subparagraphs a., b. and c. of this
        paragraph.

          (3) In the event all of the stock of a subsidiary Delaware corporation
     party to a merger effected under Section 253 of this title is not owned by
     the parent corporation immediately prior to the merger, appraisal rights
     shall be available for the shares of the subsidiary Delaware corporation.

     (c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.

     (d) Appraisal rights shall be perfected as follows:

          (1) If a proposed merger or consolidation for which appraisal rights
     are provided under this section is to be submitted for approval at a
     meeting of stockholders, the corporation, not less than 20 days prior to
     the meeting, shall notify each of its stockholders who was such on the
     record date for such meeting with respect to shares for which appraisal
     rights are available pursuant to subsection (b) or (c) hereof that
     appraisal rights are available for any or all of the shares of the
     constituent corporations, and shall include in such notice a copy of this
     section. Each stockholder electing to demand the appraisal of such
     stockholder's shares shall deliver to the corporation, before the taking of
     the vote on the merger or consolidation, a written demand for appraisal of
     such stockholder's shares. Such demand will be sufficient if it reasonably
     informs the corporation of the identity of the stockholder and that the
     stockholder intends thereby to demand the appraisal of such stockholder's
     shares. A proxy or vote against the merger or consolidation shall not
     constitute such a demand. A stockholder electing to take such action must
     do so by a separate written demand as herein provided. Within 10 days after
     the effective date of such merger or consolidation, the surviving or
     resulting corporation shall notify each stockholder of each constituent
     corporation who has complied with this subsection and has not voted in
     favor of or consented to the merger or consolidation of the date that the
     merger or consolidation has become effective; or

          (2) If the merger or consolidation was approved pursuant to Section
     228 or Section 253 of this title, each constituent corporation, either
     before the effective date of the merger or consolidation or within ten days
     thereafter, shall notify each of the holders of any class or series of
     stock of such constituent corporation who are entitled to appraisal rights
     of the approval of the merger or consolidation and that appraisal rights
     are available for any or all shares of such class or series of stock of
     such constituent corporation, and shall include in such notice a copy of
     this section; provided that, if the notice is given on or after the
     effective date of the merger or consolidation, such notice shall be given
     by the surviving or resulting corporation to all such holders of any class
     or series of stock of a constituent corporation that are entitled to
     appraisal rights. Such notice may, and, if given on or after the effective
     date of the merger or consolidation, shall, also notify such stockholders
     of the effective date of the merger or consolidation. Any stockholder
     entitled to appraisal rights may, within 20 days after the date of mailing
     of such notice, demand in writing from the surviving or resulting
     corporation the appraisal of such holder's shares. Such demand will be
     sufficient if it reasonably informs the corporation of the identity of the
     stockholder and that the stockholder intends thereby to demand the
     appraisal of such holder's shares. If such notice did not notify
     stockholders of the effective date of the merger or consolidation, either
     (i) each such constituent corporation shall send a second notice before the
     effective date of the merger or consolidation notifying each of the holders
     of any class or series of stock of such constituent corporation that are
     entitled to appraisal rights of the effective date of the merger or
     consolidation or (ii) the surviving or resulting corporation shall send
     such a second notice to all such holders on or within 10 days after such
     effective date; provided, however, that if such second notice is sent more
     than 20 days following the sending of the first notice,

                                       C-2
<PAGE>   145

     such second notice need only be sent to each stockholder who is entitled to
     appraisal rights and who has demanded appraisal of such holder's shares in
     accordance with this subsection. An affidavit of the secretary or assistant
     secretary or of the transfer agent of the corporation that is required to
     give either notice that such notice has been given shall, in the absence of
     fraud, be prima facie evidence of the facts stated therein. For purposes of
     determining the stockholders entitled to receive either notice, each
     constituent corporation may fix, in advance, a record date that shall be
     not more than 10 days prior to the date the notice is given, provided, that
     if the notice is given on or after the effective date of the merger or
     consolidation, the record date shall be such effective date. If no record
     date is fixed and the notice is given prior to the effective date, the
     record date shall be the close of business on the day next preceding the
     day on which the notice is given.

     (e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw such stockholder's demand for appraisal and to accept the terms offered
upon the merger or consolidation. Within 120 days after the effective date of
the merger or consolidation, any stockholder who has complied with the
requirements of subsections (a) and (d) hereof, upon written request, shall be
entitled to receive from the corporation surviving the merger or resulting from
the consolidation a statement setting forth the aggregate number of shares not
voted in favor of the merger or consolidation and with respect to which demands
for appraisal have been received and the aggregate number of holders of such
shares. Such written statement shall be mailed to the stockholder within 10 days
after such stockholder's written request for such a statement is received by the
surviving or resulting corporation or within 10 days after expiration of the
period for delivery of demands for appraisal under subsection (d) hereof,
whichever is later.

     (f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by 1 or more publications at
least 1 week before the day of the hearing, in a newspaper of general
circulation published in the City of Wilmington, Delaware or such publication as
the Court deems advisable. The forms of the notices by mail and by publication
shall be approved by the Court, and the costs thereof shall be borne by the
surviving or resulting corporation.

     (g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.

     (h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation
                                       C-3
<PAGE>   146

or by any stockholder entitled to participate in the appraisal proceeding, the
Court may, in its discretion, permit discovery or other pretrial proceedings and
may proceed to trial upon the appraisal prior to the final determination of the
stockholder entitled to an appraisal. Any stockholder whose name appears on the
list filed by the surviving or resulting corporation pursuant to subsection (f)
of this section and who has submitted such stockholder's certificates of stock
to the Register in Chancery, if such is required, may participate fully in all
proceedings until it is finally determined that such stockholder is not entitled
to appraisal rights under this section.

     (i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of his State or of any state.

     (j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.

     (k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded appraisal rights as provided in subsection (d) of
this section shall be entitled to vote such stock for any purpose or to receive
payment of dividends or other distributions on the stock (except dividends or
other distributions payable to stockholders of record at a date which is prior
to the effective date of the merger or consolidation); provided, however, that
if no petition for an appraisal shall be filed within the time provided in
subsection (e) of this section, or if such stockholder shall deliver to the
surviving or resulting corporation a written withdrawal of such stockholder's
demand for an appraisal and an acceptance of the merger or consolidation, either
within 60 days after the effective date of the merger or consolidation as
provided in subsection (e) of this section or thereafter with the written
approval of the corporation, then the right of such stockholder to an appraisal
shall cease. Notwithstanding the foregoing, no appraisal proceeding in the Court
of Chancery shall be dismissed as to any stockholder without the approval of the
Court, and such approval may be conditioned upon such terms as the Court deems
just.

     (l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.

                                       C-4
<PAGE>   147

                                    PART II

                     INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS

     The Nevada Revised Statutes, Sections 78.751 and 78.7502, Article XII of
Watson's articles of incorporation, as amended, and Article VI of Watson's
amended and restated bylaws provide for the indemnification of officers,
directors, employees and agents under certain circumstances.

     Set forth below is Article XII of Watson's restated articles of
incorporation, as amended, pertaining to indemnification of officers, directors,
employees and agents and insurance:

          (1) To the extent not prohibited by law, the Corporation shall
     indemnify any person who was or is a party or is threatened to be made a
     party to any threatened, pending or completed action, suit or proceeding,
     whether civil, criminal, administrative or investigative, except an action
     by or in the right of the Corporation, by reason of the fact that he is or
     was a director, officer, employee or agent of the Corporation, or is or was
     serving at the request of the Corporation as a director, officer, employee
     or agent of another corporation, partnership, joint venture, trust or other
     enterprise, against expenses, including attorneys' fees, judgments, fines
     and amounts paid in settlement actually and reasonably incurred by him in
     connection with the action, suit or proceeding if he acted in good faith
     and in a manner which he reasonably believed to be in or not opposed to the
     best interests of the Corporation, and, with respect to any criminal action
     or proceeding, has no reasonable cause to believe his conduct was unlawful.
     The termination of any action, suit or proceeding by judgment, order,
     settlement, conviction, or upon a plea nolo contendere or its equivalent,
     does not, of itself, create a presumption that the person did not act in
     good faith and in a manner which he reasonably believed to be in or not
     opposed to the best interests of the Corporation, and that, with respect to
     any criminal action or proceeding, he had reasonable cause to believe that
     his conduct was unlawful.

          (2) To the extent not prohibited by law, the Corporation shall
     indemnify any person who was or is a party or is threatened to be made a
     party to any threatened, pending or completed action or suit by or in the
     right of the Corporation to procure a judgment in its favor by reason of
     the fact that he is or was a director, officer, employee or agent of the
     Corporation, or is or was serving at the request of the Corporation as a
     director, officer, employee or agent of another corporation, partnership,
     joint venture, trust or other enterprise against expenses, including
     amounts paid in settlement and attorneys' fees actually and reasonably
     incurred by him in connection with the defense or settlement of the action
     or suit if he acted in good faith and in a manner which he reasonably
     believed to be in or not opposed to the best interests of the Corporation.
     Indemnification may not be made for any claim issue or matter as to which
     such a person has been adjudged by a court of competent jurisdiction, after
     exhaustion of all appeals therefrom to be liable to the Corporation or for
     amounts paid in settlement to the Corporation, unless and only to the
     extent that the court in which the action or suit was brought or other
     court of competent jurisdiction determines upon application that in view of
     all the circumstances of the case, the person is fairly and reasonably
     entitled to indemnity for such expenses as the court deems proper, all
     subject to the authorizations set forth in Section 78.751 of the Nevada
     Revised Statutes.

          (3) To the extent that a director, officer, employee or agent of a
     Corporation has been successful on the merits or otherwise in defense of
     any action, suit or proceeding referred to in subsections 1 and 2 of
     Article XII, or in defense of any claim, issue or matter therein, he must
     be indemnified by the Corporation against expenses, including attorneys'
     fees, actually and reasonably incurred by him in connection with the
     defense.

          (4) Any indemnification under subsections 1 and 2 of Article XII,
     unless ordered by a court or advanced pursuant to subsection 5 of Article
     XII, may be made by the Corporation only as authorized in the specific case
     upon determination that indemnification of the director, officer, employee
     or agent is proper in the circumstances by (a) the stockholders of the
     Corporation; (b) the

                                      II-1
<PAGE>   148

     Board of Directors by majority vote of a quorum consisting of directors who
     were not parties to the action, suit or proceeding; (c) independent legal
     counsel in a written opinion if a majority vote of a quorum consisting of
     directors who were not parties to the action, suit or proceeding so orders;
     and (d) independent legal counsel in a written opinion if a quorum
     consisting of directors who were not parties to the action, suit or
     proceeding cannot be obtained.

          (5) The Corporation shall, from time to time, reimburse or advance to
     any director or officer or other person entitled to indemnification
     hereunder the funds necessary for payment of expenses, including attorneys'
     fees and disbursements, incurred in connection with any proceeding, in
     advance of the final disposition of such proceeding; provided, however,
     that, if required by the Nevada Revised Statutes, such expenses incurred by
     or on behalf of any director or officer may be paid in advance of the final
     disposition of the action, suit or proceeding only upon receipt of an
     undertaking by or on behalf of the director or officer to repay the amount
     if it is ultimately determined by a court of competent jurisdiction that he
     is not entitled to be indemnified by the Corporation. The provisions of
     this subsection do not affect any rights to advancement of expenses to
     which corporate personnel other than directors or officers may be entitled
     under any contract or otherwise by law.

          (6) The indemnification and advancement of expenses authorized in or
     ordered by a court pursuant to this Article XII (a) does not exclude any
     other rights to which a person seeking indemnification or advancement of
     expenses maybe entitled under these Articles of Incorporation, or any
     bylaws, agreement, vote of stockholders or disinterested directors or
     otherwise, for either an action in his official capacity or an action in
     another capacity while holding his office, except that indemnification,
     unless ordered by a court pursuant to subsection 2 or for the advancement
     of expenses made pursuant to subsection 5, may not be made to or on behalf
     of any director or officer if a final adjudication establishes that his
     acts or omissions involved intentional misconduct, fraud or a knowing
     violation of the law and was material to the cause of action (b) continues
     as to a person who has ceased to be a director or officer (or other person
     indemnified hereunder) and shall inure to the benefit of the heirs,
     executors and administrators of such person.

     Set forth below is Article VI of Watson's amended and restated bylaws:

          SECTION 1. Agents, Proceedings and Expenses. For the purposes of this
     Article, "agent" means any person who is or was a director, officer,
     employee or other agent of the corporation, or is or was serving at the
     request of the corporation as a director, officer, employee or agent of
     another foreign or domestic corporation, partnership, joint venture, trust
     or other enterprise, or was a director, officer, employee or agent of a
     foreign or domestic corporation which was a predecessor corporation of the
     corporation or of another enterprise at the request of such predecessor
     corporation; "proceeding" means any threatened, pending or completed action
     or proceeding, whether threatened, pending or completed action or
     proceeding, whether civil, criminal, administrative or investigative; and
     "expenses" includes, without limitation, attorneys' fees and any expenses
     of establishing a right to indemnification.

          SECTION 2. Actions Other Than by the Corporation. The corporation may
     indemnify any person who was or is a party, or is threatened to be made a
     party, to any proceeding by reason of the fact that such person is or was
     an agent of the corporation, against expenses, judgments, fines,
     settlements and other amounts actually and reasonably incurred in
     connection with such proceeding to the full extent permitted by the Nevada
     Revised Statues as may be in effect from time to time.

          SECTION 3. Insurance. Upon and in the event of a determination by the
     board of directors of the corporation to purchase such insurance, the
     corporation shall purchase and maintain, insurance on behalf of any agent
     of the corporation against any liability asserted against or incurred by
     the agent in such capacity or arising out of the agent's status as such
     whether or not the corporation would have the power to indemnify the agent
     against such liability under the provisions of this section.

          SECTION 4. Fiduciaries of Corporate Employee Benefit Plan. This
     Article does not apply to any proceeding against any trustee, investment
     manager or other fiduciary of an employee benefit plan in such person's
     capacity as such, even though such person may also be an agent of the
     corporation as

                                      II-2
<PAGE>   149

     defined in Section 1 of this Article. Nothing contained in this Article
     shall limit any right to indemnification to which such a trustee,
     investment manager or other fiduciary may be entitled by contract or
     otherwise, which shall be enforceable to the extent permitted by applicable
     law other than this Article.

ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES


<TABLE>
<CAPTION>
EXHIBIT
NUMBER                            DESCRIPTION
-------                           -----------
<C>       <S>
  2.1     Agreement and Plan of Merger, dated as of May 24, 2000,
          among Watson Pharmaceuticals, Inc., WS Acquisition Corp. and
          Schein Pharmaceutical, Inc. (included as Annex A to the
          proxy statement/prospectus).
  3.1     Articles of Incorporation of Watson Pharmaceuticals, Inc.,
          and all amendments thereto, filed as Exhibit 3.1 to Watson's
          Quarterly Report on Form 10-Q for the quarter ended June 30,
          1995 and Exhibit 3.1 (A) to Watson's Quarterly Report on
          Form 10-Q for the quarter ended June 30, 1996 and hereby
          incorporated by reference.
  3.2     Bylaws of Watson Pharmaceuticals, Inc., as amended as of
          December 11, 1998, filed as Exhibit 3.2 to Watson's
          Registration Statement on Form S-8 (Reg. No. 333-70933),
          filed on January 21, 1999 and hereby incorporated by
          reference.
  5.1     Opinion of Kummer Kaempfer Bonner & Renshaw regarding the
          legality of the securities.
  8.1     Opinion of Cooley Godward LLP regarding tax matters.
 10.1     Credit Agreement, dated as of July 5, 2000 among Watson, SG
          Cowen Securities Corporation and Societe Generale.
 21.1     List of Subsidiaries of Watson.
 23.1     Consent of Cooley Godward LLP (set forth in Exhibit 8.1).
*23.2     Consent of PricewaterhouseCoopers LLP.
*23.3     Consent of Ernst & Young LLP, independent auditors.
*23.4     Consent of Deloitte & Touche LLP.
*23.5     Consent of BDO Seidman, LLP.
 24.1     Powers of Attorney, pursuant to which amendments to this
          registration statement may be filed.
*99.1     Form of Schein Proxy.
*99.2     Consent of CIBC World Markets Corp.
</TABLE>


-------------------------


* Filed herewith. All other exhibits have been previously filed.


FINANCIAL STATEMENT SCHEDULES:

     One Financial Statement Schedule has previously been filed as part of
Schein's Form 10-K for the fiscal year ended December 25, 1999.

ITEM 22. UNDERTAKINGS

     The undersigned Registrant hereby undertakes:

          (1) To file, during any period in which offers or sales are being
     made, a post-effective amendment to this Registration Statement:

             (i) To include any prospectus required in Section 10(a)(3) of the
        Securities Act of 1933;

             (ii) To reflect in the prospectus any facts or events arising after
        the effective date of the Registration Statement (or the most recent
        post-effective amendment thereof) which, individually or in the
        aggregate, represent a fundamental change in the information set forth
        in the Registration Statement;

             (iii) To include any material information with respect to the plan
        of distribution not previously disclosed in the Registration Statement
        or any material change to such information in the Registration
        Statement;

                                      II-3
<PAGE>   150

     provided, however, that paragraphs (1)(i) and (1)(ii) do not apply if the
     information required to be included in a post-effective amendment by those
     paragraphs is contained in periodic reports filed by the Registrant
     pursuant to section 13 or section 15(d) of the Securities Exchange Act of
     1934 that are incorporated by reference in the Registration Statement;

          (2) That, for the purpose of determining any liability under the
     Securities Act of 1933, each such post-effective amendment shall be deemed
     to be a new registration statement relating to the securities offered
     therein, and the offering of such securities at that time shall be deemed
     to be the initial bona fide offering thereof;

          (3) To remove from registration by means of a post-effective amendment
     any of the securities being registered which remain unsold at the
     termination of the offering;

          (4) That, for purposes of determining any liability under the
     Securities Act of 1933, each filing of the Registrant's annual report
     pursuant to section 13(a) or section 15(d) of the Securities Exchange Act
     of 1934 that is incorporated by reference in the Registration Statement
     shall be deemed to be a new registration statement relating to the
     securities offered therein, and the offering of such securities at that
     time shall be deemed to be the initial bona tide offering thereof;

          (5) To respond to requests for information that is incorporated by
     reference into the prospectus pursuant to Items 4, 10(b), 11 or 13 of this
     Form, within one business day of receipt of such request, and to send the
     incorporated documents by first class mail or other equally prompt means.
     This includes information contained in documents filed subsequent to the
     effective date of the Registration Statement through the date of responding
     to the request;

          (6) That, prior to any public reoffering of the securities registered
     hereunder through use of a prospectus which is a part of this Registration
     Statement, by any person or party who is deemed to be an underwriter within
     the meaning of Rule 145(c), the issuer undertakes that such reoffering
     prospectus will contain the information called for by the applicable
     registration form with respect to reofferings by persons who may be deemed
     underwriters, in addition to the information called for by the other Items
     of the applicable form;

          (7) That every prospectus (i) that is filed pursuant to paragraph (6)
     immediately preceding, or (ii) that purports to meet the requirements of
     section 10(a)(3) of the Securities Act and is used in connection with an
     offering of securities subject to Rule 415, will be filed as a part of an
     amendment to the registration statement and will not be used until such
     amendment is effective, and that, for purposes of determining any liability
     under the Securities Act, each such post-effective amendment shall be
     deemed to be a new registration statement relating to the securities
     offered therein, and the offering of such securities at that time shall be
     deemed to be the initial bona fide offering thereof; and

          (8) To supply by means of a post-effective amendment all information
     concerning a transaction, and the company being acquired involved therein,
     that was not the subject of and included in the Registration Statement when
     it became effective.

          Insofar as indemnification for liabilities arising under the
     Securities Act of 1933 may be permitted to directors, officers and
     controlling persons of the Registrant pursuant to the foregoing provisions,
     or otherwise, the Registrant has been advised that in the opinion of the
     Securities and Exchange Commission such indemnification is against public
     policy as expressed in the Act and is, therefore, unenforceable. In the
     event that a claim for indemnification against such liabilities (other than
     the payment by the Registrant of expenses incurred or paid by a director,
     officer or controlling person of the Registrant in the successful defense
     of any action, suit or proceeding) is asserted by such director, officer or
     controlling person in connection with the securities being registered, the
     Registrant will, unless in the opinion of its counsel the matter has been
     settled by controlling precedent, submit to a court of appropriate
     jurisdiction the question whether such indemnification by it is against
     public policy as expressed in the Act and will be governed by the final
     adjudication of such issue.

                                      II-4
<PAGE>   151

                                   SIGNATURES


     Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Amendment No. 1 Registration Statement on Form
S-4 to be signed on its behalf by the undersigned, thereunto duly authorized, in
the City of Corona, State of California, on July 26, 2000.


                                          WATSON PHARMACEUTICALS, INC.

                                          By:                  *
                                            ------------------------------------
                                                    Allen Y. Chao, Ph.D.
                                             Chairman, Chief Executive Officer
                                                       and President


     Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.



<TABLE>
<CAPTION>
                      SIGNATURE                                      TITLE                    DATE
                      ---------                                      -----                    ----
<C>                                                    <C>                                <S>
                          *                            Chairman, Chief Executive Officer  July 26, 2000
-----------------------------------------------------            and President
                Allen Y. Chao, Ph.D.

                          *                             Senior Vice President and Chief   July 26, 2000
-----------------------------------------------------          Financial Officer
                  Michael E. Boxer

                          *                                Vice President -- Finance      July 26, 2000
-----------------------------------------------------   (Principal Accounting Officer)
                    R. Chato Abad

                          *                                        Director               July 26, 2000
-----------------------------------------------------
                  Ronald R. Taylor

                          *                                        Director               July 26, 2000
-----------------------------------------------------
                  Andrew L. Turner

                          *                                        Director               July 26, 2000
-----------------------------------------------------
                  Michel J. Feldman

                          *                                        Director               July 26, 2000
-----------------------------------------------------
                    Fred G. Weiss

                          *                                        Director               July 26, 2000
-----------------------------------------------------
                  Michael J. Fedida

                /s/ ALBERT F. HUMMEL                               Director               July 26, 2000
-----------------------------------------------------
                  Albert F. Hummel

             *By: /s/ ROBERT C. FUNSTEN                                                   July 26, 2000
   -----------------------------------------------
                  Robert C. Funsten
                  Attorney-in-Fact
</TABLE>


                                      II-5
<PAGE>   152

                                 EXHIBIT INDEX


<TABLE>
<CAPTION>
EXHIBIT
NUMBER                             DESCRIPTION
-------                            -----------
<C>        <S>
   2.1     Agreement and Plan of Merger, dated as of May 24, 2000,
           among Watson Pharmaceuticals, Inc., WS Acquisition Corp. and
           Schein Pharmaceutical, Inc. (included as Annex A to the
           proxy statement/prospectus).
   3.1     Articles of Incorporation of Watson Pharmaceuticals, Inc.,
           and all amendments thereto, filed as Exhibit 3.1 to Watson's
           Quarterly Reports on Form 10-Q for the quarter ended June
           30, 1995 and Exhibit 3.1 (A) to Watson's Quarterly Report on
           Form 10-Q for the quarter ended June 30, 1996 and hereby
           incorporated by reference.
   3.2     Bylaws of Watson Pharmaceuticals, Inc., as amended as of
           December 11, 1998, filed as Exhibit 3.2 to Watson's
           Registration Statement on Form S-8 (Reg. No. 333-70933),
           filed on January 21, 1999 and hereby incorporated by
           reference.
   5.1     Opinion of Kummer Kaempfer Bonner & Renshaw regarding the
           legality of the securities.
   8.1     Opinion of Cooley Godward LLP regarding tax matters.
  10.1     Credit Agreement, dated as of July 5, 2000 among Watson, SG
           Cowen Securities Corporation and Societe Generale.
  21.1     List of Subsidiaries of Watson.
  23.1     Consent of Cooley Godward LLP (set forth in Exhibit 8.1).
 *23.2     Consent of PricewaterhouseCoopers LLP.
 *23.3     Consent of Ernst & Young LLP, independent auditors.
 *23.4     Consent of Deloitte & Touche LLP.
 *23.5     Consent of BDO Seidman, LLP.
  24.1     Powers of Attorney, pursuant to which amendments to this
           registration statement may be filed.
 *99.1     Form of Schein Proxy.
 *99.2     Consent of CIBC World Markets Corp.
</TABLE>


-------------------------

* Filed herewith. All other exhibits have been previously filed.



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