<PAGE> 1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _________
COMMISSION FILE NUMBER 0-20045
WATSON PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
NEVADA 95-3872914
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
311 BONNIE CIRCLE
CORONA, CA 92880
(Address of principal executive offices, including zip code)
(909) 270-1400
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days: Yes [X] No [ ]
The number of shares of the Registrant's only class of common stock outstanding
as of August 6, 1999 was approximately 95,805,500.
================================================================================
<PAGE> 2
WATSON PHARMACEUTICALS, INC.
INDEX TO FORM 10-Q FOR THE
QUARTERLY PERIOD ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets as of June 30, 1999 and December 31, 1998......... 1
Consolidated Statements of Income for the
Three and Six Months Ended June 30, 1999 and 1998......................... 2
Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 1999 and 1998................................... 3
Notes to Consolidated Financial Statements.................................... 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations......................... 7
Item 3. Quantitative and Qualitative Disclosure about Market Risk................. 12
PART II. OTHER INFORMATION AND SIGNATURES
Item 1. Legal Proceedings......................................................... 13
Item 5. Other Information......................................................... 14
Item 6. Exhibits and Reports on Form 8-K.......................................... 15
Signatures......................................................................... 15
</TABLE>
<PAGE> 3
WATSON PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
---------- ------------
ASSETS (UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents ...................................... $ 55,818 $ 59,663
Marketable securities .......................................... 34,098 32,903
Accounts receivable, net ....................................... 129,615 91,329
Inventories .................................................... 108,623 81,907
Prepaid expenses and other current assets ...................... 14,181 27,358
Deferred tax assets ............................................ 16,183 29,634
---------- ----------
Total current assets ........................................ 358,518 322,794
Property and equipment, net ........................................ 134,265 125,918
Investments and other assets ....................................... 535,820 201,080
Product rights and other intangibles, net .......................... 495,797 481,551
---------- ----------
$1,524,400 $1,131,343
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses .......................... $ 67,953 $ 70,730
Income taxes payable ........................................... 6,194 --
Current portion of long-term debt .............................. 1,973 1,843
Current liability from acquisition of product rights ........... 15,950 30,380
---------- ----------
Total current liabilities ................................... 92,070 102,953
Long-term debt ..................................................... 150,327 151,083
Long-term liability from acquisition of product rights ............. 7,090 23,040
Deferred tax liabilities ........................................... 189,118 54,512
---------- ----------
Total liabilities ........................................... 438,605 331,588
---------- ----------
Commitments and contingencies ......................................
Minority interest .................................................. 400 400
---------- ----------
Stockholders' equity:
Preferred stock; no par value per share;
2,500,000 shares authorized; none outstanding .................. -- --
Common stock; $0.0033 par value per share;
500,000,000 shares authorized; 95,778,000 and 95,312,000
shares issued .................................................. 316 315
Additional paid-in capital ....................................... 390,349 368,777
Retained earnings ................................................ 439,256 370,119
Accumulated other comprehensive income ........................... 255,474 60,144
---------- ----------
Total stockholders' equity .................................. 1,085,395 799,355
---------- ----------
$1,524,400 $1,131,343
========== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
- 1 -
<PAGE> 4
WATSON PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited, in thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- ---------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net revenues ................................ $ 170,242 $ 152,684 $ 329,485 $ 285,020
Cost of sales ............................... 55,427 54,135 105,424 99,775
--------- --------- --------- ---------
Gross profit .......................... 114,815 98,549 224,061 185,245
--------- --------- --------- ---------
Operating expenses:
Research and development ................. 13,573 12,714 23,715 23,377
Selling, general and administrative ...... 28,539 29,266 56,011 54,052
Amortization ............................. 7,350 5,454 14,040 10,071
Merger and related expenses (Note B) ..... -- -- 20,467 --
Charge for acquired in-process
research and development ............... -- -- -- 13,000
--------- --------- --------- ---------
Total operating expenses .............. 49,462 47,434 114,233 100,500
--------- --------- --------- ---------
Operating income ............................ 65,353 51,115 109,828 84,745
--------- --------- --------- ---------
Other income (expense):
Equity in earnings of joint ventures ..... 354 2,179 385 3,790
Investment and other income .............. 927 1,821 1,886 3,293
Interest expense ......................... (2,797) (1,510) (5,615) (1,774)
--------- --------- --------- ---------
Total other income (expense), net ..... (1,516) 2,490 (3,344) 5,309
--------- --------- --------- ---------
Income before income tax provision .......... 63,837 53,605 106,484 90,054
Provision for income taxes .................. 17,671 19,407 37,347 37,157
--------- --------- --------- ---------
Net income .................................. $ 46,166 $ 34,198 $ 69,137 $ 52,897
========= ========= ========= =========
Basic earnings per share .................... $ 0.48 $ 0.36 $ 0.72 $ 0.56
========= ========= ========= =========
Diluted earnings per share .................. $ 0.47 $ 0.35 $ 0.71 $ 0.55
========= ========= ========= =========
Weighted average shares
outstanding, no dilution ................. 95,690 94,825 95,595 94,375
========= ========= ========= =========
Weighted average shares
outstanding, diluted basis ............... 97,930 97,460 98,045 96,915
========= ========= ========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
- 2 -
<PAGE> 5
WATSON PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------------
1999 1998
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ......................................................... $ 69,137 $ 52,897
--------- ---------
Reconciliation to net cash provided by operating activities:
Depreciation .................................................... 6,506 6,017
Amortization .................................................... 14,040 10,071
Charge for acquired in-process research and development ......... -- 13,000
Deferred income tax provision (benefit) ......................... 17,557 (10,338)
Equity in earnings of joint ventures ............................ (144) (3,194)
Tax benefits related to exercise of stock options ............... 9,397 11,889
Other ........................................................... 2,198 1,282
Changes in assets and liabilities, net of acquisition:
Accounts receivable ......................................... (39,154) (515)
Inventories ................................................. (26,716) (10,400)
Prepaid expenses and other current assets ................... 10,768 (1,032)
Other assets ................................................ 406 (1,515)
Accounts payable and accrued expenses ....................... (2,777) 7,489
Income taxes payable ........................................ 6,194 17,364
--------- ---------
Total adjustments ........................................ (1,725) 40,118
--------- ---------
Net cash provided by operating activities ............... 67,412 93,015
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment ................................ (14,671) (11,349)
Purchases of marketable securities ................................. (27,240) (11,309)
Proceeds from maturities of marketable securities .................. 25,967 42,265
Acquisitions of product rights ..................................... (32,984) (54,606)
Acquisition of business ............................................ -- (67,695)
Addition to investment in Andrx .................................... (3,000) --
Additions to investment in joint ventures .......................... (500) (7,435)
--------- ---------
Net cash used by investing activities ................... (52,428) (110,129)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt ........................... -- 148,662
Principal payments on long-term debt ............................... (625) (5,965)
Payments on liability for acquisition of product rights ............ (30,380) (45,380)
Proceeds from exercise of stock options and warrants ............... 12,176 20,185
--------- ---------
Net cash (used) provided by financing activities ........ (18,829) 117,502
--------- ---------
Net increase (decrease) in cash and cash equivalents .... (3,845) 100,388
Cash and cash equivalents at beginning of period ................... 59,663 97,817
--------- ---------
Cash and cash equivalents at end of period ......................... $ 55,818 $ 198,205
========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
- 3 -
<PAGE> 6
WATSON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - GENERAL
The accompanying unaudited consolidated financial statements of Watson
Pharmaceuticals, Inc. ("Watson" or the "Company") should be read in conjunction
with the Company's Annual Report on Form 10-K for the year ended December 31,
1998. In the opinion of management, the accompanying financial statements
contain all adjustments necessary to present fairly the Company's financial
position and results of operations for the periods presented. Unless otherwise
noted, all such adjustments are of a normal, recurring nature. In addition,
certain comparative prior year amounts in the consolidated financial statements
have been reclassified to conform to the current year presentation. The results
of operations for any interim period are not necessarily indicative of the
results of operations to be expected for the entire year.
Watson's consolidated financial statements have been restated to reflect the
January 1999 acquisition of TheraTech, Inc. ("TheraTech") as further discussed
in Note B. This acquisition was accounted for as a pooling of interests and
qualified as a tax-free merger for federal income tax purposes. The accompanying
consolidated financial statements include the results of TheraTech for all
periods presented.
In February 1998, the Company completed its acquisition of The Rugby Group, Inc.
("Rugby"), a developer and marketer of off-patent pharmaceutical products, from
Hoechst Marion Roussel, Inc. The acquisition was accounted for as a purchase and
the accompanying consolidated financial statements include Rugby's results of
operations since the date of its acquisition. Under the purchase method of
accounting, the portion of the purchase price that is allocated to an acquired
company's in-process research and development ("IPR&D") is charged to expense at
the date of acquisition. In the first quarter of 1998, the Company recorded a
charge of $13.0 million for IPR&D in connection with the Rugby acquisition.
NOTE B - ACQUISITION OF THERATECH
Watson completed its acquisition of TheraTech, a leading drug-delivery company
that develops, manufactures and markets innovative products based on its
patented and proprietary technologies and systems, in January 1999. Under the
terms of the TheraTech merger agreement, each share of TheraTech common stock
was converted into the right to receive 0.2663 of a share of the Company's
common stock. Accordingly, the Company issued approximately 5.8 million common
shares, with a market value on the date of acquisition of approximately $330
million, in exchange for all of the outstanding common shares of TheraTech.
In connection with this acquisition, during the first quarter of 1999, Watson
recorded a special charge of $20.5 million for certain merger and related
expenses. The charge consisted of transaction fees for investment bankers,
attorneys, accountants and financial printing costs ($11.1 million) and closure
costs associated with the elimination of duplicate or discontinued products,
operations and facilities ($9.4 million). The eliminated operations were not
significant to the Company and management expects the closure process to be
completed during the third quarter of 1999. The $9.4 million of closure costs
consisted of employee termination costs ($3.9 million), non-cash facility
shutdown and asset impairment costs ($4.2 million) and lease and contract
termination costs ($1.3 million). Through
- 4 -
<PAGE> 7
June 30, 1999, the Company had paid approximately $10.2 million in transaction
costs and paid or charged-off assets of approximately $6.5 million in
closure-related expenses of the TheraTech merger. Accrued merger expenses as of
June 30, 1999 total approximately $3.8 million.
NOTE C - INVENTORIES
Inventories consisted of the following (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
-------- ------------
<S> <C> <C>
Raw materials......... $ 36,414 $ 25,961
Work-in-progress...... 12,283 12,728
Finished goods........ 59,926 43,218
-------- --------
$108,623 $ 81,907
======== ========
</TABLE>
NOTE D - INVESTMENTS AND OTHER ASSETS
Long-term investments consist primarily of the Company's investment in Andrx
Corporation, a drug-delivery company utilizing controlled-release technologies
to develop oral pharmaceutical products. Andrx' common stock trades on the
Nasdaq Stock Market under the symbol ADRX. On June 30, 1999, Watson exercised a
warrant issued by Andrx in July 1994 and acquired approximately 674,000 Andrx
common shares for $3.0 million. As of June 30, 1999, following the warrant
exercise and Andrx' two-for-one stock split in June 1999, the Company held
approximately 6.1 million common shares of Andrx. This represents approximately
19.4% of the total Andrx common shares outstanding. Watson accounts for this
investment using the cost method, adjusted to fair market value. The unrealized
gain on the Company's investment in Andrx was $256.3 million and $60.6 million
(net of income taxes of $170.9 million and $40.4 million), at June 30, 1999 and
December 31, 1998, respectively. This unrealized gain was the primary component
of accumulated other comprehensive income in the stockholders' equity section of
Watson's consolidated balance sheets.
NOTE E - EARNINGS PER SHARE ("EPS")
The following table sets forth the computation of basic and diluted EPS:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
(in thousands, except for EPS) 1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Numerator:
Net income.............................. $46,166 $34,198 $69,137 $52,897
======= ======= ======= =======
Denominators:
Denominator for basic EPS, weighted
average shares outstanding........... 95,690 94,825 95,595 94,375
Assumed exercise of dilutive stock
options and warrants................. 2,240 2,635 2,450 2,540
------- ------- ------- -------
Denominator for diluted EPS............. 97,930 97,460 98,045 96,915
======= ======= ======= =======
Basic EPS................................... $ 0.48 $ 0.36 $ 0.72 $ 0.56
======= ======= ======= =======
Diluted EPS................................. $ 0.47 $ 0.35 $ 0.71 $ 0.55
======= ======= ======= =======
</TABLE>
- 5 -
<PAGE> 8
NOTE F - COMPREHENSIVE INCOME
Comprehensive income includes all changes in equity during a period except those
resulting from investments by and distributions to the Company's stockholders.
Watson's comprehensive income consisted of the following:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
(in thousands) 1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income .................... $ 46,166 $ 34,198 $ 69,137 $ 52,897
Unrealized gain on equity
securities, net of tax ..... 130,520 14,636 195,330 4,650
-------- -------- -------- --------
Comprehensive income .......... $176,686 $ 48,834 $264,467 $ 57,547
======== ======== ======== ========
</TABLE>
NOTE G - SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-----------------------
(in thousands) 1999 1998
------- --------
<S> <C> <C>
Cash paid during the periods for:
Interest.......................................... $ 5,532 $ 412
Income taxes...................................... 13,536 19,718
Acquisition of business:
Fair value of assets acquired..................... $ -- $(93,339)
Fair value of liabilities assumed................. -- 25,644
------- --------
Net cash paid.................................. $ -- $(67,695)
======= ========
</TABLE>
- 6 -
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO 1998
Net revenues for the three months ended June 30, 1999 were $170.2 million
compared to $152.7 million for the 1998 period, an increase of $17.5 million or
11%. Second quarter revenue growth was attributable to increased sales of
branded products, including dermatology and newly acquired female healthcare
products, and increased licensing income. These sales increases were partially
offset by lower sales of the Dilacor XR(R) product and its generic equivalent,
diltiazem, due to supply interruptions, and of certain other generic products,
including various Rugby products phased out in mid-1998. Sales of Dilacor XR(R)
and its generic equivalent may continue to decline in future periods due to
continued supply interruptions at Watson's sole supplier. (See "Item 5. Other
Information") Second quarter 1999 revenues included an $8 million fee arising
from certain outlicensing activities. Overall, branded products accounted for
approximately 50% of net product sales in the second quarter of 1999, up from
approximately 40% in the 1998 period. As a result of the higher margins
generated by branded products, the gross profit margin on product sales
increased to 65% in the second quarter of 1999 from 63% in the same period of
1998.
Research and development expenses increased to $13.6 million in the second
quarter of 1999, compared to $12.7 million in the same period of 1998, due to
differences in the timing of various projects.
Selling, general and administrative expenses decreased to $28.5 million for the
second quarter of 1999, compared to $29.3 million in the prior year period,
primarily due to efficiencies realized from the consolidation of distribution
facilities subsequent to the Rugby acquisition in 1998. This decrease was
partially offset by higher personnel-related costs in the selling and marketing
area, primarily due to expansion of the female healthcare sales force, and in
the administrative area, in support of the Company's growth.
Second quarter amortization expense increased to $7.4 million in 1999, compared
to $5.5 million in the 1998 period, primarily due to amortization of the cost of
the female healthcare product rights acquired in November 1998. Watson has
capitalized such acquired product rights and is amortizing them over estimated
lives of 20 years.
Equity in earnings from joint ventures decreased significantly in the second
quarter of 1999 primarily due to reduced earnings from the Company's 50%
interest in Somerset Pharmaceuticals, Inc., due to lower revenues and higher
research and development costs. Currently, Somerset's sole product is an
anti-Parkinson's drug that lost Orphan Drug exclusivity in 1996, although other
potential indications for this product are under development. This decrease was
partially offset by increased earnings from the ANCIRC joint venture with Andrx
in the 1999 period as a result of a new product launch during second quarter
1999.
Interest expense increased significantly during the second quarter of 1999
compared to the 1998 period due to interest on the Company's $150 million of
senior unsecured notes issued in May 1998.
The second quarter 1999 income tax provision reflects a lower effective tax rate
on pretax income than in 1998, 34% compared to 36%, and a nonrecurring tax
benefit of $4.1 million, both of which result from recent changes in income tax
regulations relating to the "separate return limitation year" ("SRLY")
limitations on the use of acquired net operating loss ("NOL") carryforwards.
Previously, the
- 7 -
<PAGE> 10
Company had maintained a valuation allowance against certain acquired deferred
tax assets related to NOL carryforwards because of uncertainty as to their
future realization under the SRLY limitations. With the June 1999 change in SRLY
rules, management now believes that the carryforwards will be realized and that
the related valuation allowance should be reversed, which reversal will result
in a reduction in the Company's 1999 income tax provision aggregating $9.8
million. For tax purposes, $4.1 million of that total may not be utilized until
future years, and has been reflected as a one-time reduction in income tax
expense during the second quarter 1999. The remaining $5.7 million will be
utilized for tax purposes during 1999 and is being recognized through a
reduction in the Company's effective tax rate, exclusive of the one-time
benefit, to approximately 34% during the second, third and fourth quarters of
1999.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO 1998
Net revenues for the six months ended June 30, 1999 were $329.5 million compared
to $285.0 million for the 1998 period, an increase of $44.5 million or 16%. The
revenue growth was attributable to increased sales of branded products,
including newly acquired female healthcare products and dermatology products.
These sales increases were partially offset by lower sales of the Dilacor XR(R)
product and diltiazem, due to supply interruptions, and of certain other generic
products. Sales of Dilacor XR(R) and its generic equivalent may continue to
decline in future periods due to continued supply interruptions at Watson's sole
supplier. (See "Item 5. Other Information") Overall, branded products accounted
for approximately 50% of net product sales in the first six months of 1999, up
from approximately 40% in the 1998 period. As a result of the higher margins
generated by branded products, the gross profit margin on product sales
increased to 66% in the 1999 period from 63% in 1998.
Selling, general and administrative expenses increased to $56.0 million for the
first half of 1999, compared to $54.1 million in the prior year period. Selling
and marketing expenses accounted for essentially all of this increase, with
higher personnel-related costs more than offsetting lower distribution costs.
The higher personnel costs resulted primarily from the expansion of the female
healthcare sales group, while the decreased distribution costs resulted from
efficiencies of facility consolidation subsequent to the Rugby acquisition.
First half 1999 amortization expense increased to $14.0 million compared to
$10.1 million in the 1998 period, primarily due to amortization of the cost of
the female healthcare product rights acquired in November 1998.
During the first quarters of 1999 and 1998, Watson recorded nonrecurring charges
related to its acquisitions of TheraTech and Rugby, respectively. In connection
with the acquisition of TheraTech, Watson recorded a special charge of $20.5
million for certain merger and related expenses. The charge consisted of
transaction fees for investment bankers, attorneys, accountants and financial
printing costs ($11.1 million) and closure costs associated with the elimination
of duplicate or discontinued products, operations and facilities ($9.4 million).
The eliminated operations were not significant to the Company and management
expects the closure process to be completed during the third quarter of 1999.
The $9.4 million of closure costs consisted of employee termination costs ($3.9
million), non-cash facility shutdown and asset impairment costs ($4.2 million)
and lease and contract termination costs ($1.3 million). Through June 30, 1999,
the Company had paid approximately $10.2 million in transaction costs and paid
or charged-off assets of approximately $6.5 million in closure-related expenses
of the TheraTech merger. Accrued merger expenses as of June 30, 1999 total
approximately $3.8 million. In the first quarter of 1998, the Company recorded a
nonrecurring charge of $13.0 million for IPR&D in connection with the Rugby
acquisition.
- 8 -
<PAGE> 11
Equity in earnings from joint ventures decreased significantly in the first half
of 1999 primarily due to reduced earnings from the Company's interest in
Somerset, partially offset by higher earnings from the ANCIRC joint venture.
Interest expense increased significantly during the six months ended June 30,
1999 due to interest on the Company's $150 million of senior unsecured notes
issued in May 1998.
The provision for income taxes of $37.3 million for the 1999 period reflects an
overall tax rate of 35%, while the $37.2 million provision for 1998 reflects an
overall rate of 41%. The lower 1999 effective tax rate is primarily the result
of a decrease in the amount of non-deductible merger-related charges incurred
during the current year and the realization of certain tax assets due to changes
in income tax regulations.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital increased from $219.8 million at December 31, 1998
to $266.4 million at June 30, 1999. This $46.6 million increase was primarily
due to the Company's net income for the six months ended June 30, 1999 and
growth in its accounts receivable and inventory balances at June 30, 1999. These
working capital increases were partially offset by cash used for the
reacquisition of product rights for the Androderm(R) transdermal patch,
acquisitions of property and equipment and a scheduled payment pursuant to the
purchase of product rights.
In April 1998, the Company filed a registration statement with the SEC to raise
up to $300 million from offerings of senior or subordinated debt securities,
common stock, preferred stock or a combination thereof. In May 1998, pursuant to
this shelf offering, the Company issued $150 million of 7-1/8% senior unsecured
notes due May 2008, with interest payable semi-annually in May and November. The
balance of the Company's shelf offering remains available for issuance at such
times and in such amounts as the Company deems appropriate
In the first quarter of 1999, the Company entered into a credit facility that
provides for unsecured borrowing commitments totaling $30 million. To date, no
borrowings have been made under this credit facility.
Management believes that current cash balances and the cash provided from
operations will be sufficient to meet the Company's normal operating
requirements during the coming year. The Company continues to review additional
opportunities to acquire or invest in companies, technologies, product rights
and other investments that are compatible with its existing business. Watson
could use cash and financing sources discussed herein, or financing sources that
subsequently become available to the Company, to fund additional acquisitions or
investments. If a material acquisition or investment is completed, the Company's
operating results and financial condition could change materially in future
periods.
- 9 -
<PAGE> 12
YEAR 2000 COMPLIANCE PROGRAM
The Year 2000 ("Y2K") issue arises because many computer systems and programs
recognize only the last two digits of years (and not the century designation)
and may be unable to properly recognize and process dates beyond December 31,
1999. Date sensitive systems that use two digits rather than four to identify a
year may recognize the year 2000 as 1900 or some other date, and may
consequently fail or produce erroneous data. Watson's Y2K Compliance Program is
designed to minimize the possibility of serious Y2K interruptions, and consists
of four primary phases:
Phase 1 - evaluate whether the Company's date sensitive systems are able
to interpret dates beyond the year 1999;
Phase 2 - respond to and remedy any inadequacies that may emerge from
the evaluation process in Phase 1;
Phase 3 - investigate the Year 2000 readiness of third parties that
Watson has material relationships with and,
Phase 4 - develop a contingency plan for any of the Company's date
sensitive systems which may not be timely remedied through
procedures in Phase 2.
Watson's Y2K Compliance Program has addressed its primary business application
systems (including manufacturing, sales, distribution and finance), internal
network systems, personal computers and telecommunications systems. Phases 1 and
2 have been completed for these systems and management believes that they are
Y2K compliant. Watson expects to complete Phases 1 and 2 for secondary systems
(including telemarketing support and building security systems, and certain
laboratory support equipment) by October 1999. Watson plans to install new
telemarketing support and building security systems by that date, which systems
have been selected primarily for their enhanced features and to accommodate the
Company's growth, but also because they are Y2K compliant. Watson is in the
process of transitioning TheraTech's primary business application systems to its
Y2K compliant systems, with completion anticipated in the third quarter of 1999.
TheraTech's secondary systems are currently in Phases 1 and 2 of Watson's Y2K
Compliance Program, with completion expected in the fourth quarter of 1999.
In the third quarter of 1998, Watson began Phase 3 of its Y2K Compliance
Program. Phase 3 procedures initially included communication with the Company's
customers, vendors and material service providers regarding their Y2K readiness
plans and progress. Substantially all of these third parties have responded that
they are now, or will be by year-end, Y2K compliant. A small number of Watson's
top 20 customers and top 20 vendors and service providers did not respond. In
these limited instances, second-request letters have been sent and the Company
is contacting the appropriate third party representatives by phone to ascertain
their Y2K readiness. In addition, Watson is attempting to verify the Y2K
readiness of these third parties by reviewing public information including
financial statements and internet sites. Also in Phase 3, the Company upgraded
its electronic data interchange ("EDI") system and is currently testing its EDI
documents with its business partners. Watson expects this EDI testing to be
completed by October 1999.
The cost of Watson's Y2K Compliance Program has not had, and is not expected to
have, a material effect on Watson's financial position or results of operations.
Milestones, implementation dates, contingency plans and the anticipated costs of
Watson's Y2K Compliance Program are subject to change based on new circumstances
that may arise or new information that becomes available.
- 10 -
<PAGE> 13
It is management's opinion that any Y2K-related failures in Watson's internal
information systems and technology infrastructure will not have a material
adverse effect on the Company's results of operations, liquidity or financial
position, however, there can be no assurance that serious interruptions will not
occur. In addition, there can be no assurance that the systems or equipment of
other parties that interact with Watson's systems will be compliant on a timely
basis. Watson believes that the failure of systems or equipment of one or more
of its key third party contractors or customers is the most reasonably likely
worst case Y2K scenario, and that an extended business interruption could
possibly have a material adverse effect on the results of operations, liquidity
or financial position of the Company.
Where appropriate, Watson continues to develop contingency plans in the event
that key third parties do not become Y2K compliant on a timely basis, or in the
event of unanticipated internal system failures. This effort reflects the
formalization of existing disaster recovery plans and includes the procurement
of additional raw material, packaging material and finished goods inventory, the
installation of back-up power generation systems and the implementation of
parallel procedures in key operating areas, among other measures.
The foregoing represents a Y2K readiness disclosure statement pursuant to the
Year 2000 Readiness and Disclosure Act.
CAUTIONARY STATEMENT FOR PURPOSES OF THE SAFE HARBOR PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
This report contains forward-looking statements. The Company desires to take
advantage of the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995 and is including this statement for the express purpose of
availing itself of the protections of the safe harbor with respect to all
forward-looking statements. Several important factors, in addition to the
specific factors discussed in connection with such forward-looking statements
individually, could affect the future results of the Company and could cause
those results to differ materially from those expressed in the forward-looking
statements contained herein.
The Company's estimated or anticipated future results, product performance or
other non-historical facts are forward-looking and reflect Watson's current
perspective of existing trends and information. These statements involve risks
and uncertainties that cannot be predicted or quantified and, consequently,
actual results may differ materially from those expressed or implied by such
forward-looking statements. Such risks and uncertainties include, among others,
the success of Watson's product development activities and the timeliness with
which regulatory authorizations and product roll-out may be achieved, market
acceptance of Watson's products and the impact of competitive products and
pricing, the availability on commercially reasonable terms of raw materials and
other third party sourced products, dependence on sole source suppliers and
risks associated with a production interruption or shipment delays at such
suppliers, successful compliance with extensive, costly, complex and evolving
governmental regulations and restrictions, the ability to timely and cost
effectively integrate acquisitions, exposure to product liability and other
lawsuits and contingencies, the outcome of certain litigation involving the
Company and related costs and expenses and possible diversion of management's
time and attention arising from such litigation, the successful and timely
implementation of the Company's Year 2000 Compliance Program, and other risks
and uncertainties
- 11 -
<PAGE> 14
detailed in this report and from time to time in Watson's other SEC filings
including, without limitation, the Company's Annual Reports on Form 10-K.
Therefore, the Company wishes to caution each reader of this report to consider
carefully these factors as well as the specific factors that may be discussed
with each forward-looking statement in this report or disclosed in the Company's
filings with the SEC as such factors, in some cases, could affect the ability of
the Company to implement its business strategy and may cause actual results to
differ materially from those contemplated by the statements expressed herein.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
As discussed in Note D to the accompanying Notes to Consolidated Financial
Statements, the Company's investment in Andrx, which was stated on Watson's
balance sheet at a fair market value of $467.2 million at June 30, 1999,
consisted of approximately 6.1 million shares of Andrx common stock. This
investment has exposure to price risk, as the Andrx common stock is a publicly
traded equity security, the market price of which has been, and may continue to
be, volatile. The following table sets forth the Andrx quarterly high and low
share market price information, based on published financial sources, for 1998
and through June 30, 1999 (adjusted for the 2-for-1 stock split effective June
1, 1999):
<TABLE>
<CAPTION>
1999, by quarter: HIGH LOW
----------------- --------- ---------
<S> <C> <C>
First................... $ 46.25 $ 22.25
Second.................. 78.00 30.82
1998, by quarter:
First................... $ 19.13 $ 12.25
Second.................. 21.32 14.07
Third................... 21.50 12.94
Fourth.................. 25.85 12.32
</TABLE>
Substantially all of the Company's cash equivalents and marketable securities
are at fixed interest rates and, as such, the fair value of these instruments is
affected by changes in market interest rates. However, all of these investments
mature within one year. As a result, the Company believes that the market risk
arising from its holding of these financial instruments is minimal. The Company
believes that the fair value of its fixed-rate long-term debt approximates its
carrying value of approximately $155 million at June 30, 1999. While changes in
market interest rates may affect the fair value of the Company's long-term debt,
management believes the effect, if any, of reasonably possible near-term changes
in the fair value of such debt on the Company's financial condition, results of
operations or cash flows will not be material. The Company has no material
foreign exchange or commodity price risks.
- 12 -
<PAGE> 15
PART II - OTHER INFORMATION AND SIGNATURES
ITEM 1. LEGAL PROCEEDINGS
Reference is made to Item 3 in the Company's 1998 Annual Report on Form 10-K and
Item 1 in the Company's Form 10-Q for the quarter ended March 31, 1999 for
background information on certain legal proceedings. In addition, from time to
time, the Company is involved in certain other legal proceedings arising in the
normal course of its business. The Company does not believe that such other
matters are likely to have a material adverse effect on the Company. The
following is a description of significant legal proceeding developments during
the period covered by this Quarterly Report.
With respect to the phentermine hydrochloride product liability suits filed
against Rugby Laboratories, Inc. and other Watson entities, additional actions
raising similar issues have been filed. As of July 31, 1999, a total of
approximately 700 cases have been filed against Rugby and other Watson entities
in a number of state courts and federal court. The Company believes that it will
be fully indemnified by Rugby's former owner, Hoechst Marion Roussel, Inc.
("HMR"), for the defense of all such cases and for any liability that may arise
out of these cases. HMR is currently controlling the defense of all these cases
as the indemnifying party under its agreements with the Company.
On August 4, 1999, Watson Laboratories, Inc., a subsidiary of the Company, filed
suit in the United States District Court for the Central District of California
(Watson Laboratories, Inc. vs. Rhone-Poulenc Rorer, Inc., et. al.) seeking
unspecified damages, restitution and injunctive relief to enjoin Rhone-Poulenc
Rorer, Inc. and other defendants and their successors ("RPR"), from producing or
selling products in the United States that compete with the Company's Dilacor
XR(R) product or its generic equivalent. The suit contends that the announced
plans to combine RPR with HMR, which sells Cardizem(R)CD, a product that
competes with the Company's Dilacor XR(R) product or its generic equivalent,
would constitute a breach of the agreements entered into by RPR and Watson
Laboratories, Inc. in connection with the Company's June 1997 acquisition from
RPR of certain worldwide marketing, sales and distribution rights to the Dilacor
XR(R) product and its generic equivalent. The complaint also seeks unspecified
damages from RPR for breach of contract and unfair competition arising, in part,
from RPR's failure to fulfill its supply obligations to the Company for the
Dilacor XR(R) product and its generic equivalent. See "Item 5. Other
Information" below.
On June 9, 1999, a suit was filed against the Company (William Higuchi and
Setsuko Higuchi v. Watson Pharmaceuticals, Inc.) in the United States District
Court for the District of Utah. The plaintiffs allege that they were holders of
TheraTech, Inc. stock certificates and were entitled to receive Company stock
certificates free of any restrictive legends in connection with the Company's
acquisition of TheraTech. The complaint contends, among other things, that the
Company breached its obligation to the plaintiffs by initially issuing Company
stock certificates that contained restrictive legends and by unreasonably
delaying issuance of certificates without restrictive legends, during which time
the trading prices of the Company's stock declined. The complaint includes
various tort and contract claims, and seeks consequential damages of
approximately $11,500,000 and punitive damages. The Company has not yet
responded to the complaint, but believes it has substantial defenses to the
claims made by plaintiffs. The Company also believes that to the extent
liability exists, if at all, the Company may be entitled to indemnification
and/or contribution from third parties.
The Company is unable to predict the likelihood of the outcome of any of these
litigation matters or the potential liability, if any, to the Company that may
arise from these litigation matters.
- 13 -
<PAGE> 16
ITEM 5. OTHER INFORMATION
In June 1997, the Company acquired exclusive United States and certain worldwide
marketing, sales and distribution rights to the Dilacor XR(R) product and its
generic equivalent formulation of diltiazem from RPR for $190 million and future
royalties. In connection with this acquisition, RPR agreed to supply Watson with
all of its requirements for Dilacor XR(R) product and its generic equivalent
through June 2000. For this purpose, RPR designated as its contract manufacturer
Centeon LLC. RPR agreed to remain fully liable to Watson for Centeon's
performance. Centeon is a joint venture between RPR and Hoechst AG and has been
operating under an FDA Consent Decree since January 1997.
In August 1998, Centeon ceased its manufacturing operations after an FDA
inspection. Since that time, Centeon has not manufactured any Dilacor XR(R)
product or its generic equivalent. Centeon is currently the Company's sole
source for these products. The Company has been working with the FDA to secure
the release of certain Centeon inventory existing at the time of Centeon's
production shut-down. Over the last several months, Watson has obtained releases
from time to time of this inventory and continues to work with the FDA to secure
additional releases. Although Watson intends to continue its efforts, there can
be no assurances that any additional inventory will be released from Centeon.
Due to RPR's supply failures, the Company has accelerated its plans to establish
an alternate source of supply for the Dilacor XR(R) product and its generic
equivalent. In this regard, Watson has submitted to the FDA a request for a site
transfer of the manufacturing of the Dilacor XR(R) product and its generic
equivalent to Watson's Corona, California facility. The Company expects that the
FDA will consider approval of its site transfer only after a successful cGMP
inspection of its Corona facility. Watson anticipates that an FDA inspection of
its Corona facility will occur sometime this year.
As reported in the Company's 1998 Annual Report on Form 10-K and its Form 10-Q
for the period ended March 31, 1999, Watson has initiated a quality improvement
plan to address the FDA observations arising from inspections of the Company's
Corona and Miami, Florida facilities in late 1998 and early 1999. Watson is
continuing to implement its quality improvement initiatives and is working with
the FDA to resolve all outstanding issues as speedily as possible. The Company
has pending with the FDA product submissions (including abbreviated new drug
applications) seeking, among other things, approval to manufacture certain
products at its Corona or Miami facilities, as the case may be. The Company
expects that the FDA will consider approval of its pending product submissions
only after a successful cGMP inspection of the relevant facility to which the
submission pertains.
The process for obtaining governmental approval to manufacture and market
pharmaceutical products is rigorous, time-consuming and costly, and Watson
cannot predict the extent to which this process may be affected by legislative
and regulatory developments. Watson is dependent on receiving FDA and other
governmental approvals prior to manufacturing, marketing and shipping its
products. Consequently, there is always the possibility that the FDA or other
applicable agency will not grant such approvals, or that there will be a delay
in the rate or timing or an increase in the cost of such
- 14 -
<PAGE> 17
approvals, any of which could adversely affect Watson's product introduction
plans or results of operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.26 Form of Key Employee Agreement. The Company has entered
into a Key Employee Agreement with each of its executive
officers who include Michael E. Boxer, Allen Y. Chao,
Ph.D., Charles Ebert, Robert C. Funsten, David C. Hsia,
Ph.D. and G. Frederick Wilkinson. A copy of each of
these individual's Key Employee Agreements will be
provided to the Staff upon request.
27.1 Financial Data Schedule (EDGAR version only)
(b) Report on Form 8-K filed during the quarter ended June 30, 1999:
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
WATSON PHARMACEUTICALS, INC.
(Registrant)
By: /s/ MICHAEL E. BOXER
-------------------------------------
Michael E. Boxer
Senior Vice President -
Chief Financial Officer
(Principal Financial Officer)
By: /s/ R. CHATO ABAD
------------------------------------
R. Chato Abad
Vice President - Finance
(Principal Accounting Officer)
Dated: August 12, 1999
- 15 -
<PAGE> 1
EXHIBIT 10.26
WATSON PHARMACEUTICALS, INC.
KEY EMPLOYEE AGREEMENT
This Key Employee Agreement ("Agreement") is entered into as of
__________, 1999 (the "Effective Date"), by and between ________________________
("Executive") and Watson Pharmaceuticals, Inc. (the "Company"), a Nevada
corporation.
WHEREAS, the Company desires to employ Executive to provide personal
services to the Company, and wishes to provide Executive with certain
compensation and benefits in return for his services; and
WHEREAS, Executive wishes to be employed by the Company and provide
personal services to the Company in return for certain compensation and
benefits, including the benefits provided under the Agreement;
NOW, THEREFORE, in consideration of the mutual promises and covenants
contained herein, it is hereby agreed by and between the parties hereto as
follows:
1. EMPLOYMENT BY THE COMPANY. Subject to terms set forth herein,
the Company agrees to employ Executive in the position of _______________ and
Executive hereby accepts employment effective as of the Effective Date. In this
position, Executive shall perform such duties as are assigned from time to time
by the Chief Executive Officer ("CEO") of the Company, consistent with the
Bylaws of the Company and as may be required by the Company's Board of Directors
(the "Board"). During his employment with the Company, Executive will devote his
best efforts and substantially all of his business time and attention (except
for vacation periods as set forth herein and reasonable periods of illness or
other incapacity permitted by the Company's general employment policies) to the
business of the Company. Executive shall abide by the general employment
policies and procedures of the Company, except that wherever the terms of this
Agreement may differ from or are in conflict with the Company's general
employment policies or procedures, this Agreement shall control.
2. COMPENSATION.
2.1 SALARY. For services to be rendered hereunder, Executive
shall receive a base salary as set forth in Section 1 of the Compensation and
Severance Terms Schedule, attached hereto as Exhibit A. Executive will be
considered annually for increases in base salary in accordance with Company
policy and subject to review and approval by the CEO or the Compensation
Committee of the Board, as appropriate.
2.2 BONUS. Executive shall be eligible to participate in the
Company's bonus plan at the executive level throughout the duration of
Executive's employment with the Company. The Company shall have the sole
discretion to determine whether Executive is entitled to any such bonus and to
determine the amount of the bonus. The amount of Executive's bonus may be
determined in part based on Executive's performance with respect to certain
goals established by the Company and attainment by the Company of its planned
financial objectives for the bonus period. Notwithstanding the foregoing, no
bonus is guaranteed to Executive. Any bonus is subject
1.
<PAGE> 2
to the approval of the CEO or the Compensation Committee of the Board, as
appropriate. The Company retains the authority to review, grant, deny or revise
any bonus in its sole discretion. To be eligible to receive a bonus, Executive
must remain in employment with the Company throughout the entire fiscal year.
The target level of such bonus is set forth in Section 2 of Exhibit A attached
hereto.
2.3 STOCK OPTIONS. In addition to any stock options which
the Company may have already granted to Executive prior to the Effective Date,
subject to approval of the Board or the Compensation Committee of the Board, as
appropriate, Executive will receive the stock option grants (if any) set forth
in Section 3 of Exhibit A, and such additional grants of stock options as may
from time to time be granted, pursuant to the terms and conditions set forth in
the applicable stock option agreement and plan documents, copies of which will
be made available upon Executive's request. For the purposes of this Agreement,
all stock options granted to Executive by the Company prior to the Effective
Date, granted hereunder, or granted in the future shall be referred to
hereinafter as the "Options."
2.4 PAID TIME OFF. Executive shall be eligible to accrue
paid time off ("PTO") during the term of this Agreement, in accordance with the
Company's standard policy regarding PTO and in an amount commensurate with other
employees at a level similar to that of the Executive.
2.5 STANDARD COMPANY BENEFITS. Executive shall be entitled
to all rights and benefits for which he is eligible under the terms and
conditions of the standard Company benefits plans (e.g., health and disability
insurance, 401(k) retirement plan, etc.) and other benefits and incentives which
may be in effect from time to time and provided by the Company to employees at
levels similar to the Executive.
3. PROPRIETARY INFORMATION AND INVENTIONS.
Executive agrees to execute and abide by the Employee
Proprietary Information and Inventions Agreement attached hereto as Exhibit C
and made a part hereof by this reference.
4. OUTSIDE ACTIVITIES.
4.1 ACTIVITIES. Except with the prior written consent of the
CEO or the Board, as appropriate, Executive will not during his employment with
the Company undertake or engage in any other employment, occupation or business
enterprise, other than ones in which Executive is a passive investor. Executive
may engage in civic and not-for-profit activities so long as such activities do
not materially interfere with the performance of his duties hereunder.
4.2 INVESTMENTS AND INTERESTS. During his employment by the
Company, Executive agrees not to acquire, assume or participate in, directly or
indirectly, any position, investment or interest known by him to be adverse to
or in conflict with the interest of the Company, its business or prospects,
financial or otherwise. By way of clarification, nothing contained in this
Agreement shall prevent Executive from holding, for investment purposes only, no
more than one percent (1%) of the capital stock of any publicly traded company.
4.3 NON-COMPETITION. During his employment by the Company,
except on behalf of the Company, Executive will not directly or indirectly,
whether as an officer, director,
2.
<PAGE> 3
stockholder, partner, proprietor, associate, representative, consultant, or in
any capacity whatsoever engage in, become financially interested in, be employed
by or have any business connection with any other person, corporation, firm,
partnership or other entity whatsoever known by him to compete directly with the
Company, anywhere in the world, in any line of business engaged in (or planned
to be engaged in) by the Company.
5. OTHER AGREEMENTS.
Executive represents and warrants that his employment by the
Company will not conflict with and will not be constrained by any prior
agreement or relationship with any third party. Executive represents and
warrants that he will not disclose to the Company or use on behalf of the
Company any confidential information governed by any agreement with any third
party except in accordance with an agreement between the Company and any such
third party. During Executive's employment by the Company, Executive may use, in
the performance of his duties, all information generally known and used by
persons with training and experience comparable to his own and all information
which is common knowledge in the industry or otherwise legally in the public
domain.
6. TERMINATION OF EMPLOYMENT.
6.1 AT-WILL EMPLOYMENT. Executive's relationship with the
Company is at-will. The Company shall have the right to terminate Executive's
employment with the Company at any time with or without Cause and with or
without notice.
6.2 TERMINATION BY COMPANY FOR CAUSE. If the Company
terminates Executive's employment at any time for Cause, Executive's salary
shall cease on the date of termination; and Executive will not be entitled to
severance pay, pay in lieu of notice or any other such compensation.
(a) DEFINITION OF "CAUSE." For purposes of this
Agreement, "Cause" shall mean (i) Executive's conviction of any felony; or, (ii)
Executive's gross misconduct, material violation of Company policy, or material
breach of Executive's duties to the Company, which Executive fails to correct
within thirty (30) days after Executive is given written notice by the CEO or
the Board, as appropriate.
6.3 TERMINATION BY COMPANY WITHOUT CAUSE. If the Company
terminates Executive's employment at any time without Cause, Executive shall be
entitled to severance benefits as set forth in Section 4.1 of the Compensation
and Severance Terms Schedule, attached hereto as Exhibit A.
6.4 EXECUTIVE'S VOLUNTARY RESIGNATION. Executive may
terminate his employment with the Company at any time, with or without Good
Reason, and with or without notice. In the event Executive voluntarily
terminates his employment other than for Good Reason, he will not be entitled to
severance pay, pay in lieu of notice or any other such compensation.
6.5 EXECUTIVE'S RESIGNATION FOR GOOD REASON. Executive may
resign his employment for Good Reason so long as Executive tenders his
resignation to the Company within sixty (60) days after the occurrence of the
event which forms the basis for his termination for Good Reason. If Executive
terminates his employment for Good Reason, Executive shall be eligible for
severance benefits as set forth in Section 4.2 of Exhibit A, attached hereto.
3.
<PAGE> 4
(a) DEFINITION OF "GOOD REASON." For purposes of
this Agreement, "Good Reason" shall mean any one of the following events which
occurs on or after the Effective Date: (i) any reduction of the Executive's then
existing annual base salary, except to the extent the annual base salary of all
other executive officers of the Company is similarly reduced (provided such
reduction does not exceed fifteen percent (15%) of Executive's then existing
annual base salary); (ii) any material reduction in the package of benefits and
incentives, taken as a whole, provided to the Executive (except that employee
contributions may be raised to the extent of any cost increases imposed by third
parties) or any action by the Company which would materially and adversely
affect the Executive's participation or reduce the Executive's benefits under
any such plans, except to the extent that such benefits and incentives of all
other executive officers of the Company are similarly reduced; (iii) any
diminution of the Executive's duties, responsibilities, authority, reporting
structure, titles or offices, excluding for this purpose an isolated,
insubstantial or inadvertent action not taken in bad faith which is remedied by
the Company immediately after notice thereof is given by the Executive; (iv)
request that the Executive relocate to a work site that would increase the
Executive's one-way commute distance by more than thirty-five (35) miles from
his then principal residence, unless the Executive accepts such relocation
opportunity; (v) any material breach by the Company of its obligations under
this Agreement; or (vi) any failure by the Company to obtain the assumption of
this Agreement by any successor or assign of the Company.
6.6 TERMINATION FOR DEATH OR DISABILITY. Executive's
employment with the Company will be terminated in the event of Executive's
death, or any illness, disability or other incapacity in such a manner that
Executive is physically rendered unable regularly to perform his duties
hereunder for a period in excess of one hundred eighty (180) consecutive days or
more than one hundred eighty (180) days in any consecutive twelve (12) month
period. The determination regarding whether Executive is physically unable
regularly to perform his duties shall be made by the Board. Executive's
inability to be physically present on the Company's premises shall not
constitute a presumption that Executive is unable to perform such duties. In the
event that Executive's employment with the Company is terminated for death or
disability as described in this Section 6.6, Executive or Executive's heirs,
successors, and assigns shall not receive any compensation or benefits other
than payment of accrued salary and PTO and such other benefits as expressly
required in such event by applicable law or the terms of applicable benefit
plans.
6.7 CESSATION. If Executive violates any provision of
Section 8 of this Agreement or the Employee Proprietary Information and
Inventions Agreement and Executive fails to correct such violation within ten
(10) days after Executive is given written notice by the CEO or the Board, as
appropriate, then any severance payments or other benefits being provided to
Executive will cease immediately, and Executive will not be entitled to any
further compensation from the Company.
7. CHANGE OF CONTROL.
7.1 DEFINITION. For purposes of this Agreement, Change of
Control means the occurrence of any of the following:
(a) a sale of assets representing fifty percent
(50%) or more of the net book value and of the fair market value of the
Company's consolidated assets (in a single transaction or in a series of related
transactions);
4.
<PAGE> 5
(b) a liquidation or dissolution of the Company;
(c) a merger or consolidation involving the Company
or any subsidiary of the Company after the completion of which: (i) in the case
of a merger (other than a triangular merger) or a consolidation involving the
Company, the shareholders of the Company immediately prior to the completion of
such merger or consolidation beneficially own (within the meaning of Rule 13d-3
promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), or comparable successor rules), directly or indirectly, outstanding
voting securities representing less than sixty percent (60%) of the combined
voting power of the surviving entity in such merger or consolidation, and (ii)
in the case of a triangular merger involving the Company or a subsidiary of the
Company, the shareholders of the Company immediately prior to the completion of
such merger beneficially own (within the meaning of Rule 13d-3 promulgated under
the Exchange Act, or comparable successor rules), directly or indirectly,
outstanding voting securities representing less than sixty percent (60%) of the
combined voting power of the surviving entity in such merger and less than sixty
percent (60%) of the combined voting power of the parent of the surviving entity
in such merger;
(d) an acquisition by any person, entity or "group"
(within the meaning of Section 13(d) or 14(d) of the Exchange Act or any
comparable successor provisions), other than any employee benefit plan, or
related trust, sponsored or maintained by the Company or an affiliate of the
Company and other than in a merger or consolidation of the type referred to in
clause "(c)" of this sentence, of beneficial ownership (within the meaning of
Rule 13d-3 promulgated under the Exchange Act, or comparable successor rules) of
outstanding voting securities of the Company representing more than thirty
percent (30%) of the combined voting power of the Company (in a single
transaction or series of related transactions); or
(e) in the event that the individuals who, as of the
Effective Date, are members of the Board (the "Incumbent Board"), cease for any
reason to constitute at least fifty percent (50%) of the Board. (If the
election, or nomination for election by the Company's shareholders, of any new
member of the Board is approved by a vote of at least fifty percent (50%) of the
Incumbent Board, such new member of the Board shall be considered as a member of
the Incumbent Board.)
7.2 TERMINATION AFTER A CHANGE OF CONTROL. In the event
Executive's employment with the Company is terminated without Cause, or
Executive resigns for Good Reason, within thirteen (13) months following a
Change of Control (a "Change of Control Termination"), then Executive shall be
eligible for severance benefits as set forth in Section 4.3 of Exhibit A,
attached hereto.
7.3 PARACHUTE PAYMENTS. In the event that the severance,
acceleration of stock options and other benefits provided for in this Agreement
("Agreement Benefits"), together with benefits otherwise payable to Executive,
(i) constitute a "parachute payment" within the meaning of Section 280G (as it
may be amended or replaced) of the Internal Revenue Code of 1986, as amended or
replaced (the "Code"), and (ii) but for this Section 7.3, would be subject to
the excise tax imposed by Section 4999 (as it may be amended or replaced) of the
Code (the "Excise Tax"), then Executive's Agreement Benefits shall be either
(a) provided to Executive in full, or
5.
<PAGE> 6
(b) provided to Executive only as to such lesser
extent that would result in no portion of such Agreement Benefits being subject
to the Excise Tax,
whichever of the foregoing amounts, taking into account the applicable federal,
state and local income taxes and the Excise Tax, results in the receipt by
Executive, on an after-tax basis, of the greatest amount of benefits,
notwithstanding that all or some portion of such Agreement Benefits may be
taxable under the Excise Tax. If clause (b) above is applicable, then at the
option of Executive, Executive and the Company shall enter into a consulting
agreement which shall (i) provide the Executive with payments and benefits,
payable over the term of the agreement, the present value of which in the
aggregate is equal to or greater than the present value (determined by applying
a discount rate equal to the interest rate provided in Section 1274(b)(2)(B) of
the Code) of the amount of the reduction in Agreement Benefits otherwise payable
to Executive, but not in excess of reasonable compensation for the consulting
services, (ii) require Executive to make his services available to the Company
for no more than thirty (30) hours per month, (iii) have a term of not more than
three (3) years (unless Executive consents to a longer period), and (iv) contain
appropriate provisions restricting Executive from competition with the Company
or being employed by or consulting for a competing business for the duration of
the consulting period (provided that Executive's Options remain exercisable in
accordance with their terms during the consulting period).
Unless the Company and Executive otherwise agree in writing, any determination
required under this Section 7.3 shall be made in writing in good faith by the
Company's independent public accountants (or independent public accountants
selected by the Executive in the event that the independent public accountants
of the entity involved in the Change of Control are the same as those of the
Company) (the "Accountants"). In the event of a reduction in benefits hereunder,
Executive shall be given the choice, subject to approval by the Company, of
which benefits to reduce. For purposes of making the calculations required by
this Section 7.3, the Accountants may make reasonable assumptions and
approximations concerning applicable taxes and may rely on reasonable, good
faith interpretations concerning the application of the Code. The Company and
Executive shall furnish to the Accountants such information and documents as the
Accountants may reasonably request in order to make a determination under this
Section 7.3. The Company shall bear all costs the Accountants may reasonably
incur in connection with any calculations contemplated by this Section 7.3.
8. NONSOLICITATION. While employed by the Company, and for one (1)
year following the termination of Executive's employment with the Company,
Executive agrees not to solicit, attempt to solicit, induce, or otherwise cause
any employee or independent contractor of the Company to terminate his or her
employment or contractual relationship in order to become an employee or
independent contractor to or for Executive or any other person or entity.
9. RELEASE. In exchange for the severance compensation and benefits
provided under this Agreement to which Executive would not otherwise be
entitled, Executive shall enter into and execute a release substantially in the
form attached hereto as Exhibit B (the "Release") upon Executive's termination
of employment. Unless the Release is executed by Executive and delivered to the
Company within twenty-one (21) days (forty-five (45) days in the event of a
group termination) after the termination of Executive's employment with the
Company, Executive shall not receive any severance benefits provided under this
Agreement, acceleration, if any, of Executive's Options as provided in this
Agreement shall not apply and Executive's Options in such
6.
<PAGE> 7
event may be exercised following the date of Executive's termination only to the
extent provided under their original terms in accordance with the applicable
stock option plan and option agreements.
10. GENERAL PROVISIONS.
10.1 NOTICES. Any notices provided hereunder must be in
writing and shall be deemed effective upon personal delivery (including,
personal delivery by facsimile transmission) or the third day after mailing by
first class mail, to the Company at its primary office location and to Executive
at his address as listed on the Company payroll (which address may be changed by
written notice).
10.2 SEVERABILITY. Whenever possible, each provision of this
Agreement will be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be invalid or
unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity or unenforceability will not affect any other
provision or any other jurisdiction, and such invalid or unenforceable provision
shall be reformed, construed and enforced in such jurisdiction so as to render
it valid and enforceable consistent with the intent of the parties insofar as
possible.
10.3 WAIVER. If either party should waive any breach of any
provisions of this Agreement, he or it shall not thereby be deemed to have
waived any preceding or succeeding breach of the same or any other provision of
this Agreement.
10.4 ENTIRE AGREEMENT. This Agreement, together with the
Employee Proprietary Information and Inventions Agreement, constitute the final,
complete, and exclusive embodiment of the entire agreement between Executive and
the Company regarding the subject matter hereof and supersede any prior
agreement, promise, representation, or statement, written or otherwise, between
Executive and the Company with regard to this subject matter. This Agreement is
entered into without reliance on any promise, representation, statement or
agreement other than those expressly contained or incorporated herein, and it
cannot be modified or amended except in a writing signed by Executive and a duly
authorized officer of the Company.
10.5 COUNTERPARTS. This Agreement may be executed in separate
counterparts, any one of which need not contain signatures of more than one
party, but all of which taken together will constitute one and the same
Agreement.
10.6 HEADINGS. The headings of the sections hereof are
inserted for convenience only and shall not be deemed to constitute a part
hereof nor to affect the meaning thereof.
10.7 SUCCESSORS AND ASSIGNS. This Agreement is intended to
bind and inure to the benefit of and be enforceable by Executive, the Company
and their respective successors, assigns, heirs, executors and administrators,
except that Executive may not assign any of his duties hereunder and he may not
assign any of his rights hereunder without the written consent of the Company,
which shall not be withheld unreasonably.
10.8 ATTORNEYS' FEES. If either party hereto brings any
action to enforce his or its rights hereunder, the prevailing party in any such
action shall be entitled to recover his or its reasonable attorneys' fees and
costs incurred in connection with such action.
7.
<PAGE> 8
10.9 ARBITRATION. To provide a mechanism for rapid and
economical dispute resolution, Executive and the Company agree that any and all
disputes, claims, or causes of action, in law or equity, arising from or
relating to this Agreement (including the Release) or its enforcement,
performance, breach, or interpretation, will be resolved, to the fullest extent
permitted by law, by final, binding, and confidential arbitration held in Orange
County, California and conducted by Judicial Arbitration & Mediation
Services/Endispute ("JAMS"), under its then-existing Rules and Procedures.
Nothing in this Section 10.9 or in this Agreement is intended to prevent either
Executive or the Company from obtaining injunctive relief in court to prevent
irreparable harm pending the conclusion of any such arbitration.
10.10 REMEDIES. Executive's duties under Section 8 and the
Employee Proprietary Information and Inventions Agreement shall survive
termination of Executive's employment with the Company. Executive acknowledges
that a remedy at law for any breach or threatened breach by Executive of the
provisions of these sections and the Employee Proprietary Information and
Inventions Agreement would be inadequate, and that such a breach would cause
irreparable harm to the Company; and Executive therefore agrees that the Company
shall be entitled to injunctive relief in case of any such breach or threatened
breach.
10.11 GOVERNING LAW. All questions concerning the
construction, validity and interpretation of this Agreement will be governed by
the law of the State of California as applied to contracts made and to be
performed entirely within California.
IN WITNESS WHEREOF, the parties have executed this Agreement effective
as of the Effective Date above written.
WATSON PHARMACEUTICALS, INC.
By:
-------------------------------------
Name:
Title:
EXECUTIVE:
-------------------------------------
Name:
8.
<PAGE> 9
EXHIBIT A
COMPENSATION AND SEVERANCE TERMS SCHEDULE
1. BASE SALARY
For services to be rendered under this Agreement, Executive shall
receive an initial base salary at an annualized rate of $_____________, payable
in accordance with the Company's standard payroll practices, and subject to
increases as set forth in the Agreement.
2. BONUS
Executive's annual bonus, if granted, shall be at a target level of __%
of Executive's then current salary.
3. STOCK OPTIONS
As of the Effective Date, Executive has outstanding option(s) to
purchase the number of shares of Company common stock as indicated on Attachment
A to this Exhibit A.
4. SEVERANCE BENEFITS
4.1 TERMINATION BY COMPANY WITHOUT CAUSE. If the Company terminates
Executive's employment at any time without Cause, the Company shall provide to
Executive, within thirty (30) days after the Effective Date of the Release
attached hereto as Exhibit B (as "Effective Date" is defined in the Release), as
the only severance compensation and benefits, a lump sum severance payment,
subject to standard withholdings or deductions, in an amount equal to the sum
of: (a) two times twelve (12) months of Executive's then base salary; (b) two
times Executive's bonus to be earned for the year in which the termination
occurs or two times the bonus amount paid to Executive in the prior year,
whichever is greater; and (c) Executive's prorated bonus (based on Executive's
target bonus amount) for the year in which the termination occurs. In addition,
the Company will provide Executive with continued group health insurance
benefits (medical, dental and vision) for Executive and Executive's eligible
dependents for a period of up to eighteen (18) months under COBRA, and if
Executive is not covered under the Company's group health insurance plan at the
end of eighteen (18) months, the Company shall use its best efforts to provide
Executive and Executive's eligible dependents with comparable health insurance
coverage for an additional period of up to six (6) months, but the Company shall
not be obligated to pay more than one hundred fifty percent (150%) of the cost
of COBRA coverage for such comparable coverage; provided, however, that in any
event the Company's obligation to provide any health benefits pursuant to this
sentence ends when Executive becomes eligible for health insurance with a new
employer (and Executive agrees to promptly notify the Company in writing of any
such event of eligibility).
4.2 EXECUTIVE'S RESIGNATION FOR GOOD REASON. If Executive terminates
his employment with the Company for Good Reason, the Company shall provide to
Executive, as the only severance compensation and benefits, the same severance
compensation and benefits provided in Section 4.1 hereof.
1.
<PAGE> 10
4.3 CHANGE OF CONTROL TERMINATION. In the event of a Change of
Control Termination, the Company shall provide to Executive, as the only
compensation and benefits, (a) the same severance compensation and benefits
provided in Section 4.1 hereof and, (b) any unvested Options held by Executive
shall have their vesting accelerated in full so as to become one hundred percent
(100%) vested and immediately exercisable in full as of the date of such
termination.
2.
<PAGE> 11
EXHIBIT B
RELEASE AGREEMENT
I understand that my position with Watson Pharmaceuticals, Inc. (the "Company")
terminated effective _______________ (the "Separation Date"). The Company has
agreed that if I choose to sign this Release, the Company will, within thirty
(30) days after the Effective Date of this Release, pay me certain severance
benefits (minus the standard withholdings and deductions) pursuant to the terms
of the Key Employee Agreement (the "Agreement") entered into as of
______________, 1999, between myself and the Company, and any agreements
incorporated therein by reference. I understand that I am not entitled to such
severance benefits unless I sign this Release. I further understand that,
regardless of whether I sign this Release, the Company will pay me all of my
accrued salary and paid time off through the Separation Date, to which I am
entitled by law.
In consideration for the severance benefits I am receiving under the Agreement,
I hereby release the Company and its officers, directors, agents, attorneys,
employees, shareholders, parents, subsidiaries, and affiliates from any and all
claims, liabilities, demands, causes of action, attorneys' fees, damages, or
obligations of every kind and nature, whether they are now known or unknown,
arising at any time prior to the date I sign this Release. This general release
includes, but is not limited to: all federal and state statutory and common law
claims, claims related to my employment or the termination of my employment or
related to breach of contract, tort, wrongful termination, discrimination,
harassment, defamation, fraud, wages or benefits, or claims for any form of
equity or compensation. Notwithstanding the release in the preceding sentence, I
am not releasing any right of indemnification I may have for any liabilities and
costs of defense (including without limitation reasonable attorneys' fees)
arising from my actions within the course and scope of my employment with the
Company.
In releasing claims unknown to me at present, I am waiving all rights and
benefits under Section 1542 of the California Civil Code, and any law or legal
principle of similar effect in any jurisdiction: "A GENERAL RELEASE DOES NOT
EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS
FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE
MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR."
If I am forty (40) years of age or older as of the Separation Date, I
acknowledge that I am knowingly and voluntarily waiving and releasing any rights
I may have under the federal Age Discrimination in Employment Act of 1967, as
amended ("ADEA"). I also acknowledge that the consideration given for the waiver
in the above paragraph is in addition to anything of value to which I was
already entitled. I have been advised by this writing, as required by the ADEA
that: (a) my waiver and release do not apply to any claims that may arise after
my signing of this Release; (b) I should consult with an attorney prior to
executing this Release; (c) I have twenty-one (21) days (forty-five (45) days in
the event of a group termination) within which to consider this Release
(although I may choose to voluntarily execute this Release earlier); (d) I have
seven (7) days following the execution of this release to revoke the Release;
and (e) this Release will not be effective until the eighth day after this
Release has been signed both by me and by the Company ("Effective Date").
Agreed:
- ----------------------------------- ----------------------------------------
Date [EMPLOYEE]
<PAGE> 12
EXHIBIT C
WATSON PHARMACEUTICALS, INC.
EMPLOYEE PROPRIETARY INFORMATION
AND INVENTION AGREEMENT
In consideration of my employment or continued employment by WATSON
PHARMACEUTICALS, INC. or one of its subsidiaries (collectively, the "COMPANY"),
and the compensation now and hereafter paid to me, I hereby agree as follows:
1. NONDISCLOSURE.
1.1 RECOGNITION OF COMPANY'S RIGHTS; NONDISCLOSURE. At all times
during my employment and thereafter, I will hold in strictest confidence and
will not disclose, use, lecture upon or publish any of the Company's Proprietary
Information (defined below), except for such disclosure, use or publication as
may be required in connection with my work for the Company, or unless the Chief
Executive Officer or General Counsel of the Company expressly authorizes such
disclosure, use or publication in writing. I will obtain Company's written
approval before publishing or submitting for publication any material (written,
oral, or otherwise) that relates to my work at Company and/or incorporates any
Proprietary Information. I hereby assign to the Company any rights I may have or
acquire in such Proprietary Information and recognize that all Proprietary
Information shall be the sole property of the Company and its assigns.
1.2 PROPRIETARY INFORMATION. The term "PROPRIETARY INFORMATION"
shall mean any and all confidential and/or proprietary knowledge, data or
information of the Company and its affiliated entities. By way of illustration
but not limitation, "PROPRIETARY INFORMATION" includes (a) information regarding
compositions of matter, compounds, formulations, devices, machines, manufacture,
diseases, therapeutic indications, mechanisms, processes, formulas, data,
programs, manuals, protocols, other works of authorship, know-how and
improvements, and (b) information regarding plans for research, development, new
products, marketing and selling, business plans, budgets and unpublished
financial statements, licenses, prices and costs, suppliers and customers; and
(c) information regarding the skills and compensation of other employees of the
Company. Notwithstanding the foregoing, it is understood that, at all such
times, I am free to use information which is generally known in the trade or
industry, which is not gained as result of a breach of this Agreement, and my
own skill, knowledge, know-how and experience to whatever extent and in
whichever way I wish.
1.3 THIRD PARTY INFORMATION. I understand, in addition, that the
Company has received and in the future will receive from third parties
confidential or proprietary information ("THIRD PARTY INFORMATION") subject to a
duty on the Company's part to maintain the confidentiality of such information
and to use it only for certain limited purposes. During the term of my
employment and thereafter, I will hold Third Party Information in the strictest
confidence and will not disclose to anyone (other than Company personnel who
need to know such information in connection with their work for the Company) or
use, except in connection with my work for the Company, Third Party Information
unless expressly authorized in writing by the Chief Executive Officer or General
Counsel of the Company.
<PAGE> 13
1.4 NO IMPROPER USE OF INFORMATION OF PRIOR EMPLOYERS AND OTHERS.
During my employment by the Company I will not improperly use or disclose any
confidential information or trade secrets, if any, of any former employer or any
other person to whom I have an obligation of confidentiality, and I will not
bring onto the premises of the Company any unpublished documents or any property
belonging to any former employer or any other person to whom I have an
obligation of confidentiality unless consented to in writing by that former
employer or person. I will use in the performance of my duties only information
which is generally known and used by persons with training and experience
comparable to my own, which is common knowledge in the industry or otherwise
legally in the public domain, or which is otherwise provided or developed by the
Company.
2. ASSIGNMENT OF INVENTIONS.
2.1 INVENTIONS. The term "INVENTIONS" shall mean any and all
inventions, discoveries, designs, improvements, and ideas, whether patentable or
not, and copyrightable material. By way of illustration but not limitation,
"Inventions" include processes, machines, manufactures, compositions of matter,
organisms, molecules, cells, tissues, compounds, reagents, ingredients,
metabolites, precursors, intermediates, formulations, devices, diagnostics,
therapeutics, formulas, data, data compilations, programs, manuals, protocols,
and other works of authorship.
2.2 PROPRIETARY RIGHTS. The term "PROPRIETARY RIGHTS" shall mean all
trade secret, patent, trademark, service mark, tradename, domain name,
copyright, and other intellectual property rights throughout the world.
2.3 PRIOR INVENTIONS. Inventions, if any, patented or unpatented,
which I made prior to the commencement of my employment with the Company are
excluded from the scope of this Agreement. To preclude any possible uncertainty,
I have set forth on Exhibit B (Previous Inventions) attached hereto a complete
list of all Inventions that I have, alone or jointly with others, conceived,
developed or reduced to practice or caused to be conceived, developed or reduced
to practice prior to the commencement of my employment with the Company, that I
consider to be my property or the property of third parties and that I wish to
have excluded from the scope of this Agreement (collectively referred to as
"PRIOR INVENTIONS"). If disclosure of any such Prior Invention would cause me to
violate any prior confidentiality agreement, I understand that I am not to list
such Prior Inventions in Exhibit B but am only to disclose a cursory name for
each such invention, a listing of the party(ies) to whom it belongs and the fact
that full disclosure as to such inventions has not been made for that reason. A
space is provided on Exhibit B for such purpose. If no such disclosure is
attached or completed, I represent that there are no Prior Inventions. If, in
the course of my employment with the Company, I incorporate a Prior Invention
into a Company product, process or machine, the Company is hereby granted and
shall have a nonexclusive, royalty-free, irrevocable, perpetual, worldwide
license (with rights to sublicense through multiple tiers of sublicensees) to
make, have made, modify, improve, use, sell, offer to sell, import and export
such Prior Invention. I agree not to incorporate into any Company product any
Prior Invention that I do not own or with respect to which I do not have the
right to grant such a nonexclusive license to the Company. Notwithstanding the
foregoing, I agree that I will not incorporate, or permit to be incorporated,
Prior Inventions in any Company Inventions without the Company's prior written
consent.
2.
<PAGE> 14
2.4 ASSIGNMENT OF INVENTIONS. Subject to Sections 2.5 and 2.7, I
hereby assign and agree to assign in the future (when any such Inventions or
Proprietary Rights are first conceived, reduced to practice or fixed in a
tangible medium, as applicable) to the Company all my right, title and interest
in and to any and all Inventions (and all Proprietary Rights with respect
thereto) whether or not patentable or registrable under copyright or similar
statutes, made or conceived or reduced to practice or learned by me, either
alone or jointly with others, during the period of my employment with the
Company. Inventions assigned to the Company, or to a third party as directed by
the Company pursuant to this Section 2, are hereinafter referred to as "COMPANY
INVENTIONS."
2.5 NONASSIGNABLE INVENTIONS. This Agreement does not apply to an
Invention which qualifies fully as a nonassignable Invention under Section 2870
of the California Labor Code (hereinafter "SECTION 2870"). I have reviewed the
notification on Exhibit A (Limited Exclusion Notification) and agree that my
signature acknowledges receipt of the notification.
2.6 OBLIGATION TO KEEP COMPANY INFORMED. During the period of my
employment and for twelve (12) months after termination of my employment with
the Company, I will promptly disclose to the Company fully and in writing all
Inventions authored, conceived or reduced to practice by me, either alone or
jointly with others that relate to the Company's field of business or to the
work I performed for the Company during my employment ("Related Subsequent
Inventions"). In addition, I will promptly disclose to the Company all patent
applications filed by me or on my behalf within a year after termination of
employment that claim or disclose Related Subsequent Inventions. At the time of
each such disclosure, I will advise the Company in writing of any Inventions
that I believe fully qualify for protection under Section 2870; and I will at
that time provide to the Company in writing all evidence necessary to
substantiate that belief. The Company will keep in confidence and will not use
for any purpose or disclose to third parties without my consent any confidential
information disclosed in writing to the Company pursuant to this Agreement
relating to Inventions that qualify fully for protection under the provisions of
Section 2870. I will preserve the confidentiality of any Invention that does not
fully qualify for protection under Section 2870.
2.7 GOVERNMENT OR THIRD PARTY. I also agree to assign all my right,
title and interest in and to any particular Invention to a third party,
including without limitation the United States, as directed by the Company.
2.8 WORKS FOR HIRE. I acknowledge that all original works of
authorship which are made by me (solely or jointly with others) within the scope
of my employment and which are protectable by copyright are "works made for
hire," pursuant to United States Copyright Act (17 U.S.C., Section 101).
2.9 ENFORCEMENT OF PROPRIETARY RIGHTS. I will assist the Company in
every proper way to obtain, and from time to time enforce, United States and
foreign Proprietary Rights relating to Company Inventions in any and all
countries. To that end I will execute, verify and deliver such documents and
perform such other acts (including appearances as a witness) as the Company may
reasonably request for use in applying for, obtaining, perfecting, evidencing,
sustaining and enforcing such Proprietary Rights and the assignment thereof. In
addition, I will execute, verify and deliver assignments of such Proprietary
Rights to the Company or its
3.
<PAGE> 15
designee. My obligation to assist the Company with respect to Proprietary Rights
relating to such Company Inventions in any and all countries shall continue
beyond the termination of my employment, but the Company shall compensate me at
a reasonable rate after my termination for the time actually spent by me at the
Company's request on such assistance.
In the event the Company is unable for any reason, after reasonable
effort, to secure my signature on any document needed in connection with the
actions specified in the preceding paragraph, I hereby irrevocably designate and
appoint the Company and its duly authorized officers and agents as my agent and
attorney in fact, which appointment is coupled with an interest, to act for and
in my behalf to execute, verify and file any such documents and to do all other
lawfully permitted acts to further the purposes of the preceding paragraph with
the same legal force and effect as if executed by me. I hereby waive and
quitclaim to the Company any and all claims, of any nature whatsoever, which I
now or may hereafter have for infringement of any Proprietary Rights assigned
hereunder to the Company.
3. RECORDS. I agree to keep and maintain adequate and current
records (in the form of notes, sketches, drawings and in any other form that may
be required by the Company) of all Proprietary Information developed by me and
all Inventions made by me during the period of my employment by the Company,
which records shall be available to and remain the sole property of the Company
at all times.
4. ADDITIONAL ACTIVITIES. I agree that during the period of my
employment by the Company I will not, without the Company's express written
consent, engage in any employment or business activity which is competitive
with, or would otherwise conflict with, my employment by the Company. I agree
further that for the period of my employment by the Company and for one (l) year
after the date of termination of my employment by the Company I will not induce
any employee of the Company to leave the employ of the Company.
5. NO CONFLICTING OBLIGATION. I represent that my performance of
all the terms of this Agreement and as an employee of the Company does not and
will not breach any agreement to keep in confidence information acquired by me
in confidence or in trust prior to my employment by the Company. I have not
entered into, and I agree I will not enter into, any agreement either written or
oral in conflict herewith.
6. RETURN OF COMPANY DOCUMENTS. When I leave the employ of the
Company, I will deliver to the Company any and all drawings, notes, memoranda,
specifications, devices, formulas, samples, and documents, together with all
copies thereof, and any other material containing or disclosing any Company
Inventions, Third Party Information or Proprietary Information of the Company. I
further agree that any property situated on the Company's premises and owned by
the Company, including disks and other storage media, desks, lockers, filing
cabinets or other work areas, is subject to inspection by Company personnel at
any time with or without notice. Prior to leaving, I will cooperate with the
Company in completing the Company's termination interview process and will sign
the Company's termination statement if so requested.
7. LEGAL AND EQUITABLE REMEDIES. Because my services are personal
and unique and because I may have access to and become acquainted with the
Proprietary
4.
<PAGE> 16
Information of the Company, the Company shall have the right to enforce this
Agreement and any of its provisions by injunction, specific performance or other
equitable relief, without bond and without prejudice to any other rights and
remedies that the Company may have for a breach of this Agreement.
8. NOTICES. Any notices required or permitted hereunder shall be
given to the appropriate party at the address specified below or at such other
address as the party shall specify in writing. Such notice shall be deemed given
upon personal delivery to the appropriate address or if sent by certified or
registered mail, three (3) days after the date of mailing.
9. NOTIFICATION OF NEW EMPLOYER. In the event that I leave the
employ of the Company, I hereby consent to the notification of my new employer
of my rights and obligations under this Agreement.
GENERAL PROVISIONS.
9.1 GOVERNING LAW; CONSENT TO PERSONAL JURISDICTION. This Agreement
will be governed by and construed according to the laws of the State of
California, as such laws are applied to agreements entered into and to be
performed entirely within California between California residents. I hereby
expressly consent to the personal jurisdiction of the state and federal courts
located in Riverside County, California for any lawsuit filed there against me
by Company arising from or related to this Agreement.
9.2 SEVERABILITY. In case any one or more of the provisions
contained in this Agreement shall, for any reason, be held to be invalid,
illegal or unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect the other provisions of this Agreement, and
this Agreement shall be construed as if such invalid, illegal or unenforceable
provision had never been contained herein. Moreover, if any one or more of the
provisions contained in this Agreement shall for any reason be held to be
excessively broad as to duration, geographical scope, activity or subject, it
shall be construed by limiting and reducing it, so as to be enforceable to the
extent compatible with the applicable law as it shall then appear.
9.3 SUCCESSORS AND ASSIGNS. This Agreement will be binding upon my
heirs, executors, administrators and other legal representatives and will be for
the benefit of the Company, its successors, and its assigns.
9.4 SURVIVAL. The provisions of this Agreement shall survive the
termination of my employment and the assignment of this Agreement by the Company
to any successor in interest or other assignee.
9.5 EMPLOYMENT. I agree and understand that the Company is an "at
will" employer and that nothing in this Agreement shall confer any right with
respect to continuation of employment by the Company, nor shall it interfere in
any way with my right or the Company's right to terminate my employment at any
time, with or without cause.
9.6 WAIVER. No waiver by the Company of any breach of this Agreement
shall be a waiver of any preceding or succeeding breach. No waiver by the
Company of any right under
5.
<PAGE> 17
this Agreement shall be construed as a waiver of any other right. The Company
shall not be required to give notice to enforce strict adherence to all terms of
this Agreement.
9.7 ENTIRE AGREEMENT. The obligations pursuant to Sections 1 and 2
of this Agreement shall apply to any time during which I was previously
employed, or am in the future employed, by the Company as a consultant if no
other agreement governs nondisclosure and assignment of inventions during such
period. This Agreement is the final, complete and exclusive agreement of the
parties with respect to the subject matter hereof and supersedes and merges all
prior discussions between us. No modification of or amendment to this Agreement,
nor any waiver of any rights under this Agreement, will be effective unless in
writing and signed by the party to be charged. Any subsequent change or changes
in my duties, salary or compensation will not affect the validity or scope of
this Agreement.
This Agreement shall be effective as of the first day of my employment
with the Company.
I HAVE READ THIS AGREEMENT CAREFULLY AND UNDERSTAND ITS TERMS. I HAVE
COMPLETELY FILLED OUT EXHIBIT B TO THIS AGREEMENT.
Dated:
----------------------------------
SIGNATURE:
------------------------------
EMPLOYEE NAME:
--------------------------
(TYPE OR PRINT)
ACCEPTED AND AGREED:
WATSON PHARMACEUTICALS, INC.
By:
-------------------------------------
Title:
----------------------------------
6.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the Watson
Pharmaceuticals, Inc. Form 10-Q for the period ended June 30, 1999 and is
qualified in its entirety by reference to such report.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 55,818
<SECURITIES> 34,098
<RECEIVABLES> 133,202
<ALLOWANCES> 3,587
<INVENTORY> 108,623
<CURRENT-ASSETS> 358,518
<PP&E> 207,579
<DEPRECIATION> 73,314
<TOTAL-ASSETS> 1,524,400
<CURRENT-LIABILITIES> 92,070
<BONDS> 150,327
0
0
<COMMON> 316
<OTHER-SE> 1,085,079
<TOTAL-LIABILITY-AND-EQUITY> 1,524,400
<SALES> 329,485
<TOTAL-REVENUES> 329,485
<CGS> 105,424
<TOTAL-COSTS> 105,424
<OTHER-EXPENSES> 3,344
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,615
<INCOME-PRETAX> 106,484
<INCOME-TAX> 37,347
<INCOME-CONTINUING> 69,137
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 69,137
<EPS-BASIC> 0.72
<EPS-DILUTED> 0.71
</TABLE>
