<PAGE> 1
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, 1996
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
incorporation or organization) Identification No.)
311 BONNIE CIRCLE, CORONA, CA 91720
- - ---------------------------------------- -------------------
(Address of principal executive offices) (Zip Code)
909-270-1400
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(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 twelve 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 outstanding of the Registrant's only class of common stock
as of March 31, 1996 was 36,607,989 shares.
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WATSON PHARMACEUTICALS, INC.
INDEX TO THE FORM 10-Q
FOR THE THREE MONTHS ENDED MARCH 31, 1996
<TABLE>
<CAPTION>
PAGE
NUMBER
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PART I FINANCIAL INFORMATION
<S> <C>
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets As of
March 31, 1996 and December 31, 1995 3
Consolidated Statements of Income for the
Three Months Ended March 31, 1996 and 1995 5
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1996 and 1995 6
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 9
PART II OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 13
</TABLE>
2
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PART I FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
WATSON PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
--------- -----------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $105,623 $ 92,214
Marketable securities 29,235 26,038
Accounts receivable, net of allowances for
doubtful accounts of $1,300 and $1,320 24,508 25,081
Royalty receivable 5,986 8,205
Inventories 28,274 22,637
Prepaid expenses and other current assets 2,389 2,344
Current deferred tax assets 17,414 21,115
-------- --------
Total current assets 213,429 197,634
Property and equipment, net 71,806 69,999
Investments in joint ventures 49,220 49,355
Other assets 4,550 5,133
-------- --------
Total assets $339,005 $322,121
======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
3
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WATSON PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
--------- -----------
(unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 20,569 $ 25,215
Income taxes payable 3,363 2,985
Current portion of long-term debt 621 622
-------- --------
Total current liabilities 24,553 28,822
Long-term debt 3,426 3,577
Other liabilities 458 687
-------- --------
Total liabilities 28,437 33,086
-------- --------
Commitments and contingencies
Stockholders' equity:
Preferred stock; no par; 2,500,000 shares
authorized; none outstanding
Common stock; par value of $.0033; 100,000,000
shares authorized; 36,607,989 and 36,368,725
shares issued and outstanding 121 120
Additional paid-in capital 151,507 146,439
Retained earnings 159,696 142,711
Unrealized holding gain (loss) on marketable securities (151) 621
Unearned compensation-stock awards (605) (856)
-------- --------
Total stockholders' equity 310,568 289,035
-------- --------
Total liabilities and stockholders' equity $339,005 $322,121
======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
4
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WATSON PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Per Share Data)
(UNAUDITED)
<TABLE>
<CAPTION>
For the three months
ended March 31,
-----------------------------
1996 1995
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<S> <C> <C>
Revenues:
Product sales $39,556 $28,924
Royalty income 5,986 5,200
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Total revenues 45,542 34,124
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Operating expenses:
Cost of revenues 18,716 14,727
Research and development 4,456 4,770
Selling, general and administrative 4,262 4,198
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Total operating expenses 27,434 23,695
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Operating income 18,108 10,429
Other income:
Equity in earnings of joint ventures 4,644 5,211
Investment and other income 1,863 1,088
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Total other income 6,507 6,299
------- -------
Income before provision for income taxes 24,615 16,728
Provision for income taxes 7,630 4,338
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Net income $16,985 $12,390
======= =======
Per share data:
Earnings per share $ 0.45 $ 0.34
======= =======
Weighted average number of common and
common equivalent shares outstanding 37,626 36,735
======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
5
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WATSON PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
For the three months
ended March 31,
--------------------------
1996 1995
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 16,985 $ 12,390
--------- --------
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 1,429 1,268
Provision for doubtful accounts (20) 20
Amortization of unearned compensation-stock awards 251 397
Amortization of deferred income (229) (229)
Equity in earnings of joint ventures (3,770) (4,243)
Dividends received from Somerset 4,500 4,500
Decrease in deferred partnership liability (5,200)
Tax benefit related to stock option plan 2,350 1,469
Changes in assets and liabilities:
Decrease in accounts receivable 593 451
Decrease in royalty receivable 2,219
(Increase) in inventories (5,637) (1,964)
(Increase) decrease in other current assets (46) 259
Decrease in deferred tax assets 3,700 666
(Increase) decrease in other assets 583 (302)
Increase (decrease) in accounts payable and
accrued expenses (4,645) 2,287
Increase in income taxes payable 377 1,828
--------- --------
Total adjustments 1,655 1,207
--------- --------
Net cash provided by operating activities 18,640 13,597
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (3,276) (3,618)
Disposal of property and equipment 40
Purchases of marketable securities (174,586) (62,261)
Proceeds from sales of marketable securities 170,617 62,708
Investment in other joint ventures (595)
--------- --------
Net cash used in investing activities (7,800) (3,171)
--------- --------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
6
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WATSON PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
For the three months
ended March 31,
-----------------------------
1996 1995
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<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options $ 2,721 $ 1,826
Principal payments on long-term debt (152) (173)
-------- -------
Net cash provided by financing activities 2,569 1,653
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NET INCREASE IN CASH AND CASH EQUIVALENTS 13,409 12,079
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 92,214 71,165
-------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $105,623 $83,244
======== =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the periods for:
Interest $ 84 $ 96
Income taxes $ 986 $ 40
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
7
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WATSON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(UNAUDITED)
NOTE A - MERGER WITH CIRCA PHARMACEUTICALS, INC. ("CIRCA")
On July 17, 1995, the stockholders of Watson Pharmaceuticals, Inc. (the
"Company") and Circa approved the merger in which Circa became a wholly-owned
subsidiary of the Company. Under the terms of the merger agreement, Circa
stockholders received 0.86 of a share of the Company's common stock for each
Circa share. Accordingly, the Company issued approximately 18.7 million shares
of its common stock for all of the outstanding common shares of Circa. The
merger qualified as a tax-free reorganization and was accounted for as a
pooling-of-interests. The Company's financial statements have been
retroactively restated to include the results of Circa for all periods
presented.
NOTE B - GENERAL
The unaudited, consolidated financial statements as of March 31, 1996 and for
the three months ended March 31, 1996 and 1995, as well as related notes should
be read in conjunction with the Company's Annual Report on Form 10-K for the
year ended December 31, 1995.
In the opinion of management, the accompanying consolidated financial
statements contain all adjustments (consisting of only normal recurring
adjustments), necessary to present fairly the Company's financial position as
of March 31, 1996, and the results of operations and cash flows for the three
months ended March 31, 1996 and 1995. The results of operations and cash flows
for the three months ended March 31, 1996 are not necessarily indicative of the
results of operations or cash flows which may be reported for the remainder of
1996. The accounting policies followed during the three months ended March 31,
1996 were the same as those disclosed in the Company's Annual Report on Form
10-K for the year ended December 31, 1995.
8
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WATSON PHARMACEUTICALS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Introductory note: The following discussion gives effect to the merger between
the Company and Circa as more fully described in Note A to the Notes to
Consolidated Financial Statements.
The Company cautions readers that certain important factors may affect the
Company's actual results and could cause such results to differ materially from
any forward-looking statements which may be deemed to have been made in this
Report, or which are otherwise made by or on behalf of the Company. Such
factors include, but are not limited to, changing market conditions; the
availability and cost of raw materials; the impact of competitive products and
pricing; the timely development, FDA approval and market acceptance of the
Company's products, the products producing royalties for the Company and the
products being developed and marketed by the Company's joint ventures; and
other risks detailed herein or detailed from time to time in the Company's
Securities and Exchange Commission filings.
RESULTS OF OPERATIONS
Revenues for the three months ended March 31, 1996 were $45.5 million compared
to $34.1 million for the three months ended March 31, 1995, an increase of
$11.4 million or 33.5%. The product sales component of revenues increased
$10.6 million or 36.8% in the first quarter of 1996 as compared to the first
quarter of 1995. The royalty income component of revenues increased $0.8
million or 15.1% when compared to the three months ended March 31, 1995. The
increase in product sales was due to a combination of increased sales of the
Company's core products (defined as those products available in the marketplace
for greater than one year) and the successful introduction of five new products
(defined as those products introduced into the marketplace within the last
twelve months), subsequent to March 31, 1995. Net sales of new products for
the three months ended March 31, 1996 amounted to $9.7 million or 24.5% of
total product sales. The increase in royalty income was due to increased
prescriptions written for Dilacor XR(R) during the three months ended March 31,
1996, as compared to the three months ended March 31, 1995. The level of
product sales and royalty income during the first quarter may not be indicative
of future sales and royalties during the remainder of 1996.
Cost of revenues increased $4.0 million to $18.7 million for the three months
ended March 31, 1996, as compared to the three months ended March 31, 1995.
This increase was attributable to the increased product sales in the first
quarter of 1996. Gross profit margins increased to 52.7% in the three months
ended March 31, 1996 from 49.1% in the three months ended March 31, 1995.
This increase was due primarily to the higher than average gross profit
margins earned on certain new products sold during the first quarter of 1996.
9
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WATSON PHARMACEUTICALS, INC.
Research and development expenses decreased by $0.3 million or 6.6% to $4.5
million for the first quarter of 1996. The Company continues to integrate the
product research and development activities of Circa and Watson following the
July 1995 merger. The level of research and development expenses incurred
during the first quarter may not be indicative of future research and
development expenses during the remainder of 1996.
Selling, general and administrative expenses increased by 1.5% to $4.3 million
when compared to the first quarter of 1995, but decreased as a percentage of
revenues from 12.3% to 9.4%. Although selling, general and administrative
spending has increased in support of the Company's growth, the growth of
revenues has outpaced the growth of these expenses.
The Company's equity in earnings from joint ventures was generated primarily
from its 50% ownership of Somerset Pharmaceuticals, Inc. Total earnings from
joint ventures decreased by $0.6 million or 10.9% to $4.6 million, as compared
to the first quarter of 1995. This decrease was due in part to Somerset's
increased research and development expenses. In addition, the Company's
increased ownership percentage of ANCIRC (as described in the Company's Annual
Report on Form 10-K for the year ended December 31, 1995), and ANCIRC's
increased research and development activities have contributed to lower joint
venture earnings in the first quarter of 1996. ANCIRC, which conducts
research in the area of controlled-release technology, is a joint venture 50%
owned by the Company and 50% owned by Andrx Corporation. Prior to the October
1995 amendment of its joint venture agreement with Andrx, the Company owned 40%
of ANCIRC. Management anticipates the earnings from joint ventures for the
balance of 1996 will be consistent, on a quarterly basis, with the earnings
from joint ventures in the first quarter of 1996 and slightly lower than joint
venture earnings achieved during 1995.
Investment and other income increased by $0.8 million during the first quarter
of 1996. This increase was primarily due to rising interest rates and a larger
base of invested cash during the three months ended March 31, 1996.
The provision for income taxes increased by $3.3 million in 1996, as compared
to 1995. The Company's effective income tax rate increased from 25.9% in 1995
to 31.0% in 1996, due primarily to reduced federal and state income tax
credits available in 1996.
Net income increased by $4.6 million or 37.1% in the first quarter of 1996 as
compared to 1995. This increase was due primarily to the increased revenues
and gross profit margins the Company experienced in the three months ended
March 31, 1996. Earnings per share increased from $0.34 to $0.45 in the first
quarter of 1996 as compared to 1995, on an increase of approximately 0.9
million weighted average common and common equivalent shares outstanding.
10
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WATSON PHARMACEUTICALS, INC.
LIQUIDITY AND CAPITAL RESOURCES
During the three months ended March 31, 1996, the Company's cash and marketable
securities increased by $16.6 million to $134.9 million. Cash flows from
operations provided the majority of this increase, supplemented by proceeds
from the exercise of stock options, offset by purchases of property and
equipment and net purchases of marketable securities.
Working capital increased from $168.8 million at December 31, 1995 to $188.9
million at March 31, 1996. The largest components of this increase were the
increase in inventories ($5.6 million), the decrease in accounts payable and
accrued expenses ($4.6 million), the decrease in deferred tax assets ($3.7
million) and the increase in cash and cash equivalents ($13.4 million). The
Company believes that current cash resources, future operating cash flows and
funds available under a bank credit agreement will be sufficient to fund its
current and anticipated working capital needs.
The Company regularly reviews potential opportunities to acquire or invest in
technologies, products or product rights. The Company also regularly reviews
potential acquisitions, investments or combinations involving businesses
compatible with its existing business. The Company could use sources other
than cash, such as the issuance of debt or equity securities, to finance any
such acquisition or investment. If such an acquisition or investment was
completed, the Company's operating results and financial condition could change
materially in future periods.
11
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WATSON PHARMACEUTICALS, INC.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in various disputes and litigation matters
which arise in the ordinary course of business. The litigation process is
inherently uncertain and it is possible that the resolution of these disputes
and lawsuits may adversely effect the Company. Management believes, however,
that the ultimate resolution of such matters will not have a material adverse
impact on the Company's financial position or results of operations. There
have been no material developments in any legal matter since the filing of the
Company's 1995 Annual Report on Form 10-K, except as noted below.
In October 1995, a putative class action complaint captioned Jimmy
Jackson v. Circa Pharmaceuticals, Inc., et al., was filed against Circa,
Lawrence Raisfeld and Robert Shulman, former presidents of Circa, and Roger
Jordan, president of Vitarine Pharmaceuticals, in the Circuit Court of
Tallapoosa County, Alabama. See the discussion under Legal Proceedings -
Pending Litigation in the Company's Annual Report on Form 10-K for the year
ended December 31, 1995. On April 26, 1996, the Circuit Court issued an order
dismissing the action as to Messrs. Raisfeld, Shulman and Jordan, but
certifying the action as a class action with regard to Circa. Circa intends to
appeal the Circuit Court's decision to the Supreme Court of Alabama, and to
otherwise vigorously defend this action.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27.1 Financial Data Schedule (EDGAR version only)
(b) Reports on Form 8-K:
None.
12
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WATSON PHARMACEUTICALS, INC.
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/ ALLEN CHAO, PH.D.
-----------------------------------------
Allen Chao, Ph.D.
Chief Executive Officer and Director
(Principal Executive and Financial Officer)
By: /s/ CHATO ABAD
-----------------------------------------
Chato Abad
Vice President - Corporate Controller
(Principal Accounting Officer)
Dated: May 9, 1996
13
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 105,623
<SECURITIES> 29,235
<RECEIVABLES> 24,508
<ALLOWANCES> 1,300
<INVENTORY> 28,274
<CURRENT-ASSETS> 213,429
<PP&E> 105,791
<DEPRECIATION> 33,985
<TOTAL-ASSETS> 339,005
<CURRENT-LIABILITIES> 24,553
<BONDS> 0
0
0
<COMMON> 121
<OTHER-SE> 310,447
<TOTAL-LIABILITY-AND-EQUITY> 339,005
<SALES> 39,556
<TOTAL-REVENUES> 45,542
<CGS> 18,716
<TOTAL-COSTS> 27,434
<OTHER-EXPENSES> (6,507)
<LOSS-PROVISION> (20)
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 24,615
<INCOME-TAX> 7,630
<INCOME-CONTINUING> 16,985
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,985
<EPS-PRIMARY> 0.45
<EPS-DILUTED> 0.45
</TABLE>
