-----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, M00ZMtCZnz4hmNFyrUP4arVM1h/Tha6it6t+357vxJ13C8g2zn21COipxmCok0tB /KvSLXbuYOqwZV+w/0J44Q== 0000892569-99-002240.txt : 19990817 0000892569-99-002240.hdr.sgml : 19990817 ACCESSION NUMBER: 0000892569-99-002240 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990816 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WATSON PHARMACEUTICALS INC CENTRAL INDEX KEY: 0000884629 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 953872914 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-13305 FILM NUMBER: 99690237 BUSINESS ADDRESS: STREET 1: 311 BONNIE CIRCLE CITY: CORONA STATE: CA ZIP: 91720 BUSINESS PHONE: 9092701400 MAIL ADDRESS: STREET 1: 311 BONNIE CIRCLE CITY: CORONA STATE: CA ZIP: 91720 10-Q 1 FORM 10-Q PERIOD END JUNE 30, 1999 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------------- FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______ to _________ COMMISSION FILE NUMBER 0-20045 WATSON PHARMACEUTICALS, INC. (Exact name of registrant as specified in its charter) NEVADA 95-3872914 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 311 BONNIE CIRCLE CORONA, CA 92880 (Address of principal executive offices, including zip code) (909) 270-1400 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes [X] No [ ] The number of shares of the Registrant's only class of common stock outstanding as of August 6, 1999 was approximately 95,805,500. ================================================================================ 2 WATSON PHARMACEUTICALS, INC. INDEX TO FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
PAGE ---- PART I. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements: Consolidated Balance Sheets as of June 30, 1999 and December 31, 1998......... 1 Consolidated Statements of Income for the Three and Six Months Ended June 30, 1999 and 1998......................... 2 Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1999 and 1998................................... 3 Notes to Consolidated Financial Statements.................................... 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations......................... 7 Item 3. Quantitative and Qualitative Disclosure about Market Risk................. 12 PART II. OTHER INFORMATION AND SIGNATURES Item 1. Legal Proceedings......................................................... 13 Item 5. Other Information......................................................... 14 Item 6. Exhibits and Reports on Form 8-K.......................................... 15 Signatures......................................................................... 15
3 WATSON PHARMACEUTICALS, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share amounts)
JUNE 30, DECEMBER 31, 1999 1998 ---------- ------------ ASSETS (UNAUDITED) Current assets: Cash and cash equivalents ...................................... $ 55,818 $ 59,663 Marketable securities .......................................... 34,098 32,903 Accounts receivable, net ....................................... 129,615 91,329 Inventories .................................................... 108,623 81,907 Prepaid expenses and other current assets ...................... 14,181 27,358 Deferred tax assets ............................................ 16,183 29,634 ---------- ---------- Total current assets ........................................ 358,518 322,794 Property and equipment, net ........................................ 134,265 125,918 Investments and other assets ....................................... 535,820 201,080 Product rights and other intangibles, net .......................... 495,797 481,551 ---------- ---------- $1,524,400 $1,131,343 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses .......................... $ 67,953 $ 70,730 Income taxes payable ........................................... 6,194 -- Current portion of long-term debt .............................. 1,973 1,843 Current liability from acquisition of product rights ........... 15,950 30,380 ---------- ---------- Total current liabilities ................................... 92,070 102,953 Long-term debt ..................................................... 150,327 151,083 Long-term liability from acquisition of product rights ............. 7,090 23,040 Deferred tax liabilities ........................................... 189,118 54,512 ---------- ---------- Total liabilities ........................................... 438,605 331,588 ---------- ---------- Commitments and contingencies ...................................... Minority interest .................................................. 400 400 ---------- ---------- Stockholders' equity: Preferred stock; no par value per share; 2,500,000 shares authorized; none outstanding .................. -- -- Common stock; $0.0033 par value per share; 500,000,000 shares authorized; 95,778,000 and 95,312,000 shares issued .................................................. 316 315 Additional paid-in capital ....................................... 390,349 368,777 Retained earnings ................................................ 439,256 370,119 Accumulated other comprehensive income ........................... 255,474 60,144 ---------- ---------- Total stockholders' equity .................................. 1,085,395 799,355 ---------- ---------- $1,524,400 $1,131,343 ========== ==========
See accompanying Notes to Consolidated Financial Statements. - 1 - 4 WATSON PHARMACEUTICALS, INC. CONSOLIDATED STATEMENTS OF INCOME (Unaudited, in thousands, except per share amounts)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, --------------------------- --------------------------- 1999 1998 1999 1998 --------- --------- --------- --------- Net revenues ................................ $ 170,242 $ 152,684 $ 329,485 $ 285,020 Cost of sales ............................... 55,427 54,135 105,424 99,775 --------- --------- --------- --------- Gross profit .......................... 114,815 98,549 224,061 185,245 --------- --------- --------- --------- Operating expenses: Research and development ................. 13,573 12,714 23,715 23,377 Selling, general and administrative ...... 28,539 29,266 56,011 54,052 Amortization ............................. 7,350 5,454 14,040 10,071 Merger and related expenses (Note B) ..... -- -- 20,467 -- Charge for acquired in-process research and development ............... -- -- -- 13,000 --------- --------- --------- --------- Total operating expenses .............. 49,462 47,434 114,233 100,500 --------- --------- --------- --------- Operating income ............................ 65,353 51,115 109,828 84,745 --------- --------- --------- --------- Other income (expense): Equity in earnings of joint ventures ..... 354 2,179 385 3,790 Investment and other income .............. 927 1,821 1,886 3,293 Interest expense ......................... (2,797) (1,510) (5,615) (1,774) --------- --------- --------- --------- Total other income (expense), net ..... (1,516) 2,490 (3,344) 5,309 --------- --------- --------- --------- Income before income tax provision .......... 63,837 53,605 106,484 90,054 Provision for income taxes .................. 17,671 19,407 37,347 37,157 --------- --------- --------- --------- Net income .................................. $ 46,166 $ 34,198 $ 69,137 $ 52,897 ========= ========= ========= ========= Basic earnings per share .................... $ 0.48 $ 0.36 $ 0.72 $ 0.56 ========= ========= ========= ========= Diluted earnings per share .................. $ 0.47 $ 0.35 $ 0.71 $ 0.55 ========= ========= ========= ========= Weighted average shares outstanding, no dilution ................. 95,690 94,825 95,595 94,375 ========= ========= ========= ========= Weighted average shares outstanding, diluted basis ............... 97,930 97,460 98,045 96,915 ========= ========= ========= =========
See accompanying Notes to Consolidated Financial Statements. - 2 - 5 WATSON PHARMACEUTICALS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited, in thousands)
SIX MONTHS ENDED JUNE 30, --------------------------- 1999 1998 --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income ......................................................... $ 69,137 $ 52,897 --------- --------- Reconciliation to net cash provided by operating activities: Depreciation .................................................... 6,506 6,017 Amortization .................................................... 14,040 10,071 Charge for acquired in-process research and development ......... -- 13,000 Deferred income tax provision (benefit) ......................... 17,557 (10,338) Equity in earnings of joint ventures ............................ (144) (3,194) Tax benefits related to exercise of stock options ............... 9,397 11,889 Other ........................................................... 2,198 1,282 Changes in assets and liabilities, net of acquisition: Accounts receivable ......................................... (39,154) (515) Inventories ................................................. (26,716) (10,400) Prepaid expenses and other current assets ................... 10,768 (1,032) Other assets ................................................ 406 (1,515) Accounts payable and accrued expenses ....................... (2,777) 7,489 Income taxes payable ........................................ 6,194 17,364 --------- --------- Total adjustments ........................................ (1,725) 40,118 --------- --------- Net cash provided by operating activities ............... 67,412 93,015 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property and equipment ................................ (14,671) (11,349) Purchases of marketable securities ................................. (27,240) (11,309) Proceeds from maturities of marketable securities .................. 25,967 42,265 Acquisitions of product rights ..................................... (32,984) (54,606) Acquisition of business ............................................ -- (67,695) Addition to investment in Andrx .................................... (3,000) -- Additions to investment in joint ventures .......................... (500) (7,435) --------- --------- Net cash used by investing activities ................... (52,428) (110,129) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of long-term debt ........................... -- 148,662 Principal payments on long-term debt ............................... (625) (5,965) Payments on liability for acquisition of product rights ............ (30,380) (45,380) Proceeds from exercise of stock options and warrants ............... 12,176 20,185 --------- --------- Net cash (used) provided by financing activities ........ (18,829) 117,502 --------- --------- Net increase (decrease) in cash and cash equivalents .... (3,845) 100,388 Cash and cash equivalents at beginning of period ................... 59,663 97,817 --------- --------- Cash and cash equivalents at end of period ......................... $ 55,818 $ 198,205 ========= =========
See accompanying Notes to Consolidated Financial Statements. - 3 - 6 WATSON PHARMACEUTICALS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A - GENERAL The accompanying unaudited consolidated financial statements of Watson Pharmaceuticals, Inc. ("Watson" or the "Company") should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 1998. In the opinion of management, the accompanying financial statements contain all adjustments necessary to present fairly the Company's financial position and results of operations for the periods presented. Unless otherwise noted, all such adjustments are of a normal, recurring nature. In addition, certain comparative prior year amounts in the consolidated financial statements have been reclassified to conform to the current year presentation. The results of operations for any interim period are not necessarily indicative of the results of operations to be expected for the entire year. Watson's consolidated financial statements have been restated to reflect the January 1999 acquisition of TheraTech, Inc. ("TheraTech") as further discussed in Note B. This acquisition was accounted for as a pooling of interests and qualified as a tax-free merger for federal income tax purposes. The accompanying consolidated financial statements include the results of TheraTech for all periods presented. In February 1998, the Company completed its acquisition of The Rugby Group, Inc. ("Rugby"), a developer and marketer of off-patent pharmaceutical products, from Hoechst Marion Roussel, Inc. The acquisition was accounted for as a purchase and the accompanying consolidated financial statements include Rugby's results of operations since the date of its acquisition. Under the purchase method of accounting, the portion of the purchase price that is allocated to an acquired company's in-process research and development ("IPR&D") is charged to expense at the date of acquisition. In the first quarter of 1998, the Company recorded a charge of $13.0 million for IPR&D in connection with the Rugby acquisition. NOTE B - ACQUISITION OF THERATECH Watson completed its acquisition of TheraTech, a leading drug-delivery company that develops, manufactures and markets innovative products based on its patented and proprietary technologies and systems, in January 1999. Under the terms of the TheraTech merger agreement, each share of TheraTech common stock was converted into the right to receive 0.2663 of a share of the Company's common stock. Accordingly, the Company issued approximately 5.8 million common shares, with a market value on the date of acquisition of approximately $330 million, in exchange for all of the outstanding common shares of TheraTech. In connection with this acquisition, during the first quarter of 1999, Watson recorded a special charge of $20.5 million for certain merger and related expenses. The charge consisted of transaction fees for investment bankers, attorneys, accountants and financial printing costs ($11.1 million) and closure costs associated with the elimination of duplicate or discontinued products, operations and facilities ($9.4 million). The eliminated operations were not significant to the Company and management expects the closure process to be completed during the third quarter of 1999. The $9.4 million of closure costs consisted of employee termination costs ($3.9 million), non-cash facility shutdown and asset impairment costs ($4.2 million) and lease and contract termination costs ($1.3 million). Through - 4 - 7 June 30, 1999, the Company had paid approximately $10.2 million in transaction costs and paid or charged-off assets of approximately $6.5 million in closure-related expenses of the TheraTech merger. Accrued merger expenses as of June 30, 1999 total approximately $3.8 million. NOTE C - INVENTORIES Inventories consisted of the following (in thousands):
June 30, December 31, 1999 1998 -------- ------------ Raw materials......... $ 36,414 $ 25,961 Work-in-progress...... 12,283 12,728 Finished goods........ 59,926 43,218 -------- -------- $108,623 $ 81,907 ======== ========
NOTE D - INVESTMENTS AND OTHER ASSETS Long-term investments consist primarily of the Company's investment in Andrx Corporation, a drug-delivery company utilizing controlled-release technologies to develop oral pharmaceutical products. Andrx' common stock trades on the Nasdaq Stock Market under the symbol ADRX. On June 30, 1999, Watson exercised a warrant issued by Andrx in July 1994 and acquired approximately 674,000 Andrx common shares for $3.0 million. As of June 30, 1999, following the warrant exercise and Andrx' two-for-one stock split in June 1999, the Company held approximately 6.1 million common shares of Andrx. This represents approximately 19.4% of the total Andrx common shares outstanding. Watson accounts for this investment using the cost method, adjusted to fair market value. The unrealized gain on the Company's investment in Andrx was $256.3 million and $60.6 million (net of income taxes of $170.9 million and $40.4 million), at June 30, 1999 and December 31, 1998, respectively. This unrealized gain was the primary component of accumulated other comprehensive income in the stockholders' equity section of Watson's consolidated balance sheets. NOTE E - EARNINGS PER SHARE ("EPS") The following table sets forth the computation of basic and diluted EPS:
Three Months Ended Six Months Ended June 30, June 30, ---------------------- ---------------------- (in thousands, except for EPS) 1999 1998 1999 1998 ------- ------- ------- ------- Numerator: Net income.............................. $46,166 $34,198 $69,137 $52,897 ======= ======= ======= ======= Denominators: Denominator for basic EPS, weighted average shares outstanding........... 95,690 94,825 95,595 94,375 Assumed exercise of dilutive stock options and warrants................. 2,240 2,635 2,450 2,540 ------- ------- ------- ------- Denominator for diluted EPS............. 97,930 97,460 98,045 96,915 ======= ======= ======= ======= Basic EPS................................... $ 0.48 $ 0.36 $ 0.72 $ 0.56 ======= ======= ======= ======= Diluted EPS................................. $ 0.47 $ 0.35 $ 0.71 $ 0.55 ======= ======= ======= =======
- 5 - 8 NOTE F - COMPREHENSIVE INCOME Comprehensive income includes all changes in equity during a period except those resulting from investments by and distributions to the Company's stockholders. Watson's comprehensive income consisted of the following:
Three Months Ended Six Months Ended June 30, June 30, ------------------------ ------------------------ (in thousands) 1999 1998 1999 1998 -------- -------- -------- -------- Net income .................... $ 46,166 $ 34,198 $ 69,137 $ 52,897 Unrealized gain on equity securities, net of tax ..... 130,520 14,636 195,330 4,650 -------- -------- -------- -------- Comprehensive income .......... $176,686 $ 48,834 $264,467 $ 57,547 ======== ======== ======== ========
NOTE G - SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Six Months Ended June 30, ----------------------- (in thousands) 1999 1998 ------- -------- Cash paid during the periods for: Interest.......................................... $ 5,532 $ 412 Income taxes...................................... 13,536 19,718 Acquisition of business: Fair value of assets acquired..................... $ -- $(93,339) Fair value of liabilities assumed................. -- 25,644 ------- -------- Net cash paid.................................. $ -- $(67,695) ======= ========
- 6 - 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO 1998 Net revenues for the three months ended June 30, 1999 were $170.2 million compared to $152.7 million for the 1998 period, an increase of $17.5 million or 11%. Second quarter revenue growth was attributable to increased sales of branded products, including dermatology and newly acquired female healthcare products, and increased licensing income. These sales increases were partially offset by lower sales of the Dilacor XR(R) product and its generic equivalent, diltiazem, due to supply interruptions, and of certain other generic products, including various Rugby products phased out in mid-1998. Sales of Dilacor XR(R) and its generic equivalent may continue to decline in future periods due to continued supply interruptions at Watson's sole supplier. (See "Item 5. Other Information") Second quarter 1999 revenues included an $8 million fee arising from certain outlicensing activities. Overall, branded products accounted for approximately 50% of net product sales in the second quarter of 1999, up from approximately 40% in the 1998 period. As a result of the higher margins generated by branded products, the gross profit margin on product sales increased to 65% in the second quarter of 1999 from 63% in the same period of 1998. Research and development expenses increased to $13.6 million in the second quarter of 1999, compared to $12.7 million in the same period of 1998, due to differences in the timing of various projects. Selling, general and administrative expenses decreased to $28.5 million for the second quarter of 1999, compared to $29.3 million in the prior year period, primarily due to efficiencies realized from the consolidation of distribution facilities subsequent to the Rugby acquisition in 1998. This decrease was partially offset by higher personnel-related costs in the selling and marketing area, primarily due to expansion of the female healthcare sales force, and in the administrative area, in support of the Company's growth. Second quarter amortization expense increased to $7.4 million in 1999, compared to $5.5 million in the 1998 period, primarily due to amortization of the cost of the female healthcare product rights acquired in November 1998. Watson has capitalized such acquired product rights and is amortizing them over estimated lives of 20 years. Equity in earnings from joint ventures decreased significantly in the second quarter of 1999 primarily due to reduced earnings from the Company's 50% interest in Somerset Pharmaceuticals, Inc., due to lower revenues and higher research and development costs. Currently, Somerset's sole product is an anti-Parkinson's drug that lost Orphan Drug exclusivity in 1996, although other potential indications for this product are under development. This decrease was partially offset by increased earnings from the ANCIRC joint venture with Andrx in the 1999 period as a result of a new product launch during second quarter 1999. Interest expense increased significantly during the second quarter of 1999 compared to the 1998 period due to interest on the Company's $150 million of senior unsecured notes issued in May 1998. The second quarter 1999 income tax provision reflects a lower effective tax rate on pretax income than in 1998, 34% compared to 36%, and a nonrecurring tax benefit of $4.1 million, both of which result from recent changes in income tax regulations relating to the "separate return limitation year" ("SRLY") limitations on the use of acquired net operating loss ("NOL") carryforwards. Previously, the - 7 - 10 Company had maintained a valuation allowance against certain acquired deferred tax assets related to NOL carryforwards because of uncertainty as to their future realization under the SRLY limitations. With the June 1999 change in SRLY rules, management now believes that the carryforwards will be realized and that the related valuation allowance should be reversed, which reversal will result in a reduction in the Company's 1999 income tax provision aggregating $9.8 million. For tax purposes, $4.1 million of that total may not be utilized until future years, and has been reflected as a one-time reduction in income tax expense during the second quarter 1999. The remaining $5.7 million will be utilized for tax purposes during 1999 and is being recognized through a reduction in the Company's effective tax rate, exclusive of the one-time benefit, to approximately 34% during the second, third and fourth quarters of 1999. SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO 1998 Net revenues for the six months ended June 30, 1999 were $329.5 million compared to $285.0 million for the 1998 period, an increase of $44.5 million or 16%. The revenue growth was attributable to increased sales of branded products, including newly acquired female healthcare products and dermatology products. These sales increases were partially offset by lower sales of the Dilacor XR(R) product and diltiazem, due to supply interruptions, and of certain other generic products. Sales of Dilacor XR(R) and its generic equivalent may continue to decline in future periods due to continued supply interruptions at Watson's sole supplier. (See "Item 5. Other Information") Overall, branded products accounted for approximately 50% of net product sales in the first six months of 1999, up from approximately 40% in the 1998 period. As a result of the higher margins generated by branded products, the gross profit margin on product sales increased to 66% in the 1999 period from 63% in 1998. Selling, general and administrative expenses increased to $56.0 million for the first half of 1999, compared to $54.1 million in the prior year period. Selling and marketing expenses accounted for essentially all of this increase, with higher personnel-related costs more than offsetting lower distribution costs. The higher personnel costs resulted primarily from the expansion of the female healthcare sales group, while the decreased distribution costs resulted from efficiencies of facility consolidation subsequent to the Rugby acquisition. First half 1999 amortization expense increased to $14.0 million compared to $10.1 million in the 1998 period, primarily due to amortization of the cost of the female healthcare product rights acquired in November 1998. During the first quarters of 1999 and 1998, Watson recorded nonrecurring charges related to its acquisitions of TheraTech and Rugby, respectively. In connection with the acquisition of TheraTech, Watson recorded a special charge of $20.5 million for certain merger and related expenses. The charge consisted of transaction fees for investment bankers, attorneys, accountants and financial printing costs ($11.1 million) and closure costs associated with the elimination of duplicate or discontinued products, operations and facilities ($9.4 million). The eliminated operations were not significant to the Company and management expects the closure process to be completed during the third quarter of 1999. The $9.4 million of closure costs consisted of employee termination costs ($3.9 million), non-cash facility shutdown and asset impairment costs ($4.2 million) and lease and contract termination costs ($1.3 million). Through June 30, 1999, the Company had paid approximately $10.2 million in transaction costs and paid or charged-off assets of approximately $6.5 million in closure-related expenses of the TheraTech merger. Accrued merger expenses as of June 30, 1999 total approximately $3.8 million. In the first quarter of 1998, the Company recorded a nonrecurring charge of $13.0 million for IPR&D in connection with the Rugby acquisition. - 8 - 11 Equity in earnings from joint ventures decreased significantly in the first half of 1999 primarily due to reduced earnings from the Company's interest in Somerset, partially offset by higher earnings from the ANCIRC joint venture. Interest expense increased significantly during the six months ended June 30, 1999 due to interest on the Company's $150 million of senior unsecured notes issued in May 1998. The provision for income taxes of $37.3 million for the 1999 period reflects an overall tax rate of 35%, while the $37.2 million provision for 1998 reflects an overall rate of 41%. The lower 1999 effective tax rate is primarily the result of a decrease in the amount of non-deductible merger-related charges incurred during the current year and the realization of certain tax assets due to changes in income tax regulations. LIQUIDITY AND CAPITAL RESOURCES The Company's working capital increased from $219.8 million at December 31, 1998 to $266.4 million at June 30, 1999. This $46.6 million increase was primarily due to the Company's net income for the six months ended June 30, 1999 and growth in its accounts receivable and inventory balances at June 30, 1999. These working capital increases were partially offset by cash used for the reacquisition of product rights for the Androderm(R) transdermal patch, acquisitions of property and equipment and a scheduled payment pursuant to the purchase of product rights. In April 1998, the Company filed a registration statement with the SEC to raise up to $300 million from offerings of senior or subordinated debt securities, common stock, preferred stock or a combination thereof. In May 1998, pursuant to this shelf offering, the Company issued $150 million of 7-1/8% senior unsecured notes due May 2008, with interest payable semi-annually in May and November. The balance of the Company's shelf offering remains available for issuance at such times and in such amounts as the Company deems appropriate In the first quarter of 1999, the Company entered into a credit facility that provides for unsecured borrowing commitments totaling $30 million. To date, no borrowings have been made under this credit facility. Management believes that current cash balances and the cash provided from operations will be sufficient to meet the Company's normal operating requirements during the coming year. The Company continues to review additional opportunities to acquire or invest in companies, technologies, product rights and other investments that are compatible with its existing business. Watson could use cash and financing sources discussed herein, or financing sources that subsequently become available to the Company, to fund additional acquisitions or investments. If a material acquisition or investment is completed, the Company's operating results and financial condition could change materially in future periods. - 9 - 12 YEAR 2000 COMPLIANCE PROGRAM The Year 2000 ("Y2K") issue arises because many computer systems and programs recognize only the last two digits of years (and not the century designation) and may be unable to properly recognize and process dates beyond December 31, 1999. Date sensitive systems that use two digits rather than four to identify a year may recognize the year 2000 as 1900 or some other date, and may consequently fail or produce erroneous data. Watson's Y2K Compliance Program is designed to minimize the possibility of serious Y2K interruptions, and consists of four primary phases: Phase 1 - evaluate whether the Company's date sensitive systems are able to interpret dates beyond the year 1999; Phase 2 - respond to and remedy any inadequacies that may emerge from the evaluation process in Phase 1; Phase 3 - investigate the Year 2000 readiness of third parties that Watson has material relationships with and, Phase 4 - develop a contingency plan for any of the Company's date sensitive systems which may not be timely remedied through procedures in Phase 2. Watson's Y2K Compliance Program has addressed its primary business application systems (including manufacturing, sales, distribution and finance), internal network systems, personal computers and telecommunications systems. Phases 1 and 2 have been completed for these systems and management believes that they are Y2K compliant. Watson expects to complete Phases 1 and 2 for secondary systems (including telemarketing support and building security systems, and certain laboratory support equipment) by October 1999. Watson plans to install new telemarketing support and building security systems by that date, which systems have been selected primarily for their enhanced features and to accommodate the Company's growth, but also because they are Y2K compliant. Watson is in the process of transitioning TheraTech's primary business application systems to its Y2K compliant systems, with completion anticipated in the third quarter of 1999. TheraTech's secondary systems are currently in Phases 1 and 2 of Watson's Y2K Compliance Program, with completion expected in the fourth quarter of 1999. In the third quarter of 1998, Watson began Phase 3 of its Y2K Compliance Program. Phase 3 procedures initially included communication with the Company's customers, vendors and material service providers regarding their Y2K readiness plans and progress. Substantially all of these third parties have responded that they are now, or will be by year-end, Y2K compliant. A small number of Watson's top 20 customers and top 20 vendors and service providers did not respond. In these limited instances, second-request letters have been sent and the Company is contacting the appropriate third party representatives by phone to ascertain their Y2K readiness. In addition, Watson is attempting to verify the Y2K readiness of these third parties by reviewing public information including financial statements and internet sites. Also in Phase 3, the Company upgraded its electronic data interchange ("EDI") system and is currently testing its EDI documents with its business partners. Watson expects this EDI testing to be completed by October 1999. The cost of Watson's Y2K Compliance Program has not had, and is not expected to have, a material effect on Watson's financial position or results of operations. Milestones, implementation dates, contingency plans and the anticipated costs of Watson's Y2K Compliance Program are subject to change based on new circumstances that may arise or new information that becomes available. - 10 - 13 It is management's opinion that any Y2K-related failures in Watson's internal information systems and technology infrastructure will not have a material adverse effect on the Company's results of operations, liquidity or financial position, however, there can be no assurance that serious interruptions will not occur. In addition, there can be no assurance that the systems or equipment of other parties that interact with Watson's systems will be compliant on a timely basis. Watson believes that the failure of systems or equipment of one or more of its key third party contractors or customers is the most reasonably likely worst case Y2K scenario, and that an extended business interruption could possibly have a material adverse effect on the results of operations, liquidity or financial position of the Company. Where appropriate, Watson continues to develop contingency plans in the event that key third parties do not become Y2K compliant on a timely basis, or in the event of unanticipated internal system failures. This effort reflects the formalization of existing disaster recovery plans and includes the procurement of additional raw material, packaging material and finished goods inventory, the installation of back-up power generation systems and the implementation of parallel procedures in key operating areas, among other measures. The foregoing represents a Y2K readiness disclosure statement pursuant to the Year 2000 Readiness and Disclosure Act. CAUTIONARY STATEMENT FOR PURPOSES OF THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 This report contains forward-looking statements. The Company desires to take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and is including this statement for the express purpose of availing itself of the protections of the safe harbor with respect to all forward-looking statements. Several important factors, in addition to the specific factors discussed in connection with such forward-looking statements individually, could affect the future results of the Company and could cause those results to differ materially from those expressed in the forward-looking statements contained herein. The Company's estimated or anticipated future results, product performance or other non-historical facts are forward-looking and reflect Watson's current perspective of existing trends and information. These statements involve risks and uncertainties that cannot be predicted or quantified and, consequently, actual results may differ materially from those expressed or implied by such forward-looking statements. Such risks and uncertainties include, among others, the success of Watson's product development activities and the timeliness with which regulatory authorizations and product roll-out may be achieved, market acceptance of Watson's products and the impact of competitive products and pricing, the availability on commercially reasonable terms of raw materials and other third party sourced products, dependence on sole source suppliers and risks associated with a production interruption or shipment delays at such suppliers, successful compliance with extensive, costly, complex and evolving governmental regulations and restrictions, the ability to timely and cost effectively integrate acquisitions, exposure to product liability and other lawsuits and contingencies, the outcome of certain litigation involving the Company and related costs and expenses and possible diversion of management's time and attention arising from such litigation, the successful and timely implementation of the Company's Year 2000 Compliance Program, and other risks and uncertainties - 11 - 14 detailed in this report and from time to time in Watson's other SEC filings including, without limitation, the Company's Annual Reports on Form 10-K. Therefore, the Company wishes to caution each reader of this report to consider carefully these factors as well as the specific factors that may be discussed with each forward-looking statement in this report or disclosed in the Company's filings with the SEC as such factors, in some cases, could affect the ability of the Company to implement its business strategy and may cause actual results to differ materially from those contemplated by the statements expressed herein. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK As discussed in Note D to the accompanying Notes to Consolidated Financial Statements, the Company's investment in Andrx, which was stated on Watson's balance sheet at a fair market value of $467.2 million at June 30, 1999, consisted of approximately 6.1 million shares of Andrx common stock. This investment has exposure to price risk, as the Andrx common stock is a publicly traded equity security, the market price of which has been, and may continue to be, volatile. The following table sets forth the Andrx quarterly high and low share market price information, based on published financial sources, for 1998 and through June 30, 1999 (adjusted for the 2-for-1 stock split effective June 1, 1999):
1999, by quarter: HIGH LOW ----------------- --------- --------- First................... $ 46.25 $ 22.25 Second.................. 78.00 30.82 1998, by quarter: First................... $ 19.13 $ 12.25 Second.................. 21.32 14.07 Third................... 21.50 12.94 Fourth.................. 25.85 12.32
Substantially all of the Company's cash equivalents and marketable securities are at fixed interest rates and, as such, the fair value of these instruments is affected by changes in market interest rates. However, all of these investments mature within one year. As a result, the Company believes that the market risk arising from its holding of these financial instruments is minimal. The Company believes that the fair value of its fixed-rate long-term debt approximates its carrying value of approximately $155 million at June 30, 1999. While changes in market interest rates may affect the fair value of the Company's long-term debt, management believes the effect, if any, of reasonably possible near-term changes in the fair value of such debt on the Company's financial condition, results of operations or cash flows will not be material. The Company has no material foreign exchange or commodity price risks. - 12 - 15 PART II - OTHER INFORMATION AND SIGNATURES ITEM 1. LEGAL PROCEEDINGS Reference is made to Item 3 in the Company's 1998 Annual Report on Form 10-K and Item 1 in the Company's Form 10-Q for the quarter ended March 31, 1999 for background information on certain legal proceedings. In addition, from time to time, the Company is involved in certain other legal proceedings arising in the normal course of its business. The Company does not believe that such other matters are likely to have a material adverse effect on the Company. The following is a description of significant legal proceeding developments during the period covered by this Quarterly Report. With respect to the phentermine hydrochloride product liability suits filed against Rugby Laboratories, Inc. and other Watson entities, additional actions raising similar issues have been filed. As of July 31, 1999, a total of approximately 700 cases have been filed against Rugby and other Watson entities in a number of state courts and federal court. The Company believes that it will be fully indemnified by Rugby's former owner, Hoechst Marion Roussel, Inc. ("HMR"), for the defense of all such cases and for any liability that may arise out of these cases. HMR is currently controlling the defense of all these cases as the indemnifying party under its agreements with the Company. On August 4, 1999, Watson Laboratories, Inc., a subsidiary of the Company, filed suit in the United States District Court for the Central District of California (Watson Laboratories, Inc. vs. Rhone-Poulenc Rorer, Inc., et. al.) seeking unspecified damages, restitution and injunctive relief to enjoin Rhone-Poulenc Rorer, Inc. and other defendants and their successors ("RPR"), from producing or selling products in the United States that compete with the Company's Dilacor XR(R) product or its generic equivalent. The suit contends that the announced plans to combine RPR with HMR, which sells Cardizem(R)CD, a product that competes with the Company's Dilacor XR(R) product or its generic equivalent, would constitute a breach of the agreements entered into by RPR and Watson Laboratories, Inc. in connection with the Company's June 1997 acquisition from RPR of certain worldwide marketing, sales and distribution rights to the Dilacor XR(R) product and its generic equivalent. The complaint also seeks unspecified damages from RPR for breach of contract and unfair competition arising, in part, from RPR's failure to fulfill its supply obligations to the Company for the Dilacor XR(R) product and its generic equivalent. See "Item 5. Other Information" below. On June 9, 1999, a suit was filed against the Company (William Higuchi and Setsuko Higuchi v. Watson Pharmaceuticals, Inc.) in the United States District Court for the District of Utah. The plaintiffs allege that they were holders of TheraTech, Inc. stock certificates and were entitled to receive Company stock certificates free of any restrictive legends in connection with the Company's acquisition of TheraTech. The complaint contends, among other things, that the Company breached its obligation to the plaintiffs by initially issuing Company stock certificates that contained restrictive legends and by unreasonably delaying issuance of certificates without restrictive legends, during which time the trading prices of the Company's stock declined. The complaint includes various tort and contract claims, and seeks consequential damages of approximately $11,500,000 and punitive damages. The Company has not yet responded to the complaint, but believes it has substantial defenses to the claims made by plaintiffs. The Company also believes that to the extent liability exists, if at all, the Company may be entitled to indemnification and/or contribution from third parties. The Company is unable to predict the likelihood of the outcome of any of these litigation matters or the potential liability, if any, to the Company that may arise from these litigation matters. - 13 - 16 ITEM 5. OTHER INFORMATION In June 1997, the Company acquired exclusive United States and certain worldwide marketing, sales and distribution rights to the Dilacor XR(R) product and its generic equivalent formulation of diltiazem from RPR for $190 million and future royalties. In connection with this acquisition, RPR agreed to supply Watson with all of its requirements for Dilacor XR(R) product and its generic equivalent through June 2000. For this purpose, RPR designated as its contract manufacturer Centeon LLC. RPR agreed to remain fully liable to Watson for Centeon's performance. Centeon is a joint venture between RPR and Hoechst AG and has been operating under an FDA Consent Decree since January 1997. In August 1998, Centeon ceased its manufacturing operations after an FDA inspection. Since that time, Centeon has not manufactured any Dilacor XR(R) product or its generic equivalent. Centeon is currently the Company's sole source for these products. The Company has been working with the FDA to secure the release of certain Centeon inventory existing at the time of Centeon's production shut-down. Over the last several months, Watson has obtained releases from time to time of this inventory and continues to work with the FDA to secure additional releases. Although Watson intends to continue its efforts, there can be no assurances that any additional inventory will be released from Centeon. Due to RPR's supply failures, the Company has accelerated its plans to establish an alternate source of supply for the Dilacor XR(R) product and its generic equivalent. In this regard, Watson has submitted to the FDA a request for a site transfer of the manufacturing of the Dilacor XR(R) product and its generic equivalent to Watson's Corona, California facility. The Company expects that the FDA will consider approval of its site transfer only after a successful cGMP inspection of its Corona facility. Watson anticipates that an FDA inspection of its Corona facility will occur sometime this year. As reported in the Company's 1998 Annual Report on Form 10-K and its Form 10-Q for the period ended March 31, 1999, Watson has initiated a quality improvement plan to address the FDA observations arising from inspections of the Company's Corona and Miami, Florida facilities in late 1998 and early 1999. Watson is continuing to implement its quality improvement initiatives and is working with the FDA to resolve all outstanding issues as speedily as possible. The Company has pending with the FDA product submissions (including abbreviated new drug applications) seeking, among other things, approval to manufacture certain products at its Corona or Miami facilities, as the case may be. The Company expects that the FDA will consider approval of its pending product submissions only after a successful cGMP inspection of the relevant facility to which the submission pertains. The process for obtaining governmental approval to manufacture and market pharmaceutical products is rigorous, time-consuming and costly, and Watson cannot predict the extent to which this process may be affected by legislative and regulatory developments. Watson is dependent on receiving FDA and other governmental approvals prior to manufacturing, marketing and shipping its products. Consequently, there is always the possibility that the FDA or other applicable agency will not grant such approvals, or that there will be a delay in the rate or timing or an increase in the cost of such - 14 - 17 approvals, any of which could adversely affect Watson's product introduction plans or results of operations. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 10.26 Form of Key Employee Agreement. The Company has entered into a Key Employee Agreement with each of its executive officers who include Michael E. Boxer, Allen Y. Chao, Ph.D., Charles Ebert, Robert C. Funsten, David C. Hsia, Ph.D. and G. Frederick Wilkinson. A copy of each of these individual's Key Employee Agreements will be provided to the Staff upon request. 27.1 Financial Data Schedule (EDGAR version only) (b) Report on Form 8-K filed during the quarter ended June 30, 1999: None. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. WATSON PHARMACEUTICALS, INC. (Registrant) By: /s/ MICHAEL E. BOXER ------------------------------------- Michael E. Boxer Senior Vice President - Chief Financial Officer (Principal Financial Officer) By: /s/ R. CHATO ABAD ------------------------------------ R. Chato Abad Vice President - Finance (Principal Accounting Officer) Dated: August 12, 1999 - 15 - EX-10.26 2 FORM OF KEY EMPLOYMENT AGREEMENT 1 EXHIBIT 10.26 WATSON PHARMACEUTICALS, INC. KEY EMPLOYEE AGREEMENT This Key Employee Agreement ("Agreement") is entered into as of __________, 1999 (the "Effective Date"), by and between ________________________ ("Executive") and Watson Pharmaceuticals, Inc. (the "Company"), a Nevada corporation. WHEREAS, the Company desires to employ Executive to provide personal services to the Company, and wishes to provide Executive with certain compensation and benefits in return for his services; and WHEREAS, Executive wishes to be employed by the Company and provide personal services to the Company in return for certain compensation and benefits, including the benefits provided under the Agreement; NOW, THEREFORE, in consideration of the mutual promises and covenants contained herein, it is hereby agreed by and between the parties hereto as follows: 1. EMPLOYMENT BY THE COMPANY. Subject to terms set forth herein, the Company agrees to employ Executive in the position of _______________ and Executive hereby accepts employment effective as of the Effective Date. In this position, Executive shall perform such duties as are assigned from time to time by the Chief Executive Officer ("CEO") of the Company, consistent with the Bylaws of the Company and as may be required by the Company's Board of Directors (the "Board"). During his employment with the Company, Executive will devote his best efforts and substantially all of his business time and attention (except for vacation periods as set forth herein and reasonable periods of illness or other incapacity permitted by the Company's general employment policies) to the business of the Company. Executive shall abide by the general employment policies and procedures of the Company, except that wherever the terms of this Agreement may differ from or are in conflict with the Company's general employment policies or procedures, this Agreement shall control. 2. COMPENSATION. 2.1 SALARY. For services to be rendered hereunder, Executive shall receive a base salary as set forth in Section 1 of the Compensation and Severance Terms Schedule, attached hereto as Exhibit A. Executive will be considered annually for increases in base salary in accordance with Company policy and subject to review and approval by the CEO or the Compensation Committee of the Board, as appropriate. 2.2 BONUS. Executive shall be eligible to participate in the Company's bonus plan at the executive level throughout the duration of Executive's employment with the Company. The Company shall have the sole discretion to determine whether Executive is entitled to any such bonus and to determine the amount of the bonus. The amount of Executive's bonus may be determined in part based on Executive's performance with respect to certain goals established by the Company and attainment by the Company of its planned financial objectives for the bonus period. Notwithstanding the foregoing, no bonus is guaranteed to Executive. Any bonus is subject 1. 2 to the approval of the CEO or the Compensation Committee of the Board, as appropriate. The Company retains the authority to review, grant, deny or revise any bonus in its sole discretion. To be eligible to receive a bonus, Executive must remain in employment with the Company throughout the entire fiscal year. The target level of such bonus is set forth in Section 2 of Exhibit A attached hereto. 2.3 STOCK OPTIONS. In addition to any stock options which the Company may have already granted to Executive prior to the Effective Date, subject to approval of the Board or the Compensation Committee of the Board, as appropriate, Executive will receive the stock option grants (if any) set forth in Section 3 of Exhibit A, and such additional grants of stock options as may from time to time be granted, pursuant to the terms and conditions set forth in the applicable stock option agreement and plan documents, copies of which will be made available upon Executive's request. For the purposes of this Agreement, all stock options granted to Executive by the Company prior to the Effective Date, granted hereunder, or granted in the future shall be referred to hereinafter as the "Options." 2.4 PAID TIME OFF. Executive shall be eligible to accrue paid time off ("PTO") during the term of this Agreement, in accordance with the Company's standard policy regarding PTO and in an amount commensurate with other employees at a level similar to that of the Executive. 2.5 STANDARD COMPANY BENEFITS. Executive shall be entitled to all rights and benefits for which he is eligible under the terms and conditions of the standard Company benefits plans (e.g., health and disability insurance, 401(k) retirement plan, etc.) and other benefits and incentives which may be in effect from time to time and provided by the Company to employees at levels similar to the Executive. 3. PROPRIETARY INFORMATION AND INVENTIONS. Executive agrees to execute and abide by the Employee Proprietary Information and Inventions Agreement attached hereto as Exhibit C and made a part hereof by this reference. 4. OUTSIDE ACTIVITIES. 4.1 ACTIVITIES. Except with the prior written consent of the CEO or the Board, as appropriate, Executive will not during his employment with the Company undertake or engage in any other employment, occupation or business enterprise, other than ones in which Executive is a passive investor. Executive may engage in civic and not-for-profit activities so long as such activities do not materially interfere with the performance of his duties hereunder. 4.2 INVESTMENTS AND INTERESTS. During his employment by the Company, Executive agrees not to acquire, assume or participate in, directly or indirectly, any position, investment or interest known by him to be adverse to or in conflict with the interest of the Company, its business or prospects, financial or otherwise. By way of clarification, nothing contained in this Agreement shall prevent Executive from holding, for investment purposes only, no more than one percent (1%) of the capital stock of any publicly traded company. 4.3 NON-COMPETITION. During his employment by the Company, except on behalf of the Company, Executive will not directly or indirectly, whether as an officer, director, 2. 3 stockholder, partner, proprietor, associate, representative, consultant, or in any capacity whatsoever engage in, become financially interested in, be employed by or have any business connection with any other person, corporation, firm, partnership or other entity whatsoever known by him to compete directly with the Company, anywhere in the world, in any line of business engaged in (or planned to be engaged in) by the Company. 5. OTHER AGREEMENTS. Executive represents and warrants that his employment by the Company will not conflict with and will not be constrained by any prior agreement or relationship with any third party. Executive represents and warrants that he will not disclose to the Company or use on behalf of the Company any confidential information governed by any agreement with any third party except in accordance with an agreement between the Company and any such third party. During Executive's employment by the Company, Executive may use, in the performance of his duties, all information generally known and used by persons with training and experience comparable to his own and all information which is common knowledge in the industry or otherwise legally in the public domain. 6. TERMINATION OF EMPLOYMENT. 6.1 AT-WILL EMPLOYMENT. Executive's relationship with the Company is at-will. The Company shall have the right to terminate Executive's employment with the Company at any time with or without Cause and with or without notice. 6.2 TERMINATION BY COMPANY FOR CAUSE. If the Company terminates Executive's employment at any time for Cause, Executive's salary shall cease on the date of termination; and Executive will not be entitled to severance pay, pay in lieu of notice or any other such compensation. (a) DEFINITION OF "CAUSE." For purposes of this Agreement, "Cause" shall mean (i) Executive's conviction of any felony; or, (ii) Executive's gross misconduct, material violation of Company policy, or material breach of Executive's duties to the Company, which Executive fails to correct within thirty (30) days after Executive is given written notice by the CEO or the Board, as appropriate. 6.3 TERMINATION BY COMPANY WITHOUT CAUSE. If the Company terminates Executive's employment at any time without Cause, Executive shall be entitled to severance benefits as set forth in Section 4.1 of the Compensation and Severance Terms Schedule, attached hereto as Exhibit A. 6.4 EXECUTIVE'S VOLUNTARY RESIGNATION. Executive may terminate his employment with the Company at any time, with or without Good Reason, and with or without notice. In the event Executive voluntarily terminates his employment other than for Good Reason, he will not be entitled to severance pay, pay in lieu of notice or any other such compensation. 6.5 EXECUTIVE'S RESIGNATION FOR GOOD REASON. Executive may resign his employment for Good Reason so long as Executive tenders his resignation to the Company within sixty (60) days after the occurrence of the event which forms the basis for his termination for Good Reason. If Executive terminates his employment for Good Reason, Executive shall be eligible for severance benefits as set forth in Section 4.2 of Exhibit A, attached hereto. 3. 4 (a) DEFINITION OF "GOOD REASON." For purposes of this Agreement, "Good Reason" shall mean any one of the following events which occurs on or after the Effective Date: (i) any reduction of the Executive's then existing annual base salary, except to the extent the annual base salary of all other executive officers of the Company is similarly reduced (provided such reduction does not exceed fifteen percent (15%) of Executive's then existing annual base salary); (ii) any material reduction in the package of benefits and incentives, taken as a whole, provided to the Executive (except that employee contributions may be raised to the extent of any cost increases imposed by third parties) or any action by the Company which would materially and adversely affect the Executive's participation or reduce the Executive's benefits under any such plans, except to the extent that such benefits and incentives of all other executive officers of the Company are similarly reduced; (iii) any diminution of the Executive's duties, responsibilities, authority, reporting structure, titles or offices, excluding for this purpose an isolated, insubstantial or inadvertent action not taken in bad faith which is remedied by the Company immediately after notice thereof is given by the Executive; (iv) request that the Executive relocate to a work site that would increase the Executive's one-way commute distance by more than thirty-five (35) miles from his then principal residence, unless the Executive accepts such relocation opportunity; (v) any material breach by the Company of its obligations under this Agreement; or (vi) any failure by the Company to obtain the assumption of this Agreement by any successor or assign of the Company. 6.6 TERMINATION FOR DEATH OR DISABILITY. Executive's employment with the Company will be terminated in the event of Executive's death, or any illness, disability or other incapacity in such a manner that Executive is physically rendered unable regularly to perform his duties hereunder for a period in excess of one hundred eighty (180) consecutive days or more than one hundred eighty (180) days in any consecutive twelve (12) month period. The determination regarding whether Executive is physically unable regularly to perform his duties shall be made by the Board. Executive's inability to be physically present on the Company's premises shall not constitute a presumption that Executive is unable to perform such duties. In the event that Executive's employment with the Company is terminated for death or disability as described in this Section 6.6, Executive or Executive's heirs, successors, and assigns shall not receive any compensation or benefits other than payment of accrued salary and PTO and such other benefits as expressly required in such event by applicable law or the terms of applicable benefit plans. 6.7 CESSATION. If Executive violates any provision of Section 8 of this Agreement or the Employee Proprietary Information and Inventions Agreement and Executive fails to correct such violation within ten (10) days after Executive is given written notice by the CEO or the Board, as appropriate, then any severance payments or other benefits being provided to Executive will cease immediately, and Executive will not be entitled to any further compensation from the Company. 7. CHANGE OF CONTROL. 7.1 DEFINITION. For purposes of this Agreement, Change of Control means the occurrence of any of the following: (a) a sale of assets representing fifty percent (50%) or more of the net book value and of the fair market value of the Company's consolidated assets (in a single transaction or in a series of related transactions); 4. 5 (b) a liquidation or dissolution of the Company; (c) a merger or consolidation involving the Company or any subsidiary of the Company after the completion of which: (i) in the case of a merger (other than a triangular merger) or a consolidation involving the Company, the shareholders of the Company immediately prior to the completion of such merger or consolidation beneficially own (within the meaning of Rule 13d-3 promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or comparable successor rules), directly or indirectly, outstanding voting securities representing less than sixty percent (60%) of the combined voting power of the surviving entity in such merger or consolidation, and (ii) in the case of a triangular merger involving the Company or a subsidiary of the Company, the shareholders of the Company immediately prior to the completion of such merger beneficially own (within the meaning of Rule 13d-3 promulgated under the Exchange Act, or comparable successor rules), directly or indirectly, outstanding voting securities representing less than sixty percent (60%) of the combined voting power of the surviving entity in such merger and less than sixty percent (60%) of the combined voting power of the parent of the surviving entity in such merger; (d) an acquisition by any person, entity or "group" (within the meaning of Section 13(d) or 14(d) of the Exchange Act or any comparable successor provisions), other than any employee benefit plan, or related trust, sponsored or maintained by the Company or an affiliate of the Company and other than in a merger or consolidation of the type referred to in clause "(c)" of this sentence, of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act, or comparable successor rules) of outstanding voting securities of the Company representing more than thirty percent (30%) of the combined voting power of the Company (in a single transaction or series of related transactions); or (e) in the event that the individuals who, as of the Effective Date, are members of the Board (the "Incumbent Board"), cease for any reason to constitute at least fifty percent (50%) of the Board. (If the election, or nomination for election by the Company's shareholders, of any new member of the Board is approved by a vote of at least fifty percent (50%) of the Incumbent Board, such new member of the Board shall be considered as a member of the Incumbent Board.) 7.2 TERMINATION AFTER A CHANGE OF CONTROL. In the event Executive's employment with the Company is terminated without Cause, or Executive resigns for Good Reason, within thirteen (13) months following a Change of Control (a "Change of Control Termination"), then Executive shall be eligible for severance benefits as set forth in Section 4.3 of Exhibit A, attached hereto. 7.3 PARACHUTE PAYMENTS. In the event that the severance, acceleration of stock options and other benefits provided for in this Agreement ("Agreement Benefits"), together with benefits otherwise payable to Executive, (i) constitute a "parachute payment" within the meaning of Section 280G (as it may be amended or replaced) of the Internal Revenue Code of 1986, as amended or replaced (the "Code"), and (ii) but for this Section 7.3, would be subject to the excise tax imposed by Section 4999 (as it may be amended or replaced) of the Code (the "Excise Tax"), then Executive's Agreement Benefits shall be either (a) provided to Executive in full, or 5. 6 (b) provided to Executive only as to such lesser extent that would result in no portion of such Agreement Benefits being subject to the Excise Tax, whichever of the foregoing amounts, taking into account the applicable federal, state and local income taxes and the Excise Tax, results in the receipt by Executive, on an after-tax basis, of the greatest amount of benefits, notwithstanding that all or some portion of such Agreement Benefits may be taxable under the Excise Tax. If clause (b) above is applicable, then at the option of Executive, Executive and the Company shall enter into a consulting agreement which shall (i) provide the Executive with payments and benefits, payable over the term of the agreement, the present value of which in the aggregate is equal to or greater than the present value (determined by applying a discount rate equal to the interest rate provided in Section 1274(b)(2)(B) of the Code) of the amount of the reduction in Agreement Benefits otherwise payable to Executive, but not in excess of reasonable compensation for the consulting services, (ii) require Executive to make his services available to the Company for no more than thirty (30) hours per month, (iii) have a term of not more than three (3) years (unless Executive consents to a longer period), and (iv) contain appropriate provisions restricting Executive from competition with the Company or being employed by or consulting for a competing business for the duration of the consulting period (provided that Executive's Options remain exercisable in accordance with their terms during the consulting period). Unless the Company and Executive otherwise agree in writing, any determination required under this Section 7.3 shall be made in writing in good faith by the Company's independent public accountants (or independent public accountants selected by the Executive in the event that the independent public accountants of the entity involved in the Change of Control are the same as those of the Company) (the "Accountants"). In the event of a reduction in benefits hereunder, Executive shall be given the choice, subject to approval by the Company, of which benefits to reduce. For purposes of making the calculations required by this Section 7.3, the Accountants may make reasonable assumptions and approximations concerning applicable taxes and may rely on reasonable, good faith interpretations concerning the application of the Code. The Company and Executive shall furnish to the Accountants such information and documents as the Accountants may reasonably request in order to make a determination under this Section 7.3. The Company shall bear all costs the Accountants may reasonably incur in connection with any calculations contemplated by this Section 7.3. 8. NONSOLICITATION. While employed by the Company, and for one (1) year following the termination of Executive's employment with the Company, Executive agrees not to solicit, attempt to solicit, induce, or otherwise cause any employee or independent contractor of the Company to terminate his or her employment or contractual relationship in order to become an employee or independent contractor to or for Executive or any other person or entity. 9. RELEASE. In exchange for the severance compensation and benefits provided under this Agreement to which Executive would not otherwise be entitled, Executive shall enter into and execute a release substantially in the form attached hereto as Exhibit B (the "Release") upon Executive's termination of employment. Unless the Release is executed by Executive and delivered to the Company within twenty-one (21) days (forty-five (45) days in the event of a group termination) after the termination of Executive's employment with the Company, Executive shall not receive any severance benefits provided under this Agreement, acceleration, if any, of Executive's Options as provided in this Agreement shall not apply and Executive's Options in such 6. 7 event may be exercised following the date of Executive's termination only to the extent provided under their original terms in accordance with the applicable stock option plan and option agreements. 10. GENERAL PROVISIONS. 10.1 NOTICES. Any notices provided hereunder must be in writing and shall be deemed effective upon personal delivery (including, personal delivery by facsimile transmission) or the third day after mailing by first class mail, to the Company at its primary office location and to Executive at his address as listed on the Company payroll (which address may be changed by written notice). 10.2 SEVERABILITY. Whenever possible, each provision of this Agreement will be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be invalid or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity or unenforceability will not affect any other provision or any other jurisdiction, and such invalid or unenforceable provision shall be reformed, construed and enforced in such jurisdiction so as to render it valid and enforceable consistent with the intent of the parties insofar as possible. 10.3 WAIVER. If either party should waive any breach of any provisions of this Agreement, he or it shall not thereby be deemed to have waived any preceding or succeeding breach of the same or any other provision of this Agreement. 10.4 ENTIRE AGREEMENT. This Agreement, together with the Employee Proprietary Information and Inventions Agreement, constitute the final, complete, and exclusive embodiment of the entire agreement between Executive and the Company regarding the subject matter hereof and supersede any prior agreement, promise, representation, or statement, written or otherwise, between Executive and the Company with regard to this subject matter. This Agreement is entered into without reliance on any promise, representation, statement or agreement other than those expressly contained or incorporated herein, and it cannot be modified or amended except in a writing signed by Executive and a duly authorized officer of the Company. 10.5 COUNTERPARTS. This Agreement may be executed in separate counterparts, any one of which need not contain signatures of more than one party, but all of which taken together will constitute one and the same Agreement. 10.6 HEADINGS. The headings of the sections hereof are inserted for convenience only and shall not be deemed to constitute a part hereof nor to affect the meaning thereof. 10.7 SUCCESSORS AND ASSIGNS. This Agreement is intended to bind and inure to the benefit of and be enforceable by Executive, the Company and their respective successors, assigns, heirs, executors and administrators, except that Executive may not assign any of his duties hereunder and he may not assign any of his rights hereunder without the written consent of the Company, which shall not be withheld unreasonably. 10.8 ATTORNEYS' FEES. If either party hereto brings any action to enforce his or its rights hereunder, the prevailing party in any such action shall be entitled to recover his or its reasonable attorneys' fees and costs incurred in connection with such action. 7. 8 10.9 ARBITRATION. To provide a mechanism for rapid and economical dispute resolution, Executive and the Company agree that any and all disputes, claims, or causes of action, in law or equity, arising from or relating to this Agreement (including the Release) or its enforcement, performance, breach, or interpretation, will be resolved, to the fullest extent permitted by law, by final, binding, and confidential arbitration held in Orange County, California and conducted by Judicial Arbitration & Mediation Services/Endispute ("JAMS"), under its then-existing Rules and Procedures. Nothing in this Section 10.9 or in this Agreement is intended to prevent either Executive or the Company from obtaining injunctive relief in court to prevent irreparable harm pending the conclusion of any such arbitration. 10.10 REMEDIES. Executive's duties under Section 8 and the Employee Proprietary Information and Inventions Agreement shall survive termination of Executive's employment with the Company. Executive acknowledges that a remedy at law for any breach or threatened breach by Executive of the provisions of these sections and the Employee Proprietary Information and Inventions Agreement would be inadequate, and that such a breach would cause irreparable harm to the Company; and Executive therefore agrees that the Company shall be entitled to injunctive relief in case of any such breach or threatened breach. 10.11 GOVERNING LAW. All questions concerning the construction, validity and interpretation of this Agreement will be governed by the law of the State of California as applied to contracts made and to be performed entirely within California. IN WITNESS WHEREOF, the parties have executed this Agreement effective as of the Effective Date above written. WATSON PHARMACEUTICALS, INC. By: ------------------------------------- Name: Title: EXECUTIVE: ------------------------------------- Name: 8. 9 EXHIBIT A COMPENSATION AND SEVERANCE TERMS SCHEDULE 1. BASE SALARY For services to be rendered under this Agreement, Executive shall receive an initial base salary at an annualized rate of $_____________, payable in accordance with the Company's standard payroll practices, and subject to increases as set forth in the Agreement. 2. BONUS Executive's annual bonus, if granted, shall be at a target level of __% of Executive's then current salary. 3. STOCK OPTIONS As of the Effective Date, Executive has outstanding option(s) to purchase the number of shares of Company common stock as indicated on Attachment A to this Exhibit A. 4. SEVERANCE BENEFITS 4.1 TERMINATION BY COMPANY WITHOUT CAUSE. If the Company terminates Executive's employment at any time without Cause, the Company shall provide to Executive, within thirty (30) days after the Effective Date of the Release attached hereto as Exhibit B (as "Effective Date" is defined in the Release), as the only severance compensation and benefits, a lump sum severance payment, subject to standard withholdings or deductions, in an amount equal to the sum of: (a) two times twelve (12) months of Executive's then base salary; (b) two times Executive's bonus to be earned for the year in which the termination occurs or two times the bonus amount paid to Executive in the prior year, whichever is greater; and (c) Executive's prorated bonus (based on Executive's target bonus amount) for the year in which the termination occurs. In addition, the Company will provide Executive with continued group health insurance benefits (medical, dental and vision) for Executive and Executive's eligible dependents for a period of up to eighteen (18) months under COBRA, and if Executive is not covered under the Company's group health insurance plan at the end of eighteen (18) months, the Company shall use its best efforts to provide Executive and Executive's eligible dependents with comparable health insurance coverage for an additional period of up to six (6) months, but the Company shall not be obligated to pay more than one hundred fifty percent (150%) of the cost of COBRA coverage for such comparable coverage; provided, however, that in any event the Company's obligation to provide any health benefits pursuant to this sentence ends when Executive becomes eligible for health insurance with a new employer (and Executive agrees to promptly notify the Company in writing of any such event of eligibility). 4.2 EXECUTIVE'S RESIGNATION FOR GOOD REASON. If Executive terminates his employment with the Company for Good Reason, the Company shall provide to Executive, as the only severance compensation and benefits, the same severance compensation and benefits provided in Section 4.1 hereof. 1. 10 4.3 CHANGE OF CONTROL TERMINATION. In the event of a Change of Control Termination, the Company shall provide to Executive, as the only compensation and benefits, (a) the same severance compensation and benefits provided in Section 4.1 hereof and, (b) any unvested Options held by Executive shall have their vesting accelerated in full so as to become one hundred percent (100%) vested and immediately exercisable in full as of the date of such termination. 2. 11 EXHIBIT B RELEASE AGREEMENT I understand that my position with Watson Pharmaceuticals, Inc. (the "Company") terminated effective _______________ (the "Separation Date"). The Company has agreed that if I choose to sign this Release, the Company will, within thirty (30) days after the Effective Date of this Release, pay me certain severance benefits (minus the standard withholdings and deductions) pursuant to the terms of the Key Employee Agreement (the "Agreement") entered into as of ______________, 1999, between myself and the Company, and any agreements incorporated therein by reference. I understand that I am not entitled to such severance benefits unless I sign this Release. I further understand that, regardless of whether I sign this Release, the Company will pay me all of my accrued salary and paid time off through the Separation Date, to which I am entitled by law. In consideration for the severance benefits I am receiving under the Agreement, I hereby release the Company and its officers, directors, agents, attorneys, employees, shareholders, parents, subsidiaries, and affiliates from any and all claims, liabilities, demands, causes of action, attorneys' fees, damages, or obligations of every kind and nature, whether they are now known or unknown, arising at any time prior to the date I sign this Release. This general release includes, but is not limited to: all federal and state statutory and common law claims, claims related to my employment or the termination of my employment or related to breach of contract, tort, wrongful termination, discrimination, harassment, defamation, fraud, wages or benefits, or claims for any form of equity or compensation. Notwithstanding the release in the preceding sentence, I am not releasing any right of indemnification I may have for any liabilities and costs of defense (including without limitation reasonable attorneys' fees) arising from my actions within the course and scope of my employment with the Company. In releasing claims unknown to me at present, I am waiving all rights and benefits under Section 1542 of the California Civil Code, and any law or legal principle of similar effect in any jurisdiction: "A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR." If I am forty (40) years of age or older as of the Separation Date, I acknowledge that I am knowingly and voluntarily waiving and releasing any rights I may have under the federal Age Discrimination in Employment Act of 1967, as amended ("ADEA"). I also acknowledge that the consideration given for the waiver in the above paragraph is in addition to anything of value to which I was already entitled. I have been advised by this writing, as required by the ADEA that: (a) my waiver and release do not apply to any claims that may arise after my signing of this Release; (b) I should consult with an attorney prior to executing this Release; (c) I have twenty-one (21) days (forty-five (45) days in the event of a group termination) within which to consider this Release (although I may choose to voluntarily execute this Release earlier); (d) I have seven (7) days following the execution of this release to revoke the Release; and (e) this Release will not be effective until the eighth day after this Release has been signed both by me and by the Company ("Effective Date"). Agreed: - ----------------------------------- ---------------------------------------- Date [EMPLOYEE] 12 EXHIBIT C WATSON PHARMACEUTICALS, INC. EMPLOYEE PROPRIETARY INFORMATION AND INVENTION AGREEMENT In consideration of my employment or continued employment by WATSON PHARMACEUTICALS, INC. or one of its subsidiaries (collectively, the "COMPANY"), and the compensation now and hereafter paid to me, I hereby agree as follows: 1. NONDISCLOSURE. 1.1 RECOGNITION OF COMPANY'S RIGHTS; NONDISCLOSURE. At all times during my employment and thereafter, I will hold in strictest confidence and will not disclose, use, lecture upon or publish any of the Company's Proprietary Information (defined below), except for such disclosure, use or publication as may be required in connection with my work for the Company, or unless the Chief Executive Officer or General Counsel of the Company expressly authorizes such disclosure, use or publication in writing. I will obtain Company's written approval before publishing or submitting for publication any material (written, oral, or otherwise) that relates to my work at Company and/or incorporates any Proprietary Information. I hereby assign to the Company any rights I may have or acquire in such Proprietary Information and recognize that all Proprietary Information shall be the sole property of the Company and its assigns. 1.2 PROPRIETARY INFORMATION. The term "PROPRIETARY INFORMATION" shall mean any and all confidential and/or proprietary knowledge, data or information of the Company and its affiliated entities. By way of illustration but not limitation, "PROPRIETARY INFORMATION" includes (a) information regarding compositions of matter, compounds, formulations, devices, machines, manufacture, diseases, therapeutic indications, mechanisms, processes, formulas, data, programs, manuals, protocols, other works of authorship, know-how and improvements, and (b) information regarding plans for research, development, new products, marketing and selling, business plans, budgets and unpublished financial statements, licenses, prices and costs, suppliers and customers; and (c) information regarding the skills and compensation of other employees of the Company. Notwithstanding the foregoing, it is understood that, at all such times, I am free to use information which is generally known in the trade or industry, which is not gained as result of a breach of this Agreement, and my own skill, knowledge, know-how and experience to whatever extent and in whichever way I wish. 1.3 THIRD PARTY INFORMATION. I understand, in addition, that the Company has received and in the future will receive from third parties confidential or proprietary information ("THIRD PARTY INFORMATION") subject to a duty on the Company's part to maintain the confidentiality of such information and to use it only for certain limited purposes. During the term of my employment and thereafter, I will hold Third Party Information in the strictest confidence and will not disclose to anyone (other than Company personnel who need to know such information in connection with their work for the Company) or use, except in connection with my work for the Company, Third Party Information unless expressly authorized in writing by the Chief Executive Officer or General Counsel of the Company. 13 1.4 NO IMPROPER USE OF INFORMATION OF PRIOR EMPLOYERS AND OTHERS. During my employment by the Company I will not improperly use or disclose any confidential information or trade secrets, if any, of any former employer or any other person to whom I have an obligation of confidentiality, and I will not bring onto the premises of the Company any unpublished documents or any property belonging to any former employer or any other person to whom I have an obligation of confidentiality unless consented to in writing by that former employer or person. I will use in the performance of my duties only information which is generally known and used by persons with training and experience comparable to my own, which is common knowledge in the industry or otherwise legally in the public domain, or which is otherwise provided or developed by the Company. 2. ASSIGNMENT OF INVENTIONS. 2.1 INVENTIONS. The term "INVENTIONS" shall mean any and all inventions, discoveries, designs, improvements, and ideas, whether patentable or not, and copyrightable material. By way of illustration but not limitation, "Inventions" include processes, machines, manufactures, compositions of matter, organisms, molecules, cells, tissues, compounds, reagents, ingredients, metabolites, precursors, intermediates, formulations, devices, diagnostics, therapeutics, formulas, data, data compilations, programs, manuals, protocols, and other works of authorship. 2.2 PROPRIETARY RIGHTS. The term "PROPRIETARY RIGHTS" shall mean all trade secret, patent, trademark, service mark, tradename, domain name, copyright, and other intellectual property rights throughout the world. 2.3 PRIOR INVENTIONS. Inventions, if any, patented or unpatented, which I made prior to the commencement of my employment with the Company are excluded from the scope of this Agreement. To preclude any possible uncertainty, I have set forth on Exhibit B (Previous Inventions) attached hereto a complete list of all Inventions that I have, alone or jointly with others, conceived, developed or reduced to practice or caused to be conceived, developed or reduced to practice prior to the commencement of my employment with the Company, that I consider to be my property or the property of third parties and that I wish to have excluded from the scope of this Agreement (collectively referred to as "PRIOR INVENTIONS"). If disclosure of any such Prior Invention would cause me to violate any prior confidentiality agreement, I understand that I am not to list such Prior Inventions in Exhibit B but am only to disclose a cursory name for each such invention, a listing of the party(ies) to whom it belongs and the fact that full disclosure as to such inventions has not been made for that reason. A space is provided on Exhibit B for such purpose. If no such disclosure is attached or completed, I represent that there are no Prior Inventions. If, in the course of my employment with the Company, I incorporate a Prior Invention into a Company product, process or machine, the Company is hereby granted and shall have a nonexclusive, royalty-free, irrevocable, perpetual, worldwide license (with rights to sublicense through multiple tiers of sublicensees) to make, have made, modify, improve, use, sell, offer to sell, import and export such Prior Invention. I agree not to incorporate into any Company product any Prior Invention that I do not own or with respect to which I do not have the right to grant such a nonexclusive license to the Company. Notwithstanding the foregoing, I agree that I will not incorporate, or permit to be incorporated, Prior Inventions in any Company Inventions without the Company's prior written consent. 2. 14 2.4 ASSIGNMENT OF INVENTIONS. Subject to Sections 2.5 and 2.7, I hereby assign and agree to assign in the future (when any such Inventions or Proprietary Rights are first conceived, reduced to practice or fixed in a tangible medium, as applicable) to the Company all my right, title and interest in and to any and all Inventions (and all Proprietary Rights with respect thereto) whether or not patentable or registrable under copyright or similar statutes, made or conceived or reduced to practice or learned by me, either alone or jointly with others, during the period of my employment with the Company. Inventions assigned to the Company, or to a third party as directed by the Company pursuant to this Section 2, are hereinafter referred to as "COMPANY INVENTIONS." 2.5 NONASSIGNABLE INVENTIONS. This Agreement does not apply to an Invention which qualifies fully as a nonassignable Invention under Section 2870 of the California Labor Code (hereinafter "SECTION 2870"). I have reviewed the notification on Exhibit A (Limited Exclusion Notification) and agree that my signature acknowledges receipt of the notification. 2.6 OBLIGATION TO KEEP COMPANY INFORMED. During the period of my employment and for twelve (12) months after termination of my employment with the Company, I will promptly disclose to the Company fully and in writing all Inventions authored, conceived or reduced to practice by me, either alone or jointly with others that relate to the Company's field of business or to the work I performed for the Company during my employment ("Related Subsequent Inventions"). In addition, I will promptly disclose to the Company all patent applications filed by me or on my behalf within a year after termination of employment that claim or disclose Related Subsequent Inventions. At the time of each such disclosure, I will advise the Company in writing of any Inventions that I believe fully qualify for protection under Section 2870; and I will at that time provide to the Company in writing all evidence necessary to substantiate that belief. The Company will keep in confidence and will not use for any purpose or disclose to third parties without my consent any confidential information disclosed in writing to the Company pursuant to this Agreement relating to Inventions that qualify fully for protection under the provisions of Section 2870. I will preserve the confidentiality of any Invention that does not fully qualify for protection under Section 2870. 2.7 GOVERNMENT OR THIRD PARTY. I also agree to assign all my right, title and interest in and to any particular Invention to a third party, including without limitation the United States, as directed by the Company. 2.8 WORKS FOR HIRE. I acknowledge that all original works of authorship which are made by me (solely or jointly with others) within the scope of my employment and which are protectable by copyright are "works made for hire," pursuant to United States Copyright Act (17 U.S.C., Section 101). 2.9 ENFORCEMENT OF PROPRIETARY RIGHTS. I will assist the Company in every proper way to obtain, and from time to time enforce, United States and foreign Proprietary Rights relating to Company Inventions in any and all countries. To that end I will execute, verify and deliver such documents and perform such other acts (including appearances as a witness) as the Company may reasonably request for use in applying for, obtaining, perfecting, evidencing, sustaining and enforcing such Proprietary Rights and the assignment thereof. In addition, I will execute, verify and deliver assignments of such Proprietary Rights to the Company or its 3. 15 designee. My obligation to assist the Company with respect to Proprietary Rights relating to such Company Inventions in any and all countries shall continue beyond the termination of my employment, but the Company shall compensate me at a reasonable rate after my termination for the time actually spent by me at the Company's request on such assistance. In the event the Company is unable for any reason, after reasonable effort, to secure my signature on any document needed in connection with the actions specified in the preceding paragraph, I hereby irrevocably designate and appoint the Company and its duly authorized officers and agents as my agent and attorney in fact, which appointment is coupled with an interest, to act for and in my behalf to execute, verify and file any such documents and to do all other lawfully permitted acts to further the purposes of the preceding paragraph with the same legal force and effect as if executed by me. I hereby waive and quitclaim to the Company any and all claims, of any nature whatsoever, which I now or may hereafter have for infringement of any Proprietary Rights assigned hereunder to the Company. 3. RECORDS. I agree to keep and maintain adequate and current records (in the form of notes, sketches, drawings and in any other form that may be required by the Company) of all Proprietary Information developed by me and all Inventions made by me during the period of my employment by the Company, which records shall be available to and remain the sole property of the Company at all times. 4. ADDITIONAL ACTIVITIES. I agree that during the period of my employment by the Company I will not, without the Company's express written consent, engage in any employment or business activity which is competitive with, or would otherwise conflict with, my employment by the Company. I agree further that for the period of my employment by the Company and for one (l) year after the date of termination of my employment by the Company I will not induce any employee of the Company to leave the employ of the Company. 5. NO CONFLICTING OBLIGATION. I represent that my performance of all the terms of this Agreement and as an employee of the Company does not and will not breach any agreement to keep in confidence information acquired by me in confidence or in trust prior to my employment by the Company. I have not entered into, and I agree I will not enter into, any agreement either written or oral in conflict herewith. 6. RETURN OF COMPANY DOCUMENTS. When I leave the employ of the Company, I will deliver to the Company any and all drawings, notes, memoranda, specifications, devices, formulas, samples, and documents, together with all copies thereof, and any other material containing or disclosing any Company Inventions, Third Party Information or Proprietary Information of the Company. I further agree that any property situated on the Company's premises and owned by the Company, including disks and other storage media, desks, lockers, filing cabinets or other work areas, is subject to inspection by Company personnel at any time with or without notice. Prior to leaving, I will cooperate with the Company in completing the Company's termination interview process and will sign the Company's termination statement if so requested. 7. LEGAL AND EQUITABLE REMEDIES. Because my services are personal and unique and because I may have access to and become acquainted with the Proprietary 4. 16 Information of the Company, the Company shall have the right to enforce this Agreement and any of its provisions by injunction, specific performance or other equitable relief, without bond and without prejudice to any other rights and remedies that the Company may have for a breach of this Agreement. 8. NOTICES. Any notices required or permitted hereunder shall be given to the appropriate party at the address specified below or at such other address as the party shall specify in writing. Such notice shall be deemed given upon personal delivery to the appropriate address or if sent by certified or registered mail, three (3) days after the date of mailing. 9. NOTIFICATION OF NEW EMPLOYER. In the event that I leave the employ of the Company, I hereby consent to the notification of my new employer of my rights and obligations under this Agreement. GENERAL PROVISIONS. 9.1 GOVERNING LAW; CONSENT TO PERSONAL JURISDICTION. This Agreement will be governed by and construed according to the laws of the State of California, as such laws are applied to agreements entered into and to be performed entirely within California between California residents. I hereby expressly consent to the personal jurisdiction of the state and federal courts located in Riverside County, California for any lawsuit filed there against me by Company arising from or related to this Agreement. 9.2 SEVERABILITY. In case any one or more of the provisions contained in this Agreement shall, for any reason, be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect the other provisions of this Agreement, and this Agreement shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein. Moreover, if any one or more of the provisions contained in this Agreement shall for any reason be held to be excessively broad as to duration, geographical scope, activity or subject, it shall be construed by limiting and reducing it, so as to be enforceable to the extent compatible with the applicable law as it shall then appear. 9.3 SUCCESSORS AND ASSIGNS. This Agreement will be binding upon my heirs, executors, administrators and other legal representatives and will be for the benefit of the Company, its successors, and its assigns. 9.4 SURVIVAL. The provisions of this Agreement shall survive the termination of my employment and the assignment of this Agreement by the Company to any successor in interest or other assignee. 9.5 EMPLOYMENT. I agree and understand that the Company is an "at will" employer and that nothing in this Agreement shall confer any right with respect to continuation of employment by the Company, nor shall it interfere in any way with my right or the Company's right to terminate my employment at any time, with or without cause. 9.6 WAIVER. No waiver by the Company of any breach of this Agreement shall be a waiver of any preceding or succeeding breach. No waiver by the Company of any right under 5. 17 this Agreement shall be construed as a waiver of any other right. The Company shall not be required to give notice to enforce strict adherence to all terms of this Agreement. 9.7 ENTIRE AGREEMENT. The obligations pursuant to Sections 1 and 2 of this Agreement shall apply to any time during which I was previously employed, or am in the future employed, by the Company as a consultant if no other agreement governs nondisclosure and assignment of inventions during such period. This Agreement is the final, complete and exclusive agreement of the parties with respect to the subject matter hereof and supersedes and merges all prior discussions between us. No modification of or amendment to this Agreement, nor any waiver of any rights under this Agreement, will be effective unless in writing and signed by the party to be charged. Any subsequent change or changes in my duties, salary or compensation will not affect the validity or scope of this Agreement. This Agreement shall be effective as of the first day of my employment with the Company. I HAVE READ THIS AGREEMENT CAREFULLY AND UNDERSTAND ITS TERMS. I HAVE COMPLETELY FILLED OUT EXHIBIT B TO THIS AGREEMENT. Dated: ---------------------------------- SIGNATURE: ------------------------------ EMPLOYEE NAME: -------------------------- (TYPE OR PRINT) ACCEPTED AND AGREED: WATSON PHARMACEUTICALS, INC. By: ------------------------------------- Title: ---------------------------------- 6. EX-27.1 3 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the Watson Pharmaceuticals, Inc. Form 10-Q for the period ended June 30, 1999 and is qualified in its entirety by reference to such report. 1,000 6-MOS DEC-31-1999 JAN-01-1999 JUN-30-1999 55,818 34,098 133,202 3,587 108,623 358,518 207,579 73,314 1,524,400 92,070 150,327 0 0 316 1,085,079 1,524,400 329,485 329,485 105,424 105,424 3,344 0 5,615 106,484 37,347 69,137 0 0 0 69,137 0.72 0.71
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