<PAGE> 1
EXHIBIT 99.4
PAGES 59 THROUGH 67 OF THE PROXY STATEMENT/PROSPECTUS INCLUDED IN AMENDMENT NO.
2 TO WATSON'S S-4, AS FILED WITH THE SEC ON JULY 28, 2000.
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma condensed combined financial statements
are based on the historical consolidated financial statements of Watson and
Schein, combined and adjusted to give effect to the proposed acquisition of
Schein by Watson. The acquisition is being completed in a two-tiered
transaction, as described below:
- In the first tier of the transaction, WS Acquisition Corp. purchased for
cash 26,068,469 shares of Schein common stock for $19.50 per share.
- Subsequent to the consummation of the first tier of the transaction and
pursuant to the merger agreement, each remaining outstanding share of
Schein common stock will be converted into the right to receive a fraction
of a share of Watson common stock that is based upon the average of the
closing price of a share of Watson common stock on the New York Stock
Exchange for the ten consecutive trading days ending on the trading day two
trading days prior to the date of the special meeting of Schein
stockholders called to approve and adopt the merger agreement (the Watson
average stock price). However, if the Watson average stock price is less
than $37.82, Watson may, at its sole discretion, exchange cash, stock or a
combination thereof, as set forth in the merger agreement, to acquire the
remaining outstanding shares of Schein common stock. The second tier of the
acquisition is expected to close in late August 2000. Since the number of
shares to be issued in the second tier of the acquisition will not be known
until the last business day prior to the special meeting, the unaudited pro
forma condensed combined financial statements have been prepared using an
exchange ratio of 0.50661 based on the average trading price of Watson's
common stock for the five business day period from May 23, 2000 to May 30,
2000 (two business days prior and subsequent to the announcement of the
acquisition) of $45.40.
For purposes of the unaudited pro forma condensed combined financial
statements, the term "acquisition" includes both tier one and tier two of the
proposed transaction. The following unaudited pro forma condensed combined
statements of operations for the three months ended March 31, 2000 and the year
ended December 31, 1999 give effect to the acquisition as if it had occurred at
the beginning of each period presented. The unaudited pro forma condensed
combined statement of operations for the three months ended March 31, 2000 was
prepared based upon the unaudited consolidated statements of income of Watson
for the three months ended March 31, 2000 and of Schein for the three months
ended March 25, 2000. The unaudited pro forma condensed combined statement of
operations for the year ended December 31, 1999 was prepared based upon the
consolidated statements of income of Watson for the year ended December 31, 1999
and of Schein for the year ended December 25, 1999.
The following unaudited pro forma condensed combined balance sheet as of
March 31, 2000 gives effect to the acquisition as if it had occurred on such
date and was prepared based on the consolidated balance sheets of Watson as of
March 31, 2000 and of Schein as of March 25, 2000.
These unaudited pro forma condensed combined financial statements should be
read in conjunction with the Watson and Schein audited consolidated financial
statements and unaudited interim consolidated financial statements, including
the notes thereto, which are included in Watson's Annual Report on Form 10-K for
the year ended December 31, 1999, Watson's Quarterly Report on Form 10-Q for the
quarter ended March 31, 2000, Schein's Annual Report on Form 10-K for the year
ended December 25, 1999 and Schein's Quarterly Report on Form 10-Q for the
quarter ended March 25, 2000, which are incorporated by reference in this proxy
statement/prospectus.
The unaudited pro forma adjustments are based upon information set forth in
this proxy statement/prospectus and certain assumptions as described in the
notes to the unaudited pro forma condensed combined financial statements.
Watson's management believes that the pro forma assumptions are reasonable under
the circumstances.
The unaudited pro forma condensed combined financial statements do not
reflect any incremental direct costs, including a significant restructuring
charge management expects to record in connection with the acquisition, or
potential cost savings which are expected to result from the consolidation of
certain 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.
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<PAGE> 2
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.
48
<PAGE> 3
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.
49
<PAGE> 4
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.
50
<PAGE> 5
WATSON/SCHEIN
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF MARCH 31, 2000
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO
HISTORICAL HISTORICAL FORMA
WATSON SCHEIN ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS COMBINED
------------ ------------ ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ........... $ 305,422 $ 18,279 $ (250,280) $ 73,042 $ (a) $ 146,463
Marketable securities ............... 9,670 9,670
Accounts receivable, net ............ 145,254 41,560 10,000(d) 196,814
Inventories ......................... 123,387 125,392 248,779
Prepaid expenses and other
current assets .................... 12,335 11,306 23,641
Deferred tax assets ................. 31,440 14,071 45,511
------------ ----------- -----------
Total current assets ................... 627,508 210,608 (250,280) 73,042 10,000 670,878
Property and equipment, net ............ 142,056 100,138 242,194
Excess of Purchase Consideration over
net tangible assets acquired ......... 607,291 (b) 607,291
Product rights and other
intangibles, net ..................... 568,945 50,278 619,223
Investments and other assets ........... 412,970 20,860 11,375 (c) 445,205
------------ ----------- ----------- ---------- ----------- -----------
$ 1,751,479 $ 381,884 $ 368,386 $ 73,042 $ 10,000 $ 2,584,791
============ =========== =========== ========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued
expenses .......................... $ 55,869 $ 99,183 $ $ (30,000)(d) $ 125,052
Current portion of long-term debt ... 1,555 136,142 60,000 (136,142) (d) 61,555
Income taxes payable ................ 89,627 8,045 (7,481) (g) 90,191
Current liability from acquisitions
of products and businesses ........ 7,658 7,658
------------ -----------
Total current liabilities .............. 154,709 243,370 60,000 (143,623) (30,000) 284,456
Long-term debt ......................... 149,346 84,428 229,430 136,142 40,000 (d) 639,346
Long-term liability from acquisitions
of products and businesses ........... 13,049 13,049
Deferred tax liabilities ............... 143,601 4,402 148,003
Other long-term liabilities ............ 4,601 4,601
----------- -----------
Total liabilities ...................... 460,705 336,801 289,430 (7,481) 10,000 1,089,455
------------ ----------- ----------- ---------- ----------- -----------
Commitments and contingencies
Stockholders' equity:
Common stock ........................... 318 329 19 46 (375)(e,h) 337
Additional paid-in capital ............. 405,369 101,817 264,543 80,477 (182,294)(e,h) 669,912
Retained earnings (deficit) ............ 693,720 (61,853) (60,000) 61,853 (f,h) 633,720
Accumulated other comprehensive
income ............................... 191,367 7,024 (7,024)(h) 191,367
Subscription receivable ................ (2,234) 2,234 (h)
----------- -----------
Total stockholders' equity.............. 1,290,774 45,083 204,562 80,523 (125,606) 1,495,336
------------ ----------- ---------- ---------- ----------- -----------
$ 1,751,479 $ 381,884 $ 493,992 $ 73,042 $ (115,606) $ 2,584,791
============ =========== ========== ========== =========== ===========
</TABLE>
See accompanying notes to the unaudited pro forma condensed combined financial
statements.
51
<PAGE> 6
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>
<CAPTION>
<S> <C>
Cash ........................................................ $ 508,335
Watson common stock ......................................... 264,562 (i)
------------
Total Purchase Consideration ................................ 772,897
Add: Non-recurring transaction costs ........................ 20,000 (ii)
Less: Write-off of in-process research and development ...... (60,000)(iii)
Less: Schein pro forma net tangible assets at March 25,
2000 ........................................................ (125,606)(iv)
------------
Excess of purchase consideration over net tangible assets
acquired .................................................... $ 607,291 (iv)
============
</TABLE>
(i) As of March 25, 2000, there were approximately 32,984,000 shares of
Schein common stock outstanding. Additionally, there were approximately
7,354,000 stock options outstanding under Schein's existing stock option
plans. The total purchase consideration in the acquisition will depend
upon the number of Schein stock options that are exercised prior to the
closing of the acquisition, as further discussed below.
The accompanying unaudited pro forma condensed combined financial
statements take into consideration the purchase of 26,068,469 shares of
common stock of Schein after completion of the tender offer in July 2000,
at a cash price of $19.50 per share. It is assumed that as part of the
second tier of the transaction, approximately 11,500,000 shares of Schein
common stock (the remaining shares of Schein common stock outstanding as
of March 25, 2000 and the stock options assumed to be exercised prior to
the closing date, as further described in the following paragraph) are
exchanged using the exchange ratio specified in the merger agreement based
on the average Watson common stock trading price for the five business day
period from May 23, 2000 to May 30, 2000 (two business days prior and
subsequent to the announcement of the acquisition) of $45.40, thereby
resulting in each share of Schein common stock being converted into the
right to receive a fraction of a share of Watson common stock valued at
$23.00. The value of the merger consideration per share of Schein common
stock will be increased proportionately above $23.00 if the Watson average
stock price is greater than $54.52 per share, up to a maximum value of
$26.50 where the Watson average stock price is $62.82 per share or higher.
Conversely, the value of the purchase consideration will be decreased
proportionately below $23.00, if the Watson average stock price is less
than $44.61 per share down to a minimum value of $19.50 where the Watson
average stock price is $37.82 per share or lower. At this minimum value of
$19.50, Watson would have the option to pay the purchase consideration in
cash, in stock or a combination thereof.
As a result of the acquisition, options related to Schein's existing stock
option plans will either 1) become fully vested and the employees will
have the ability to exercise the related options prior to the effective
time of the merger (stock options not exercised prior to the effective
time of the merger will be terminated); or 2) be exchanged for Watson
stock options in accordance with the appropriate exchange ratio set forth
in the merger agreement. For purposes of preparing these unaudited pro
forma condensed combined financial statements, it is assumed that all
employees who hold stock options that will terminate if not exercised
prior to the effective time of the merger, will exercise their stock
options. The number of such options that are expected to be exercised is
4,587,000. Management considers this assumption to be reasonable based on
the fact that substantially all of the options have a current exercise
price which is less than the average market price of a share of Schein
common stock and the options are subject to accelerated vesting terms
which are triggered as a result of this acquisition.
(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
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<PAGE> 7
an estimated average period of 20 years at a rate of $30.4 million per
year. Management believes that a portion of this amount will be allocated
to product rights with estimated useful lives up to twenty years.
Management believes that the remaining balance will be allocated to
goodwill with an estimated useful life of twenty to twenty-five years.
After consummation of the acquisition, Watson will utilize the valuations
and other studies to make a final allocation of the purchase
consideration, including allocation to tangible assets and liabilities,
identifiable intangible assets and goodwill. As a result of this final
allocation, the amount of the excess of purchase consideration over net
tangible assets acquired and the average amortization period may be
different from what has been assumed in the preparation of these unaudited
pro forma condensed combined financial statements. On an on-going basis,
Watson will perform periodic reviews of the goodwill and other intangible
assets arising from the acquisition to ensure that they are carried at
recoverable amounts in the light of current business conditions.
The Schein pro forma net tangible assets as of March 25, 2000 include cash
of $73.0 million and an income tax benefit of $7.5 million arising in connection
with the assumed exercise of Schein stock options as discussed in Note (i)
above.
Certain amounts in the historical consolidated financial statements of
Watson and Schein have been reclassified to conform to the unaudited pro forma
condensed combined financial statement presentation. No adjustments are
necessary to eliminate intercompany transactions and balances in the unaudited
pro forma condensed combined financial statements as there were no intercompany
transactions or balances.
Pro forma adjustments giving effect to the acquisition in the unaudited
pro forma condensed combined statements of operations reflect the following:
(a) Amortization of the excess of the purchase consideration over net
tangible assets acquired on a straight-line basis over 20 years. Refer to
Note (iv) above.
(b) The total amount of funds required by Watson is estimated to be
approximately $800 million to (a) consummate the acquisition (including
direct transaction costs of $20 million and fees related to the new bank
facility of $11.4 million); (b) refinance certain existing indebtedness of
Schein in the total amount of $220.6 million; and (c) finance immediate
working capital needs of Schein. For purposes of preparing these unaudited
pro forma condensed combined financial statements, it is assumed that
Watson would use $250 million of cash on hand and new borrowings to fund
this acquisition. The incremental interest expense resulting from the new
borrowings is as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS YEAR ENDED
ENDED DECEMBER 31,
MARCH 31, 2000 1999
-------------- -------------
<S> <C> <C>
Incremental interest on acquisition-related borrowings ...... $ 12,485 $ 49,940
Less: Schein historical interest expense .................... (4,538) (18,661)
Amortization of deferred financing costs .................... 569 2,275
Reduction in interest income from use of cash on hand to
fund portion of purchase consideration ...................... 3,129 12,517
Commitment fee on unused bank facility ...................... 140 562
------------- -------------
Incremental net interest expense ............................ $ 11,785 $ 46,633
============= =============
</TABLE>
For purposes of preparing the unaudited pro forma condensed
combined financial statements, it is assumed that Watson will incur
$11.4 million of deferred financing costs which will be amortized
using a method which approximates the effective interest method over
the expected average term of the associated financing agreements or
five years. The incremental interest expense has been calculated based
on an assumed interest rate of 9.08%. A change of 1/8 of 1% in the
assumed interest rate will change annual interest expense after tax by
$0.4 million.
(c) Income tax effect of pro forma adjustments.
(d) Earnings per share calculations are based on the weighted average
number of shares of Watson common stock and common equivalent shares
outstanding for each period presented, including the shares of Watson
assumed to be issued in connection with the acquisition as if they had
been issued at the beginning of each period presented. In addition,
options to purchase 2,767,000 shares of Schein common stock are expected
to be converted into options for Watson common stock and as such have been
included in the calculation of the diluted weighted average number of
shares as if they had been outstanding at the beginning of each period
presented for purposes of calculating the pro forma earnings per share.
Earnings per share will differ according to the number of Watson shares
ultimately issued in connection with this acquisition. The earnings per
share calculations are also subject to change depending on the number of
Schein stock options exercised as discussed in Note (i) above.
(e) The historical financial statements of Watson include the
following significant non-recurring items:
- During the year ended December 31, 1999 and the three months
ended March 31, 2000, Watson sold 2.2 million (adjusted to
reflect Andrx' April 2000 two-for-one stock split) and 4.2
million shares (as adjusted to reflect the stock split),
respectively, of Andrx Corporation stock on the open market for
$54.6 million and $182.2 million, respectively, recording pre-tax
gains of $44.3 million and $166.9 million, respectively.
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<PAGE> 8
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.
54
