<PAGE> 1
As Filed with the Securities and Exchange Commission on April 11, 1997.
Registration No. 333-20029-01
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
POST-EFFECTIVE AMENDMENT
NO. 1 ON FORM S-3* TO
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------
WATSON PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
NEVADA 95-3872914
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
311 BONNIE CIRCLE
CORONA, CALIFORNIA 91720
(909) 270-1400
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
---------------------
ALLEN CHAO, PH.D.
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
311 BONNIE CIRCLE
CORONA, CALIFORNIA 91720
(909) 270-1400
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
COPIES TO:
<TABLE>
<S> <C>
MICHEL J. FELDMAN, ESQ. PHILIP B. SCHWARTZ, ESQ.
ARTHUR DON, ESQ. AKERMAN, SENTERFITT & EIDSON, P.A.
D'ANCONA & PFLAUM ONE S.E. THIRD AVENUE
30 NORTH LASALLE STREET 28TH FLOOR
CHICAGO, IL 60602 MIAMI, FL 33131
</TABLE>
---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
From time to time after the effective date of this
Post-Effective Amendment No. 1.
---------------------
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
The Registrant hereby amends this Post-Effective Amendment No. 1 to this
Registration Statement on such date or dates as may be necessary to delay its
effective date until the Registrant shall file a further amendment which
specifically states that this Post-Effective Amendment No. 1 to this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933, as amended, or until this
Post-Effective Amendment No. 1 to this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
- ---------------
* Filed as a Post-Effective Amendment on Form S-3 to such Form S-4 Registration
Statement pursuant to the provisions of Rule 401(e) and the procedure
described herein. See "Introductory Statement Not Forming Part of Prospectus."
================================================================================
<PAGE> 2
INTRODUCTORY STATEMENT NOT FORMING PART OF PROSPECTUS
The designation of this Post-Effective Amendment as Registration No.
333-20029-01 denotes that this is the first Post-Effective Amendment to the Form
S-4 filed by the Registrant in connection with the merger of a subsidiary of the
Registrant with and into Royce Laboratories, Inc. ("Royce"). This Amendment
relates to the shares of the Registrant's Common Stock issuable upon exercise of
the Royce warrants and options described herein. All filing fees payable in
connection with the registration of these securities were paid at the time of
filing of the Form S-4 Registration Statement. The Registrant contemplates that
it will file a separate post-effective amendment on Form S-8 to the Form S-4
relating to shares of the Registrant's Common Stock issuable upon exercise of
the stock options held by officers, directors, consultants, employees and former
employees of Royce and eligible to be registered on Form S-8.
<PAGE> 3
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
PRELIMINARY PROSPECTUS DATED APRIL 11, 1997.
SUBJECT TO COMPLETION
PROSPECTUS
SHARES
WATSON PHARMACEUTICALS, INC.
COMMON STOCK ($.0033 PAR VALUE)
On April , 1997 (the "Effective Time"), a subsidiary of Watson
Pharmaceuticals, Inc., a Nevada corporation ("Watson" or the "Company"), merged
with Royce Laboratories, Inc., a Florida corporation ("Royce"), pursuant to an
Agreement and Plan of Merger (the "Merger Agreement") dated as of December 24,
1996, as amended (the "Merger"). As a result of the Merger, Royce became a
wholly owned subsidiary of Watson, and each share of Royce common stock
outstanding at the Effective Time was converted into the right to receive
approximately of a share of Watson Common Stock. As a further result of
the Merger, certain warrants and options previously exercisable for Royce common
stock are now exercisable for Watson Common Stock.
This Prospectus relates to up to shares of Watson Common Stock
that may be issued upon exercise of the following Royce warrants and options:
1. Up to shares of Watson Common Stock issuable upon exercise of
a warrant ("Gruntal Warrant 1") held by Gruntal & Co., Incorporated ("Gruntal").
2. Up to shares of Watson Common Stock issuable upon exercise of
a warrant ("Gruntal Warrant 2") held by Gruntal.
3. Up to shares of Watson Common Stock issuable upon exercise of
warrants issued by Royce as part of a settlement of certain class action
litigation (the "Series F Warrants").
4. Up to shares of Watson Common Stock issuable upon exercise of
an option (the "Major Option") held by Major Pharmaceuticals, Inc. ("Major").
5. Up to shares of Watson Common Stock issuable upon exercise of
an option (the "P&PSI Option") held by Physician and Pharmaceutical Services,
Inc. ("P&PSI").
See "DESCRIPTION OF WARRANTS AND OPTIONS" below for a description of the
warrants and options referred to above.
The Company's Common Stock is traded on the NASDAQ National Market System
under the symbol "WATS." On April , 1997, the last reported sale price of the
Company's Common Stock on the National Market System was $ per share.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
---------------------
The date of this Prospectus is April , 1997.
<PAGE> 4
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION IN CONNECTION WITH THIS OFFERING NOT CONTAINED IN THIS PROSPECTUS
OR IN THE DOCUMENTS INCORPORATED BY REFERENCE HEREIN, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL,
OR A SOLICITATION OF AN OFFER TO BUY, ANY OF THE SECURITIES OFFERED BY THIS
PROSPECTUS IN ANY JURISDICTION, TO ANY PERSON TO WHOM IT IS NOT LAWFUL TO MAKE
ANY SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE OF THE SECURITIES MADE UNDER THIS PROSPECTUS SHALL,
UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN
THE AFFAIRS OF THE COMPANY SINCE THE DATE OF THIS PROSPECTUS OR THAT THE
INFORMATION CONTAINED HEREIN OR IN ANY DOCUMENTS INCORPORATED BY REFERENCE
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information.................................................................. 3
Incorporation of Certain Documents by Reference........................................ 3
The Company............................................................................ 4
Use of Proceeds........................................................................ 5
Description of Warrants and Options.................................................... 5
Legal Matters.......................................................................... 6
Experts................................................................................ 6
Index to Financial Statements.......................................................... F-1
</TABLE>
2
<PAGE> 5
AVAILABLE INFORMATION
Watson is subject to the informational reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act") and, in
accordance therewith, files reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information are available for inspection and copying at the
public reference facilities maintained by the Commission at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional
offices of the Commission, located at Suite 1300, 7 World Trade Center, New
York, New York 10048 and Citicorp Center, Suite 1400, 500 West Madison Street,
Chicago, Illinois 60661-2511. Copies of such materials can also be obtained by
mail from the Public Reference Section of the Commission at Room 1024, Judicial
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. Such
material can also be inspected at the offices of the National Association of
Securities Dealers, 1935 K Street, N.W., Washington, D.C. 20006. In addition,
electronic copies of the Registration Statement and all related exhibits and
schedules may be accessed on the World Wide Web via the Commission's EDGAR
database at its website (http://www.sec.gov).
The Company has filed with the Commission under the Securities Act of 1933,
as amended (the "Securities Act"), a Post-Effective Amendment No. 1 on Form S-3
to its registration statement (No. 333-20029) on Form S-4 (herein, together with
all amendments and exhibits thereto, referred to as the "Registration
Statement") with respect to the shares of the Company's Common Stock offered
hereby. This Prospectus does not contain all of the information set forth in the
Registration Statement, certain parts of which are omitted in accordance with
the rules and regulations of the Commission. Statements contained herein or in
any document incorporated by reference herein as to the contents of any contract
or other document referred to herein or therein are not necessarily complete,
and in each circumstance reference is made to the copy of such contract or other
document filed as an exhibit to the Registration Statement, or incorporated by
reference. Each such statement is qualified in all respects by such reference.
The Registration Statement and any amendments thereto, including exhibits filed
as a part thereof, are available for inspection and copying as set forth above.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
THIS PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT PRESENTED
HEREIN OR DELIVERED HEREWITH. COPIES OF SUCH DOCUMENTS (OTHER THAN EXHIBITS TO
SUCH DOCUMENTS, UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY REFERENCE)
ARE AVAILABLE, WITHOUT CHARGE, TO ANY PERSON, INCLUDING ANY BENEFICIAL OWNER, TO
WHOM THIS PROSPECTUS IS DELIVERED, UPON WRITTEN OR ORAL REQUEST TO WATSON
PHARMACEUTICALS, INC., 311 BONNIE CIRCLE, CORONA, CALIFORNIA 91720, TELEPHONE
NUMBER (909) 270-1400; ATTENTION: INVESTOR RELATIONS.
The following documents filed with the Commission are incorporated by
reference herein:
1. Annual Report of the Company on Form 10-K for the year ended December
31, 1996.
2. Current Reports of the Company on Form 8-K dated January 9, 1997 and
February 27, 1997.
3. The Proxy Statement/Prospectus dated March 13, 1997, filed as part of
the Company's Registration Statement on Form S-4 described above.
4. The description of the Company's Common Stock contained in its
Registration Statement on Form 8-A dated April 3, 1992.
5. Annual Report of Royce on Form 10-K for the year ended December 31,
1996.
In addition, all documents filed by the Company with the Commission
pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act or the
Securities Act after the date hereof and prior to the
3
<PAGE> 6
termination of the offering made by this Prospectus shall be deemed to be
incorporated by reference herein and shall be a part hereof from the date of
filing of such documents. Any statement contained in a document incorporated by
reference herein or contained in this Prospectus shall be deemed to be modified
or superseded for purposes hereof to the extent that a statement contained
herein (or in any other subsequently filed document which also is incorporated
by reference herein) modifies or supersedes such statement. Any statement so
modified or superseded shall not be deemed to constitute a part hereof except as
so modified or superseded.
THE COMPANY
Watson develops, manufactures and markets a comprehensive array of
off-patent pharmaceuticals, and develops proprietary pharmaceutical products.
Watson pursues a balanced strategy of generating revenue through its
long-established off-patent pharmaceuticals business, capitalizing on its proven
capabilities to support the development of off-patent and proprietary products,
and seeking opportunities to acquire businesses, technologies and products to
broaden its technology platform. Watson's objective is to become a fully
integrated pharmaceutical company, which (i) develops and markets off-patent
pharmaceuticals and (ii) develops proprietary products and markets such products
worldwide through pharmaceutical companies, joint ventures and its own marketing
efforts. Watson targets difficult-to-produce niche pharmaceuticals, thereby
avoiding competition with traditional commodity-oriented off-patent
pharmaceutical companies. Watson also regularly reviews potential opportunities
to acquire or invest in technologies, products or product rights and businesses
compatible with its existing business.
The Proxy Statement/Prospectus dated March 13, 1997, incorporated herein by
reference and available without charge upon request (see "INCORPORATION OF
CERTAIN DOCUMENTS BY REFERENCE" above), contains a more complete description of
Watson's business and a discussion of risk factors that should be considered
carefully before investing in Watson Common Stock. The Proxy
Statement/Prospectus also contains certain financial and other information
concerning, among other things, the merger of a subsidiary of Watson into
Oclassen Pharmaceuticals, Inc., which merger (the "Oclassen Merger") was
consummated effective February 27, 1997. Additional financial information is
presented in this Prospectus, commencing at page F-1.
Watson's principal executive offices are located at 311 Bonnie Circle,
Corona, California 91720. Its telephone number is (909) 270-1400.
4
<PAGE> 7
USE OF PROCEEDS
The net proceeds received by the Company upon any exercises of the warrants
and options described below under "DESCRIPTION OF WARRANTS AND OPTIONS" will be
added to the Company's working capital and will be used for general corporate
purposes. During periods that the exercise prices of such warrants or options
are higher than the market price of the Company's Common Stock, the Company does
not expect that such warrants or options will be exercised.
DESCRIPTION OF WARRANTS AND OPTIONS
In connection with the Merger, each of the following Royce options and
warrants has become an option or warrant to purchase a number of whole shares of
Watson Common Stock equal to the number of shares of Royce common stock into
which such options or warrants were exercisable immediately prior to the
Effective Date multiplied by approximately , the exchange ratio calculated
by $7.25 divided by the Average Closing Price (as defined in the Merger
Agreement) of Watson Common Stock (the "Exchange Ratio") (rounded to the nearest
whole share with 0.5 rounded upward) at an option or warrant exercise price
determined by dividing the exercise price of such option or warrant immediately
prior to the Effective Date by the Exchange Ratio (the option price per share,
as so determined, being rounded to the nearest full cent with $.005 rounded
upward).
Gruntal Warrants. Prior to the Merger, Gruntal held warrants to purchase up
to 283,333 shares of Royce common stock, 200,000 of which were exercisable at
$3.50 per share ("Gruntal Warrant 1") and 83,333 of which were exercisable at
$6.00 per share ("Gruntal Warrant 2") (Gruntal Warrant 1 and Gruntal Warrant 2
may sometimes be collectively referred to as the "Gruntal Warrants"). As a
result of the Merger, Gruntal Warrant 1 may be exercised for shares of
Watson Common Stock at an exercise price of $ per share and Gruntal
Warrant 2 may be exercised for shares of Watson Common Stock at an
exercise price of $ per share.
Gruntal Warrant 1 is exercisable until August 12, 1999 and Gruntal Warrant
2 is exercisable until July 21, 1998. The Gruntal Warrants may be exercised in
cash. Alternatively, the holder of the Gruntal Warrants may at any time and from
time to time exercise the Gruntal Warrants, in whole or in part, by surrendering
the warrant certificate in exchange for the number of shares of Watson Common
Stock equal to (x) the number of shares as to which the particular Gruntal
Warrant is being exercised, multiplied by (y) a fraction, the numerator of which
is the market price of the Watson Common Stock at the date of exercise less the
exercise price and the denominator of which is such market price. The holders of
the Gruntal Warrants also have certain demand and piggyback registration rights.
If such registration should involve an underwriting agreement, such underwriting
agreement would include, among other things, customary indemnification and
contribution obligations.
The Gruntal Warrants were issued to Gruntal as part of their compensation
for acting as the placement agent for Royce's 1994 and 1995 private placements.
Series F Warrants. During the fourth quarter of 1994, Royce issued warrants
(the "Series F Warrants") to purchase up to 658,333 shares of Royce common stock
at an exercise price of $15.00 per share as part of a settlement of certain
class action litigation. As a result of the Merger, the Series F Warrants allow
the holders thereof the right to purchase an aggregate of shares of
Watson Common Stock at an exercise price of $ per share.
The Series F Warrants are exercisable until December 31, 1999. The Company
has the right to call the Series F Warrants under certain conditions if the
market price of Watson Common Stock after the Merger exceeds $ per
share for 20 consecutive trading days.
Major Option. One of Royce's customers, Major Pharmaceuticals, Inc.
("Major"), held an option to purchase up to 50,000 shares of Royce common stock
(the "Major Option") at an exercise price of $6.00 per share. The option was
granted in return for the customer agreeing that Royce would be Major's sole
source of
5
<PAGE> 8
supply for certain products for a period of five years. As a result of the
Merger, due to a change of control provision contained in the agreement
documenting the Major Option, the Major Option has become fully vested at the
Effective Time of the Merger. Additionally, as a result of the Merger, the Major
Option will allow the holder thereof to purchase shares of Watson
Common Stock at an exercise price of $ per share.
The Major Option is exercisable until February 25, 2002, and is not
transferable. Major may pay the exercise price in cash. Alternatively, Major has
the right at any time and from time to time to convert the Major Option into
shares of Watson Common Stock. Upon exercise of such conversion right with
respect to any shares subject to options, Major will receive (without payment by
Major of any cash) that number of shares of Watson Common Stock equal to the
quotient obtained by dividing (x) the fair market value of such options on the
conversion date, which value shall be determined by subtracting (A) the
aggregate option price of the converted option shares immediately prior to the
exercise of the conversion right from (B) the aggregate fair market value of
such converted option shares on the conversion date, by (y) the fair market
value of one share of Watson Common Stock on the conversion date.
Major has certain demand and piggyback registration rights under the Major
Option, and has the right to indemnification with respect to any untrue or
alleged untrue statements or omissions contained in such registration statement
except for statements or omissions made in reliance on written information
provided by Major specifically for use in the preparation of such registration
statement.
P&PSI Option. A consultant to Royce, Physician and Pharmaceutical Services,
Inc. ("P&PSI") held an option to purchase up to 20,000 shares of Royce common
stock (the "P&PSI Option") at an exercise price of $10.50 per share if certain
annual minimum net sales targets were met by the consultant during 1997. If
certain 1997 net sales targets are met, P&PSI could earn on January 1, 1998, the
right to receive upon exercise up to 20,000 shares of Royce common stock
underlying the P&PSI Option. Assuming that P&PSI earns the right to exercise all
of the shares underlying the P&PSI Option, as a result of the Merger P&PSI would
have the right to purchase shares of Watson Common Stock at an exercise
price of $ per share upon the exercise of the P&PSI Option.
The P&PSI Option will expire on December 31, 1999. Payment of the option
price may be made by cash or by delivery of Watson Common Stock having a fair
market value equal to the option price, or by a combination of cash and shares.
The P&PSI Option is not transferable.
LEGAL MATTERS
The validity of the issuance of the Company's Common Stock being offered
hereby will be passed upon for the Company by D'Ancona & Pflaum, Chicago,
Illinois. As of the date of this Prospectus, Michel J. Feldman, a partner of
D'Ancona & Pflaum and a director and Secretary of the Company, beneficially
owned 24,750 shares of the Company's Common Stock. In addition, other members of
D'Ancona & Pflaum own additional shares of the Company's Common Stock, which
ownership is not material in the aggregate.
EXPERTS
The financial statements incorporated in this Prospectus by reference to
the Annual Report on Form 10-K of Watson Pharmaceuticals, Inc. (the "Form 10-K")
as of December 31, 1995 and 1996 and for each of the three years in the period
ended December 31, 1996, except as they relate to Somerset Pharmaceuticals, Inc.
and Circa Pharmaceuticals, Inc., have been audited by Price Waterhouse LLP,
independent accountants, and, insofar as they relate to Somerset
Pharmaceuticals, Inc. and Circa Pharmaceuticals, Inc., by Deloitte & Touche LLP
and Coopers & Lybrand L.L.P., independent accountants, whose reports thereon
also appear in the Form 10-K. Such financial statements have been so
incorporated in reliance on the reports of such independent accountants given on
the authority of such firms as experts in auditing and accounting.
6
<PAGE> 9
The supplementary financial statements included in this Prospectus, except
as they relate to Oclassen Pharmaceuticals, Inc., Somerset Pharmaceuticals, Inc.
and Circa Pharmaceuticals, Inc., have been audited by Price Waterhouse LLP,
independent accountants, and, insofar as they relate to Oclassen
Pharmaceuticals, Inc., Somerset Pharmaceuticals, Inc. and Circa Pharmaceuticals,
Inc., by Arthur Andersen LLP, Deloitte & Touche LLP and Coopers & Lybrand
L.L.P., independent accountants, whose reports thereon appear herein. Such
financial statements have been so included in reliance on the reports of such
independent accountants given on the authority of such firms as experts in
auditing and accounting.
The consolidated financial statements of Royce Laboratories, Inc. as of
December 31, 1996 and 1995 and for each of the three years in the period ended
December 31, 1996 incorporated in this Prospectus by reference to the Annual
Report on Form 10-K of Royce Laboratories, Inc. for the year ended December 31,
1996 have been so incorporated in reliance on the report of Price Waterhouse
LLP, independent accountants, given on the authority of said firm as experts in
auditing and accounting.
The consolidated financial statements of Somerset Pharmaceuticals, Inc. as
of December 31, 1996 and 1995 and for each of the three years in the period then
ended incorporated in this Prospectus by reference from the Annual Report on
Form 10-K of Watson Pharmaceuticals, Inc. for the year ended December 31, 1996
have been audited by Deloitte & Touche LLP, independent auditors, as stated in
their report, which is included and incorporated herein by reference, and have
been so incorporated in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
The consolidated statements of operations and cash flows of Circa
Pharmaceuticals, Inc. for the year ended December 31, 1994, incorporated by
reference in this Prospectus, have been incorporated herein in reliance on the
report of Coopers & Lybrand L.L.P., independent accountants, given on the
authority of that firm as experts in accounting and auditing.
7
<PAGE> 10
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Watson's Supplementary Consolidated Financial Statements
Reports of Independent Accountants............................................... F-2
Supplementary Consolidated Balance Sheets as of December 31, 1996 and 1995....... F-6
Supplementary Consolidated Statements of Income for each of the Three Years in
the Period Ended December 31, 1996.............................................. F-7
Supplementary Consolidated Statements of Stockholders' Equity for each of the
Three Years in the Period Ended December 31, 1996............................... F-8
Supplementary Consolidated Statements of Cash Flows for each of the Three Years
in the Period Ended December 31, 1996........................................... F-9
Notes to Supplementary Consolidated Financial Statements......................... F-11
</TABLE>
F-1
<PAGE> 11
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of Watson Pharmaceuticals, Inc.
We have audited, in accordance with generally accepted auditing standards, the
consolidated balance sheets of Watson Pharmaceuticals, Inc. as of December 31,
1996 and 1995, and the related consolidated statements of income, retained
earnings, shareholders' equity and cash flows for each of the three years in the
period ended December 31, 1996 (not presented separately herein); and in our
report dated February 7, 1997, except as to Note 2, which is as of February 27,
1997, we expressed an unqualified opinion on those consolidated financial
statements.
As described in Note 2 in the footnotes to the consolidated financial statements
of Watson Pharmaceuticals, Inc., on February 27, 1997, Watson Pharmaceuticals,
Inc. merged with Oclassen Pharmaceuticals, Inc. in a transaction accounted for
as a pooling of interests. The accompanying supplementary consolidated financial
statements give retroactive effect to the merger of Watson Pharmaceuticals, Inc.
with Oclassen Pharmaceuticals, Inc.
In our opinion, based upon our audits and the report of other auditors, the
accompanying supplementary consolidated balance sheets and the related
supplementary consolidated statements of income and retained earnings and of
cash flows present fairly, in all material respects, the financial position of
Watson Pharmaceuticals, Inc. and its subsidiaries at December 31, 1996 and 1995,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We did not audit the
financial statements of Somerset, an entity which is 50% owned by the Company.
The Company's investment in Somerset aggregated $24,653,000 and $25,741,000 at
December 31, 1996 and 1995 respectively, and its equity in the earnings of
Somerset totaled $20,100,000, $24,800,000, and $25,100,000 for the years ended
December 31, 1996, 1995, and 1994, respectively. We did not audit the financial
statements of Circa, a wholly owned subsidiary, as of December 31, 1994, which
statement reflects net income of $17,259,000 (includes equity in the earnings of
Somerset of $25,100,000). In addition, we did not audit the financial statements
of Oclassen which statements reflect total assets of $35,900,000 and $30,021,000
at December 31, 1996 and 1995 respectively, and total revenues of $34,421,000,
$29,247,000, and $28,557,000 for the years ended December 31, 1996, 1995, and
1994, respectively. Those statements were audited by other auditors whose report
thereon has been furnished to us, and our opinion expressed herein, insofar as
it relates to the amounts included for Oclassen Pharmaceuticals, Inc., is based
solely on the report of the other auditors. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits and the report of
other auditors provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Costa Mesa, California
April 10, 1997
F-2
<PAGE> 12
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Somerset Pharmaceuticals, Inc.:
We have audited the accompanying consolidated balance sheets of Somerset
Pharmaceuticals, Inc. and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the three years in the period ended December 31, 1996 (incorporated
herein and not included separately). These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Somerset Pharmaceuticals, Inc.
and subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
/s/ Deloitte & Touche LLP
Pittsburgh, Pennsylvania
February 6, 1997, except for Note 12,
as to which the date is March 7, 1997
F-3
<PAGE> 13
[LETTERHEAD OF ARTHUR ANDERSEN LLP]
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Oclassen Pharmaceuticals, Inc.:
We have audited the balance sheets of Oclassen Pharmaceuticals, Inc. (a
Delaware corporation) as of December 31, 1995 and 1996, and the related
statements of income, stockholders' equity (deficit) and cash flows for each of
the three years in the period ended December 31, 1996 (not presented herein).
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Oclassen Pharmaceuticals,
Inc. as of December 31, 1995 and 1996, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1996 in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Oakland, California
January 17, 1997
F-4
<PAGE> 14
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Circa Pharmaceuticals, Inc.
We have audited the consolidated statements of operations and cash flows of
Circa Pharmaceutical, Inc. and Subsidiaries (the "Company") for the year ended
December 31, 1994. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits. We did not audit the financial
statements of Somerset Pharmaceuticals, Inc. ("Somerset"), an entity which is
50% owned by the Company. In 1994, the Company has recorded income from Somerset
of $25,089,000. Those statements were audited by other auditors whose report has
been furnished to us, and our opinion, insofar as it relates to the amounts
included for Somerset, is based solely on the report of other auditors.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, based on our audit and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated results of operations and cash flows of
Circa Pharmaceuticals, Inc. and Subsidiaries for the year ended December 31,
1994, in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
/s/ Coopers & Lybrand L.L.P.
Melville, New York
February 7, 1995
F-5
<PAGE> 15
WATSON PHARMACEUTICALS, INC.
SUPPLEMENTARY CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents (Note 1)............................... $153,625 $ 95,216
Marketable securities (Note 1)................................... 80,966 41,761
Accounts receivable, net of allowances for doubtful accounts of
$2,891 and $2,135............................................. 29,636 28,126
Royalty receivable (Note 6)...................................... 5,554 8,205
Inventories (Note 3)............................................. 27,143 25,886
Prepaid expenses and other current assets........................ 5,689 4,161
Deferred tax assets (Note 7)..................................... 9,807 21,115
-------- --------
Total current assets..................................... 312,420 224,470
Property and equipment, net (Note 3)............................... 74,918 71,045
Investments in joint ventures and other long-term investments (Note
4)............................................................... 61,164 49,355
Other assets....................................................... 6,995 7,272
-------- --------
Total assets............................................. $455,497 $352,142
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses (Note 3)................... $ 29,069 $ 32,817
Income taxes payable (Note 7).................................... 473 2,985
Current portion of long-term debt (Note 5)....................... 673 622
-------- --------
Total current liabilities................................ 30,215 36,424
Long-term debt (Note 5)............................................ 2,904 3,577
Deferred tax liabilities (Note 7).................................. 12,226
Other liabilities.................................................. 3 726
-------- --------
Total liabilities........................................ 45,348 40,727
-------- --------
Commitments and contingencies (Note 12)
Minority interest (Note 1)......................................... 401
--------
Mandatorily redeemable preferred stock (Note 8).................... 39,389 36,650
-------- --------
Stockholders' equity:
Preferred stock; no par; 2,500,000 shares authorized; none
outstanding (Note 9)
Preferred Stock, Series A, $0.001 par value; 1,000,000 shares
authorized, 500,000 shares issued and outstanding............. 1,000 1,000
Common stock; par value of $.0033; 100,000,000 shares authorized;
37,516,033 and 37,016,662 shares issued and outstanding,
respectively (Note 9)......................................... 125 123
Additional paid-in capital....................................... 160,874 147,662
Retained earnings................................................ 201,898 126,859
Unrealized holding gain on available-for-sale securities......... 7,189 621
Notes receivable -- common stock................................. (727) (644)
Unearned compensation -- stock awards (Note 1)................... (856)
-------- --------
Total stockholders' equity............................... 370,359 274,765
-------- --------
Total liabilities and stockholders' equity............... $455,497 $352,142
======== ========
</TABLE>
See accompanying Notes to Supplementary Consolidated Financial Statements.
F-6
<PAGE> 16
WATSON PHARMACEUTICALS, INC.
SUPPLEMENTARY CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Product sales............................................ $201,322 $159,724 $121,703
Royalty income (Note 6).................................. 27,162 22,247 1,209
-------- -------- --------
Total revenues................................... 228,484 181,971 122,912
-------- -------- --------
Operating expenses:
Cost of revenues (Note 10)............................... 86,861 74,274 57,957
Research and development (Note 10)....................... 21,180 22,350 22,565
Selling, general and administrative (Note 10)............ 34,446 31,545 28,070
Merger expenses (Note 2)................................. 13,939
-------- -------- --------
Total operating expenses......................... 142,487 142,108 108,592
-------- -------- --------
Operating income........................................... 85,997 39,863 14,320
Other income:
Equity in earnings of joint ventures (Note 4)............ 17,909 22,766 24,968
Investment and other income.............................. 9,725 12,755 7,768
Gain from legal settlements.............................. 2,299
-------- -------- --------
Total other income, net.......................... 27,634 35,521 35,035
-------- -------- --------
Income before provision for income taxes................... 113,631 75,384 49,355
Provision for income taxes (Note 7)........................ 35,875 24,867 10,853
-------- -------- --------
Net income................................................. $ 77,756 $ 50,517 $ 38,502
======== ======== ========
Net income available to common stockholders................ $ 75,039 $ 47,800 $ 36,585
======== ======== ========
Per share data:
Earnings per share
-- Primary............................................ $ 1.94 $ 1.27 $ 0.98
======== ======== ========
-- Fully diluted...................................... $ 1.88
========
Weighted average number of common and common equivalent
shares outstanding:
-- Primary............................................ 38,657 37,778 37,144
======== ======== ========
-- Fully diluted...................................... 41,388
========
</TABLE>
See accompanying Notes to Supplementary Consolidated Financial Statements.
F-7
<PAGE> 17
WATSON PHARMACEUTICALS, INC.
SUPPLEMENTARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
SERIES A
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL RETAINED RECEIVABLE
--------------- ---------------- PAID-IN EARNINGS FROM
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) STOCKHOLDERS
------ ------ ------- ------ ---------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1993.......... 500 $1,000 36,174 $120 $131,762 $42,474 $ (668)
Exercise of options/warrants......... 224 1 515
Collection of note receivable from
stockholders....................... 40
Tax benefit related to stock option
plan............................... 659
Common stock issued to employees..... 26 326
Cancellation of common stock issued
to employees....................... (6) (100)
Amortization of unearned
compensation.......................
Adjustment for unrealized holding
loss on investment.................
Repurchases of common stock, net of
issuances.......................... (1) 37 (25)
Accretion of issuance cost of
mandatorily redeemable preferred
stock.............................. (109)
Cumulative dividends on mandatorily
redeemable preferred stock......... (1,808)
Net income........................... -- -- 38,502
--- ------ ------- ----- -------- -------- -----
BALANCE AT DECEMBER 31, 1994.......... 500 1,000 36,417 121 133,199 79,059 (653)
Exercise of options/warrants......... 600 2 7,628
Tax benefit related to stock option
plan............................... 6,808
Amortization of unearned
compensation.......................
Adjustment for unrealized holding
gain on investment.................
Repurchases of common stock, net of
issuances.......................... 27 9
Accretion of issuance cost of
mandatorily redeemable preferred
stock.............................. (109)
Cumulative dividends on mandatorily
redeemable preferred stock......... (2,608)
Net income........................... -- -- 50,517
--- ------ ------- ----- -------- -------- -----
BALANCE AT DECEMBER 31, 1995.......... 500 1,000 37,017 123 147,662 126,859 (644)
Exercise of options/warrants......... 503 2 5,517 (68)
Tax benefit related to stock option
plan............................... 7,752
Amortization of unearned
compensation.......................
Adjustment for unrealized holding
gain on investment.................
Repurchases of common stock, net of
issuances.......................... (4) (57) (15)
Accretion of issuance cost of
mandatorily redeemable preferred
stock.............................. (109)
Cumulative dividends on mandatorily
redeemable preferred stock......... (2,608)
Net income........................... 77,756
--- ------ ------- ----- -------- -------- -----
BALANCE AT DECEMBER 31, 1996.......... 500 $1,000 37,516 $125 $160,874 $201,898 $ (727)
=== ====== ======= ===== ======== ======== =====
<CAPTION>
UNREALIZED HOLDING
GAIN (LOSS) ON UNEARNED TOTAL
AVAILABLE-FOR-SALE COMPENSATION STOCKHOLDERS'
SECURITIES STOCK AWARDS EQUITY
------------------ ------------ -------------
<S> <<C> <C> <C>
BALANCE AT DECEMBER 31, 1993.......... $ -- $ (4,079) $ 170,609
Exercise of options/warrants......... 516
Collection of note receivable from
stockholders....................... 40
Tax benefit related to stock option
plan............................... 659
Common stock issued to employees..... 326
Cancellation of common stock issued
to employees....................... 80 (20)
Amortization of unearned
compensation....................... 1,185 1,185
Adjustment for unrealized holding
loss on investment................. (870) (870)
Repurchases of common stock, net of
issuances.......................... 12
Accretion of issuance cost of
mandatorily redeemable preferred
stock.............................. (109)
Cumulative dividends on mandatorily
redeemable preferred stock......... (1,808)
Net income........................... 38,502
------ ------- --------
BALANCE AT DECEMBER 31, 1994.......... (870) (2,814) 209,042
Exercise of options/warrants......... 7,630
Tax benefit related to stock option
plan............................... 6,808
Amortization of unearned
compensation....................... 1,958 1,958
Adjustment for unrealized holding
gain on investment................. 1,491 1,491
Repurchases of common stock, net of
issuances.......................... 36
Accretion of issuance cost of
mandatorily redeemable preferred
stock.............................. (109)
Cumulative dividends on mandatorily
redeemable preferred stock......... (2,608)
Net income........................... 50,517
------ ------- --------
BALANCE AT DECEMBER 31, 1995.......... 621 (856) 274,765
Exercise of options/warrants......... 5,451
Tax benefit related to stock option
plan............................... 7,752
Amortization of unearned
compensation....................... 856 856
Adjustment for unrealized holding
gain on investment................. 6,568 6,568
Repurchases of common stock, net of
issuances.......................... (72)
Accretion of issuance cost of
mandatorily redeemable preferred
stock.............................. (109)
Cumulative dividends on mandatorily
redeemable preferred stock......... (2,608)
Net income........................... 77,756
------ ------- --------
BALANCE AT DECEMBER 31, 1996.......... $7,189 $ -- $ 370,359
====== ======= ========
</TABLE>
See accompanying Notes to the Supplementary Consolidated Financial Statements.
F-8
<PAGE> 18
WATSON PHARMACEUTICALS, INC.
SUPPLEMENTARY CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------
1996 1995 1994
--------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................................ $ 77,756 $ 50,517 $ 38,502
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization.................................. 7,187 6,024 4,880
Amortization of unearned compensation-stock awards............. 856 1,958 1,491
Amortization of deferred income and bond premium............... (917) (146)
Decrease in deferred partnership liability..................... (14,033) (1,209)
Dividends received from Somerset............................... 18,000 18,000 18,000
Equity in earnings of joint ventures........................... (14,684) (19,067) (20,945)
Gain on sale of Marsam stock................................... (6,243) (3,180)
Gain on settlement with former officers........................ (2,299)
Deferred income tax provision (benefit)........................ 20,399 8,215 (597)
Tax benefit related to stock option plan....................... 7,752 6,808 659
Changes in assets and liabilities:
Increase in accounts receivable.............................. (1,510) (9,157) (7,869)
(Increase) decrease in royalty receivable.................... 2,651 (8,205)
Increase in inventories...................................... (1,257) (6,196) (3,903)
(Increase) decrease in prepaid expenses and other current
assets...................................................... (885) 47 (152)
(Increase) decrease in other assets.......................... (2,400) 82 49
Increase (decrease) in accounts payable and accrued
expenses.................................................... (3,748) 6,810 1,863
Increase (decrease) in income taxes payable.................. (2,512) 3,263
Decrease in accrual for legal settlements.................... (10,881)
Decrease in other liabilities................................ (723)
--------- --------- --------
Total adjustments......................................... 29,126 (12,611) (24,239)
--------- --------- --------
Net cash provided by operating activities................. 106,882 37,906 14,263
--------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment............................... (11,034) (22,922) (21,707)
Disposals of property and equipment............................... 462 1,463 104
Purchases of marketable securities................................ (840,969) (387,280) (19,164)
Proceeds from maturities of marketable securities................. 801,179 396,725 47,471
Loan to officer................................................... 200 (700)
Proceeds from sale of Marsam stock................................ 7,005 3,869
Proceeds from sale of a joint venture............................. 7,992
Investment in Andrx............................................... (15,645) (6,000)
Purchase of other assets.......................................... (2,000)
Increase in investment in other joint ventures.................... (3,090) (818) (1,518)
--------- --------- --------
Net cash provided by (used in) investing activities....... (53,252) (23,472) 10,347
--------- --------- --------
</TABLE>
See accompanying Notes to Supplementary Consolidated Financial Statements.
F-9
<PAGE> 19
WATSON PHARMACEUTICALS, INC.
SUPPLEMENTARY CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
-------- ------- -------
<S> <C> <C> <C>
Cash flows from financing activities:
Proceeds from issuance of long-term debt............................. $ 5,000
Principal payments on long-term debt................................. $ (622) $(1,502) (1,938)
Proceeds from exercise of stock options.............................. 5,401 7,666 528
Net collections of notes receivable from stockholders................ 40
-------- ------- -------
Net cash provided by financing activities.................... 4,779 6,164 3,630
-------- ------- -------
Net increase in cash and cash equivalents.............................. 58,409 20,598 28,240
Cash and cash equivalents at beginning of year......................... 95,216 74,618 46,378
-------- ------- -------
Cash and cash equivalents at end of year............................... $153,625 $95,216 $74,618
======== ======= =======
Supplemental disclosures of cash flow information:
Cash paid during the periods for:
Interest.......................................................... $ 318 $ 446 $ 901
Income taxes...................................................... $ 10,332 $ 6,765 $10,082
Additional disclosures of non-cash items:
Issuance of common stock for note receivable...................... $ (57) $ 27 $ 37
Exchange of inventory for rights to license new product........... $ 445
</TABLE>
See accompanying Notes to Supplementary Consolidated Financial Statements.
F-10
<PAGE> 20
WATSON PHARMACEUTICALS, INC.
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS AND PRINCIPLES OF CONSOLIDATION
Watson Pharmaceuticals, Inc. ("Watson" or the "Company") is engaged in the
research and development, production, marketing and distribution of off-patent
and proprietary pharmaceutical products. The supplementary consolidated
financial statements include the accounts of wholly owned and majority owned
subsidiaries, and have been retroactively restated to include the accounts of
Circa Pharmaceuticals, Inc. ("Circa") that merged with the Company on July 17,
1995 and Oclassen Pharmaceuticals, Inc. ("Oclassen") that merged with the
Company on February 27, 1997 (Note 2). Intercompany accounts and transactions
have been eliminated.
The supplementary consolidated financial statements will become the
historical consolidated financial statements of the Company and subsidiaries
after consolidated financial statements covering the date of consummation of the
merger are issued.
The Company's wholly owned subsidiaries include Watson Laboratories, Inc.
("Watson Labs"), Circa, Watson Pharmaceuticals (Asia) Ltd. (Note 13), Corona
Pharmaceuticals, Inc. (currently inactive) and Oclassen. Changzhou Watson
Pharmaceuticals Co. Ltd. is the Company's only majority owned subsidiary. During
1995, all of the assets of Zetachron, Inc., a wholly owned subsidary, were
either merged into Watson Labs or disposed of for an immaterial loss.
Investments are accounted for under the equity method of accounting where
the Company can exert significant influence and ownership does not exceed 50%.
All investments in which the Company holds less than a 20% interest and does not
exert significant influence are accounted for under the cost method of
accounting. The Company's investments accounted for under the equity method
include Somerset Pharmaceuticals, Inc, ANCIRC and Changzhou Siyao
Pharmaceuticals Co. Ltd.. The investment in Andrx Corporation is accounted for
under the cost method of accounting. See Note 4 for further discussion of these
investments.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include time deposits and readily marketable
securities with original maturities of three months or less.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company values financial instruments as required by Statement of
Financial Accounting Standards No. 107, "Disclosures about Fair Values of
Financial Instruments" ("SFAS 107"). The carrying amounts of cash and cash
equivalents, marketable securities, accounts and other receivables, inventories,
accounts payable, accrued expenses and debt approximate fair value.
MARKETABLE SECURITIES
The Company's investment portfolio consists of fixed income securities,
equity securities and money market funds, all of which are included in the
Company's cash and cash equivalents or marketable securities. In 1994, the
Company adopted SFAS 115, "Accounting for Certain Investments in Debt and Equity
Securities" ("SFAS 115"). Under SFAS 115, all of the Company's investments are
classified as "available-for-sale" securities and are reported at fair market
value. Any unrealized holding gains or losses are reported, net of applicable
income taxes, as a separate component of stockholders' equity. Realized gains
and losses are determined on the specific identification method and are reported
in income. Maturity dates on fixed income securities ranged from 1997 to 2023.
F-11
<PAGE> 21
WATSON PHARMACEUTICALS, INC.
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table includes the Company's cash equivalents and the
amortized cost and fair market values of all marketable securities (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1996
----------------------------------------------
GROSS GROSS FAIR
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUES
--------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Fixed income securities:
U.S. Treasury securities.................... $ 69,062 150 $ (91) $ 69,121
State-issued securities..................... 3,405 3,405
Corporate bonds............................. 16,964 2 (30) 16,936
Commercial paper............................ 107,273 4 (1) 107,276
Equity securities............................. 17,545 1 17,546
Money market funds............................ 20,307 20,307
-------- ---- ----- --------
$234,556 $157 $(122) $234,591
======== ==== ===== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995
----------------------------------------------
GROSS GROSS FAIR
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUES
--------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Fixed income securities:
U.S. Treasury securities.................... $ 50,054 $463 $ (54) $ 50,463
State-issued securities..................... 4,400 4,400
Corporate bonds............................. 11,854 232 12,086
Commercial paper............................ 46,197 (48) 46,149
Equity securities............................. 6,624 28 6,652
Money market funds............................ 17,227 17,227
-------- ---- ----- --------
$136,356 $723 $(102) $136,977
======== ==== ===== ========
</TABLE>
The Company disposed of its investment in common stock of Marsam
Pharmaceuticals, Inc. ("Marsam") during 1995. Realized gains from the sales of
Marsam common stock were $6.2 million and $3.2 million for the years ended
December 31, 1995, and 1994, respectively. Realized gains and losses from the
sales of other marketable securities were not material for the three years in
the period ended December 31, 1996.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Major renewals and improvements
are capitalized, while normal maintenance and repairs are expensed as incurred.
At the time properties are retired from service, the cost and accumulated
depreciation are removed from the respective accounts and gains or losses are
reflected in income.
Depreciation expense is computed principally on a straight-line basis, over
the estimated useful lives of two to ten years for furniture, fixtures and
equipment and thirty years for buildings and building improvements. Leasehold
improvements and assets recorded under capital leases are amortized on a
straight-line basis over the terms of the respective leases.
F-12
<PAGE> 22
WATSON PHARMACEUTICALS, INC.
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ACCOUNTING FOR LONG-LIVED ASSETS
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of," ("SFAS 121") which requires
the Company to periodically review the recoverability of long-lived assets based
on the related undiscounted future cash flows. The adoption of SFAS 121 did not
have a material impact on the Company's financial condition or results of
operations.
MINORITY INTEREST
Minority interest represents third party capital contributions received or
receivable by the Company.
UNEARNED COMPENSATION
Prior to its merger with the Company (Note 2), Circa maintained stock award
plans (the "stock awards") for key employees and officers. The stock awards
contained certain vesting provisions which required unearned compensation to be
recorded for the fair market value of the shares issued. Concurrent with the
merger with Circa, the stock awards were converted to equivalent common shares
in the Company pursuant to the merger exchange ratio in the merger agreement.
Compensation expense was charged on a straight-line basis to selling, general
and administrative expense over the related vesting periods. At December 31,
1996, unearned compensation related to the stock awards had been fully
amortized.
REVENUE RECOGNITION
Revenues from product sales are recognized upon shipment and are net of
returns and adjustments. Royalty income is recognized as earned pursuant to the
terms of the Company's amended agreement with Rhone-Poulenc Rorer, Inc. (Note
6).
PRODUCT SALES TO MAJOR CUSTOMERS
In 1996 and 1995, no individual customers accounted for more than 10% of
the Company's product sales. In 1994, one customer accounted for 10% of product
sales.
RESEARCH AND DEVELOPMENT ACTIVITIES
The costs associated with the development, testing and approval of
pharmaceutical products are expensed as incurred.
INCOME TAXES
The Company accounts for income taxes in accordance with SFAS 109,
"Accounting for Income Taxes" ("SFAS 109"). Under the liability method specified
by SFAS 109, the deferred tax assets and liabilities are measured each year
based on the difference between the financial statement and income tax bases of
assets and liabilities at the applicable enacted income tax rates. The deferred
tax provision is the result of changes in the deferred tax assets and
liabilities.
EARNINGS PER SHARE
The computation of primary earnings per share is based on the weighted
average number of common and common equivalent shares outstanding. Common
equivalent shares include the dilutive effect of the assumed exercise of all
outstanding stock options and warrants, described in Note 9, using the treasury
stock method. Fully diluted earnings per share assumes the conversion of
convertible preferred stock (Notes 8 and 9), if dilutive, as well as the
dilutive effects of stock options and warrants using the treasury stock method.
F-13
<PAGE> 23
WATSON PHARMACEUTICALS, INC.
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company adopted Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"), in 1996. As permitted by
SFAS 123, the Company continues to measure compensation cost in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees", but provides pro forma disclosures of net income and earnings per
share as if the fair value method (as defined in SFAS 123) had been applied
beginning in 1995.
USE OF ESTIMATES BY MANAGEMENT
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make certain
estimates and assumptions. These estimates and assumptions are reflected in the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at December 31, 1996 and 1995. Management's estimates and
assumptions are also reflected in the revenues and expenses for the three years
in the period ended December 31, 1996.
CONCENTRATION OF CREDIT RISK
The Company is potentially subject to a concentration of credit risk with
respect to its trade receivable balance, all of which is due from service
providers, distributors, wholesalers and chain drug stores in the health care
and pharmaceutical industries. The Company performs ongoing credit evaluations
of its customers and maintains reserves for potential uncollectible accounts.
Actual losses from uncollectible accounts have been within management's
expectations.
RECLASSIFICATIONS
Certain amounts in the 1994 and 1995 financial statements have been
reclassified to conform with the 1996 presentation. These reclassifications had
no effect on net income or retained earnings.
2. MERGERS
MERGER WITH CIRCA
On July 17, 1995, the stockholders of the Company and Circa approved a
merger which resulted in Circa becoming 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.
In connection with the merger, the Company recorded a one-time charge of
$13.9 million for merger-related expenses during the quarter ended September 30,
1995. These expenses included investment banking fees and other costs related to
the consolidation of operations between the two companies.
MERGER WITH OCLASSEN
Effective February 27, 1997, the Company completed a merger with Oclassen,
which resulted in Oclassen becoming a wholly owned subsidiary of the Company.
Oclassen, founded in 1985, develops and markets specialty pharmaceuticals for
the prevention, diagnosis and treatment of skin diseases. Immediately prior to
the completion of the merger, each holder of Oclassen Preferred Stock, Series A,
B, C, D and E voluntarily converted each share of Oclassen Preferred Stock into
one share of Oclassen common stock. Subsequent to the conversion of preferred
shares to common shares, under the terms of the merger agreement, the holders of
F-14
<PAGE> 24
WATSON PHARMACEUTICALS, INC.
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Oclassen common stock received 0.37 of a share of the Company's common stock for
each share of Oclassen common stock. Accordingly, to effectuate the merger, the
Company issued approximately 3.3 million shares of the Company's common stock
for all of the outstanding common shares of Oclassen.
The merger qualifies as a tax free reorganization and was accounted for as
a pooling-of-interests. These supplementary consolidated financial statements
have been retroactively restated to include the results of Oclassen for all
periods presented.
The following table summarizes the combined and separate results of Watson
and Oclassen for the three years in the period ended December 31, 1996. For
purposes of the following table, the results for Watson include the accounts of
Circa.
<TABLE>
<CAPTION>
WATSON OCLASSEN COMBINED
-------- -------- --------
<S> <C> <C> <C>
Year ended December 31, 1996
Total revenues................................................ $194,120 $ 34,364 $228,484
Net income.................................................... $ 73,298 $ 4,458 $ 77,756
Year ended December 31, 1995
Total revenues................................................ $152,935 $ 29,036 $181,971
Net income.................................................... $ 47,890 $ 2,627 $ 50,517
Year ended December 31, 1994
Total revenues................................................ $ 94,858 $ 28,054 $122,912
Net income.................................................... $ 36,545 $ 1,957 $ 38,502
</TABLE>
The combined financial results of the Company and Oclassen presented above
include reclassifications made to conform accounting policies and financial
statement presentation of the two companies. There were no adjustments that
affected net income of the combined company. There were no intercompany
transactions between the two companies.
In connection with the Oclassen merger, the Company expects to record a
one-time charge of approximately $8.5 million for merger-related expenses during
the quarter ending March 31, 1997. These expenses include investment banking
fees and other costs related to the consolidation of operations between the two
companies.
PENDING MERGER
On December 24, 1996, Watson entered into a definitive Agreement and Plan
of Merger, as amended effective March 4, 1997 (collectively the "Royce Merger
Agreement") with Royce Laboratories, Inc. ("Royce"). Pursuant to the Royce
Merger Agreement, Royce agreed to merge with a subsidiary of Watson created for
the purpose of the merger, with Royce surviving as a wholly owned subsidiary of
Watson.
Royce develops, manufactures and markets off-patent prescription drugs in
solid dosage forms (tablets and capsules). At present, Royce manufactures and
markets 20 off-patent prescription drugs in 42 dosage strengths and had received
approval on an additional drug in 3 dosage strengths that it has not yet
commenced manufacturing and marketing. Additionally, Royce has ANDAs pending
with the FDA for 9 new products in 15 dosage strengths.
At the effective time of the Royce merger, Royce stockholders will receive
an aggregate of up to approximately 2.6 million shares of Watson common stock in
exchange for all of the outstanding common stock of Royce. It is intended that
the Royce merger will qualify as a pooling of interests for accounting purposes
and a tax-free reorganization for federal income tax purposes. The Royce Merger
Agreement may be terminated and the Royce merger abandoned if the Royce merger
has not occurred by April 30, 1997. The Royce stockholders' meeting is scheduled
for April 16, 1997, and if approved, the Royce merger is expected to close the
same day.
F-15
<PAGE> 25
WATSON PHARMACEUTICALS, INC.
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. BALANCE SHEET COMPONENTS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Inventories:
Raw materials.......................................................... $ 10,482 $ 11,837
Work-in-process........................................................ 5,874 5,112
Finished goods......................................................... 10,787 8,937
-------- --------
$ 27,143 $ 25,886
======== ========
Property and equipment:
Buildings and improvements............................................. $ 37,859 $ 22,457
Leaseholds improvements................................................ 8,317 8,340
Land and land improvements............................................. 4,937 4,937
Machinery and equipment................................................ 46,998 42,658
Research and laboratory equipment...................................... 9,474 9,020
Furniture and fixtures................................................. 3,525 3,114
-------- --------
111,110 90,526
Less accumulated depreciation and amortization......................... (39,852) (34,247)
-------- --------
71,258 56,279
Construction in progress............................................... 3,660 14,766
-------- --------
$ 74,918 $ 71,045
======== ========
Accounts payable and accrued expenses:
Trade accounts payable................................................. $ 16,394 $ 19,224
Reserve for litigation settlement...................................... 2,839
Accrued payroll and benefits........................................... 3,372 3,573
Reserve for sales coupons.............................................. 1,101 1,783
Contract obligations................................................... 2,651 2,708
Other accrued expenses................................................. 5,551 2,690
-------- --------
$ 29,069 $ 32,817
======== ========
</TABLE>
4. INVESTMENTS IN JOINT VENTURES AND OTHER LONG-TERM INVESTMENTS
JOINT VENTURES
Somerset Pharmaceuticals, Inc. ("Somerset")
The Company maintains a 50% interest in the outstanding common stock of
Somerset and utilizes the equity method to account for this investment. Somerset
markets the product Eldepryl(R), which is used in the treatment of Parkinson's
disease. Income recognized from Somerset was approximately $20.1 million, $24.8
million, and $25.1 million for the years ended December 31, 1996, 1995, and
1994, respectively. Income includes 50% of Somerset's earnings, ongoing
management fees and amortization of deferred income, offset by amortization of
goodwill. The excess cost of this investment over its net assets was $7.4
million and $8.4 million at December 31, 1996 and 1995, respectively, and is
being amortized on a straight-line basis over 15 years.
Orphan drug exclusivity expired for Eldepryl(R) in June 1996. During 1996,
the Company experienced a decrease in earnings from Somerset due to increased
competition for Elderpryl(R) and increased research and development spending.
Management anticipates that the Company's equity in earnings from Somerset will
be
F-16
<PAGE> 26
WATSON PHARMACEUTICALS, INC.
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
substantially reduced in 1997 from prior year levels due to increased
competition for Eldepryl(R) and anticipated increased research and development
expenditures in connection with the development of several new products.
Condensed income statements and balance sheets of Somerset are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Net revenues........................................... $101,512 $107,365 $124,566
Costs and expenses..................................... 46,895 42,812 59,557
Income taxes........................................... 18,815 20,200 20,900
-------- -------- --------
Net income................................... $ 35,802 $ 44,353 $ 44,109
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Current assets..................................................... $45,871 $43,993
Other assets....................................................... 7,006 7,127
------- -------
Total assets............................................. $52,877 $51,120
======= =======
Current liabilities................................................ $19,075 $17,057
Other liabilities.................................................. -- 63
Stockholders' equity............................................... 33,802 34,000
------- -------
Total liabilities and stockholders' equity............... $52,877 $51,120
======= =======
</TABLE>
ANCIRC
In July 1994, the Company and Andrx Corporation ("Andrx") formed a joint
venture, ANCIRC, to develop off-patent pharmaceutical products utilizing Andrx's
controlled-release technology. During 1995, the terms of the ANCIRC joint
venture agreement were amended whereby the Company and Andrx became equal
partners in the sharing of costs and profits in the ANCIRC joint venture.
Previously, the Company was responsible for 40% of the costs and profits of
ANCIRC. The Company utilizes the equity method to account for this joint venture
and recognized losses from ANCIRC of approximately $2.0 million, $1.7 million
and $0.2 million for the years ended December 31, 1996, 1995 and 1994,
respectively.
F-17
<PAGE> 27
WATSON PHARMACEUTICALS, INC.
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
COMBINED RESULTS FOR UNCONSOLIDATED INVESTMENTS IN JOINT VENTURES
The following aggregate financial information is provided for
unconsolidated investments in joint ventures accounted for using the equity
method:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Net revenues....................................... $101,512 $107,365 $126,726
======== ======== ========
Gross profit....................................... $ 88,840 $ 93,748 $109,979
======== ======== ========
Net income......................................... $ 31,564 $ 41,099 $ 44,409
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Current assets................................................. $ 46,572 $ 44,078
Other assets................................................... 10,342 7,127
-------- --------
Total assets......................................... $ 56,914 $ 51,205
======== ========
Current liabilities............................................ $ 20,123 $ 18,422
Other liabilities.............................................. -- 63
Stockholders' equity........................................... 36,791 32,720
-------- --------
Total liabilities and stockholders' equity........... $ 56,914 $ 51,205
======== ========
</TABLE>
China Ventures
In 1996, Watson (Asia) entered into an agreement to form two ventures with
China-based Changzhou No. 4 Pharmaceuticals Factory ("Changzhou"). The initial
joint venture, Changzhou Watson Pharmaceuticals, Co. Ltd. ("Joint Venture A")
will be engaged in the production, marketing and distribution of pharmaceutical
products in China. Joint Venture A is 87.5% owned by the Company and 12.5% owned
by Changzhou. The second joint venture, Changzhou Siyao Pharmaceuticals Co. Ltd.
("Joint Venture B") will provide the raw materials to Joint Venture A. Joint
Venture B is 25% owned by the Company and 75% owned by Changzhou. The earnings
and losses of Joint Venture B operations will be shared according to each
partner's respective ownership percentage. As of December 31, 1996, neither
joint venture had commenced operations.
American Triumvirate Insurance Company ("ATIC")
Prior to December 31, 1994, the Company had a 50% ownership interest with
another pharmaceutical company in ATIC, a captive insurance company, which
underwrote product liability insurance for Circa, Somerset and the joint venture
partner. The investment was accounted for under the equity method of accounting.
The Company recognized $759,000 as its equity in ATIC's earnings for the year
ended December 31, 1994. On December 31, 1994, the Company sold its 50% interest
in ATIC to the other joint venture partner. The selling price was $8.2 million,
which was equal to 50% of ATIC's shareholders' equity at December 31, 1994. The
Company received approximately $8.0 million in cash and established a receivable
for the balance. For financial reporting purposes, the sale of ATIC did not
result in a gain or loss to the Company.
F-18
<PAGE> 28
WATSON PHARMACEUTICALS, INC.
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OTHER LONG-TERM INVESTMENTS
Andrx Corporation
Andrx develops advanced controlled-release drug delivery systems and
distributes certain off-patent pharmaceutical products manufactured by others.
On October 30, 1995, the Company invested an additional $15.6 million in Andrx,
bringing its ownership to 19.5% of Andrx's total outstanding common shares. The
Company utilizes the cost method to account for its investment in Andrx. On June
14, 1996, Andrx completed an initial public offering of its securities,
effectively reducing the Company's ownership interest in Andrx to approximately
15.6% at December 31, 1996. At December 31, 1996, the Company recorded an
unrealized gain of $7.2 million (net of applicable income taxes of $4.8 million)
on its investment in Andrx.
5. DEBT
In 1994, the Company entered into an agreement, which was subsequently
amended as of December 31, 1996, with a bank (the "financing agreement") that
provided for several financing facilities. Under the terms of a facility in this
agreement, $5.0 million was borrowed in 1994. A seven-year note payable was
established, with monthly payments due through August 2001.
The facilities available to the Company under the financing agreement are
composed of (i) a $20 million revolving, unsecured line of credit which expires
on August 1, 1998, (ii) a $6.0 million revolving, unsecured equipment line of
credit which expires on August 1, 1997, and (iii) a $10.0 million non-revolving,
unsecured line of credit which expires on August 1, 1997. At August 1, 1997 the
Company has the option of converting any outstanding balances under the $6.0
million and $10.0 million lines of credit into five and seven year notes
payable, respectively. The financing agreement provides for (a) variable
interest rates, which would initially range from the bank's Reference Rate
(8.25% at December 31, 1996) minus one-quarter of a percentage point and (b)
fixed interest rate options. The Company must maintain specified financial
ratios and must comply with certain restrictive covenants. At December 31, 1996,
the Company was in compliance with all of the ratios and covenants. Except for
the note payable discussed in the preceding paragraph, no borrowings have been
made under this financing agreement.
In June 1996, Oclassen renewed a secured line of credit agreement with a
bank and increased borrowings available under the line from $5 million to $10
million. Proceeds from this line of credit may be used for general working
capital purposes and to finance product acquisitions. Borrowings are available
on a short-term basis under various market-based interest rate options. The line
of credit is renewable on March 31, 1997. Pursuant to the terms of the line of
credit, Oclassen must comply with certain covenants. As of December 31, 1996,
Oclassen was in compliance with these covenants. There were no borrowings during
1996 under the line.
LONG-TERM DEBT IS SUMMARIZED AS FOLLOWS:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1996 1995
------ ------
(IN THOUSANDS)
<S> <C> <C>
Note payable to bank, unsecured, at a fixed rate of 8.105%, payable
in monthly installments of $78, including interest, due August
2001............................................................... $3,577 $4,199
Less current portion............................................ (673) (622)
------ ------
Long-term debt.................................................. $2,904 $3,577
====== ======
</TABLE>
F-19
<PAGE> 29
WATSON PHARMACEUTICALS, INC.
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1996, annual maturities of long-term debt consisted of the
following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, (IN THOUSANDS):
-----------------------------------------------------------------
<S> <C>
1997............................................................. $ 673
1998............................................................. 730
1999............................................................. 791
2000............................................................. 858
2001............................................................. 525
------
$3,577
======
</TABLE>
6. PARTNERSHIP WITH RHONE-POULENC RORER, INC. ("RPR")
In 1989, the Company and RPR formed a partnership (the "Partnership") to
develop and market Dilacor XR(R), a pharmaceutical product used in the treatment
of hypertension and angina. In connection with the development of Dilacor XR(R),
the Company incurred a liability to the Partnership reflecting the Company's
share of development and operating costs. At December 31, 1993, the liability
due to the Partnership was $15.2 million. The Partnership agreement was amended
in April 1993, such that after September 1, 1993 the Company earned a royalty
from RPR's sales of Dilacor XR(R). The amended agreement also provided that all
royalties earned would be used first to offset the Partnership liability and
that any royalties in excess of the Partnership liability would be remitted to
the Company. As royalties were earned in 1994 and 1995, the Partnership
liability was fully eliminated in 1995 pursuant to the terms of this agreement.
Subsequent to the elimination of the partnership liability, royalties earned are
remitted to the Company on a quarterly basis.
In a subsequent amendment, effective January 1, 1995, it was agreed that
royalty income would be determined by prescriptions written, as defined, for
Dilacor XR(R). The royalty rates established under the agreement were 1% in
1994, 20% in 1995 and 1996, 22% from 1997 to 2000, and 3% thereafter. For the
years ended December 31, 1996, 1995 and 1994, the Company earned royalties of
$27.2 million, $22.2 million and $1.2 million, respectively and recorded a
royalty receivable balance of $5.6 million and $8.2 million at December 31, 1996
and 1995, respectively. Dilacor XR(R) lost exclusivity in May 1995. The loss of
exclusivity for Dilacor XR(R) did not have a significant impact on 1995 and 1996
sales of the product.
7. INCOME TAXES
The provision for income taxes is summarized as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
---------------------------
1996 1995 1994
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Taxes currently payable:
Federal................................................. $ 4,634 $ 6,623 $ 8,400
State................................................... 3,364 3,336 2,397
------- ------- -------
Total current................................... 7,998 9,959 10,797
------- ------- -------
Deferred tax provision (benefit):
Federal................................................. 17,089 7,622 (592)
State................................................... 3,034 478 (11)
------- ------- -------
Total deferred.................................. 20,123 8,100 (603)
------- ------- -------
Exercise of stock options not treated as a reduction of
income tax expense...................................... 7,754 6,808 659
------- ------- -------
Total provision for income taxes................ $35,875 $24,867 $10,853
======= ======= =======
</TABLE>
F-20
<PAGE> 30
WATSON PHARMACEUTICALS, INC.
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The exercise of stock options represents a tax benefit reflected as a
reduction of taxes currently payable, with a corresponding increase to the
additional paid-in capital account. Income taxes have been provided for the
possible distribution of approximately $17.0 million of undistributed earnings
related to the Company's investments in joint ventures.
The income tax provision differs from the amount computed by applying the
federal income tax rate to income as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
----------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Expected tax at federal statutory rate.......................... 35% 35% 35%
State income tax, net of federal benefit........................ 5 5 6
Research tax credits and other credits.......................... (1) (1) (2)
Dividends received deduction.................................... (4) (7) (11)
Non-deductible merger expenses.................................. 3
Other........................................................... (2) (1) (4)
Reduction of valuation allowance related to deferred tax
assets........................................................ (1) (1) (2)
-- -- ---
32% 33% 22%
== == ===
</TABLE>
Deferred tax assets and liabilities are measured based on the difference
between the financial statement and tax bases of assets and liabilities at the
applicable enacted tax rates. Deferred tax assets and liabilities are the
results of the following temporary differences:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
-------- -------
(IN THOUSANDS)
<S> <C> <C>
Benefits from net operating loss carryforwards.................. $ 390 $19,630
Difference in accounting for inventory and receivables.......... 6,191 4,019
Benefits from tax credits and carryforward credits.............. 2,070 4,077
Contract revenue and expense recognition........................ 1,064 1,087
Other........................................................... 2,943 3,823
-------- -------
Total deferred tax assets............................. 12,658 32,636
Deferred tax asset valuation allowance.......................... (3,146) (4,742)
-------- -------
Deferred tax assets net of valuation allowance........ 9,512 27,894
-------- -------
Difference in depreciation for book and tax purposes............ (5,650) (4,998)
Difference in investment basis for book and tax................. (6,005) (116)
-------- -------
Total deferred tax liabilities........................ (11,655) (5,114)
-------- -------
Net deferred tax (liabilities) assets................. $ (2,143) $22,780
======== =======
</TABLE>
The Company had net operating loss ("NOL") carryforwards at December 31,
1996 of approximately $1.1 million for federal and New York state income tax
purposes. In the year ended December 31, 1996, the Company utilized NOL
carryforwards of approximately $46.7 million and $8.5 million to offset federal
and New York state income, respectively. The utilization of the New York NOL
carryforward is generally limited to the federal NOL carryforward amount. The
Company's NOL carryforwards will begin to expire in 2006. The Company has
approximately $0.9 million in federal alternative minimum tax credits which have
no expiration date. These credits are available to directly offset future
federal income taxes.
During 1996, Oclassen utilized its remaining NOL carryforwards of
approximately $3.8 million and $2.3 million for federal and state income tax
purposes, respectively.
Additionally, at December 31, 1996, Oclassen had research and development
credit carryforwards available to reduce future federal income taxes through
2011 of approximately $875,000 and combined orphan drug and research and
development credit carryforwards available to reduce future California state
income
F-21
<PAGE> 31
WATSON PHARMACEUTICALS, INC.
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
taxes through 2001 approximating $320,000. Watson's acquisition of Oclassen and
any other changes in the ownership of Oclassen may limit the annual amount of
credit carryforwards available for future use.
8. MANDATORILY REDEEMABLE PREFERRED STOCK
As discussed in Note 2, in connection with the Company's merger with
Oclassen, the holders of Oclassen's mandatorily redeemable Preferred Stock
Series B, C, D and E voluntarily converted each share of preferred stock into
one share of Oclassen common stock and immediately exchanged each outstanding
common share of Oclassen for 0.37 shares of the Company's common stock. As a
condition of the merger and the voluntary conversion of Oclassen Preferred
Stock, referred to above, all accrued and unpaid dividends on shares of Oclassen
Preferred Stock were forfeited and all preference payments that holders of
Oclassen Preferred Stock would have received upon consummation of the merger
were forfeited. Undeclared cumulative accrued dividends through December 31,
1996 totaled approximately $7 million. The following describes each class of
mandatorily redeemable Preferred Stock including amounts outstanding as of
December 31, 1996.
SERIES B
Oclassen is authorized to issue 2,889,403 shares, and had issued 1,418,184
shares of Series B Preferred Stock at a price of $2.30 per share before
reduction for issuance costs and 5,000 shares at a price of $4.36 per share.
SERIES C
Oclassen is authorized to issue 3,024,748 shares, and had issued 1,422,906
shares of Series C Preferred Stock at a price of $4.36 per share before
reduction for issuance costs.
SERIES D
Oclassen is authorized to issue 7,000,000 shares, and had issued 3,105,888
shares of Series D Preferred Stock at a price of $5.00 per share before
reduction for issuance costs.
SERIES E
Oclassen is authorized to issue, and had issued 625,000 shares of Series E
Preferred Stock at a price of $12.00 per share before reduction for issuance
costs.
The rights of the preferred stockholders as to dividends, redemption,
liquidation and conversion are defined by Oclassen's Certificate of
Incorporation and are summarized as follows:
The shares of Series B, C, D and E Preferred Stock had liquidation
preferences which equal the sum of the original issue price plus any unpaid
cumulative dividends, whether or not declared. The priority of liquidation and
dividend preferences was first Series E, Series D, Series C and Series B
Preferred Stock as a group, then Series A Preferred Stock and then Common Stock
to the extent of book value per share, after which preferred and common
stockholders share ratably. The priority of liquidation in a merger, acquisition
or sale of substantially all of Oclassen's assets is as above except that after
the Series A preference, common stockholders share equally with preferred
stockholders on an "as if converted to common" basis. Annual dividends of $0.96,
$0.40, $0.35, $0.18 and $0.20 per share are payable to Series E, Series D,
Series C, Series B and Series A Preferred Stockholders, respectively, in
preference to any dividend distributions to common stockholders. The Series E,
Series D, Series C and Series B preferred stock dividends are noncumulative
through April 22, 1994, and are cumulative thereafter. These amounts through
December 31, 1996 totaled $7 million and are included in the accompanying
balance sheets in mandatorily redeemable preferred stock. No dividends have been
declared through December 31, 1996.
F-22
<PAGE> 32
WATSON PHARMACEUTICALS, INC.
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS
Net income available to common stockholders represents net income as
adjusted to reflect accrued dividends and the accretion of issuance costs
related to mandatorily redeemable Preferred Stock.
9. STOCKHOLDERS' EQUITY
PREFERRED STOCK
In 1992, the Company authorized 2,500,000 shares of no par preferred stock.
The Board of Directors has the authority to fix the rights, preferences,
privileges and restrictions, including dividend rates, conversion and voting
rights, terms and prices of redemptions and liquidation preferences without vote
or action by the stockholders. At December 31, 1996, no preferred stock was
issued.
Oclassen is authorized to issue 1 million shares and has issued 500,000
shares of Series A Preferred Stock at a price of $2.00 per share. The Series A
Preferred Stock dividends are noncumulative. As discussed in Note 2, in
connection with Watson's acquisition of Oclassen, these shares were voluntarily
converted into Oclassen common stock and immediately thereafter exchanged,
pursuant to the exchange ratio defined in the merger agreement, for 184,850
shares of Watson Common Stock. In addition, Oclassen is authorized to issue 1
million shares of preferred stock, which is undesignated as to series.
STOCK OPTION PLANS
The Company has adopted several stock option plans that authorize the
granting of options to employees and directors to purchase the Company's common
stock subject to certain conditions. The options are generally granted at the
fair market value of the shares underlying the options at the date of the grant,
become exercisable over a five year period and expire in ten years. In
conjunction with the mergers with Circa and Oclassen, certain stock option plans
were assumed (the "assumed options") by the Company. The assumed options were
adjusted by the respective exchange ratio as specified in each respective merger
agreement. No additional options will be granted under any of the assumed
options plans.
As discussed in Note 1, the Company has applied the disclosure-only
provision SFAS 123. Had compensation cost been determined based on the fair
value at the grant date consistent with the provisions of SFAS 123, the
Company's net income and earnings per share would have been reduced to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
-------------------
1996 1995
------- -------
(IN THOUSANDS,
EXCEPT SHARE
AMOUNTS)
<S> <C> <C>
Net income
As reported............................................ $77,756 $50,517
------- -------
Pro forma.............................................. 70,331 47,295
------- -------
Primary earnings per share
As reported............................................ $ 1.94 $ 1.27
Pro forma.............................................. $ 1.80 $ 1.21
Fully diluted earnings per share
As reported............................................ $ 1.88 $ 1.27
Pro forma.............................................. $ 1.74 $ 1.21
------- -------
</TABLE>
The weighted-average fair value of each option has been estimated on the
date of grant using the Black-Scholes options-pricing model with the following
weighted-average assumptions used for the grants in 1996
F-23
<PAGE> 33
WATSON PHARMACEUTICALS, INC.
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and 1995, respectively: no dividend yield; expected volatility of 51% and 55%;
risk-free interest rate of 6.18% and 6.43%; and expected terms ranging from
approximately three to seven years. Weighted averages are used because of
varying assumed exercise dates.
A summary of the status of the Company's stock option plans as of December
31, 1996, 1995 and 1994, and for the years then ended is presented below (shares
in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------------
1996 1995 1994
------------------ ------------------ ------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ --------- ------ --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year........... 3,713 $20 2,635 $11 2,033 $ 8
Granted.................................. 565 35 1,777 31 910 15
Exercised................................ (503) 10 (599) 13 (123) 7
Canceled................................. (334) 31 (100) 22 (185) 11
------ --- ------ --- ------ ---
Outstanding at end of year................. 3,441 $21 (3,713) $20 2,635 $11
------ ------ ------
Options exercisable at year end............ 1,747 1,498 1,160
------ ------ ------
Weighted-average fair value of options
granted during the year.................. $17.62 $16.26 $8.23
------ ------ ------
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1996 (shares in thousands):
<TABLE>
<CAPTION>
WEIGHTED AVERAGE WEIGHTED AVERAGE
WEIGHTED AVERAGE EXERCISE PRICE EXERCISE PRICE
SHARES REMAINING OF SHARES SHARES OF SHARES
RANGE OF EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE OUTSTANDING EXERCISABLE EXERCISABLE
- ---------------------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$ 4 to $ 9.................. 1,269 2.3 $ 7 964 $ 7
$ 9 to $28.................. 758 6.9 $ 19 456 $ 18
$28 to $37.................. 1,058 8.7 $ 36 298 $ 36
$38 to $48.................. 356 9.1 $ 42 29 $ 39
----- --- --- ----- ---
$ 4 to $48.................. 3,441 6.7 $ 25 1,747 $ 16
</TABLE>
STOCK PURCHASE PLAN
During 1987, Oclassen adopted the 1987 Stock Purchase Plan (the "1987
Purchase Plan") under which it had reserved 469,069 shares, as converted
pursuant to the exchange ratio defined in the Company's merger agreement with
Oclassen, for sale to employees, directors and consultants. The terms of the
1987 Purchase Plan provide that the price of the shares to be purchased under
the 1987 Purchase Plan shall be determined by Oclassen's Board of Directors,
provided that such price shall not be less than fair market value of Oclassen
common stock at the date of grant. In the event of voluntary or involuntary
termination of employment, Oclassen retains the right to repurchase, for a
period of 60 days after such termination, the unvested shares purchased under
the 1987 Purchase Plan at the original purchase price. Initial grants under the
1987 Purchase Plan generally vest at the rate of 25% at the end of the 12 month
period following commencement of employment, with the remaining balance vesting
ratably over the next 36 months. Subsequent grants under the 1987 Purchase Plan
generally vest ratably over 48 months following the date of the grant. At
December 31, 1996, there were no remaining shares of common stock available for
issuance under the 1987 Purchase Plan.
F-24
<PAGE> 34
WATSON PHARMACEUTICALS, INC.
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTES RECEIVABLE FROM STOCKHOLDERS
Notes receivable from stockholders relate to shares issued under the 1987
Purchase Plan, bear interest at rates ranging from 6.04% to 9.0% per annum, and
are generally due the earlier of four years from the date of issuance or the
date of the employee's termination.
10. LICENSE, ROYALTY AND CO-PROMOTION ARRANGEMENTS
Oclassen has entered into various license and royalty agreements which
provide Oclassen with certain rights to develop and market products using
certain technological and patent rights covered under the agreements. In
addition, such agreements require Oclassen to pay royalties on sales and certain
agreements contain requirements for development funding and/or minimum marketing
efforts to maintain exclusivity.
Beginning in 1996, Oclassen became obligated for minimum purchase
commitments of raw materials for one of its product lines. The commitment is for
approximately $690,000 annually through 2001.
In August, 1993, Oclassen terminated an agreement for the co-promotion of
one of its products. The termination agreement provided for a termination
payment of $1.2 million to be paid by Oclassen in eight equal quarterly
installments of $150,000 through July 1, 1995. The termination payment was
charged to expense upon signing of the termination agreement. The termination
agreement also includes a noncompete provision which expired July 1, 1995.
During August 1992, Oclassen entered into development and marketing
agreements with another company (the "Licensee") concerning the use of an oral
formulation of FIAU for the treatment of hepatitis-B infections. Under terms of
the agreements, all funding for the worldwide development of oral FIAU for the
treatment of hepatitis-B, would be paid by the Licensee. Additionally, the
Licensee would market any resulting products outside the United States, would
pay development milestone payments to Oclassen and would pay royalties to
Oclassen based on sales outside the United States. In connection with the matter
discussed further in Note 12, all activity related to these agreements has
ceased. Contract obligations and reserves of approximately $2.7 million, net of
any contractual and legal obligations, will be relieved upon the resolution of
any uncertainties related to the agreements or their termination.
During February 1995, in connection with renegotiating one of its license
and supply agreements, Oclassen acquired the Monodox(R) New Drug Application
("NDA") for $2.0 million and recorded the purchase as an intangible asset. The
Monodox(R) NDA is being amortized over a six-year period. In addition to the
NDA, Oclassen received various product cost reductions. The term of the new
supply agreement is through February 1, 2000, and shall be automatically renewed
in one-year increments thereafter unless terminated by one of the parties to the
agreement.
In May 1996, Oclassen entered into an agreement to in-license patents and
products based on the use of 5-methoxypsoralen for the treatment of psoriasis
and vitiligo. The agreement provides for payment by Oclassen of technology
transfer fees aggregating up to $1.1 million if certain technology development
milestones are achieved. Additionally, Oclassen is required to pay royalties
based on net sales during the term of the agreement.
In June 1996, Oclassen in-licensed rights to a topical iodine
anti-microbial product line technology which is currently under development.
Oclassen paid $500,000 upon the execution of the agreement, which is included in
research and development expenses. The agreement provides for payment by
Oclassen of up to $8 million if certain milestones are achieved, and royalties
based upon net sales during the term of the agreement.
F-25
<PAGE> 35
WATSON PHARMACEUTICALS, INC.
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. RELATED PARTIES
The Company leases a portion of its facilities from related parties. The
aggregate rent expense for 1996, 1995 and 1994 was $432,000, $432,000 and
$550,000 respectively, and was allocated to cost of revenues, research and
development and selling, general and administrative expenses.
In 1989, the Company assigned its purchase rights under a lease for office
and manufacturing facilities to a partnership in which the Company's Chief
Executive Officer and certain family members are the general partners. The
partnership purchased the facilities and assumed the lease with the Company. In
April 1994, the Company acquired the manufacturing and office facilities from
the family partnership for a purchase price of $3.6 million which approximated
the fair market value at the time of sale.
At December 31, 1996, a receivable of approximately $2.4 million was due
from the President of the Company. This receivable arose from an agreement
whereby the Company makes the payment of applicable income taxes due from the
grant of restricted stock to the President. When the restricted stock vests and
is eligible to be sold, the receivable balance will be repaid.
In March 1994, Oclassen made a $700,000 interest bearing, secured loan (the
"1994 Loan") to its President and Chief Executive Officer. In June 1996,
Oclassen restructured this loan whereby $200,000 of the principal balance, plus
accrued interest, was repaid and the remaining $500,000 principal balance was
replaced with a new $500,000 loan (the "1996 Loan"). The 1996 Loan bears
interest at 3.94 percent per annum, with accrued interest payable monthly, and
is secured by real property. The 1996 Loan matures on the earlier of (a) June 1,
1999, (b) the termination of employment of Oclassen's President and Chief
Executive Officer, or (c) within 180 days of the sale of the real property
securing the loan.
12. COMMITMENTS AND CONTINGENCIES
FACILITY AND EQUIPMENT LEASES
The Company has entered into operating leases for certain of its facilities
and equipment. The terms of the operating leases for the Company's facilities
require the Company to pay property taxes and normal maintenance expenses, and
maintain minimum insurance coverage. Total rental expense for operating leases
was approximately $1.5 million, $1.5 million and $1.9 million for the years
ended December 31, 1996, 1995 and 1994, respectively.
At December 31, 1996, future minimum lease payments under all noncancelable
operating leases consist of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 (IN THOUSANDS)
--------------------------------------
<S> <C>
1997............................................................. $1,413
1998............................................................. 953
1999............................................................. 857
2000............................................................. 889
2001 and thereafter.............................................. 1,025
------
Total minimum lease payments........................... $5,137
======
</TABLE>
LEGAL MATTERS
In July 1995, Circa initiated discussions with the United States Department
of Justice as to the possible resolution of a long-standing open inquiry with
regard to possible violations of the False Claims Act in respect
F-26
<PAGE> 36
WATSON PHARMACEUTICALS, INC.
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of drugs sold prior to cessation of these product sales in 1990. Through these
discussions, the parties entered into a settlement agreement in March 1996.
Under the terms of this agreement, in March 1996, the Company paid $2.7 million
in settlement of all outstanding claims. The Company had established a reserve
at December 31, 1995 for the full amount of the settlement.
In November 1994, Circa settled its litigation with a former president, who
resigned in 1990. Under the terms of the agreement, the former president,
through an escrow agent, sold all of the 528,108 shares of Circa's common stock
owned by him. The proceeds from the sale of a substantial portion of such
shares, after payment of expenses and various taxes, were utilized to settle
Circa's claim that his conduct damaged Circa and also to reimburse Circa for
legal expenses paid on his behalf in past years. Circa recognized a gain on
settlement of $2.3 million. In 1994, Circa made cash settlement payments
aggregating $8.9 million, which amounts had been provided for in prior years.
Such payments related to civil anti-trust claims settled in 1994 and other
claims settled in prior years.
During 1993, clinical trials involving a compound that was licensed to
another company by Oclassen in 1992 were halted as a result of serious adverse
events. The potential exists for product liability claims against Oclassen, and
several claims have been filed through December 31, 1996. At this time, the
financial obligation related to this matter remains uncertain. However, Oclassen
believes, based on the opinion of outside counsel, that the outcome of this
matter will not have a material effect on Oclassen's financial position or
results of operations.
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.
F-27
<PAGE> 37
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The only expenses incurred in connection with this transaction are the
following, all of which are estimated.
<TABLE>
<S> <C>
Printing expenses......................................................... $ 5,000
Accounting fees and expenses.............................................. $12,000
Legal fees and expenses................................................... $ 5,000
--------
Total................................................................... $22,000
========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 78.751 of the Nevada Revised Statutes authorizes a corporation,
under certain circumstances, to indemnify its directors and officers (including
reimbursement for expenses incurred). The Registrant has provided for
indemnification to the fullest extent permitted by the provisions of the Nevada
statute in its Articles of Incorporation and Bylaws.
The Registrant maintains a directors' and officers' liability insurance
policy that, subject to the terms and conditions of the policy, insures the
directors and officers of the Registrant against losses up to $20,000,000 in the
aggregate (subject to a $250,000 retention per loss) arising from any wrongful
act (as defined by the policy) in his or her capacity as a director or officer.
The policy reimburses the Registrant for amounts which lawfully indemnifies the
Registrant or as required or permitted by law to indemnify its directors and
officers.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<S> <C> <C>
4.1 -- Articles of Incorporation of the Registrant, as amended (incorporated by reference
to Exhibit 3.1 to 33-46229)
4.2 -- Bylaws of the Registrant, as amended (incorporated by reference to Exhibit 3.2 to
33-46229)
*4.3 -- Agreement and Plan of Merger among the Registrant, Dolphin Acquisition Corp. and
Royce Laboratories, Inc. dated as of December 24, 1996, as amended
4.4 -- Specimen Warrant Certificate for the Series F Warrants (incorporated by reference
to Exhibit 4.2 to Amendment No. 1 to Royce's Registration Statement on Form S-2
dated January 27, 1994, registration number 33-72276)
4.5 -- Form of Warrant Agreement for the Series F Warrants (incorporated by reference to
Exhibit 4.3 to Amendment No. 1 to Royce's Registration Statement on Form S-2 dated
January 27, 1994, registration number 33-72276)
4.6 -- Placement Agreement Warrant issued to Gruntal in connection with 1995 private
placement (incorporated by reference to Exhibit 10.13 to Royce's Registration
Statement on Form S-3 dated August 18, 1995, registration number 33-61917)
4.7 -- Warrant issued to Gruntal (incorporated by reference to Exhibit 10.12 to Royce's
Registration Statement on Form S-3 dated December 9, 1994, registration number
33-84260)
*4.8 -- Stock Option Agreement made as of February 25, 1995 between Royce and Major
Pharmaceuticals, Inc.
*4.9 -- Non-Incentive Stock Option Agreement made as of February 1, 1996 between Royce and
P&PSI
*5.1 -- Opinion of D'Ancona & Pflaum
**23.1 -- Consent of Price Waterhouse LLP (Costa Mesa)
**23.2 -- Consent of Deloitte & Touche LLP
**23.3 -- Consent of Coopers & Lybrand L.L.P.
**23.4 -- Consent of Price Waterhouse LLP (Miami)
**23.5 -- Consent of Arthur Andersen LLP
**23.6 -- Consent of D'Ancona & Pflaum
*24.1 -- Power of Attorney
</TABLE>
II-1
<PAGE> 38
- ---------------
* Previously filed as Exhibits 2.1, 10.7, 10.8, 5.1 and 24.1 to this
Registration Statement on Form S-4, Reg. No. 333-20029.
** Filed herewith.
(b) Financial Statement Schedules
Supplementary Valuation and Qualifying Accounts.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set
forth in the Registration Statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration
Statement or any material change to such information in the
Registration Statement;
Provided, however, that paragraphs (1)(i) and (1)(ii) do not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed with or furnished to the
Commission by the Registrant pursuant to section 13 or section 15(d) of the
Securities Exchange Act of 1934 that are incorporated by reference in the
Registration Statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the
termination of the offering.
(4) That, for purposes of determining any liability under the Securities
Act of 1933, each filing of the Registrant's annual report pursuant to
section 13(a) or section 15(d) of the Securities Exchange Act of 1934
that is incorporated by reference in the registration statement shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions (see Item 15 above), or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
II-2
<PAGE> 39
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained
in a form of prospectus filed by the Registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to
be part of this Registration Statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
II-3
<PAGE> 40
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Post-Effective
Amendment No. 1 on Form S-3 to its Registration Statement on Form S-4 to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Corona, State of California, on this 11th day of April, 1997.
WATSON PHARMACEUTICALS, INC.
(Registrant)
By: /s/ Allen Chao
------------------------------------
Allen Chao, Ph.D.
Chairman and Chief Executive Officer
(Principal Executive and Financial
Officer)
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 1 on Form S-3 to Registration Statement on Form S-4
has been duly signed on April 11, 1997 by the following persons in the
capacities indicated:
<TABLE>
<CAPTION>
SIGNATURES TITLES DATE
- --------------------------------------------- ------------------------------- ---------------
<C> <S> <C>
/s/ Allen Chao Chairman and Chief Executive April 11, 1997
- --------------------------------------------- Officer (Principal Executive
Allen Chao, Ph.D. and Financial Officer)
* President and Director April 11, 1997
- ---------------------------------------------
Melvin Sharoky, M.D.
* Vice President Corporate April 11, 1997
- --------------------------------------------- Controller (Principal
Chato Abad Accounting Officer)
* Secretary and Director April 11, 1997
- ---------------------------------------------
Michel J. Feldman
* Director April 11, 1997
- ---------------------------------------------
Alec D. Keith, Ph.D.
* Director April 11, 1997
- ---------------------------------------------
Albert F. Hummel
* Director April 11, 1997
- ---------------------------------------------
Michael Fedida
* Director April 11, 1997
- ---------------------------------------------
Ronald R. Taylor
By: /s/ Allen Chao
- ---------------------------------------------
Attorney in fact
</TABLE>
II-4
<PAGE> 41
WATSON PHARMACEUTICALS, INC.
SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND DEDUCTIONS/ END OF
OF PERIOD EXPENSES OTHER PERIOD
------------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
YEAR END 1996:
Allowance for doubtful accounts............. $1,350 $1,579 $ (1,145) $1,784
Product return allowance.................... $ 785 $3,576 $ (3,254) $1,107
YEAR END 1995:
Allowance for doubtful accounts............. $1,083 $ 400 $ (133) $1,350
Product return allowance.................... $ 263 $3,033 $ (2,511) $ 785
YEAR END 1994:
Allowance for doubtful accounts............. $ 574 $ 759 $ (250) $1,083
Product return allowance.................... $ 164 $1,704 $ (1,605) $ 263
</TABLE>
II-5
<PAGE> 42
EXHIBIT INDEX
ITEM 16. EXHIBITS.
<TABLE>
<S> <C> <C>
4.1 -- Articles of Incorporation of the Registrant, as amended (incorporated by reference
to Exhibit 3.1 to 33-46229)
4.2 Bylaws of the Registrant, as amended (incorporated by reference to Exhibit 3.2 to
33-46229)
*4.3 -- Agreement and Plan of Merger among the Registrant, Dolphin Acquisition Corp. and
Royce Laboratories, Inc. dated as of December 24, 1996, as amended
4.4 -- Specimen Warrant Certificate for the Series F Warrants (incorporated by reference
to Exhibit 4.2 to Amendment No. 1 to Royce's Registration Statement on Form S-2
dated January 27, 1994, registration number 33-72276)
4.5 -- Form of Warrant Agreement for the Series F Warrants (incorporated by reference to
Exhibit 4.3 to Amendment No. 1 to Royce's Registration Statement on Form S-2 dated
January 27, 1994, registration number 33-72276)
4.6 -- Placement Agreement Warrant issued to Gruntal in connection with 1995 private
placement (incorporated by reference to Exhibit 10.13 to Royce's Registration
Statement on Form S-3 dated August 18, 1995, registration number 33-61917)
4.7 -- Warrant issued to Gruntal (incorporated by reference to Exhibit 10.12 to Royce's
Registration Statement on Form S-3 dated December 9, 1994, registration number
33-84260)
*4.8 -- Stock Option Agreement made as of February 25, 1995 between Royce and Major
Pharmaceuticals, Inc.
*4.9 -- Non-Incentive Stock Option Agreement made as of February 1, 1996 between Royce and
P&PSI
*5.1 -- Opinion of D'Ancona & Pflaum
**23.1 -- Consent of Price Waterhouse LLP (Costa Mesa)
**23.2 -- Consent of Deloitte & Touche LLP
**23.3 -- Consent of Coopers & Lybrand L.L.P.
**23.4 -- Consent of Price Waterhouse LLP (Miami)
**23.5 -- Consent of Arthur Andersen LLP
**23.6 -- Consent of D'Ancona & Pflaum
*24.1 -- Power of Attorney
</TABLE>
- ---------------
* Previously filed as Exhibits 2.1, 10.7, 10.8, 5.1 and 24.1 to this
Registration Statement on Form S-4, Reg. No. 333-20029.
** Filed herewith.
II-6
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of this Registration Statement on Form S-3 and the Prospectus
Statement/Prospectus of the Registration Statement on Form S-4 (No. 333-20029)
of our report dated February 7, 1997, except as to Note 2, which is as of
February 27, 1997, appearing on page F-2 of the Watson Pharmaceuticals, Inc.
("Watson") Annual Report on Form 10-K for the year ended December 31, 1996 and
to the incorporation by reference in the Registration Statement on Form S-8
of Watson of our report dated April 10, 1997 appearing on page F-2 of this
Form S-3. We also consent to the reference to us under the heading "Experts."
PRICE WATERHOUSE LLP
Costa Mesa, California
April 11, 1997
<PAGE> 1
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the inclusion and incorporation by reference in this
Post-Effective Amendment No. 1 on Form S-3 to Registration Statement No.
333-20029 of Watson Pharmaceuticals, Inc. on Form S-4 of our report dated
February 6, 1997 (except for Note 12, as to which the date is March 7, 1997)
relating to the consolidated financial statements of Somerset Pharmaceuticals,
Inc. and subsidiaries as of December 31, 1996 and 1995 and for each of the
three years in the period then ended, appearing in the Annual Report on
Form 10-K of Watson Pharmaceuticals, Inc. for the year ended December 31,
1996 and to the reference to us under the heading "Experts" in the Prospectus,
which is part of such Registration Statement.
/s/ Deloitte & Touche LLP
Pittsburgh, Pennsylvania
April 10, 1997
<PAGE> 1
Exhibit 23.3
CONSENT OF COOPERS & LYBRAND L.L.P.
We consent to the incorporation by reference in this Post-Effective Amendment
No. 1 of Watson Pharmaceuticals, Inc. on Form S-3 to Form S-4 (File No.
333-20029-01), of our report dated February 7, 1995, on our audit of the
consolidated financial statements of Circa Pharmaceuticals, Inc. for the year
ended December 31, 1994. We also consent to the reference to our Firm under the
caption "Experts."
COOPERS & LYBRAND L.L.P.
/s/ Coopers & Lybrand L.L.P.
Melville, New York
April 10, 1997
<PAGE> 1
EXHIBIT 23.4
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of this Post Effective Amendment No. 1 on Form S-3 to the
Registration Statement on Form S-4 of Watson Pharmaceuticals, Inc. of our report
dated February 19, 1997, which appears on page F-1 of the Annual Report on Form
10-K of Royce Laboratories, Inc. for the year ended December 31, 1996. We also
consent to the reference to us under the heading "Experts" in such Prospectus.
/s/ PRICE WATERHOUSE LLP
- -------------------------
PRICE WATERHOUSE LLP
Miami, Florida
April 11, 1997
<PAGE> 1
EXHIBIT 23.5
CONSENT OF ARTHUR ANDERSEN LLP
As independent public accountants, we hereby consent to the use of our
reports (and to all references to our Firm) included in or made a part of this
registration statement.
ARTHUR ANDERSEN LLP
Oakland, California
April 10, 1997
<PAGE> 1
EXHIBIT 23.6
April 11, 1997
Watson Pharmaceuticals, Inc. (the "Company")
311 Bonnie Circle
Corona, CA 91720
Gentlemen:
We hereby consent to the references to our firm under the heading "Legal
Matters" in the Prospectus included in this Post-Effective Amendment No. 1 to
the Company's Registration Statement on Form S-4, No. 333-20029.
Very truly yours,
D'ANCONA & PFLAUM
By /s/ MERRILL A. FREED
------------------------------------
Merrill A. Freed, a Partner
