<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 14, 2000
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
WATSON PHARMACEUTICALS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<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:
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
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. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
========================================================================================================================
Proposed Maximum Proposed Maximum
Title of Each Class of Amount to be Offering Price Per Aggregate Offering Amount of
Securities to be Registered Registered(1) Unit Price Registration Fee(2)
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common stock, par value
$0.0033 per share 13,664,157 $ 23.14 $316,181,445.60 $ 83,471.90
========================================================================================================================
</TABLE>
<PAGE> 2
(1) This Registration Statement relates to common stock, par value $0.0033 per
share, of Watson Pharmaceuticals, Inc. ("Watson") issuable to holders of
common stock, par value $0.01 per share, of Schein Pharmaceutical, Inc.
("Schein") in the proposed merger of WS Acquisition Corp., a wholly owned
subsidiary of Watson, with and into Schein. The amount of Watson common
stock to be registered has been determined by multiplying 0.975 (an
estimate of the maximum fraction of a share of Watson common stock that may
be issued for a share of Schein common stock) by 14,015,135, the maximum
aggregate number of shares of Schein common stock that would be outstanding
prior to the merger, assuming the exercise of all outstanding Schein
options and warrants (whether or not currently exercisable), excluding
shares of Schein common stock currently held indirectly by Watson through
WS Acquisition Corp., which will be cancelled in the merger without
consideration.
(2) The registration fee was calculated pursuant to Rule 457(f) as 0.000264
multiplied by $22.56 (the average of the high and low prices of Schein
common stock on the New York Stock Exchange on July 12, 2000), multiplied
by 14,015,135 shares.
[ ] Check box if any part of the fee is offset as provided by Rule 0-11(a)(2)
and identify the filing with which the offsetting fee was previously paid.
Identify the previous filing by registration statement number, or the form
or schedule and the date of its filing.
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.
<PAGE> 3
[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 ________, 2000 at _____[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 ________, 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 77.8% 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 13 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> 4
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 _______ __, 2000, and is first
being mailed to stockholders of Schein on or about ________ __, 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.
<PAGE> 5
--------------------------------------------------------------------------------
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 [__________] ___, 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.
--------------------------------------------------------------------------------
<PAGE> 6
SCHEIN PHARMACEUTICAL, INC.
100 CAMPUS DRIVE
FLORHAM PARK, NEW JERSEY 07932
(973) 593-5500
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON [_____ ___, ____]
To the Stockholders of Schein Pharmaceutical, Inc.:
A special meeting of stockholders of Schein Pharmaceutical, Inc., a
Delaware corporation, will be held on ______ __, 2000 at [____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
[_____ ___, ____] 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 [________] 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
----------------------------------------
Florham Park, New Jersey Robert C. Funsten
________ ___, 2000 Secretary
<PAGE> 7
TABLE OF CONTENTS
<TABLE>
<S> <C>
QUESTIONS AND ANSWERS ABOUT THE MERGER....................................... 1
SUMMARY...................................................................... 3
RISK FACTORS................................................................. 13
Risks Relating to the Merger............................................ 13
Risks Relating to Investing in the Pharmaceutical Industry.............. 15
Risks Relating to Watson................................................ 20
Risks Relating to Schein................................................ 25
THE COMPANIES................................................................ 29
Watson.................................................................. 29
WS Acquisition Corp. ................................................... 29
Schein.................................................................. 29
THE SPECIAL MEETING OF SCHEIN STOCKHOLDERS................................... 30
Date, Time and Place.................................................... 30
Purpose of the Special Meeting.......................................... 30
Recommendation of Schein's Board of Directors........................... 30
Record Date and Voting Power............................................ 30
Voting and Revocation of Proxies........................................ 30
Required Vote........................................................... 30
Solicitation of Proxies................................................. 31
Other Matters........................................................... 31
THE MERGER................................................................... 32
General Description of the Merger....................................... 32
Background.............................................................. 32
Reasons for the Merger.................................................. 39
Watson's Reasons for the Merger......................................... 40
Schein's Reasons for the Merger......................................... 41
Opinion of Schein's Financial Advisor................................... 43
Interests of Schein's Officers and Directors in the Merger.............. 50
Material Federal Income Tax Consequences................................ 52
Anticipated Accounting Treatment........................................ 53
Restrictions on Resales by Affiliates................................... 53
CERTAIN TERMS OF THE MERGER AGREEMENT........................................ 55
The Tender Offer........................................................ 55
The Merger.............................................................. 55
Effective Time of the Merger............................................ 55
Conversion of Securities................................................ 55
Schein Stock Options.................................................... 57
Stock Purchase Plan..................................................... 58
Representations and Warranties.......................................... 58
Stockholder Meetings; Registration Statement............................ 59
No Solicitation......................................................... 60
Indemnification and Insurance........................................... 61
Interim Financing....................................................... 62
Conditions to the Merger................................................ 62
Termination of the Merger Agreement..................................... 63
Effect of Termination................................................... 63
Fees and Expenses....................................................... 63
Extension; Waiver....................................................... 63
Amendment............................................................... 63
</TABLE>
i
<PAGE> 8
<TABLE>
<S> <C>
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS.................. 65
Unaudited Pro Forma Condensed Combined Statement of Operations.......... 67
Unaudited Pro Forma Condensed Combined Balance Sheet.................... 69
Notes to Unaudited Pro Forma Condensed Combined Financial Statements.... 70
APPRAISAL RIGHTS............................................................. 74
COMPARATIVE RIGHTS OF WATSON STOCKHOLDERS AND SCHEIN STOCKHOLDERS............ 76
Size of the Board of Directors.......................................... 76
Removal of Directors.................................................... 76
Filling New Seats or Vacancies on the Board of Directors................ 76
Limitation of Personal Liability........................................ 77
Indemnification......................................................... 77
Transactions Involving Directors and Officers........................... 78
Advance Notice of Stockholder Business.................................. 79
Power to Call Special Meeting of Stockholders........................... 80
Distributions........................................................... 80
Stockholder Approval of Certain Business Combinations................... 81
Dissolution............................................................. 84
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS..................................... 85
LEGAL MATTERS................................................................ 85
EXPERTS...................................................................... 85
STOCKHOLDER PROPOSALS........................................................ 85
WHERE YOU CAN FIND MORE INFORMATION.......................................... 86
Annexes:
A Agreement and Plan of Merger
B Opinion of CIBC World Markets Corp.
C Delaware General Corporation Law, Section 262
</TABLE>
ii
<PAGE> 9
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 77.8% of the
outstanding shares of Schein common stock.
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.
1
<PAGE> 10
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 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> 11
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 86. 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 29)
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
3
<PAGE> 12
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 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 32)
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 55)
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)
4
<PAGE> 13
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 12, 2000,
Schein common stock closed at $22.63 per share, and Watson common stock closed
at $52.75 per share.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES (PAGE 52)
Because the merger was preceded by a tender offer pursuant to which WS
Acquisition Corp. purchased for cash 77.8% 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 39)
WATSON'S REASONS FOR THE MERGER (PAGE 40)
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 41)
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;
5
<PAGE> 14
- 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 30)
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 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 43)
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 30)
Time, Date and Place. A special meeting of the stockholders of Schein
will be held on [DAY], [MONTH] [DATE], [YEAR], at the principal executive
offices of Schein located at 100 Campus Drive, Florham Park, New Jersey 07932 at
[_____ 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 [________, ______], 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 [_________]
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
77.8% 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.
6
<PAGE> 15
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 [___]% of the shares entitled to vote at the
special meeting.
INTERESTS OF SCHEIN'S OFFICERS AND DIRECTORS IN THE MERGER (PAGE 50)
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 62)
The obligations of Watson and Schein to complete the merger are subject
to the satisfaction of certain conditions described below.
TERMINATION OF THE MERGER AGREEMENT (PAGE 63)
Watson and Schein can terminate the merger agreement by mutual written
consent and for various other reasons described below.
ANTICIPATED ACCOUNTING TREATMENT (PAGE 53)
The merger is expected to be accounted for as a "purchase" transaction
under generally accepted accounting principles.
APPRAISAL RIGHTS (PAGE 74)
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> 16
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 12, 2000)............... 51.88 55.63 20.56 23.50
</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 12, 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 12, 2000 $52.75 $22.63 $23.06
</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 12, 2000, the
estimated exchange ratio would have been .43721 and you would have received a
fraction of a share of Watson common stock worth $23.06 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> 17
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 ....... -- -- -- 13,000 -- -- --
and development(3)
--------- --------- --------- --------- --------- --------- ---------
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>
<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>
9
<PAGE> 18
---------------------
(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> 19
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> 20
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> 21
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>
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
13
<PAGE> 22
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 the two companies
may arise. Watson may also incur additional charges in subsequent quarters to
reflect costs associated with the merger.
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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.
RISKS RELATING TO INVESTING IN THE PHARMACEUTICAL INDUSTRY
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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
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Corona facility continue to be unresolved. Watson cannot predict what the
ultimate outcome will be or when product approvals from its Corona facility will
be forthcoming. In this regard, Watson has not received any product approvals
from its Corona facility within the last 15 months.
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 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,
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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 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.
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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 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.
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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,
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 $55.63 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,
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- 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.
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.
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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
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Chao, Ph.D., Chairman, Chief Executive Officer and President of Watson, was
diagnosed with very early stage 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
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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 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
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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 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.
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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.
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.
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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, Illinois, Massachusetts, 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.
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.
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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 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.
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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.
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THE SPECIAL MEETING OF SCHEIN STOCKHOLDERS
DATE, TIME AND PLACE
The special meeting of Schein stockholders will be held on [________],
2000, at the principal executive offices of Schein located at 100 Campus Drive,
Florham Park, New Jersey 07932 commencing at [______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, [_________], 2000, are entitled to notice of, and to vote
at, the special meeting. There were approximately [____] holders of record of
Schein common stock at the close of business on the record date, with
[_________] 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
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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
77.8% 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 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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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.
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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 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
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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.
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
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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.
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
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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 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.
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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.
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.
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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 directors,
Watson contacted Schein to inform it that the Watson board of directors had
approved the revised proposal.
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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 77.8%
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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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;
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- 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.
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
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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.
- 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;
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- 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 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
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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.
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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
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<PAGE> 54
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 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
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<PAGE> 55
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 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> <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
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<PAGE> 56
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 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:
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<PAGE> 57
<TABLE>
<CAPTION>
Implied Exchange
Ratio Range
-----------------
<S> <C>
Schein Precedent Transactions Analysis/ 0.2413x - 0.4708x
Watson Selected Companies Analysis
Schein Precedent Transaction Analysis/ 0.2130x - 0.4531x
Watson Discounted Cash Flow Analysis
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>
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
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<PAGE> 58
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
directors and officers 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 61.
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
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<PAGE> 59
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 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
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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 57 and "Stock Purchase
Plan" on page 58.
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 77.8% of the outstanding Schein common
stock, the receipt of Watson common stock and/or cash by Schein stockholders
pursuant to the merger 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.
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<PAGE> 61
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
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<PAGE> 62
Act) of Schein before the merger may be resold by them only in transactions
permitted by the resale 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.
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<PAGE> 63
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 77.8% 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.
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<PAGE> 64
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
- 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 OF THE FRACTION OF A
SHARE WOULD BE SHARE OF WATSON
IF THE CONVERTED INTO THE COMMON STOCK THAT A
WATSON FOLLOWING APPROXIMATE SCHEIN STOCKHOLDER
AVERAGE STOCK FRACTION OF A SHARE OF WOULD RECEIVE FOR EACH
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
</TABLE>
56
<PAGE> 65
<TABLE>
<CAPTION>
AND THE IMPLIED VALUE*
THEN EACH SCHEIN OF THE FRACTION OF A
SHARE WOULD BE SHARE OF WATSON
IF THE CONVERTED INTO THE COMMON STOCK THAT A
WATSON FOLLOWING APPROXIMATE SCHEIN STOCKHOLDER
AVERAGE STOCK FRACTION OF A SHARE OF WOULD RECEIVE FOR EACH
PRICE IS: WATSON COMMON STOCK: SCHEIN SHARE WOULD BE:
------------- ---------------------- ----------------------
<S> <C> <C>
$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
$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
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<PAGE> 66
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.
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;
58
<PAGE> 67
- 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.
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
59
<PAGE> 68
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
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<PAGE> 69
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;
- 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
61
<PAGE> 70
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.
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
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<PAGE> 71
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.
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.
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<PAGE> 72
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.
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<PAGE> 73
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 September 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
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<PAGE> 74
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 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.
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<PAGE> 75
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.
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<PAGE> 76
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.
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<PAGE> 77
WATSON/SCHEIN
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF MARCH 31, 2000
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL HISTORICAL PRO 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.
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<PAGE> 78
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
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<PAGE> 79
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.
(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.
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<PAGE> 80
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 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.
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<PAGE> 81
(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.
(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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<PAGE> 82
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
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<PAGE> 83
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 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.
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<PAGE> 84
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.
FILLING NEW SEATS OR VACANCIES ON THE BOARD OF DIRECTORS
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<PAGE> 85
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
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<PAGE> 86
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 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;
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- 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 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
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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, 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.
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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 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.
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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.
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
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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.
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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.
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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 _______________, 2000 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 ___________,
2000.
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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;
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- 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 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 [____________],
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.
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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 [________________], 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.
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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
---------------------
--------------------------------------------------------------------------------
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<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C> <C>
ARTICLE I THE OFFER ...................................................................... 2
SECTION 1.01. The Offer .......................................................... 2
SECTION 1.02. Company Action ..................................................... 4
SECTION 1.03. Directors .......................................................... 5
SECTION 1.04. Adjustment ......................................................... 6
ARTICLE II THE MERGER .................................................................... 6
SECTION 2.01. The Merger ......................................................... 6
SECTION 2.02. Effective Time ..................................................... 6
SECTION 2.03. Effect of the Merger ............................................... 6
SECTION 2.04. Certificate of Incorporation; By-Laws .............................. 7
SECTION 2.05. Closing ............................................................ 7
SECTION 2.06. Directors and Officers ............................................. 7
SECTION 2.07. Stockholders Meeting ............................................... 7
SECTION 2.08. Merger Without Meeting of Stockholders ............................. 8
ARTICLE II CONVERSION OF SECURITIES ...................................................... 8
SECTION 3.01. Effect on Capital Stock ............................................ 8
SECTION 3.02. Exchange of Certificates ........................................... 10
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 ..... 15
SECTION 4.06. Compliance, Permits ................................................ 16
SECTION 4.07. SEC Filings, Financial Statements .................................. 20
SECTION 4.08. Absence of Certain Changes or Events ............................... 20
SECTION 4.09. No Undisclosed Liabilities ......................................... 21
SECTION 4.10. Absence of Litigation .............................................. 21
SECTION 4.11. Employee Benefit Plans; Employment Agreements ...................... 21
SECTION 4.12. Labor Matters ...................................................... 22
SECTION 4.13. Restrictions on Business Activities ................................ 23
SECTION 4.14. Title to Property .................................................. 23
SECTION 4.15. Taxes .............................................................. 23
SECTION 4.16. Environmental Matters .............................................. 24
SECTION 4.17. Brokers ............................................................ 25
SECTION 4.18. Intellectual Property .............................................. 25
SECTION 4.19. Warranties ......................................................... 26
SECTION 4.20. Products Liability ................................................. 26
SECTION 4.21. Vote Required ...................................................... 26
SECTION 4.22. Takeover Statutes .................................................. 26
</TABLE>
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<TABLE>
<S> <C> <C>
SECTION 4.23. Opinion of Financial Advisor ....................................... 26
ARTICLE V REPRESENTATIONS AND WARRANTIES OF PARENT AND PURCHASER ......................... 27
SECTION 5.01. Organization and Qualification ..................................... 27
SECTION 5.02. Authority Relative to this Agreement ............................... 27
SECTION 5.03. No Conflict, Required Filings and Consents ......................... 27
SECTION 5.04. Capitalization ..................................................... 28
SECTION 5.05. SEC Filings, Financial Statements .................................. 28
SECTION 5.06. Absence of Certain Changes or Events ............................... 29
SECTION 5.07. No Undisclosed Liabilities ......................................... 29
SECTION 5.08. Funds .............................................................. 30
ARTICLE VI CONDUCT OF BUSINESS PENDING THE MERGER ........................................ 30
SECTION 6.01. Conduct of Business by the Company Pending the Merger .............. 30
SECTION 6.02. No Solicitation .................................................... 33
SECTION 6.03. Information Supplied ............................................... 34
ARTICLE VII ADDITIONAL AGREEMENTS ........................................................ 35
SECTION 7.01. Filings, Other Actions; Notification ............................... 35
SECTION 7.02. Access to Information; Confidentiality ............................. 36
SECTION 7.03. Stock Options ...................................................... 36
SECTION 7.04. Employee Benefits .................................................. 38
SECTION 7.05. Indemnification .................................................... 39
SECTION 7.06. Notification of Certain Matters .................................... 41
SECTION 7.07. Further Action ..................................................... 43
SECTION 7.08. Public Announcements ............................................... 43
SECTION 7.09. De-listing ......................................................... 43
SECTION 7.10. Expenses ........................................................... 43
SECTION 7.11. Financing .......................................................... 43
SECTION 7.12. Credit Facility .................................................... 43
SECTION 7.13. Affiliate Agreements ............................................... 44
ARTICLE VIII CONDITIONS TO THE MERGER .................................................... 45
SECTION 8.01. Conditions to Obligation of Each Party to Effect the Merger ........ 45
SECTION 8.02. Additional Condition to Obligation of the Company .................. 45
ARTICLE IX TERMINATION ................................................................... 45
SECTION 9.01. Termination ........................................................ 45
SECTION 9.02. Effect of Termination .............................................. 47
SECTION 9.03. Fees and Expenses .................................................. 47
ARTICLE X GENERAL PROVISIONS ............................................................. 48
SECTION 10.01. Effectiveness of Representations, Warranties and Agreements ....... 48
SECTION 10.02. Notices ........................................................... 49
SECTION 10.03. Amendment ......................................................... 50
SECTION 10.04. Waiver ............................................................ 50
SECTION 10.05. Headings .......................................................... 50
SECTION 10.06. Severability ...................................................... 50
SECTION 10.07. Entire Agreement .................................................. 50
</TABLE>
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<TABLE>
<S> <C> <C>
SECTION 10.08. Assignment, Purchaser ............................................. 51
SECTION 10.09. Parties in Interest ............................................... 51
SECTION 10.10. Failure or Indulgence Not Waiver; Remedies Cumulative ............. 51
SECTION 10.11. Governing Law ..................................................... 51
SECTION 10.12. Counterparts ...................................................... 51
SECTION 10.13. Waiver of Jury Trial .............................................. 51
SECTION 10.14. Disclosure Schedule ............................................... 51
SECTION 10.15. Certain Definitions ............................................... 52
</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
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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
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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 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
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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.
(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
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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 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
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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, 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").
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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.
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).
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(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 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.
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(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
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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 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).
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(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
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
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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.
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.
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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 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.
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(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, 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.
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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.
(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;
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(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;
(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;
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(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 of
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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
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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 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
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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 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
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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 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.
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(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 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.
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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 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)
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(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 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
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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
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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) 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
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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 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
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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) (ii) 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 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);
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(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.
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
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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
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
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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, 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
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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 Consideration as provided
herein and (ii) in accordance with the terms of the Company 1999 Stock Option
Plan and the Company 1995 Non-Employee
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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, 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
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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
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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 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
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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) 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 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.
(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. (aii 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,
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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
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
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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.
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
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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 Purchase Price
------------- --------------
<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.
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
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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 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
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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 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.
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(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
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in this 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.
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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
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,
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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.
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.
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(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).
(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
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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 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
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(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.
(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).
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(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;
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(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.
(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
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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.
(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.
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(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.
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(pppp) "Termination Date" shall have the meaning set forth in Section
9.01(c).
(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
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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
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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
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
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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, 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.
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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
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<PAGE> 158
ANNEX C
SCHEIN PHARMACEUTICAL, INC.
TERM SHEET
<TABLE>
<S> <C>
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 Standard for a security of this nature
Warranties
</TABLE>
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<PAGE> 159
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;
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The Board of Directors
Schein Pharmaceutical, Inc.
May 24, 2000
Page 2
(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;
(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
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<PAGE> 161
The Board of Directors
Schein Pharmaceutical, Inc.
May 24, 2000
Page 3
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 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.
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<PAGE> 162
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
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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
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
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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, 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.
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<PAGE> 165
(g) At the hearing on such petition, the Court shall determine the stockholders
who have complied with this section and who have become entitled to appraisal
rights. The Court may require the stockholders who have demanded an appraisal
for their shares and who hold stock represented by certificates to submit their
certificates of stock to the Register in Chancery for notation thereon of the
pendency of the appraisal proceedings; and if any stockholder fails to comply
with such direction, the Court may dismiss the proceedings as to such
stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court shall
appraise the shares, determining their fair value exclusive of any element of
value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial 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.
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(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-5
<PAGE> 167
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.
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<PAGE> 168
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 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
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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 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
-------------- -----------
<S> <C>
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, field 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.
</TABLE>
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<TABLE>
<S> <C>
23.5 Consent of BDO Seidman, LLP.
24.1 Powers of Attorney (set forth on signature page).
99.1 Form of Schein Proxy.
99.2 Consent of CIBC World Markets Corp.
</TABLE>
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;
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
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<PAGE> 171
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.
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<PAGE> 172
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the registrant has duly caused this 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 14, 2000.
WATSON PHARMACEUTICALS, INC.
By: /s/ Allen Y. Chao
-----------------------------------
Allen Y. Chao, Ph.D.
Chairman, Chief Executive Officer
and President
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Robert C. Funsten his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign any
and all amendments (including post-effective amendments) to this Registration
Statement, and to file the same, with all exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorney-in-fact and agent full power and authority to do and perform
each and every act and thing requisite and necessary to be done in connection
therewith, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his substitutes or substitute, may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ Allen Y. Chao Chairman, Chief Executive Officer
----------------------------- and President July 14, 2000
Allen Y. Chao, Ph.D.
/s/ Michael E. Boxer Senior Vice President
----------------------------- and Chief Financial Officer July 14, 2000
Michael E. Boxer
/s/ R. Chato Abad Vice President - Finance
----------------------------- (Principal Accounting Officer) July 14, 2000
R. Chato Abad
/s/ Ronald R. Taylor Director July 14, 2000
-----------------------------
Ronald R. Taylor
</TABLE>
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<PAGE> 173
<TABLE>
<S> <C> <C>
/s/ Andrew L. Turner Director July 14, 2000
-----------------------------
Andrew L. Turner
/s/ Michel J. Feldman Director July 14, 2000
-----------------------------
Michel J. Feldman
/s/ Fred G. Weiss Director July 14, 2000
-----------------------------
Fred G. Weiss
/s/ Michael J. Fedida Director July 14, 2000
-----------------------------
Michael J. Fedida
Director July __, 2000
-----------------------------
Albert F. Hummel
</TABLE>
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<PAGE> 174
<TABLE>
<CAPTION>
Exhibit Number Description
-------------- -----------
<S> <C>
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, field 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 (set forth on signature page).
99.1 Form of Schein Proxy.
99.2 Consent of CIBC World Markets Corp.
</TABLE>
II-8
