<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 For the
transition period from _______ to _________
COMMISSION FILE NUMBER 0-20045
WATSON PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
NEVADA 95-3872914
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
311 BONNIE CIRCLE CORONA, CA 91720
(Address of principal executive offices) (Zip Code)
909-270-1400
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days:
YES [X] NO [ ]
The number of shares outstanding as of April 30, 1998 of the Registrant's only
class of common stock was 89,155,107 shares.
<PAGE> 2
WATSON PHARMACEUTICALS, INC.
INDEX TO THE FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION PAGE NUMBER
-----------
<S> <C>
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets
as of March 31, 1998 and
December 31, 1997 3
Consolidated Statements of
Income for the Three Months
Ended March 31, 1998 and 1997 5
Consolidated Statements of Cash
Flows for the Three Months Ended
March 31, 1998 and 1997 6
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and
Analysis of Financial Condition
and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosure
About Market Risk 16
PART II OTHER INFORMATION AND SIGNATURES
Item 1. Legal Proceedings 16
Item 4. Submission of Matters to a Vote of
Security Holders 17
Item 6. Exhibits and Reports on Form 8-K 17
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
WATSON PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
---- ----
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 29,665 $ 82,837
Marketable securities 5,547 32,102
Accounts receivable, net of allowances for
doubtful accounts of $5,665 and $2,140 73,056 65,068
Inventories:
Raw materials 22,269 16,905
Work-in-process 6,295 9,303
Finished goods 35,951 20,759
Prepaid expenses and other current assets 921 416
Deferred tax assets 29,805 19,399
-------- --------
Total current assets 203,509 246,789
Property and equipment, net 93,113 88,004
Investments and other assets 116,461 131,083
Product rights and other intangibles, net 362,575 289,129
-------- --------
Total assets $775,658 $755,005
======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
3
<PAGE> 4
WATSON PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
-------- --------
(unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 64,908 $ 44,423
Income taxes payable 14,429 9,553
Current portion of long-term debt 859 864
Current liability from acquisition of product rights 50,000 45,000
-------- --------
Total current liabilities 130,196 99,840
Long-term debt 2,177 2,385
Long-term liability from acquisition of product rights 20,000 50,000
Deferred tax liabilities 26,802 36,887
-------- --------
Total liabilities 179,175 189,112
-------- --------
Commitments and contingencies
Minority interest 1,022 859
-------- --------
Stockholders' equity:
Preferred stock; no par; 2,500,000 shares
authorized; none outstanding
Common stock; par value per share of $.0033; 500,000,000
shares authorized; 89,109,458 and 87,882,233 shares
issued and outstanding 294 290
Additional paid-in capital 285,266 256,682
Retained earnings 286,862 275,037
Accumulated other comprehensive income 23,039 33,025
-------- --------
Total stockholders' equity 595,461 565,034
-------- --------
Total liabilities and stockholders' equity $775,658 $755,005
======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
4
<PAGE> 5
WATSON PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Earnings Per Share)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------
1998 1997
-------- --------
<S> <C> <C>
Product sales, net $121,872 $ 58,699
Cost of sales 45,100 25,688
-------- --------
Gross profit 76,772 33,011
-------- --------
Royalty income 7,041
-------- --------
Operating expenses:
Research & development expenses 5,648 4,619
Selling, general & administrative
expenses 20,757 10,424
Amortization expense 4,617
Charge for acquired in-process
research and development 18,790
Merger expense 8,897
-------- --------
Total operating expenses 49,812 23,940
-------- --------
Operating income 26,960 16,112
-------- --------
Other income:
Equity in earnings of joint ventures 1,610 4,135
Interest and other income 1,005 3,515
-------- --------
Total other income 2,615 7,650
-------- --------
Income before income tax provision 29,575 23,762
Provision for income taxes 17,750 9,711
-------- --------
Net income $ 11,825 $ 14,051
======== ========
BASIC EARNINGS PER SHARE $ 0.13 $ 0.16
======== ========
DILUTED EARNINGS PER SHARE $ 0.13 $ 0.16
======== ========
Weighted average shares
outstanding, no dilution 88,301 86,279
======== ========
Weighted average shares
outstanding, diluted basis 90,588 88,377
======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
5
<PAGE> 6
WATSON PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1998 1997
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 11,825 $ 14,051
-------- --------
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 2,070 2,097
Amortization 4,617
Charge for acquired in-process research and development 18,790
Deferred income tax (benefit) provision (1,777) 675
Dividends received from Somerset 4,000
Equity in earnings of joint ventures (1,342) (3,507)
Provision for doubtful accounts 20 226
Tax benefit related to stock option plan 10,500 6,083
Changes in assets and liabilities:
Accounts receivable 6,984 (6,799)
Royalty receivable (7,029)
Inventories (4,092) (7,222)
Prepaid expenses and other current assets (505) (520)
Other assets (301) 132
Accounts payable and accrued expenses 1,103 5,950
Income taxes payable 4,876 1,486
-------- --------
Total adjustments 40,943 (4,428)
-------- --------
Net cash provided by operating activities 52,768 9,623
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (4,256) (2,151)
Purchase of marketable securities (5,544) (49,536)
Proceeds from maturities of marketable securities 32,099 32,050
Acquisition of product rights (32,960)
Acquisition of business (67,545)
Increase in investment in joint ventures (609) (300)
-------- --------
Net cash used in investing activities $(78,815) $(19,937)
-------- --------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
6
<PAGE> 7
WATSON PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------
1998 1997
--------- ---------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt $ (213) $ (255)
Principal payments on liability for acquisition
of product rights (45,000)
Proceeds from exercise of stock options 18,088 3,504
--------- ---------
Net cash (used in) provided by financing
activities (27,125) 3,249
--------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS (53,172) (7,065)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 82,837 158,221
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 29,665 $ 151,156
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the periods for:
Interest $ 58 $ 105
Income taxes $ 4,332 $ 1,496
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Acquisition of product rights:
Fair value of assets acquired $ (52,960)
Fair value of liabilities assumed 20,000
---------
Net cash paid $ (32,960)
=========
Acquisition of business:
Fair value of assets acquired $ (93,189)
Fair value of liabilities assumed 25,644
---------
Net cash paid $ (67,545)
=========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
7
<PAGE> 8
WATSON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
NOTE A - GENERAL
The unaudited consolidated financial statements as of March 31, 1998 and for the
three months ended March 31, 1998 and 1997, as well as related notes, should be
read in conjunction with the Company's Annual Report on Form 10-K, as amended,
for the year ended December 31, 1997 (the "1997 Form 10-K"). As discussed in
Note B to these Consolidated Financial Statements, during 1997 the Company
acquired Oclassen Pharmaceuticals, Inc. ("Oclassen") and Royce Laboratories,
Inc. ("Royce") in transactions accounted for as poolings of interests. These
consolidated financial statements have been restated to include the results of
operations of the pooled companies for all periods presented. In addition, on
February 27, 1998, the Company acquired The Rugby Group, Inc. ("Rugby") in a
transaction accounted for under the purchase method. The results of Rugby from
the date of acquisition forward have been recorded in the Company's consolidated
financial statements.
In the opinion of management, the accompanying consolidated financial statements
contain all adjustments (consisting of only normal recurring adjustments),
necessary to present fairly the Company's financial position as of March 31,
1998, and the results of operations and cash flows for the three months ended
March 31, 1998 and 1997. The results of operations and cash flows for the three
months ended March 31, 1998 are not necessarily indicative of the results of
operations or cash flows which may be reported for the remainder of 1998. The
accounting policies followed during the three months ended March 31,1998 were
the same as those disclosed in the Company's 1997 Form 10-K.
NOTE B - ACQUISITIONS
During 1997 and through March 1998, the Company made the following
acquisitions:
BRANDED PHARMACEUTICALS
ACQUISITION OF PRODUCT RIGHTS TO DILACOR XR(R) - On June 30, 1997, the Company
obtained the exclusive U.S. and certain worldwide marketing, sales and
distribution rights to Dilacor XR(R) for $190.0 million in cash and notes,
future contingent payments and an inventory supply agreement. These product
rights were capitalized and are amortized on the straight-line basis over 17
years. Dilacor XR(R) has been available in the U.S. for the treatment of
hypertension since June 1992 and was approved for the treatment of chronic
stable angina in March 1995.
8
<PAGE> 9
WATSON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
ACQUISITION OF PRODUCTS FROM G. D. SEARLE & CO. ("SEARLE") - In the fourth
quarter of 1997, the Company acquired the U.S. rights to certain Searle branded
off-patent oral contraceptive products. The Company has paid $116.2 million
through March 31, 1998 under the terms of this agreement and will pay an
additional $20.0 million through September 1998. The Company also acquired the
U.S. rights to additional Searle oral contraceptive products that are currently
in development (the "Development Products"). Payment for these products is due
upon achievement of certain events, which include in certain instances,
approvals by the Food and Drug Administration. If all contingent events occur
before July 1, 1999, the aggregate acquisition cost for the Development Products
will be $37.5 million plus certain contingent payments.
ACQUISITION OF OCLASSEN - In February 1997, the Company acquired Oclassen.
Watson issued approximately 6.6 million shares of its common stock for all of
the outstanding common shares of Oclassen. At the acquisition date, the value of
the Watson shares issued was $135.0 million. Oclassen markets specialty
pharmaceutical products to prevent and treat skin diseases.
OFF-PATENT PHARMACEUTICALS
ACQUISITION OF ROYCE - In April 1997, the Company acquired Royce. Royce develops
and manufactures off-patent prescription drugs in solid dosage forms (tablets
and capsules). The Company issued approximately 5.2 million shares of its common
stock (valued at $98.0 million on the merger date) for all of the outstanding
common shares of Royce. All Royce products are now marketed directly by the
Company under the "Watson Laboratories" label.
ACQUISITION OF RUGBY - On February 27, 1998, Watson completed its acquisition of
Rugby from Hoechst Marion Roussel, Inc. ("HMR") Rugby develops and markets a
wide array of off-patent pharmaceutical products. The acquisition was accounted
for as a purchase and the results of Rugby from the date of acquisition forward
have been recorded in the Company's consolidated financial statements. The
consideration paid by Watson in connection with the Rugby acquisition consisted
of an initial cash payment of $67.5 million, future royalty payments on sales of
certain products licensed from HMR and a contingent payment based on future
operating results. The initial cash payment was made from cash on hand. Watson
expects to make future contingent
9
<PAGE> 10
WATSON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
payments from a combination of cash on hand and future operating cash flows. The
cost in excess of the net assets acquired was $25.1 million. This asset is
amortized on the straight-line basis over twenty years and is included in
product rights and other intangibles in the accompanying consolidated balance
sheet. In connection with the Rugby acquisition, Watson recorded a special
non-cash charge of $18.8 million for the write-off of in-process research and
development associated with Rugby's wholly owned subsidiary, Chelsea
Laboratories, Inc.
The Company continues to review additional acquisition and investment
opportunities. In April 1998, the Company filed a universal shelf registration
("the Registration Statement") with the Securities and Exchange Commission. The
Registration Statement allows the Company to raise up to $300 million from
offerings of senior or subordinated debt securities, common stock, preferred
stock or a combination thereof at such times that the Company believes raising
funds would be advantageous. Please refer to the Liquidity and Capital Resources
section of this Form 10-Q for further discussion of the Registration Statement
and securities that the Company will issue pursuant to the Registration
Statement.
NOTE C - EARNINGS PER SHARE ("EPS")
In 1997, the Company adopted Statement of Financial Accounting Standards No.
128, "Earnings per Share", ("SFAS 128"). In accordance with the implementation
provisions of SFAS 128, the Company has restated earnings per share in the
Consolidated Statement of Income for the three months ended March 31, 1997. A
reconciliation of the numerators and the denominators of basic and diluted
earnings per share for the three months ended March 31, 1998 and 1997 is as
follows (in thousands, except for EPS):
<TABLE>
<CAPTION>
THREE MONTHS ENDED,
MARCH 31,
-------------------
1998 1997
------- -------
<S> <C> <C> <C>
Basic EPS Computation:
Net income (numerator) $11,825 $14,051
Weighted average shares outstanding (denominator) 88,301 86,279
BASIC EPS $ 0.13 $ 0.16
======= =======
Diluted EPS Computation:
Net income (numerator) $11,825 $14,051
Weighted average shares outstanding 88,301 86,279
Assumed exercise of all outstanding
stock options 2,287 2,098
------- -------
Weighted average shares outstanding,
diluted basis (denominator) 90,588 88,377
DILUTED EPS $ 0.13 $ 0.16
======= =======
</TABLE>
10
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WATSON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
NOTE D - STOCK SPLIT
In October 1997, the Company effected a two-for-one stock split in the form of a
100% stock dividend. Share and per share amounts for all reported periods have
been restated to reflect the stock split.
NOTE E - LONG-TERM INVESTMENTS
Investments and other assets consisted of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Investments in joint ventures $ 33,577 $ 31,626
Other long-term investments 75,411 92,233
Other assets 7,473 7,224
-------- --------
$116,461 $131,083
======== ========
</TABLE>
Investment in Somerset Pharmaceuticals, Inc. ("Somerset") joint venture
The Company owns 50% of the outstanding common stock of Somerset and utilizes
the equity method to account for this investment. Somerset manufactures and
markets the product Eldepryl(R), which is used in the treatment of Parkinson's
disease. Income recognized from Somerset was approximately $1.8 million and $4.5
million for the three months ended March 31, 1998 and 1997, respectively. Income
is composed of the Company's 50% share of Somerset's earnings and management
fees, offset by amortization of goodwill. The net excess of the cost of this
investment over the fair value of net assets acquired was $6.2 million and $6.4
million at March 31, 1998 and December 31, 1997, respectively. Such goodwill is
amortized on the straight-line basis over 15 years.
The Company has entered into several other joint ventures, including ANCIRC, the
Company's collaboration with Andrx Corporation ("Andrx"), and two agreements
with China-based Changzhou No. 4 Pharmaceuticals Factory.
11
<PAGE> 12
WATSON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Other long-term investments
Other long-term investments are comprised primarily of the Company's investment
in Andrx. Andrx develops advanced controlled-release drug delivery systems and
distributes certain off-patent pharmaceutical products manufactured by others.
Andrx trades publicly on the Nasdaq Stock Market under the symbol ADRX. At March
31, 1998, the Company owned 2.7 million common shares of Andrx, which represents
approximately 18.1% of the total Andrx common shares outstanding. Watson
accounts for this investment using the cost method, adjusted to fair value. At
March 31, 1998, the Company's net unrealized gain on its investment in Andrx was
$22.8 million (net of income taxes of $15.2 million). Such amount is reported as
a separate component of stockholders' equity under the caption "Accumulated
Other Comprehensive Income."
NOTE F - ADOPTION OF NEW ACCOUNTING PRINCIPLES
Reporting Comprehensive Income
As of January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130 "Reporting Comprehensive Income", ("SFAS 130"). SFAS 130
established new rules for the reporting and display of comprehensive income and
its components in the financial statements. Comprehensive income includes all
changes in equity during a period except those resulting from investments by and
distributions to the Company's stockholders. Watson's comprehensive income is
comprised of net income and the unrealized gain (loss) on marketable securities.
The adoption of SFAS 130 had no effect on the Company's consolidated results of
operations, financial position or cash flows. The components of comprehensive
income during the three months ended March 31, 1998 and 1997, were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1998 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Net income $ 11,825 $ 14,051
Unrealized gain (loss) on marketable
securities, net of tax (9,986) 10,992
-------- --------
Comprehensive income $ 1,839 $ 25,043
======== ========
</TABLE>
Disclosures About Segments of an Enterprise and Related Information
In 1997, the Financial Accounting Standards Board issued Statement No. 131,
"Disclosures About Segments of an Enterprise and Related Information" ("SFAS
131") which is required to be adopted for the Company's year ending December 31,
1998. SFAS 131 requires that certain financial information regarding operating
segments be publicly reported on the same basis as used internally by management
to evaluate segment performance. The adoption of SFAS 131 will have no impact on
the Company's consolidated results of operations, financial position or cash
flows.
12
<PAGE> 13
WATSON PHARMACEUTICALS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 1998 AND 1997
Product sales for the three months ended March 31, 1998 were $121.9 million
compared to $58.7 million for the three months ended March 31, 1997, an increase
of $63.2 million or 108%. The increase in revenues was primarily due to sales
generated from products acquired in the second half of 1997, which included
Dilacor XR(R) and certain Women's Health products. Due to recent off-patent
competition, the Company's sales and gross profits from Dilacor XR(R) are likely
to decline in future periods. The Company also had increased sales of
Dermatology products and certain off-patent products. The Company reported no
royalty income in the first quarter of 1998, as compared to royalty income of
$7.0 million in the first quarter of 1997 as a result of its purchase of the
rights to Dilacor XR(R) in June 1997.
Gross profit margins increased to 63.0% in 1998 from 56.2% in 1997. This
increase was due to the higher proportion of branded products sold in the first
quarter of 1998, as compared to 1997. Branded pharmaceutical products, as
contrasted with off-patent pharmaceutical products, are generally characterized
by higher gross profit margins over the course of a product's life cycle.
Research and development expenses increased from $4.6 million in the three
months ended March 31, 1997 to $5.6 million in the 1998 period. Approximately
$400,000 of this increase is due to the February 27, 1998 acquisition of Rugby.
The balance of the increase is due to the Company's ongoing research and
development activities in branded and off-patent pharmaceutical products.
Selling, general and administrative expenses were $20.7 million for the first
quarter of 1998, compared to $10.4 million in the year-ago period. This increase
consists of an $8.3 million increase in sales and marketing expenses and a $2.0
million increase in general and administrative expenses. The Company incurred
additional selling and marketing expenses in support of its newly acquired
branded products in the Primary Care, Women's Health and NeuroPsychiatric
groups. The increased expenses were due primarily to sales force costs,
advertising and other promotional expenses. During 1997 and through March 31,
1998, the Company added a significant number of sales force personnel. At March
31, 1998, the Company had approximately 330 sales and marketing
representatives, as compared to approximately 130 representatives at March 31,
1997.
General and administrative expenses increased by $2.0 million, approximately
$900,000 of which was attributable to the acquisition of Rugby. The remainder of
the increase in general and administrative expenses was related to certain
severance amounts associated with management changes in the first quarter of
1998. As a percentage of net sales, general and administrative expenses declined
from 6.0% in the first quarter of 1997 to 4.5% in the first quarter of 1998.
Amortization expense in the first quarter of 1998 increased to $4.6 million as a
result of product right acquisitions in the second half of 1997. The Company has
capitalized these product rights and is amortizing them over estimated lives of
17 years. The Company recorded cost in excess of net assets acquired (goodwill)
of $25.1 million related to its acquisition of Rugby in February 1998. Goodwill
is amortized on the straight-line method over an estimated life of 20 years. No
significant amortization expense was recorded in the 1997 period.
13
<PAGE> 14
WATSON PHARMACEUTICALS, INC.
In connection with the Rugby acquisition during the first quarter of 1998, the
Company recorded a special non-cash charge of $18.8 million for the write-off of
in-process research and development associated with Rugby's wholly owned
subsidiary, Chelsea Laboratories, Inc. Watson based this charge on an
assessment, in conjunction with an independent valuation firm, of the value of
purchased research and development at Rugby. In the first quarter of 1997, the
Company recorded a one-time charge of $8.9 million for costs incurred in
connection with its acquisition of Oclassen. These costs included investment
banking fees and other merger-related expenses.
Equity in earnings from joint ventures decreased $2.5 million, or 61%, to $1.6
million in the first quarter of 1998 compared to $4.1 million in 1997, due
primarily to lower earnings from Somerset. The decrease in Somerset earnings is
due in part to the loss of exclusivity for Eldepryl(R) in June 1996. During 1997
and 1996, a number of competitors introduced off-patent tablets to compete with
Eldepryl(R) capsules. In recent years, Somerset has also increased its research
and development spending. Management expects the Company's earnings from
Somerset during 1998 to continue to decline.
Investment and other income in the three months ended March 31, 1998 decreased
by $2.5 million to $1.0 million due to lower cash and marketable securities
balances in 1998. The reduced cash and marketable securities balances were the
result of the Company's acquisitions during the second half of 1997 and the
acquisition of Rugby in February 1998.
The provision for income taxes increased to $17.8 million in 1998, compared to
$9.7 million in 1997. The effective income tax rate was 60% and 41% for the
three months ended March 31, 1998 and 1997, respectively. The increase in the
Company's effective income tax rate in 1998 as compared to 1997, was due
primarily to the non-deductibility of the charge for acquired in-process
research and development incurred in connection with the Rugby acquisition.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital decreased from $146.9 million at December 31, 1997
to $73.3 million at March 31, 1998. This $73.6 million decrease was primarily
due to the scheduled payment in January 1998 of $45.0 million for the purchase
of product rights to Dilacor XR(R) and the payment in February 1998 of
approximately $67.5 million in connection with the Rugby acquisition. The
overall decrease was partially offset by cash flows from operations of $52.8
million in the first quarter of 1998 and working capital acquired in the
February 1998 Rugby acquisition.
The growth in the Company's accounts receivable and inventory balances is the
result of increased product sales. The Company performs ongoing credit
evaluations of its customers and maintains reserves for potentially
uncollectible accounts and obsolete inventory. Actual losses have not exceeded
management's expectations.
14
<PAGE> 15
WATSON PHARMACEUTICALS, INC.
At March 31, 1998, the Company had notes payable outstanding of approximately
$3.0 million. In addition, two credit facilities are available to the Company
with unsecured borrowing commitments totaling $95.0 million. Watson made no
borrowings against these credit facilities in the first quarter of 1998.
In April 1998, the Company filed a universal shelf registration ("the
Registration Statement") with the Securities and Exchange Commission. The
Company may offer and sell from time to time securities in one or more series,
in amounts, at prices and on terms to be determined by market conditions at the
time of sale, as discussed in more detail in the Registration Statement. In May
1998, pursuant to the Registration Statement, the Company will issue $150
million 7 1/8% Senior Notes due May 2008. The notes will be issued at a discount
and will yield an effective interest rate of approximately 7 1/4% to the
Company. Watson expects to use the proceeds for general corporate purposes,
including working capital, funding of potential acquisitions of complementary
products, technologies or businesses, future commitments with respect to recent
acquisitions, and capital expenditures.
Management believes that cash provided from operations will be sufficient to
meet its normal operating requirements during the coming year. However, as
previously noted, the Company has entered into several acquisitions that are
expected to require significant future cash payments. Certain of these
transactions also provide for the payment of certain contingent amounts. To
date, the Company has used existing cash to fund its acquisitions. Watson
expects to use operating cash flow and proceeds from the notes described above
in order to meet its remaining acquisition commitments.
The Company continues to review additional opportunities to acquire or invest in
companies, technologies, product rights and other investments that are
compatible with its existing business. Watson could use sources other than cash,
such as financing alternatives discussed herein, to fund additional acquisitions
or investments. If such an acquisition or investment is completed, the Company's
operating results and financial condition could change materially in future
periods.
15
<PAGE> 16
WATSON PHARMACEUTICALS, INC.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
All of the Company's liquid investments are at fixed interest rates and
therefore the fair value of these instruments is affected by changes in market
interest rates. However, substantially all of the Company's liquid investments
mature within one year. As a result, the Company believes that the market risk
arising from its holding of these financial instruments is minimal.
The Company's investment in Andrx, which was stated at a fair value of $75.0
million at March 31, 1998, is composed of 2.7 million shares of Andrx common
stock. Andrx common stock has traded on The Nasdaq Stock Market, under the
symbol "ADRX", since its initial public offering in June 1996. As a publicly
traded equity security, this investment has exposure to price risk. The
following table sets forth the Andrx quarterly high and low share price
information for 1997 and through March 31, 1998:
<TABLE>
<CAPTION>
1997, BY QUARTER HIGH LOW
---------------- ---- ---
<S> <C> <C>
First $ 26.75 $ 15.25
Second $ 38.75 $ 20.50
Third $ 45.63 $ 31.75
Fourth $ 47.00 $ 28.75
1998, FIRST QUARTER $ 38.25 $ 24.50
-------------------
</TABLE>
CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS
The Securities and Exchange Commission (SEC) encourages companies to disclose
forward-looking information so investors may better understand a company's
future prospects and make informed investment decisions. This report contains
such forward-looking statements made pursuant to the safe harbor provisions of
the Securities Litigation Reform Act of 1995. The reader must carefully consider
all such statements as they inherently involve certain risks and uncertainties
that could cause actual results to differ materially from the Company's
forward-looking statements. The reader should carefully evaluate such statements
in light of risk factors described herein or described in the Company's SEC
filings. In particular, the reader should refer to Watson's 1997 Form 10-K and
all filings on Form 8-K during 1997 and 1998.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in various disputes and litigation matters that 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 affect the Company. Management believes, however, that the ultimate
resolution of such matters will not have a material adverse effect on Watson's
financial position or results of operations. There have been no material
developments in any such matters since the filing of the Company's 1997 Form
10-K.
16
<PAGE> 17
WATSON PHARMACEUTICALS, INC.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the registrant's annual meeting of stockholders held on May 4, 1998, two
proposals were set before the stockholders for their vote.
PROPOSAL ONE: Election of two directors to hold office until the 2001 Annual
Meeting
<TABLE>
<CAPTION>
Director - Class III VOTE FOR VOTE WITHHELD
-------------------- -------- -------------
<S> <C> <C>
Allen Chao, Ph.D. 75,131,516 2,372,038
Michel J. Feldman 74,263,002 3,240,552
</TABLE>
PROPOSAL TWO: Ratification of the selection of Price Waterhouse LLP as
independent public accountants for the Company for the current
year
For: 77,188,883
Against: 171,836
Abstain: 142,835
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27.1 Financial Data Schedule (EDGAR version only)
(b) Reports on Form 8-K:
On March 16, 1998, the Company filed a Form 8-K Report to
disclose its completion of the acquisition of The Rugby Group,
Inc.
On April 30, 1998, the Company filed a Form 8-K Report to
disclose its financial results for the quarter ended March 31,
1998.
17
<PAGE> 18
WATSON PHARMACEUTICALS, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
WATSON PHARMACEUTICALS, INC.
(Registrant)
By: /S/ ALLEN CHAO
----------------------------------------
Allen Chao, Ph.D.
Chairman, Chief Executive Officer and
President
(Principal Executive Officer)
By: /S/ CHATO ABAD
----------------------------------------
Chato Abad
Vice President - Finance
(Principal Financial and Accounting
Officer)
Dated: May 15, 1998
18
<PAGE> 19
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<C> <S>
27.1 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 29,665
<SECURITIES> 5,547
<RECEIVABLES> 78,721
<ALLOWANCES> 5,665
<INVENTORY> 64,515
<CURRENT-ASSETS> 203,509
<PP&E> 150,104
<DEPRECIATION> 56,991
<TOTAL-ASSETS> 775,658
<CURRENT-LIABILITIES> 130,196
<BONDS> 0
0
0
<COMMON> 294
<OTHER-SE> 595,167
<TOTAL-LIABILITY-AND-EQUITY> 775,658
<SALES> 121,872
<TOTAL-REVENUES> 121,872
<CGS> 45,100
<TOTAL-COSTS> 94,912
<OTHER-EXPENSES> (2,615)
<LOSS-PROVISION> 20
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 29,575
<INCOME-TAX> 17,750
<INCOME-CONTINUING> 11,825
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,825
<EPS-PRIMARY> 0.13<F1>
<EPS-DILUTED> 0.13
<FN>
<F1>For Purposes of This Exhibit, Primary means Basic
</FN>
</TABLE>
