-----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, LaRcTrLpqMRATpmZgmR8jjeVOp6E7+Mzr75A6NqYutRm4fKduLAbuzbrCy29K+v+ nWbCT3K1EDR4pj/WuclERA== 0001017062-99-000912.txt : 19990518 0001017062-99-000912.hdr.sgml : 19990518 ACCESSION NUMBER: 0001017062-99-000912 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990517 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: 99625085 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 - DATED MARCH 31, 1999 ================================================================================ 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 MARCH 31, 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 91720 (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 May 6, 1999 was 95,651,700. ================================================================================ WATSON PHARMACEUTICALS, INC. INDEX TO FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999 PAGE ---- PART I. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements: Consolidated Balance Sheets as of March 31, 1999 and December 31, 1998................................................. 3 Consolidated Statements of Income for the Three Months Ended March 31, 1999 and 1998........................ 4 Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1999 and 1998........................ 5 Notes to Consolidated Financial Statements........................... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................. 9 Item 3. Quantitative and Qualitative Disclosure about Market Risk...... 12 PART II. OTHER INFORMATION AND SIGNATURES Item 1. Legal Proceedings.............................................. 13 Item 4. Submission of Matters to a Vote of Security Holders............ 13 Item 5. Other Information.............................................. 14 Item 6. Exhibits and Reports on Form 8-K............................... 14 Signatures.............................................................. 15 -2- WATSON PHARMACEUTICALS, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except share amounts)
March 31, December 31, 1999 1998 ----------- ------------ ASSETS (unaudited) Current assets: Cash and cash equivalents................................... $ 65,831 $ 59,663 Marketable securities....................................... 20,838 32,903 Accounts receivable, net.................................... 118,195 91,329 Inventories................................................. 102,646 81,907 Prepaid expenses and other current assets................... 22,038 27,358 Deferred tax assets......................................... 25,197 29,634 ---------- ---------- Total current assets...................................... 354,745 322,794 Property and equipment, net....................................... 130,385 125,918 Investments and other assets...................................... 308,115 201,080 Product rights and other intangibles, net......................... 474,349 481,551 ---------- ---------- $1,267,594 $1,131,343 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses....................... $ 77,876 $ 70,730 Income taxes payable........................................ 18,163 -- Current portion of long-term debt........................... 2,109 2,223 Current liability from acquisition of product rights........ 15,000 30,000 ---------- ---------- Total current liabilities................................. 113,148 102,953 Long-term debt.................................................... 153,811 154,123 Long-term liability from acquisition of product rights............ 5,000 20,000 Deferred tax liabilities.......................................... 97,865 54,512 ---------- ---------- Total liabilities......................................... 369,824 331,588 ---------- ---------- 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; par value of $0.0033 per share, 500,000,000 shares authorized; issued: 95,628,018 and 95,312,183 shares... 316 315 Additional paid-in capital...................................... 379,009 368,777 Retained earnings............................................... 393,090 370,119 Accumulated other comprehensive income.......................... 124,955 60,144 ---------- ---------- Total stockholders' equity................................ 897,370 799,355 ---------- ---------- $1,267,594 $1,131,343 ========== ==========
See accompanying Notes to Consolidated Financial Statements. -3- WATSON PHARMACEUTICALS, INC. CONSOLIDATED STATEMENTS OF INCOME (Unaudited, in thousands, except per share amounts)
Three Months Ended March 31, ----------------------------- 1999 1998 -------- -------- Product sales, net....................... $159,243 $132,336 Cost of sales............................ 49,997 45,640 -------- -------- Gross profit........................ 109,246 86,696 -------- -------- Operating expenses: Research and development.............. 10,142 10,663 Selling, general and administrative... 27,472 24,786 Amortization.......................... 6,690 4,617 Merger and related expenses (Note B).. 20,467 -- Charge for acquired in-process research and development............ -- 13,000 -------- -------- Total operating expenses.......... 64,771 53,066 -------- -------- Operating income......................... 44,475 33,630 -------- -------- Other income (expense): Equity in earnings of joint ventures.. 31 1,611 Investment and other income........... 959 1,472 Interest expense...................... (2,818) (264) -------- -------- Total other income (expense), net. (1,828) 2,819 -------- -------- Income before income tax provision...... 42,647 36,449 Provision for income taxes............... 19,676 17,750 -------- -------- Net income............................... $ 22,971 $ 18,699 ======== ======== Basic earnings per share................. $ 0.24 $ 0.20 ======== ======== Diluted earnings per share............... $ 0.23 $ 0.19 ======== ======== Weighted average shares outstanding, no dilution.............. 95,518 93,922 ======== ======== Weighted average shares outstanding, diluted basis............ 98,161 96,364 ======== ========
See accompanying Notes to Consolidated Financial Statements. -4- WATSON PHARMACEUTICALS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited, in thousands)
Three Months Ended March 31, --------------------- 1999 1998 -------- ------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income................................................... $ 22,971 $ 18,699 -------- -------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation.............................................. 3,271 2,974 Amortization.............................................. 6,690 4,617 Charge for acquired in-process research and development... -- 13,000 Deferred income tax provision (benefit)................... 4,437 (1,777) Equity in loss (earnings) of joint ventures............... 75 (1,342) Tax benefits related to exercise of options............... 1,225 10,500 Other..................................................... (24) 353 Changes in assets and liabilities, net of acquisition: Accounts receivable..................................... (26,710) 6,384 Inventories............................................. (20,619) (4,034) Prepaid expenses and other current assets............... 2,912 (956) Other assets............................................ 3,992 (418) Accounts payable and accrued expenses................... 7,146 1,377 Income taxes payable.................................... 18,163 4,876 -------- -------- Total adjustments..................................... 558 35,554 -------- -------- Net cash provided by operating activities........... 23,529 54,253 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property and equipment.......................... (7,556) (4,969) Purchases of marketable securities........................... (10,296) (5,560) Proceeds from maturities of marketable securities............ 23,166 35,091 Acquisitions of product rights............................... (1,107) (32,960) Acquisition of business...................................... -- (67,545) Additions to investment in joint ventures.................... (150) (801) -------- -------- Net cash provided (used) by investing activities.......... 4,057 (76,744) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on long-term debt......................... (426) (575) Payments on liability for acquisition of product rights...... (30,000) (45,000) Proceeds from exercise of stock options and warrants......... 9,008 18,382 -------- -------- Net cash used by financing activities..................... (21,418) (27,193) -------- -------- Net increase (decrease) in cash and cash equivalents... 6,168 (49,684) Cash and cash equivalents at beginning of period............. 59,663 97,817 -------- -------- Cash and cash equivalents at end of period................... $ 65,831 $ 48,133 ======== ========
See accompanying Notes to Consolidated Financial Statements. -5- 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 $18.8 million for IPR&D in connection with the Rugby acquisition. This charge was subsequently adjusted to $13.0 million to reflect a recently revised Securities and Exchange Commission ("SEC") preferred methodology for valuing IPR&D. 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. Of this amount, approximately $11.2 million had been paid in cash through March 31, 1999. The charge comprises 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 -6- WATSON PHARMACEUTICALS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS closure costs consists of employee termination costs ($3.9 million), facility shutdown and asset impairment costs ($4.2 million) and lease and contract termination costs ($1.3 million). NOTE C -- INVENTORIES Inventories consisted of the following (in thousands):
March 31, December 31, 1999 1998 --------- ------------ Raw materials................... $ 35,073 $25,961 Work-in-progress................ 15,001 13,286 Finished goods.................. 52,572 42,660 -------- ------- $102,646 $81,907 ======== =======
NOTE D -- INVESTMENTS AND OTHER ASSETS Long-term investments consist primarily of the Company's investment in Andrx, 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. At March 31, 1999, the Company owned 2.7 million common shares of Andrx, which represents approximately 17.6% of the total Andrx common shares outstanding. The Company also has a warrant to acquire approximately 337,100 shares of Andrx, exercisable in whole or in part until July 8, 1999 at an exercise price of $8.90 per share. 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 $125.0 million and $60.6 million (net of income taxes of $83.3 million and $40.4 million), at March 31, 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. -7- WATSON PHARMACEUTICALS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE E -- EARNINGS PER SHARE ("EPS") A reconciliation of the computation of basic and diluted EPS follows (in thousands, except for EPS):
Three Months Ended March 31, ----------------- 1999 1998 ------- ------- Basic EPS: - ---------- Net income.............................. (numerator) $22,971 $18,699 Weighted average shares outstanding, no dilution............................ (denominator) 95,518 93,922 Basic EPS............................ $ 0.24 $ 0.20 ======= ======= Diluted EPS: - ------------ Net income.............................. (numerator) $22,971 $18,699 Weighted average shares outstanding..... 95,518 93,922 Assumed exercise of dilutive stock options and warrants................... 2,643 2,442 ------- ------- Weighted average shares outstanding, diluted basis.......................... (denominator) 98,161 96,364 Diluted EPS.......................... $ 0.23 $ 0.19 ======= =======
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 net income and the unrealized gain or loss on equity securities. The components of comprehensive income were as follows (in thousands):
Three Months Ended March 31, ------------------ 1999 1998 ------- ------- Net income.............................. $22,971 $18,699 Unrealized gain (loss) on equity securities, net of tax................. 64,810 (9,986) ------- ------- Comprehensive income.................... $87,781 $ 8,713 ======= =======
NOTE G -- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Three Months Ended March 31, ------------------ 1999 1998 ------- ------- (in thousands) Cash paid during the periods for: Interest............................ $ 43 $ 254 Income taxes........................ 1,232 4,332 Acquisition of business: Fair value of assets acquired....... $ -- $(93,189) Fair value of liabilities assumed... -- 25,644 ------ -------- Net cash paid..................... $ -- ($67,545) ====== ========
-8- WATSON PHARMACEUTICALS, INC. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations - Three Months Ended March 31, 1999 Compared to 1998 Product sales for the three months ended March 31, 1999 were $159.2 million compared to $132.3 million for the 1998 period, an increase of $26.9 million or 20%. The sales increase was primarily due to i) sales of women's health products acquired in November 1998, ii) increased sales of certain core brand products, and iii) sales generated by the Rugby product line, acquired on February 28, 1998. These sales increases also helped partially offset decreased sales of certain third party sourced products due to recurrent shipment delays arising from an unresolved production interruption at a third party manufacturer. Overall, brand products accounted for 50% of net product sales in the 1999 quarter, up from 48% in the 1998 period. As a result of the higher margins generated by brand products, the gross profit margin increased from 65.5% in the first quarter of 1998 to 68.6% in 1999. Research and development expenses were $10.1 million in the first quarter of 1999, compared to $10.7 million in 1998. This decrease was primarily due to a TheraTech milestone payment made in the first quarter of 1998, with no comparable payment required in 1999, and a reduction in test chemical expenses incurred in the first quarter of 1999. Selling, general and administrative expenses were $27.5 million for the first quarter of 1999, compared to $24.8 million in the prior year period. Selling and marketing expenses increased primarily due to an expansion of the sales force from an average headcount of 330 in first quarter 1998 to 425 in 1999. The additional sales force personnel were primarily in the women's health group and in the Rugby telemarketing force. The Company also experienced increased promotional expenses on its expanded line of women's health products, acquired in November 1998. First quarter amortization expense increased to $6.7 million in 1999, compared to $4.6 million in the 1998 period, primarily due to amortization of the cost of the oral contraceptive product rights acquired in November 1998. Watson has capitalized such acquired product rights and is amortizing them over estimated lives of 20 years. In addition, the 1999 period reflects three months of goodwill amortization related to the Rugby acquisition, compared to one month in the 1998 period. In connection with the acquisition of TheraTech, Watson recorded a special charge of $20.5 million for certain merger and related expenses during the first quarter of 1999. Of this amount, approximately $11.2 million had been paid in cash through March 31, 1999. The charge comprises 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 consists of employee termination costs ($3.9 million), facility shutdown and asset impairment costs ($4.2 million) and lease and contract termination costs ($1.3 million). In the first quarter of 1998, the Company recorded a nonrecurring charge for in-process research and development in connection with the Rugby acquisition, reflected herein at its final valuation of $13.0 million. -9- WATSON PHARMACEUTICALS, INC. Equity in earnings from joint ventures decreased significantly in the first quarter of 1999 primarily due to reduced earnings from the Company's 50% interest in Somerset. In recent years, the Company's earnings from Somerset have declined as a result of increased competition and increased research and development expenditures. Currently, Somerset's sole product is Eldepryl(R), which lost patent protection in 1996. Interest expense increased significantly during the first quarter of 1999 due to interest on the Company's $150 million offering of senior unsecured notes issued in May 1998. The provision for income taxes increased to $19.7 million in the first quarter of 1999, compared to $17.8 million in the 1998 quarter. The effective income tax rate was 46% in the 1999 period and 49% in 1998. These effective tax rates reflect the non-deductibility for income tax purposes of a portion of the 1999 merger expenses and all of the 1998 charge for acquired in-process research and development. Liquidity and Capital Resources The Company's working capital increased from $219.8 million at December 31, 1998 to $241.6 million at March 31, 1999. This $21.8 million increase was primarily due to the Company's net income in the first quarter of 1999 and growth in its accounts receivable and inventory balances at March 31, 1999. These working capital increases were partially offset by cash used for acquisitions of property and equipment, a scheduled payment pursuant to the purchase of product rights and increased current liabilities (primarily income taxes payable) at March 31, 1999. 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. 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. -10- WATSON PHARMACEUTICALS, INC. YEAR 2000 COMPLIANCE PROGRAM Watson has instituted a multi-phase program to (a) evaluate whether its computerized information systems are able to interpret dates beyond the year 1999, (b) to respond to and remedy any inadequacies which may emerge from the evaluation process, (c) to investigate the Year 2000 readiness of third parties having material relationships with the Company and (d) to develop a contingency plan for any Year 2000 date sensitive systems of the Company, which may not be immediately remedied (the "Year 2000 Compliance Program"). An inability to interpret dates beyond 1999 could cause computer system errors or system failure, potentially leading to disruptions in operations. The aggregate cost of the Company's Year 2000 Compliance Program is expected to be approximately $500,000. Watson's Year 2000 Compliance Program has addressed its primary business application systems (including manufacturing, sales, distribution and finance), internal network systems, personal computers and telecommunications systems. The evaluation and remedy phases have been completed for these business units and systems and management believes that they are currently Year 2000 compliant. The Company expects to transition TheraTech's primary business application systems to its Year 2000 compliant systems by July 1999. The evaluation and remedy phases on TheraTech's secondary systems are underway and are expected to be completed by June 1999. In the third quarter of 1998, Watson began the third phase of its Year 2000 Compliance Program, which is a review of external entities having material relationships with the Company. Communications with these entities are underway and the company expects this phase to be completed by June 1999. Watson is developing a contingency plan for unanticipated Year 2000 exposure as part of its overall efforts to ensure that its systems are Year 2000 compliant on a timely basis. This contingency plan 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 Company's management believes that an adequate program is in place in order to be Year 2000 compliant, however, there can be no assurance that this program ultimately will be successful. Any unanticipated failure in the Company's internal systems to be Year 2000 compliant, or any failure by a material third party to bring its own systems into compliance, could have a material adverse effect on Watson's business, its financial position and its results of operations. The foregoing represents a Year 2000 readiness disclosure entitled to protection as provided in the Year 2000 Information and Readiness 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 -11- WATSON PHARMACEUTICALS, INC. 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, 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 successful and timely implementation of the Company's Year 2000 Compliance Program, and other risks and uncertainties 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 $245.3 million at March 31, 1999, consisted of 2.7 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 March 31, 1999:
1999 High Low - ---- ---- --- First quarter................................... $92.50 $44.50 1998, by quarter - ---------------- First........................................... $38.25 $24.50 Second.......................................... 42.63 28.13 Third........................................... 43.00 25.88 Fourth.......................................... 51.69 24.63
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. -12- WATSON PHARMACEUTICALS, INC. 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 March 31, 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. 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 for background information on certain legal proceedings. 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 and others, additional actions raising similar issues have been filed. As of April 30, 1999, a total of approximately 600 cases have been filed against Rugby and other Watson entities in 26 different state courts and federal court. The Company believes that it will be fully indemnified by Hoechst Marion Roussel, Inc. (the former owner of Rugby) for the defense of all such cases and for any liability that may arise out of these cases. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At Watson's annual meeting of stockholders held on May 3, 1999, two proposals were set before the stockholders for their vote. PROPOSAL ONE: Election of two directors to hold office until the 2002 Annual Meeting:
DIRECTOR -- CLASS I VOTES FOR VOTES WITHHELD - ------------------- --------- -------------- Michael J. Fedida......... 71,642,265 888,514 Albert F. Hummel.......... 71,493,568 1,037,211
PROPOSAL TWO: Ratification of the selection of PricewaterhouseCoopers LLP as independent accountants for the Company for the year ending December 31, 1999: For....................... 72,350,848 Against................... 63,858 Abstain................... 116,073
-13- WATSON PHARMACEUTICALS, INC. ITEM 5. OTHER INFORMATION As reported in the Company's 1998 Annual Report on Form 10-K, the Company received from the Food and Drug Administration ("FDA") a Warning Letter in January 1999 arising from a December 1998 inspection of the Company's Corona, California facility. The Company has responded to FDA and has initiated a quality improvement plan. The Company believes that this plan will address FDA observations contained in the Warning Letter and those arising from a subsequent inspection of the Corona facility. In connection with a January 1999 inspection of the Company's Miami, Florida facility, FDA issued to Watson a Warning Letter in April 1999. In the Warning Letter, the agency commented that observations about inadequate investigations, documentation and training had appeared in past inspection reports (although FDA acknowledged that a number of these had occurred prior to Watson's purchase of the Miami facility). Watson believes that certain ongoing improvements it has and intends to implement at its Miami facility will address FDA's concern and has responded to FDA accordingly. Moreover, in the April 1999 Warning Letter, FDA acknowledged that it had received the Company's previously submitted responses to FDA's observations made in its January 1999 inspection of the Miami facility. FDA's January 1999 observations generally concerned cGMP compliance in areas such as documentation, investigations and training. FDA stated that it would evaluate the corrections taken by the Company at FDA's next inspection of the Miami facility. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 27.1 Financial Data Schedule (EDGAR version only) (b) Report on Form 8-K filed during the quarter ended March 31, 1999: On January 29, 1999, the Company filed a Form 8-K Report, dated January 15, 1999, in which it announced the consummation of its merger with TheraTech, Inc. -14- 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 Chief Financial Officer (Principal Financial Officer) By: /s/ R. CHATO ABAD ------------------------------------- R. Chato Abad Vice President-Finance (Principal Accounting Officer) Dated: May 14, 1999 -15- EX-27.1 2 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 65,831 20,838 122,132 3,937 102,646 354,745 200,583 70,198 1,267,594 113,148 153,811 0 0 316 897,054 1,267,594 159,243 159,243 49,997 49,997 1,828 0 2,818 42,647 19,676 22,971 0 0 0 22,971 0.24 0.23
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