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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K/A
AMENDMENT NO. 1
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
COMMISSION FILE NUMBER 0-20045
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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.)
311 BONNIE CIRCLE
CORONA, CA 91720
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
(909) 270-1400
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $.0033 PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
AGGREGATE MARKET VALUE, AS OF MARCH 15, 1996, OF COMMON STOCK HELD BY
NON-AFFILIATES OF THE REGISTRANT: $1,333,452,334 BASED ON THE LAST REPORTED SALE
PRICE ON THE NASDAQ NATIONAL MARKET SYSTEM.
NUMBER OF SHARES OF COMMON STOCK OUTSTANDING ON MARCH 15, 1996: 36,607,903
DOCUMENTS INCORPORATED BY REFERENCE
The registrant filed a definitive Proxy Statement pursuant to Regulation
14A within 120 days of the end of the fiscal year ended December 31, 1995.
Portions of such Proxy Statement are incorporated by reference in Part III of
this report.
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<PAGE> 2
ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA(1)
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Product sales............................. $130,688 $ 93,649 $ 70,838 $ 34,773 $ 30,802
Royalty income............................ 22,247 1,209
-------- -------- -------- -------- --------
Total revenues......................... 152,935 94,858 70,838 34,773 30,802
-------- -------- -------- -------- --------
Cost of revenues.......................... 64,996 48,972 39,207 23,291 21,506
Research and development.................. 18,573 18,980 15,085 8,217 9,556
Selling, general and administrative....... 17,030 13,342 15,682 14,944 17,206
Merger expenses(3)........................ 13,939
-------- -------- -------- -------- --------
Total operating expenses............... 114,538 81,294 69,974 46,452 48,268
-------- -------- -------- -------- --------
Operating income (loss)................ 38,397 13,564 864 (11,679) (17,466)
-------- -------- -------- -------- --------
Equity in earnings of joint ventures...... 22,766 24,968 24,688 20,712 18,392
Investment and other income(2)............ 11,594 6,542 16,879 2,871 9,657
Gain from (provision for) legal
settlements(4)......................... 2,299 (6,297) (73,383)
Partnership loss(5)....................... (7,644) (15,598)
-------- -------- -------- -------- --------
34,360 33,809 27,626 7,985 (45,334)
-------- -------- -------- -------- --------
Income (loss) before provision
(benefit) for income taxes........... 72,757 47,373 28,490 (3,694) (62,800)
Provision (benefit) for income taxes...... 24,867 10,828 (21,927) 2,396 (7,596)
-------- -------- -------- -------- --------
Net income (loss)...................... $ 47,890 $ 36,545 $ 50,417 $ (6,090) $(55,204)
======== ======== ======== ======== ========
PER SHARE DATA:
Earnings per common and common equivalent
share(6)............................... $ 1.29 $ 1.00 $ 1.42 $ (0.18) $ (1.72)
======== ======== ======== ======== ========
Weighted average number of common and common
equivalent shares outstanding(6).......... 37,143 36,515 35,504 32,938 32,036
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Current assets.............................. $197,634 $172,912 $155,025 $ 57,118 $ 40,987
Working capital............................. 168,812 154,661 131,943 31,534 23,618
Total assets................................ 322,121 262,316 235,672 130,516 122,238
Long-term debt and capitalized lease
obligations............................... 3,577 5,058 2,143 3,991 2,736
Deferred partnership liability.............. 14,033 15,242 7,598
Total stockholders' equity.................. 289,035 223,370 185,081 77,872 81,426
</TABLE>
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(1) The Company merged with Zetachron in October 1991 and Circa in July 1995.
The transactions were accounted for as poolings-of-interests, and
accordingly, the consolidated financial data presented includes the accounts
of Zetachron and Circa for all periods presented.
(2) Included in investment and other income for the years ended December 31,
1995, 1994, 1993, 1992 and 1991 were gains from the sales of the common
stock of Marsam Pharmaceuticals of $6.2 million, $3.2 million, $14.5
million, $1.1 million and $1.9 million, respectively. The Company disposed
of its investment in Marsam during 1995.
1
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Company has historically derived a substantial portion of its revenues
from the manufacture and sale of off-patent pharmaceutical products. While this
continues to be the primary revenue source, certain developments have occurred
which have augmented the Company's revenue mix in 1995.
In 1995, sales of off-patent products accounted for approximately 85.5% of
total revenues; royalty income accounted for 14.5% of total revenues. In 1994,
off-patent product sales accounted for approximately 99% of total revenues;
royalty income accounted for the remaining 1%. In 1993, product sales of
off-patent medications accounted for approximately 100% of total revenues. The
significant change in the revenue mix from 1994 to 1995 was largely due to an
increase in the contractual royalty rate from 1% in 1994 to 20% in 1995 earned
by the Company on sales of Dilacor XR(R) by Rhone-Poulene Rorer, Inc. ("RPR").
Dilacor XR(R) lost patent exclusivity in May 1995. As a result, royalty income
may decline as competitive generic versions of this drug enter the market place.
In 1991, the Company expanded its work on the development of advanced drug
delivery systems with the acquisition of Zetachron, Inc., a research and
development organization. In 1995, the Company merged Zetachron into its
wholly-owned subsidiary, Watson Laboratories. Research in the advanced drug
delivery area continues, although these activities have not generated
significant revenues for the Company to date. The drug delivery systems under
development employ various routes of administration, including oral and vaginal.
These systems potentially could control and improve the absorption of selected
drugs in the blood stream, improve dose reliability, reduce side effects and
increase patient convenience and compliance. Management believes that a
significant market exists for drug delivery systems that will enhance and
simplify the therapeutic benefits to the patient. Novel drug delivery systems
have proven they can provide the cost-effectiveness and improved therapeutic
profiles that translate into added-value for today's patient. Moreover, many of
these systems offer the clear differentiation and extended patent protection
needed to shield existing products from generic competition.
In July 1995, the Company strengthened and diversified its revenue base
through a merger with Circa Pharmaceuticals, Inc. ("Circa"). The merger,
accounted for as a pooling-of-interests, enhanced the Company's manufacturing
capabilities and increased its product development program, particularly in the
area of proprietary products. Prior to Watson's merger with Circa, in February
1990, as a result of an investigation by the United States Food and Drug
Administration ("FDA"), Circa ceased manufacturing and marketing all
pharmaceutical products. This investigation was a result of Circa's
non-compliance with certain FDA rules and regulations. Circa was restricted by
the FDA from obtaining scientific review of its applications. In April 1993,
following the completion of a comprehensive three-year rehabilitation program,
the FDA notified Circa that all regulatory restrictions were lifted and that it
was in compliance with "current Good Manufacturing Practices". As a result,
Circa began operating under the standard framework of the FDA. In November 1994,
Circa received its first product approval from the FDA since 1989. Such events
were significant, and if they were to recur, would have a material adverse
effect on the Company's financial position and results of operations. The
Company strictly adheres to FDA requirements, as well as requirements of all
other applicable government agencies. Accordingly, management has no reason to
believe that similar events will occur in the future.
The Company owns a 50% equity interest in Somerset Pharmaceuticals, Inc.
("Somerset"), which exclusively markets Eldepryl(R) for the treatment of
Parkinson's disease. The Company recorded equity in earnings of this joint
venture of $24.8 million in 1995. Exclusivity expires for Eldepryl(R) in June
1996. The Company's earnings from Somerset in 1997 may decrease by as much as
approximately 30% to 50% due to decreased sales of Eldepryl(R) and increased
research and development expenditures in support of the Phase III clinical
trials on a transdermal Eldepryl(R) patch.
In 1989, Circa and RPR were partners in the development of Dilacor XR(R).
In connection with the Dilacor XR(R) product the Company incurred a liability to
the partnership reflecting the Company's share of development and operating
costs. At December 31, 1993, the liability to the partnership was $15.2 million.
The partnership agreement was amended in April 1993, so that after September
1993 the Company earns a royalty from RPR's sales of Dilacor XR(R). The amended
partnership agreement also provides that all royalties earned will be used first
to offset the partnership liability. As royalties were earned in 1994 and 1995,
the partnership liability was reduced per the terms of this agreement. The
royalty revenues have been recorded gross of the partnership liability.
Dilacor XR(R) is used for the treatment of hypertension and angina. Royalty
income is determined based upon the market demand for the product, as evidenced
by prescriptions written, as defined. Revenues under this royalty agreement were
$22.2 million in 1995 and $1.2 million in 1994. As contractually specified, the
royalty percentage earned by Watson in 1994 on RPR's sales of Dilacor XR(R) was
1%, whereas in 1995 it was 20%. 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 Dilacor XR(R). However, if competitors introduce generic
versions of this drug, sales of Dilacor XR(R) are likely to decrease, resulting
in a corresponding decrease in the Company's royalty income. However, it is the
Company's intent to launch a generic Dilacor XR(R) as competition intensifies.
The future generic Dilacor XR(R) profit split is expected to be shared equally
by both Watson and RPR. Actual revenues, costs and profits, however, from any
future collaboration, if any, cannot be determined at this time.
2
<PAGE> 4
The Company continues to expand its research and development efforts in the
area of proprietary product development through joint ventures, product
acquisitions and strategic alliances. The Company also continues to seek
opportunities to broaden its technology platform and to invest in new products,
technologies or businesses that are consistent with its strategy to focus on
niche or technically difficult to duplicate products. This strategy was
evidenced by the Company's increased investment in Andrx Corporation ("Andrx"),
a company engaged in the development of advanced controlled-release delivery
systems for certain orally-administered drugs. In October 1995, the Company
purchased additional Andrx common stock for approximately $15.6 million,
increasing its ownership to 19.5% of the total outstanding common stock of
Andrx.
The Company's future results of operations will depend to a significant
extent upon its ability to introduce new off-patent and proprietary
pharmaceutical products. Future operating results may vary significantly on an
annual or quarterly basis depending on the timing of, and the Company's ability
to obtain, FDA approvals of ANDAs and NDAs for such products and FDA approvals
for shipment of such products. Newly introduced off-patent products with limited
or no off-patent competition are typically sold at higher prices, often
resulting in increased gross profit margins. As competition from other
manufacturers intensifies, selling prices typically decline. The Company's
future operating results may also be affected by a variety of additional
factors, including customer purchasing practices and changes in the degree of
competition affecting the Company's products. The loss of exclusivity with
respect to Eldepryl(R) and Dilacor XR(R) and/or the introduction by other
companies of additional competitive products, could have a material adverse
effect on the financial condition of the Company.
QUARTERLY FLUCTUATIONS
The Company's results of operations on a quarterly basis have fluctuated in
the past, and may continue to fluctuate. The Company believes such fluctuations
are primarily due to new product introductions and to a variety of additional
factors including, without limitation, purchasing practices of the Company's
customers and changes in the degree of competition regarding the Company's
products.
To the extent that any of the Company's comments stated herein could be
deemed to be forward-looking statements, please see PART I, ITEM I of this Form
10-K for the year ended December 31, 1995, which contains certain statements to
the effect that the Company is subject to certain risks and uncertainties,
including changing market conditions, the availability and cost of raw
materials, the impact of competitive products and pricing, and the timely
development, FDA approval and market acceptance of the Company's products.
3
<PAGE> 5
RESULTS OF OPERATIONS
The following table represents selected components of the Company's results
of operations, in thousands of dollars and as percentages of revenues. The table
reflects the Company's merger with Circa for all periods presented.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------
1995 1994 1993
------------------ ----------------- ------------------
$ % $ % $ %
-------- ----- ------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Product sales.................... $130,688 85.5% $93,649 98.7% $ 70,838 100.0%
Royalty income................... 22,247 14.5 1,209 1.3
-------- ----- ------- ----- ------- -----
152,935 100.0 94,858 100.0 70,838 100.0
-------- ----- ------- ----- ------- -----
Operating expenses:
Cost of revenues................. 64,996 42.6 48,972 51.6 39,207 55.4
Research & development........... 18,573 12.1 18,980 20.0 15,085 21.3
Selling, general &
administrative................ 17,030 11.1 13,342 14.1 15,682 22.1
Merger expenses.................. 13,939 9.1
-------- ----- ------- ----- ------- -----
114,538 74.9 81,294 85.7 69,974 98.8
-------- ----- ------- ----- ------- -----
Operating income.............. 38,397 25.1 13,564 14.3 864 1.2
Other income:
Equity in earnings from joint
ventures...................... 22,766 14.9 24,968 26.3 24,688 34.9
Investment and other income,
net........................... 11,594 7.6 8,841 9.3 2,938 4.1
-------- ----- ------- ----- ------- -----
34,360 22.5 33,809 35.6 27,626 39.0
-------- ----- ------- ----- ------- -----
Income before provision (benefit)
for income taxes.............. 72,757 47.6 47,373 49.9 28,490 40.2
Provision (benefit) for income
taxes............................ 24,867 16.3 10,828 11.4 (21,927) (31.0)
-------- ----- ------- ----- ------- -----
Net income............... $ 47,890 31.3% $36,545 38.5% $ 50,417 71.2%
======== ===== ======= ===== ======= =====
</TABLE>
YEARS ENDED DECEMBER 31, 1995 AND 1994
Revenues for the year ended December 31, 1995 were $152.9 million compared
to $94.9 million for the year ended December 31, 1994, an increase of $58.0
million or 61.2%. The increase in revenues was composed of a $37.0 million
increase in product sales and a $21.0 million increase in royalty income. The
increase in product sales was due primarily to increased sales of the Company's
core products, defined as products available in the marketplace for one year or
longer. In addition, the Company introduced eight products during 1995 which
accounted for $12.9 million in sales, or 9.9% of total 1995 product sales.
The increase in royalty income was attributable to an increase in market
demand for Dilacor XR(R) and to the increase in the royalty percentage on
prescriptions written for Dilacor XR(R) from 1% in 1994 to 20% in 1995. The
royalty percentage on Dilacor XR(R) will increase to 22% for prescriptions
written in the years ending December 31, 1997 through 2000 and then decline to
3% thereafter.
Cost of revenues increased $16.0 million to $65.0 million for the year
ended December 31, 1995 (an increase of 32.7%). Cost of revenues were 49.7% of
product sales in 1995 compared to 52.3% in 1994. This favorable decrease was due
to higher than average gross margins earned on certain core products and new
products introduced during 1995.
Research and development expenses were consistent with the prior year,
decreasing slightly from $19 million in 1994 to $18.6 million in 1995, despite
increasing research and development efforts in the area of proprietary
pharmaceuticals. Following the merger with Circa, the Company integrated the two
research and
4
<PAGE> 6
development departments into one, eliminating duplication and focusing efforts.
The Company expects that 1996 research and development expenses will be
consistent with 1995 research and development expenses.
Selling, general and administrative expenses increased 27.6% to $17.0
million for 1995 from $13.3 million in 1994. The increase in such expenses is
largely attributable to increased marketing and selling expenses associated with
new product introductions and an increase in administrative support due to the
overall growth of the Company. As a percentage of revenues, these costs
decreased from 14.1% to 11.1% from 1994 to 1995, which reflected management's
efforts to control costs. In addition, the Company's growth in revenues out
paced the growth in selling, general and administrative expenses.
Equity in earnings from joint ventures decreased 8.8% (or $2.2 million) to
$22.8 million in 1995 compared to $25.0 million in 1994. The two most
significant ventures included in this earnings amount are Somerset and ANCIRC, a
joint venture with Andrx. Equity in earnings from Somerset decreased slightly
from $25.1 million in 1994 to $24.8 million in 1995. The Company's portion of
ANCIRC's losses increased from $220,000 in 1994 to $1.7 million in 1995. In
October 1995, the Company amended its joint venture agreement with Andrx and
became equal partners in ANCIRC. Previously, the Company recognized 40% of the
costs and profits from ANCIRC.
In connection with the merger with Circa, the Company recorded a one-time
$13.9 million charge for costs incurred related to the merger. These costs
included investment banking fees and other costs related to the consolidation of
operations between the two companies. Included in investment and other income in
1995 was a $6.2 million gain from the sale of Marsam Pharmaceuticals, Inc.
("Marsam") common stock, a stock held for investment purposes, as compared to a
$3.2 million gain in 1994. During 1995, the Company disposed of its remaining
investment in Marsam common stock. In addition, during 1994, the Company
recognized a one-time gain from legal settlements of $2.3 million. The balance
of the increase in investment and other income in 1995 as compared to 1994, was
due to higher short-term interest rates on a larger base of invested cash.
The provision for income taxes increased to $24.9 million in 1995, compared
to $10.8 million in 1994. The effective income tax rates for the years ended
December 31, 1995 and 1994 were 34% and 23%, respectively. This increase was
primarily attributable to increased taxable income and the non-deductibility of
a significant portion of merger expenses recognized in 1995.
Net income increased to $47.9 million in 1995 from $36.5 million in 1994.
As a percentage of revenues, net income decreased to 31.3% in 1995 from 38.5%
principally due to the one-time merger expenses related to the merger with Circa
and the higher effective income tax rate in 1995. Exclusive of non-recurring
merger expenses of $13.9 million, a third quarter gain of $6.2 million from the
gain on sale of Marsam common stock and the income tax effect of such items, net
income for 1995 would have been $57.0 million or $1.54 per share.
YEARS ENDED DECEMBER 31, 1994 AND 1993
Revenues for the year ended December 31, 1994 were $94.9 million compared
to $70.8 million for the year ended December 31, 1993, an increase of $24.1
million or 34.0%. The increase in revenues was composed of a $22.8 million
increase in product sales and a $1.2 million increase in royalty income. The
increase in product sales was due primarily to the introduction of five new
products in 1994. The remaining portion of the increase stemmed from the sales
of core products. The increase in royalty income resulted from royalties on
sales of Dilacor XR(R) by RPR during 1994. The 1% royalty rate in 1994 generated
$1.2 million of royalty income.
Cost of revenues increased $9.8 million to $49.0 million for the year ended
December 31, 1994 (an increase of 25.0%). Cost of revenues were 52.3% of product
sales in 1994 compared to 55.4% in 1993. This favorable decrease was due to
higher than average gross margins earned on new products introduced in 1994 and
certain core products.
Research and development expenses increased 25.8% to $19.0 million for 1994
from $15.1 million for 1993. The increase was primarily due to the addition of
research personnel and increased usage of test chemicals for validation batches
as required by the FDA.
5
<PAGE> 7
Selling, general and administrative expenses decreased 14.9% to $13.3
million in 1994 from $15.7 million in 1993. The $2.4 million decrease in such
expenses was largely attributable to a reduction in the Company's 1994 legal
expenses due to the resolution of certain litigation matters.
Equity in earnings from joint ventures in 1994 increased slightly to $25.0
million from $24.7 million due primarily to earnings from Somerset. In 1993, the
Company recognized a loss from its partnership with RPR of $7.6 million. In
September 1993, the partnership agreement was amended to provide that the
Company would no longer share in profits and losses of the partnership and,
instead, earns royalties from the sales of Dilacor XR(R). The royalty rate
established in the amendment was 1% in 1994, 20% in 1995 and 1996, 22% from 1997
to 2000 and 3% thereafter. Royalties earned during 1994 were used to offset the
partnership liability, which was $14.0 million and $15.2 million at December 31,
1994 and 1993, respectively. Royalties earned in excess of this liability will
be remitted to the Company.
Investment and other income in 1994 was $6.5 million, a decrease of $10.3
million from the 1993 amount. This decrease was primarily attributable to the
fewer number of Marsam common shares sold in 1994, offset by increased interest
income on the invested proceeds from the Company's public offerings in 1993. The
1994 gain on sales of Marsam common stock was $3.2 million compared to $14.5
million in 1993. In addition, the Company recognized a one-time gain from legal
settlements of $2.3 million in 1994 as compared to a provision for legal
settlements of $6.3 million in 1993.
Income tax expense was $10.8 million, compared to an income tax benefit of
$21.9 million in 1993. The effective income tax rate in 1994 was 23%, compared
with an income tax benefit rate of 77% in 1993. As a result of the merger, the
1993 statement of income reflected the reduction in the valuation allowance
relating to Circa's net deferred tax asset balance at December 31, 1993. In
determining that the deferred tax asset was fully realizable by the combined
company, management considered the prior operating results of each company and
the future plans and expectations for the combined company.
Net income as a percentage of revenues decreased to 38.5% for 1994 from
71.2%, principally from the income tax benefit recorded in 1993, as discussed
above.
LIQUIDITY AND CAPITAL RESOURCES
As the Company has grown during the last three years, its overall liquidity
requirements have increased. The significant increase in accounts
receivable, inventories, and investment in property and equipment have been
financed primarily by cash flows from operating activities and from the
Company's public offerings in 1993. The net proceeds from these offerings were
used primarily for working capital and purchases of property and equipment. The
balance was invested in short-term investments during 1993, 1994 and 1995.
The Company's working capital increased from $154.7 million at December 31,
1994 to $168.8 million at December 31, 1995. This $14.1 million increase was
primarily due to increased cash flow from operations. Net cash provided by all
sources in 1995 was $21.0 million compared to $26.1 million in 1994. The
decrease was primarily attributable to the Company's $15.6 million additional
investment in Andrx, the reduction of the $14.0 million deferred partnership
liability and net changes in certain assets and liabilities. During 1994,
activities were financed primarily with $13.4 million provided by operations,
$8.0 million from the sale of the Company's interest in a joint venture and $5.0
million from bank borrowings.
The Company has experienced a significant increase in accounts receivable
balances over the last three years. This growth has been caused primarily by
increased product sales by the Company. The Company performs ongoing credit
evaluations of its customers and maintains reserves for potentially
uncollectible accounts. Actual losses have been within management's
expectations.
During 1995, the Company spent $22.6 million on property and equipment
additions and has budgeted approximately $14.0 million for such capital
expenditures in 1996.
At December 31, 1995, the Company had a note payable outstanding of
approximately $4.2 million. This is composed of a single, unsecured term loan
with interest at a fixed rate of 8.1% and payments due monthly through September
2001. In addition, a credit facility of $26.0 million is currently available to
the Company, composed of (i) a $10 million revolving, unsecured working capital
line of credit, (ii) a $6 million revolving, unsecured equipment loan and (iii)
a $10 million non-revolving, unsecured building improvement loan. The Company
has made no borrowings against this credit facility.
6
<PAGE> 8
Primarily as a result of funds from the 1993 public offerings and continued
cash flows from operations, the Company has cash and marketable securities of
$118.3 million at December 31, 1995. The Company anticipates that its current
cash balances and marketable securities together with: (a) net cash provided by
operating activities; and (b) amounts available under its bank financing
agreement will be sufficient to fund its short-term working capital requirements
and enable the Company to continue its operations on long-term basis. To the
extent that additional capital resources are required, such capital may be
raised through bank borrowings, equity offerings, or other means. The Company
regularly reviews potential opportunities to acquire or invest in technologies,
products or product rights. The Company also regularly reviews potential
acquisitions, investments or combinations involving businesses compatible with
its existing business. The Company could use sources other than cash, such as
issuance of debt or equity securities, to finance any such acquisition or
investment. If such an acquisition or investment was completed, the Company's
operating results and financial condition could change materially in future
periods.
Management believes inflation does not have, and has not had, a significant
impact on the Company's revenues or operations.
7
<PAGE> 9
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) 1. CONSOLIDATED FINANCIAL STATEMENTS
The following are included herein under Item 8:
Report of Independent Accountants
Consolidated Balance Sheets as of December 31, 1995 and 1994
Consolidated Statements of Income for the three years ended December 31,
1995.
Consolidated Statements of Stockholders' Equity for the three years ended
December 31, 1995.
Consolidated Statements of Cash Flows for the three years ended December
31, 1995.
Notes to Consolidated Financial Statements
(A) 2. FINANCIAL STATEMENT SCHEDULES:
II. Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable or the
required information is included in the Consolidated Financial Statements or
notes thereto.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- --------------------------------------------------------------------------------
<C> <C> <S>
*2.1 -- Agreement and Plan of Merger among the Registrant, Gum Acquisition Corp. and
Circa Pharmaceuticals, Inc., filed as Exhibit 2.1 to the Company's Registration
Statement on Form S-4 Reg. No. 33-60211 ("33- 60211") and hereby incorporated by
reference.
*3.1 -- Articles of Incorporation of the Company and all amendments thereto, filed as
Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1995 and hereby incorporated by reference.
*3.2 -- Bylaws of the Company, as amended as of July 18, 1995, filed as Exhibit 3.2 to
the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995
and hereby incorporated by reference.
*4.1 -- Amendment to loan agreement between the Company, its subsidiaries and Bank of
America NT & SA dated February 26, 1996.
*4.2 -- Loan Agreement between the Company, its subsidiaries and Bank of America NT & SA
dated August 19, 1994 filed as Exhibit 4.1 to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1994 and hereby incorporated by
reference.
*10.1 -- Lease between Westgate Associates and the Company dated October 1991 and
addendums thereto, filed as Exhibit 10.5 to the Company's Registration Statement
on Form S-1 Reg. No. 33-46229 ("33-46229") and hereby incorporated by reference.
*10.2 -- Industrial Real Estate Lease, as amended, dated August 8, 1995, between
Hsi-Hsiung Hsu Hwa Chao (Chao Family) Trust I and the Company, filed as Exhibit
10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1995 and hereby incorporated by reference.
*10.3 -- Amended Lease Agreement between Zetachron, Incorporated and Research Property
Associates dated February 1, 1983, filed as Exhibit 10.7 to 33-46229 and hereby
incorporated by reference.
*10.4 -- Grant of Option to Purchase Real Estate by and between Dr. Alec Keith, Mr.
Wallace C. Snipes and Zetachron, Incorporated dated July 1, 1987, filed as
Exhibit 10.8 to 33-46229 and hereby incorporated by reference.
*10.5 -- The Company's 1985 Stock Incentive Plan, filed as Exhibit 10.11 to 33-46229 and
hereby incorporated by reference.
</TABLE>
8
<PAGE> 10
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- --------------------------------------------------------------------------------
<C> <C> <S>
*10.6 -- 1991 Stock Option Plan of the Company as revised, filed as Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995 and
hereby incorporated by reference.
*10.7 -- 1995 Non-Employee Directors' Stock Option Plan, as amended, filed as Exhibit
10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended June
30, 1995 and hereby incorporated by reference.
*10.8 -- Form of the Company's Employee Invention, Confidential Information Agreement,
filed as Exhibit 10.22 to 33-46229 and hereby incorporated by reference.
*10.9 -- Purchase Agreement relating to the Company's purchase of 132 Business Center
Drive property, filed as Exhibit 10.15 to the Company's 1993 Annual Report on
Form 10-K and hereby incorporated by reference.
*10.10 -- Purchase and Sale Agreement between the Company, its subsidiaries and AETNA Real
Estate Associates dated October 18, 1994 regarding the acquisition of 311 Bonnie
Circle, Corona, California, filed as Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1994 and hereby
incorporated by reference.
*10.11 -- Senior Executive Employment Agreement dated as of May 29, 1995 between the
Company and Allen Chao, filed as Exhibit 10.1 to 33-60211 and hereby
incorporated by reference.
*10.12 -- Form of Senior Executive Employment Agreement dated as of May 29, 1995 between
the Company and David C. Hsia, filed as Exhibit 10.2 to 33-60211 and hereby
incorporated by reference.
*10.13 -- Form of Senior Executive Employment Agreement, dated as of May 29, 1995 between
the Company and Alec D. Keith, filed as Exhibit 10.3 to 33-60211 and hereby
incorporated by reference.
*10.14 -- Employment Agreement with Dr. Melvin Sharoky dated April 26, 1991 as amended
January 19, 1993 and July 17, 1995, filed as Exhibit 10.3 to the Company's
Quarter Report on Form 10-Q for the quarter ended June 30, 1995 and hereby
incorporated by reference.
11.1 -- Statement of computation of per share earnings.
*21.1 -- Subsidiaries of the Company.
23.1 -- Consent of Price Waterhouse LLP.
23.2 -- Consent of Deloitte & Touche LLP.
23.3 -- Consent of Coopers & Lybrand L.L.P.
27.1 -- Financial Data Schedule (EDGAR version only).
*99.1 -- Consolidated Financial Statements of Somerset Pharmaceuticals, Inc. and
Subsidiaries for the years ended December 31, 1995, 1994 and 1993.
</TABLE>
- ---------------
* Previously filed
9
<PAGE> 11
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this amended report to be
signed on its behalf by the undersigned, thereunto duly authorized.
WATSON PHARMACEUTICALS, INC.
(Registrant)
By: /s/ ALLEN CHAO, PH.D.
------------------------------------
Allen Chao, Ph.D.
Chairman and Chief Executive Officer
(Principal Executive and Financial
Officer)
Date: January 10, 1997
10
<PAGE> 12
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants..................................................... F-2
Consolidated Balance Sheets as of December 31, 1995 and 1994.......................... F-5
Consolidated Statements of Income for each of the three years in the period ended
December 31, 1995................................................................... F-6
Consolidated Statements of Stockholders' Equity for each of the three years in the
period ended December 31, 1995...................................................... F-7
Consolidated Statements of Cash Flows for each of the three years in the period ended
December 31, 1995................................................................... F-8
Notes to Consolidated Financial Statements............................................ F-10
Financial Statement Schedule:
II Valuation and Qualifying Accounts............................................... F-22
</TABLE>
All other schedules are omitted because they are not applicable or the
required information is included in the Consolidated Financial Statements or
notes thereto.
F-1
<PAGE> 13
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Watson Pharmaceuticals, Inc.
In our opinion, based upon our audits and the reports of other auditors,
the consolidated financial statements in the accompanying index on page F-1
present fairly, in all material respects, the financial position of Watson
Pharmaceuticals, Inc. and its subsidiaries at December 31, 1995 and 1994, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1995, 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 Pharmaceuticals, Inc. (Somerset), an entity which is 50%
owned by the Company. The Company's investment in Somerset aggregated
$25,741,000 and $22,554,000 at December 31, 1995 and 1994, respectively, and its
equity in the earnings of Somerset totaled $24,800,000, $25,100,000 and
$23,800,000 for the years ended December 31, 1995, 1994 and 1993, respectively.
In addition, we did not audit the financial statements of Circa Pharmaceuticals,
Inc. (Circa), a wholly owned subsidiary, as of December 31, 1994 and for
each of the two years in the period ended December 31, 1994, which statements
reflect total assets of $103,857,000 (includes $22,554,000 of investment in
Somerset) and net income of $17,259,000 and $8,395,000 (includes equity in the
earnings of Somerset of $25,100,000 and $23,800,000, respectively) for the years
ended December 31, 1994 and 1993, respectively. Those financial statements were
audited by other auditors whose reports thereon have been furnished to us, and
our opinion expressed herein, insofar as it relates to the amounts included for
Somerset and Circa, is based solely on the reports of each of the respective
other auditors. We conducted our audits of the consolidated financial statements
of Watson Pharmaceuticals, Inc. 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 respective reports of other auditors provide a reasonable basis
for the opinion expressed above.
PRICE WATERHOUSE LLP
Costa Mesa, California
February 5, 1996, except as to Note 11,
which is as of March 4, 1996
F-2
<PAGE> 14
[DELOITTE & TOUCHE LLP LETTERHEAD]
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, 1995 and 1994, and
the related consolidated statements of income, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1995. 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, 1995 and 1994, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1995 in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Pittsburgh, Pennsylvania
February 2, 1996
F-3
<PAGE> 15
[COOPERS & LYBRAND LETTERHEAD]
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Circa Pharmaceuticals, Inc.
We have audited the accompanying consolidated balance sheet of Circa
Pharmaceuticals, Inc. and Subsidiaries (the "Company") as of December 31, 1994,
and the related consolidated statements of operations, shareholders' equity and
cash flows for each of the two years in the period 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. The Company's investment in Somerset constitutes 22% of consolidated
total assets in 1994. In 1994 and 1993, the Company has recorded income from
Somerset of $25,089,000 and $23,787,000, respectively. 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 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, based on our audits and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Circa
Pharmaceuticals, Inc. and Subsidiaries as of December 31, 1994 and the
consolidated results of their operations and their cash flows for each of the
two years in the period ended December 31, 1994, in conformity with generally
accepted accounting principles.
As discussed in Notes 1 and 2, the Company changed its method of accounting for
investments in marketable securities effective January 1, 1994.
/s/ Coopers & Lybrand L.L.P.
Melville, New York
February 7, 1995.
F-4
<PAGE> 16
WATSON PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1994
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents (Note 1)......................... $ 92,214 $ 71,165
Marketable securities (Note 1)............................. 26,038 35,531
Accounts receivable, net of allowances for doubtful
accounts of $1,320 and $903 (Note 1).................... 25,081 16,128
Royalty receivable (Note 6)................................ 8,205
Inventories (Note 3)....................................... 22,637 16,361
Prepaid expenses and other current assets.................. 2,344 2,732
Current deferred tax assets (Note 7)....................... 21,115 30,995
------------ ------------
Total current assets............................... 197,634 172,912
Property and equipment, net (Note 3)......................... 69,999 54,115
Investments in joint ventures and other long-term investments
(Note 4)................................................... 49,355 31,824
Other assets................................................. 5,133 3,465
------------ ------------
Total assets....................................... $322,121 $262,316
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses (Note 3)............. $ 25,215 $ 17,610
Income taxes payable (Note 7).............................. 2,985
Current portion of long-term debt (Note 5)................. 622 641
------------ ------------
Total current liabilities.......................... 28,822 18,251
Long-term debt (Note 5)...................................... 3,577 5,058
Deferred partnership liability (Note 6)...................... 14,033
Other liabilities............................................ 687 1,604
------------ ------------
Total liabilities.................................. 33,086 38,946
------------ ------------
Commitments and contingencies (Note 10)
Stockholders' equity:
Preferred stock; no par; 2,500,000 shares authorized; none
outstanding (Note 8)....................................
Common stock; par value of $.0033; 100,000,000 shares
authorized; 36,368,725 and 35,782,704 shares issued and
outstanding, respectively (Note 8)...................... 120 118
Additional paid-in capital................................. 146,439 132,115
Retained earnings.......................................... 142,711 94,821
Unrealized holding gain (loss) on marketable securities.... 621 (870)
Unearned compensation-stock awards (Note 1)................ (856) (2,814)
------------ ------------
Total stockholders' equity......................... 289,035 223,370
------------ ------------
Total liabilities and stockholders' equity......... $322,121 $262,316
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 17
WATSON PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
1995 1994 1993
-------- ------- --------
<S> <C> <C> <C>
Revenues:
Product sales............................................. $130,688 $93,649 $ 70,838
Royalty income (Note 6)................................... 22,247 1,209
------- ------- --------
Total revenues.................................... 152,935 94,858 70,838
------- ------- --------
Operating expenses:
Cost of revenues (Note 9)................................. 64,996 48,972 39,207
Research and development (Note 9)......................... 18,573 18,980 15,085
Selling, general and administrative (Note 9).............. 17,030 13,342 15,682
Merger expenses (Note 2).................................. 13,939
------- ------- --------
Total operating expenses.......................... 114,538 81,294 69,974
------- ------- --------
Operating income............................................ 38,397 13,564 864
Other income (expense):
Equity in earnings of joint ventures (Note 4)............. 22,766 24,968 24,688
Investment and other income............................... 11,594 6,542 16,879
Gain from (provision for) legal settlements............... 2,299 (6,297)
Partnership loss.......................................... (7,644)
------- ------- --------
Total other income, net........................... 34,360 33,809 27,626
------- ------- --------
Income before provision for income taxes.................... 72,757 47,373 28,490
Provision (benefit) for income taxes (Note 7)............... 24,867 10,828 (21,927)
------- ------- --------
Net income.................................................. $ 47,890 $36,545 $ 50,417
======= ======= ========
Per share data:
Earnings per share (Note 1)................................. $ 1.29 $ 1.00 $ 1.42
======= ======= ========
Weighted average number of common and common equivalent
shares outstanding (Note 1)............................... 37,143 36,515 35,504
======= ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 18
WATSON PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
NOTES UNREALIZED HOLDING
COMMON STOCK ADDITIONAL RECEIVABLE GAIN (LOSS) UNEARNED TOTAL
--------------- PAID-IN RETAINED FROM ON MARKETABLE COMPENSATION STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS STOCKHOLDERS SECURITIES STOCK AWARDS EQUITY
------ ------ ---------- --------- ------------ ------------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER
31, 1992.......... 31,699 $105 $ 71,629 $ 7,859 $(42) $ (4,850) $ 74,701
Net proceeds from
initial public
offering........ 2,443 8 25,975 25,983
Net proceeds from
second public
offering........ 1,065 3 28,921 28,924
Exercise of
options/warrants... 410 1 2,093 2,094
Net collections of
notes receivable
from
stockholders.... 2 2
Tax benefit
related to stock
option plan..... 2,285 2,285
Common stock
issued to
employees....... 344 1 2,862 (2,863) 0
Cancellation of
common stock
issued to
employees....... (411 ) (1) (2,960) 2,163 (798)
Amortization of
unearned
compensation.... 1,471 1,471
Net income........ 50,417 50,417
------ ---- -------- -------- ---- ----- ------- --------
BALANCE AT DECEMBER
31, 1993.......... 35,550 117 130,805 58,276 (40) (4,079) 185,079
Exercise of
options/warrants... 213 1 425 426
Collections of
notes receivable
from
stockholders.... 40 40
Tax benefit
related to stock
option plan..... 659 659
Common stock
issued to
employees....... 26 326 326
Cancellation of
common stock
issued to
employees....... (6 ) (100) 80 (20)
Amortization of
unearned
compensation.... 1,185 1,185
Adjustment for
unrealized
holding loss on
investment...... $ (870) (870)
Net income........ 36,545 36,545
------ ---- -------- -------- ---- ----- ------- --------
BALANCE AT DECEMBER
31, 1994.......... 35,783 118 132,115 94,821 (870) (2,814) 223,370
Exercise of
options......... 586 2 7,516 7,518
Tax benefit
related to stock
option plan..... 6,808 6,808
Amortization of
unearned
compensation.... 1,958 1,958
Adjustment for
unrealized
holding gain on
investment...... 1,491 1,491
Net income........ 47,890 47,890
------ ---- -------- -------- ---- ----- ------- --------
BALANCE AT DECEMBER
31, 1995.......... 36,369 $120 $146,439 $142,711 $ $ 621 $ (856) $ 289,035
====== ==== ======== ======== ==== ===== ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE> 19
WATSON PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------
1995 1994 1993
--------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.............................................. $ 47,890 $ 36,545 $ 50,417
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................ 5,243 4,447 3,666
Amortization of unearned compensation-stock awards... 1,958 1,491 1,471
Amortization of deferred income and bond premium..... (917) (146) (917)
Decrease in deferred partnership liability........... (14,033) (1,209)
Dividends received from Somerset..................... 18,000 18,000 17,688
Equity in earnings of joint ventures................. (19,067) (20,945) (13,152)
Gain on sale of Marsam stock......................... (6,243) (3,180) (14,491)
Gain on settlements with former officers............. (2,299) (3,416)
Provision for doubtful accounts...................... 417 119 257
Tax benefit related to stock option plan............. 6,808 659 2,285
Changes in assets and liabilities:
Increase in accounts receivable...................... (9,371) (7,262) (2,089)
Increase in royalty receivable....................... (8,205)
Increase in inventories.............................. (6,276) (3,715) (4,829)
Decrease in prepaid expenses and other current
assets............................................. 24 420 845
(Increase) decrease in deferred tax assets........... 8,215 (597) (29,632)
(Increase) decrease in other assets.................. 82 49 (157)
Increase in accounts payable and accrued expenses.... 7,605 1,931 7,798
Increase (decrease) in income taxes payable.......... 3,263 (360)
Decrease in accrual for legal settlements............ (10,881) (5,256)
--------- -------- --------
Total adjustments............................... (12,497) (23,118) (40,289)
--------- -------- --------
Net cash provided by operating activities....... 35,393 13,427 10,128
--------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment..................... (22,588) (21,484) (13,380)
Disposals of property and equipment..................... 1,463 104 4
Purchases of marketable securities...................... (386,502) (19,164) (18,173)
Proceeds from sale of marketable securities............. 396,725 45,324
Proceeds from sale of Marsam stock...................... 7,005 3,869 16,428
Proceeds from sale of a joint venture................... 7,992
Investment in Andrx..................................... (15,645) (6,000)
Investment (increase) decrease in other joint
ventures............................................. (818) (1,518) 676
Payment to partnership.................................. (8,000)
--------- -------- --------
Net cash provided by (used in) investing
activities.................................... $ (20,360) $ 9,123 $(22,445)
--------- -------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE> 20
WATSON PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------
1995 1994 1993
--------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from initial public offering............... $ 25,983
Net proceeds from second public offering................ 28,924
Proceeds from issuance of long-term debt................ $ 5,000
Principal payments on long-term debt.................... $ (1,502) (1,938) (2,665)
Purchase and retirement of stock........................ (825)
Proceeds from exercise of stock options................. 7,518 426 2,094
Net collections of notes receivable from stockholders... 40 2
--------- -------- --------
Net cash provided by financing activities....... 6,016 3,528 53,513
--------- -------- --------
Net increase in cash and cash equivalents................. 21,049 26,078 41,196
Cash and cash equivalents at beginning of year............ 71,165 45,087 3,891
--------- -------- --------
Cash and cash equivalents at end of year.................. $ 92,214 $ 71,165 $ 45,087
========= ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest............................................. $ 446 $ 901 $ 778
Income taxes......................................... $ 6,765 $ 10,082 $ 6,387
ADDITIONAL DISCLOSURES OF NON-CASH ITEMS:
Stock issued in exchange for note receivable............ $ 20
</TABLE>
See accompanying notes to consolidated financial statements.
F-9
<PAGE> 21
WATSON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Description of business and principles of consolidation
Watson Pharmaceuticals, Inc. (the "Company") is engaged in the production,
marketing and distribution of off-patent pharmaceutical products and the
research and development of proprietary pharmaceutical products and drug
delivery systems. The consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries, including Circa Pharmaceuticals,
Inc. ("Circa") that merged with the Company on July 17, 1995 (Note 2).
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. Intercompany accounts and transactions have been eliminated.
The Company's wholly-owned subsidiaries include Watson Laboratories, Inc.
("Watson Labs"), Circa, Watson Pharmaceuticals (Asia), Ltd. ("Watson (Asia)"),
and Corona Pharmaceuticals, Inc. (currently inactive). Watson (Asia) was formed
in 1995 to expand the Company's operations into the Asian and Pacific Rim
markets. In 1995, the Company developed a plan to merge its wholly-owned
subsidiary, Zetachron, Inc. ("Zetachron") into Watson Labs. At December 31,
1995, all Zetachron assets were either merged into Watson Labs or disposed of
for an immaterial loss. The Company's investments accounted for under the equity
method include Somerset Pharmaceuticals, Inc. and ANCIRC. 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. For certain
long-term investments for which there are no market prices, a reasonable
estimate of fair value could not be made without incurring excessive costs. It
was not practicable to estimate the fair value of an investment representing
19.5% of the issued common stock of Andrx Corporation, a privately-held company.
Accordingly, the investment in Andrx was carried at its original cost of $21.6
million at December 31, 1995.
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". 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 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 1996 to 2023.
F-10
<PAGE> 22
WATSON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The amortized cost and fair market values of all marketable securities are
summarized as follows (in thousands):
<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.............. $ 36,741 $463 $ (54) $ 37,150
State-issued securities............... 4,400 4,400
Corporate bonds....................... 9,444 232 9,676
Commercial paper...................... 46,197 (48) 46,149
Equity securities....................... 6,624 28 6,652
Money market funds...................... 14,225 14,225
-------- ---- ----- --------
$117,631 $723 $(102) $118,252
======== ==== ===== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1994
----------------------------------------------------
GROSS GROSS FAIR
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUES
--------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Fixed income securities:
U.S. Treasury securities.............. $ 51,526 $ $(2,610) $ 48,916
State-issued securities............... 8,961 (62) 8,899
Commercial paper...................... 16,699 16,699
Equity securities....................... 4,648 (771) 3,877
Marsam common stock..................... 763 2,573 3,336
Money market funds...................... 24,969 24,969
-------- ------ ------- --------
$107,566 $2,573 $(3,443) $106,696
======== ====== ======= ========
</TABLE>
Realized gains from the sales of Marsam common stock were $6.2 million,
$3.2 million and $14.5 million for the years ended December 31, 1995, 1994 and
1993, 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, 1995.
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-11
<PAGE> 23
WATSON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 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,
1995, unearned compensation related to the stock awards totalled $856,000 and
will be amortized through January 1997.
Revenue recognition
Revenues from product sales are recognized upon shipment and are net of
returns. 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 1993, two customers accounted for 28% of product sales, 15% and 13%
individually. In 1994, two customers accounted for 25% of product sales, 13% and
12% individually. In 1995, no individual customers accounted for more than 10%
of the Company's product sales.
Research and development activities
The costs associated with the development, testing and approval of
pharmaceutical products and drug delivery systems are expensed as incurred.
Income taxes
The Company accounts for income taxes in accordance with SFAS 109,
"Accounting for Income Taxes". 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 earnings per share is based on the weighted average
number of common shares outstanding. The weighted average number of shares
includes the dilutive effect of the assumed exercise of all outstanding stock
options and warrants described in Note 8.
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, 1995 and 1994. Management's estimates and
assumptions are also reflected in the revenues and expenses for the three years
ended December 31, 1995.
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
F-12
<PAGE> 24
WATSON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 1993 and 1994 financial statements have been
reclassified to conform with the 1995 presentation. These reclassifications had
no effect on net income or retained earnings.
Recent Pronouncements
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for
Stock-Based Compensation," which established a fair-value-based method of
accounting for stock-based compensation plans and requires additional
disclosures for those companies who elect not to adopt the new method of
accounting. The Company will be required to adopt SFAS 123 in 1996. The
Company's intention is to continue to account for employee stock awards in
accordance with APB Opinion No. 25 and to adopt the disclosure only alternative
as described in SFAS 123. Accordingly, it is expected that this adoption will
not have a material impact on the Company's consolidated financial statements
or results of operations.
In March 1995, the Financial Accounting Standards Board issued SFAS 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 review for impairment
of long-lived assets certain identifiable intangibles and goodwill related to
those assets whenever events or changes in circumstances indicate that the
carrying amount of an asset might not be recoverable. In certain situations, an
impairment loss would be recognized. SFAS 121 will become effective in 1996. The
company has studied the implications of SFAS 121 and, based on its initial
evaluation, does not expect its adoption to have a material impact on the
Company's financial condition or results of operations.
2. MERGER WITH CIRCA
On July 17, 1995, the stockholders of the Company and Circa approved the
merger which resulted in Circa becoming a wholly-owned subsidiary of the
Company. Circa, founded in 1960, develops and manufactures off-patent and
proprietary drugs, develops alternative drug delivery systems and distributes
pharmaceutical products. 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 qualifies 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.
Combined and separate results of Watson and Circa during the periods
preceding the merger are summarized as follows (in thousands):
<TABLE>
<CAPTION>
WATSON CIRCA ADJUSTMENT COMBINED
------- ------- ---------- --------
<S> <C> <C> <C> <C>
Six months ended June 30, 1995 (Unaudited)
Total revenues................................ $53,142 $ 7,483 $60,625
Equity in earnings of joint ventures.......... $10,204 $10,204
Net income.................................... $12,257 $13,447 $25,704
Year ended December 31, 1994
Total revenues................................ $87,057 $ 7,801 $94,858
Equity in earnings of joint ventures.......... $24,968 $24,968
Net income.................................... $18,686 $17,259 $ 600 $36,545
Year ended December 31, 1993
Total revenues................................ $67,547 $ 3,291 $70,838
Equity in earnings of joint ventures.......... $24,688 $24,688
Net income.................................... $12,222 $ 8,395 $ 29,800 $50,417
</TABLE>
The combined financial results of the Company and Circa presented above
include adjustments and reclassifications made to conform accounting policies
and financial statement presentation of the two companies. The adjustments that
affected net income resulted from the reduction in the valuation allowance
related to certain net deferred tax assets. These deferred tax assets resulted
principally from net operating loss carryforwards and tax credit carryforwards
generated by Circa prior to its acquisition by the Company. Previously, these
net deferred tax assets were fully reserved by Circa. In determining that the
deferred tax assets were fully realizable by the combined company, management
considered the prior operating results of each company and the future plans and
expectations for the combined company. Intercompany transactions between the two
companies for the periods presented were not material.
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.
F-13
<PAGE> 25
WATSON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. BALANCE SHEET COMPONENTS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1994
-------- --------
(IN THOUSANDS)
<S> <C> <C>
INVENTORIES:
Raw materials................................................ $ 11,483 $ 7,969
Work-in-process.............................................. 5,112 3,264
Finished goods............................................... 6,042 5,128
-------- --------
$ 22,637 $ 16,361
======== ========
PROPERTY AND EQUIPMENT:
Buildings and improvements................................... $ 22,457 $ 23,392
Leasehold improvements....................................... 7,396 7,339
Land and land improvements................................... 4,937 5,058
Machinery and equipment...................................... 41,403 31,421
Research and laboratory equipment............................ 9,020 7,753
Furniture and fixtures....................................... 2,667 2,372
-------- --------
87,880 77,335
Less accumulated depreciation and amortization............... (32,647) (28,307)
-------- --------
55,233 49,028
Construction in progress..................................... 14,766 5,087
-------- --------
$ 69,999 $ 54,115
======== ========
ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
Trade accounts payable....................................... $ 16,824 $ 10,140
Reserve for litigation settlement............................ 2,839 3,119
Accrued payroll and benefits................................. 2,716 1,890
Reserve for sales coupons.................................... 1,783
Other accrued expenses....................................... 1,053 2,461
-------- --------
$ 25,215 $ 17,610
======== ========
</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 $24.8 million, $25.1
million and $23.8 million for the years ended December 31, 1995, 1994 and 1993,
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 the Company's proportionate share of
Somerset's net assets was $8.4 million and $9.4 million at December 31, 1995 and
1994 respectively, and is being amortized on a straight-line basis over 15
years.
F-14
<PAGE> 26
WATSON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Condensed income statements and balance sheets of Somerset are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1995 1994 1993
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Net revenues....................................... $107,365 $124,566 $118,998
Costs and expenses................................. 42,812 59,557 55,825
Income taxes....................................... 20,200 20,900 21,408
-------- -------- --------
Net income............................... $ 44,353 $ 44,109 $ 41,765
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1994
------- -------
(IN THOUSANDS)
<S> <C> <C>
Current assets................................................... $43,993 $48,770
Other assets..................................................... 7,127 6,380
------- -------
Total assets........................................... $51,120 $55,150
======= =======
Current liabilities.............................................. $17,057 $29,211
Other liabilities................................................ 63 292
Stockholders' equity............................................. 34,000 25,647
------- -------
Total liabilities and stockholders' equity............. $51,120 $55,150
======= =======
</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 $1.7 million and $220,000 for
the years ended December 31, 1995 and 1994, respectively.
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,
----------------------------------
1995 1994 1993
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Net revenues....................................... $107,365 $126,726 $121,202
======== ======== ========
Gross profit....................................... $ 93,748 $109,979 $107,158
======== ======== ========
Net income......................................... $ 41,099 $ 44,409 $ 43,567
======== ======== ========
</TABLE>
F-15
<PAGE> 27
WATSON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1994
------- -------
(IN THOUSANDS)
<S> <C> <C>
Current assets................................................... $44,078 $49,473
Other assets..................................................... 7,127 6,516
------- -------
Total assets........................................... $51,205 $55,989
======= =======
Current liabilities.............................................. $18,422 $30,201
Other liabilities................................................ 63 292
Stockholders' equity............................................. 32,720 25,496
------- -------
Total liabilities and stockholders' equity............. $51,205 $55,989
======= =======
</TABLE>
American Triumvirate Insurance Company ("ATIC")
Prior to December 21, 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 and $901,000 as its equity in ATIC's earnings
for the years ended December 31, 1994 and 1993, respectively. On December 21,
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.
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.
5. DEBT
In 1994, the Company entered into an agreement 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 September 2001.
At December 31, 1995, the facilities available to the Company under the
financing agreement are composed of (i) a $10 million revolving, unsecured
working capital line of credit, (ii) a $6 million revolving, unsecured equipment
loan and (iii) a $10 million non-revolving, unsecured building improvement loan.
The financing agreement provides for a variable interest rate, which would
initially range from the bank's prime rate (8.50% at December 31, 1995) minus
one-eighth of a percent to the bank's prime rate. The Company may elect a fixed
interest rate, which would be based on the bank's short-term base rate plus a
maximum of one and one-eighth percent. The Company must maintain specified
financial ratios and must comply with certain restrictive covenants. At December
31, 1995, the Company was in compliance with all of the ratios and covenants.
The financing agreement expires on June 1, 1996. Except for the note payable
outstanding at December 31, 1995, no borrowings have been made under this
financing agreement.
Long-term debt is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1995 1994
------ ------
(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 September
2001............................................................. $4,199 $4,770
Mortgage due to bank, repaid on November 30, 1995.................. 562
Mortgage due to Pennsylvania Industrial Development Authority,
repaid
on November 30, 1995............................................. 367
------ ------
4,199 5,699
Less current portion............................................. (622) (641)
------ ------
Long-term debt........................................... $3,577 $5,058
====== ======
</TABLE>
F-16
<PAGE> 28
WATSON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1995, annual maturities of long-term debt consist of the
following:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31, (IN THOUSANDS)
--------------------------------------------------------------------
<S> <C>
1996................................................................ $ 622
1997................................................................ 673
1998................................................................ 730
1999................................................................ 791
2000................................................................ 858
Thereafter.......................................................... 525
------
$4,199
======
</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. Dilacor XR(R) was launched by the Partnership in 1992. At
December 31, 1993, a liability was due to the Partnership of $15.2 million for
the Company's share of development and operating costs. The Partnership
agreement was amended in April 1993, such that after September 1, 1993 the
Company earns a royalty from sales of the branded product, Dilacor XR(R). The
amended agreement also provided that all royalties earned will be used first to
offset the Partnership liability. The royalty rate established for this
agreement was 1% in 1994, 20% in 1995 and 1996, 22% from 1997 to 2000 and 3%
thereafter. Royalties earned in excess of the Partnership liability will be
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).
For the year ended December 31, 1993, the Company recognized a loss of $7.6
million from the Partnership. For the years ended December 31, 1995 and 1994,
the Company earned royalties of $22.2 million and $1.2 million, respectively and
recorded a royalty receivable of $8.2 million at December 31, 1995.
7. INCOME TAXES
The provision for income taxes is summarized as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1995 1994 1993
------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Taxes currently payable:
Federal............................................ $ 6,623 $ 8,400 $ 4,635
State.............................................. 3,336 2,372 1,010
------- ------- --------
9,959 10,772 5,645
Deferred provision (benefit):
Federal............................................ 7,622 (592) (25,421)
State.............................................. 478 (11) (4,436)
------- ------- --------
8,100 (603) (29,857)
Exercise of stock options not treated as a reduction
of income tax expense.............................. 6,808 659 2,285
------- ------- --------
$24,867 $10,828 $(21,927)
======= ======= ========
</TABLE>
F-17
<PAGE> 29
WATSON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The exercise of stock options represents a tax benefit reflected as a
reduction of taxes currently payable, however, it is not treated as a reduction
of income tax expense for financial reporting purposes. 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>
YEARS ENDED DECEMBER 31,
--------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Expected tax at federal statutory rate...................... 35% 35% 35%
State income tax, net of federal benefit.................... 5 6 6
Research tax credits........................................ (1) (2) (3)
Dividends received deduction................................ (7) (11) (17)
Non-deductible merger expenses.............................. 3
Other....................................................... (1) (4)
Reduction of valuation allowance related to deferred tax
assets.................................................... -- (1) (98)
-- --- ---
34% 23% (77)%
== === ===
</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,
---------------------
1995 1994
------- -------
(IN THOUSANDS)
<S> <C> <C>
Benefits from net operating loss carryforwards................. $18,122 $26,562
Difference in accounting for inventory and receivables......... 4,019 2,045
Benefits from tax credits and carryforward credits............. 2,965 3,023
Difference in depreciation for book and tax purposes........... (4,998) (3,394)
Difference in investment basis for book and tax................ (116) 502
Other items.................................................... 2,788 2,257
------- -------
Net deferred tax assets.............................. $22,780 $30,995
======= =======
</TABLE>
The Company had net operating loss ("NOL") carryforwards at December 31,
1995 of approximately $51.0 million for federal and New York state income tax
purposes. During 1995, the Company utilized NOL carryforwards of approximately
$26.3 million and $9.0 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. Due to certain income tax
regulations related to the Company's ownership change, the amount of the federal
NOL carryforward available to offset future taxable income is subject to an
annual limitation of approximately $40.0 million. The annual NOL limitation may
be further limited if additional changes in ownership occur. The Company's NOL
carryforwards will begin to expire in 2006. The Company has approximately $1.9
million in federal qualified research credits which expire beginning in 2001 and
approximately $1.7 million in federal alternative minimum tax credits which have
no expiration date. These credits are available to directly offset future
federal income taxes.
The NOL carryforwards discussed above were generated by Circa prior to its
acquisition by the Company. Prior to the acquisition, Circa's net deferred tax
assets were fully reserved due to uncertainty of future realization. As a result
of the acquisition of Circa by Watson, the Company determined that such net
deferred tax assets were likely to be realized. See Note 2 for related
discussion.
F-18
<PAGE> 30
WATSON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. 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, 1995, no preferred stock was
issued.
Warrants
In 1987, the Company issued warrants to purchase shares of the Company's
common stock at $8.48 per share. All of the warrants were exercised prior to
their expiration in September 1994, which resulted in the issuance of 101,203
shares of the Company's common stock.
Stock option plans
The Company has adopted several stock option plans that authorize the
granting of options to employees, directors and/or consultants 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 merger with Circa, certain stock option plans
were assumed (the "assumed options") by the Company. The assumed options were
adjusted by the exchange ratio as specified in the merger agreement. No
additional options will be granted under any of the assumed options plans.
Activity under the stock option plans during the years ended December 31,
1995, 1994 and 1993 is summarized as follows:
<TABLE>
<CAPTION>
NUMBER OPTION PRICE
OF SHARES PER SHARE
--------- ---------------
<S> <C> <C>
Outstanding at December 31, 1992......................... 1,673,059 $ 0.30 - $30.52
Granted................................................ 204,547 $ 6.69 - $25.00
Exercised.............................................. (357,976) $ 0.30 - $11.05
Canceled............................................... (84,029) $ 5.38 - $30.52
--------- ---------------
Outstanding at December 31, 1993......................... 1,435,601 $ 2.00 - $30.52
Granted................................................ 741,470 $12.65 - $33.00
Exercised.............................................. (30,512) $ 3.67 - $16.50
Canceled............................................... (170,441) $ 6.69 - $30.52
--------- ---------------
Outstanding at December 31, 1994......................... 1,976,118 $ 2.00 - $33.00
Granted................................................ 1,572,698 $18.75 - $47.00
Exercised.............................................. (567,107) $ 2.00 - $49.05
Canceled............................................... (70,524) $14.39 - $37.25
--------- ---------------
Outstanding at December 31, 1995......................... 2,911,185 $ 3.67 - $47.00
========= ===============
Exercisable at December 31, 1995......................... 1,115,664 $ 3.67 - $36.63
========= ===============
</TABLE>
In 1991, the Company issued 330,125 non-statutory options at an exercise
price of $3.67 per share. Through December 31, 1995, 103,299 of these options
were exercised. The remaining 226,826 options are exercisable in 1996.
F-19
<PAGE> 31
WATSON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. RELATED PARTIES
The Company leases a portion of its facilities from related parties. The
rent expense is charged to cost of revenues, research and development and
selling, general and administrative expenses. These leases are summarized below:
In 1985, the Company entered into leases for a manufacturing facility and
leasehold improvements with a family trust in which the Chief Executive Officer
and certain family members are beneficiaries for an original term of ten years,
commencing January 1, 1986. The agreement for the leasehold improvements has
expired and the obligation was paid in full at December 31, 1995. The lease for
the manufacturing facility was extended through December 31, 2000, requires
monthly payments of approximately $25,000 and includes a 5% per year escalation
factor.
In 1989, the Company assigned its purchase rights under a lease for office
and manufacturing facilities to a partnership in which the 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.
The Company's research and development facility in Pennsylvania is leased
from a partnership in which the Chairman of the Board is a partner. The 15 year
lease was entered into on March 1, 1984. Lease payments of approximately
$130,000 were made to the partnership in each of the three years ended December
31, 1995. The Company has the option, at any time during the lease period, to
purchase the building from the partnership for the partnership's cost ($1.2
million) plus the cost of any partnership improvements to the building. The
Company guarantees the partnership's mortgage on the building.
Rent paid to related parties is summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
----------------------
1995 1994 1993
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Cost of revenues..................................... $247 $323 $548
Research and development expenses.................... 154 133 225
Selling, general and administrative expenses......... 31 94 122
---- ---- ----
$432 $550 $895
==== ==== ====
</TABLE>
10. 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, normal maintenance expenses and
maintain minimum insurance coverage. Total rental expense for operating leases
were approximately $631,000, $1.1 million and $1.3 million for the years ended
December 31, 1995, 1994 and 1993, respectively.
F-20
<PAGE> 32
WATSON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1995, future minimum lease payments under all noncancelable
operating leases consist of the following:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31, (IN THOUSANDS)
--------------------------------------------------------------------
<S> <C>
1996................................................................ $ 642
1997................................................................ 629
1998................................................................ 507
1999................................................................ 320
2000................................................................ 297
------
Total minimum lease payments........................................ $2,395
======
</TABLE>
Employee retirement plan
The Company maintains a 401(k) retirement plan covering substantially all
employees. Monthly contributions are made by the Company based upon the employee
contributions to the plan. The Company contributed approximately $190,000,
$161,000 and $67,000 to the retirement plan for the years ended December 31,
1995, 1994 and 1993, respectively.
Legal matters
March 1996 Settlement of United States Department of Justice Inquiry
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
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.
1993 and 1994 Legal Settlements and Legal Provisions
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.
In 1993, Circa settled anti-trust and other matters requiring payments of
$4.8 million. In addition, Circa recorded a gain of $2.5 million related to a
settlement of an action against a former officer and received a refund of $1.1
million from a settlement fund established in 1991. Income from these events
was offset by an increase in the liability for future legal settlements.
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.
11. SUBSEQUENT EVENT
In March 1996, the Company's wholly-owned subsidiary, Watson
Pharmaceuticals (Asia) Ltd. ("Watson (Asia)") entered into an agreement to form
two joint ventures with China-based Changzhou No. 4 Pharmaceutical Factory
("Changzhou"). The first joint venture, Changzhou Watson Pharmaceuticals Co.
Ltd. ("Joint Venture A") will establish a manufacturing facility in China for
the production, marketing and sales of pharmaceuticals and related products. A
second joint venture will be known as Changzhou Siyao Pharmaceuticals Co. Ltd.
("Joint Venture B"). Joint Venture B will provide the raw materials to Joint
Venture A. The total investment by Watson (Asia) in Joint Ventures A and B is
anticipated to be approximately $9.0 million. Joint Venture A will be 87.5%
owned by Watson (Asia) and 12.5% owned by Changzhou. Joint Venture B will be
owned 25% by Watson (Asia) and 75% by Changzhou. The Company will consolidate
Joint Venture A and will account for Joint Venture B under the equity method of
accounting.
F-21
<PAGE> 33
WATSON PHARMACEUTICALS, INC.
SCHEDULE II -- VALUATION & QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGE TO BALANCE AT
BEGINNING COSTS AND DEDUCTIONS/ END OF
OF PERIOD EXPENSES OTHER PERIOD
------------ --------- ----------- ----------
<S> <C> <C> <C> <C>
YEAR END 1995:
Allowance for doubtful accounts............. $ 903 $ 417 $ $1,320
YEAR END 1994:
Allowance for doubtful accounts............. $ 574 $ 579 $ (250) $ 903
YEAR END 1993:
Allowance for doubtful accounts............. $ 121 $ 453 $ $ 574
</TABLE>
F-22
<PAGE> 34
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
EXHIBIT NO. DESCRIPTION PAGE
- ----------- ---------------------------------------------------------------------- ------------
<C> <C> <S> <C>
*2.1 -- Agreement and Plan of Merger among the Registrant, Gum Acquisition
Corp. and Circa Pharmaceuticals, Inc., filed as Exhibit 2.1 to the
Company's Registration Statement on Form S-4 Reg. No. 33-60211 ("33-
60211") and hereby incorporated by reference.
*3.1 -- Articles of Incorporation of the Company and all amendments thereto,
filed as Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1995 and hereby incorporated by
reference.
*3.2 -- Bylaws of the Company, as amended as of July 18, 1995, filed as
Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1995 and hereby incorporated by reference.
*4.1 -- Amendment to loan agreement between the Company, its subsidiaries and
Bank of America NT & SA dated February 26, 1996.
*4.2 -- Loan Agreement between the Company, its subsidiaries and Bank of
America NT & SA dated August 19, 1994 filed as Exhibit 4.1 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1994 and hereby incorporated by reference.
*10.1 -- Lease between Westgate Associates and the Company dated October 1991
and addendums thereto, filed as Exhibit 10.5 to the Company's
Registration Statement on Form S-1 Reg. No. 33-46229 ("33-46229") and
hereby incorporated by reference.
*10.2 -- Industrial Real Estate Lease, as amended, dated August 8, 1995,
between Hsi-Hsiung Hsu Hwa Chao (Chao Family) Trust I and the Company,
filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1995 and hereby incorporated by
reference.
*10.3 -- Amended Lease Agreement between Zetachron, Incorporated and Research
Property Associates dated February 1, 1983, filed as Exhibit 10.7 to
33-46229 and hereby incorporated by reference.
*10.4 -- Grant of Option to Purchase Real Estate by and between Dr. Alec Keith,
Mr. Wallace C. Snipes and Zetachron, Incorporated dated July 1, 1987,
filed as Exhibit 10.8 to 33-46229 and hereby incorporated by
reference.
*10.5 -- The Company's 1985 Stock Incentive Plan, filed as Exhibit 10.11 to
33-46229 and hereby incorporated by reference.
*10.6 -- 1991 Stock Option Plan of the Company as revised, filed as Exhibit
10.1 to the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1995 and hereby incorporated by reference.
*10.7 -- 1995 Non-Employee Directors' Stock Option Plan, as amended, filed as
Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1995 and hereby incorporated by reference.
*10.8 -- Form of the Company's Employee Invention, Confidential Information
Agreement, filed as Exhibit 10.22 to 33-46229 and hereby incorporated
by reference.
*10.9 -- Purchase Agreement relating to the Company's purchase of 132 Business
Center Drive property, filed as Exhibit 10.15 to the Company's 1993
Annual Report on Form 10-K and hereby incorporated by reference.
</TABLE>
<PAGE> 35
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
EXHIBIT NO. DESCRIPTION PAGE
- ----------- ---------------------------------------------------------------------- ------------
<C> <C> <S> <C>
*10.10 -- Purchase and Sale Agreement between the Company, its subsidiaries and
AETNA Real Estate Associates dated October 18, 1994 regarding the
acquisition of 311 Bonnie Circle, Corona, California, filed as Exhibit
10.1 to the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1994 and hereby incorporated by reference.
*10.11 -- Senior Executive Employment Agreement dated as of May 29, 1995 between
the Company and Allen Chao, filed as Exhibit 10.1 to 33-60211 and
hereby incorporated by reference.
*10.12 -- Form of Senior Executive Employment Agreement dated as of May 29, 1995
between the Company and David C. Hsia, filed as Exhibit 10.2 to
33-60211 and hereby incorporated by reference.
*10.13 -- Form of Senior Executive Employment Agreement, dated as of May 29,
1995 between the Company and Alec D. Keith, filed as Exhibit 10.3 to
33-60211 and hereby incorporated by reference.
*10.14 -- Employment Agreement with Dr. Melvin Sharoky dated April 26, 1991 as
amended January 19, 1993 and July 17, 1995, filed as Exhibit 10.3 to
the Company's Quarter Report on Form 10-Q for the quarter ended June
30, 1995 and hereby incorporated by reference.
11.1 -- Statement of computation of per share earnings.
*21.1 -- Subsidiaries of the Company.
23.1 -- Consent of Price Waterhouse LLP.
23.2 -- Consent of Deloitte & Touche LLP.
23.3 -- Consent of Coopers & Lybrand L.L.P.
27.1 -- Financial Data Schedule (EDGAR version only)
*99.1 -- Consolidated Financial Statements of Somerset Pharmaceuticals, Inc.
and Subsidiaries for the years ended December 31, 1995, 1994 and 1993.
</TABLE>
- ---------------
* Previously Filed
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No. 33-70878 and No. 33-94350) of Watson
Pharmaceuticals, Inc. of our report dated February 5, 1996, except as to Note
11, which is as of March 4, 1996, appearing on page F-2 of the Annual Report
on Form 10-K/A for the year ended December 31, 1995.
PRICE WATERHOUSE LLP
Costa Mesa, California
January 10, 1997
<PAGE> 1
Exhibit 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
33-70878 and 33-94350 on Form S-8 and No. 333-16275 on Form S-4 of Watson
Pharmaceuticals, Inc. of our report dated February 2, 1996 (relating to the
consolidated financial statements of Somerset Pharmaceuticals, Inc. and
subsidiaries) appearing in this Annual Report on Form 10-K/A of Watson
Pharmaceuticals, Inc. for the year ended December 31, 1995.
Deloitte & Touche LLP
/s/ Deloitte & Touche LLP
Pittsburgh, Pennsylvania
January 10, 1997
<PAGE> 1
Exhibit 23.3
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
33-70878 and 33-94350 of Watson Pharmaceuticals, Inc. on Form S-8 of our report
dated February 7, 1995, on our audits of the consolidated financial statements
and financial statement schedule of Circa Pharmaceuticals, Inc as of December
31, 1994, and for the years ended December 31, 1994 and 1993, appearing in this
Annual Report of Form 10-K/A Amendment No. 1 of Watson Pharmaceuticals, Inc.
for the year ended December 31, 1995.
Coopers & Lybrand L.L.P
Melville, New York
January 10, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 92,214
<SECURITIES> 26,038
<RECEIVABLES> 33,286
<ALLOWANCES> 1,320
<INVENTORY> 22,637
<CURRENT-ASSETS> 197,634
<PP&E> 102,646
<DEPRECIATION> 32,647
<TOTAL-ASSETS> 322,121
<CURRENT-LIABILITIES> 28,822
<BONDS> 0
0
0
<COMMON> 120
<OTHER-SE> 288,915
<TOTAL-LIABILITY-AND-EQUITY> 322,121
<SALES> 130,688
<TOTAL-REVENUES> 152,935
<CGS> 64,996
<TOTAL-COSTS> 114,538
<OTHER-EXPENSES> (34,360)
<LOSS-PROVISION> 417
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 72,757
<INCOME-TAX> 24,867
<INCOME-CONTINUING> 47,890
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 47,890
<EPS-PRIMARY> 1.29
<EPS-DILUTED> 1.29
</TABLE>
