-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ut1DQ8fce0osD3y5AvJyscdyMxb3F0SbidcURF2u9j3gVszlmB1jTSe5EDlBeMmc yVYOofYkk6h3TTZ7VlR0yQ== /in/edgar/work/20000714/0000891618-00-003876/0000891618-00-003876.txt : 20000920 0000891618-00-003876.hdr.sgml : 20000920 ACCESSION NUMBER: 0000891618-00-003876 CONFORMED SUBMISSION TYPE: S-4 PUBLIC DOCUMENT COUNT: 11 FILED AS OF DATE: 20000714 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WATSON PHARMACEUTICALS INC CENTRAL INDEX KEY: 0000884629 STANDARD INDUSTRIAL CLASSIFICATION: [2834 ] IRS NUMBER: 953872914 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4 SEC ACT: SEC FILE NUMBER: 333-41466 FILM NUMBER: 673269 BUSINESS ADDRESS: STREET 1: 311 BONNIE CIRCLE CITY: CORONA STATE: CA ZIP: 92880 BUSINESS PHONE: 9092701400 MAIL ADDRESS: STREET 1: 311 BONNIE CIRCLE CITY: CORONA STATE: CA ZIP: 92880 S-4 1 s-4.txt FORM S-4 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) NEVADA 2834 95-3872914 ------------------------------ ---------------------------- ---------------------- (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
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
======================================================================================================================== 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) - ------------------------------------------------------------------------------------------------------------------------ Common stock, par value $0.0033 per share 13,664,157 $ 23.14 $316,181,445.60 $ 83,471.90 ========================================================================================================================
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. 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. 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. 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. - -------------------------------------------------------------------------------- 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 7 TABLE OF CONTENTS 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
i 8 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
ii 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 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 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 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 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 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 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 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.
WATSON SCHEIN COMMON STOCK COMMON STOCK ---------------- ----------------- LOW HIGH LOW HIGH ------ ------ ------ ------ 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
* 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:
ESTIMATED EQUIVALENT WATSON COMMON SCHEIN SCHEIN STOCK COMMON STOCK PER SHARE PRICE ------------- ------------ -------------------- May 24, 2000 $48.75 $16.81 $22.65 July 12, 2000 $52.75 $22.63 $23.06
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 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.
QUARTER ENDED MARCH 31, YEARS ENDED DECEMBER 31,(1) --------------------- --------------------------------------------------------- 2000 1999 1999 1998 1997 1996 1995 --------- --------- --------- --------- --------- --------- --------- (IN THOUSANDS, EXCEPT EARNINGS PER SHARE) 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 ========= ========= ========= ========= ========= ========= =========
AT DECEMBER 31, AT MARCH 31, ------------------------------------------------------------ 2000 1999 1998 1997 1996 1995 ------------ ---------- ---------- -------- -------- -------- (IN THOUSANDS) 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
9 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 19 SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA SCHEIN PHARMACEUTICAL, INC.
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) 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) ======== ========= ========= ========= ========= ======== =========
AT DECEMBER AT MARCH 25, ---------------------------------------------------------- 2000 1999 1998 1997 1996 1995 ------------ --------- -------- -------- -------- -------- (IN THOUSANDS) 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
- ---------- (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 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.
THREE MONTHS ENDED YEAR ENDED MARCH 31, 2000 DECEMBER 31, 1999 -------------- ----------------- (IN THOUSANDS EXCEPT PER SHARE DATA) 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
12 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.
THREE MONTHS YEAR ENDED ENDED DECEMBER 31, MARCH 31, 2000 1999 -------------- ------------ 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 --
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 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. 14 23 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 15 24 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 16 25 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, 17 26 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. 18 27 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. 19 28 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, 20 29 - 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. 21 30 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 22 31 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 23 32 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 24 33 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. 25 34 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. 26 35 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. 27 36 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. 28 37 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. 29 38 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 30 39 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. 31 40 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. 32 41 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 33 42 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 34 43 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 35 44 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. 36 45 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. 37 46 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. 38 47 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." 39 48 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; 40 49 - 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 41 50 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; 42 51 - 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 43 52 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. 44 53 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 45 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 46 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:
Implied Equity Cash Consideration Merger Consideration Reference Range for Schein in Tender Offer Based on Midpoint of Collar -------------------------- ------------------ --------------------------- $13.88 - $20.63 per share $19.50 per share $23.00 per share
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:
Implied Equity Closing Price of Watson Reference Range for Watson Common Stock on May 22, 2000 -------------------------- ---------------------------- $43.22 - $58.24 per share $50.06 per share
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:
Acquiror Target -------- ------ - 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.
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 47 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:
Implied Equity Cash Consideration Merger Consideration Reference Range for Schein in Tender Offer Based on Midpoint of Collar -------------------------- ------------------ --------------------------- $14.05 - $20.35 per share $19.50 per share $23.00 per share
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:
Implied Equity Cash Consideration Merger Consideration Reference Range for Schein in Tender Offer Based on Midpoint of Collar -------------------------- ------------------ --------------------------- $20.90 - $28.75 per share $19.50 per share $23.00 per share
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:
Implied Equity Closing Price of Watson Reference Range for Watson Common Stock on May 22, 2000 -------------------------- ---------------------------- $44.91 - $65.97 per share $50.06 per share
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: 48 57
Implied Exchange Ratio Range ----------------- 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
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:
Implied Period Exchange Ratio ------ -------------- One month 0.3530x Two months 0.3699x Three months 0.3682x Six months 0.3152x
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 49 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 50 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 51 60 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. 52 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 53 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. 54 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. 55 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:
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: - ------------- ---------------------- ---------------------- $65.00 0.40769 $26.50 $64.00 0.41406 $26.50 $63.00 0.42063 $26.50 $62.82 0.42187 $26.50 $62.00 0.42187 $26.16 $61.00 0.42187 $25.73 $60.00 0.42187 $25.31 $59.00 0.42187 $24.89 $58.00 0.42187 $24.47 $57.00 0.42187 $24.05
56 65
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: - ------------- ---------------------- ---------------------- $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
* 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 57 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 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 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 60 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 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 62 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. 63 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. 64 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 65 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. 66 75 WATSON/SCHEIN UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS(e) QUARTER ENDED MARCH 31, 2000 (IN THOUSANDS, EXCEPT PER SHARE DATA)
HISTORICAL HISTORICAL PRO FORMA WATSON SCHEIN ADJUSTMENTS COMBINED ---------- ---------- ---------- --------- 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 ========= ========= ======== =========
See accompanying notes to the unaudited pro forma condensed combined financial statements. 67 76 WATSON/SCHEIN UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS(e) YEAR ENDED DECEMBER 31, 1999 (IN THOUSANDS, EXCEPT PER SHARE DATA)
HISTORICAL HISTORICAL PRO FORMA WATSON SCHEIN ADJUSTMENTS COMBINED ---------- ---------- ----------- ----------- 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 ========= ========= ======== ===========
See accompanying notes to the unaudited pro forma condensed combined financial statements. 68 77 WATSON/SCHEIN UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET AS OF MARCH 31, 2000 (IN THOUSANDS)
HISTORICAL HISTORICAL PRO FORMA WATSON SCHEIN ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS COMBINED ---------- ---------- ----------- ----------- ----------- ---------- 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 ========== ========= ========= ========= ========= ==========
See accompanying notes to the unaudited pro forma condensed combined financial statements. 69 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): 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) =========
(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 70 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. 71 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):
THREE MONTHS YEAR ENDED ENDED DECEMBER 31, MARCH 31, 2000 1999 -------------- ------------ 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 ======== ========
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. 72 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. 73 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 74 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. 75 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 76 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 77 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; 78 87 - 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 79 88 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. 80 89 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. 81 90 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 82 91 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. 83 92 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. 84 93 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. 85 94 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; 86 95 - 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. 87 96 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. 88 97 ANNEX A - -------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER AMONG: WATSON PHARMACEUTICALS, INC., A NEVADA CORPORATION; WS ACQUISITION CORP., A DELAWARE CORPORATION; AND SCHEIN PHARMACEUTICAL, INC., A DELAWARE CORPORATION ---------------------- DATED AS OF MAY 24, 2000 --------------------- - -------------------------------------------------------------------------------- A-1 98
TABLE OF CONTENTS 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
A-2 99 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
A-3 100 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
Annex A Certain Conditions to the Offer Annex B Credit Facility Use of Proceeds Annex C Preferred Stock Term Sheet Exhibit A Form of Affiliate Agreements A-4 101 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 A-5 102 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 A-6 103 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 A-7 104 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 A-8 105 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"). A-9 106 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). A-10 107 (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. A-11 108 (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 A-12 109 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). A-13 110 (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 A-14 111 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. A-15 112 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. A-16 113 (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. A-17 114 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; A-18 115 (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; A-19 116 (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 A-20 117 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 A-21 118 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 A-22 119 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 A-23 120 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. A-24 121 (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. A-25 122 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) A-26 123 (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 A-27 124 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 A-28 125 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 A-29 126 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 A-30 127 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); A-31 128 (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 A-32 129 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 A-33 130 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 A-34 131 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 A-35 132 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 A-36 133 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 A-37 134 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 A-38 135 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, A-39 136 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 A-40 137 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 A-41 138 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.
Purchase Date Purchase Price ------------- -------------- 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
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 A-42 139 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 A-43 140 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. A-44 141 (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 A-45 142 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. A-46 143 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, A-47 144 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. A-48 145 (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 A-49 146 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 A-50 147 (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). A-51 148 (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; A-52 149 (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 A-53 150 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. A-54 151 (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. A-55 152 (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. A-56 153 IN WITNESS WHEREOF, Parent, Purchaser and the Company have caused this Agreement to be executed as of the date first written above by their respective officers thereunto duly authorized. WATSON PHARMACEUTICALS, INC. By: /s/ Allen Y. Chao --------------------------------- Name: Allen Y. Chao Title: Chairman, President and Chief Executive Officer WS ACQUISITION CORP. By: /s/ Allen Y. Chao --------------------------------- Name: Allen Y. Chao Title: Chairman, President and Chief Executive Officer SCHEIN PHARMACEUTICAL, INC. By: /s/ Martin Sperber --------------------------------- Name: Martin Sperber Title: Chairman and Chief Executive Officer A-57 154 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 A-58 155 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 A-59 156 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. A-60 157 ANNEX B Credit Facility Use of Proceeds Approximately $30 million -- pay down of past due accounts payable Approximately $10 million -- general working capital purposes, including reducing the acceleration of accounts receivable collection A-61 158 ANNEX C SCHEIN PHARMACEUTICAL, INC. TERM SHEET Securities Series A Preferred Stock Amount Up to $40 Million. as provided in Section 7.12(a) Closing As provided in Section 7.12(a) Voting Rights Non-Voting Dividend 15%, PIK dividend Use of Proceeds As provided in Annex B Mandatory Redemption 100% of redemption amount plus accrued and unpaid dividends At the earliest of (i) one year and five days after the Company's Senior Floating Rate Notes scheduled maturity of 2004, (ii) upon prepayment of the Senior Floating Rate Notes and (iii) when the terms of the bank credit agreement and the Senior Floating Rate Notes permit prepayment. Optional Redemption Optional by Company at any time Covenants, Representations and Standard for a security of this nature Warranties
A-62 159 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; B-1 160 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 B-2 161 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. B-3 162 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 C-1 163 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 C-2 164 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. C-3 165 (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. C-4 166 (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-5 167 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. II-1 168 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 II-2 169 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
Exhibit Number Description - -------------- ----------- 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.
II-3 170 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.
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 II-4 171 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. II-5 172 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.
SIGNATURE TITLE DATE /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
II-6 173 /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
II-7 174
Exhibit Number Description - -------------- ----------- 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.
II-8 EX-5.1 2 ex5-1.txt EXHIBIT 5.1 1 EXHIBIT 5.1 OPINION OF KUMMER KAEMPFER BONNER & RENSHAW July 13, 2000 Watson Pharmaceuticals, Inc. 311 Bonnie Circle Corona, California 92880 Ladies and Gentleman: We have acted as counsel for Watson Pharmaceuticals, Inc., a Nevada corporation (the "Company"), in connection with the merger (the "Merger") and other transactions contemplated by that certain Agreement and Plan of Merger, dated as of May 24, 2000, by and among the Company, WS Acquisition Corp., a Delaware corporation and a wholly owned subsidiary of the Company and Schein Pharmaceutical, Inc., a Delaware corporation. This opinion is being furnished in connection with a Registration Statement on Form S-4 ("Registration Statement") to be filed by the Company with the Securities and Exchange Commission covering the offer and sale of up to 13,664,157 shares of the Company's common stock, $0.0033 par value per share ("Common Stock"), subject to the exercise of options, to be issued in connection with the Merger. In rendering this opinion, we have examined the following documents: (i) the Company's Articles of Incorporation, as amended, and Bylaws, as amended, (ii) the resolutions adopted by the Board of Directors of the Company on May 23, 2000, (iii) the Registration Statement, and (iv) such other documents, legal opinions and precedents, corporate and other records of the Company, and certificates of public officials and officers of the Company that we have deemed necessary or appropriate to provide a basis for the below opinion. Based upon and subject to the foregoing, in our opinion, the shares of Common Stock of the Company which are being offered and sold by the Company pursuant to the Registration Statement, when sold in the manner and for the consideration contemplated by the Registration Statement, will be legally issued, fully paid and non-assessable. We consent to the filing of this opinion as an Exhibit to the Registration Statement and to the reference to our firm under the heading "Legal Matters." Very truly yours, By: /s/ KUMMER KAEMPFER BONNER & RENSHAW ------------------------------------- Kummer Kaempfer Bonner & Renshaw EX-8.1 3 ex8-1.txt EXHIBIT 8.1 1 EXHIBIT 8.1 OPINION OF COOLEY GODWARD July 13, 2000 Watson Pharmaceuticals, Inc. 311 Bonnie Circle Corona, CA 92880 Ladies and Gentlemen: This opinion is being delivered to you in connection with your acquisition of Schein Pharmaceutical, Inc. (the "Company") pursuant to the merger of WS Acquisition Corp. ("Purchaser") with and into the Company (the "Merger") under the Agreement and Plan of Merger dated as of May 24, 2000 by and among you, Purchaser and the Company (the "Merger Agreement"), as described in the Proxy Statement - Prospectus pursuant to a Registration Statement on Form S-4 filed with the Securities and Exchange Commission. Except as otherwise provided, capitalized terms used but not defined herein shall have the meanings set forth in the Merger Agreement. We have acted as counsel to Watson Pharmaceuticals, Inc. ("Parent"), in connection with the Merger. As such, and for the purpose of rendering this opinion, we have examined, and are relying upon (without any independent investigation or review thereof) the truth and accuracy, at all relevant times, of the statements, representations and warranties contained in the following documents (including all exhibits and schedules attached thereto): (a)the Merger Agreement; and (b)such other instruments and documents related to the formation, organization and operation of Parent, Purchaser and the Company or to the consummation of the Merger and the other transactions contemplated by the Merger Agreement as we have deemed necessary or appropriate. In connection with rendering this opinion, we have assumed (without any independent investigation or review thereof) that: (a) Original documents submitted to us (including signatures thereto) are authentic, documents submitted to us as copies conform to the original documents, and that all such documents have been (or will be by the Effective Time) duly and validly executed and delivered where due execution and delivery are a prerequisite to the effectiveness thereof; (b)All representations, warranties and statements made or agreed to by Parent, Purchaser and the Company, their managements, employees, officers, directors and stockholders in connection with the Merger, including, but not limited to, those set forth in the Merger Agreement (including the exhibits thereto) are true and accurate at all relevant times; (c) The Merger will be consummated in accordance with the terms of the Merger Agreement without any waiver, breach, or amendment of any covenant, condition or other provision thereof; and (d)Any representation or statement made "to the best of knowledge" or similarly qualified is correct without such qualification. We have reviewed the information and statements contained in the Proxy Statement - Prospectus under the heading "Material Federal Income Tax Consequences" (the "Tax Discussion") and we believe that, subject to the qualifications and limitations contained in the Tax Discussion, the matters stated in the Tax Discussion, to the extent that they represent matters of law or legal conclusions, are fairly presented as of the date hereof, and that the Tax Discussion addresses the material federal income tax considerations relevant to the Company's stockholders. 2 This opinion does not address the various state, local or foreign tax consequences that may result from the Merger or the other transactions contemplated by the Merger Agreement. In addition, no opinion is expressed as to any federal income tax consequence of the Merger or the other transactions contemplated by the Merger Agreement except as specifically set forth herein, and this opinion may not be relied upon except with respect to the consequences specifically discussed herein. No opinion is expressed as to the federal income tax treatment that may be relevant to a particular stockholder in light of personal circumstances or to certain types of stockholders subject to special treatment under the federal income tax laws (for example, life insurance companies, dealers in securities, taxpayers subject to the alternative minimum tax, banks, tax-exempt organizations, non-United States persons, and stockholders who acquired their shares of Company capital stock pursuant to the exercise of options or otherwise as compensation or who hold their Company capital stock as part of a straddle or risk reduction transaction). No opinion is expressed as to any transaction other than the Merger as described in the Merger Agreement, or as to any transaction whatsoever, including the Merger, if any of the representations, warranties, statements and assumptions material to our opinion and upon which we have relied are not accurate and complete in all material respects at all relevant times. This opinion only represents our best judgment as to the federal income tax consequences of the Merger and is not binding on the Internal Revenue Service or any court of law, tribunal, administrative agency or other governmental body. The conclusions are based on the Internal Revenue Code of 1986, as amended, existing judicial decisions, administrative regulations and published rulings. No assurance can be given that future legislative, judicial or administrative changes or interpretations would not affect the accuracy of the conclusions stated herein. Nevertheless, by rendering this opinion, we undertake no responsibility to advise you of any new developments in the application or interpretation of the federal income tax laws. This opinion is being delivered solely in connection with the filing of the Registration Statement. It may not be relied upon or utilized for any other purpose or by any person other than you and the Company stockholders and may not be made available to any other person without our prior written consent. We consent to the reproduction and filing of this opinion as an Exhibit to the Registration Statement and to the reference to us under the heading "Experts" in such Registration Statement. Sincerely, /s/ Webb B. Morrow III - ----------------------- Webb B. Morrow III EX-10.1 4 ex10-1.txt EXHIBIT 10.1 1 EXHIBIT 10.1 CREDIT AGREEMENT Dated as of July 5, 2000 among WATSON PHARMACEUTICALS, INC., as Borrower, THE FINANCIAL INSTITUTIONS FROM TIME TO TIME PARTIES HERETO as Lenders, SG COWEN SECURITIES CORPORATION, as Arranger and Book Runner, and SOCIETE GENERALE, as Administrative Agent and Syndication Agent 2 TABLE OF CONTENTS
Page ---- CREDIT AGREEMENT .....................................................................................................1 ARTICLE I DEFINITIONS ...........................................................................................5 1.01. Certain Defined Terms....................................................................5 1.02. Computation of Time Periods.............................................................25 1.03. Accounting Terms........................................................................25 1.04. Other Terms.............................................................................25 ARTICLE II AMOUNTS AND TERMS OF LOANS............................................................................25 2.01. Revolving Loan Facility.................................................................25 2.02. Term Loan Facility......................................................................27 2.03. Swing Loans.............................................................................28 2.04. Letters of Credit.......................................................................29 2.05. Promise to Pay; Evidence of Debt........................................................34 2.06. Use of Proceeds of Loans................................................................34 2.07. Authorized Officers, Employees and Administrative Agents................................35 ARTICLE III PAYMENTS AND PREPAYMENTS..............................................................................35 3.01. Prepayments; Reductions in Revolving Loan Commitments...................................35 3.02. Payments................................................................................37 3.03. Taxes...................................................................................38 3.04. Increased Capital.......................................................................40 ARTICLE IV INTEREST AND FEES ....................................................................................40 4.01. Interest on the Loans and other Obligations.............................................40 4.02. Special Provisions Governing Eurodollar Rate Loans......................................43 4.03. Fees....................................................................................45 ARTICLE V CONDITIONS TO LOANS ..................................................................................46 5.01. Conditions Precedent to the Initial Loans...............................................46 5.02. Conditions Precedent to All Loans.......................................................47 ARTICLE VI REPRESENTATIONS AND WARRANTIES........................................................................48 6.01. Representations and Warranties of the Borrower..........................................48 ARTICLE VII REPORTING COVENANTS ..................................................................................53 7.01. Financial Statements....................................................................53 7.02. Management Reports......................................................................54 7.03. Other Financial Information.............................................................54 7.04. Defaults and Other Events...............................................................54 7.05. Lawsuits................................................................................54 7.06. ERISA Notices...........................................................................55 7.07. Environmental Notices...................................................................55 7.08. FDA Notices.............................................................................56 7.09. Labor Matters...........................................................................56 7.10. Other Information.......................................................................56
1 3 ARTICLE VIII AFFIRMATIVE COVENANTS ................................................................................57 8.01. Existence, etc..........................................................................57 8.02. Powers; Conduct of Business.............................................................57 8.03. Compliance with Laws, etc...............................................................57 8.04. Payment of Taxes and Claims.............................................................57 8.05. Insurance...............................................................................57 8.06. Inspection of Property; Books and Records; Discussions..................................57 8.07. ERISA Compliance........................................................................58 8.08. Maintenance of Property.................................................................58 8.09. Maintenance of Licenses, Permits, etc...................................................58 8.10. Merger..................................................................................58 8.11. Loan Party..............................................................................59 ARTICLE IX NEGATIVE COVENANTS ...................................................................................59 9.01. Indebtedness............................................................................59 9.02. Sales of Assets.........................................................................60 9.03. Liens...................................................................................61 9.04. Investments.............................................................................61 9.05. Accommodation Obligations...............................................................62 9.06. Restricted Junior Payments..............................................................63 9.07. Change in Nature of Business............................................................63 9.08. Transactions with Affiliates............................................................63 9.09. Restriction on Fundamental Changes......................................................63 9.10. Sales and Leasebacks....................................................................63 9.11. Margin Regulations......................................................................64 9.12. ERISA...................................................................................64 9.13. Capital Expenditures....................................................................64 9.14. Amendment of Governing Documents........................................................64 9.15. Environmental Liabilities...............................................................64 9.16. No Activities Leading to Forfeiture.....................................................65 ARTICLE X FINANCIAL COVENANTS ..................................................................................65 10.01. Minimum Net Worth.......................................................................65 10.02. Minimum Interest Coverage Ratio.........................................................65 10.03. Minimum Fixed Charge Coverage Ratio.....................................................65 10.04. Maximum Leverage Ratio..................................................................65 ARTICLE XI EVENTS OF DEFAULT; RIGHTS AND REMEDIES................................................................66 11.01. Events of Default.......................................................................66 11.02. Rights and Remedies.....................................................................68 ARTICLE XII THE AGENT ............................................................................................69 12.01. Appointment.............................................................................69 12.02. Nature of Duties........................................................................69 12.03. Rights, Exculpation, etc................................................................69 12.04. Reliance................................................................................70 12.05. Indemnification.........................................................................70 12.06. The Administrative Agent Individually...................................................71 12.07. Successor Administrative Agents.........................................................71 12.08. Relations Among Lenders.................................................................72 12.09. Concerning the Loan Documents...........................................................72
4 ARTICLE XIII MISCELLANEOUS ........................................................................................72 13.01. Assignments and Participations..........................................................72 13.02. Relations Among Lenders.................................................................74 13.03. Replacement of Lender...................................................................74 13.04. Expenses................................................................................75 13.05. Indemnity...............................................................................75 13.06. Change in Accounting Principles.........................................................76 13.07. Setoff..................................................................................76 13.08. Ratable Sharing.........................................................................77 13.09. Amendments and Waivers..................................................................77 13.10. Notices.................................................................................77 13.11. Survival of Warranties and Agreements...................................................78 13.12. Failure or Indulgence Not Waiver; Remedies Cumulative...................................78 13.13. Marshalling; Payments Set Aside.........................................................78 13.14. Independence of Covenants...............................................................78 13.15. Severability............................................................................79 13.16. Headings................................................................................79 13.17. Governing Law...........................................................................79 13.18. Limitation of Liability.................................................................79 13.19. Successors and Assigns..................................................................79 13.20. Certain Consents and Waivers............................................................79 13.21. Counterparts; Effectiveness; Inconsistencies............................................80 13.22. Entire Agreement........................................................................80 13.23. Confidentiality.........................................................................81
5 EXHIBITS AND SCHEDULES Exhibit A -- Form of Assignment and Acceptance Exhibit B-1 -- Form of Revolving Loan Note Exhibit B-2 -- Form of Term Loan Note Exhibit B-3 -- Form of Swing Loan Note Exhibit C -- Form of Notice of Borrowing Exhibit D -- Form of Notice of Continuation/Conversion Exhibit E -- List of Closing Documents Exhibit F -- Form of Officer's Certificate Exhibit G -- Form of Compliance Certificate Schedule I Loan Party Addresses 6 CREDIT AGREEMENT This CREDIT AGREEMENT dated as of July 5, 2000 (as amended, supplemented or modified from time to time, this "Agreement") is entered into among WATSON PHARMACEUTICALS, INC., a Nevada Corporation (the "Borrower"), the financial institutions from time to time party hereto, whether by execution of this Agreement or an Assignment and Acceptance (the "Lenders"), SG COWEN SECURITIES CORPORATION, in its capacity as arranger and book runner (in such capacity, the "Arranger"), and SOCIETE GENERALE ("SG"), in its separate capacities as administrative agent for the Lenders (in such capacity, the "Administrative Agent") and as syndication agent for the Lenders (in such capacity, the "Syndication Agent"). ARTICLE I DEFINITIONS 1.01. Certain Defined Terms. The following terms used in this Agreement shall have the following meanings, applicable both to the singular and the plural forms of the terms defined: "Accommodation Obligation" means any Contractual Obligation, contingent or otherwise, of any Person with respect to any Indebtedness, obligation or liability of another, if the primary purpose or intent thereof by the Person incurring the Accommodation Obligation is to provide assurance to the obligee of such Indebtedness, obligation or liability of another Person that such Indebtedness, obligation or liability will be paid or discharged, or that any agreements relating thereto will be complied with, or that the holders thereof will be protected (in whole or in part) against loss in respect thereof including, without limitation, direct and indirect guarantees, endorsements (except for collection or deposit in the ordinary course of business), notes co-made or discounted, recourse agreements, take-or-pay agreements, keep-well agreements, agreements to purchase or repurchase such Indebtedness, obligation or liability or to provide any security therefor or to provide funds for the payment or discharge thereof, agreements to maintain solvency, assets, level of income, or other financial condition, and agreements to make payment other than for value received. "Acquisition" means, collectively, the Tender Offer and, on and after the Merger Effective Date, the Merger. "Administrative Agent" has the meaning ascribed to such term in the preamble hereto. "Administrative Agent's Account" means the Administrative Agent's account, account number 9044019 (re: Watson Pharmaceuticals), maintained at the office of Societe Generale, 1221 Avenue of the Americas, New York, New York, ABA #026004226, or such other account as the Administrative Agent may from time to time specify in writing to the Borrower and the Lenders. "Administrative Agent's Fee Letter" means the letter dated the date hereof between the Administrative Agent and the Borrower. "ANCIRC" means ANCIRC, a New York partnership jointly owned by Circasub Inc., an indirect Subsidiary of the Borrower, and SR Six, Inc., a subsidiary of Andrx Corporation. "Affiliate" means, as applied to any specified Person, any other Person that directly or indirectly controls, is controlled by, or is under common control with, such specified Person. For purposes of this definition, "control" (including, with correlative meanings, the terms "controlling", 7 "controlled by" and "under common control with"), as applied to any specified Person, means the possession, directly or indirectly, of the power to vote ten percent (10%) or more of the Securities having voting power for the election of directors of such specified Person or otherwise to direct or cause the direction of the management and policies of such specified Person, whether through the ownership of voting Securities or by contract or otherwise. "Agents" means, collectively, the Administrative Agent, the Syndication Agent and the Arranger. "Agreement" has the meaning ascribed to such term in the preamble hereto. "Applicable Base Rate Margin" means initially a rate equal to 0.375% per annum during the period from the Closing Date until the Six Month Date. Thereafter, such rate will reset quarterly as set forth below on the first day of the month following receipt by the Administrative Agent of the financial statements delivered in accordance with Section 7.01(a), commencing with the Six Month Date, based upon the Leverage Ratio for the applicable Financial Covenant Period, calculated as of the last day of such period; provided, however, if the calculation of the Leverage Ratio based upon the unaudited financial statements of the Borrower and its Subsidiaries for the fourth fiscal quarter of any Fiscal Year varies from the calculation of the Leverage Ratio based upon the audited financial statements of the Borrower and its Subsidiaries for such Fiscal Year, such rate will be reset (as set forth below) retroactively to the first day of the month following receipt by the Administrative Agent of the unaudited financial statements for such fourth fiscal quarter:
If the Leverage Applicable Base Rate Ratio is : Margin --------------------- -------------------- Equal to or greater than 3.5 1.250% Less than 3.5 but equal to or greater than 3.0 0.875% Less than 3.0 but equal to or greater than 2.5 0.625% Less than 2.5 but equal to or greater than 2.0 0.375% Less than 2.0 but equal to or greater than 1.5 0.250% Less than 1.5 0.125%
"Applicable Eurodollar Rate Margin" means initially a rate equal to 1.375% per annum during the period from the Closing Date until the Six Month Date. Thereafter, such rate will reset quarterly as set forth below on the first day of the month following receipt by the Administrative Agent of the financial statements delivered in accordance with Section 7.01(a), commencing with the Six Month Date, based upon the Leverage Ratio for the applicable Financial Covenant Period, calculated as of the last day of the period; provided, however, if the calculation of the Leverage Ratio based upon the unaudited financial statements of the Borrower and its Subsidiaries for the fourth fiscal quarter of any Fiscal Year varies from the calculation of the Leverage Ratio based upon the audited financial statements of the Borrower and its Subsidiaries for such Fiscal Year, such rate will be reset (as set forth below) retroactively to the first day of the month following receipt by the Administrative Agent of the unaudited financial statements for such fourth fiscal quarter:
If the Leverage Applicable Eurodollar Ratio is : Rate Margin --------------------- --------------------- Equal to or greater than 3.5 2.250% Less than 3.5 but equal to or greater than 3.0 1.875% Less than 3.0 but equal to or greater than 2.5 1.625%
8 Less than 2.5 but equal to or greater than 2.0 1.375% Less than 2.0 but equal to or greater than 1.5 1.250% Less than 1.5 1.125%
"Applicable Lending Office" means, with respect to a particular Lender, its Eurodollar Lending Office in respect of provisions relating to Eurodollar Rate Loans and its Domestic Lending Office in respect of provisions relating to Base Rate Loans. "Approved Fund" means any fund that invests in bank loans. "Arranger" has the meaning ascribed to such term in the preamble hereto. "Asset Sale" means any sale, conveyance, transfer, lease or other disposition of property of any Loan Party to any Person other than another Loan Party. "Assignment and Acceptance" means an Assignment and Acceptance substantially in the form of Exhibit A attached hereto and made a part hereof (with blanks appropriately completed) delivered to the Administrative Agent in connection with an assignment of a Lender's interest under this Agreement in accordance with the provisions of Section 13.01. "Attributable Debt" means with respect to a Sale and Leaseback Transaction, at the time of determination, the present value (discounted at the rate of interest implicit in such transaction, determined in accordance with GAAP) of the obligation of the lessee for net rental payments during the remaining term of the lease included in such Sale and Leaseback Transaction (including any period for which such lease has been extended or may, at the option of the lessor, be extended). "Availability" means, at any particular time, the amount by which the Maximum Revolving Credit Amount at such time exceeds the Revolving Credit Obligations at such time; provided, however, that during the period from the Closing Date to the Business Day immediately preceding the Schein Redemption Date, the Availability shall be reduced by $55,000,000. "Aventis" means Aventis, S.A., a company formed under the laws of France, formerly known as Rhone-Poulenc Rorer, and its affiliates. "Base Rate" means, on any date, a fluctuating interest rate per annum equal to the higher of: (a) the rate of interest then most recently established by SG in New York, New York as its base rate for Dollars loaned in the United States, in effect on such date; and (b) the Federal Funds Rate in effect on such date plus 1/2 of 1%. The Base Rate is not necessarily intended to be the lowest rate of interest determined by SG in connection with extensions of credit. "Base Rate Loans" means all Loans which bear interest at a rate determined by reference to the Base Rate as provided in Section 4.01(a). "Bankruptcy Code" means Title 11 of the United States Code (11 U.S.C. Sections 101 et seq.), as amended from time to time, and any successor statute. 9 "Benefit Plan" means a defined benefit plan as defined in Section 3(35) of ERISA (other than a Multiemployer Plan) which is subject to Title IV of ERISA or Section 412 of the Code in respect of which any Loan Party or any ERISA Affiliate is, or within the immediately preceding six (6) years was, an "employer" as defined in Section 3(5) of ERISA. "Board of Directors" means the board of directors or equivalent governing body of a Person (or the general partner of such Person, as the case may be,) or any committee thereof duly authorized to act on behalf of such board of directors or equivalent governing body. "Borrower" has the meaning ascribed to such term in the preamble hereto. "Borrowing" means a borrowing consisting of Loans of the same Type made on the same day by the Lenders. "Business" means the development, licensing, manufacturing , marketing, distribution and sale of pharmaceutical products. "Business Day" means a day, in the applicable local time, which is not a Saturday or Sunday or a legal holiday and on which banks are not required or permitted by law or other governmental action to close (i) in New York, New York, (ii) in the case of Eurodollar Rate Loans, in London, England and (iii) in the case of Letter of Credit transactions for the Issuing Bank, in the place where its office for issuance and administration of the pertinent Letter of Credit is located. "Capital Expenditures" means, for any period being measured hereunder, the aggregate of all expenditures (whether paid in cash or other assets or accrued as a liability (but without duplication)) during such period that, in conformity with GAAP, are required to be included in or reflected by a Loan Party's fixed asset account as reflected in its balance sheet; provided, however, that Capital Expenditures shall include, whether or not such a designation would be in conformity with GAAP, (A) that portion of Capital Leases which is capitalized on the balance sheet of such Loan Party and (B) expenditures for Equipment which is purchased simultaneously with the trade-in of existing Equipment owned by such Loan Party to the extent that the gross purchase price of the purchased Equipment exceeds the fair value of the Equipment being traded in at such time. "Capital Lease" means, as applied to any Person, any lease of any property (whether real, personal or mixed) by that Person as lessee which, in conformity with GAAP, is accounted for as a capital lease on the balance sheet of that Person. "Capital Stock" means, with respect to any Person, any capital stock of such Person, regardless of class or designation, and all warrants, options, purchase rights, conversion or exchange rights, voting rights, calls or claims of any character with respect thereto. "Cash Capital Expenditures" means, for any period, that portion of Capital Expenditures which is paid in cash. "Cash Equivalents" shall mean (i) marketable direct obligations issued or unconditionally guaranteed by the United States Government or issued by an agency thereof and backed by the full faith and credit of the United States, in each case maturing within one (1) year after the date of acquisition thereof; (ii) marketable direct obligations issued by any state of the United States of America or any political subdivision of any such state or any public instrumentality thereof maturing within ninety (90) days after the date of acquisition thereof and, at the time of acquisition, having one of the two highest ratings obtainable from either Standard & Poor's Corporation or Moody's Investors Service, Inc. (or, if at 10 any time neither Standard & Poor's Corporation nor Moody's Investors Service, Inc. shall be rating such obligations, then from other nationally recognized rating services) and not listed in Credit Watch published by Standard & Poor's Corporation; (iii) commercial paper, other than commercial paper issued by the Borrower or any of its Affiliates, maturing no more than ninety (90) days after the date of creation thereof and, at the time of acquisition, having a rating of at least A-1 or P-1 from either Standard & Poor's Corporation or Moody's Investors Service, Inc. (or, if at any time neither Standard & Poor's Corporation nor Moody's Investors Service, Inc. shall be rating such obligations, then the highest rating from other nationally recognized rating services) (iv) domestic and Eurodollar certificates of deposit or time deposits or bankers' acceptances maturing within one hundred ninety (90) days after the date of acquisition thereof issued by any commercial bank organized under the laws of the United States of America or any state thereof or the District of Columbia or European Economic Community or Canada having combined capital and surplus of not less than $250,000,000; (v) bankers' acceptances maturing no more than ninety (90) days after the date of creation thereof and, at the time of acquisition, having a rating of at least A-1 or P-1 from either Standard & Poor's Corporation or Moody's Investors Service, Inc. (or, if at any time neither Standard & Poor's Corporation nor Moody's Investors Service, Inc. shall be rating such obligation, then the highest rating from other nationally recognized rating services); (vi) corporate securities maturing no more than one (1) year after the date of acquisition thereof and, at the time of acquisition, having one of the two highest ratings obtainable from either Standard & Poor's Corporation of Moody's Investors Service, Inc. (or, if at any time neither Standard & Poor's Corporation nor Moody's Investors Service, Inc. shall be rating such obligations, then one of the two highest ratings from other nationally recognized rating services); (vii) repurchase agreements with respect to United States government securities, with contract periods not to exceed thirty (30) days; and (viii) money market mutual funds that invest primarily in the instruments set forth in the foregoing clauses of this definition. "CERCLA" means the Comprehensive Environmental Response, Compensation and Liability Act of 1980, 42 U.S.C. Sections 9601 et seq., any amendments thereto, any successor statutes, and any regulations promulgated thereunder. "Change of Control" means the occurrence of one or more of the following events: (a) the consummation of any transaction (including, without limitation, any merger or consolidation) the result of which is that any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act) is or becomes the beneficial owner (as defined in Rules 13d-3 and 13d-5 under the Securities Exchange Act), directly or indirectly, of more than 40% of the total voting power of the Equity Interests of the Borrower; (b) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all, the assets of the Borrower and its Subsidiaries taken as a whole to any "person" or group of "persons" for purposes of Section 13(d) of the Securities Exchange Act (other than to any Wholly Owned Subsidiary of the Borrower); or (c) the adoption of a plan of liquidation of the Borrower. "Chief Financial Officer" means the chief financial officer, chief accounting officer or vice president of finance of the Borrower. "Claim" means any claim or demand, by any Person, of whatsoever kind or nature for any alleged Liabilities and Costs, whether based in contract, tort, implied or express warranty, strict liability, criminal or civil statute, Permit, ordinance or regulation, common law or otherwise. 11 "Closing Date" means the date on which all of the conditions precedent in Sections 5.01 and 5.02 have been satisfied or waived pursuant to Section 13.09. "Code" means the Internal Revenue Code of 1986, as amended from time to time, and any successor statute and any regulations or guidelines promulgated thereunder. "Commercial Letter of Credit" means any documentary letter of credit issued by an Issuing Bank pursuant to Section 2.04 for the account of the Borrower, which is drawable upon presentation of documents evidencing the sale or shipment of goods purchased by the Borrower or any of its Subsidiaries in the ordinary course of their business. "Commission" means the Securities and Exchange Commission and any Person succeeding to the functions thereof. "Commitment" means, with respect to any Lender, such Lender's Revolving Loan Commitment and Term Loan Commitment, and as modified from time to time pursuant to the terms of this Agreement or to give effect to any applicable Assignment and Acceptance, and "Commitments" means the aggregate principal amount of the Commitments of all the Lenders, the maximum amount of which shall not exceed $700,000,000. "Commitment Termination Date" means the day which is the earliest of (A) August 4, 2005, (B) the termination of the Commitments pursuant to Section 11.02(a) and (C) the date of termination in whole of the Revolving Credit Commitments pursuant to Section 3.01(a)(ii). "Compliance Certificate" has the meaning ascribed to such term in Section 7.01(c). "Contaminant" means any waste, pollutant (as that term is defined in 42 U.S.C. 9601(33) or in 33 U.S.C. 1362(13)), hazardous substance (as that term is defined in 42 U.S.C. 9601(14)), hazardous chemical (as that term is defined by 29 CFR Section 1910.1200(c)), toxic substance, hazardous waste (as that term is defined in 42 U.S.C. 6901), radioactive material, special waste, petroleum, including crude oil or any petroleum-derived substance, waste, or breakdown or decomposition product thereof, or any constituent of any such substance or waste, including, but not limited to polychlorinated biphenyls, and asbestos. "Contractual Obligation" means, as applied to any Person, any provision of any Securities issued by that Person or any indenture, mortgage, deed of trust, security agreement, pledge agreement, guaranty, contract, undertaking, agreement or instrument to which that Person is a party or by which it or any of its properties is bound, or to which it or any of its properties is subject. "Contribution Agreement" means the Contribution Agreement dated as of the date hereof among the Borrower and the Guarantors, as such agreement may be further amended, supplemented or otherwise modified from time to time. "Current Assets" means, as at any date of determination, the total assets of the Borrower and its Subsidiaries on a consolidated basis which may properly be classified as current assets in conformity with GAAP. "Current Liabilities" means, as at any date of determination, the current liabilities of the Borrower and its Subsidiaries on a consolidated basis which may properly be classified as current liabilities in conformity with GAAP. 12 "Customary Permitted Liens" means (a) Liens (other than Environmental Liens and Liens in favor of the PBGC) with respect to the payment of taxes, assessments or governmental charges or claims, in all cases which are not yet due or are being contested in good faith by appropriate proceedings and with respect to which adequate reserves or other appropriate provisions are being maintained in accordance with GAAP; (b) statutory Liens of landlords and Liens of suppliers, mechanics, carriers, materialmen, warehousemen or workmen and other Liens imposed by law created in the ordinary course of business in all cases for amounts not yet due or which are being contested in good faith by appropriate proceedings and with respect to which adequate reserves or other appropriate provisions are being maintained in accordance with GAAP; (c) Liens (other than Environmental Liens and any Lien in favor of the PBGC) incurred or deposits made in the ordinary course of business in connection with worker's compensation, unemployment insurance or other types of social security benefits or to secure the performance of bids, tenders, sales, leases, contracts (other than for the repayment of borrowed money), surety, appeal and performance bonds, in all cases for amounts not yet due or which are being contested in good faith by appropriate proceedings and with respect to which adequate reserves or other appropriate provisions are being maintained in accordance with GAAP; and (d) zoning restrictions, easements, licenses, reservations, covenants, rights-of-way, utility easements, building restrictions and other similar charges or encumbrances on the use of real property which do not materially interfere with the ordinary conduct of the business of the Loan Parties and which do not materially adversely affect the value of the real property. "Debt" means, as applied to any Person at any time, all indebtedness, obligations or other liabilities of such Person (i) for borrowed money or evidenced by debt securities, debentures, acceptances, notes or other similar instruments, (ii) under profit payment agreements or in respect of obligations to redeem, repurchase or exchange any Securities of such Person or to pay dividends in respect of any stock, (iii) reimbursement obligations with respect to letters of credit issued for such Person's account (to the extent not accounted for in clause (i) above), (iv) to pay the deferred purchase price of property or services, except accounts payable and accrued expenses arising in the ordinary course of business, or (v) in respect of Capital Leases. "Default" means an event which, with the giving of notice or the lapse of time, or both, would constitute an Event of Default. "Default Rate" has the meaning ascribed to such term in Section 4.01(d). "Disclosure Letter" means the Disclosure Letter dated as of the date hereof from the Borrower to the Administrative Agent and the Lenders. "DOL" means the United States Department of Labor and any Person succeeding to the functions thereof. "Dollars" and "$" mean the lawful money of the United States. "Domestic Lending Office" means, with respect to any Lender, such Lender's office, located in the United States, specified as the "Domestic Lending Office" under its name on the signature pages hereof or on the Assignment and Acceptance by which it became a Lender or such other United 13 States office of such Lender as it may from time to time specify by written notice to the Borrower and the Administrative Agent. "EBITDA" means, for any Financial Covenant Period, (i) the Net Income, plus the following amounts (without duplication) to the extent deducted in calculating such Net Income: (A) depreciation and amortization expense, (B) interest expense, (C) the provision for income taxes (including federal, state, local and foreign income taxes), (D) extraordinary or unusual losses, (E) non-cash portion of nonrecurring losses and charges, (F) other non-operating, non-cash losses and (G) cash expenditures arising in connection with the transactions contemplated by the Transaction Documents in an aggregate amount not to exceed $85,000,000; minus (ii) the following amounts (without duplication) for such Financial Covenant Period to the extent included in the calculation of such Net Income: (A) the amount of extraordinary gains, (B) interest income and (C) other non-operating, non-cash income; each item in clauses (i) and (ii) calculated pursuant to GAAP for such period. "Eligible Assignee" means (A) any of the following Persons approved by the Administrative Agent and, unless a Default has occurred and is continuing, the Borrower, such approval not to be unreasonably withheld or delayed: (i) a commercial bank organized under the laws of the United States or any state thereof; (ii) a savings and loan association or savings bank organized under the laws of the United States or any state thereof; (iii) a commercial bank organized under the laws of any other country or a political subdivision thereof; provided that (x) such bank is acting through a branch or agency located in the United States or (y) such bank is organized under the laws of a country that is a member of the Organization for Economic Cooperation and Development or a political subdivision of such a country; and (iv) any other entity which is an "accredited investor" (as defined in Regulation D under the Securities Act) which extends credit or buys loans as one of its businesses, including, but not limited to, insurance companies, mutual funds and lease financing companies; and (B) any Lender and any Affiliate or Approved Fund of any Lender; provided that no Affiliate of the Borrower and no member of the pharmaceutical industry or other competitor of the Borrower or any of its Subsidiaries shall be an Eligible Assignee. "Environmental, Health or Safety Requirement of Law" means Requirements of Law derived from or relating to federal, state and local laws, regulations, ordinances or orders relating to or addressing the environment, health or safety, including but not limited to any law, regulation, ordinance or order relating to the use, handling, or disposal of any Contaminant, any law, regulation, ordinance or order relating to Remedial Action, and any law, regulation, ordinance or order relating to workplace or worker safety and health, as such Requirements of Law are promulgated by the specifically authorized agency responsible for administering such Requirements of Law. "Environmental Lien" means a Lien in favor of any Governmental Authority for (i) any liability under any applicable Environmental, Health or Safety Requirement of Law or (ii) damages arising from, or costs incurred by such Governmental Authority in response to, a Release or threatened Release of a Contaminant into the indoor or outdoor environment. "Environmental Property Transfer Act" means any applicable Requirement of Law triggered by the transfer, sale, lease, mortgage or closure of any Property, that conditions, restricts, prohibits or requires any notification or disclosure for environmental reasons. "Equipment" means a Person's present and future (i) equipment and fixtures, including, without limitation, machinery, manufacturing, distribution, selling, computer system, data processing and office equipment, assembly systems, tools, molds, dies, fixtures, appliances, furniture, furnishings, vehicles, vessels, aircraft, aircraft engines, and trade fixtures, (ii) other tangible personal property, and 14 (iii) any and all accessions, parts and appurtenances attached to any of the foregoing or used in connection therewith, and any substitutions therefor and replacements, products and proceeds thereof. "Equity Interests" means, with respect to any Person, any Capital Stock issued by such Person, regardless of class or designation, any limited or general partnership interest in such Person, or any limited liability membership interest in such Person, regardless of designation. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, and any successor statute. "ERISA Affiliate" means any (i) corporation which is a member of the same controlled group of corporations (within the meaning of Section 414(b) of the Code) as any Loan Party, (ii) partnership, trade or business (whether or not incorporated) which is under common control (within the meaning of Section 414(c) of the Code) with any Loan Party, and (iii) "affiliated service group" (as defined in Section 414(m) of the Code). "Eurodollar Affiliate" means, with respect to each Lender, the Affiliate of such Lender (if any) set forth below such Lender's name under the heading "Eurodollar Affiliate" on the signature pages hereof or on the Assignment and Acceptance by which it became a Lender or such Affiliate of a Lender as it may from time to time specify by written notice to the Borrower and the Administrative Agent. "Eurodollar Interest Payment Date" means (i) with respect to any Eurodollar Rate Loan, the last day of each Eurodollar Interest Period applicable to such Loan and (ii) with respect to any Eurodollar Rate Loan having a Eurodollar Interest Period in excess of three (3) calendar months, the last day of each calendar quarter during such Eurodollar Interest Period. "Eurodollar Interest Period" has the meaning set forth in Section 4.02(b). "Eurodollar Lending Office" means, with respect to any Lender, the office or offices of such Lender (if any) set forth below such Lender's name under the heading "Eurodollar Lending Office" on the signature pages hereof or on the Assignment and Acceptance by which it became a Lender or such office or offices of such Lender as it may from time to time specify by written notice to the Borrower and the Administrative Agent. "Eurodollar Rate" means, with respect to any Eurodollar Interest Period applicable to a Borrowing of Eurodollar Rate Loans, an interest rate per annum obtained by dividing (i) the rate per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) appearing on Telerate Page 3750 (or any successor page) as the London interbank offered rate for deposits in U.S. dollars at approximately 11:00 a.m. (London time) on the Interest Rate Determination Date for such Eurodollar Interest Period for a period equal to such Eurodollar Interest Period (provided that, if for any reason such rate is not available, the term "Eurodollar Rate" shall mean, for any Interest Period for all Eurodollar Rate Advances comprising part of the same Borrowing, the rate per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) appearing on Reuters Screen LIBO Page as the London interbank offered rate for deposits in Dollars at approximately 11:00 A.M. (London time) two Business Days prior to the first day of such Interest Period for a term comparable to such Interest Period; provided, however, if more than one rate is specified on Reuters Screen LIBO Page, the applicable rate shall be the arithmetic mean of all such rates), by (ii) a percentage equal to 100% minus the Eurodollar Reserve Percentage. The Eurodollar Rate shall be adjusted automatically on and as of the effective date of any change in the Eurodollar Reserve Percentage. 15 "Eurodollar Rate Loans" means those Loans outstanding which bear interest at a rate determined by reference to the Eurodollar Rate as provided in Section 4.01(a). "Eurodollar Reserve Percentage" means, for any day, that percentage which is in effect on such day, as prescribed by the Federal Reserve Board for determining the maximum reserve requirement (including, without limitation, any emergency, supplemental or other marginal reserve requirement) for a member bank of the Federal Reserve System in New York, New York with deposits exceeding five billion Dollars in respect of "Eurocurrency Liabilities" (or in respect of any other category of liabilities which includes deposits by reference to which the interest rate on Eurodollar Rate Loans is determined or any category of extensions of credit or other assets which includes loans by a non-United States office of any bank to United States residents). "Event of Default" means any of the occurrences set forth in Section 11.01 after the expiration of any applicable grace period and the giving of any applicable notice, in each case as expressly provided in Section 11.01. "Excess Cash Flow" means, for any Fiscal Year other than the Fiscal Year ending December 31, 2000, EBITDA for such Fiscal Year, minus cash interest paid during such Fiscal Year, minus Cash Capital Expenditures made during such Fiscal Year, minus principal payments made on Funded Debt (excluding Revolving Loans) during such Fiscal Year, minus taxes paid in cash during such Fiscal Year, plus the decrease or minus the increase in Working Capital during such Fiscal Year. "Excluded Sale Proceeds" means (i) proceeds from Asset Sales described in clauses (i), (ii), (iii), (vi) and (viii) of Section 9.02, , (ii) proceeds from a sale, transfer and other disposition described in clause (iv), (v) or (vii) of Section 9.02 to the extent such proceeds are reinvested within 180 days following such sale, transfer or other disposition in Property used by a Loan Party in the ordinary course of its business, and (iii) proceeds as described in Section 1.01 of the Disclosure Letter. "Excluded Securities Proceeds" means (i) proceeds from the issuance of debt that are used to refinance outstanding indebtedness of the Borrower and (ii) proceeds from Attributable Debt, purchase money Indebtedness, Capital Leases and trade payables, in each case to the extent such Indebtedness is permitted under Section 9.01. "FDA" shall mean the Food and Drug Administration. "Federal Funds Rate" means, for any period, a fluctuating interest rate per annum equal for each day during such period to the weighted average of the rates on overnight federal funds transactions with members of the Federal Reserve System arranged by federal funds brokers, as published for such day (or, if such day is not a Business Day in New York, New York, for the next preceding Business Day) in New York, New York by the Federal Reserve Bank of New York, or if such rate is not so published for any day which is a Business Day in New York, New York, the average of the quotations for such day on such transactions received by the Administrative Agent from three federal funds brokers of recognized standing selected by the Administrative Agent. "Federal Reserve Board" means the Board of Governors of the Federal Reserve System or any Governmental Authority succeeding to its functions. "Financial Covenant Period" means, in determining compliance with the financial covenants hereunder, (i) with respect to the fiscal quarter ending December 31, 2000, the financial information for such fiscal quarter multiplied by four; (ii) with respect to the fiscal quarter ending March 31, 2001, the financial information for the fiscal quarters ending December 31, 2000 and March 31, 2001 16 multiplied by two; (iii) with respect to the fiscal quarter ending June 30, 2001, the financial information for the fiscal quarters ending December 31, 2000, March 31, 2001 and June 30, 2001 multiplied by four-thirds; and (iv) with respect to each fiscal quarter ending thereafter, the financial information for the immediately preceding four fiscal quarters ending on the last day of such fiscal quarter. "Fiscal Year" means the fiscal year of the Borrower and its Subsidiaries ending on December 31 of each calendar year. "Fixed Charge Coverage Ratio" means, for any Financial Covenant Period, the ratio of (i) EBITDA less Cash Capital Expenditures made during such period to (ii) Interest Expense plus the regularly scheduled installments of Funded Debt payable during such period. "Floating Rate Note Indenture" means the Indenture dated December 24, 1997 between Schein and The Bank of New York, as trustee for the issuance of Schein's Floating Rate Notes. "Floating Rate Notes" means the Floating Rate Notes due 2004 issued by Schein pursuant to the Floating Rate Note Indenture. "Forfeiture Proceeding" means any action, proceeding or investigation affecting any of the Loan Parties before any court, governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, or the receipt of notice by any such party that any of them is a suspect in or a target of any governmental inquiry or investigation, which may result in an indictment of any of them or the seizure or forfeiture of any of their property. "Funded Debt" means Debt which matures more than one year from the date of its creation or matures within one year from such date but is renewable or extendible, at the option of the debtor, to a date more than one year from such date or arises under a revolving credit or similar agreement which obligates the lender or lenders to extend credit during a period of more than one year from such date including, without limitation, all amounts of Funded Debt required to be paid or prepaid within one year from the date of determination. "Funding Date" means the date of the funding of a Loan. "GAAP" means generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board and the American Institute of Certified Public Accountants and the Financial Accounting Standards Board or in such other statements by such other entity as may be in general use by significant segments of the accounting profession as in effect from time to time. "Governing Documents" means, (a) with respect to any corporation, (i) the articles/certificate of incorporation (or the equivalent organizational documents) of such corporation, (ii) the by-laws (or the equivalent governing documents) of the corporation and (iii) any document setting forth the designation, amount and/or relative rights, limitations and preferences of any class or series of such corporation's Capital Stock; and (b) with respect to any general partnership, (i) the partnership agreement (or the equivalent organizational documents) of such partnership and (ii) any document setting forth the designation, amount and/or relative rights, limitations and preferences of any of the partnership interests; and (c) with respect to any limited partnership, (i) the partnership agreement (or the equivalent organizational documents) of such partnership, (ii) a certificate of limited partnership (or the equivalent organizational documents) and (iii) any document setting forth the designation, amount and/or relative rights, limitations and preferences of any of the partnership interests; and (d) with respect to any limited liability company, (i) the certificate of limited liability (or equivalent filings) of such limited liability 17 company, (ii) the operating agreement (or the equivalent organizational documents) of such limited liability company, and (iii) any document setting forth the designation, amount and/or relative rights, limitations and preferences of any of such company's membership interests. "Governmental Authority" means any nation or government, any federal, state, local or other political subdivision thereof and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. "Guaranties" means, collectively, the Guaranties, substantially in the form of the Guaranties referred to in the List of Closing Documents, executed by the Guarantors in favor of the Administrative Agent and the Lenders, as such Guaranties may be amended, supplemented or otherwise modified from time to time. "Guarantors" means, collectively, (i) from the Closing Date until the Merger Effective Date, the Initial Guarantors, (ii) on and after the Merger Effective Date, the Initial Guarantors, Schein and the Specified Schein Subsidiaries and (iii) Subsidiaries that execute a Guaranty and an Acknowledgment of New Loan Party from time to time hereafter. "Holder" means any Person entitled to enforce any of the Obligations, whether or not such Person holds any evidence of Indebtedness, including, without limitation, the Administrative Agent and each Lender. "Indebtedness" means, as applied to any Person at any time and without duplication, (a) all indebtedness, obligations or other liabilities of such Person (i) for borrowed money or evidenced by debt securities, debentures, acceptances, notes or other similar instruments, and any accrued interest, fees and charges relating thereto, (ii) under profit payment agreements or in respect of obligations to redeem, repurchase or exchange any Securities of such Person or to pay dividends in respect of any stock, (iii) with respect to letters of credit issued for such Person's account, (iv) to pay the deferred purchase price of property or services, except accounts payable and accrued expenses arising in the ordinary course of business, (v) in respect of Capital Leases or (vi) which are Accommodation Obligations of the type referred to in clauses (i) through (v) above; (b) all indebtedness, obligations or other liabilities of such Person or others secured by a Lien (other than a Customary Permitted Lien) on any property of such Person, whether or not such indebtedness, obligations or liabilities are assumed by such Person (but only to the extent of the fair market value of such property in the case of indebtedness, obligations or liabilities that are not assumed by such Person), all as of such time; (c) all indebtedness, obligations or other liabilities of such Person in respect of Interest Rate Contracts and foreign exchange contracts, net of liabilities owed to such Person by the counterparties thereon; (d) all preferred stock subject (upon the occurrence of any contingency or otherwise) to mandatory redemption; and (e) all contingent Contractual Obligations with respect to any of the foregoing. "Indemnified Matters" has the meaning ascribed to such term in Section 13.05. "Indemnitees" has the meaning ascribed to such term in Section 13.05. "Initial Guarantors" means Watson Laboratories, Inc., a Nevada corporation, Watson Laboratories, Inc. - New York, a New York corporation, Watson Laboratories, Inc. - Utah, a Delaware corporation, Watson Pharma, Inc., a Delaware corporation, The Rugby Group, Inc., a New York corporation, Rugby Laboratories, Inc., a New York corporation, and Royce Laboratories, Inc., a Florida corporation. 18 "Interest Coverage Ratio" means, with respect to any Financial Covenant Period, the ratio of (i) EBITDA to (ii) Interest Expense. "Interest Expense" means, for any period being measured hereunder, total interest expense for such period, whether paid or accrued (including the interest component of Capital Leases) of the Borrower and its Subsidiaries on a consolidated basis, as determined in conformity with GAAP. "Interest Rate Contracts" means interest rate exchange, swap, collar, cap, hedging or similar agreements. "Interest Rate Determination Date" has the meaning ascribed to such term in Section 4.02(c). "Investment" means, with respect to any Person, (i) any purchase or other acquisition by that Person of Securities, or of a beneficial interest in Securities, issued by any other Person, (ii) any purchase by that Person of all or substantially all of the assets of a business conducted by another Person, and (iii) any direct or indirect loan, advance (other than prepaid expenses, accounts receivable, advances to employees and similar items made or incurred in the ordinary course of business) or capital contribution by that Person to any other Person, including all Indebtedness to such Person arising from a sale of property by such Person other than in the ordinary course of its business. The amount of any Investment shall be the original cost of such Investment, plus the cost of all additions thereto less the amount of any return of capital or principal to the extent such return is in cash with respect to such Investment without any adjustments for increases or decreases in value or write-ups, write-downs or write-offs with respect to such Investment. "IRS" means the Internal Revenue Service and any Person succeeding to the functions thereof. "Issue" means, with respect to any Letter of Credit, either issue, or extend the expiry of, or renew, or increase the amount of, such Letter of Credit, and the term "Issued" or "Issuance" shall have a corresponding meaning. "Issuing Bank" means SG and any successor or assignee thereof. "Lender" has the meaning ascribed to such term in the preamble hereto. "Letter of Credit" means any Commercial Letter of Credit or Standby Letter of Credit. "Letter of Credit Fee" means the fees described in Section 4.03(b). "Letter of Credit Obligations" means, at any particular time, the sum of (i) all outstanding Reimbursement Obligations, plus (ii) the aggregate undrawn face amount of all outstanding Letters of Credit, plus (iii) the aggregate face amount of all Letters of Credit requested by the Borrower but not yet issued (unless the request for an unissued Letter of Credit has been denied pursuant to Section 2.04(c)). "Letter of Credit Reimbursement Agreement" means, with respect to a Letter of Credit, such form of application therefor and form of reimbursement agreement therefor (whether in a single or several documents, taken together) as the Issuing Bank from which the Letter of Credit is requested may employ in the ordinary course of business for its own account, with such modifications thereto as may be agreed upon by the Issuing Bank and the Borrower and as are not materially adverse (in the reasonable judgment of the Issuing Bank) to the interests of the Lenders; provided, however, in the event of any 19 conflict between the terms hereof and of any Letter of Credit Reimbursement Agreement, the terms hereof shall control. "Leverage Ratio" means, for any Financial Covenant Period, the ratio of (i) the outstanding Funded Debt for the Borrower and its Subsidiaries at the end of such period, to (ii) EBITDA for such period. "Liabilities and Costs" means all liabilities, obligations, responsibilities, losses, damages, personal injury, death costs, punitive damages, economic damages, consequential damages, treble damages, intentional, willful or wanton injury, damage or threat to the environment, natural resources or public health or welfare, costs and expenses (including, without limitation, attorney, expert and consulting fees and costs of investigation, feasibility studies or Remedial Action), fines, penalties and monetary sanctions, interest, direct or indirect, known or unknown, absolute or contingent, past, present or future. "Lien" means any mortgage, deed of trust, pledge, hypothecation, assignment, conditional sale agreement, deposit arrangement, security interest, encumbrance, lien (statutory or other), preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever in respect of any property of a Person, whether granted voluntarily or imposed by law, and includes the interest of a lessor under a Capital Lease or under any financing lease having substantially the same economic effect as any of the foregoing and the filing of any financing statement or similar notice (other than a financing statement filed by a "true" lessor pursuant to Section 9-408 of the Uniform Commercial Code), naming the owner of such property as debtor, under the Uniform Commercial Code or other comparable law of any jurisdiction. "List of Closing Documents" shall mean the List of Closing Documents attached hereto and made a part hereof as Exhibit E. "Loan Documents" means this Agreement, the Notes, the Administrative Agent's Fee Letter, the Guaranties, the Contribution Agreement, the Letter of Credit Reimbursement Agreements, any Interest Rate Contracts to which any Lender or any Affiliate of a Lender is a party, any foreign exchange contracts to which any Lender or any Affiliate of a Lender is a party, and all other instruments, agreements and written Contractual Obligations between any Loan Party and the Administrative Agent, the Issuing Bank or any Lender delivered to either the Administrative Agent, the Issuing Bank or such Lender pursuant to or in connection with the transactions contemplated hereby. "Loan Party" means the Borrower and each of the Guarantors. "Loans" means all Revolving Loans, Term Loans and Swing Loans. "Margin Stock" means "margin stock" as such term is defined in Regulation U. "Material Adverse Effect" means (i) a material adverse effect on the Acquisition, (ii) a material adverse effect upon the condition (financial or otherwise), operations, assets, business, properties, performance or prospects of the Borrower and its Subsidiaries and Schein and its Subsidiaries, taken as a whole, (iii) a material adverse effect on the ability of the Loan Parties to perform their respective payment obligations under the Loan Documents, or (iv) a material adverse effect on the ability of the Lenders or the Administrative Agent to enforce the Loan Documents. "Maturity Date" means August 4, 2005. 20 "Maximum Revolving Credit Amount" means, at any particular time, the Revolving Loan Commitments at such time. "Merger" means the merger to be consummated pursuant to the Merger Agreement. "Merger Agreement" means the Agreement and Plan of Merger, dated as of May 24, 2000, among the Borrower, WS Acquisition Corp. and Schein. "Merger Documents" means, collectively, the Merger Agreement and each of the other agreements, notes, guarantees, consents, instruments, certificates and opinions delivered by the Borrower or any other Person in connection with the Merger. "Merger Effective Date" means the date on which the Merger is consummated. "Multiemployer Plan" means an employee benefit plan as defined in Section 4001(a)(3) of ERISA which is, or within the immediately preceding six (6) years was, contributed to by either the Borrower or any ERISA Affiliate. "Net Cash Proceeds" means with respect to any Asset Sale or issuance of Securities, an amount equal to the gross cash proceeds of such Asset Sale or issuance, net of (i) attorneys' fees, accountants' fees, brokerage, consultant and other customary fees, underwriting commissions and other fees and expenses actually incurred in connection therewith, (ii) taxes paid or reasonably estimated to be payable as a result thereof and (iii) the amount of any Indebtedness secured by a Lien on the asset being sold that has been repaid with the proceeds of such Asset Sale. "Net Income" means, for any period being measured hereunder, the net earnings (or loss) after taxes of the Borrower and its Subsidiaries on a consolidated basis for such period taken as a single accounting period determined in conformity with GAAP. "Net Worth" means, as at any time of determination, the total assets of the Borrower and its Subsidiaries on a consolidated basis less total liabilities of the Borrower and its Subsidiaries on a consolidated basis, each determined in accordance with GAAP. "Notes" means the Revolving Loan Notes, the Term Loan Notes and the Swing Loan Notes. "Notice of Borrowing" means a notice substantially in the form of Exhibit C attached hereto and made a part hereof. "Notice of Continuation/Conversion" means a notice substantially in the form of Exhibit D. "Obligations" means all Loans, advances, debts, liabilities, obligations, covenants and duties owing by any Loan Party to any of the Agents, the Issuing Bank, any Lender, any Affiliate of any of the Agents, the Issuing Bank or any Lender, or any Person entitled to indemnification pursuant to Section 13.05 of this Agreement, of any kind or nature, present or future, whether or not evidenced by any note, guaranty or other instrument, whether arising by reason of an extension of credit, opening or amendment of a Letter of Credit or payment of a draft drawn thereunder, arising under this Agreement, the Notes or any other Loan Document, whether or not for the payment of money, whether arising by reason of an extension of credit, loan, guaranty, indemnification, Interest Rate Contract, foreign exchange contract or in any other manner, whether direct or indirect (including those acquired by assignment), 21 absolute or contingent, due or to become due, now existing or hereafter arising and however acquired. The term includes, without limitation, all interest, charges, expenses, fees, attorneys' fees and disbursements and any other sum chargeable to the Loan Parties under this Agreement, the Notes or any other Loan Document. "Officer's Certificate" means, with respect to any Person, a certificate executed on behalf of such Person by (i) the chairman or vice-chairman of such Person's board of directors or (ii) such Person's president, any of its vice-presidents, its chief financial officer, chief accounting officer, vice president of finance or its treasurer. "Operating Lease" means, as applied to any Person, any lease of any property (whether real, personal or mixed) by that Person as lessee which is not a Capital Lease. "Other Taxes" has the meaning ascribed to such term in Section 3.03(b). "PBGC" means the Pension Benefit Guaranty Corporation or any Person succeeding to the functions thereof. "Permits" means any permit, approval, authorization, license, variance, or permission required from a Governmental Authority under an applicable Requirement of Law. "Permitted Existing Indebtedness" means the Indebtedness identified as such in Section 1.01(A) of the Disclosure Letter. "Permitted Existing Investments" means the Investments identified as such in Section 1.01(B) of the Disclosure Letter. "Permitted Existing Liens" means the Liens on assets of any Loan Party identified as such in Section 1.01(C) of the Disclosure Letter. "Person" means any natural person, corporation, limited partnership, general partnership, joint stock company, joint venture, association, company, trust, bank, trust company, land trust, business trust, limited liability company or other organization, whether or not a legal entity, and any Governmental Authority. "Plan" means an employee benefit plan defined in Section 3(3) of ERISA (other than a Multiemployer Plan) in respect of which the Borrower or any ERISA Affiliate is, or within the immediately preceding six (6) years was, an "employer" as defined in Section 3(5) of ERISA. "Process Agent" has the meaning ascribed to such term in Section 13.20(a). "Property" means any and all interests in any kind of property or asset, whether real, personal or mixed, whether tangible or intangible. "Pro Rata Share" means, with respect to any Lender, the percentage obtained by dividing (i) with respect to a Revolving Loan Lender, such Lender's Revolving Loan Commitment (or, if after the Revolving Termination Date, the outstanding balances of such Lender's Revolving Loans) by the aggregate amount of all Revolving Loan Lenders' Revolving Loan Commitments (or, if after the Revolving Termination Date, the outstanding balances of all Revolving Loans); (ii) with respect to a Term Loan Lender, the outstanding amount of such Term Loan Lender's Term Loans by the aggregate outstanding amount of all Term Loans; and (iii) with respect to all Lenders, each Lender's Revolving 22 Loan Commitment (or, if after the Revolving Termination Date, the outstanding balance of such Lender's Revolving Loans), such Lender's outstanding Term Loans by the sum of all the Lenders' Revolving Loan Commitments (or, if after the Revolving Termination Date, the outstanding balance of all Revolving Loans) plus the outstanding Term Loans. "RCRA" means the Resource Conservation and Recovery Act of 1986, 42 U.S.C. Sections 6901 et seq., any amendments thereto, any successor statutes, and any regulations promulgated thereunder. "Register" has the meaning ascribed to such term in Section 13.01(c). "Regulation U" means Regulation U of the Federal Reserve Board as in effect from time to time. "Regulation X" means Regulation X of the Federal Reserve Board as in effect from time to time. "Reimbursement Date" is defined in Section 2.04(d)(i)(A). "Reimbursement Obligations" means, as to the Borrower, the aggregate reimbursement or repayment obligations of the Borrower with respect to amounts drawn under Letters of Credit. "Release" means release, spill, emission, leaking, pumping, injection, deposit, disposal, discharge, dispersal, leaching or migration into the indoor or outdoor environment or into or out of any Property, including the movement of Contaminants through or in the air, soil, surface water, groundwater or Property. "Remedial Action" means any action required to (i) clean up, remove, treat or in any other way address Contaminants in the indoor or outdoor environment; (ii) prevent the Release or threat of Release or minimize the further Release of Contaminants so they do not migrate or endanger or threaten to endanger public health or welfare or the indoor or outdoor environment; or (iii) perform pre-remedial studies and investigations and post-remedial monitoring and care. "Rental Payments" means, for any period, the aggregate amount of all rents paid or accrued under all Operating Leases for Equipment of any Loan Party as lessee (net of sublease income), all as determined on a combined basis in conformity with GAAP. "Replacement Event" means, with respect to any Lender, the appointment of, or the taking of possession by, a receiver, custodian, conservator, trustee or liquidator of such Lender, or the declaration by the appropriate regulatory authority that such Lender is insolvent. "Replacement Lender" means a financial institution which is an Eligible Assignee or is otherwise reasonably acceptable to the Administrative Agent and which is not a Loan Party or an Affiliate of a Loan Party. "Reportable Event" has the meaning ascribed to such term in Section 4043 of ERISA or regulations promulgated thereunder, other than an event which is not subject to the thirty (30) day notice requirement of such regulations. "Requirements of Law" means, as to any Person, the charter and by-laws or other organizational or governing documents of such Person, and any law, rule or regulation, or determination 23 of an arbitrator or a court or other Governmental Authority, in each case applicable to or binding upon such Person or any of its property or to which such Person or any of its property is subject including, without limitation, the Securities Act, the Securities Exchange Act, Regulations U and X, ERISA, the Fair Labor Standards Act and any certificate of occupancy, zoning ordinance, building, environmental or land use requirement or Permit or environmental, labor, employment, occupational safety or health law, rule or regulation. "Requisite Lenders" means Lenders whose Pro Rata Shares, in the aggregate, are greater than 50.1%; provided, however, that, in the event that the Commitments have been terminated pursuant to the terms of this Agreement, "Requisite Lenders" means Lenders whose aggregate ratable shares (stated as a percentage) of the aggregate outstanding amount of the Obligations are greater than 50.1%. "Restricted Junior Payment" means (i) any dividend or other distribution, direct or indirect, on account of any shares of any class of capital stock of, partnership interest of or other equity interest of, a Loan Party now or hereafter outstanding, except a dividend payable solely in shares of that class of stock or in any junior class of stock to the holders of that class, (ii) any redemption, retirement, sinking fund or similar payment, purchase or other acquisition for value, direct or indirect, of any shares of any class of capital stock of, partnership interest of or other equity interest of, a Loan Party now or hereafter outstanding, (iii) any payment or prepayment of principal of, premium, if any, or interest, fees or other charges on or with respect to, and any redemption, purchase, retirement, defeasance, sinking fund or similar payment and any claim for rescission with respect to, any subordinated indebtedness and (iv) any payment made to redeem, purchase, repurchase or retire, or to obtain the surrender of, any outstanding warrants, options or other rights to acquire shares of any class of capital stock of, partnership interest of or other equity interest of, a Loan Party now or hereafter outstanding. "Revolving Credit Obligations" means, at any particular time, the sum of (i) the outstanding principal amount of the Swing Loans at such time, plus (ii) the outstanding principal amount of the Revolving Loans at such time, plus (iii) Letter of Credit Obligations outstanding at such time. "Revolving Loan" has the meaning ascribed to such term in Section 2.01(a). "Revolving Loan Commitment" means, with respect to any Lender, the obligation of such Lender to make Revolving Loans pursuant to the terms and conditions of this Agreement, and which shall not exceed the principal amount set forth opposite such Lender's name under the heading "Revolving Loan Commitment" on the signature pages hereof or the signature page of the Assignment and Acceptance by which it became (or becomes) a Lender, as modified from time to time pursuant to the terms of this Agreement or to give effect to any applicable Assignment and Acceptance, and "Revolving Loan Commitments" means the aggregate principal amount of the Revolving Loan Commitments of all the Lenders, the maximum amount of which shall not exceed a principal amount of $200,000,000. "Revolving Loan Lender" means a Lender who has a Revolving Loan Commitment. "Revolving Loan Notes" has the meaning assigned thereto in Section 2.05(a)(i). "Schein" means Schein Pharmaceutical, Inc., a Delaware corporation. "Schein Parties" means (i) Schein and the Specified Schein Subsidiaries during the period from the Closing Date to the Merger Effective Date and (ii) Steris Laboratories, Inc., a Delaware corporation, and Marsam Pharmaceuticals, Inc., a Delaware corporation. 24 "Schein Payment Date" means the date which is the earlier of (i) the Schein Redemption Date and (ii) the seventieth day following the Closing Date. "Schein Redemption Date" means the date on which Schein redeems its Floating Rate Notes. "Securities" means any stock, shares, voting trust certificates, bonds, debentures, notes or other evidences of indebtedness, secured or unsecured, convertible, subordinated or otherwise, or any certificates of interest, shares, or participations in temporary or interim certificates for the purchase or acquisition of, or any right to subscribe to, purchase or acquire any of the foregoing, but shall not include any evidence of the Obligations. "Securities Act" means the Securities Act of 1933, as amended from time to time, and any successor statute. "Securities Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time, and any successor statute. "Senior Note Indenture" means the Senior Indenture dated May 18, 1998 between the Company and First Union National Bank, as Trustee for the issuance of the Company's Senior Notes. "Senior Notes" means the Senior Notes due 2008 issued by the Borrower pursuant to the Senior Note Indenture. "Six Month Date" means January 8, 2001. "Solvent", when used with respect to any Person, means that at the time of determination: (a) the fair market value of its assets is in excess of the total amount of its liabilities (including, without limitation, contingent liabilities); and (b) the present fair saleable value of its assets is greater than its probable liability on its existing debts as such debts become absolute and matured; and (c) it is then able and expects to be able to pay its debts (including, without limitation, contingent debts and other commitments) as they mature; and (d) it has capital sufficient to carry on its business as conducted and as proposed to be conducted. "Specified Schein Subsidiaries" means Danbury Pharmacal, Inc., a Delaware corporation, and Danbury Pharmacal Puerto Rico, Inc., a Delaware corporation. "Standby Letter of Credit" means any letter of credit issued by an Issuing Bank pursuant to Section 2.04 for the account of the Borrower, which is not a Commercial Letter of Credit. "Strategic Partner" means any agreement or arrangement with one or more other Persons to develop, license, manufacture, market, sell or distribute products in lines of businesses that do not violate Section 9.07. "Subsidiary" means any corporation or other entity of which securities or other ownership interests having ordinary voting power to elect a majority of the board of directors or other 25 persons performing similar functions are at the time directly or indirectly owned or controlled by such Person, one or more of the other subsidiaries of such Person or any combination thereof. "Swing Loan" has the meaning assigned thereto in Section 2.03(a). "Swing Loan Lender" means SG, in its individual capacity, or, in the event SG is not the Administrative Agent, the Administrative Agent (or any Affiliate of the Administrative Agent designated by the Administrative Agent), in its individual capacity. "Swing Loan Note" means one or more notes evidencing the Borrower's Obligation to repay the Swing Loans. "Taxes" has the meaning ascribed to such term in Section 3.03(a). "Tender Offer" means the Offer to Purchase for Cash, dated June 6, 2000, made by WS Acquisition Corp., a Delaware corporation and wholly-owned Subsidiary of the Borrower. "Tender Offer Documents" means, collectively, the Tender Offer and each of the other agreements, notes, guarantees, consents, instruments, certificates and opinions delivered by the Borrower or any other Person in connection with the Tender Transaction. "Tender Transaction" means the consummation of the transactions contemplated by the Tender Offer. "Term Loan" has the meaning ascribed to such term in Section 2.02(a)(i). "Term Loan Commitment" means, with respect to any Lender, the obligation of such Lender to make Term Loans pursuant to the terms and conditions of this Agreement, and which shall not exceed the principal amount set forth opposite such Lender's name under the heading "Term Loan Commitment" on the signature pages hereof or the signature page of the Assignment and Acceptance by which it became (or becomes) a Lender, as modified from time to time pursuant to the terms of this Agreement or to give effect to any applicable Assignment and Acceptance, and "Term Loan Commitments" means the aggregate principal amount of the Term Loan Commitments of all the Lenders, the maximum amount of which shall not exceed $500,000,000. "Term Loan Lender" means a Lender who has a Term Loan Commitment. "Term Loan Notes" has the meaning assigned thereto in Section 2.05(a)(ii). "Termination Event" means (i) any Reportable Event with respect to any Benefit Plan, (ii) the withdrawal of the Borrower or an ERISA Affiliate from a Benefit Plan during a plan year in which it was a "substantial employer" as defined in Section 4001(a)(2) of ERISA, (iii) the occurrence of an obligation arising under Section 4041 of ERISA of the Borrower or an ERISA Affiliate to provide affected parties with a written notice of an intent to terminate a Benefit Plan in a distress termination described in Section 4041(c) of ERISA, (iv) the institution by the PBGC of proceedings to terminate any Benefit Plan, (v) any event or condition which constitutes grounds under Section 4042 of ERISA for the appointment of a Trustee to administer a Benefit Plan, or (vi) the partial or complete withdrawal of the Borrower or any ERISA Affiliate from a Multiemployer Plan. "Transaction Documents" means, collectively, the Loan Documents, the Tender Offer Documents and, on and after the Merger Effective Date, the Merger Documents. 26 "Type" means, with respect to any Loan, its nature as a Eurodollar Rate Loan or a Base Rate Loan. "Uniform Commercial Code" means the Uniform Commercial Code as enacted in the State of New York, as it may be amended from time to time. "Unused Commitment Fee" shall have the meaning ascribed to such term in Section 4.03(a). "Voting Securities" means with respect to any Person, Securities with respect to any class or classes of capital stock of such Person entitling the holders thereof ordinarily to vote in the election of the members of the board of directors of such Person. "Working Capital" means, as at any date of determination, an amount equal to Current Assets minus Current Liabilities. "Wholly Owned Subsidiary" means a Subsidiary of the Borrower all the Equity Interests of which are owned by the Borrower or another Wholly Owned Subsidiary. 1.02. Computation of Time Periods. In this Agreement, in the computation of periods of time from a specified date to a later specified date, the word "from" means "from and including" and the words "to" and "until" each mean "to but excluding". Periods of days referred to in this Agreement shall be counted in calendar days unless Business Days are expressly prescribed. Any period determined hereunder by reference to a month or months or year or years shall end on the day in the relevant calendar month in the relevant year, if applicable, immediately preceding the date numerically corresponding to the first day of such period, provided that if such period commences on the last day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month during which such period is to end), such period shall, unless otherwise expressly required by the other provisions of this Agreement, end on the last day of the calendar month. 1.03. Accounting Terms. For purposes of this Agreement, all accounting terms not otherwise defined herein shall have the meanings assigned to them in conformity with GAAP. 1.04. Other Terms. Terms not otherwise defined herein which are defined in, or used in, Article 9 of the Uniform Commercial Code shall have the respective meanings assigned to such terms in Article 9 of the Uniform Commercial Code. ARTICLE II AMOUNTS AND TERMS OF LOANS 2.01. Revolving Loan Facility. (a) Availability. Subject to the terms and conditions set forth in this Agreement, each Revolving Loan Lender hereby severally agrees to make revolving loans (each individually, a "Revolving Loan" and, collectively, the "Revolving Loans") to the Borrower from time to time during the period from the Closing Date to the Business Day immediately preceding the Commitment Termination Date, in an amount not to exceed such Lender's Pro Rata Share of the Availability at such time; provided, however, that on the Closing Date, the Availability shall be limited to $100,000,000. Each Base Rate Loan shall be for a minimum amount of Five Million Dollars ($5,000,000) and in integral multiples of One Million Dollars ($1,000,000) in excess of that amount. Each Eurodollar Rate Loan shall be for a 27 minimum amount of Five Million Dollars ($5,000,000) and in integral multiples of One Million Dollars ($1,000,000) in excess of that amount. All Revolving Loans comprising the same Borrowing under this Agreement shall be made by the Lenders simultaneously and proportionately to their then respective Pro Rata Shares, it being understood that no Revolving Loan Lender shall be responsible for any failure by any other Revolving Loan Lender to perform its obligation to make a Revolving Loan hereunder nor shall the Revolving Loan Commitment of any Revolving Loan Lender be increased or decreased as a result of any such failure. Subject to the provisions of this Agreement, the Borrower may repay any outstanding Revolving Loan made to it on any day which is a Business Day and any amounts so repaid may be reborrowed in accordance with the provisions of this Section 2.01(a). (b) Notice of Borrowing. When the Borrower desires to borrow under this Section 2.01, the Borrower shall deliver to the Administrative Agent a Notice of Borrowing, signed by it, no later than 1:00 p.m. (New York time) (i) on the proposed Funding Date, in the case of a Borrowing of Base Rate Loans, and (ii) at least three (3) Business Days in advance of the proposed Funding Date, in the case of a Borrowing of Eurodollar Rate Loans; provided that no Borrowing of Eurodollar Rate Loans shall be made on the Closing Date. Such Notice of Borrowing shall specify (i) the proposed Funding Date (which shall be a Business Day), (ii) the amount of the proposed Borrowing, (iii) whether the proposed Borrowing will be of Base Rate Loans or Eurodollar Rate Loans, and (iv) in the case of Eurodollar Rate Loans, the requested Eurodollar Interest Period. In lieu of delivering such a Notice of Borrowing, the Borrower may give the Administrative Agent telephonic notice of any proposed Borrowing by the time required under this Section 2.01(b) if it confirms such notice by delivery of the Notice of Borrowing to the Administrative Agent promptly, but in no event later than 5:00 p.m. (New York time) on the same day. Any Notice of Borrowing (or telephonic notice in lieu thereof) given pursuant to this Section 2.01(b) shall be irrevocable. (c) Making of Revolving Loans. (i) Promptly after receipt of a Notice of Borrowing under Section 2.01(b) (or telephonic notice in lieu thereof), the Administrative Agent shall notify each Lender by facsimile, or other similar form of transmission, of the proposed Borrowing. Each Lender shall deposit an amount equal to its Pro Rata Share of the amount requested by the Borrower to be made as Revolving Loans in the Administrative Agent's Account at its office in New York, New York, in immediately available funds, not later than 3:00 p.m. (New York time) on any Funding Date applicable thereto. Subject to the fulfillment of the conditions precedent set forth in Section 5.02, the Administrative Agent shall make the proceeds of such amounts received by it available to the Borrower at the Administrative Agent's office in New York, New York on such Funding Date (or on the date received if later than such Funding Date). The failure of any Lender to deposit the amount described above with the Administrative Agent on the applicable Funding Date shall not relieve any other Lender of its obligations hereunder to make its Revolving Loan on such Funding Date. (ii) Unless the Administrative Agent shall have been notified by any Lender no later than 3:00 p.m. (New York time) on the applicable Funding Date in respect of any Borrowing of Revolving Loans that such Lender does not intend to fund its Revolving Loan requested to be made on such Funding Date, the Administrative Agent may assume that such Lender has funded its Revolving Loan and is depositing the proceeds thereof with the Administrative Agent on the Funding Date, and the Administrative Agent in its sole discretion may, but shall not be obligated to, disburse a corresponding amount to the Borrower on the Funding Date. If the Revolving Loan proceeds corresponding to that amount are advanced to the Borrower by the Administrative Agent but are not in fact deposited with the Administrative Agent by such Lender on or prior to the applicable Funding Date, such Lender agrees to pay, and in addition the Borrower agrees to repay, to the Administrative Agent forthwith on demand such corresponding amount, together with interest thereon, for each day from the date such amount is disbursed to or for the benefit of the Borrower until the date such amount is paid or repaid to the Administrative Agent, (A) in the case of the Borrower, at the interest rate applicable to such Borrowing 28 and (B) in the case of such Lender, at the Federal Funds rate for the first Business Day, and thereafter at the interest rate applicable to such Borrowing. If such Lender shall pay to the Administrative Agent the corresponding amount, the amount so paid shall constitute such Lender's Revolving Loan, and if both such Lender and the Borrower shall pay and repay such corresponding amount, the Administrative Agent shall promptly pay to the Borrower such corresponding amount. This Section 2.01(c)(ii) does not relieve any Lender of its obligation to make its Revolving Loan on any Funding Date; nor does this Section relieve the Borrower of its obligation to pay or repay any Lender funding its Revolving Loan pursuant to this Section interest on such Revolving Loan from such Funding Date until the date on which such Revolving Loan is repaid in full. (d) Repayment of Revolving Loans. The Revolving Loan Commitments shall terminate, and all outstanding Revolving Loans shall be paid in full, on the Commitment Termination Date. 2.02. Term Loan Facility. (a) Amount of Loans. Subject to the terms and conditions set forth in this Agreement, each Term Loan Lender hereby severally agrees to make a Term Loan (each individually, a "Term Loan" and, collectively, the "Term Loans") to the Borrower on the Closing Date in an amount not to exceed such Term Loan Lender's Term Loan Commitment. All Term Loans shall be made by the Term Loan Lenders simultaneously and proportionately to their then respective Pro Rata Shares, it being understood that no Term Loan Lender shall be responsible for any failure by any other Term Loan Lender to perform its obligation to make a Term Loan hereunder nor shall the Commitment of any Term Loan Lender be increased or decreased as a result of any such failure. (b) Notice of Borrowing. The Borrower shall deliver to the Administrative Agent a Notice of Borrowing, signed by it, no later than 1:00 p.m. (New York time) on the Business Day immediately preceding the proposed Closing Date. Such Notice of Borrowing shall specify (i) the proposed Funding Date (which shall be a Business Day and the Closing Date) and (ii) the amount of the proposed Borrowing with respect to the Term Loans. All Term Loans shall be Base Rate Loans on the Closing Date but after the Closing Date may be converted to Eurodollar Rate Loans pursuant to Section 4.01(c). Any Notice of Borrowing given pursuant to this Section 2.02(b) shall be irrevocable. (c) Making of Term Loans. Promptly after receipt of the Notice of Borrowing under Section 2.02(b), the Administrative Agent shall notify each Term Loan Lender by telecopy, or other similar form of transmission, of the proposed Borrowing. Each Term Loan Lender shall deposit an amount equal to its Pro Rata Share of the amount requested by the Borrower specified in such Notice of Borrowing to be made as Term Loans in the Administrative Agent's Account at its office in New York, New York, in immediately available funds, not later than 3:00 p.m. (New York time) on the Closing Date. Subject to the fulfillment of the conditions precedent set forth in Sections 5.01 and 5.02, the Administrative Agent shall make the proceeds of such amounts received by it available to the Borrower at the Administrative Agent's office in New York, New York on the Closing Date. The failure of any Term Loan Lender to deposit the amount described above with the Administrative Agent on the Closing Date shall not relieve any other Term Loan Lender of its obligations hereunder to make its Term Loan on the Closing Date. (d) Repayment of Term Loans. (i) The principal amount of the Term Loans shall be payable in quarterly installments on the first day of January, April, July and October in each year, commencing on October 1, 2000 and ending on the Maturity Date, in the amounts set forth below: October 1, 2000 $15,000,000 January 1, 2001 $15,000,000
29 April 1, 2001 $15,000,000 July 1, 2001 $15,000,000 October 1, 2001 $20,000,000 January 1, 2002 $20,000,000 April 1, 2002 $20,000,000 July 1, 2002 $20,000,000 October 1, 2002 $25,000,000 January 1, 2003 $25,000,000 April 1, 2003 $25,000,000 July 1, 2003 $25,000,000 October 1, 2003 $30,000,000 January 1, 2004 $30,000,000 April 1, 2004 $30,000,000 July 1, 2004 $30,000,000 October 1, 2004 $35,000,000 January 1, 2005 $35,000,000 April 1, 2005 $35,000,000 Maturity Date $35,000,000
provided, however, that the last installment shall be in the amount necessary to repay in full the outstanding principal amount of the Term Loans. 2.03. Swing Loans. (a) Swing Loans. Subject to the terms and conditions set forth herein, the Swing Loan Lender may, in its sole discretion, make loans (the "Swing Loans") to the Borrower, from time to time after the Closing Date and prior to the Commitment Termination Date, up to an aggregate principal amount at any one time outstanding which shall not exceed an amount equal to $5,000,000. The Swing Loan Lender shall have no duty to make or to continue to make Swing Loans. All Swing Loans shall be payable on demand with accrued interest thereon and shall otherwise be subject to all the terms and conditions applicable to Revolving Loans, except that (x) Swing Loans shall not have a minimum amount requirement and (y) all interest on the Swing Loans made by the Swing Loan Lender shall be payable to the Swing Loan Lender solely for its own account. (b) Notice of Borrowing. When the Borrower desires to borrow under this Section 2.03, it shall deliver to the Administrative Agent an irrevocable Notice of Borrowing, signed by it, no later than 3:00 p.m. (New York time) on the day of the proposed Borrowing of a Swing Loan. Such Notice of Borrowing shall specify (i) the date of the proposed Borrowing (which shall be a Business Day), (ii) the amount of the proposed Borrowing and (iii) instructions for the disbursement of the proceeds of the proposed Borrowing. In lieu of delivering such a Notice of Borrowing, the Borrower shall give the Administrative Agent irrevocable telephonic notice of any proposed Borrowing by 3:00 p.m. (New York time) on the day of the proposed Borrowing, and shall confirm such notice by delivery of the Notice of Borrowing by facsimile to the Administrative Agent promptly, but in no event later than 4:00 p.m. (New York time) on the same day. All Swing Loans shall be Base Rate Loans. (c) Making of Swing Loans. The Swing Loan Lender shall deposit the amount it intends to fund, if any, in respect of the Swing Loans requested by the Borrower with the Administrative Agent at its office in New York, New York not later than 3:00 p.m. (New York time) in immediately available funds on the date of the proposed Borrowing applicable thereto. The Swing Loan Lender shall not make any Swing Loan during the period commencing on the first Business Day after it receives written notice from the Requisite Lenders that one or more of the conditions precedent contained in Section 5.02 shall not on such date be satisfied, and ending when such conditions are satisfied, and the Swing Loan Lender shall not otherwise be required to determine that, or take notice whether, the conditions precedent set 30 forth in Section 5.02 hereof have been satisfied in connection with the making of any Swing Loan. Subject to the preceding sentence, the Administrative Agent shall make such proceeds available to the Borrower at the Administrative Agent's office in New York, New York on the date of the proposed Borrowing and shall disburse such proceeds to the Borrower in accordance with the Borrower's disbursement instructions set forth in the applicable Notice of Borrowing. (d) Repayment of Swing Loans. The Borrower shall repay the outstanding Swing Loans owing to the Swing Loan Lender (i) upon demand by the Swing Loan Lender and (ii) on the Commitment Termination Date. In the event that the Borrower fails to repay any Swing Loans, together with interest thereon, as set forth in the first sentence of this paragraph, then, upon the request of the Swing Loan Lender, each Revolving Loan Lender shall make Revolving Loans to the Borrower (irrespective of the satisfaction of the conditions in Section 5.02 or the requirement to deliver a Notice of Borrowing in Section 2.01(b), which conditions and requirement such Revolving Loan Lenders irrevocably waive) in an amount equal to such Revolving Loan Lender's Pro Rata Share of the aggregate amount of the Swing Loans then outstanding (net of that portion of such Swing Loan, if any, owing to such Revolving Loan Lender in its capacity as a Swing Loan Lender) after giving effect to any prepayments and repayments made by the Borrower, and the Borrower hereby authorizes the Administrative Agent to apply the proceeds of such Revolving Loans to the repayment of such Swing Loans. To the extent the Administrative Agent receives any amounts in prepayment or repayment of outstanding Revolving Loans prior to such request, the Administrative Agent shall apply such amounts when received to the repayment of the Swing Loans then outstanding. The failure of any Revolving Loan Lender to make available to the Administrative Agent its Pro Rata Share of such Revolving Loans shall not relieve any other Revolving Loan Lender of its obligation hereunder to make available to the Administrative Agent such other Revolving Loan Lender's Pro Rata Share of such Revolving Loans on the date of such request. 2.04. Letters of Credit. Subject to the terms and conditions set forth herein, the Issuing Bank hereby agrees to Issue for the account of the Borrower one or more Letters of Credit during the period from the Closing Date to the date which is the fifth Business Day prior to the Commitment Termination Date, subject to the following provisions: (a) Types and Amounts. The Issuing Bank shall not have any obligation to Issue, and shall not Issue any Letter of Credit at any time: (i) if the aggregate Letter of Credit Obligations with respect to the Issuing Bank, after giving effect to the Issuance of the Letter of Credit requested hereunder, shall exceed $50,000,000 or any limit imposed by law or regulation upon the Issuing Bank; (ii) if the Issuing Bank receives written notice (A) from the Administrative Agent at or before 3:00 p.m. (New York time) on the date of the proposed Issuance of such Letter of Credit that immediately after giving effect to the Issuance of such Letter of Credit, (1) the Letter of Credit Obligations at such time would exceed $50,000,000 or (2) the Revolving Credit Obligations at such time would exceed the Maximum Revolving Credit Amount at such time, or (B) from the Requisite Lenders at or before 1:00 p.m. (New York time) on the date of the proposed Issuance of such Letter of Credit that one or more of the conditions precedent contained in Article V, as applicable, would not on such date be satisfied (or waived pursuant to Section 13.09), unless such conditions are thereafter satisfied or waived and written notice of such satisfaction or waiver is given to the Issuing Bank by the Administrative Agent (and the Issuing Bank shall not otherwise be required to determine that, or take notice whether, the conditions precedent set forth in Article V, as applicable, have been satisfied or waived); or (iii) if the Letter of Credit requested would have an expiration date later than the earlier of (A) the date which occurs 180 days following the date of Issuance with respect to a Commercial 31 Letter of Credit or the date which occurs 360 days following the date of Issuance with respect to a Standby Letter of Credit or (B) five Business Days immediately preceding the Commitment Termination Date; provided that any Letter of Credit may, by its terms, be renewable or automatically renew for successive periods of up to one year so long as such Letter of Credit expires on or prior to the date referred to in clause (B) above; or (iv) which is in a currency other than Dollars. (b) Conditions. In addition to being subject to the satisfaction of the conditions precedent contained in Article V, as applicable, the obligation of the Issuing Bank to Issue any Letter of Credit is subject to the satisfaction in full of the following conditions: (i) if the Issuing Bank so requests, the Borrower shall have executed and delivered to such Issuing Bank and the Administrative Agent a Letter of Credit Reimbursement Agreement and such other documents and materials as are customarily required for the issuance of similar Letters of Credit by the Issuing Bank; (ii) the terms of the proposed Letter of Credit shall be satisfactory to the Issuing Bank in its reasonable credit judgment; and (iii) no order, judgment or decree of any court, arbitrator or Governmental Authority shall purport by its terms to enjoin or restrain the Issuing Bank from Issuing the Letter of Credit and no law, rule or regulation applicable to the Issuing Bank and no request or directive (whether or not having the force of law and whether or not the failure to comply therewith would be unlawful) from a Governmental Authority with jurisdiction over the Issuing Bank shall prohibit or request that the Issuing Bank refrain from the Issuance of letters of credit generally or the Issuance of such Letter of Credit. (c) Issuance of Letters of Credit. The Borrower shall give the Issuing Bank and the Administrative Agent written notice that it is requesting that the Issuing Bank Issue a Letter of Credit not later than 3:00 p.m. (New York time) on the third Business Day preceding the requested date for Issuance thereof, or such shorter notice as may be reasonably acceptable to such Issuing Bank and the Administrative Agent. Such notice shall be irrevocable unless and until such request is denied by the applicable Issuing Bank pursuant to the terms hereof and shall specify (A) the stated amount of the Letter of Credit requested, (B) the effective date (which shall be a Business Day) of Issuance of such Letter of Credit, (C) the date on which such Letter of Credit is to expire, (D) the Person for whose benefit such Letter of Credit is to be Issued, and (E) other relevant terms of such Letter of Credit. Such Issuing Bank shall notify the Administrative Agent immediately upon receipt of a written notice from the Borrower requesting that a Letter of Credit be Issued and, upon the Administrative Agent's request therefor, send a copy of such notice to the Administrative Agent. The Issuing Bank shall give the Administrative Agent written notice, or telephonic notice confirmed promptly thereafter in writing, of the Issuance of a Letter of Credit (which notice the Administrative Agent shall promptly transmit by telegram, telex, facsimile, telephone or similar transmission to each Lender). (d) Reimbursement Obligations; Duties of Issuing Banks. (i) Notwithstanding any provisions to the contrary in any Letter of Credit Reimbursement Agreement: (A) the Borrower shall reimburse the Issuing Bank for amounts drawn under each Letter of Credit, no later than the date (the "Reimbursement Date") which is one Business Day after the Borrower receives notice from the Issuing Bank that a draft has been presented under such Letter of Credit; and 32 (B) all Reimbursement Obligations with respect to any Letter of Credit shall bear interest at the rate applicable to Base Rate Loans in accordance with Section 4.01(a) from the date of the relevant drawing under such Letter of Credit until the Reimbursement Date and thereafter at the rate applicable in accordance with Section 4.01(d). (ii) The Issuing Bank shall give the Administrative Agent written notice, or telephonic notice confirmed promptly thereafter in writing, of all drawings under a Letter of Credit and the payment (or the failure to pay when due) by the Borrower on account of a Reimbursement Obligation (which notice the Administrative Agent shall promptly transmit by telegram, telex, facsimile or similar transmission to each Lender). (iii) No action taken or omitted, in good faith and without gross negligence or willful misconduct, by the Issuing Bank under or in connection with any Letter of Credit shall put the Issuing Bank under any resulting liability to any Revolving Loan Lender, the Borrower or, so long as it is not Issued in violation of Section 2.04(a), relieve any Revolving Loan Lender of its obligations hereunder to the Issuing Bank. Solely as between the Issuing Bank and the Revolving Loan Lenders, in determining whether to pay under any Letter of Credit, the Issuing Bank shall have no obligation to the Revolving Loan Lenders other than to confirm that any documents required to be delivered under a respective Letter of Credit appear to have been delivered and that they appear on their face to comply with the requirements of such Letter of Credit. (e) Participations. (i) Immediately upon Issuance by the Issuing Bank of any Letter of Credit in accordance with the procedures set forth in this Section 2.04, each Revolving Loan Lender shall be deemed to have irrevocably and unconditionally purchased and received from the Issuing Bank, without recourse or warranty, an undivided interest and participation in such Letter of Credit to the extent of such Revolving Loan Lender's Pro Rata Share, including, without limitation, all obligations of the Borrower with respect thereto (other than amounts owing to the Issuing Bank under Section 2.04(g)) and any security therefor and guaranty pertaining thereto. (ii) If the Issuing Bank makes any payment under any Letter of Credit and the Borrower does not repay such amount to the Issuing Bank on the Reimbursement Date, the Issuing Bank shall promptly notify the Administrative Agent, which shall promptly notify each Revolving Loan Lender, and each Revolving Loan Lender shall promptly and unconditionally pay to the Administrative Agent for the account of the Issuing Bank, in immediately available funds, the amount of such Revolving Loan Lender's Pro Rata Share of such payment (net of that portion of such payment, if any, made by such Revolving Loan Lender in its capacity as the Issuing Bank), and the Administrative Agent shall promptly pay to the Issuing Bank such amounts received by it, and any other amounts received by the Administrative Agent for the Issuing Bank's account, pursuant to this Section 2.04(e). All such payments shall constitute Revolving Loans made to the Borrower pursuant to Section 2.01 (irrespective of the satisfaction of the conditions in Section 5.02 or the requirement in Section 2.01(b) to deliver a Notice of Borrowing, which conditions and requirement, for the purpose of refunding any Reimbursement Obligation owing to the Issuing Bank, the Revolving Loan Lenders irrevocably waive). If a Revolving Loan Lender does not make its Pro Rata Share of the amount of such payment available to the Administrative Agent, such Revolving Loan Lender agrees to pay to the Administrative Agent for the account of the Issuing Bank, forthwith on demand, such amount together with interest thereon, for the first Business Day after the date such payment was first due at the Federal Funds Rate, and thereafter at the interest rate then applicable to a Base Rate Loan in accordance with Section 4.01(a). The failure of any such Revolving Loan Lender to make available to the Administrative Agent for the account of an Issuing Bank its Pro Rata Share of any such payment shall neither relieve any other Revolving Loan Lender of its obligation hereunder to make available to the Administrative Agent for the account of the Issuing Bank such other Revolving Loan Lender's Pro Rata Share of any payment on the date such 33 payment is to be made nor increase the obligation of any other Revolving Loan Lender to make such payment to the Administrative Agent. This Section does not relieve the Borrower of its obligation to pay or repay any Revolving Loan Lender funding its Pro Rata Share of such payment pursuant to this Section interest on the amount of such payment from such date such payment is to be made until the date on which payment is repaid in full. (iii) Whenever the Issuing Bank receives a payment on account of a Reimbursement Obligation, including any interest thereon, as to which any Revolving Loan Lender has made a Revolving Loan pursuant to clause (ii) of this Section, the Issuing Bank shall promptly pay to the Administrative Agent such payment in accordance with Section 3.02. Each such payment shall be made by the Issuing Bank or the Administrative Agent, as the case may be, on the Business Day on which such Person receives the funds paid to such Person pursuant to the preceding sentence, if received prior to 11:00 a.m. (New York time) on such Business Day, and otherwise on the next succeeding Business Day. (iv) Upon the request of any Lender, the Issuing Bank shall furnish such Lender copies of any Letter of Credit or Letter of Credit Reimbursement Agreement to which the Issuing Bank is party and such other documentation as reasonably may be requested by such Lender. (v) The obligations of a Revolving Loan Lender to make payments to the Administrative Agent for the account of the Issuing Bank with respect to a Letter of Credit shall be irrevocable, shall not be subject to any qualification or exception whatsoever except willful misconduct or gross negligence of the Issuing Bank, and shall be honored in accordance with this Article II (irrespective of the satisfaction of the conditions described in Article V, as applicable, which conditions, for the purposes of refunding any Reimbursement Obligation owed to the Issuing Bank, such Revolving Loan Lenders irrevocably waive) under all circumstances, including, without limitation, any of the following circumstances: (A) any lack of validity or enforceability hereof or of any of the other Loan Documents; (B) the existence of any claim, setoff, defense or other right which the Borrower may have at any time against a beneficiary named in a Letter of Credit or any transferee of a beneficiary named in a Letter of Credit (or any Person for whom any such transferee may be acting), the Administrative Agent, the Issuing Bank, any Lender, or any other Person, whether in connection herewith, with any Letter of Credit, the transactions contemplated herein or any unrelated transactions (including any underlying transactions between the account party and beneficiary named in any Letter of Credit); (C) any draft, certificate or any other document presented under the Letter of Credit having been determined to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect; (D) the surrender or impairment of any security for the performance or observance of any of the terms of any of the Loan Documents; (E) any failure by the Issuing Bank to make any reports required pursuant to Section 2.04(h) or the inaccuracy of any such report; or (F) the occurrence of any Event of Default or Default. 34 (f) Payment of Reimbursement Obligations. (i) The Borrower unconditionally agrees to pay to the Issuing Bank, in Dollars, the amount of all Reimbursement Obligations, interest and other reasonable amounts payable to the Issuing Bank under or in connection with the Letters of Credit when such amounts are due and payable, irrespective of any claim, setoff, defense or other right which the Borrower may have at any time against the Issuing Bank or any other Person. (ii) In the event any payment by the Borrower received by the Issuing Bank with respect to a Letter of Credit and distributed by the Administrative Agent to the Lenders on account of their participation is thereafter set aside, avoided or recovered from the Issuing Bank in connection with any receivership, liquidation or bankruptcy proceeding, each such Lender which received such distribution shall, upon demand by the Issuing Bank, contribute such Lender's Pro Rata Share of the amount set aside, avoided or recovered together with interest at the rate required to be paid by the Issuing Bank upon the amount required to be repaid by it. (g) Issuing Bank Charges. The Borrower shall pay to the Issuing Bank, solely for its own account, the standard charges assessed by the Issuing Bank in connection with the issuance, administration, amendment and payment or cancellation of Letters of Credit and such compensation in respect of such Letters of Credit for the Borrower's account as may be agreed upon by the Borrower and the Issuing Bank from time to time. (h) Issuing Bank Reporting Requirements. The Issuing Bank shall, no later than the tenth (10th) Business Day following the last day of each calendar month, provide to the Administrative Agent and the Borrower a schedule for Letters of Credit issued by it, in form and substance reasonably satisfactory to the Administrative Agent and the Borrower, setting forth the aggregate Letter of Credit Obligations outstanding to it at the end of each month and any information requested by the Administrative Agent or the Borrower relating to the date of issue, account party, amount, expiration date and reference number of each Letter of Credit issued by it. (i) Indemnification; Exoneration. (A) In addition to all other amounts payable to the Issuing Bank, the Borrower hereby agrees to defend, indemnify, and save the Administrative Agent, the Issuing Bank and each Lender harmless from and against any and all claims, demands, liabilities, penalties, damages, losses (other than loss of profits), costs, charges and expenses (including reasonable attorneys' fees but excluding taxes) which the Administrative Agent, the Issuing Bank or such Lender may incur or be subject to as a consequence, direct or indirect, of (i) the Issuance of any Letter of Credit other than as a result of the gross negligence or willful misconduct of the Issuing Bank, as determined by a court of competent jurisdiction, or (ii) the failure of the Issuing Bank issuing a Letter of Credit to honor a drawing under such Letter of Credit as a result of any act or omission, whether rightful or wrongful, of any present or future de jure or de facto government or Governmental Authority. (B) As between the Borrower on the one hand and the Administrative Agent, the Lenders and the Issuing Bank on the other hand, the Borrower assumes all risks of the acts and omissions of, or misuse of Letters of Credit by, the respective beneficiaries of the Letters of Credit. In furtherance and not in limitation of the foregoing, subject to the provisions of the Letter of Credit Reimbursement Agreements, the Administrative Agent, the Issuing Bank and the Lenders shall not be responsible for (except to the extent resulting from their gross negligence or willful misconduct, as determined by a court of competent jurisdiction): (i) the form, validity, legality, sufficiency, accuracy, genuineness or legal effect of any document submitted by any party in connection with the application for and Issuance of the Letters of Credit, even if it should in fact prove to be in any or all respects invalid, insufficient, inaccurate, fraudulent or forged; (ii) the validity, legality or sufficiency of any instrument transferring or assigning or purporting to transfer or assign a Letter of Credit or the rights or benefits thereunder or proceeds thereof, in 35 whole or in part, which may prove to be invalid or ineffective for any reason; (iii) failure of the beneficiary of a Letter of Credit to comply duly with conditions required in order to draw upon such Letter of Credit; (iv) errors, omissions, interruptions or delays in transmission or delivery of any messages, by mail, facsimile, cable, telegraph, telex or otherwise, whether or not they be in cipher; (v) errors in interpretation of technical terms; (vi) any loss or delay in the transmission or otherwise of any document required in order to make a drawing under any Letter of Credit or of the proceeds thereof; (vii) the misapplication by the beneficiary of a Letter of Credit of the proceeds of any drawing under such Letter of Credit; (viii) any litigation, proceeding or charges with respect to such Letter of Credit; and (ix) any consequences arising from causes beyond the control of the Administrative Agent, the Issuing Bank or the Lenders. 2.05. Promise to Pay; Evidence of Debt. (a) Promise to Pay. (i) The Borrower agrees to pay when due the principal amount of each Revolving Loan which is made to the Borrower, and further agrees to pay all unpaid interest accrued thereon, in accordance with the terms of this Agreement and the promissory notes evidencing the Revolving Loans owing to the Revolving Loan Lenders. The Borrower shall execute and deliver to each Revolving Loan Lender a promissory note to evidence the Revolving Loans owing to such Revolving Loan Lender and agrees to execute and deliver to such Revolving Loan Lender and any assignee of such Revolving Loan Lender such promissory notes as are necessary after giving effect to any assignment thereof pursuant to Section 13.01, each substantially in the form of Exhibit B-1 attached hereto and made a part hereof (all such promissory notes and all amendments thereto, replacements thereof and substitutions therefor being collectively referred to as the "Revolving Loan Notes"; and "Revolving Loan Note" means any one of the Revolving Loan Notes). (ii) The Borrower agrees to pay when due the principal amount of each Term Loan which is made to the Borrower, and further agrees to pay all unpaid interest accrued thereon, in accordance with the terms of this Agreement and the promissory notes evidencing the Term Loans. The Borrower shall execute and deliver to each Term Loan Lender a promissory note to evidence the Term Loan owing to such Term Loan Lender and agrees to execute and deliver to such Term Loan Lender and any assignee of such Term Loan Lender such promissory notes as are necessary after giving effect to any assignment thereof pursuant to Section 13.01, each substantially in the form of Exhibit B-2 attached hereto and made a part hereof (all such promissory notes and all amendments thereto, replacements thereof and substitutions therefor being collectively referred to as the "Term Loan Notes"; and "Term Loan Note" means any one of the Term Loan Notes). (iii) The Borrower agrees to pay when due the principal amount of each Swing Loan which is made to the Borrower, and further agrees to pay all unpaid interest accrued thereon, in accordance with the terms of this Agreement and the promissory notes evidencing the Swing Loans owing to the Swing Loan Lender. The Borrower shall execute and deliver to the Swing Loan Lender a promissory note to evidence the Swing Loans owing to the Swing Loan Lender and agrees to execute and deliver to the Swing Loan Lender and any assignee of the Swing Loan Lender such promissory notes as are necessary after giving effect to any assignment thereof pursuant to Section 13.01, each substantially in the form of Exhibit B-3 attached hereto and made a part hereof (all such promissory notes and all amendments thereto, replacements thereof and substitutions therefor being collectively referred to as the "Swing Loan Notes"; and "Swing Loan Note" means any one of the Swing Loan Notes). 2.06. Use of Proceeds of Loans. The proceeds of the Loans shall be used (i) to finance the cash portion of the Tender Offer, (ii) to refinance certain existing indebtedness of Schein, (iii) to pay the fees and costs associated with the transactions contemplated under the Transaction Documents, and 36 (iv) to finance working capital and other general corporate needs of the Borrower and its Subsidiaries not prohibited hereunder. 2.07. Authorized Officers, Employees and Administrative Agents. On the Closing Date and from time to time thereafter, the Borrower shall deliver to the Administrative Agent an Officer's Certificate setting forth the names of the officers, employees and agents of the Borrower, in each case who are authorized to request Loans on behalf of the Borrower and containing a specimen signature of each such officer, employee or agent. The officers, employees and agents so authorized shall also be authorized to act for the Borrower in respect of all other matters relating to the Loan Documents. The Administrative Agent shall be entitled to rely conclusively on each such officer's, employee's or agent's authority to request such Loan until the Administrative Agent receives written notice to the contrary. In addition, the Administrative Agent shall be entitled to rely conclusively on any written notice sent to it by telecopy. The Administrative Agent shall have no duty to verify the authenticity of the signature appearing on, or any telecopy or facsimile of, any written Notice of Borrowing or any other document, and, with respect to an oral request for such a Loan, the Administrative Agent shall have no duty to verify the identity of any person representing himself or herself as one of the officers, employees or agents authorized to make such request or otherwise to act on behalf of the Borrower. Neither the Administrative Agent nor any Lender shall incur any liability to the Borrower or any other Person in acting upon any facsimile or telephonic notice referred to above which the Administrative Agent believes to have been given by a duly authorized officer or other person authorized to borrow on behalf of the Borrower. ARTICLE III PAYMENTS AND PREPAYMENTS 3.01. Prepayments; Reductions in Revolving Loan Commitments. (a) Voluntary Prepayments/Reductions. (i) The Borrower may, at any time and from time to time, prepay the Loans in whole or in part upon at least one (1) Business Day's (with respect to Base Rate Loans) or three (3) Business Days' (with respect to Eurodollar Loans) prior written notice to the Administrative Agent (which the Administrative Agent shall promptly transmit to each Lender, it being agreed that the failure of the Administrative Agent to give such notice shall not affect the Borrower's right to prepay any Loan); provided, however, that any partial prepayment shall be in minimum amounts of $1,000,000 and in multiples of $1,000,000 in excess thereof; provided, further, that Eurodollar Rate Loans may only be prepaid, in whole or in part, (A) on the expiration date of the then applicable Eurodollar Interest Period or (B) otherwise upon payment of the amounts described in Section 4.02(f). Any notice of prepayment given to the Administrative Agent under this Section 3.01(a)(i) shall specify the Loans to be prepaid, the date (which shall be a Business Day) of prepayment, and the aggregate principal amount of the prepayment. Any prepayment of Term Loans shall be applied pro rata to the remaining principal installments of such Loans. When notice of prepayment is delivered as provided herein, the principal amount of the Loans specified in such notice shall become due and payable on the prepayment date specified in such notice. (ii) The Borrower, upon at least three (3) Business Days' prior notice to the Administrative Agent (which the Administrative Agent shall promptly transmit to each Lender), shall have the right, at any time and from time to time, to terminate in whole or permanently reduce ratably in part the unused portions of the Revolving Loan Commitments, provided that the Borrower shall have made whatever payment may be required to reduce the Revolving Credit Obligations to an amount less 37 than or equal to the Revolving Loan Commitments as reduced or terminated on the date of such reduction. Any partial reduction of the Revolving Loan Commitments shall be in an aggregate minimum amount of Five Million Dollars ($5,000,000) and integral multiples of One Million Dollars ($1,000,000) in excess of that amount, and shall reduce the Revolving Loan Commitment of each Revolving Loan Lender proportionately in accordance with such Revolving Loan Lender's Pro Rata Share. Any notice of termination or reduction given to the Administrative Agent under this Section 3.01(a)(ii) shall specify the date (which shall be a Business Day) of such termination or reduction and, with respect to a partial reduction, the aggregate principal amount thereof. When notice of termination or reduction is delivered as provided herein, the principal amount of the Revolving Loans specified in the notice shall become due and payable on the date specified in such notice. (iii) The prepayments and payments in respect of reductions and terminations described in clauses (i) and (ii) of this Section 3.01(a) may be made pursuant to such clauses at any time and from time to time without premium or penalty (except as provided in Section 4.02(f)). (b) Mandatory Prepayments/Reductions. (i) Promptly and in any event within five Business Days of receipt by any Loan Party of Net Cash Proceeds (other than Excluded Sales Proceeds) on account of one or more Asset Sales, such Loan Party shall make or cause to be made a mandatory prepayment of the Term Loans in an amount equal to 50% of such Net Cash Proceeds. Subject to Section 3.01(b)(v), each such prepayment shall be applied pro rata to the remaining principal installments of the Term Loans. (ii) Promptly and in any event within five Business Days of receipt by any Loan Party of any Net Cash Proceeds (other than Excluded Securities Proceeds) from the issuance of any Securities evidencing debt obligations by such Loan Party, such Loan Party shall make or cause to be made a mandatory prepayment of the Term Loans in an amount equal to 50% of such Net Cash Proceeds. Subject to Section 3.01(b)(v), each such prepayment shall be applied pro rata to the remaining principal installments of the Term Loans. (iii) Promptly and in any event within five Business Days of receipt by any Loan Party of any Net Cash Proceeds from the issuance of any Securities evidencing equity interests by such Loan Party, such Loan Party shall make or cause to be made a mandatory prepayment of the Term Loans in an amount equal to 25% of such Net Cash Proceeds. Subject to Section 3.01(b)(v), each such prepayment shall be applied pro rata to the remaining principal installments of the Term Loans. (iv) On the earlier of (A) the date the financial statements of the Borrower and its Subsidiaries are delivered to the Administrative Agent pursuant to Section 7.01(b) and (B) the 90th day following the last day of each Fiscal Year, the Borrower shall make or cause to be made a mandatory prepayment of the Term Loans in an amount equal to the lesser of 50% (if the Leverage Ratio of the Borrower and its Subsidiaries on a consolidated basis for the twelve fiscal month period ending on the last day of such Fiscal Year is greater than 2.25 to 1.00) of the Excess Cash Flow for such Fiscal Year or the aggregate principal amount of the Term Loans outstanding as of the date of payment; provided, however, that a mandatory prepayment of the Term Loans in an amount equal to the lesser of 25% of the Excess Cash Flow for such Fiscal Year or the aggregate principal amount of the Term Loans outstanding as of the date of payment shall be required hereunder if the Leverage Ratio of the Borrower and its Subsidiaries on a consolidated basis for the twelve fiscal month period ending on the last day of such Fiscal Year is less than 2.25 to 1.00 but greater than 1.50 to 1.00, and no mandatory prepayment shall be required hereunder if the Leverage Ratio of the Borrower and its Subsidiaries on a consolidated basis for the twelve fiscal month period ending on the last of such Fiscal Year is less than 1.50 to 1.00. Subject to 38 Section 3.01(b)(v), each such prepayment shall be applied pro rata to the remaining principal installments of the Term Loans. (v) Nothing in this Section 3.01(b) shall be construed to constitute the Lenders' consent to any transaction which is not expressly permitted by Article IX. 3.02. Payments. (a) Manner and Time of Payment. All payments of principal, interest, fees and other Obligations which are payable to the Administrative Agent or any Lender shall be made without condition or deduction for any counterclaim, defense, recoupment or set-off, in Dollars and in immediately available funds, delivered to the Administrative Agent not later than 1:00 p.m. (New York time) on the date due, by deposit of such funds to the Administrative Agent's Account. The Administrative Agent shall thereafter cause to be distributed to the Lenders their respective Pro Rata Shares of such payments in accordance with the provisions of Section 3.02(b) if received prior to 1:00 p.m. (New York time), and on the next succeeding Business Day, if received thereafter, by the Administrative Agent. (b) Apportionment of Payments. (i) Subject to the provisions of Section 3.02(b)(ii), all payments of principal and interest in respect of outstanding Revolving Loans shall be applied by the Administrative Agent to the ratable payment of the Revolving Loans owing to the Lenders, and all payments of principal in respect of outstanding Term Loans shall be applied by the Administrative Agent to the payment of such Term Loans owing to the respective Term Loan Lenders in accordance with their respective Pro Rata Shares thereof. (ii) After the occurrence of an Event of Default and while the same is continuing, the Administrative Agent shall apply all payments and prepayments of any Obligations in the following order: (A) first, to pay principal of and interest on any Revolving Loans which the Administrative Agent may have advanced on behalf of any Lender pursuant to Section 2.01(c)(ii) for which the Administrative Agent has not been reimbursed by such Lender or the Borrower; (B) second, to pay Obligations in respect of any fees, expense reimbursements or indemnities then due to the Agents; (C) third, to pay interest on the Loans; (D) fourth, to pay the principal amount of the Loans then outstanding in accordance with each Lender's Pro Rata Share; (E) fifth, to pay obligations in respect of any expense reimbursements or indemnities then due to any Lender; and (F) sixth, to pay all other Obligations in such order as the Administrative Agent may determine in its sole discretion. The order of priority set forth in this Section 3.02(b)(ii) and the related provisions of this Agreement are set forth solely to determine the rights and priorities of the Administrative Agent and the Lenders as among themselves. If sufficient funds are not available to fund all Obligations described in any of the foregoing clauses (A) through (F), the available funds shall be allocated to the Obligations described in such clause ratably. 39 (c) Payments on Non-Business Days. Whenever any payment to be made by the Borrower hereunder or under the Notes is stated to be due on a day which is not a Business Day, the payment shall instead be due on the next succeeding Business Day, and any such extension of time shall be included in the computation of the payment of interest and fees hereunder. 3.03. Taxes. (a) Payments Free and Clear of Taxes. Any and all payments by the Borrower hereunder, under the Notes or under any other Loan Document shall be made free and clear of and without deduction or withholding for any and all present or future taxes, levies, imposts, duties, fees, deductions, charges or withholdings, and all interest, penalties, additions to tax and liabilities with respect thereto, excluding, in the case of each Lender and the Administrative Agent, taxes imposed on its income, capital, profits or gains and franchise taxes imposed on it, in each case by (i) the United States except withholding taxes contemplated pursuant to Section 3.03(e)(ii)(C), (ii) the Governmental Authority of the jurisdiction in which such Lender's office is located or (iii) the Governmental Authority in which such Person is organized, managed, controlled or doing business, in each case including all political subdivisions thereof (all such non-excluded taxes, levies, imposts, deductions, charges, withholdings and liabilities being hereinafter referred to as "Taxes"). If the Borrower shall be required by law to withhold or deduct any Taxes from or in respect of any sum payable hereunder, under the Notes or under any other Loan Document to any Lender or the Administrative Agent, (x) such sum payable shall be increased as may be necessary so that after making all required withholdings or deductions (including withholdings or deductions applicable to additional sums payable under this Section 3.03) such Lender or the Administrative Agent (as the case may be) receives an amount equal to the sum it would have received had no such withholdings or deductions been made, (y) the Borrower shall make such withholdings or deductions, and (z) the Borrower shall pay the full amount withheld or deducted to the relevant taxation authority or other authority in accordance with applicable law.] (b) Other Taxes. In addition, the Borrower agrees to pay any present or future stamp, value-added or documentary taxes or any other excise or property taxes, charges or similar levies which arise from and which relate directly to (i) any payment made under any Loan Document or (ii) the execution, delivery or registration of, or otherwise with respect to, this Agreement, the Notes or any other Loan Document (hereinafter referred to as "Other Taxes"). (c) Indemnification. The Borrower will indemnify each Lender and the Administrative Agent against, and reimburse each on demand for, the full amount of all Taxes and Other Taxes (including, without limitation, any Taxes or Other Taxes imposed by any Governmental Authority on amounts payable under this Section 3.03 and any additional income or franchise taxes resulting therefrom) incurred or paid by such Lender or the Administrative Agent (as the case may be) or any Affiliate of such Lender and any liability (including penalties, interest, and out-of-pocket expenses paid to third parties) arising therefrom or with respect thereto, whether or not such Taxes or Other Taxes were correctly or lawfully payable. A certificate as to any amount payable to any Person under this Section 3.03 submitted by such Person to the Borrower shall, absent manifest error, be final, conclusive and binding upon all parties hereto. This indemnification shall be made within thirty (30) days from the date such Person makes written demand therefor and within thirty (30) days after the receipt of any refund of the Taxes or Other Taxes following final determination that the Taxes or Other Taxes which gave rise to the indemnification were not required to be paid, such Person shall repay the amount of such paid indemnity to the Borrower. (d) Receipts. Within thirty (30) days after the date of any payment of Taxes or Other Taxes by the Borrower, the Borrower will furnish to the Administrative Agent, at its address referred to in Section 13.10, the original or a certified copy of a receipt or other documentation reasonably satisfactory to the Administrative Agent evidencing payment thereof. The Borrower will furnish to the Administrative Agent upon the Administrative Agent's request from time to time an Officer's Certificate 40 stating that all Taxes and Other Taxes of which it is aware that are due have been paid and that no additional Taxes or Other Taxes of which it is aware are due. (e) Foreign Bank Certifications. (i) Each Lender that is not created or organized under the laws of the United States or a political subdivision thereof shall deliver to the Borrower and the Administrative Agent on or before the Closing Date or the date on which such Lender becomes a Lender pursuant to Section 13.01 hereof a true and accurate certificate executed by a duly authorized officer of such Lender to the effect that such Lender is eligible to receive payments hereunder and under the Notes without deduction or withholding of United States federal income tax (A) under the provisions of an applicable tax treaty concluded by the United States (in which case the certificate shall be accompanied by one duly completed copy of IRS Form W-8BEN (or any successor or substitute form)), (B) under Sections 1442(c)(1) and 1442(a) of the Code (in which case the certificate shall be accompanied by one duly completed copy of IRS Form W8ECI (or any successor or substitute form)) or (C) under Section 871(h) or 881(c) of the Code (in which case the certificate shall be accompanied by one duly completed copy of IRS Form W-8BEN (or any successor or substitute form)). (ii) Each such Lender further agrees to deliver to the Borrower and the Administrative Agent from time to time, a true and accurate certificate executed by a duly authorized officer of such Lender before or promptly upon the occurrence of any event requiring a change in the most recent certificate previously delivered by it to the Borrower and the Administrative Agent pursuant to this Section 3.03(e). Each certificate required to be delivered pursuant to this Section 3.03(e)(ii) shall certify as to one of the following: (A) that such Lender can continue to receive payments hereunder and under the Notes without deduction or withholding of United States federal income tax; (B) that such Lender cannot continue to receive payments hereunder and under the Notes without deduction or withholding of United States federal income tax as specified therein but does not require additional payments pursuant to Section 3.03(a) because it is entitled to recover the full amount of any such deduction or withholding from a source other than the Borrower; (C) that such Lender is no longer capable of receiving payments hereunder and under the Notes without deduction or withholding of United States federal income tax as specified therein by reason of the adoption or implementation of, or any change in, or in the interpretation or administration of, any law or regulation (including the Code, regulations thereunder or any applicable tax treaty) or any guideline or request from any Governmental Authority or quasi-governmental authority after the later of the Closing Date or the date on which a Lender became a Lender pursuant to Section 13.01 and that it is not capable of recovering the full amount of the same from a source other than the Borrower; or (D) that such Lender is no longer capable of receiving payments hereunder without deduction or withholding of United States federal income tax as specified therein other than by reason of the adoption or implementation of, or any change in, or in the interpretation or administration of, any law or regulation (including the Code, regulations thereunder or any applicable tax treaty) or any guideline or request from any Governmental Authority or quasi-governmental authority after the later of the Closing Date or the date on which a Lender became a Lender pursuant to Section 13.01. 41 Any notice given by any Lender or other Person under this Section 3.03 shall be effective only if given within one year after such Lender or other Person becomes aware or should have become aware of the events giving rise to such notice. 3.04. Increased Capital. If any Lender determines that (i) the adoption or implementation after the date hereof of or any change after the date hereof in or in the interpretation or administration of any law or regulation or any guideline or request after the date hereof from any central bank or other Governmental Authority or quasi-governmental authority exercising jurisdiction, power or control over such Lender or banks or financial institutions generally (whether or not having the force of law), compliance with which affects or would affect the amount of capital required or expected to be maintained by such Lender or any corporation controlling such Lender and (ii) the amount of such capital is increased by or based upon the making or maintenance by any Lender of its Loans, any Lender's participation in or obligation to participate in the Loans or other advances made hereunder or under the Notes or the existence of any Lender's obligation to make Loans, then, in any such case, upon demand by such Lender (with a copy of such demand to the Administrative Agent), the Borrower agrees to pay to the Administrative Agent for the account of such Lender, from time to time as specified by such Lender, additional amounts sufficient to compensate such Lender or such corporation therefor. Such demand shall be accompanied by a statement as to the amount of such compensation and include a brief summary of the basis for such demand. Such statement shall be conclusive and binding for all purposes, absent manifest error. Any notice given by any Lender under this Section 3.04 shall be effective only if given within one year after such Lender becomes aware or should have become aware of the events giving rise to such notice. ARTICLE IV INTEREST AND FEES 4.01. Interest on the Loans and other Obligations. (a) Rate of Interest. (i) All Revolving Loans, Term Loans and the outstanding amount of all other Obligations (other than Swing Loans) shall bear interest on the unpaid amount thereof from the date such Loans are made and such other Obligations are due and payable until paid in full, except as otherwise provided in Section 4.01(d), as follows: (A) If a Base Rate Loan or such other Obligation, at a rate per annum equal to the sum of (I) the Base Rate as in effect from time to time as interest accrues, plus (II) the Applicable Base Rate Margin in effect at such time; and (B) If a Eurodollar Rate Loan, at a rate per annum equal to the sum of (I) the Eurodollar Rate determined for the applicable Eurodollar Interest Period, plus (II) the Applicable Eurodollar Rate Margin in effect from time to time during such Eurodollar Interest Period. (ii) All Swing Loans shall bear interest on the unpaid amount thereof from the date such Loans are made until paid in full, except as otherwise provided in Section 4.01(d), at a rate per annum equal to the sum of (I) the Base Rate as in effect from time to time as interest accrues, plus (II) the Applicable Base Rate Margin in effect at such time. (iii) The applicable basis for determining the rate of interest on the Loans shall be selected by the Borrower at the time a Notice of Borrowing or a Notice of Conversion/Continuation is delivered by the Borrower to the Administrative Agent; provided, however, the Borrower may not select the Eurodollar Rate as the applicable basis for determining the rate of interest on such a Loan if (x) such 42 Loan is to be made on the Closing Date or (y) at the time of such selection an Event of Default has occurred and is continuing. If on any day any Loan is outstanding with respect to which notice has not been timely delivered to the Administrative Agent in accordance with the terms hereof specifying the basis for determining the rate of interest on that day, then for that day interest on that Loan shall be determined by reference to the Base Rate. (b) Interest Payments. (i) Interest accrued on each Base Rate Loan shall be payable in arrears (A) on the first Business Day of each calendar quarter, commencing on the first such day following the making of such Base Rate Loan and (B) on the Maturity Date or such other date on which such Loans become due and payable. (ii) Interest accrued on each Eurodollar Rate Loan shall be payable in arrears (A) on each Eurodollar Interest Payment Date applicable to such Loan and (B) on the Maturity Date or such other date on which such Loans become due and payable. (iii) Interest accrued on the principal balance of all other Obligations shall be payable in arrears (A) on the first Business Day of each calendar month, commencing on the first such day following the incurrence of such Obligation and (B) on the Maturity Date or such other date on which the Loans become due and payable. (c) Conversion or Continuation. (i) The Borrower shall have the option (A) to convert at any time all or any part of the outstanding Base Rate Loans (other than Swing Loans) to Eurodollar Rate Loans; (B) to convert all or any part of outstanding Eurodollar Rate Loans having Eurodollar Interest Periods which expire on the same date to Base Rate Loans on such expiration date; or (C) to continue all or any part of outstanding Eurodollar Rate Loans having Eurodollar Interest Periods which expire on the same date as Eurodollar Rate Loans, and the succeeding Eurodollar Interest Period of such continued Loans shall commence on such expiration date; provided, however, no such outstanding Loan may be continued as, or be converted into, a Eurodollar Rate Loan (i) if the continuation of, or the conversion into, would violate any of the provisions of Section 4.02 or (ii) if an Event of Default or Default would occur or has occurred and is continuing. Any conversion into or continuation of Eurodollar Rate Loans under this Section 4.01(c) shall be in a minimum amount of $5,000,000 and in integral multiples of $1,000,000 in excess of that amount. (ii) To convert or continue a Loan under Section 4.01(c)(i), the Borrower shall deliver a Notice of Conversion/Continuation to the Administrative Agent no later than 1:00 p.m. (New York time) at least three (3) Business Days in advance of the proposed conversion/continuation date. A Notice of Conversion/Continuation shall specify (A) the proposed conversion/continuation date (which shall be a Business Day), (B) the principal amount of the Loan to be converted/continued, (C) whether such Loan shall be converted and/or continued and (D) in the case of a conversion to, or continuation of, a Eurodollar Rate Loan, the requested Eurodollar Interest Period. In lieu of delivering a Notice of Conversion/Continuation, the Borrower may give the Administrative Agent telephonic notice of any proposed conversion/continuation by the time required under this Section 4.01(c)(ii), and such notice shall be confirmed in writing delivered to the Administrative Agent promptly (but in no event later than 5:00 p.m. (New York time) on the same day). Promptly after receipt of a Notice of Conversion/Continuation under this Section 4.01(c)(ii) (or telephonic notice in lieu thereof), the Administrative Agent shall notify each Lender by telex or facsimile, or other similar form of transmission, of the proposed conversion/continuation. Any Notice of Conversion/Continuation for conversion to, or continuation of, a Loan (or telephonic notice in lieu thereof) shall be irrevocable, and the Borrower shall be bound to convert or continue in accordance therewith. 43 (d) Default Interest. Notwithstanding the rates of interest specified in Section 4.01(a) or elsewhere herein, (i) upon the occurrence of any Event of Default specified in Section 11.01(a) and for as long thereafter as such Event of Default shall be continuing, the principal balance of all Loans and of all other Obligations shall bear interest at a rate which is two percent (2.0%) per annum in excess of the rate of interest applicable to such Obligations from time to time, (ii) upon the occurrence of any other Event of Default and for as long thereafter as such Event of Default shall be continuing, the Requisite Lenders may elect that the principal balance of all Loans and of all other Obligations bear interest during such period at a rate which is two percent (2.0%) per annum in excess of the rate of interest applicable to such Obligations from time to time and (iii) upon the occurrence of any Event of Default and for as long thereafter as such Event of Default shall be continuing, the Borrower shall convert all or any part of outstanding Eurodollar Rate Loans to Base Rate Loans. (e) Computation of Interest. Interest on (i) Base Rate Loans and all other Obligations shall be computed on the basis of the actual number of days elapsed in the period during which interest accrues and a year of 365/366 days and (ii) Eurodollar Rate Loans shall be computed on the basis of the actual number of days elapsed in the period during which interest accrues and a year of 360 days. In computing interest on any Loan, the date of the making of the Loan shall be included and the date of payment made in accordance with Section 3.02 shall be excluded; provided, however, if a Loan is repaid on the same day on which it is made, one (1) day's interest shall be paid on such Loan. (f) Changes; Legal Restrictions. If after the date hereof any Lender determines that the adoption or implementation of or any change in or in the interpretation or administration of any law or regulation or any guideline or request from any central bank or other Governmental Authority or quasi-governmental authority exercising jurisdiction, power or control over any Lender or over banks or financial institutions generally (whether or not having the force of law), compliance with which, in each case after the date hereof: (i) (x) subjects a Lender (or its Applicable Lending Office) to charges (other than Taxes) of any kind which is applicable to the Commitments of the Lenders to make Eurodollar Rate Loans, or (y) changes the basis of taxation of, or subjects to tax, payments to a Lender of principal, fees, interest, or any other amount payable hereunder with respect to any Loans; or (ii) imposes, modifies, or holds applicable, any reserve (other than reserves taken into account in calculating the Eurodollar Rate), special deposit, compulsory loan, FDIC insurance or similar requirement against assets held by, or deposits or other liabilities (including those pertaining to Letters of Credit) in or for the account of, advances or loans by, commitments made, or other credit extended by, or any other acquisition of funds by, a Lender or any Applicable Lending Office or Eurodollar Affiliate of that Lender; and the result of any of the foregoing is to increase the cost to that Lender of making, renewing or maintaining the Loans or its Commitments or to reduce any amount receivable thereunder; then, in any such case, within thirty (30) days after written demand by such Lender (with a copy of such demand to the Administrative Agent), the Borrower shall pay to the Administrative Agent for the account of such Lender, from time to time as specified by such Lender, such amount or amounts as may be necessary to compensate such Lender or its Eurodollar Affiliate for any such additional cost incurred or reduced amount received. Such demand shall be accompanied by a statement as to the amount of such compensation and include a summary of the basis for such demand. Such statement shall be conclusive and binding for all purposes, absent manifest error. Any notice given by any Lender under this Section 4.01(f) shall be effective only if given within one year after such Lender becomes aware or should have become aware of the events giving rise to such notice. 44 (g) Confirmation of Eurodollar Rate. Upon the request of the Borrower from time to time, the Administrative Agent shall promptly provide to the Borrower such information with respect to the applicable Eurodollar Rate as may be reasonably requested. (h) Issuing Bank Fee. The Borrower shall pay to the Issuing Bank, solely for its own account, with respect to each Letter of Credit issued by the Issuing Bank, an additional fee in an amount equal to 0.25% per annum on the undrawn face amount of such Letter of Credit, payable quarterly in arrears on the first Business Day of each calendar quarter. 4.02. Special Provisions Governing Eurodollar Rate Loans. With respect to Eurodollar Rate Loans: (a) Amount of Advance. Each Eurodollar Rate Loan shall be for a minimum amount of $5,000,000 and in integral multiples of 1,000,000 in excess of that amount. (b) Determination of Eurodollar Interest Period. By giving notice as set forth in Section 2.01(b) or Section 2.02(b) (with respect to a Borrowing of Eurodollar Rate Loans) or Section 4.01(c) (with respect to a conversion into or continuation of Eurodollar Rate Loans), the Borrower shall have the option, subject to the other provisions of this Section 4.02, to select an interest period (a "Eurodollar Interest Period") to apply to the Loans described in such notice, subject to the following provisions: (i) The Borrower may only select, as to a particular Borrowing of Eurodollar Rate Loans, a Eurodollar Interest Period of either one, two, three or six months in duration; (ii) In the case of immediately successive Eurodollar Interest Periods applicable to a Borrowing of Eurodollar Rate Loans, each successive Eurodollar Interest Period shall commence on the day on which the next preceding Eurodollar Interest Period expires; (iii) If any Eurodollar Interest Period would otherwise expire on a day which is not a Business Day, such Eurodollar Interest Period shall be extended to expire on the next succeeding Business Day if the next succeeding Business Day occurs in the same calendar month, and if there shall be no succeeding Business Day in such calendar month, such Eurodollar Interest Period shall expire on the immediately preceding Business Day; (iv) The Borrower may not select a Eurodollar Interest Period as to any Loan if such Eurodollar Interest Period terminates later than the Maturity Date; (v) The Borrower may not select a Eurodollar Interest Period with respect to any portion of principal of a Loan which extends beyond a date on which the Borrower is required to make a scheduled payment of such portion of principal; and (vi) There shall be no more than fifteen (15) Eurodollar Interest Periods in effect at any one time. (c) Determination of Interest Rate. As soon as practicable on the second Business Day prior to the first day of each Eurodollar Interest Period (the "Interest Rate Determination Date"), the Administrative Agent shall determine (pursuant to the procedures set forth in the definition of "Eurodollar Rate") the interest rate which shall apply to Eurodollar Rate Loans, for which an interest rate is then being determined for the applicable Eurodollar Interest Period and shall promptly give notice thereof (in writing or by telephone confirmed in writing) to the Borrower and to each Lender. The Administrative Agent's 45 determination shall be presumed to be correct, absent manifest error, and shall be binding upon the Borrower. (d) Interest Rate Unascertainable, Inadequate or Unfair. In the event that at least one (1) Business Day before the Interest Rate Determination Date: (i) the Administrative Agent reasonably determines that adequate and fair means do not exist for ascertaining the applicable interest rates by reference to which the Eurodollar Rate then being determined is to be fixed; (ii) the Requisite Lenders advise the Administrative Agent that Dollar deposits in the principal amounts of the Eurodollar Rate Loans comprising such Borrowing are not generally available in the London interbank market for a period equal to such Eurodollar Interest Period; or (iii) the Requisite Lenders advise the Administrative Agent that the Eurodollar Rate as determined by the Administrative Agent, after taking into account the adjustments for reserves and increased costs provided for in Section 4.01(f), will not adequately and fairly reflect the cost to such Lenders of funding Loans of such Type; then the Administrative Agent shall forthwith give notice thereof to the Borrower, whereupon (until the Administrative Agent notifies the Borrower that the circumstances giving rise to such suspension no longer exist) the right of the Borrower to elect to have Loans bear interest based upon the Eurodollar Rate shall be suspended and each outstanding Loan of such Types shall be converted into a Base Rate Loan on the last day of the then current Eurodollar Interest Period therefor, and any Notice of Borrowing for which Revolving Loans have not then been made shall be deemed to be a request for Base Rate Loans, notwithstanding any prior election by the Borrower to the contrary. (e) Illegality. (i) If at any time any Lender determines (which determination shall, absent manifest error, be final and conclusive and binding upon all parties) that the making or continuation of any Eurodollar Rate Loan has become unlawful or impermissible by compliance by that Lender with any law, governmental rule, regulation or order of any Governmental Authority (whether or not having the force of law and whether or not failure to comply therewith would be unlawful or would result in costs or penalties), then, and in any such event, such Lender may give notice of that determination, in writing, to the Borrower and the Administrative Agent, and the Administrative Agent shall promptly transmit the notice to each other Lender. (ii) When notice is given by a Lender under Section 4.02(e)(i), (A) the Borrower's right to request from such Lender and such Lender's obligation, if any, to make Eurodollar Rate Loans shall be immediately suspended, and such Lender shall make a Base Rate Loan as part of any requested Borrowing of Eurodollar Rate Loans and (B) if the affected Eurodollar Rate Loan or Loans are then outstanding, the Borrower shall immediately, or if permitted by applicable law, no later than the date permitted thereby, upon at least one (1) Business Day's prior written notice to the Administrative Agent and the affected Lender, convert each such Loan into a Base Rate Loan. (iii) If at any time after a Lender gives notice under Section 4.02(e)(i) such Lender determines that it may lawfully make Eurodollar Rate Loans, such Lender shall promptly give notice of that determination, in writing, to the Borrower and the Administrative Agent, and the Administrative Agent shall promptly transmit the notice to each other Lender. The Borrower's right to request, and such Lender's obligation, if any, to make Eurodollar Rate Loans shall thereupon be restored. 46 (f) Compensation. In addition to all amounts required to be paid by the Borrower pursuant to Section 4.01, the Borrower shall compensate each Lender, upon demand, for all losses, expenses and liabilities (including, without limitation, any loss or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by such Lender to fund or maintain such Lender's Eurodollar Rate Loans to the Borrower but excluding any loss of the Applicable Eurodollar Rate Margin on the relevant Loans) which that Lender may sustain (i) if for any reason a Borrowing, conversion into or continuation of Eurodollar Rate Loans does not occur on a date specified therefor in a Notice of Borrowing or a Notice of Conversion/ Continuation given by the Borrower or in a telephonic request by it for borrowing or conversion/continuation or a successive Eurodollar Interest Period does not commence after notice therefor is given pursuant to Section 4.01(c), including, without limitation, pursuant to Section 4.02(d), (ii) if for any reason any Eurodollar Rate Loan is prepaid (including, without limitation, mandatorily pursuant to Section 3.01) on a date which is not the last day of the applicable Eurodollar Interest Period, (iii) as a consequence of a required conversion of a Eurodollar Rate Loan to a Base Rate Loan as a result of any of the events indicated in Section 4.02(d) or (e) or (iv) as a consequence of any failure by the Borrower to repay Eurodollar Rate Loans when required by the terms hereof. The Lender making demand for such compensation shall deliver to the Borrower concurrently with such demand a written statement in reasonable detail as to such losses, expenses and liabilities, and this statement shall be conclusive as to the amount of compensation due to that Lender, absent manifest error. (g) Affiliates Not Obligated. No Eurodollar Affiliate or other Affiliate of any Lender shall be deemed a party hereto or shall have any liability or obligation hereunder. 4.03. Fees. (a) Unused Commitment Fee. The Borrower agrees to pay to the Administrative Agent, for the account of the Lenders in accordance with their Pro Rata Shares, during the period commencing on the Closing Date and ending on the Commitment Termination Date, a fee (the "Unused Commitment Fee"), accruing at the rate of three-eighths of one percent (0.375%) per annum on the average amount by which the Revolving Loan Commitments exceed the Revolving Credit Obligations minus the outstanding principal amount of the Swing Loans, such fee being payable quarterly, in arrears, on the first Business Day of each calendar quarter and on the Commitment Termination Date, in each case in respect of the quarter (or portion thereof) immediately preceding the date such payment is required. (b) Letter of Credit Fee. In addition to any charges paid pursuant to Section 2.04(g), the Borrower shall pay to the Agent, for the account of the Revolving Loan Lenders in accordance with their respective Pro Rata Shares: (i) with respect to each Commercial Letter of Credit issued by the Issuing Bank, a fee at a per annum rate equal to 0.125% on the face amount of such Letter of Credit, payable on the date such Letter of Credit is issued, and 0.125% on the face amount of such Letter of Credit, payable on the date the Issuing Bank honors a draft drawn under such Letter of Credit; (ii) with respect to each Standby Letter of Credit issued by the Issuing Bank, a fee at a per annum rate equal to the Applicable Eurodollar Rate Margin on the undrawn face amount of such Letter of Credit, payable quarterly in arrears on the first Business Day of each calendar quarter; and (iii) during the occurrence and continuation of (A) an Event of Default specified in Section 11.01(a) and (B) any other Event of Default when the Requisite Lenders elect that the principal balance of all Loan and all other Obligations bear interest at a rate which is two percent (2%) per annum in excess of the rate of interest otherwise applicable to the Loans and such Obligations, an additional fee in an amount equal to two percent (2%) per annum on the undrawn face amount of each Standby Letter of Credit, payable quarterly in arrears on the first Business Day of each calendar quarter. 47 (c) Computation of Fees. All of the above fees payable on a per annum basis shall be computed on the basis of the actual number of days elapsed in a year of 360 days. All such fees shall be payable in addition to, and not in lieu of, interest, compensation, expense reimbursements, indemnification and other Obligations. ARTICLE V CONDITIONS TO LOANS 5.01. Conditions Precedent to the Initial Loans. The obligation of each Lender on the Closing Date to make its initial Loans requested to be made by it shall be subject to the satisfaction of all of the following conditions precedent: (a) Documents. The Administrative Agent (on behalf of itself and the Lenders) shall have received on or before the Closing Date all of the following: (i) this Agreement, the Notes, the Guaranties, the Contribution Agreement, the Administrative Agent's Fee Letter and all other agreements, documents, instruments, certificates, opinions and corporate resolutions described in the List of Closing Documents, each duly executed where appropriate and in form and substance satisfactory to the Lenders and in sufficient copies for each of the Lenders; (ii) a pro-forma consolidated balance sheet of the Borrower and its Subsidiaries as of the Closing Date, giving effect to the Tender Transaction, certified by the Chief Financial Officer of the Borrower; and (iii) such additional documentation as the Administrative Agent or the Requisite Lenders may reasonably request. (b) Acquisition Documents; Consummation of Acquisition. The Administrative Agent shall have received, true and correct copies of each of the Acquisition Documents, including all schedules and exhibits thereto and all amendments, supplements and modifications thereto or otherwise delivered in connection therewith together with all closing documents, opinions and certificates executed in connection therewith (including a copy of the Notification and Report Form in respect of the Acquisition furnished to the Department of Justice and the Federal Trade Commission pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976), all of which shall be in full force and effect. The Acquisition Documents shall not have been materially amended, supplemented or otherwise modified since the date thereof (except for such material amendments, supplements or modifications that have been approved by the Administrative Agent). The Acquisition Documents shall be accompanied by an Officer's Certificate of the Borrower, dated the Closing Date, to such effect. The Borrower and each other party to the Transaction Documents shall be in material compliance with all the terms thereof, and the Administrative Agent shall have received, with a copy for each Lender, an Officer's Certificate of the Borrower certifying that the only condition to the consummation of the Tender Transaction remaining to be satisfied (which condition shall be satisfied substantially simultaneously with the making of the initial Loans) is the delivery of funds sufficient to pay the consideration under the Tender Offer Documents. (c) No Legal Impediments. No law, regulation, order, judgment or decree of any Governmental Authority shall, and the Administrative Agent shall not have received any notice that any action, suit, investigation, litigation or proceeding is pending or overtly threatened in any court or before any arbitrator or Governmental Authority which (i) purports to enjoin, prohibit, restrain or otherwise affect (A) the making of the Loans on the Closing Date, (B) the Acquisition or (C) the consummation of 48 any transaction contemplated pursuant to the Transaction Documents or (ii) would be reasonably expected to impose or result in the imposition of a Material Adverse Effect. (d) Consents. Each Loan Party shall have received all consents and authorizations required pursuant to any material Contractual Obligation with any other Person and shall have obtained all consents and authorizations of, and effected all notices to and filings with, any Governmental Authority, in each case, as may be necessary to allow such Loan Party, lawfully and without risk of rescission, (i) to execute, deliver and perform, in all material respects, its obligations under each Transaction Document to which it is, or is to be, a party and each other agreement or instrument to be executed and delivered by it pursuant thereto or in connection therewith and (ii) to consummate the transactions contemplated by the Transaction Documents. (e) No Change in Condition. No Material Adverse Effect shall have occurred since December 31, 1999. (f) No Default. No Default or Event of Default shall have occurred and be continuing or would result from the making of the Loans on the Closing Date. (g) Representations and Warranties. All of the representations and warranties contained in Section 6.01 and in the other Loan Documents shall be true and complete in all material respects on and as of the Closing Date. (h) Fees and Expenses Paid. There shall have been paid to the Administrative Agent, for the account of the Agents and the Lenders, all fees due and payable on or before the Closing Date, and all expenses (including, without limitation, legal fees and expenses) due and payable on or before the Closing Date. (i) Financial Information. The Administrative Agent shall have received, with copies for each Lender, each of the financial statements referred to in Section 6.01(h), in form and substance satisfactory to the Administrative Agent and the Lenders. (j) Indebtedness. The Administrative Agent shall have received satisfactory evidence that the Borrower's existing Indebtedness (other than the Permitted Existing Indebtedness listed in Section 1.01(A) of the Disclosure Letter) has been satisfied and that Schein's existing Indebtedness has been satisfied (or, in the case of the Floating Rate Notes, satisfactory provision has been made for the payment thereof) and that Schein has not incurred or assumed any indebtedness not otherwise acceptable to the Lenders. 5.02. Conditions Precedent to All Loans. The obligation of each Lender to make any Loan requested to be made by it on any Funding Date on or after the Closing Date is subject to the following conditions precedent as of each such date: (a) Representations and Warranties. As of such date, both before and after giving effect to the Loans to be made, all of the representations and warranties contained in Section 6.01 and in the other Loan Documents shall be true and complete in all material respects (except to the extent that such representations or warranties are made as of an earlier date, in which case they shall be true and complete in all material respects as of such earlier date). (b) No Defaults. As of such date, no Default or Event of Default shall have occurred and be continuing or would result from the making of the requested Loan or the application of the proceeds therefrom. 49 Each request by the Borrower for a Loan, each submission by the Borrower of a Notice of Borrowing, each acceptance by the Borrower of the proceeds of each Loan made hereunder, shall constitute a representation and warranty by the Borrower as of the Funding Date in respect of such Loan that all the conditions contained in this Section 5.02 have been satisfied. ARTICLE VI REPRESENTATIONS AND WARRANTIES 6.01. Representations and Warranties of the Borrower. In order to induce the Lenders to enter into this Agreement and to make the Loans, the Borrower hereby represents and warrants as follows: (a) Organization; Powers. Each Loan Party (i) is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of organization, and (ii) has all requisite power and authority to own, operate and encumber its assets and to conduct its business as presently contemplated. (b) Authority. (i) Each Loan Party has the requisite power and authority to execute, deliver and perform each of the Transaction Documents and the Merger Documents to which it is a party. (ii) No other action or proceeding on the part of any Loan Party is necessary to execute, deliver and perform each of the Transaction Documents and the Merger Documents to which it is a party thereto or to consummate the transactions contemplated thereby. (iii) Each of the Transaction Documents to which any Loan Party is a party has been duly executed and delivered by such Loan Party and constitutes the legal, valid and binding obligation of such Loan Party, enforceable against such Loan Party in accordance with its terms, except as such enforceability may be limited by (i) bankruptcy, insolvency, reorganization or other similar laws affecting the enforcement of creditors' rights generally and (ii) general principles of equity relating to enforceability (regardless of whether such enforceability is considered in a proceeding in equity or at law). (c) Ownership. Section 6.01(C) of the Disclosure Letter sets forth the ownership of the Borrower and its Subsidiaries as of the date hereof. Each Loan Party has delivered to the Administrative Agent true and complete copies of the Governing Documents for such Loan Party in effect as of the date hereof. There exists no other agreement or understanding (written or oral) affecting in any material respect the relative rights, obligations or liabilities of such other than said Governing Documents so delivered and such Loan Party is in compliance in all material respects with all of its Governing Documents. (d) No Conflict. The execution, delivery and performance by each Loan Party of each Loan Document to which it is a party and the consummation of the transactions contemplated thereby do not and will not (i) conflict with the Governing Documents of such Loan Party, (ii) violate any Requirements of Law (including Regulation U) or any material Contractual Obligation of such Loan Party or require the termination of any material Contractual Obligation by such Loan Party, or (iii) result in or require the creation or imposition of any Lien whatsoever upon any of the property or assets of such Loan Party. The execution, delivery and performance by each Loan Party of each Transaction Document (other than a Loan Document) to which it is a party and the consummation of the transactions contemplated thereby do not and will not (i) conflict with the Governing Documents of such Loan Party, (ii) except for the agreements set forth in Section 6.01(d) of the Disclosure Letter and except the permits, registrations 50 and filings required to be made as a result of the Tender Offer and Merger which permits, registrations and filings do not have nor are reasonably likely to have a Material Adverse Effect, violate any Requirements of Law or any material Contractual Obligation of such Loan Party or require the termination of any material Contractual Obligation by such Loan Party, or (iii) result in or require the creation or imposition of any Lien whatsoever upon any of the property or assets of such Loan Party. (e) Governmental Consents. Except as set forth in Section 6.01(e) of the Disclosure Letter and except the permits, registrations and filings required to be made as a result of the Tender Offer and Merger which permits, registrations and filings do not have nor are reasonably likely to have a Material Adverse Effect, the execution, delivery and performance by each Loan Party of each Transaction Document to which it is a party and the consummation of the transactions contemplated thereby do not and will not require any registration with, consent or approval of, or notice to, or other action to, with or by any Governmental Authority, except consents and filings that have been obtained or made. (f) Governmental Regulation. No Loan Party is subject to regulation under the Public Utility Holding Company Act of 1935, the Federal Power Act, the Interstate Commerce Act, or the Investment Company Act of 1940, or any other federal or state statute or regulation which limits its ability to incur indebtedness or its ability to consummate the transactions contemplated by the Transaction Documents. (g) Subsidiaries. As of the Closing Date, the Borrower has no Subsidiaries or interests in any joint venture or partnership of any other Person other than the Subsidiaries and material joint ventures and partnerships set forth on Section 6.01(C) of the Disclosure Letter. (h) Financial Position of the Borrower. True and complete copies of the following financial statements have been delivered to the Administrative Agent and the Lenders: (i) the audited consolidated balance sheets as at the end of each fiscal year ended December 31, 1999, December 31, 1998 and December 31, 1997, and the related consolidated statements of income and cash flow for the Borrower and its Subsidiaries, (ii) the unaudited consolidated balance sheet as at March 31, 2000 and the unaudited pro forma condensed combined balance sheet and statement of operations (after giving effect to the consummation of the Tender Transaction) for such period then ended, (iii) the audited consolidated balance sheets as at the end of each fiscal year ended December 31, 1999, December 31, 1998 and December 31, 1997, and the related consolidated statements of income and cash flow for Schein and its Subsidiaries, and (iv) the unaudited consolidated balance sheet as at March 31, 2000. The foregoing financial statements were prepared in conformity with GAAP, except, with respect to interim financial statements, the absence of full footnote disclosure and year-end audit adjustments and as otherwise noted therein, and fairly present in all material respects the financial position, and the results of operations and cash flows of the Borrower and its Subsidiaries and Schein and its Subsidiaries, as applicable, for each of the periods covered thereby as at the respective dates thereof subject, in the case of interim financial statements, to normal year-end audit adjustments and the absence of footnote disclosure. No Loan Party has any Accommodation Obligation, contingent liability or liability for any Taxes, long-term leases or commitments, not reflected in the foregoing financial statements which will have or is reasonably likely to have a Material Adverse Effect. (i) Projections. The Borrower has delivered to the Administrative Agent and each Lender pursuant to Section 5.01(a) certain projected financial statements of the Borrower and its Subsidiaries which have been prepared in good faith and using accounting principles consistently applied. (j) Litigation; Adverse Effects. Except as set forth in Sections 6.01(J) and 6.01(P) of the Disclosure Letter, there is no action, suit, proceeding, investigation or arbitration before or by any Governmental Authority or private arbitrator pending or, to the knowledge of each Loan Party, overtly 51 threatened against such Loan Party or any of its assets (i) challenging the validity or the enforceability of any of the Loan Documents or transactions contemplated thereby or (ii) which will or is reasonably likely to result in any Material Adverse Effect. There is no material loss contingency within the meaning of GAAP which has not been reflected in the financial statements of the Borrower and its Subsidiaries and which will or is reasonably likely to result in any Material Adverse Effect. No Loan Party is (A) in violation of any applicable Requirements of Law which violation will have or is reasonably likely to have a Material Adverse Effect or (B) subject to, or in default with respect to, any final judgment, writ, injunction, restraining order or order of any nature, decree, rule or regulation of any court or Governmental Authority which will have or is reasonably likely to have a Material Adverse Effect. (k) No Material Adverse Effect. Since December 31, 1999, there has occurred no event which has had or is reasonably likely to have a Material Adverse Effect. (l) Payment of Taxes. All tax returns and material reports required to be filed by the Borrower and Schein have been timely filed, and all taxes, assessments, fees and other governmental charges shown on such returns have been paid when due and payable, except such taxes, if any, as are reserved against in accordance with GAAP and are being contested in good faith by appropriate proceedings. (m) Performance. No Loan Party has received notice, or has actual knowledge, that (i) it is in default in the performance, observance or fulfillment of any material (singularly or in the aggregate) Contractual Obligations applicable to it or (ii) any material (singularly or in the aggregate) condition exists which, with the giving of notice or the lapse of time or both, would constitute a default with respect to any such Contractual Obligation. (n) Disclosure. The representations and warranties of each Loan Party contained in the Loan Documents and all certificates and other documents delivered pursuant to the terms thereof, do not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements contained therein, in light of the circumstances under which they were made, not misleading in any material respect. No Loan Party has intentionally withheld any fact from the Administrative Agent or the Lenders with regard to any matter which will have or is reasonably likely to have a Material Adverse Effect. (o) Requirements of Law. Each Loan Party is in compliance in all material respects with all Requirements of Law applicable to it and its business. (p) Environmental Matters. To each Loan Party's knowledge, upon inquiry and investigation completed by such Loan Party as diligently and as thoroughly as would reasonably be required to determine any facts relevant to the representations set forth herein, and except as set forth in Section 6.01(P) of the Disclosure Letter hereto, (i) such Loan Party and its operations and Property comply in all respects with all applicable Environmental, Health or Safety Requirements of Law, except where noncompliance has not resulted or would not be reasonably likely to have a Material Adverse Effect; (ii) such Loan Party has obtained all environmental, health and safety Permits necessary for its operations and Property and all such Permits are in good standing and such Loan Party is in compliance with all terms and conditions of such Permits except such as has not resulted or would not be reasonably likely to have a Material Adverse Effect; (iii) no Loan Party nor its operations is subject to any order from or written agreement with any Governmental Authority or private party or any judicial or administrative proceeding or investigation respecting any Environmental, Health or Safety Requirements of Law or any Release or threatened Release of a Contaminant into the indoor or outdoor environment; (iv) no Loan Party nor its operations is subject to any Remedial Action or other Liabilities and Costs arising from the Release or threatened Release of a Contaminant into the indoor or outdoor environment except such as 52 has not resulted or would not be reasonably likely to have a Material Adverse Effect; (v) no Loan Party has filed any notice under any Requirement of Law indicating treatment, storage or disposal of a hazardous waste, as that term is defined under 40 CFR Part 261 or any applicable state equivalent except such as has not resulted or would not be reasonably likely to have a Material Adverse Effect; (vi) no Loan Party has filed any notice under applicable Requirement of Law reporting a Release of a Contaminant into the indoor or outdoor environment except such as has not resulted or would not be reasonably likely to have a Material Adverse Effect; (vii) no Environmental Liens have attached to any Property of any Loan Party securing obligations, individually or in the aggregate, in an amount of $25,000,000 or more; (viii) no Loan Party has received any written notice or claim to the effect that it is or may be liable to any Person as a result of the Release or threatened Release of a Contaminant into the indoor or outdoor environment except such as has not resulted or would not be reasonably likely to have a Material Adverse Effect; and (ix) neither the Acquisition nor any transaction contemplated by this Agreement is subject to any Environmental Property Transfer Act. (q) ERISA. Neither the Borrower nor any ERISA Affiliate maintains or contributes to any Benefit Plan as of the Closing Date other than a Benefit Plan listed on Section 6.01(Q) of the Disclosure Letter. Each Plan which is intended to be qualified under Section 401(a) of the Code as currently in effect has been determined by the IRS to be so qualified, and each trust related to any such Plan has been so determined to be exempt from federal income tax under Section 501(a) of the Code as currently in effect, except for changes for which the remedial amendment period has not expired. Neither the Borrower nor any ERISA Affiliate maintains or contributes to any employee welfare benefit plan within the meaning of Section 3(1) of ERISA, other than a Multiemployer Plan, which provides benefits to employees after termination of employment other than as required under Part 6 of Title I of ERISA. Each of the Borrower and its Subsidiaries is in compliance in all material respects with the responsibilities, obligations or duties imposed on it by ERISA or regulations promulgated thereunder with respect to all Plans. No accumulated funding deficiency (as defined in Section 302(a)(2) of ERISA and Section 412(a) of the Internal Revenue Code) exists in respect to any Benefit Plan. Except as set forth on Section 6.01(Q) of the Disclosure Letter, neither the Borrower nor any ERISA Affiliate nor any fiduciary of any Plan (i) has engaged in a nonexempt "prohibited transaction" described in Section 406 of ERISA or Section 4975 of the Internal Revenue Code or (ii) has taken any action which would constitute or result in a Termination Event with respect to any Plan which would result in a material liability to the Borrower or an ERISA Affiliate. Neither the Borrower nor any ERISA Affiliate has incurred any material liability to the PBGC which has not been paid within the applicable period permitted by law. Schedule B to the most recent annual report filed with the IRS with respect to each Benefit Plan and furnished to the Administrative Agent is complete and accurate in all material respects. Since the date of each such Schedule B, there has been no material adverse change in the funding status or financial condition of the Benefit Plan relating to such Schedule B which would result in a Material Adverse Effect. Neither the Borrower nor any ERISA Affiliate has failed to make any required installment under subsection (m) of Section 412 of the Code and any other payment required under Section 412 of the Code on or before the due date for such installment or other payment which could reasonably be expected to result in a lien under Section 412 of the Code. Neither the Borrower nor any ERISA Affiliate is required to provide security to a Benefit Plan under Section 401(a)(29) of the Internal Revenue Code due to a Plan amendment that results in an increase in current liability for the plan year. The Borrower and its Subsidiaries and its ERISA Affiliates are current with respect to all obligations they may have relating to any Multiemployer Plan to which they are or have been obligated to contribute. Neither the Borrower nor any ERISA Affiliate has or is likely to incur any withdrawal liability with respect to any Multiemployer Plan which would have a Material Adverse Effect. (r) Labor Matters. No Loan Party is a party to any labor contract as of the Closing Date. There are no strikes, lockouts or other disputes relating to any collective bargaining or similar 53 agreement to which such Loan Party is a party which would have or is reasonably likely to have a Material Adverse Effect. (s) Securities Activities. No Loan Party is engaged in the business of extending credit for the purpose of purchasing or carrying Margin Stock. (t) Solvency. After giving effect to the receipt and application of the Loans in accordance with the terms of this Agreement, each Loan Party is Solvent. (u) Patents, Trademarks, Permits, etc.; Government Approvals. (i) Each Loan Party owns, is licensed or otherwise has the lawful right to use the permits and other governmental approvals, patents, trademarks, trade names, copyrights, technology, know-how and processes necessary for the conduct of its business as currently conducted which are material to its condition (financial or otherwise), operations, performance and prospects. There are no claims pending or, to such Loan Party's knowledge, overtly threatened that such Loan Party is infringing or otherwise adversely affecting the rights of any Person with respect to such permits and other governmental approvals, patents, trademarks, trade names, copyrights, technology, know-how and processes, except for such claims and infringements as do not, in the aggregate, give rise to any liability on the part of such Loan Party which has or is reasonably likely to have a Material Adverse Effect. (ii) The consummation of the transactions contemplated by the Loan Documents will not impair such Loan Party's ownership of or rights under (or the license or other right to use, as the case may be) any permits and governmental approvals, patents, trademarks, trade names, copyrights, technology, know-how or processes in any manner which has or is reasonably likely to have a Material Adverse Effect. (v) Assets and Properties. Each Loan Party has good and marketable or merchantable title to all of its owned assets and property (tangible and intangible), and all such assets and property are free and clear of all Liens except Liens permitted under Section 9.03. Substantially all of the assets and property owned by, leased to or used by such Loan Party are in good operating condition and repair, ordinary wear and tear excepted, are free and clear of any known defects except such defects as do not substantially interfere with the continued use thereof in the conduct of normal operations, and are able to serve the function for which they are currently being used, except in each case where the failure of such asset to meet such requirements would not have or is not reasonably likely to have a Material Adverse Effect. Neither this Agreement nor any other Loan Document, nor any transaction contemplated under any Loan Document, will affect any right, title or interest of such Loan Party in and to any of such assets in a manner that would have or is reasonably likely to have a Material Adverse Effect. (w) Insurance. Section 6.01(W) of the Disclosure Letter accurately sets forth all insurance policies and programs currently in effect as of the Closing Date with respect to the respective property and assets and business of the Borrower and its Subsidiaries, specifying for each such policy and program, (i) the amount thereof and the amount of the deductible relating thereto, (ii) the risks insured against thereby, (iii) the name of the insurer and each insured party thereunder, (iv) the policy or other identification number thereof, (v) the expiration date thereof, (vi) the annual premium with respect thereto and (vii) the current rating of such insurer by A.M. Best or an established rating agency reasonably satisfactory to the Administration Agent. (x) Material Adverse Agreements. After giving effect to this Agreement, no Loan Party is a party to or subject to any Contractual Obligation or other restriction contained in its Governing Documents which has or is reasonably likely to have a Material Adverse Effect. 54 (y) Forfeiture Proceeding. No Loan Party is engaged in or proposes to be engaged in the conduct of any business or activity which could result in a Forfeiture Proceeding and no Forfeiture Proceeding against it is pending or threatened. ARTICLE VII REPORTING COVENANTS Each Loan Party covenants and agrees so long as any Commitment is outstanding and thereafter until payment in full of the Obligations: 7.01. Financial Statements. Each Loan Party shall maintain a system of accounting established and administered in accordance with sound business practices to permit preparation of financial statements in conformity with GAAP, and each of the financial statements described below shall be prepared from such system and records. The Borrower shall deliver or cause to be delivered to the Administrative Agent and the Lenders: (a) Quarterly Reports. As soon as practicable, and in any event within forty-five (45) days after the end of each fiscal quarter in each Fiscal Year, consolidated balance sheets of the Borrower and its Subsidiaries as at the end of such period and the related consolidated statements of income and cash flow of the Borrower and its Subsidiaries for such fiscal quarter, certified by the Chief Financial Officer of the Borrower as fairly presenting the financial position of the Borrower as at the dates indicated and the results of its operations and cash flow for the fiscal quarter indicated in accordance with GAAP, subject to normal year end adjustments and the absence of complete footnote disclosure provided that, so long as the Borrower files quarterly reports on Form 10-Q with the Commission, the delivery of such Form 10-Q for such fiscal quarter shall satisfy the requirements of this Section 7.01(a). (b) Annual Reports. As soon as practicable, and in any case within ninety (90) days after the end of such Fiscal Year, (i) the audited consolidated (and unaudited consolidating) balance sheet of the Borrower and its Subsidiaries as of the end of such Fiscal Year and the related audited consolidated (and unaudited consolidating) statements of income and audited consolidated statement of cash flow of the Borrower and its Subsidiaries for such Fiscal Year, provided that, so long as the Borrower files an annual report on Form 10-K with the Commission, the delivery of such Form 10-K for such annual period accompanied by unaudited consolidating balance sheets and statements of income of the Borrower and its Subsidiaries shall satisfy the requirements of this Section 7.01(b)(i) and (ii) a report thereon of PricewaterhouseCoopers, LLP or other independent certified public accountants acceptable to the Administrative Agent, which report shall be unqualified and shall state that such financial statements fairly present the financial position of the Borrower as at the dates indicated and the results of its operations and cash flow for the periods indicated in conformity with GAAP applied on a basis consistent with prior years and that the examination by such accountants in connection with such financial statements has been made in accordance with generally accepted auditing standards. (c) Officer's Certificate. Together with each delivery of any financial statement pursuant to paragraphs (a) and (b) of this Section 7.01, (i) an Officer's Certificate substantially in the form of Exhibit G attached hereto and made a part hereof, stating that such officer has reviewed the terms of the Loan Documents, and has made, or caused to be made under his supervision, a review in reasonable detail of the transactions and consolidated financial condition of the Borrower during the accounting period covered by such financial statements, that such review has not disclosed the existence during or at the end of such accounting period, and that such officer does not have knowledge of the existence as at the date of such Officer's Certificate, of any condition or event which constitutes an Event 55 of Default or Default, or, if any such condition or event existed or exists, specifying the nature and period of existence thereof and what action the Borrower has taken, is taking and proposes to take with respect thereto and (ii) a certificate substantially in the form of Exhibit H attached hereto (the "Compliance Certificate"), signed by the Borrower's Chief Financial Officer, setting forth calculations (with such specificity as the Lenders may reasonably request) for the period then ended which demonstrate compliance, when applicable, with the provisions of Article IX and Article X. (d) Budgets; Business Plans; Financial Projections. As soon as practicable and in any event not later than the forty-fifth day following the beginning of each Fiscal Year, (i) a quarterly budget of the Borrower and its Subsidiaries for such Fiscal Year; (ii) an annual business plan of the Borrower and its Subsidiaries for such Fiscal Year, accompanied by a report explaining the changes and departures from the business plan delivered to the Administrative Agent and the Lenders for the preceding Fiscal Year; and (iii) a plan and financial forecast, prepared in accordance with the Borrower's normal accounting procedures applied on a consistent basis, for such Fiscal Year and for the two (2) succeeding Fiscal Years of the Borrower, including, without limitation, (A) a forecasted balance sheet of the Borrower as at the end of such Fiscal Year and (B) forecasted statements of income and cash flow of the Borrower for such Fiscal Year. 7.02. Management Reports. The Borrower shall deliver or cause to be delivered to the Administrative Agent copies of any management reports delivered to any Loan Party or to any officer or employee thereof by the independent, certified public accountants in connection with the financial statements delivered pursuant to Section 7.01. 7.03. Other Financial Information. (a) Such other information, reports, contracts, schedules, lists, documents, agreements and instruments with respect to the business, condition (financial or otherwise), operations, performance, properties or prospects of any Loan Party as the Administrative Agent or any Lender may, from time to time, reasonably request. (b) Copies of all financial statements, reports and notices, if any, sent or made available generally by the Borrower to the holders of its publicly-held Securities or to a trustee under any indenture or filed by the Borrower with the Commission, and of all press releases made available generally by the Borrower to the public concerning material developments in the Borrower's business. 7.04. Defaults and Other Events. Promptly upon any Loan Party obtaining knowledge (i) of any condition or event which constitutes a Default or an Event of Default, (ii) that any Person has given any notice to any Loan Party or taken any other action with respect to a claimed default or event or condition of the type referred to in Section 11.01(e) or (iii) of any condition or event which has or is reasonably likely to have a Material Adverse Effect, such Loan Party shall deliver to the Administrative Agent and the Lenders an Officer's Certificate specifying (A) the nature and period of existence of any such claimed default, Event of Default, Default, condition or event, (B) the notice given or action taken by such Person in connection therewith and (C) what action the Borrower and such Loan Party have taken, are taking and propose to take with respect thereto. 7.05. Lawsuits. Promptly upon any Loan Party obtaining knowledge of the institution of, or written threat of, (i) any action, suit, proceeding or arbitration against or affecting such Loan Party or any asset of such Loan Party not previously disclosed pursuant to Section 6.01(J) or 6.01(P) of the Disclosure Letter and required to be publicly disclosed, the Borrower or such Loan Party shall give written notice thereof to the Administrative Agent and the Lenders and provide such other information as may be reasonably available to enable each Lender and the Administrative Agent and its counsel to evaluate such matters except, in each case, where the same is fully covered by insurance (other than applicable deductible); and (ii) in addition to the requirements set forth in clauses (i) of this Section 7.05, 56 the Borrower upon request of the Administrative Agent or the Requisite Lenders shall promptly give written notice of the status of any action, suit, proceeding, governmental investigation or arbitration covered by a report delivered pursuant to clause (i) above and provide such other information as may be reasonably available to it to enable each Lender and the Administrative Agent and its counsel to evaluate such matters. 7.06. ERISA Notices. (i) As soon as possible, and in any event within ten (10) days after either the Borrower or an ERISA Affiliate knows or has reason to know that a Termination Event has occurred, a written statement of the Chief Financial Officer of the Borrower describing such Termination Event and the action, if any, which the Borrower or such ERISA Affiliate has taken, is taking or proposes to take, with respect thereto, and, when known, any action taken or threatened by the IRS, the DOL or the PBGC with respect thereto; (ii) as soon as possible, and in any event within ten (10) days, after either the Borrower or an ERISA Affiliate knows or has reason to know that a non-exempt prohibited transaction (defined in Section 406 of ERISA and Section 4975 of the Code) that would result in a material liability to the Borrower or an ERISA Affiliate has occurred, a statement of the Chief Financial Officer of the Borrower describing such transaction; (iii) within ten (10) days after the filing thereof with the IRS, a copy of each funding waiver request filed with respect to any Benefit Plan and all communications received by either the Borrower or an ERISA Affiliate with respect to such request; (iv) promptly upon, and in any event within ten (10) days after, receipt by either the Borrower or an ERISA Affiliate of a notice of the PBGC's intention to terminate a Benefit Plan or to have a trustee appointed to administer a Benefit Plan, copies of each such notice; (v) promptly upon, and in any event within ten (10) days after, receipt by either the Borrower or an ERISA Affiliate of an unfavorable determination letter from the IRS regarding the qualification of a Plan under Section 401(a) of the Code, a copy of said determination letter, if such disqualification would result in a material liability to the Borrower or any of its Subsidiaries; (vi) promptly upon, and in any event within ten (10) days after receipt by the Borrower of a notice from a Multiemployer Plan regarding the imposition of material withdrawal liability, a copy of said notice; and (vii) promptly upon, and in any event within ten (10) days after, the Borrower or any of its Subsidiaries fails to make a required installment under subsection (m) of Section 412 of the Code or any other payment required under Section 412 of the Code on or before the due date for such installment or payment, a notification of such failure, if such failure could result in either the imposition of a Lien under said Section 412 or otherwise have a Material Adverse Effect on the Borrower or any of its Subsidiaries. 7.07. Environmental Notices. The Borrower shall notify the Administrative Agent, in writing, promptly, and in any event within ten (10) days after any Loan Party's learning thereof, of any of the following: (i) written notice or claim to the effect that such Loan Party is or may be liable to any Person as a result of the Release or threatened Release of any Contaminant into the indoor or outdoor environment; (ii) written notice that such Loan Party is subject to investigation by any Governmental Authority evaluating whether any Remedial Action is needed to respond to the Release or threatened 57 Release of any Contaminant into the indoor or outdoor environment; (iii) written notice that any Property of such Loan Party is subject to an Environmental Lien; (iv) written notice of violation to such Loan Party or awareness by the Borrower or such Loan Party of a condition which might reasonably result in a notice of violation to such Loan Party of any Environmental, Health or Safety Requirement of Law, which could have a Material Adverse Effect on the Borrower or such Loan Party; (v) commencement or written threat of any judicial or administrative proceeding alleging a violation of any Environmental, Health or Safety Requirement of Law; (vi) new or proposed changes to any existing Environmental, Health or Safety Requirement of Law that could have a Material Adverse Effect on the operations of the Borrower or such Loan Party; or (vii) any proposed acquisition of stock, assets, real estate or leasing of property, or any other action by the Borrower or such Loan Party that could subject the Borrower or such Loan Party to Environmental, Health or Safety Liabilities and Costs that could have a Material Adverse Effect. For purposes of clauses (i), (ii) and (iii), written notice shall include other non-written communications given to an agent or employee of the Borrower or such Loan Party with direct or indirect supervisory responsibility with respect to the activity, if any, which is the subject of such communication, if such activity could have a Material Adverse Effect. With respect to clauses (i) through (vii) above, such notice shall be required only if (A) the liability or potential liability, or with respect to clause (vi), the cost or potential cost of compliance, which is the subject matter of the notice is likely to exceed Thirty-Five Million Dollars ($35,000,000), or if (B) such liability or potential liability or cost of compliance when added to other liabilities of the Borrower and its Subsidiaries of the kind referred to in clauses (i) through (vii) above is likely to exceed Seventy-Five Million Dollars ($75,000,000). 7.08. FDA Notices. The Borrower shall provide to the Administrative Agent: (a) promptly after the same become available to the Borrower, with respect to each manufacturing facility of the Borrower or its Subsidiaries, all warning letters alleging violations of FDA regulatory requirements at such manufacturing facility; (b) promptly after the same become available to the Borrower, with respect to each manufacturing facility of the Borrower or its Subsidiaries, all inspectional observations recorded on a Form FD 483 and issued by the FDA at the conclusion of any FDA inspections of such facility (other than pre-approval inspections and post-approval inspections) that would be required to be publicly disclosed by the Borrower in a filing with the Commission as determined by the Borrower; and (c) all written responses to the FDA by or on behalf of the Borrower or its Subsidiaries concerning alleged violations of FDA regulatory requirements contained in warning letters or Form FD 483s referred to in subsections (a) or (b) of this Section 7.10. 7.09. Labor Matters. The Borrower shall notify the Administrative Agent in writing, promptly, but in any event within ten (10) days after learning thereof, of (i) any material labor dispute to which any Loan Party may become a party, any strikes, lockouts or other disputes relating to any Loan Party's plants and other facilities and (ii) any material liability incurred with respect to the closing of any plant or other facility of any Loan Party. 7.10. Other Information. Promptly upon receiving a request therefor from the Administrative Agent or the Requisite Lenders, the Borrower and its Subsidiaries shall prepare and deliver to the Administrative Agent such other information with respect to any Loan Party as from time to time may be reasonably requested by the Administrative Agent or the Requisite Lenders. 58 ARTICLE VIII AFFIRMATIVE COVENANTS The Borrower covenants and agrees so long as any Commitment is outstanding and thereafter until payment in full of the Obligations: 8.01. Existence, etc. Each Loan Party and each Schein Party shall at all times maintain its existence and preserve and keep, or cause to be preserved and kept, in full force and effect its rights and franchises material to its businesses except where the loss or termination of such rights and franchises does not have or is not likely, individually or in the aggregate, to have a Material Adverse Effect. 8.02. Powers; Conduct of Business. Each Loan Party and each Schein Party shall qualify and remain qualified to do business in each jurisdiction in which the nature of its business requires it to be so qualified except for those jurisdictions where failure to so qualify does not have or is not reasonably likely to have, individually or in the aggregate, a Material Adverse Effect. 8.03. Compliance with Laws, etc. Each Loan Party and each Schein Party shall, (a) comply with all Requirements of Law and all restrictive covenants affecting such Person or the business, property, assets or operations of such Person, and (b) obtain as needed all Permits necessary for its operations and maintain such Permits in good standing except in the case where noncompliance with either clause (a) or (b) above does not have or is not reasonably likely to have, individually or in the aggregate, a Material Adverse Effect. 8.04. Payment of Taxes and Claims. Each Loan Party and each Schein Party shall pay (a) all taxes, assessments and other governmental charges imposed upon it or on any of its properties or assets or in respect of any of its franchises, business, income or property before any penalty or interest accrues thereon, the failure to make payment of which will have or is reasonably likely to have, individually or in the aggregate, a Material Adverse Effect, and (b) all claims (including, without limitation, claims for labor, services, materials and supplies) for sums which have become due and payable prior to the same becoming subject to a Lien upon any of such Person's properties or assets and prior to the time when any penalty or fine shall be incurred with respect thereto; provided, however, that no such taxes, assessments and governmental charges referred to in clause (a) above or claims referred to in clause (b) above need be paid if being contested in good faith by appropriate proceedings promptly instituted and diligently conducted and if adequate reserves shall have been set aside therefor in accordance with GAAP. 8.05. Insurance. Each Loan Party and each Schein Party shall maintain, with financially sound and reputable insurers, insurance in such amounts and against such liabilities and hazards as customarily is maintained by other companies operating similar businesses. 8.06. Inspection of Property; Books and Records; Discussions. Each Loan Party and each Schein Party shall permit any authorized representative(s) designated by the Administrative Agent to visit and inspect any of the assets of such Loan Party or such Schein Party, to examine, audit, check and make copies of its financial and accounting records, books, journals, orders, receipts and any correspondence and other data relating to its businesses or the transactions contemplated by the Loan Documents (including, without limitation, in connection with environmental compliance, hazard or liability), to discuss such Person's affairs, finances and accounts with its officers and, in the presence of an officer of such Loan Party or such Schein Party, independent certified public accountants, all upon reasonable notice and at such reasonable times during normal business hours, once each fiscal year; provided, however, that upon the occurrence and during the continuance of an Event of Default each Loan 59 Party shall permit any authorized representative(s) designated by the Administrative Agent or any Lender to do all of the foregoing without notice, at any time and as often as the Administrative Agent or any Lender may request. Each such visitation and inspection (i) by or on behalf of any Lender shall be at such Lender's expense and (ii) by or on behalf of the Administrative Agent shall be at the Borrower's expense. Each Loan Party shall keep and maintain in all material respects proper books of record and account in which entries in conformity with GAAP subject to normal year-end audit adjustments and the absence of complete footnote disclosure shall be made of all dealings and transactions in relation to its businesses and activities. If an Event of Default has occurred and is continuing, each Loan Party, upon the Administrative Agent's request, shall turn over any such records to the Administrative Agent or its representatives. 8.07. ERISA Compliance. The Borrower shall, and shall cause to the best of its ability, each ERISA Affiliate to, establish, maintain and operate all Plans to comply in all material respects with the provisions of ERISA, the Code, all other applicable laws, and the regulations and interpretations thereunder and the respective requirements of the governing documents for such Plans. 8.08. Maintenance of Property. Each Loan Party and each Schein Party shall maintain in all material respects its owned and leased property in good, safe and insurable condition and repair (ordinary wear and tear excepted) and in accordance with any applicable manufacturers' specifications and recommendations, and not permit, commit or suffer any waste (except in the ordinary course of business) or abandonment of any such property and from time to time shall make or cause to be made all repairs, renewal and replacements thereof, except where the failure to make such repairs, renewals and replacements would not have or is not reasonably likely to have, individually or in the aggregate, a Material Adverse Effect; provided, however, that such property may be altered or renovated in the ordinary course of business. 8.09. Maintenance of Licenses, Permits, etc. Each Loan Party and each Schein Party shall maintain in full force and effect all licenses, permits, governmental approvals, franchises, authorizations or other rights necessary for the operation of its business, except where the failure to obtain any of the foregoing would not have or is not reasonably likely to have, individually or in the aggregate, a Material Adverse Effect; and notify the Administrative Agent in writing, promptly after learning thereof, of the suspension, cancellation, revocation or discontinuance of or of any pending or overtly threatened action or proceeding seeking to suspend, cancel, revoke or discontinue any such license, permit, governmental approval, franchise authorization or right. 8.10. Merger. (a) The Merger shall have been consummated no later than December 15, 2000. (b) As of the consummation of the Merger, the Administrative Agent shall have received an Officer's Certificate of the Borrower certifying that (i) the transactions described in the Merger Documents have been consummated in all material respects in accordance with the terms and provisions thereof, (ii) the Borrower and each other party thereto are in material compliance with all the terms thereof, (iii) the terms and provisions of the Merger Agreement, as applicable, have not been materially amended, waived, supplemented or otherwise modified from the Closing Date (except for such material amendments, supplements or modifications that have been approved by the Administrative Agent) and (iv) on and as of the Merger Effective Date (after giving effect the merger), all of the representations and warranties contained in Section 6.01 and in the other Loan Documents are true and complete in all material respects. (c) Schein and each Specified Schein Subsidiary shall have delivered to the Administrative Agent a Guaranty, an Acknowledgment of New Loan Party, and all other agreements, 60 documents, certificates, opinions and corporate resolutions described in the List of Closing Documents under the heading "Merger Effective Date Documentation", each duly executed where appropriate and in form and substance reasonably satisfactory to the Administrative Agent. (d) No law, regulation, order, judgment or decree of any Governmental Authority shall, and the Administrative Agent shall not have received any notice that any action, suit, investigation, litigation or proceeding is pending or threatened in any court or before any arbitrator or Governmental Authority which (i) purports to enjoin, prohibit, restrain or otherwise affect (A) the Merger or (B) the consummation of any transaction contemplated pursuant to the Merger Documents or (ii) would be reasonably expected to impose or result in the imposition of a Material Adverse Effect. (e) Except as set forth in Section 8.10 of the Disclosure Letter, each Schein Party shall have received all consents and authorizations required pursuant to any material Contractual Obligation with any other Person and shall have obtained all consents and authorizations of, and effected all notices to and filings with, any Governmental Authority, in each case, as may be necessary to allow such Schein Party, lawfully and without risk of rescission, (i) to execute, deliver and perform, in all material respects, its obligations under each Transaction Document to which it is, or is to be, a party and each other agreement or instrument to be executed and delivered by it pursuant thereto or in connection therewith and (ii) to consummate the transactions contemplated by the Transaction Documents. 8.11. Loan Party. On or prior to April 15 of each year, the Borrower will cause each Subsidiary (other than a Loan Party) that accounts for at least 5% of the Borrower's EBITDA on a consolidated basis, as determined at the end of the immediately preceding Fiscal Year, to execute and deliver to the Administrative Agent a Guaranty and an Acknowledgment of New Loan Party and otherwise to become a Loan Party hereunder. ARTICLE IX NEGATIVE COVENANTS The Borrower covenants and agrees so long as any Commitment is outstanding and thereafter until payment in full of the Obligations: 9.01. Indebtedness. The Loan Parties and the Schein Parties shall not, directly or indirectly, create, incur, assume or otherwise become or remain liable with respect to any Indebtedness, except: (i) the Obligations; (ii) trade payables in the ordinary course of business; (iii) Permitted Existing Indebtedness; (iv) to the extent permitted by Section 9.13, obligations under Capital Leases and purchase money Indebtedness incurred by the Loan Parties to finance the acquisition of Property if, when added to all other obligations and Indebtedness or created, incurred or assumed under this clause (iv) the aggregate amount of such obligations and Indebtedness does not exceed 10% of Net Worth at such time; (v) Indebtedness owing by one Loan Party to another Loan Party; 61 (vi) Accommodation Obligations that are permitted under Section 9.05; (vii) Interest Rate Contracts with respect to the Loans; (viii) other unsecured Indebtedness incurred in the ordinary course of business in an aggregate principal amount not to exceed Fifty Million Dollars ($50,000,000) outstanding at any time; (ix) the Floating Rate Notes during the period from the Closing Date until the Schein Repayment Date; (x) foreign exchange contracts entered into for the purpose of hedging foreign exchange risk; (xi) Attributable Debt if, when added to all other Attributable Debt created, incurred or assumed under this clause (xi), the aggregate amount outstanding does not exceed 10% of Net Worth; (xii) Indebtedness in a currency other than Dollars incurred by a Loan Party that has operations outside of the United States, provided that the aggregate amount of such Indebtedness does not exceed $20,000,000 at any time; (xiii) refinancings, extensions or other modifications of any of the items of Indebtedness described in clauses (iii), (iv), (v), (vi), (viii) or (xi) above, provided that the principal amount thereof outstanding at such time is not increased and that the terms of such refinancing, extensions or modifications are not materially adverse to the Lenders; and (xiv) Indebtedness incurred by Schein or its Subsidiaries on the Closing Date to the extent permitted under Section 9.04(viii). 9.02. Sales of Assets. The Loan Parties and the Schein Parties shall not, directly or indirectly, sell, assign, transfer, lease, convey or otherwise dispose of any assets, whether now owned or hereafter acquired, or enter into any agreement to do so, except: (i) sales of inventory in the ordinary course of business; (ii) the disposition of Property if such Property is obsolete or no longer used in or useful in the ordinary course of such Loan Party's business; (iii) leases, subleases, licenses and sublicenses of Property to other persons in the ordinary course of business; (iv) the transactions set forth in Section 9.02(iv) of the Disclosure Letter; (v) the sale of Property provided that (A) the value of such Property does not exceed 10% of Net Worth at the time of such sale and (B) when added to all other Property sold, assigned, transferred, leased, conveyed or otherwise disposed of under this clause (v), the aggregate amount does not exceed 20% of Net Worth at the time of such sale; (vi) the transactions set forth in Section 9.02(vi) of the Disclosure Letter; 62 (vii) the sale or transfer of Property pursuant to a transaction permitted under Section 9.10; and (viii) other sales of assets with an aggregate market value not in excess of $20,000,000 in any Fiscal Year. 9.03. Liens. The Loan Parties and the Schein Parties shall not, directly or indirectly, create, incur, assume or permit to exist any Lien on or with respect to their Property, except: (i) Permitted Existing Liens; (ii) Customary Permitted Liens; (iii) Liens securing Indebtedness permitted under Section 9.01(iv) provided that the Lien extends only to the property subject to such Capital Leases or the Property Acquired and Liens securing Indebtedness under Section 9.01(xii) provided that the Lien extends to Property outside the United States; (iv) leases or subleases and licenses or sublicenses granted to others, in each case incidental to, and not interfering with, the ordinary conduct of the business of the Borrower and its Subsidiaries; (v) rights of setoff and similar arrangements and Liens in favor of depository institutions and securities intermediaries to secure customary fees and similar amounts related to bank accounts or securities accounts; (vi) any Lien existing on Property of a Person (other than Schein) immediately prior to its being consolidated with or merged into the Borrower or a Subsidiary or its becoming a Subsidiary, or any Lien existing on Property acquired by the Borrower or any Subsidiary at the time such Property is so acquired (whether or not the Indebtedness secured thereby shall have been assumed); provided that (A) no such Lien shall have been created or assumed in contemplation of such consolidation or merger or such Person's becoming a Subsidiary or such acquisition of Property and (B) each such Lien shall extend solely to the item or items of Property so acquired and, if required by the terms of the instrument originally creating such Lien, other property which is an improvement to or is acquired for specific use in connection with such Property; (vii) attachment and judgment Liens that do not constitute an Event of Default pursuant to Section 11.01(h); and (viii) any Lien renewing, extending or refunding any Lien permitted by clauses (i) through (vi), provided that such Lien is not extended to any other Property. 9.04. Investments. The Loan Parties and the Schein Parties shall not, directly or indirectly, make or own any Investment, except: (i) Investments in Cash Equivalents; (ii) Permitted Existing Investments; 63 (iii) the acquisition of all or substantially all of the assets of a business conducted by another Person; provided that no Default or Event of Default exists at the time of such acquisition or would exist after giving effect thereto and subject to approval by the Requisite Lenders; (iv) Investments received in connection with the bankruptcy or reorganization in settlement of delinquent obligations of, or other disputes with, Persons arising in the ordinary course of business; (v) Investments by the Borrower in any Loan Party or by a Loan Party in another Loan party; (vi) Investments by a Loan Party in any Subsidiary of the Borrower (other than another Loan Party) provided that the aggregate amount of such Investments does not exceed (A) 10% of Net Worth during the period from the Closing Date until the Merger Effective Date or (B) 5% of Net Worth thereafter; (vii) Investments made or owned in Strategic Partners, provided that the aggregate amount of all such Investments made or owned under this clause (vii), when added to the aggregate amount of all Accommodation Obligations made, created or assumed pursuant to Section 9.05(iv), does not exceed 20% of Net Worth; (viii) the loan from the Borrower to Schein on the Closing Date in an amount sufficient to repay the outstanding indebtedness of Schein; (ix) other Investments of the Borrower consistent with the investment policy set by the Borrower's Board of Directors from time to time in an aggregate amount not to exceed Fifty Million Dollars ($50,000,000); and (x) loans and advances in the ordinary course of business to officers, directors and employees of a Loan Party or a Schein Party in an aggregate amount, when added to the Accommodation Obligations in Section 9.05(v), does not exceed Fifteen Million Dollars ($15,000,000) at any time. 9.05. Accommodation Obligations. The Loan Parties and the Schein Parties shall not, directly or indirectly, create or become or be liable with respect to any Accommodation Obligation, except: (i) recourse obligations resulting from endorsement of negotiable instruments for collection in the ordinary course of business; (ii) the Guaranties, guaranties of the Senior Notes and guaranties by Schein of the Floating Rate Notes during the period from the Closing Date until the Schein Payment Date; (iii) Accommodation Obligations in respect of obligations of customers and suppliers in an aggregate amount not to exceed Fifty Million Dollars ($50,000,000) at any time; (iv) Accommodation Obligations in Strategic Partners, provided that the aggregate amount of all such Accommodation Obligations made, created or assumed under this clause (iv), when added to the aggregate amount of all Investments made or owned pursuant to Section 9.04(vii), does not exceed 20% of Net Worth; and 64 (v) Accommodation Obligations in the ordinary course of business with respect to the loans of officers, directors and employees of a Loan Party or a Schein Party in an aggregate amount, when added to the loans and advances in Section 9.04(x), does not exceed Fifteen Million Dollars ($15,000,000) at any time. 9.06. Restricted Junior Payments. The Loan Parties and the Schein Parties shall not, directly or indirectly, declare or make any Restricted Junior Payments, except any Loan Party may make dividends and other distributions to the Borrower or another Loan Party. 9.07. Change in Nature of Business. The Loan Parties and the Schein Parties shall not make any material change in the nature or conduct of their Business. 9.08. Transactions with Affiliates. None of the Loan Parties and the Schein Parties shall, directly or indirectly, enter into or permit to exist any transaction with any Affiliate of such Loan Party or such Schein Party except for (i) transactions the terms of which are in the ordinary course of business, in accordance with customary practice, and not less favorable to such Loan Party or such Schein Party than those that might be obtained in an arm's length transaction at the time from a Person who is not an Affiliate, and (ii) reimbursement for reasonable salaries, bonuses and other compensation paid to officers, directors and managers of such Loan Party or such Schein Party commensurate with salary, bonus and compensation levels of other companies engaged in a similar business in similar circumstances. 9.09. Restriction on Fundamental Changes. Other than the Merger, no Loan Party or Schein Party shall merge into or consolidate with any other Person, or permit any other Person to merge into it, or liquidate, wind-up or dissolve (or suffer any liquidation or dissolution), or convey, lease, sell, transfer or otherwise dispose of, in one transaction or series of transactions, all or substantially all of its business or assets, whether now or hereafter acquired except that: (i) Any Loan Party may merge or consolidate into the Borrower provided that the Borrower is the surviving entity. (ii) Any Loan Party may merge or consolidate into any other Loan Party (other than the Borrower). (iii) Any Person may merge or consolidate into a Loan Party, or a Loan Party may merge or consolidate into any Person, provided that (A) such Person is an entity organized and existing under the laws of a State in the United States; (B) the Loan Party is the surviving entity and if the Loan Party is not the Borrower such Loan Party is a Wholly-Owned Subsidiary of the Borrower; and (C) no Default or Event of Default has occurred or will occur prior to and after giving effect to such merger or consolidation. 9.10. Sales and Leasebacks. No Loan Party and no Schein Parties shall become liable, by assumption or by Accommodation Obligation, with respect to any lease of any property (whether real or personal or mixed) (i) which such Loan Party or such Schein Party has sold or transferred or will sell or transfer to any other Person or (ii) which such Loan Party or such Schein Party intends to use for substantially the same purposes as any other asset which it has sold or transferred or will sell or transfer to any other Person in connection with such lease (a "Sale and Leaseback Transaction"); provided that a Loan Party and no Schein Party may enter into a Sale and Leaseback Transaction if the gross cash proceeds of such Sale and Leaseback Transaction are at least equal to the fair market value (as determined in good faith by the board of directors of such Loan Party or such Schein Party) of the Property that is the 65 subject of such Sale and Leaseback Transaction and such Loan Party or such Schein Party is not in violation of Section 9.01(xi). 9.11. Margin Regulations. No Loan Party and no Schein Party shall use all or any portion of the proceeds of any Loan made under this Agreement in violation of Regulation U. 9.12. ERISA. The Borrower shall not, nor shall it permit any ERISA Affiliate to, do any of the following: (ii) engage, or knowingly permit any ERISA Affiliate to engage, in any prohibited transaction described in Sections 406 of ERISA or 4975 of the Code for which a class exemption is not available or a private exemption has not been previously obtained from the DOL; (iii) permit to exist any accumulated funding deficiency (as defined in Sections 302 of ERISA or 412 of the Code), with respect to any Benefit Plan, which has not been waived; (iv) fail, or permit any ERISA Affiliate to fail, to pay timely required contributions or annual installments due with respect to any waived funding deficiency to any Plan; (v) terminate, or permit any ERISA Affiliate to terminate, any Benefit Plan which would result in any liability of the Borrower, or any ERISA Affiliate under Title IV of ERISA or under such Benefit Plan; or (vi) fail, or permit any ERISA Affiliate to fail, to pay any required installment under section (m) of Section 412 of the Code or any other payment required under Section 412 of the Code or Section 302 of ERISA on or before the due date for such installment or other payment. 9.13. Capital Expenditures. The Loan Parties and the Schein Parties shall not make or incur any Capital Expenditures in any Fiscal Year if, after giving effect to such Capital Expenditures, the aggregate amount of all Capital Expenditures made by the Loan Parties and the Schein Parties during such Fiscal Year would exceed the amount set forth below for such Fiscal Year:
Fiscal Year Ending Maximum Amount ------------------ -------------- December 31, 2000 $ 60,000,000 December 31, 2001 $ 70,000,000 December 31, 2002 $ 80,000,000 December 31, 2003 $110,000,000 December 31, 2004 $120,000,000
provided, however, the Borrower may carry forward from one Fiscal Year to the next Fiscal Year (but not to any subsequent Fiscal Year) 100% of any Capital Expenditures permitted but not expended during any Fiscal Year provided that the amount of Capital Expenditures carried forward to the next Fiscal Year may only be used after the Capital Expenditures permitted for such next Fiscal Year are expended. 9.14. Amendment of Governing Documents. No Loan Party shall amend, supplement or otherwise change its Governing Documents in any respect that is materially detrimental to the Lenders. 9.15. Environmental Liabilities. Except as disclosed in Section 6.01(P) of the Disclosure Letter, no Loan Party and no Schein Party shall become legally obligated, whether by settlement, stipulation, nonappealable judgment, nonappealable conclusion of an administrative proceeding, or statute, for any Liabilities and Costs which exceed $35,000,000 in a particular instance or 66 $75,000,000 in the aggregate, arising out of or relating to (a) the Release or threatened Release at any location of any Contaminant into the environment, or any Remedial Action in response thereto or (b) any violation of any Environmental, Health or Safety Requirement of Law. 9.16. No Activities Leading to Forfeiture. No Loan Party and no Schein Party shall engage in the conduct of any business or activity which will or could be reasonably expected to result in a Forfeiture Proceeding. ARTICLE X FINANCIAL COVENANTS The Borrower covenants and agrees so long as any Commitment is outstanding and thereafter until payment in full of the Obligations: 10.01. Minimum Net Worth. The Net Worth of the Borrower and its Subsidiaries on a consolidated basis at the end of each fiscal quarter of each Fiscal Year shall not be less than the sum of (i) $1,000,000,000 plus (ii) an amount equal to 50% of Net Income since the Closing Date. 10.02. Minimum Interest Coverage Ratio. The Interest Coverage Ratio of the Borrower and its Subsidiaries on a consolidated basis at the end of each Financial Covenant Period set forth below shall not be less than the ratio set forth opposite such period:
Quarter Ending Ratio -------------- ----- December 31, 2000 5.00 March 31, 2001 5.00 June 30, 2001 5.00 September 30, 2001 5.00 December 31, 2001 6.00 March 31, 2002 6.00 June 30, 2002 6.00 September 30, 2002 6.00 December 31, 2002 7.00 March 31, 2003 7.00 June 30, 2003 7.00 September 30, 2003 7.00 December 31, 2003 7.00 March 31, 2004 7.00 June 30, 2004 7.00 September 30, 2004 7.00 December 31, 2004 7.00 March 31, 2005 7.00 June 30, 2005 7.00
10.03. Minimum Fixed Charge Coverage Ratio. The Fixed Charge Coverage Ratio of the Borrower and its Subsidiaries on a consolidated basis at the end of each Financial Covenant Period shall not be less than 1.25. 10.04. Maximum Leverage Ratio. The Leverage Ratio of the Borrower and its Subsidiaries on a consolidated basis at the end of each Financial Covenant Period set forth below shall not be greater than the ratio set forth opposite such period: 67
Quarter Ending Ratio -------------- ----- December 31, 2000 2.50 March 31, 2001 2.50 June 30, 2001 2.50 September 30, 2001 2.50 December 31, 2001 2.00 March 31, 2002 2.00 June 30, 2002 2.00 September 30, 2002 2.00 December 31, 2002 1.75 March 31, 2003 1.75 June 30, 2003 1.50 September 30, 2003 1.50 December 31, 2003 1.50 March 31, 2004 1.50 June 30, 2004 1.50 September 30, 2004 1.50 December 31, 2004 1.50 March 31, 2005 1.50 June 30, 2005 1.50
ARTICLE XI EVENTS OF DEFAULT; RIGHTS AND REMEDIES 11.01. Events of Default. Each of the following occurrences shall constitute an Event of Default under this Agreement: (a) Failure to Make Payments When Due. The Borrower shall fail to pay any principal of any Note when due, or shall fail to pay any interest on any Note or any other Obligation within three (3) Business Days after such interest or Obligation shall become due. (b) Breach of Representation or Warranty. Any representation or warranty made or deemed to have been made by any Loan Party under, relating to or in connection with this Agreement, the Notes, any of the other Loan Documents or any certificate or statement furnished by any Loan Party pursuant to or in connection with this Agreement shall be false or misleading in any material respect when made. (c) Breach of Certain Covenants. Any Loan Party shall fail duly and punctually to perform or observe any agreement, covenant or obligation binding on such Loan Party under Section 7.04, Section 8.01, Section 8.05, Section 8.06, Article IX or Article X of this Agreement. (d) Other Defaults. Any Loan Party shall fail duly and punctually to perform or observe any term, covenant or obligation binding on such Loan Party (i) under Section 7.01 of this Agreement and such failure shall continue for ten (10) Business Days after the occurrence of such failure or (ii) under this Agreement (other than as described in Sections 11.01(a), (c) or (d)(i)), and such failure shall continue for thirty (30) days after any Loan Party knew, or, in the exercise of due care, should have known, of such failure (or such lesser period of time as is mandated by applicable Requirements of Law). 68 (e) Default as to Other Indebtedness. Any Loan Party shall fail to make any payment when due (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise) with respect to any Indebtedness (other than an Obligation) if the aggregate amount of such other Indebtedness is Thirty-Five Million Dollars ($35,000,000) or more; or any breach, default or event of default shall occur, or any other condition shall exist under any instrument, agreement or indenture pertaining to any such Indebtedness, if the effect thereof (with or without the giving of notice or lapse of time or both) is to cause an acceleration, mandatory redemption or other required repurchase of such Indebtedness or permit the holder or holders of such Indebtedness to accelerate the maturity of any such Indebtedness or require a redemption or other repurchase of such Indebtedness; or any such Indebtedness shall be otherwise declared to be due and payable (by acceleration or otherwise) or required to be prepaid, redeemed or otherwise repurchased by any Loan Party (other than by a regularly scheduled required prepayment) prior to the stated maturity thereof; or the holder or holders of any Lien, securing obligations of Twenty-Five Million Dollars ($25,000,000) or more, shall commence foreclosure of such Lien upon property of any Loan Party. (f) Involuntary Bankruptcy; Appointment of Receiver, etc. (i) An involuntary case shall be commenced against any Loan Party and the petition shall not be dismissed, stayed, bonded or discharged within sixty (60) days; or a court having jurisdiction in the premises shall enter a decree or order for relief in respect of any Loan Party in an involuntary case, under any applicable bankruptcy, insolvency or other similar law now or hereinafter in effect; or any other similar relief shall be granted under any applicable federal, state, local or foreign law; or the board of directors of any Loan Party (or any committee thereof) adopts any resolution or otherwise authorizes any action to approve any of the foregoing. (ii) A decree or order of a court having jurisdiction in the premises for the appointment of a receiver, liquidator, sequestrator, trustee, custodian or other officer having similar powers over any Loan Party or over all or a substantial part of the assets of any Loan Party shall be entered; or an interim receiver, trustee or other custodian of any Loan Party or of all or a substantial part of the assets of any Loan Party shall be appointed or a warrant of attachment, execution or similar process against any substantial part of the assets of any Loan Party shall be issued and any such event shall not be stayed, dismissed, bonded or discharged; or the board of directors of any Loan Party (or any committee thereof) adopts any resolution or otherwise authorizes any action to approve any of the foregoing. (g) Voluntary Bankruptcy; Appointment of Receiver, etc. Any Loan Party shall commence a voluntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or shall consent to the entry of an order for relief in an involuntary case, or to the conversion of an involuntary case to a voluntary case, under any such law, or shall consent to the appointment of or taking possession by a receiver, trustee or other custodian for all or a substantial part of its assets; or any Loan Party shall make any assignment for the benefit of creditors or shall be unable or fail, or shall admit in writing its inability, to pay its debts as such debts become due, or the board of directors of any Loan Party (or any committee thereof) adopts any resolution or otherwise authorizes any action to approve any of the foregoing. (h) Judgments and Attachments. Any money judgment (other than a money judgment covered by insurance as to which the insurance company has acknowledged coverage), writ or warrant of attachment, or similar process against any Loan Party or any assets of any Loan Party involving in any case an amount in excess of Twenty-Five Million Dollars ($25,000,000) is entered and shall remain undischarged, unvacated, unbonded or unstayed for a period of thirty (30) days. 69 (i) Dissolution. Any order, judgment or decree shall be entered against any Loan Party decreeing its involuntary dissolution or split up and such order shall remain undischarged and unstayed for a period of thirty (30) days; or any Loan Party shall otherwise dissolve or cease to exist. (j) Loan Documents. At any time, for any reason, any Loan Document ceases to be in full force and effect or any Loan Party seeks to repudiate its obligations thereunder. (k) ERISA Liabilities. Any Termination Event occurs which will or is reasonably likely to subject either the Borrower or an ERISA Affiliate to a liability which will, or is reasonably likely to have, a Material Adverse Effect. (l) Waiver Application. The plan administrator of any Benefit Plan applies under Section 412(d) of the Code for a waiver of the minimum funding standards of Section 412(a) of the Code and the Administrative Agent believes that the substantial business hardship upon which the application for the waiver is based could subject either the Borrower or any ERISA Affiliate to liability which the Administrative Agent determines will or is reasonably likely to have a Material Adverse Effect. (m) Change of Control. A Change of Control shall have occurred. (n) FDA Compliance. The FDA shall commence any action or proceeding asserting any material violation of current good manufacturing practices by the Borrower or any of its Subsidiaries, or shall seize, impound or otherwise impose restrictions on the use of material properties or assets of the Borrower or any of its Subsidiaries and such action by the FDA has or is reasonably likely to have a Material Adverse Effect. An Event of Default shall be deemed "continuing" until cured or waived in writing in accordance with Section 13.09. 11.02. Rights and Remedies. (a) Acceleration and Termination. Upon the occurrence of any Event of Default described in Section 11.01(f) or 11.01(g), the Commitments shall automatically and immediately terminate and the unpaid principal amount of, and any and all accrued interest on, the Obligations and all accrued fees shall automatically become immediately due and payable, without presentment, demand, or protest or other requirements of any kind (including, without limitation, valuation and appraisement, diligence, presentment, notice of intent to demand or accelerate and of acceleration), all of which are hereby expressly waived by the Borrower, and the obligations of the Lenders to make Loans hereunder shall thereupon terminate; and upon the occurrence and during the continuance of any other Event of Default, the Administrative Agent shall, at the request, or may with the consent, of the Requisite Lenders, declare (i) that the Commitments are terminated, whereupon the Commitments shall immediately terminate, and/or (ii) the unpaid principal amount of, and any and all accrued interest on, the Obligations and all accrued fees to be, and the same shall thereupon be, immediately due and payable, without presentment, demand, or protest or other requirements of any kind (including, without limitation, valuation and appraisement, diligence, presentment, notice of intent to demand or accelerate and of acceleration, except as may be specifically provided for herein), all of which are hereby expressly waived by the Borrower. (b) Enforcement. The Borrower acknowledges that in the event any Loan Party fails to perform, observe or discharge any of its obligations or liabilities under this Agreement or any other Loan Document, any remedy of law may prove to be inadequate relief to the Administrative Agent and the Lenders; therefore, the Borrower agrees that the Administrative Agent and the Lenders shall be 70 entitled to temporary and permanent injunctive relief in any such case without the necessity of proving actual damages. ARTICLE XII THE AGENT 12.01. Appointment. (a) Each Lender hereby designates and appoints SG as the Administrative Agent of such Lender under this Agreement, and each Lender hereby irrevocably authorizes the Administrative Agent to take such action on its behalf under the provisions of this Agreement, the Notes and the Loan Documents and to exercise such powers as are set forth herein or therein together with such other powers as are reasonably incidental thereto. As to any matters not expressly provided for by this Agreement or the other Loan Documents, the Administrative Agent shall not be required to exercise any discretion or take any action. Notwithstanding the foregoing, the Administrative Agent shall be required to act or refrain from acting (and shall be fully protected in so acting or refraining from acting) upon the instructions of the Requisite Lenders (unless the instructions or consent of all of the Lenders is required hereunder or thereunder) and such instructions shall be binding upon all Lenders; provided, however, the Administrative Agent shall not be required to take any action which (i) the Administrative Agent believes will expose it to personal liability unless the Administrative Agent receives an indemnification satisfactory to it from the Lenders with respect to such action or (ii) is contrary to this Agreement, the Notes, the other Loan Documents or applicable law. The Administrative Agent agrees to act as such on the express conditions contained in this Article XII. (b) The provisions of this Article XII are solely for the benefit of the Administrative Agent and the Lenders, and none of the Loan Parties shall have any rights to rely on or enforce any of the provisions hereof (other than as expressly set forth in Section 12.07). In performing its functions and duties under this Agreement, the Administrative Agent shall act solely as agent of the Lenders and does not assume and shall not be deemed to have assumed any obligation or relationship of agency, trustee or fiduciary with or for any Loan Party. The Administrative Agent may perform any of its duties hereunder, or under the Loan Documents, by or through its agents or employees. 12.02. Nature of Duties. The Administrative Agent shall not have any duties or responsibilities except those expressly set forth in this Agreement or in the Loan Documents. The duties of the Administrative Agent shall be mechanical and administrative in nature. The Administrative Agent shall not have by reason of this Agreement a fiduciary relationship in respect of any Holder. Nothing in this Agreement or any of the Loan Documents, expressed or implied, is intended to or shall be construed to impose upon the Administrative Agent any obligations in respect of this Agreement or any of the Loan Documents except as expressly set forth herein or therein. Each Lender shall make its own independent investigation of the financial condition and affairs of the Borrower and the other Loan Parties in connection with the Loans hereunder and shall make its own appraisal of the credit worthiness of the Borrower and the other Loan Parties initially and on a continuing basis, and the Administrative Agent shall not have any duty or responsibility, either initially or on a continuing basis, to provide any Holder with any credit or other information with respect thereto (except for reports required to be delivered by the Administrative Agent under the terms of this Agreement). If the Administrative Agent seeks the consent or approval of the Lenders to the taking or refraining from taking of any action hereunder, the Administrative Agent shall send notice thereof to each Lender. The Administrative Agent shall promptly notify each Lender at any time that the Lenders so required hereunder have instructed the Administrative Agent to act or refrain from acting pursuant hereto. 12.03. Rights, Exculpation, etc. (a) Liabilities; Responsibilities. None of the Agents, any Affiliate of any Agent, or any of their respective officers, directors, employees, agents, attorneys or 71 consultants shall be liable to any Holder for any action taken or omitted by them hereunder, under the Notes or under any of the Loan Documents, or in connection therewith, except that no Person shall be relieved of any liability imposed by law for gross negligence or willful misconduct. The Administrative Agent shall not be liable for any apportionment or distribution of payments made by it in good faith, and if any such apportionment or distribution is subsequently determined to have been made in error the sole recourse of any Holder to whom payment was due, but not made, shall be to recover from other Holders any payment in excess of the amount to which they are determined to have been entitled. The Administrative Agent shall not be responsible to any Holder for any recitals, statements, representations or warranties herein or for the execution, effectiveness, genuineness, validity, legality, enforceability, collectibility, or sufficiency of this Agreement, the Notes or any of the other Loan Documents or the transactions contemplated thereby, or for the financial condition of the Borrower or any other Loan Party. The Administrative Agent is not making any representation and warranty in connection with, and shall not be required to make any inquiry concerning, the performance or observance of any of the terms, provisions or conditions of this Agreement, the Notes or any of the Loan Documents, or the financial condition of the Borrower or any other Loan Party, or the existence or possible existence of any Default or Event of Default. (b) Right to Request Instructions. The Administrative Agent may at any time request instructions from the Lenders (and after all Obligations owing to the Lenders have been paid in full, from the Holders) with respect to any actions or approvals which by the terms of any of the Loan Documents the Administrative Agent is permitted or required to take or to grant, and the Administrative Agent shall be absolutely entitled to refrain from taking any action or to withhold any approval and shall not be under any liability whatsoever to any Person for refraining from any action or withholding any approval under any of the Loan Documents until it shall have received such instructions from those Lenders or Holders, as the case may be, from whom the Administrative Agent is required to obtain such instructions for the pertinent matter in accordance with the Loan Documents. Without limiting the generality of the foregoing, no Holder shall have any right of action whatsoever against the Administrative Agent as a result of the Administrative Agent acting or refraining from acting under the Loan Documents in accordance with the instructions of all Lenders or, where required by the express terms of this Agreement, a lesser proportion of the Lenders, or of all Holders (after the Obligations owing to the Lenders have been paid in full). (c) InterLinks. Any information, notice, document or other communication posted by the Administrative Agent on InterLinks shall constitute delivery of such information, notice, document or other communication to each Lender upon receipt by such Lender of notification from the Administrative Agent that such information, notice, document or other communication has been posted. 12.04. Reliance. The Administrative Agent shall be entitled to rely upon any written notices, statements, certificates, orders or other documents or any telephone message believed by it in good faith to be genuine and correct and to have been signed, sent or made by the proper Person, and with respect to all matters pertaining to this Agreement or any of the Loan Documents and its duties hereunder or thereunder, upon advice of legal counsel, independent public accountants and other experts selected by it. 12.05. Indemnification. To the extent that the Administrative Agent is not reimbursed and indemnified by the Borrower, the Lenders will reimburse and indemnify the Administrative Agent for and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, reasonable costs, reasonable expenses or disbursements of any kind or nature whatsoever which may be imposed on, incurred by, or asserted against it in any way relating to or arising out of the Loan Documents or any action taken or omitted by the Administrative Agent under the Loan Documents, in proportion to each Lender's Pro Rata Share; provided that no Lender shall be liable for any portion of 72 such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from the Administrative Agent's gross negligence or willful misconduct. The obligations of the Lenders under this Section 12.05 shall survive the payment in full of the Loans and all other Obligations and the termination of this Agreement. In the event that after payment and distribution of any amount by the Administrative Agent to Lenders, any Lender or third party, including the Borrower, any creditor of the Borrower or a trustee in bankruptcy, recovers from the Administrative Agent any amount found to have been wrongfully paid to the Administrative Agent or disbursed by the Administrative Agent to Lenders, then Lenders, in proportion to their respective Pro Rata Shares, shall reimburse the Administrative Agent for all such amounts. 12.06. The Administrative Agent Individually. With respect to the Loans made by it, SG shall have and may exercise the same rights and powers hereunder and is subject to the same obligations and liabilities as and to the extent set forth herein for any other Lender. The terms "Lenders" or "Requisite Lenders" or any similar terms shall, unless the context clearly otherwise indicates, include SG in its individual capacity as a Lender or one of the Requisite Lenders. SG and its Affiliates may accept deposits from, lend money to, and generally engage in any kind of banking, trust or other business with the Borrower, any of its Subsidiaries or any of its Affiliates as if it were not acting as the Administrative Agent pursuant hereto. 12.07. Successor Administrative Agents. (a) Resignation. The Administrative Agent may resign from the performance of all its functions and duties hereunder at any time by giving at least thirty (30) days' prior written notice to the Borrower and the Lenders. Such resignation shall take effect upon the acceptance by a successor Administrative Agent of appointment pursuant to this Section 12.07. (b) Appointment by Requisite Lenders. Upon any such notice of resignation, the Requisite Lenders shall have the right to appoint a successor Administrative Agent selected from among the Lenders, which appointment shall be subject to the prior written approval of the Borrower (which may not be unreasonably withheld, and shall not be required upon the occurrence and during the continuance of an Event of Default or Default). (c) Appointment by Retiring Administrative Agent. If a successor Administrative Agent shall not have been appointed within the thirty (30) day period provided in paragraph (a) of this Section 12.07, the retiring Administrative Agent shall then appoint a successor Administrative Agent who shall serve as the Administrative Agent until such time, if any, as the Requisite Lenders appoint a successor Administrative Agent as provided above. Each Lender shall indemnify and hold the Administrative Agent harmless for and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, reasonable costs, reasonable expenses or disbursements of any kind or nature whatsoever which may be imposed on, incurred by, or asserted against it in any way relating to or arising out of the appointment of a successor Administrative Agent pursuant to the terms of this paragraph (c). (d) Rights of the Successor and Retiring Administrative Agents. Upon the acceptance of any appointment as Administrative Agent hereunder by a successor Administrative Agent, such successor Administrative Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Administrative Agent, and the retiring Administrative Agent shall be discharged from its duties and obligations under this Agreement. After any retiring Administrative Agent's resignation hereunder as Administrative Agent, the provisions of this Article XII shall inure to its benefit as to any actions taken or omitted to be taken by it while it was the Administrative Agent under this Agreement. 73 12.08. Relations Among Lenders. Each Lender agrees that it will not take any legal action, nor institute any actions or proceedings, against the Borrower or any other Loan Party without the prior written consent of the Requisite Lenders. Without limiting the generality of the foregoing, no Lender may accelerate or otherwise enforce its portion of the Obligations, except in accordance with Section 11.02(a). 12.09. Concerning the Loan Documents. (a) Authority. Each Lender authorizes and directs the Administrative Agent to enter into any Loan Documents for the benefit of the Lenders. Each Lender agrees that any action taken by the Administrative Agent or all Lenders (or, where required by the express terms of this Agreement, a lesser proportion of the Lenders) in accordance with the provisions of this Agreement or the other Loan Documents, and the exercise by the Administrative Agent or all Lenders (or, where so required, such lesser proportion) of the powers set forth herein or therein, together with such other powers as are reasonably incidental thereto, shall be authorized and binding upon all of the Lenders. Without limiting the generality of the foregoing, the Administrative Agent shall have the sole and exclusive right and authority to (i) act as the disbursing and collecting agent for the Lenders with respect to all payments and collections arising in connection with this Agreement and the Loan Documents; (ii) execute and deliver each Loan Document and accept delivery of each such agreement delivered by any Loan Party and (iii) except as may be otherwise specifically restricted by the terms of this Agreement or any other Loan Document, exercise all remedies given to the Administrative Agent or the Lenders under the Loan Documents, applicable law or otherwise. ARTICLE XIII MISCELLANEOUS 13.01. Assignments and Participations. (a) Assignments. No assignment or participation of any Lender's rights or obligations under this Agreement and the Notes shall be made except in accordance with this Section 13.01. Each Lender may assign to one or more Eligible Assignees all or a portion of its rights and obligations under this Agreement and the Notes in accordance with the provisions of this Section 13.01. (b) Limitations on Assignments. Each assignment shall be subject to the following conditions: (i) each assignment shall be of a constant, and not a varying, ratable percentage of all of the assigning Lender's rights and obligations in respect of its interest being assigned under this Agreement and its Note and, in the case of a partial assignment, shall be in a minimum principal amount of Five Million Dollars ($5,000,000), or $2,500,000 in the case of an assignment of only Term Loans, except that such limitations shall not apply to an assignment by any Lender of any portion of its rights and obligations to another Lender or an assignment by any Lender of all of its rights or obligations to another Person, (ii) each such assignment shall be to an Eligible Assignee, and (iii) the parties to each such assignment shall execute and deliver to the Administrative Agent, for its acceptance and recording in the Register, an Assignment and Acceptance, together with a processing and recordation fee of Three Thousand Five Hundred Dollars ($3500); provided, however, any Lender may assign any or all of its rights and obligations under this Agreement to any of its Affiliates without notice to or consent of the Borrower or the Administrative Agent and without being subject to the foregoing conditions. Upon such execution, delivery, acceptance and recording in the Register, from and after the effective date specified in each Assignment and Acceptance and accepted by the Administrative Agent (which effective date shall not be any earlier than the date on which the Administrative Agent so accepts and records the Assignment and Acceptance in the Register), (x) the assignee thereunder shall, in addition to any rights and obligations hereunder held by it immediately prior to such effective date, if any, have the rights and obligations hereunder that have been assigned to it pursuant to such Assignment and Acceptance and shall, to the fullest extent permitted by law, have the same rights and benefits hereunder as if it were an 74 original Lender hereunder and (y) the assigning Lender shall, to the extent that rights and obligations hereunder have been assigned by it pursuant to such Assignment and Acceptance, relinquish its rights and be released from its obligations under this Agreement (and, in the case of an Assignment and Acceptance covering all or the remaining portion of such assigning Lender's rights and obligations under this Agreement, the assigning Lender shall cease to be a party hereto). (c) The Register. The Administrative Agent, acting for this purpose as agent for the Borrower, shall maintain at its address referred to in Section 13.10 a copy of each Assignment and Acceptance delivered to and accepted by it and a register (the "Register") for the recordation of the names and addresses of the Lenders and the Commitment of each Lender from time to time and whether such Lender is an original Lender or the assignee of another Lender pursuant to an Assignment and Acceptance. The Administrative Agent shall incur no liability of any kind to the Borrower, any Loan Party, any Lender or any other Person with respect to its maintenance of the Register or the recordation of information therein. The Register shall include a control account and a subsidiary account for each Lender, in which accounts (taken together) shall be recorded (i) the date and amount of each Borrowing made hereunder, (ii) the amount of any principal or interest due and payable or to become due and payable from the Borrower to each Lender hereunder and (iii) the amount of any sum received by the Administrative Agent from the Borrower hereunder and each Lender's share thereof. The Administrative Agent will render a monthly statement of such accounts to the Borrower. Each such statement shall be deemed final, binding and conclusive upon the Borrower and the other Loan Parties in all respects as to all matters reflected therein (absent manifest error) unless the Borrower, within thirty (30) days after the date such statement is rendered, delivers to the Administrative Agent written notice of any objections which the Borrower may have to any such statement. In that event, only those items expressly objected to in such notice shall be deemed to be disputed by the Borrower. The entries in the Register shall be final, conclusive and binding upon the Borrower and the other Loan Parties for all purposes, absent manifest error, and the Borrower, each of its Subsidiaries and each other Loan Party, the Administrative Agent and the Lenders shall treat each Person whose name is recorded in the Register as a Lender hereunder for all purposes of this Agreement. The Register shall be available for inspection by the Borrower or any Lender at any reasonable time and from time to time upon reasonable prior notice. No assignment of any Commitment, Loan or Note, or any interest therein, shall be effective unless and until the Assignment and Acceptance has been accepted by the Administrative Agent and registered in the Register. This Section 13.01(c) shall be construed so that all Commitments, Loans and Notes, and any interest therein, are maintained at all times in "registered form" within the meaning of sections 163(f), 871(h) and 881(c) of the Code. (d) Fee. Upon its receipt of an Assignment and Acceptance executed by the assigning Lender and an Eligible Assignee and a processing and recordation fee of $3500 (payable by the assigning Lender or the assignee, as shall be agreed between them), the Administrative Agent shall, if such Assignment and Acceptance has been completed and is in compliance with this Agreement and in substantially the form of Exhibit A hereto, (i) accept such Assignment and Acceptance, (ii) record the information contained therein in the Register and (iii) give prompt notice thereof to the Borrower and the other Lenders. (e) Participations. Each Lender may sell participations to one or more commercial banks, lending institutions, finance companies, insurance companies, other financial institutions or funds in or to all or a portion of its rights and obligations under and in respect of any and all facilities under this Agreement (including, without limitation, all or a portion of any or all of its Commitments hereunder and the Loans owing to it); provided, however, that (i) such Lender's obligations under this Agreement (including, without limitation, its Commitments hereunder) shall remain unchanged, (ii) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations, (iii) the Borrower, the Administrative Agent and the other Lenders shall continue to deal solely and directly with 75 such Lender in connection with such Lender's rights and obligations under this Agreement and (iv) such participant's rights to agree or to restrict such Lender's ability to agree to the modification, waiver or release of any of the terms of the Loan Documents, to consent to any action or failure to act by any party to any of the Loan Documents or any of their respective Affiliates, or to exercise or refrain from exercising any powers or rights which any Lender may have under or in respect of the Loan Documents, shall be limited to the right to consent to (A) the increase in the Commitment of the Lender from whom such participant purchased a participation, (B) the reduction of the principal of, or rate or amount of interest on, the Loans subject to such participation (other than by the payment or prepayment thereof), (C) the postponement of any date fixed for any payment of principal of, or interest on, the Loan(s) subject to such participation (except with respect to any modifications of the provisions relating to prepayments of Loans and other Obligations) and (D) the release of any guarantor of the Obligations. (f) Information Regarding the Borrower. Any Lender may, in connection with any assignment or participation or proposed assignment or participation pursuant to this Section 13.01, disclose to the assignee or participant or proposed assignee or participant, any information relating to the Borrower or any Subsidiary of the Borrower or any other Loan Party furnished to such Lender by the Administrative Agent or by or on behalf of the Borrower, such Subsidiary or such Loan Party; provided that, prior to any such disclosure, such assignee or participant, or proposed assignee or participant, shall agree to preserve in accordance with Section 13.23 the confidentiality of any confidential information described therein. (g) Payment to Participants. Anything in this Agreement to the contrary notwithstanding, in the case of any participation, all amounts payable by the Borrower under the Loan Documents shall be calculated and made in the manner and to the parties required hereby as if no such participation had been sold. (h) Lenders' Creation of Security Interests. Notwithstanding any other provision set forth in this Agreement, any Lender may at any time create a security interest in all or any portion of its rights under this Agreement and its Notes (including, without limitation, Obligations owing to it and the Notes held by it) in favor of any Federal Reserve Bank of the Federal Reserve Board without notice to or consent of the Borrower or the Administrative Agent. 13.02. Relations Among Lenders. Except as contemplated under this Agreement, no Lender shall make any loan, advance or other financial accommodation to the Borrower or any other Loan Party without the prior written consent of Requisite Lenders. Each Lender agrees that it will not take any action, nor institute any actions or proceedings, against the Borrower or any other Loan Party with respect to the Obligations, without the prior written consent of Requisite Lenders. 13.03. Replacement of Lender. In the event that a Replacement Event occurs and is continuing with respect to any Lender, the Borrower may designate a Replacement Lender to assume such Lender's Commitment hereunder, to purchase the Loans and participations of such Lender and such Lender's rights hereunder, without recourse to or representation or warranty by, or expense to, such Lender for a purchase price equal to the outstanding principal amount of the Loans payable to such Lender plus any accrued but unpaid interest on such Loans and accrued but unpaid fees owing to such Lender, and upon such assumption, purchase and substitution, and subject to the execution and delivery to the Administrative Agent by the Replacement Lender of documentation satisfactory to the Administrative Agent (pursuant to which such Replacement Lender shall assume the obligations of such original Lender under this Agreement), the Replacement Lender shall succeed to the rights and obligations of such Lender hereunder and such Lender shall no longer be a party hereto or have any rights hereunder provided that the obligations of the Borrower to such Lender under Section 13.05 hereof with respect to events occurring or obligations arising before such replacement shall survive such replacement. 76 13.04. Expenses. (a) Generally. The Borrower agrees upon demand to pay, or reimburse the Administrative Agent for, all of the Administrative Agent's reasonable audit, legal, appraisal, valuation, filing, document duplication and reproduction and investigation expenses and for all other out-of-pocket costs and expenses of every type and nature (including, without limitation, the reasonable fees, expenses and disbursements of legal counsel, auditors, accountants, appraisers, printers, insurance and environmental advisers, and other consultants and agents) incurred by the Administrative Agent in connection with (i) the preparation, negotiation, and execution of this Agreement and the other Loan Documents; (ii) the interpretation of this Agreement (including, without limitation, the satisfaction or attempted satisfaction of any of the conditions set forth in Article V), the other Loan Documents and the making of the Loans hereunder; (iii) the ongoing administration of this Agreement and the Loans, including consultation with attorneys in connection therewith and with respect to the Administrative Agent's rights and responsibilities under this Agreement and the other Loan Documents and the Administrative Agent's periodic audits of the Borrower and the other Loan Parties; (iv) the protection, collection or enforcement of any of the Obligations or the enforcement of any of the Loan Documents; (v) the commencement, defense or intervention in any court proceeding relating in any way to the Obligations, the assets of any Loan Party, any Loan Party, this Agreement or any of the other Loan Documents; (vi) the response to, and preparation for, any subpoena or request for document production with which the Administrative Agent is served or deposition or other proceeding in which the Administrative Agent is called to testify, in each case, relating in any way to the Obligations, the assets of any Loan Party, any Loan Party, this Agreement or any of the other Loan Documents; and (vii) any amendments, consents, waivers, assignments, restatements, or supplements to any of the Loan Documents and the preparation, negotiation, and execution of the same. (b) After Default. The Borrower further agrees to pay or reimburse the Administrative Agent and each Lender upon demand for all out-of-pocket costs and expenses, including, without limitation, reasonable attorneys' fees incurred by the Administrative Agent or such Lender after the occurrence of an Event of Default (i) in enforcing any Loan Document or any of the Obligations or any security therefor or exercising or enforcing any other right or remedy available by reason of such Event of Default; (ii) in connection with any refinancing or restructuring of the credit arrangements provided under this Agreement in the nature of a "work-out" or in any insolvency or bankruptcy proceeding; (iii) in commencing, defending or intervening in any litigation or in filing a petition, complaint, answer, motion or other pleadings in any legal proceeding relating to the Obligations, the Property, any Loan Party and related to or arising out of the transactions contemplated hereby or by any of the other Loan Documents; and (iv) in taking any other action in or with respect to any suit or proceeding (bankruptcy or otherwise) described in clauses (i) through (iii) above. 13.05. Indemnity. The Borrower further agrees to defend, protect, indemnify, and hold harmless the Administrative Agent, the Syndication Agent, the Arranger and each of the Lenders and each of their respective Affiliates, and their respective officers, directors, employees, attorneys and agents (including, without limitation, those retained in connection with the satisfaction or attempted satisfaction of any of the conditions set forth in Article V) (collectively, the "Indemnitees") from and against any and all liabilities, obligations, losses (other than loss of profits), damages, penalties, actions, judgments, suits, claims, costs, expenses and disbursements of any kind or nature whatsoever (excluding any taxes and including, without limitation, the fees and disbursements of counsel for such Indemnitees in connection with any investigative, administrative or judicial proceeding, whether or not such Indemnitees shall be designated a party thereto), imposed on, incurred by, or asserted against such Indemnitees in any manner relating to or arising out of (a) this Agreement, the Notes, the other Loan Documents, or any act, event or transaction related or attendant thereto, the making of the Loans, the management of such Loans, the use or intended use of the proceeds of the Loans, or any of the transactions contemplated by the Loan 77 Documents, or (b) any Liabilities and Costs under any Environmental Health or Safety Requirements or Law or common law principles arising from or in connection with the past, present or future operations of any Loan Party or any of its predecessors in interest, or, the past, present or future environmental condition of any Property of any Loan Party, the presence of asbestos-containing materials at any Property of any Loan Party or the Release or threatened Release of any Contaminant into the environment from any Property of any Loan Party or to which any Loan Party sent any Contaminant for treatment, storage disposal or recycling (collectively, the "Indemnified Matters"); provided, however, the Borrower shall have no obligation to an Indemnitee hereunder with respect to Indemnified Matters caused by or resulting from the willful misconduct or gross negligence of such Indemnitee, as determined by a court of competent jurisdiction in a judgment or order. To the extent that the undertaking to indemnify, pay and hold harmless set forth in the preceding sentence may be unenforceable because it is violative of any law or public policy, the Borrower shall contribute the maximum portion which it is permitted to pay and satisfy under applicable law, to the payment and satisfaction of all Indemnified Matters incurred by the Indemnitees. 13.06. Change in Accounting Principles. If any change in the accounting principles used in the preparation of the most recent financial statements referred to in Section 7.01 are hereafter required or permitted by the rules, regulations, pronouncements and opinions of the Financial Accounting Standards Board or the American Institute of Certified Public Accountants (or successors thereto or agencies with similar functions) and are adopted by the Borrower and its Subsidiaries with the agreement of its independent certified public accountants and such changes result in a change in the method or results of calculation of any of the covenants, standards or terms found in Article IX and Article X, the parties hereto agree to enter into negotiations in order to amend such provisions so as to equitably reflect such changes with the desired result that the criteria for evaluating compliance with such covenants, standards and terms by the Borrower and its Subsidiaries shall be the same after such changes as if such changes had not been made; provided, however, (i) no change in GAAP that would affect the method of calculation of any of the covenants, standards or terms shall be given effect in such calculations until such provisions are amended, in a manner satisfactory to the Requisite Lenders and the Borrower, to so reflect such change in accounting principles and (ii) the Borrower shall be deemed to be in compliance with such covenants during the sixty (60) day period following any such change in GAAP if and to the extent that the Borrower would have been in compliance therewith under GAAP as in effect immediately prior to such change. 13.07. Setoff. In addition to any Liens granted under the Loan Documents and any rights now or hereafter granted under applicable law, upon the occurrence and during the continuance of any Event of Default, each Lender and any Affiliate of any Lender is hereby authorized by the Borrower and each other Loan Party at any time and from time to time, without notice to any Person (any such notice being hereby expressly waived) to set off and to appropriate and to apply any and all deposits (general or special, including, but not limited to, indebtedness evidenced by certificates of deposit, whether matured or unmatured (but not including trust accounts)) and any other Indebtedness at any time held or owing by such Lender or any of its Affiliates to or for the credit or the account of the Borrower or such other Loan Party against and on account of the Obligations of the Borrower to such Lender or any of its Affiliates, including, but not limited to, all Loans and all claims of any nature or description arising out of or in connection with this Agreement or the Notes, irrespective of whether or not (i) such Lender shall have made any demand hereunder or (ii) the Administrative Agent, at the request or with the consent of the Requisite Lenders, shall have declared the principal of and interest on the Loans and other amounts due hereunder and under the Notes to be due and payable as permitted by Article XI and even though such Obligations may be contingent or unmatured. Each Lender agrees that it shall not, without the express consent of the Requisite Lenders, and that it shall, to the extent it is lawfully entitled to do so, upon the request of the Requisite Lenders, exercise its setoff rights hereunder against any accounts of the Borrower or any other Loan Party now or hereafter maintained with such Lender or any of its Affiliates. 78 13.08. Ratable Sharing. The Lenders agree among themselves that (i) with respect to all amounts received by them which are applicable to the payment of the Obligations (excluding the fees described in Sections 3.03, 3.04 and 4.01(f)) equitable adjustment will be made so that, in effect, all such amounts will be shared among them ratably in accordance with their Pro Rata Shares, whether received by voluntary payment, by the exercise of the right of setoff or banker's lien, by counterclaim or cross-action or by the enforcement of any or all of the Obligations (excluding the amounts described in Sections 3.03, 3.04 and 4.01(f), (ii) if any of them shall by voluntary payment or by the exercise of any right of counterclaim, setoff, banker's lien or otherwise, receive payment of a proportion of the aggregate amount of the Obligations held by it, which is greater than the amount which such Lender is entitled to receive hereunder, the Lender receiving such excess payment shall purchase, without recourse or warranty, an undivided interest and participation (which it shall be deemed to have done simultaneously upon the receipt of such payment) in such Obligations owed to the others so that all such recoveries with respect to such Obligations shall be applied ratably in accordance with their Pro Rata Shares; provided, however, that if all or part of such excess payment received by the purchasing party is thereafter recovered from it, those purchases shall be rescinded and the purchase prices paid for such participations shall be returned to such party to the extent necessary to adjust for such recovery, but without interest except to the extent the purchasing party is required to pay interest in connection with such recovery. Each of the Loan Parties agrees that any Lender so purchasing a participation from another Lender pursuant to this Section 13.08 may, to the fullest extent permitted by law, exercise all its rights of payment (including, subject to Section 13.07, the right of setoff) with respect to such participation as fully as if such Lender were the direct creditor of the Borrower or such Loan Party in the amount of such participation. 13.09. Amendments and Waivers. Unless otherwise provided in this Agreement, no amendment or modification of any provision of this Agreement or the Notes shall be effective without the written agreement of the Administrative Agent, the Requisite Lenders, the Borrower and each other Loan Party, and no termination or waiver of any provision of this Agreement or the Notes, or consent to any departure by the Borrower or any other Loan Party therefrom, shall be effective without the written concurrence of the Requisite Lenders, which the Requisite Lenders shall have the right to grant or withhold in their sole discretion. Notwithstanding the foregoing, any amendment, modification, termination, waiver or consent with respect to any of the following provisions of this Agreement and the Notes shall be effective only by a written agreement, signed by each Lender: (a) waiver of any of the conditions specified in Sections 5.01 and 5.02 (except with respect to a condition based upon another provision of this Agreement, the waiver of which requires only the concurrence of the Requisite Lenders), (b) increase in the amount of the Commitment of any Lender, (c) reduction of the principal of, rate or amount of interest on the Loans or any fees or other amounts payable to such Lender (other than by the payment or prepayment thereof), (d) postponement of the Commitment Termination Date or any other date fixed for any payment of principal of, or interest on, the Loans or any fees or other amounts payable to such Lender (except with respect to any modifications of the provisions relating to prepayments of Loans and other Obligations), (e) amendment of the definition of "Requisite Lenders", or (f) amendment of Section 13.08 or this Section 13.09. Any waiver or consent shall be effective only in the specific instance and for the specific purpose for which it was given. No notice to or demand on the Borrower in any case shall entitle the Borrower to any other or further notice or demand in similar or other circumstances. Notwithstanding anything to the contrary contained in this Section 13.09, no amendment, modification, waiver or consent shall affect the rights or duties of the Administrative Agent under this Agreement or the other Loan Documents, unless made in writing and signed by the Administrative Agent in addition to the Lenders required above to take such action. 13.10. Notices. (a) Unless otherwise specifically provided herein, any notice or other communication herein required or permitted to be given shall be in writing and may be personally served, faxed or sent by courier service or United States certified mail and shall be deemed to have been given when delivered in person or by courier service, upon receipt of a facsimile or three (3) Business Days 79 after deposit in the United States mail with postage prepaid and properly addressed. Notices to the Administrative Agent pursuant to Articles II, III or XII shall not be effective until received by the Administrative Agent. For the purposes hereof, the addresses of the parties hereto (until notice of a change thereof is delivered as provided in this Section 13.10) shall be as set forth below each party's name on the signature pages hereof or the signature page of any applicable Assignment and Acceptance, or, as to each party, at such other address as may be designated by such party in a written notice to all of the other parties to this Agreement. For purposes of any Loan Document, the address of each Loan Party shall be as set forth on Schedule I attached hereto. (b) The Borrower agrees to indemnify and hold harmless each Indemnitee from and against any and all claims, damages, liabilities, obligations, losses, penalties, actions, judgments, suits, costs, disbursements and expenses of any kind or nature (including, without limitation, reasonable fees and disbursements of counsel to any such Indemnitee) which may be imposed on, incurred by or asserted against any such Indemnitee in any manner relating to or arising out of any action taken or omitted by such Indemnitee in good faith in reliance on any notice or other written communication in the form of a facsimile purporting to be from the Borrower; provided that the Borrower shall have no obligation under this Section 13.10(b) to an Indemnitee with respect to any indemnified matter caused by or resulting from the gross negligence or willful misconduct of that Indemnitee, as determined by a court of competent jurisdiction in a judgment or order. 13.11. Survival of Warranties and Agreements. All representations and warranties made herein and all obligations of the Borrower in respect of taxes, indemnification and expense reimbursement shall survive the execution and delivery of this Agreement and the other Loan Documents, the making and repayment of the Loans and the termination of this Agreement and shall not be limited in any way by the passage of time or occurrence of any event and shall expressly cover time periods when the Administrative Agent or any of the Lenders may have come into possession or control of any assets of any Loan Party. 13.12. Failure or Indulgence Not Waiver; Remedies Cumulative. No failure or delay on the part of the Administrative Agent or any Lender in the exercise of any power, right or privilege under this Agreement, the Notes or any of the other Loan Documents shall impair such power, right or privilege or be construed to be a waiver of any default or acquiescence therein, nor shall any single or partial exercise of any such power, right or privilege preclude other or further exercise thereof or of any other right, power or privilege. All rights and remedies existing under this Agreement, the Notes and the other Loan Documents are cumulative to and not exclusive of any rights or remedies otherwise available. 13.13. Marshalling; Payments Set Aside. Neither the Administrative Agent nor any Lender shall be under any obligation to marshall any assets in favor of the Borrower, any other Loan Party or any other Person or against or in payment of any or all of the Obligations. To the extent that the Borrower makes a payment or payments to the Administrative Agent or the Lenders, or any of such Persons exercises its rights of setoff, and such payment or payments or the proceeds of such enforcement or setoff or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside or required to be repaid to a trustee, receiver or any other party, then to the extent of such recovery, the obligation or part thereof originally intended to be satisfied, and all Liens, right and remedies therefor, shall be revived and continued in full force and effect as if such payment had not been made or such enforcement or setoff had not occurred. 13.14. Independence of Covenants. All covenants hereunder shall be given independent effect so that if a particular action or condition is not permitted by any of such covenants, the fact that it would be permitted by an exception to, or be otherwise within the limitations of, another covenant shall not avoid the occurrence of an Event of Default or Default if such action is taken or condition exists. 80 13.15. Severability. In case any provision in or obligation under this Agreement, the Notes or the other Loan Documents shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby. 13.16. Headings. Section headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement or be given any substantive effect. 13.17. Governing Law. THIS AGREEMENT SHALL BE INTERPRETED, AND THE RIGHTS AND LIABILITIES OF THE PARTIES HERETO DETERMINED, IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. 13.18. Limitation of Liability. No claim may be made by the Borrower, any other Loan Party, any Lender, the Administrative Agent or any other Person against the Administrative Agent or any other Lender or the Affiliates, directors, officers, employees, attorneys or agents of any of them for any special, consequential or punitive damages in respect of any claim for breach of contract or any other theory of liability arising out of or related to the transactions contemplated by this Agreement or the Notes or the other Loan Documents, or any act, omission or event occurring in connection therewith; and the Borrower, each other Loan Party, each Lender and the Administrative Agent hereby waive, release and agree not to sue upon any such claim for any such damages, whether or not accrued and whether or not known or suspected to exist in its favor. 13.19. Successors and Assigns. This Agreement, the Notes and the other Loan Documents shall be binding upon the parties thereto and their respective successors and assigns and shall inure to the benefit of the parties thereto and the successors and permitted assigns of the Lenders. The rights hereunder of the Borrower and the other Loan Parties, or any interest therein, may not be assigned without the written consent of all Lenders. 13.20. Certain Consents and Waivers. (a) Personal Jurisdiction. (i) EACH OF THE ADMINISTRATIVE AGENT, THE LENDERS, THE BORROWER AND THE OTHER LOAN PARTIES IRREVOCABLY AND UNCONDITIONALLY SUBMITS, FOR ITSELF AND ITS PROPERTY, TO THE NONEXCLUSIVE JURISDICTION OF ANY NEW YORK STATE COURT OR FEDERAL COURT SITTING IN NEW YORK, NEW YORK, AND ANY COURT HAVING JURISDICTION OVER APPEALS OF MATTERS HEARD IN SUCH COURTS, IN ANY ACTION OR PROCEEDING ARISING OUT OF, CONNECTED WITH, RELATED TO OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED AMONG THEM IN CONNECTION WITH THIS AGREEMENT, WHETHER ARISING IN CONTRACT, TORT, EQUITY OR OTHERWISE, OR FOR RECOGNITION OR ENFORCEMENT OF ANY JUDGMENT, AND EACH OF THE PARTIES HERETO IRREVOCABLY AND UNCONDITIONALLY AGREES THAT ALL CLAIMS IN RESPECT OF ANY SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN SUCH STATE COURT OR, TO THE EXTENT PERMITTED BY LAW, IN SUCH FEDERAL COURT. EACH OF THE BORROWER AND THE OTHER LOAN PARTIES IRREVOCABLY DESIGNATES AND APPOINTS CT CORPORATION, AS ITS AGENT (THE "PROCESS AGENT") FOR SERVICE OF ALL PROCESS IN ANY SUCH PROCEEDING IN ANY SUCH COURT, SUCH SERVICE BEING HEREBY ACKNOWLEDGED TO BE EFFECTIVE AND BINDING SERVICE IN EVERY RESPECT. EACH OF THE ADMINISTRATIVE AGENT, THE LENDERS, THE BORROWER AND THE OTHER LOAN PARTIES AGREES THAT A FINAL JUDGMENT IN ANY SUCH ACTION OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS 81 BY SUIT ON THE JUDGMENT OR IN ANY OTHER MANNER PROVIDED BY LAW. EACH OF THE BORROWER AND THE OTHER LOAN PARTIES WAIVES IN ALL DISPUTES ANY OBJECTION THAT IT MAY HAVE TO THE LOCATION OF THE COURT CONSIDERING THE DISPUTE. (ii) EACH OF THE BORROWER AND THE OTHER LOAN PARTIES AGREES THAT THE ADMINISTRATIVE AGENT SHALL HAVE THE RIGHT TO PROCEED AGAINST THE BORROWER OR ANY OF THE OTHER LOAN PARTIES OR THEIR RESPECTIVE PROPERTY IN A COURT IN ANY LOCATION TO ENABLE THE ADMINISTRATIVE AGENT AND THE LENDERS TO REALIZE ON ANY SECURITY FOR THE OBLIGATIONS, OR TO ENFORCE A JUDGMENT OR OTHER COURT ORDER ENTERED IN FAVOR OF THE ADMINISTRATIVE AGENT OR ANY LENDER. EACH OF THE BORROWER AND THE OTHER LOAN PARTIES WAIVES ANY OBJECTION THAT IT MAY HAVE TO THE LOCATION OF THE COURT IN WHICH THE ADMINISTRATIVE AGENT OR ANY LENDER MAY COMMENCE A PROCEEDING DESCRIBED IN THIS SECTION. (b) Service of Process. EACH OF THE BORROWER AND THE OTHER LOAN PARTIES IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS OF ANY OF THE AFOREMENTIONED COURTS IN ANY SUCH ACTION OR PROCEEDING BY THE MAILING OF COPIES THEREOF BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO THE PROCESS AGENT OR THE BORROWER'S OR SUCH LOAN PARTY'S NOTICE ADDRESS SPECIFIED BELOW, SUCH SERVICE TO BECOME EFFECTIVE TEN (10) DAYS AFTER SUCH MAILING. EACH OF THE BORROWER AND THE OTHER LOAN PARTIES IRREVOCABLY WAIVES ANY OBJECTION (INCLUDING, WITHOUT LIMITATION, ANY OBJECTION OF THE LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS) WHICH IT MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY SUCH ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT, THE NOTES OR ANY OTHER LOAN DOCUMENT IN ANY JURISDICTION SET FORTH ABOVE. NOTHING HEREIN SHALL AFFECT THE RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR SHALL LIMIT THE RIGHT OF THE ADMINISTRATIVE AGENT OR ANY LENDER TO BRING PROCEEDINGS AGAINST THE BORROWER OR ANY OTHER LOAN PARTY IN THE COURTS OF ANY OTHER JURISDICTION. (c) Waiver of Jury Trial. EACH OF THE ADMINISTRATIVE AGENT, THE LENDERS, THE BORROWER AND THE OTHER LOAN PARTIES IRREVOCABLY WAIVES TRIAL BY JURY IN ANY ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT, THE NOTES OR ANY OTHER LOAN DOCUMENT. 13.21. Counterparts; Effectiveness; Inconsistencies. This Agreement and any amendments, waivers, consents, or supplements hereto may be executed in counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument. This Agreement shall become effective against the Borrower, each other Loan Party, each Lender and the Administrative Agent on the date hereof when each such party hereto executes and delivers this Agreement. This Agreement and each of the other Loan Documents shall be construed to the extent reasonable to be consistent one with the other, but to the extent that the terms and conditions hereof are actually inconsistent with the terms and conditions of any other Loan Document, this Agreement shall govern. 13.22. Entire Agreement. This Agreement, taken together with all of the other Loan Documents, embodies the entire agreement and understanding among the parties hereto and supersedes all prior agreements and understandings, written and oral, relating to the subject matter hereof. 82 13.23. Confidentiality. The Lenders shall hold all nonpublic information obtained from any Loan Party pursuant to this Agreement or any of the other Loan Documents in accordance with such Lender's customary procedures for handling confidential information of this nature and in accordance with safe and sound banking practices and in any event may make disclosure reasonably required by a bona fide offeree, transferee or participant in connection with the contemplated transfer or participation or as required or requested by any Governmental Authority or representative thereof or pursuant to legal process and shall require any such offeree, transferee or participant to agree (and require any of its offerees, transferees or participants to agree) to comply with this Section 13.23. In no event shall any Lender be obligated or required to return any materials furnished by the Borrower or any other Loan Party; provided, however, each offeree shall be required to agree that if it does not become a transferee or participant it shall return all materials furnished to it by the Borrower or any other Loan Party in connection with this Agreement or any of the other Loan Documents. 83 IN WITNESS WHEREOF, this Agreement has been duly executed as of the date first above written. WATSON PHARMACEUTICALS, INC. By: /s/ Michael Boxer Title: SVP and CFO Notice address: WATSON PHARMACEUTICALS, INC. 311 Bonnie Circle Corona, California 92880-2882 Attention: Robert Funsten with a copy to: Cooley Godward LLP One Maritime Plaza, 20th Floor San Francisco, California 94111-3580 Attention: Peter H. Carson 84 SOCIETE GENERALE, as Administrative Agent and Syndication Agent By: /s/ John M. Stack Title: Director Notice address: SOCIETE GENERALE 1221 Avenue of the Americas New York, New York 10020 Attention: Phone: Fax: with a copy to: Sidley & Austin 875 Third Avenue New York, New York 10022 Attention: Barbara A. Vrancik, Esq. Phone: (212)906-2306 Fax: (212)906-2021 85 SG COWEN SECURITIES CORPORATION, as Arranger and Book Runner By: /s/ John M. Stack Title: Director Notice address: SG COWEN SECURITIES CORPORATION 1221 Avenue of the Americas New York, New York 10020 Attention: Phone: Fax: with a copy to: Sidley & Austin 875 Third Avenue New York, New York 10022 Attention: Barbara A. Vrancik, Esq. Phone: (212)906-2306 Fax: (212)906-2021 86 SOCIETE GENERALE, as Lender By: /s/ John M. Stack Title: Director REVOLVING LOAN COMMITMENT: $200,000,000 TERM LOAN COMMITMENT: $500,000,000 Notice address: SOCIETE GENERALE 1221 Avenue of the Americas New York, New York 10020 Attention: Phone: Fax: with a copy to: Sidley & Austin 875 Third Avenue New York, New York 10022 Attention: Barbara A. Vrancik, Esq. Phone: (212)906-2306 Fax: (212)906-2021 EX-21.1 5 ex21-1.txt EXHIBIT 21.1 1 EXHIBIT 21.1 LIST OF SUBSIDIARIES OF WATSON WATSON PHARMACEUTICALS, INC. SUBSIDIARIES OF THE COMPANY AS OF JULY 12, 2000
NAME JURISDICTION OF INCORPORATION - ---- ----------------------------- Watson Laboratories, Inc. Nevada Watson Laboratories, Inc. - New York New York Watson Laboratories, Inc. - Utah Delaware WatsonPharma, Inc. Delaware WS Acquisition Corp. Delaware The Rugby Group, Inc. New York Watson Laboratories, Inc. - Ohio New York Rugby Laboratories, Inc. New York Royce Laboratories, Inc. Florida Nicobrand Limited Northern Ireland Watson Pharmaceuticals (Asia) Ltd. Territory of the British Virgin Islands Schein Pharmaceutical, Inc. Delaware
EX-23.2 6 ex23-2.txt EXHIBIT 23.2 1 EXHIBIT 23.2 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in this Registration Statement on Form S-4 of Watson Pharmaceuticals, Inc. of our report dated February 4, 2000 relating to the financial statements, which appears in Watson Pharmaceuticals, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1999. We also consent to the reference to us under the heading "Experts" in such Registration Statement. /s/ PRICEWATERHOUSECOOPERS LLP Los Angeles, California July 12, 2000 EX-23.3 7 ex23-3.txt EXHIBIT 23.3 1 EXHIBIT 23.3 CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" in this Registration Statement (Form S-4) and related Prospectus of Watson Pharmaceuticals, Inc. and to the incorporation by reference therein of our report dated February 5, 1999, with respect to the consolidated financial statements of TheraTech, Inc. for the years ended December 31, 1998 and 1997, included in Watson Pharmaceuticals Inc.'s Annual Report (Form 10-K) for the year ended December 31, 1999, filed with the Securities and Exchange Commission. /s/ ERNST & YOUNG LLP Salt Lake City, Utah July 12, 2000 EX-23.4 8 ex23-4.txt EXHIBIT 23.4 1 EXHIBIT 23.4 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in this Registration Statement of Watson Pharmaceuticals, Inc. on Form S-4 of our report dated February 4, 1998 relating to the consolidated financial statements of Somerset Pharmaceuticals, Inc. and subsidiaries as of December 31, 1997, and for the year then ended, appearing in the Annual Report on Form 10-K of Watson Pharmaceuticals, Inc. for the year ended December 31, 1999. We also consent to the reference to us under the heading "Experts" in the Prospectus, which is part of this Registration Statement. /s/ DELOITTE & TOUCHE LLP Pittsburgh, Pennsylvania July 12, 2000 EX-23.5 9 ex23-5.txt EXHIBIT 23.5 1 EXHIBIT 23.5 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We hereby consent to the incorporation by reference in the proxy statement/prospectus constituting a part of this registration statement of our reports dated February 16, 2000, except for Note 20 which is as of March 31, 2000, relating to the consolidated financial statements and schedule of Schein Pharmaceutical, Inc. appearing in the Company's Annual Report on Form 10-K for the year ended December 25, 1999. We also consent to the reference to us under the caption "Experts" in the proxy statement/prospectus. /s/ BDO SEIDMAN, LLP New York, New York July 12, 2000 EX-99.1 10 ex99-1.txt EXHIBIT 99.1 1 EXHIBIT 99.1 SCHEIN PHARMACEUTICAL, INC. PROXY SOLICITED BY THE BOARD OF DIRECTORS FOR THE SPECIAL MEETING OF STOCKHOLDERS TO BE HELD ON [________, ___ _____] The undersigned hereby appoints Robert C. Funsten and G. Frederick Wilkinson, and each of them, as attorneys and proxies of the undersigned, with full power of substitution, to vote all of the shares of stock of Schein Pharmaceutical, Inc., a Delaware corporation, which the undersigned may be entitled to vote at the special meeting of stockholders of Schein Pharmaceutical, Inc. to be held at 100 Campus Drive, Florham Park, NJ 07932 on [DAY OF WEEK], [______, ___] 2000 at [__:__ a.m.], local time, and at any and all postponements, continuations and adjournments thereof, with all powers that the undersigned would possess if personally present, upon and in respect of the following matters and in accordance with the following instructions, with discretionary authority as to any and all other matters that may properly come before the meeting. UNLESS A CONTRARY DIRECTION IS INDICATED, THIS PROXY WILL BE VOTED FOR PROPOSAL 1 AS MORE SPECIFICALLY DESCRIBED IN THE PROXY STATEMENT/PROSPECTUS. IF SPECIFIC INSTRUCTIONS ARE INDICATED, THIS PROXY WILL BE VOTED IN ACCORDANCE THEREWITH. (Continued, and to be dated and signed on other side) 2 MANAGEMENT RECOMMENDS A VOTE FOR PROPOSAL 1. PROPOSAL 1: 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 Pharmaceutical, Inc. [ ] FOR [ ] AGAINST [ ] ABSTAIN DATED _________________ __________________________________ __________________________________ SIGNATURE(S) Please sign exactly as your name appears hereon. If the stock is registered in the names of two or more persons, each should sign. Executors, administrators, trustees, guardians and attorneys-in-fact should add their titles. If signer is a corporation, please give full corporate name and have a duly authorized officer sign, stating title. If signer is a partnership, please sign in partnership name by authorized person. PLEASE VOTE, DATE AND PROMPTLY RETURN THIS PROXY IN THE ENCLOSED RETURN ENVELOPE WHICH IS POSTAGE PREPAID IF MAILED IN THE UNITED STATES. EX-99.2 11 ex99-2.txt EXHIBIT 99.2 1 EXHIBIT 99.2 [LETTERHEAD OF CIBC WORLD MARKETS CORP.] The Board of Directors Schein Pharmaceutical, Inc. 100 Campus Drive Florham Park, New Jersey 07932 Members of the Board: CIBC World Markets Corp. ("CIBC World Markets") hereby consents to the inclusion of the opinion letter of CIBC World Markets to the Board of Directors of Schein Pharmaceutical, Inc. ("Schein") as Annex B to, and to the reference thereto under the captions "SUMMARY - Opinion of Schein's Financial Advisor" and "THE MERGER - Opinion of Schein's Financial Advisor" in, the Proxy Statement/Prospectus of Schein and Watson Pharmaceuticals, Inc. ("Watson") relating to the proposed merger transaction involving Schein and Watson. In giving such consent, we do not admit that we come within the category of persons whose consent is required under, and we do not admit that we are "experts" for purposes of, the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder. By: /s/ CIBC WORLD MARKETS CORP. ------------------------------ CIBC WORLD MARKETS CORP. New York, New York July 14, 2000 -----END PRIVACY-ENHANCED MESSAGE-----