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As filed with the Securities and Exchange Commission on January 6, 2000
Registration No. 333-70943
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Pre-Effective Amendment No. 2
TO
FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
_________________________________
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, CALIFORNIA 92880-2882
(909) 270-1400
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
_______________________________
ROBERT C. FUNSTEN
SENIOR VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY
WATSON PHARMACEUTICALS, INC.
311 BONNIE CIRCLE
CORONA, CALIFORNIA 92880-2882
(909) 270-1400
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
COPIES TO:
MICHEL J. FELDMAN, ESQ.
STEVE CURTIS, ESQ.
D'ANCONA & PFLAUM LLC
111 E. WACKER DR., STE. 2800
CHICAGO, IL 60601-4205
(312) 602-2000
--------------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
From time to time after the effective date of this
Registration Statement on Form S-3
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If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462 (b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462 (c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
<TABLE>
CALCULATION OF REGISTRATION FEE
- -----------------------------------------------------------------------------------------------------------------
Title of securities to be Amount to be Proposed maximum Proposed maximum Amount of
registered registered offering price per aggregate offering Registration fee
share price
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
common stock
($0.0033 par value) 55,587 (1) (7) $ 34.54 (2) $ 1,920,071 $ 506.90 (3)
- -----------------------------------------------------------------------------------------------------------------
common stock
($0.0033 par value) 20,000 (4) (7) $ 34.125 (5) $ 682,500 $ 180.18 (6)
Total Registration Fee: $ 687.08
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The shares to be registered relate to shares of common stock of
TheraTech, Inc. which were issuable upon exercise of all options outstanding
under the TheraTech, Inc. 1992 Amended and Restated Directors' Stock Option
Plan. Pursuant to an Agreement and Plan of Merger dated as of October 23, 1998
(the "Merger Agreement"), these options have been converted to the right to
acquire an aggregate of 55,587 shares of Watson Pharmaceuticals, Inc. ("Watson"
or "Registrant" or "Company") common stock.
(2) Represents the weighted average exercise price of options granted
under the Plan, as adjusted to reflect the exchange ratio as set forth in the
Merger Agreement. Actual exercise prices range from $22.53 to $42.25 per share.
(3) Registration fee computed pursuant to Rule 457(h)(1).
(4) The number of shares set forth to be registered corresponds to the
estimated aggregate number of shares of common stock of the Registrant which
could be issued under a Technology Purchase Agreement by and between TheraTech,
Inc, now known as Watson Laboratories, Inc. - Utah ("TheraTech" or "Watson-
Utah"), a wholly owned subsidiary of Watson, and Innovative Devices, LLC, a
North Carolina limited liability company. In conjunction with the merger of a
subsidiary of Watson into TheraTech, Innovative Devices entered into a Consent
Agreement whereby Innovative Devices agreed to accept Watson shares in lieu of
TheraTech shares, at the same exchange ratio as set forth in the Merger
Agreement, as consideration under the Technology Purchase Agreement.
(5) Estimated solely for purposes of calculating the registration fee and
based on the average high and low prices of the Company's common stock on
January 4, 2000, as reported by the New York Stock Exchange.
(6) Registration fee computed pursuant to Rule 457(c).
(7) This Registration Statement also relates to such indeterminate number
of additional shares of common stock of Watson as may be issuable as a result of
stock dividends, stock splits, reclassifications and other changes affecting
Watson common stock.
_______________________
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file an amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933, as amended, or until this registration statement shall
become effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
INTRODUCTORY STATEMENT NOT FORMING PART OF PROSPECTUS
This registration statement on Form S-3 relates to the shares of the
registrant's common stock issuable upon exercise of the TheraTech stock options
described herein as well as to the estimated aggregate number of shares of the
registrant's common stock issuable pursuant to a Technology Purchase Agreement
between TheraTech, Inc., now known as Watson Laboratories, Inc. - Utah
("TheraTech" or "Watson-Utah"), a wholly owned subsidiary of Watson, and
Innovative Devices, LLC, a North Carolina limited liability company. The
registrant has already filed a registration statement on Form S-8 (File No. 333-
70933) relating to shares of its common stock issuable upon exercise of the
stock options held by officers, consultants, and employees of TheraTech which
are eligible to be registered on Form S-8.
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Subject to Completion, Dated January 6, 2000
PROSPECTUS
WATSON PHARMACEUTICALS, INC.
75,587 SHARES
COMMON STOCK
This prospectus relates solely to the offer and sale of up to 75,587
shares of Watson common stock which may be issued from time to time. Up to
55,587 shares of common stock may be issued upon exercise of stock options
issued under the TheraTech Directors' Stock Option Plan; and up to 20,000 shares
may be issued pursuant to a Technology Purchase Agreement between TheraTech,
Inc., now known as Watson Laboratories, Inc. - Utah, a wholly owned subsidiary
of Watson, and Innovative Devices, LLC, a North Carolina limited liability
company. After issuance, these shares may be subsequently sold by one or more of
the selling stockholders listed under the caption "Selling Stockholder
Information".
You should read this prospectus and any prospectus supplements
carefully before you invest.
Our common stock is listed on the New York Stock Exchange under the
symbol "WPI." On January 5, 2000, the last reported sale price of the
company's common stock on the New York Stock Exchange was $34.5625 per share.
The shares offered in this prospectus may be sold from time to time
directly by any of the selling stockholders or certain transferees or affiliates
of the selling stockholders, including donees and pledgees selling shares
received from a selling stockholder after the date of this prospectus.
Alternatively, a selling stockholder may from time to time offer the shares
through underwriters, dealers or agents who may receive compensation in the form
of underwriting discounts, concessions or commissions. No selling stockholder is
required to offer or sell any of the shares. All proceeds from the sale of the
shares will be paid to the selling stockholders and we will not receive any
proceeds from the offer and sale of these shares by the selling stockholders. We
will bear all of the expenses in connection with the registration of these
shares, including legal and accounting fees.
This investment involves risks. See "Risk Factors" beginning on page 4.
---------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
---------------------
The date of this prospectus is January 6, 2000
The information in this prospectus is not complete and may be changed.
Neither we nor the selling stockholders may sell these securities until the
registration statement filed with the Securities and Exchange Commission is
effective. This prospectus is not an offer to sell these securities and it is
not soliciting an offer to buy these securities in any state where the offer or
sale is not permitted.
<PAGE>
You should rely only on the information contained or incorporated by
reference in this prospectus and in any prospectus supplement. No one is
authorized to provide you with different information.
You should not assume that the information in this prospectus or any
prospectus supplement is accurate as of any date other than the date provided on
the front page of the documents.
This prospectus is neither an offer to sell these shares nor a
solicitation of an offer to buy the shares in any state where the offer or sale
is not permitted.
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WATSON PHARMACEUTICALS, INC.
Watson Pharmaceuticals, Inc. is engaged in the development, production,
marketing and distribution of branded and off-patent pharmaceutical products.
Watson's products include therapeutic and preventive agents generally sold by
prescription or over-the-counter for the treatment of human diseases and
disorders.
Branded Pharmaceutical Products
New pharmaceutical products are often patented and, as a result,
generally are offered by a single provider when first introduced to the market.
In addition to patented products, certain trademarked off-patent products that
are promoted directly to healthcare professionals are treated by Watson as
branded pharmaceutical products.
Off-Patent Pharmaceutical Products
When the relevant patents no longer protect a branded product (either
due to the patent's expiration or otherwise), opportunities exist for third
parties to introduce generic counterparts to the branded product. Such generic
or off-patent pharmaceutical products are therapeutically equivalent to their
brand-name counterparts and are generally sold at prices less than the branded
product. Accordingly, off-patent pharmaceuticals provide a safe, effective and
cost-efficient alternative to users of branded products.
Recent Acquisitions
Watson has made significant recent acquisitions of businesses, products
and technologies. During 1997, Watson acquired Royce Laboratories, Inc., a
developer and manufacturer of off-patent pharmaceutical products, and Oclassen
Pharmaceuticals, Inc., a developer and marketer of dermatology products. Watson
acquired The Rugby Group, Inc., a developer and marketer of off-patent
pharmaceutical products, in February 1998. Watson also made several product
acquisitions during 1997 and 1998, including the acquisition of certain oral
contraceptive products from G.D. Searle & Co. and the acquisition of an
anti-hypertensive product from Rhone-Poulenc Rorer. In January 1999, Watson
acquired TheraTech, Inc., a leading drug-delivery company, which is now known as
Watson Laboratories, Inc. - Utah (for ease of reference the term TheraTech
within this prospectus shall refer to Watson Laboratories, Inc. - Utah). In May
1999, TheraTech reacquired from SmithKline Beecham all marketing and
distribution rights in the United States and Canada for TheraTech's Androderm(R)
testosterone transdermal system. In October 1999, TheraTech reacquired from
Procter & Gamble marketing and distribution rights to two female hormone
replacement therapy products. Watson continues regularly to review potential
opportunities to acquire or invest in other technologies, products or product
rights and businesses compatible with its existing business.
Watson's principal executive offices are located at 311 Bonnie Circle,
Corona, California 92880-2882. Its telephone number is (909) 270-1400.
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RISK FACTORS
In addition to other information in this prospectus, you should
carefully consider the following risk factors in evaluating Watson's business.
Risks Associated with Investing in Watson Common Stock
As part of our business strategy, we intend to pursue transactions that may
cause us to experience significant charges to earnings that may adversely affect
our stock price and financial condition.
We regularly review potential transactions related to technologies,
products or product rights and businesses complementary to our business. Such
transactions could include mergers, acquisitions, strategic alliances, licensing
agreements or co-promotion agreements. In the future, we may choose to enter
into such transactions at any time. Depending upon the nature of any
transaction, we may experience a charge to earnings, which could be material,
and could possibly have an adverse impact upon the market price of our common
stock. For example, in connection with the TheraTech merger, we recorded
merger-related expenses of $20.5 million in the first quarter of 1999.
Watson's stock price has experienced substantial volatility and may continue to
be volatile.
The market price of Watson common stock has been and may continue to be
particularly volatile. For example, the market price of Watson common stock has
fluctuated during the past twelve months between $26.50 per share and $62.9375
per share and may continue to fluctuate. Market price fluctuations in our stock
may be due to acquisitions or other material public announcements, along with a
variety of additional factors including, without limitation:
- new product introductions,
- the purchasing practices of our customers,
- changes in the degree of competition for our products,
- the announcement of technological innovations or new
commercial products by us or our competitors,
- changes in governmental regulation affecting our business
environment,
- regulatory issues, including but not limited to, receipt of
new drug approvals from the FDA, compliance with FDA or other
agency regulations, or the lack or failure of either of the
foregoing,
- the issuance of new patents or other proprietary rights,
- the announcement of earnings,
- the loss of key personnel,
- the inability to acquire sufficient supplies of finished
products or raw materials,
- litigation and/or threats of litigation,
- publicity regarding actual or potential clinical results with
respect to products we have under development, and
- political developments or proposed legislation in the
pharmaceutical or healthcare industry.
These and similar factors have had and could in the future have a significant
impact on the market price of Watson's common stock. Some companies that have
had volatile market prices for their securities have been subject to securities
class action suits filed against them. If a suit were to be filed against us,
regardless of the outcome or the
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merits of the action, it could result in substantial costs and a diversion of
our management's attention and resources. This could have a material adverse
effect on our business, results of operations and financial condition.
Investors should not look to dividends as a source of income.
We have not paid any cash dividends since inception. In addition, we do
not anticipate paying cash dividends in the foreseeable future. Consequently,
any economic return to a stockholder will be derived, if at all, from
appreciation in the price of our stock, and not as a result of dividend
payments.
We may issue additional equity securities which would lead to dilution of your
ownership interest.
In April 1998, we filed a shelf registration statement with the SEC
which allows us to raise up to $300 million from offerings of senior or
subordinated debt securities, common stock, preferred stock or a combination
thereof, at such times and in such amounts as we deem appropriate. To date, we
have issued $150 million in senior unsecured notes pursuant to such registration
statement. These securities may be used to acquire technology, products, product
rights and businesses, among other purposes. The issuance of additional equity
securities or securities convertible into equity securities for these or other
purposes would result in dilution of existing stockholders' equity interests in
Watson.
Watson is authorized to issue, without shareholder approval, one or more
preferred series of stock, which may give other stockholders dividend,
conversion, voting, and liquidation rights, among other rights, which may be
superior to the rights of holders of Watson common stock.
The Watson Board of Directors has the authority to issue, without vote
or action of stockholders, shares of preferred stock in one or more series, and
has the ability to fix the rights, preferences, privileges and restrictions of
any such series. Any such series of preferred stock could contain dividend
rights, conversion rights, voting rights, terms of redemption, redemption
prices, liquidation preferences or other rights superior to the rights of
holders of Watson common stock. The Watson Board of Directors has no present
intention of issuing any such preferred series, but reserves the right to do so
in the future.
Risks Associated with Investing in the Business of Watson
In order to remain profitable and continue to grow and develop our business, we
are dependent on successful product development and commercialization of newly
developed products. If we are unable to successfully develop or commercialize
new products, our operating results will suffer.
Watson's future results of operations will depend to a significant
extent upon its ability to successfully commercialize new branded and off-patent
pharmaceutical products in a timely manner. These new products must be
continually developed, tested and manufactured and, in addition, must meet
regulatory standards and receive requisite regulatory approvals. Products
currently in development by the company may or may not receive the regulatory
approvals necessary for marketing by Watson or other third-party partners.
Furthermore, the development and commercialization process is time-consuming and
costly. If any of Watson's products, if and when acquired or developed and
approved, cannot be successfully commercialized, Watson's operating results
could be adversely affected. This risk particularly exists with respect to the
development of proprietary products because of the uncertainties and higher
costs associated with research and development of such products and the unproven
market acceptance of such products. Delays or unanticipated costs in any part of
the process or the inability of Watson to obtain regulatory approval for its
products, including failure to maintain its manufacturing facilities in
compliance with all applicable regulatory requirements, could adversely affect
Watson's operating results. In this regard, please see the risk factor titled
"Extensive industry regulation has had, and may continue to have, an impact on
our manufacturing capabilities" located on page 8 for more information.
Watson is dependent on key personnel for its continued growth and development.
Loss of such key personnel could have a material adverse effect on Watson.
The success of Watson's present and future operations will depend, to a
significant extent, upon the experience, abilities and continued services of
certain executive officers of Watson. In this regard, Allen Y. Chao, Ph.D.,
Chief Executive Officer, President and Chairman of Watson, was recently
diagnosed with very early stage stomach cancer. Subsequently, he underwent
successful surgery and is doing well. Dr. Chao recently completed a course of
chemotherapy which he elected to undertake to better ensure a complete and
thorough recovery. Although
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Watson has recently elected Fred Wilkinson as Chief Operating Officer and has
other senior management personnel, a significant loss of the services of Dr.
Chao or other key personnel could have a material adverse effect on the company.
Watson has entered into employment agreements with all of its senior executive
officers, including Dr. Chao. Watson does not carry key-man life insurance on
any of its officers.
If we are unable to adequately protect our technology or enforce our patents we
may be less able to successfully exploit such technology or use such patents to
secure an advantage over our competitors.
Although we have not experienced significant problems to date, our
success with the patented brand name products that we have developed may depend
in part on our ability to obtain patent protection for such products. We
currently have a number of U.S. and foreign patents issued and pending. However,
if our patent applications are not approved, or, if approved, if such patents
are not upheld in a court of law, it may reduce our ability to competitively
exploit our patented products. Also, such patents may or may not provide
competitive advantages for their respective products or they may be challenged
or circumvented by competitors, in which case the company's ability to
commercially exploit these products may be diminished.
We also rely on trade secrets and proprietary know-how that we seek to
protect, in part, through confidentiality agreements with our partners,
customers, employees and consultants. It is possible that these agreements will
be breached or that they won't be enforceable in every instance, and that we
will not have adequate remedies for any such breach. It is also possible that
our trade secrets will become known or independently developed by competitors.
From time to time we may need to rely on licenses to proprietary technologies,
which may be difficult or expensive to obtain.
We may need to obtain licenses to patents and other proprietary rights
held by third parties to develop, manufacture and market products. If we are
unable to obtain these licenses on commercially reasonable terms, our ability to
commercially exploit such products may be inhibited or prevented.
Patent, trademark and copyright litigation is becoming more widespread and can
be expensive and may delay or prevent entry of our products, especially
generics, into the market.
Litigation concerning patents, trademarks, copyrights and proprietary
technologies can be protracted and expensive. Additionally, brand companies are
increasingly suing companies that produce off-patent generic forms of their
patented brand name products for alleged patent and/or copyright infringement or
other violations of intellectual property rights which may delay or prevent the
entry of such a generic into the market. Since a large part of our business
deals with the marketing and development of off-patent products, there is a risk
that such a brand company may sue us for alleged patent, trademark and/or
copyright infringement or other violations of intellectual property rights. For
example, upon Watson's August, 1999 launch of its Nicotine Polacrilex Gum, which
is the generic equivalent to SmithKline Beecham Consumer Healthcare's
Nicorette(R) Gum, which is used as an aid to smoking cessation, SmithKline
Beecham served Watson with a lawsuit alleging that the User Guide and
Audiocassette included with Watson's Gum product infringe SmithKline Beecham's
copyrights. Following the filing of the lawsuit by SmithKline Beecham, the U.S.
District Court for the Southern District of New York issued a preliminary
injunction enjoining Watson, during the pendency of the lawsuit, from selling or
shipping its Nicotine Polacrilex Gum with a User Guide or Audiocassette that is
"strikingly or substantially" similar to SmithKline Beecham's User Guide and
Audiocassette. The Court also ordered Watson to recall any such product it had
previously shipped to customers. Subsequently, the District Court modified the
preliminary injunction to allow Watson to ship and sell its Nicotine Gum with a
revised User's Guide and Audiotape. SmithKline Beecham has appealed the decision
of the District Court to the U.S. Court of Appeals for the Second Circuit. The
Second Circuit has stayed the District Court's order pending the hearing for
SmithKline Beecham's appeal, which is set for January 13, 2000. Such litigation
or other similar litigation may be costly and time consuming, and could result
in a substantial delay or prevention of the introduction of Watson's products,
any of which could have a material adverse effect on our business, financial
condition or results of operations.
As a part of our business strategy we plan to continue making acquisitions of
businesses. Inherent in this practice is a risk that we may experience
difficulty integrating the businesses of companies that we have acquired into
our operations, which would be disruptive to our management and operations.
The merger of two companies involves the integration of two businesses
that have previously operated independently. Difficulties encountered in
integrating two businesses could have a material adverse effect on the operating
results or financial condition of the combined company's business. As a result
of uncertainty following a merger and during the integration process, Watson
could experience disruption in its business or employee base. There is also a
risk that key employees of a merged company may seek employment elsewhere,
including with
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competitors. For example, Dr. Dinesh Patel, the former Chief Executive Officer,
President and Chairman of TheraTech, resigned from his employment with TheraTech
following the merger to pursue other interests. If Watson and a merger partner
are not able to successfully blend their products and technology to create the
advantages that the merger is intended to create, it may affect Watson's results
of operations, its ability to develop and introduce new products and the market
price of your shares. Further, there may be overlap between the products or
customers of Watson and the merged company that may create conflicts in
relationships or other commitments detrimental to the integrated businesses.
If Watson is unable to acquire sufficient supplies from key suppliers that in
some cases may be the only source of finished products or raw materials, then
Watson's ability to deliver its products to the market may be impeded.
Some materials used in Watson's manufactured products, and some
products sold by Watson, are currently available only from sole or limited
suppliers. This includes products that have historically accounted for a
significant portion of Watson's revenues. For some products sold by Watson only
one or very few suppliers have been approved for the products or certain
materials used in the products. For example, Watson has agreements with
Rhone-Poulenc Rorer, Inc. and its affiliates (collectively "RPR") whereby RPR
agreed to supply Watson with all of its requirements for Dilacor XR(R) 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. In August 1998, Centeon ceased its manufacturing
operations after an FDA inspection. Since that time, Centeon has not
manufactured any Dilacor XR(R) or its generic equivalent. RPR/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 inventory and has recently
secured the release of all remaining inventory at Centeon. Nonetheless, extended
interruption in the production and supply of Dilacor XR(R) and its generic
equivalent from RPR, or delays in approving on a timely basis another third
party or Watson as the manufacturer of such product, could have a material
adverse effect on Watson's Dilacor XR(R) sales and the sales of its generic
equivalent, as well as on Watson's reputation in the marketplace.
On August 4, 1999 Watson filed suit against RPR and certain of its
affiliates for its failure to fulfill supply obligations to the company for
Dilacor XR(R) and its generic equivalent, among other claims. The company is
unable to predict the likelihood of the outcome of the litigation against RPR.
The company has accelerated its plans to establish an alternate source of supply
for Dilacor XR(R) and its generic equivalent. However, sources for materials for
Watson's products must be approved by the U.S. Food and Drug Administration
and/or other governmental agencies or bodies. In this regard, Watson has
submitted to the FDA a request for a site transfer of the manufacturing of
Dilacor XR(R) 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 current Good Manufacturing Practices ("cGMP")
inspection of its Corona facility. See the risk factor entitled "Extensive
industry regulation has had, and may continue to have, an impact on our
manufacturing capabilities" on page 8.
If we, our suppliers, distributors or other third parties are unable to
adequately address the potential disruptions to computer systems that may occur
due to the year 2000, we may not be able to effectively commercialize our
products.
Watson has assessed and continues to assess the potential impact of the
situation commonly referred to as the "Year 2000 Issue." The Year 2000 Issue
concerns the inability of information systems and computer software programs to
properly recognize and process date sensitive information relating to the Year
2000 and beyond. Watson has a Y2K Compliance Program in place which consists of
four primary phases that are currently underway and which management believes
will adequately address the Year 2000 Issue. However, if third party payors,
suppliers, distributors, transporters or joint venture partners do not
adequately address their Year 2000 Issues or if Watson fails to successfully
complete its Y2K Compliance Program and related year 2000 initiatives, there
could be a disruption of our operations, including, among other things, an
inability to engage in normal business activities which could possibly have a
material adverse effect on our results of operations or financial position.
Watson does not necessarily control the joint ventures it is involved in, and
the lack of control could result in reduced earnings from the commercial
exploitation of certain products.
A portion of Watson's net income is derived from joint ventures. In
addition, a substantial portion of Watson's efforts in developing
controlled-release technology prior to the TheraTech merger was primarily
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conducted through joint ventures. These arrangements involve various joint
venture partners, such as Mylan Laboratories, Inc. and Andrx Corp., each of
which is a competitor of Watson. Watson does not control the joint ventures or
the commercial exploitation of the licensed products. Although restrictions
contained in certain of Watson's joint venture arrangements have not in the past
had a material adverse impact on Watson's marketing of its products, any such
marketing restriction could affect future revenues and have a material adverse
effect on its operations. Watson's results of operations may be negatively
impacted if existing collaborative or joint venture partners withdraw or if
these products are not timely developed, approved or successfully
commercialized.
The testing, marketing and sale of our products involves the risk of product
liability claims by consumers and other third parties, and insurance against
such potential claims is expensive.
The design, development and manufacture of Watson's products involve an
inherent risk of product liability claims and associated adverse publicity.
Insurance coverage is expensive and may be difficult to obtain, and may not be
available in the future on acceptable terms, or at all. Although Watson
currently maintains product liability insurance for its products in the amounts
it believes to be commercially reasonable, if the coverage limits of these
insurance policies are not adequate, a claim brought against Watson, whether
covered by insurance or not, could have a material adverse effect upon Watson.
Risks Associated with Investing in the Pharmaceutical Industry
Extensive industry regulation has had, and will continue to have, a significant
impact on our business, especially our product development and manufacturing
capabilities.
All pharmaceutical manufacturers are subject to extensive, complex,
costly and evolving governmental regulations and restrictions administered by
the U.S. Food and Drug Administration, other federal and state agencies, and
numerous governmental authorities in other countries. Moreover, Watson and
certain of its vendors are subject to the periodic inspection of their
facilities and operations and/or the testing of their products by the FDA, the
U.S. Drug Enforcement Agency and similar state, local and foreign regulatory
authorities. Each of these organizations conducts periodic inspections to
confirm continued compliance with its regulations.
In connection with such an inspection in December 1998 by the FDA of
the company's Corona, California facility, the FDA issued to the company a
Warning Letter in January 1999. The Warning Letter related to the company's
quality systems and cGMP compliance, including areas such as documentation,
training and laboratory controls. The FDA further inspected the company's Corona
facility in the first and fourth quarters of 1999. At the close of each of these
inspections, the FDA issued to Watson a Form 483 listing the agency's
observations during the inspection. The observations from the first quarter
inspection generally related to the company's quality systems and cGMP
compliance including areas such as laboratory controls, documentation,
investigations, training, data review, and validation. The observations from the
fourth quarter inspection generally related to the company's quality systems and
cGMP compliance including areas such as training and documentation. The company
has responded to the FDA and has initiated and continues to implement quality
improvements at its Corona facility. However, in light of the uncertainties
inherent in the regulatory process, we can not assure you that the agency will
find the company's responses adequate or that the agency will not require
additional action.
In connection with a January 1999 inspection of the company's Miami,
Florida facility, the FDA issued to Watson a Warning Letter in April 1999. In
the Warning Letter, the agency commented that observations about inadequate
investigations, documentation and training had appeared in past inspection
reports (although the FDA acknowledged that a number of these had occurred prior
to Watson's purchase of the Miami facility). Watson has responded to the FDA and
has initiated and continues to implement quality improvements at its Miami
facility. However, in light of the uncertainties inherent in the regulatory
process, we can not assure you that the agency will find the company's responses
adequate or that the agency will not require additional action.
Watson has pending with the FDA product submissions (including
abbreviated new drug applications) seeking, among other things, approval to
manufacture certain products at the Corona or Miami facilities, as the case may
be. Watson 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.
8
<PAGE>
Failure to comply with FDA and other governmental regulations (including
without limitation cGMPs) can result in fines, unanticipated compliance
expenditures, interruption of production, suspension of the government's review
of product submissions, enforcement actions, injunctions and criminal
prosecution. Although Watson has instituted internal compliance programs, if
such programs do not meet regulatory agency standards or if compliance is
deficient in any way, it may have a material adverse effect on the company.
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 it 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 chance that the FDA or other
applicable agency will not approve products, or that the rate, timing and cost
of such approvals will adversely effect Watson's product introduction plans or
results of operations.
Because we are smaller than many of our national competitors in the branded
pharmaceutical products sector, we may lack the financial and other resources
needed to maintain our profit margins and to capture increased market share in
this sector.
The intensely competitive environment of the branded product business
requires an ongoing, extensive search for technological innovations and the
ability to market products effectively, including the ability to communicate the
effectiveness, safety and value of branded products to healthcare professionals
in private practice, group practices and managed care organizations. Our branded
pharmaceutical business operates primarily in the following divisional areas:
Dermatology, Women's Health and General Products. Our competitors vary depending
upon product categories, and within each product category, upon dosage strengths
and drug-delivery systems. Such competitors include the major brand name
manufacturers of pharmaceuticals such as Johnson & Johnson and American Home
Products. Based on total assets, annual revenues, and market capitalization, we
are smaller than these and other national competitors in the branded product
arena. For example, our market capitalization is approximately $3.3 billion
compared to Johnson & Johnson ($129 billion) and American Home Products
($55.8 billion). These competitors, as well as others, have been in business
for a longer period of time than Watson, have a greater number of products on
the market and have greater financial and other resources. If we directly
compete with them for the same markets and or products, their financial strength
could prevent us from capturing a profitable share of those markets.
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements concerning future
events or performance of our company. You should not rely excessively on these
forward-looking statements, because they are only predictions based on our
current expectations and assumptions. Forward-looking statements often contain
words like "estimate," "anticipate," "believe" or "expect." Many known and
unknown risks and uncertainties could cause our actual results to differ
materially from those indicated in these forward-looking statements. Such risk
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 scope, outcome and timeliness of any governmental, court or
other regulatory action (including, without limitation, the scope, outcome, or
timeliness of any inspection or other action of the FDA), the ability to timely
and cost effectively integrate acquisitions, exposure to product liability and
other lawsuits and contingencies, the outcome of certain litigation involving us
and related costs and expenses and possible diversion of management's time and
attention arising from such litigation, the successful and timely implementation
of our Y2K Compliance Program, and other risks and uncertainties detailed in
this prospectus and from time to time in Watson's other SEC filings including,
without limitation, our Annual Reports on Form 10-K.
Therefore, the company wishes to caution each reader of this prospectus to
consider carefully these factors as well as the specific factors that may be
discussed with each forward-looking statement in this prospectus 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.
9
<PAGE>
USE OF PROCEEDS
Watson will not receive any proceeds from the sale of shares of common
stock by the selling stockholders. Watson will receive no proceeds from the
issuance of the shares to Innovative Devices (although Innovative Devices
undertook certain contractual obligations as set forth in the Technology
Purchase Agreement it entered into with TheraTech). Watson will receive proceeds
from the exercise of any options to purchase common stock of Watson if and when
the options are exercised. Watson intends to use the net proceeds from the
exercise of options for general corporate purposes and working capital.
PLAN OF DISTRIBUTION
The shares offered with this prospectus may be sold from time to time
directly by any of the selling stockholders or certain transferees or affiliates
of the selling stockholders, including donees and pledgees selling shares
received from a selling stockholder after the date of this prospectus.
Alternatively, a selling stockholder may from time to time offer the shares
offered with this prospectus through underwriters, dealers or agents who may
receive compensation in the form of underwriting discounts, concessions or
commissions from the selling stockholder and/or the purchasers of the shares for
whom they act as agents.
The shares may also be sold:
- in transactions on the New York Stock Exchange, in negotiated
transactions, or by a combination of these methods;
- at fixed prices that may be changed;
- at market prices prevailing at the time of the resale;
- at prices related to such market prices;
- at negotiated prices;
- through ordinary brokers' transactions;
- through transactions involving cross or block trades or otherwise on
the New York Stock Exchange;
- "at the market" to or through market makers or into an existing
market for our common stock;
- in other ways not involving market makers or established trading
markets, including direct sales to purchasers or sales effected by
agents;
- through transactions in options, swaps or other derivatives (whether
exchange-listed or otherwise);
- in privately negotiated transactions;
- to cover short sales; or
- any combination of the foregoing.
In addition, any shares covered by this prospectus that qualify for sale
under Rule 144 of the Securities Act of 1933 may be sold under Rule 144 rather
than by means of this prospectus. If necessary to comply with the securities
laws of any state, the shares will be sold only through brokers or dealers.
Any broker-dealers who participate in a sale of the shares may be deemed to
be "underwriters" within the meaning of sections 11 and 12 of the Securities Act
of 1933 and Rule 10b-5 of the Exchange Act of 1934, and any commissions received
by them, and profits on any sales as principals, may be deemed to be
underwriting discounts and commissions under the Securities Act of 1933. If any
of the selling stockholders are deemed to be acting as an underwriter, they may
be subject to statutory liabilities of the Securities Act of 1933.
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<PAGE>
In addition, the selling stockholders and any other person participating in
the sale or distribution of the shares offered under this prospectus will be
subject to the Securities Exchange Act of 1934 and its rules and regulations,
including without limitation Rules 10b-5 and Regulation M. These provisions may
limit the timing of purchases and sales of any of the shares. In addition, any
person engaged in a distribution of the shares may not simultaneously engage in
market-making activities during the period beginning when he or she becomes a
distribution participant and ending upon his or her completion of participation
in a distribution. All of these factors may affect the marketability of the
shares and the ability of any person or entity to engage in market-making
activities.
Upon notification by a selling stockholder that any material arrangement
has been entered into with a broker-dealer for the sale of shares through a
block trade, special offering, exchange distribution or secondary distribution
or a purchase by a broker or dealer, a supplement to this prospectus will be
filed, if required, pursuant to Rule 424(b) under the Exchange Act, disclosing
(i) the name of each such selling stockholder and of the participating broker-
dealer(s), (ii) the number of shares involved, (iii) the price at which such
shares were sold, (iv) the commissions paid or discounts or concessions allowed
to such broker-dealer(s), where applicable, (v) that such broker-dealer(s) did
not conduct any investigation to verify the information set out or incorporated
by reference in this prospectus and (vi) other facts material to the
transaction. In addition, upon the company being notified by a selling
stockholder that a donee or pledgee intends to sell more than five hundred (500)
shares, a supplement to this prospectus will be filed.
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<PAGE>
SELLING STOCKHOLDER INFORMATION
The following table sets forth certain information regarding the beneficial
ownership of Watson's common stock by each of the selling stockholders as of
October 8, 1999, except as noted.
<TABLE>
<CAPTION>
Beneficial Ownership Beneficial Ownership
-------------------- --------------------
Prior to Offering (1) After Offering
-------------------- --------------
- -----------------------------------------------------------------------------------------------
Number Shares
------ ------
Of Percent Being Number Percent
-- ------- ----- ------ -------
Name Shares Of Class Offered Of Shares Of Class
- ---- ------ -------- ------- --------- --------
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Robert A. Casper (2) 13,047 * 6,667 13,047 *
- -----------------------------------------------------------------------------------------------
Gary Crocker (3) 149,953 * 11,983 137,970 *
- -----------------------------------------------------------------------------------------------
Robert K. deVeer, Jr. (3) 2,529 * 2,130 399 *
- -----------------------------------------------------------------------------------------------
David L. Gardner (2) 13,047 * 6,667 13,047 *
- -----------------------------------------------------------------------------------------------
**Dr. William I. Higuchi (3) 611,192 * 2,130 609,062 *
- -----------------------------------------------------------------------------------------------
Frank A. Leith (2) 13,047 * 6,666 13,047 *
- -----------------------------------------------------------------------------------------------
James T. O'Brien (3) 13,514 * 12,582 932 *
- -----------------------------------------------------------------------------------------------
Jay J. Pisik (3) 14,180 * 14,180 0 *
- -----------------------------------------------------------------------------------------------
Boyd J. Poulsen, Ph.D. (3) 13,114 * 12,582 532 *
- -----------------------------------------------------------------------------------------------
</TABLE>
* Represents less than 1% of all outstanding shares of Watson common stock.
**Share information for Dr. Higuchi is as of November 23, 1998.
(1) Unless otherwise indicated in the footnotes to this table, Watson
believes that each selling stockholder named in this table has sole voting and
investment power with respect to all shares of Watson common stock reflected as
being owned by such selling stockholder.
(2) As the owners of Innovative Devices, LLC, a North Carolina limited
liability company, these selling stockholders may be entitled to the estimated
aggregate number of shares being registered hereby under a Technology Purchase
Agreement entered into between Innovative Devices and TheraTech, a wholly owned
subsidiary of Watson. In connection with the merger between Watson and
TheraTech, Innovative Devices entered into a Consent Agreement whereby it agreed
to accept Watson stock in lieu of TheraTech stock, at the same exchange ratio as
set forth in the Merger Agreement, as consideration under the Technology
Purchase Agreement. Under the Consent Agreement, Watson agreed to issue shares
of its common stock to the selling stockholders, as the owners of Innovative
Devices, for the continued development, pursuant to the Technology Purchase
Agreement, of certain technology owned by Innovative Devices. Specifically,
Watson is obligated to issue shares of common stock to the selling stockholders
upon the achievement of certain milestones. The number of shares shown as
beneficially owned prior to the offering includes 3,252 shares which each of
these selling stockholders has the right to acquire as the result of having
recently met a milestone. The number of shares shown as beneficially owned after
the offering does not include 3,415 of the estimated aggregate number of shares
being offered in the case of Mr. Casper and Mr. Gardner, and 3,414 of the
estimated aggregate number of shares being offered in the case of Mr. Leith due
to the fact that Innovative Devices is not currently entitled to such shares
under the terms of the Technology Purchase Agreement.
12
<PAGE>
(3) These selling stockholders served as non-employee directors on
TheraTech's Board of Directors prior to the merger with Watson. Currently, they
do not have any connection with Watson. Mr. Crocker, Mr. Pisik, Mr. O'Brian and
Dr. Poulsen also served on various TheraTech Board committees. Dr. Higuchi
served as Chairman of the Board of TheraTech from 1985 to May of 1997. The
number of shares shown as beneficially owned prior to the offering include
shares deemed outstanding upon exercise of options.
LEGAL MATTERS
The validity of the issuance of the company's common stock being offered
hereby have been passed upon for the company by D'Ancona & Pflaum LLC, Chicago,
Illinois. Matters pertaining to the issuance of Watson's common stock under
Nevada law have been passed upon by Kummer, Kaempfer, Bonner and Renshaw,
Watson's Nevada counsel. As of the date of this registration statement, Michel
J. Feldman, a member of D'Ancona & Pflaum LLC and a director of the company,
beneficially owns 46,000 shares of the company's common stock, 1,000 of which he
disclaims beneficial ownership. In addition, other members of D'Ancona & Pflaum
LLC own additional shares of the company's common stock, which ownership is not
material in the aggregate.
EXPERTS
The consolidated financial statements of Watson Pharmaceuticals, Inc. as of
December 31, 1998 and 1997 and for each of the three years in the period ended
December 31, 1998 included in this prospectus have been so included in reliance
on the report of PricewaterhouseCoopers LLP, independent accountants, given on
the authority of said firm as experts in auditing and accounting.
The consolidated financial statements of TheraTech, Inc. at December 31,
1998 and 1997, and for each of the three years in the period ended December 31,
1998 which are referred to and made a part of this prospectus and Registration
Statement, have been audited by Ernst & Young LLP, independent auditors, as set
forth in their report appearing elsewhere herein, and are included in reliance
upon such report given on the authority of such firm as experts in accounting
and auditing.
The consolidated financial statements of Somerset Pharmaceuticals, Inc. and
subsidiaries as of December 31, 1997 and for the year then ended (not presented
herein) have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their report included herein. The report of such firm is given upon
their authority as experts in accounting and auditing.
The financial statements of Oclassen Pharmaceuticals, Inc. for the year
ended December 31, 1996 incorporated by reference in this prospectus and
elsewhere in the registration statement have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in accounting and auditing in giving said reports.
WHERE YOU CAN FIND MORE INFORMATION
Information regarding Watson, including historical financial statements and
detailed descriptions of the business of Watson, is included in documents other
than this prospectus. Watson files annual, quarterly and special reports, proxy
statements and other information with the Securities and Exchange Commission.
You may read and copy reports, statements or other information about Watson on
file at the Securities and Exchange Commission's public reference rooms in
Washington, D.C., New York, New York and Chicago, Illinois. Please call the
Securities and Exchange Commission at 1-800-SEC-0330 for further information on
the public reference rooms. You may also find Watson's Securities and Exchange
Commission filings through commercial document retrieval services and the web
site maintained by the Securities and Exchange Commission at http://www.sec.gov.
You may find additional information about Watson via its website:
http://www.watsonpharm.com. The information in the company's web site is
intended to be timely and accurate; however, there can be no assurance that this
is the case. Such information is expressly excluded from this prospectus.
The company has filed with the Securities and Exchange Commission under the
Securities Act of 1933, as amended, a registration statement on Form S-3
(herein, together with all amendments and exhibits thereto, referred to as the
"registration statement") with respect to the shares of the company's common
stock to be issued pursuant to this prospectus. This document is a part of that
registration statement. This prospectus does not contain all of the
13
<PAGE>
information set forth in the registration statement, certain parts of which are
omitted in accordance with the rules and regulations of the Securities and
Exchange Commission. Statements contained herein or in any document incorporated
by reference herein as to the contents of any contract or other document
referred to herein or therein are not necessarily complete, and in each
circumstance reference is made to the copy of such contract or other document
filed as an exhibit to the registration statement, or incorporated by reference.
Each such statement is qualified in all respects by such reference. The
registration statement and any amendments thereto, including exhibits filed as a
part thereof, are available for inspection and copying as set forth above.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
This prospectus may refer you to information about Watson located in other
documents. The information in those documents, which are identified below, is
specifically deemed to be part of this prospectus and to have been delivered to
you in connection with making your decision to invest. You can obtain a free
copy of these and other documents on the Securities and Exchange Commission's
web site or, free of charge, by writing, calling or faxing:
Attention: Ms. Sara Swee
Director of Corporate Communications
Watson Pharmaceuticals, Inc.
311 Bonnie Circle
Corona, California 92880-2882
Tel: (909) 270-1400
Fax: (909) 270-1429
The following documents filed with the Securities and Exchange Commission
are incorporated by reference herein:
1. Annual Report of the company on Form 10-K for the year ended December
31, 1998, except for Item 6, portions of Item 7 as indicated in the
Management's Discussion and Analysis of Financial Condition and
Results of Operation on page 15 of this prospectus, and Item 8.
2. Quarterly Reports of the company on Form 10-Q for the quarterly
periods ended March 31, 1999, June 30, 1999 and September 30, 1999.
3. Current Report of the company on Form 8-K dated January 15, 1999.
4. The description of the company's common stock contained in its
Registration Statement on Form 8-A dated April 3, 1992.
You should also consider as a part of this document all documents that
Watson files under the Securities Exchange Act of 1934, as amended, after the
date of this prospectus but prior to the termination of the offering made by
this prospectus. Any statement contained in a document incorporated or deemed to
be incorporated by reference in this prospectus shall be deemed to be modified
or superseded, for purposes of this prospectus, to the extent that a statement
contained herein or in any other subsequently filed document which also is or is
deemed to be incorporated by reference herein modifies or supersedes that
statement. Any statement so modified or superseded shall not be deemed, except
as so modified or superseded, to constitute a part of this prospectus.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The company has specifically incorporated by reference into this prospectus
certain portions of the Management's Discussion and Analysis of Financial
Condition and Results of Operations disclosure contained in the company's Annual
Report on Form 10-K for the year ended December 31, 1998 ("1998 MD&A"), and the
company's reports on Form 10-Q for the quarterly periods ended March 31, 1999,
June 30, 1999 and September 30, 1999. The following disclosure restates certain
sections of the 1998 MD&A solely to reflect the completion of the acquisition of
TheraTech in January 1999. The following disclosure should be read in
conjunction with the company's consolidated financial statements and notes
thereto included elsewhere in this prospectus which have been restated to
include the accounts and results of operations of TheraTech for all periods
presented. The sections of the 1998 MD&A entitled "General," "Acquisitions in
1999 and 1998," "Acquisitions in 1997 and Earlier Years," "Other Significant
Investments and Joint Ventures," "Quarterly Fluctuations," and "Year 2000
Compliance Program" were not impacted by the TheraTech acquisition and
accordingly have not been restated below. The company's acquisition of TheraTech
was accounted for under the pooling-of-interests method.
Except for the historical information contained herein, the following discussion
contains forward-looking statements that involve risks and uncertainties. Such
risks and uncertainties are discussed under the caption "Forward-Looking
Statements" on page 9 of this prospectus.
Watson completed its acquisition of TheraTech in January 1999. TheraTech is a
leading drug-delivery company that develops, manufactures and markets innovative
products based on its patented and proprietary technologies and systems. 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 $329.0
million in exchange for all of the outstanding shares of TheraTech. The
acquisition qualified as a tax-free merger for federal income tax purposes and
was accounted for as a pooling of interests. The company's consolidated
financial statements included in this Form S-3 have been restated to include the
results of TheraTech for all periods presented. In the first quarter of 1999,
Watson expects to incur a one-time charge related to this acquisition of
approximately $20.0 million. This charge will include investment banking fees,
professional fees and other acquisition and consolidation-related costs.
15
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
The following table presents the company's consolidated statements of income for
each of the three years ended December 31, 1998, 1997 and 1996, which have been
restated to reflect the acquisition of TheraTech, in thousands of dollars and as
percentages of product sales:
<TABLE>
<CAPTION>
For the Years Ended December 31,
------------------------------------------------------------------------------
1998 1997 1996
---------------------- ------------------------ -----------------------
$ % $ % $ %
---------------------- ------------------------ -----------------------
<S> <C> <C> <C> <C> <C> <C>
Net revenues............................ $ 596,193 100.0% $ 362,221 100.0% $ 258,347 100.0%
Cost of sales........................... 210,405 35.3 131,037 36.2 107,157 41.5
---------- ------ ---------- ------ ---------- ------
Gross profit........................ 385,788 64.7 231,184 63.8 151,190 58.5
---------- ------ ---------- ------ ---------- ------
Royalty income.......................... --- --- 14,249 3.9 27,162 10.5
---------- ------- ---------- ------ ---------- ------
Operating expenses:
Research and development.............. 50,706 8.5 35,007 9.7 40,981 15.9
Selling, general and administrative... 109,347 18.3 60,967 16.7 46,599 18.0
Amortization ......................... 22,469 3.8 7,213 2.0 386 0.1
Charge for acquired in-process
research and development............ 13,000 2.2 --- --- --- ---
Merger expenses...................... --- --- 14,718 4.1 --- ---
--------- ------- ---------- ------- ----------- ------
Total operating expenses............ 195,522 32.8 117,905 32.5 87,966 34.0
--------- ------- ---------- ------- ----------- ------
Operating income.................... 190,266 31.9 127,528 35.2 90,386 35.0
--------- ------- ---------- ------- ----------- ------
Other income (expense):
Equity in earnings of joint ventures.. 6,788 1.1 10,694 3.0 17,909 6.8
Investment and other income........... 8,011 1.3 13,511 3.7 11,935 4.6
Interest expense...................... (8,136) (1.3) (1,284) (0.4) (1,527) (0.5)
--------- ------- ---------- ------- ----------- ------
Total other income, net........... 6,663 1.1 22,921 6.3 28,317 10.9
--------- ------- ---------- ------- ----------- ------
Income before income tax provision.. 196,929 33.0 150,449 41.5 118,703 45.9
Provision for income taxes.............. 78,247 13.1 54,799 15.1 35,521 13.7
--------- ------- ---------- ------- ----------- ------
Net income.......................... $118,682 19.9% $ 95,650 26.4% $ 83,182 32.2%
========= ======= ========== ======= =========== ======
</TABLE>
YEARS ENDED DECEMBER 31, 1998 AND 1997
Net revenues for the year ended December 31, 1998 were $596.2 million compared
to $362.2 million for the year ended December 31, 1997, an increase of $234.0
million or 65%. This sales increase was due primarily to i) increased sales of
certain core off-patent and branded products, ii) increased sales of off-patent
products obtained through the Rugby acquisition, and iii) increased sales of
branded products, primarily as a result of the Dilacor XR(R) acquisition in June
1997 and the Searle oral contraceptive products which were purchased in October
1997.
The company earned royalties of $14.2 million in 1997 from Rhone-Poulenc Rorer
sales of Dilacor XR(R). Subsequent to Watson's June 1997 purchase of the Dilacor
XR(R) product rights, no further royalties were earned.
16
<PAGE>
Research and development expenses increased to $50.7 million in 1998 from $35.0
million in 1997. This increase was due primarily to the 1998 acquisition of
Rugby's off-patent product development group and increased spending by Watson's
and TheraTech's existing development groups.
Selling, general and administrative expenses increased to $109.3 million in 1998
from $61.0 million in 1997. The increase consists of a $38.5 million increase in
sales and marketing expenses and a $9.8 million increase in general and
administrative costs. The increased sales and marketing expenses were primarily
the result of increased sales force personnel costs, advertising and other
promotional expenses incurred in support of the company's branded products.
General and administrative costs increased during 1998 as a result of increased
staffing in certain administrative areas to support the company's growth.
However, as a percentage of net revenues, general and administrative costs
decreased to 4.8% in 1998 from 5.2% in 1997.
Amortization expense increased to $22.5 million in 1998 from $7.2 million in
1997 due to the product right acquisitions (Dilacor XR(R) and Searle oral
contraceptive products) and goodwill recorded in the Rugby acquisition.
In connection with the acquisition of Rugby during the first quarter of 1998,
the company recorded a special charge of $13.0 million for the write-off of
in-process research and development associated with Rugby's wholly owned
subsidiary, Chelsea Laboratories, Inc. Watson, in conjunction with an
independent valuation firm, based this charge on an assessment of the value of
purchased research and development at Rugby. This charge is discussed further in
Note 2 to the consolidated financial statements. No such charge was incurred in
1997.
In 1997, the company recorded one-time charges of $14.7 million for costs
incurred in connection with the mergers of Royce and Oclassen. These costs
included investment banking fees and other merger-related expenses.
Equity in earnings from joint ventures decreased $3.9 million to $6.8 million in
1998 from $10.7 million in 1997, due primarily to lower earnings from Somerset.
The decrease in Somerset earnings is due in part to increased competition with
respect to Eldepryl(R) (Somerset's sole product) and increased research and
development spending in support of various clinical trials. Management expects
the company's earnings from Somerset to continue to decline.
Investment and other income decreased to $8.0 million in 1998 from $13.5 million
in 1997 due to lower average cash and marketable securities balances in 1998.
The lower average cash and marketable securities balances in 1998 were due to
the company's acquisition-related activities.
Interest expense during 1998 increased to $8.1 million from $1.3 million in 1997
as a result of the company's $150.0 million senior debt issuance in May 1998.
These notes have a stated annual interest rate of 7 1/8% and were sold at a
discount to yield an effective annual interest rate of 7 1/4% to the company.
The provision for income taxes increased to $78.2 million in 1998, compared to
$54.8 million in 1997. The effective income tax rate was 40% and 36% for the
years ended December 31, 1998 and 1997, respectively. The increase in the
company's effective income tax rate was due primarily to the non-deductibility
for income tax purposes of the $13.0 million in-process research and development
charge incurred as a result of Watson's acquisition of Rugby.
YEARS ENDED DECEMBER 31, 1997 AND 1996
Net revenues and royalty income for the year ended December 31, 1997 were $376.4
million compared to $285.5 million for the year ended December 31, 1996, an
increase of $90.9 million or 31.8%. The increase in revenues was composed of a
$103.8 million increase in product sales, partially offset by a $12.9 million
decrease in royalty income. The increase in product sales was largely due to
sales of Dilacor XR(R), which was purchased from Rhone-Poulenc Rorer in June
1997. The company also experienced increased sales of dermatology products, oral
contraceptives, core off-patent products and new products approved or acquired
during the year. These sales increases were partially offset by decreased sales
of certain strengths in the company's hydrocodone product line.
Royalty income decreased $12.9 million or 47.5% in 1997 as compared with 1996
due to the company's June 1997 acquisition from Rhone-Poulenc Rorer of the
Dilacor XR(R) product rights. Following this acquisition, no further royalties
were earned.
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<PAGE>
Gross profit margins increased to 63.8% in 1997 from 58.5% in 1996. The increase
in gross profit margins was due largely to sales of Dilacor XR(R), higher sales
of branded dermatology products and sales of products introduced in 1997. The
increased gross profit margins from these products was partially offset by
reduced gross profit margins of certain core off-patent products.
Research and development expenses decreased to $35.0 million in 1997 from $41.0
million in 1996. Following the mergers with Royce and Oclassen, the company
consolidated certain research and development functions and eliminated duplicate
programs.
Selling, general and administrative expenses increased to $61.0 million in 1997
from $46.6 million in 1996. The increase consists of a $18.8 million increase in
sales and marketing expenses and a $4.4 million decrease in general and
administrative costs. The company incurred increased sales and marketing costs
as it expanded its marketing efforts for branded products. The company increased
its sales force from approximately 20 representatives in late 1996 to more than
300 at December 31, 1997.
As a result of the mergers of Royce and Oclassen with Watson, and the subsequent
consolidation of many of the administrative functions, the company has
experienced a decrease in its general and administrative expenses. As a
percentage of net revenues, general and administrative costs decreased from 9.0%
in 1996 to 5.2% in 1997. This decrease reflects efficiencies achieved following
the mergers and the fact that the company's sales growth outpaced the growth in
administrative costs.
Amortization expense in 1997 increased to $7.2 million from $386,000 due to
several significant product right acquisitions during the year. The company
amortizes these acquired product rights over 17 years.
In 1997, the company recorded one-time charges of $14.7 million for costs
incurred in connection with the mergers with Royce and Oclassen. These costs
included investment banking fees and other merger-related expenses. No such
expenses were incurred in 1996.
Equity in earnings from joint ventures decreased $7.2 million or 40.2% to $10.7
million in 1997 compared to $17.9 million in 1996, due primarily to lower
earnings from Somerset. The decrease in Somerset earnings is due in part to the
loss of exclusivity for Eldepryl(R) in June 1996. During 1997 and 1996, a number
of competitors introduced off-patent tablets to compete with Eldepryl(R)
capsules. Increased competition and research and development spending in support
of various clinical trials have significantly reduced Somerset's contribution to
the company's operating results.
Investment and other income increased 13.4% to $13.5 million in 1997 from $11.9
million in 1996 due to higher average cash and marketable securities balances in
1997.
The provision for income taxes increased to $54.8 million in 1997, compared to
$35.5 million in 1996. The effective income tax rate was 36% and 30% for the
years ended December 31, 1997 and 1996, respectively. The increase in the
company's effective income tax rate was due primarily to the non-deductibility
of a significant portion of merger expenses incurred in 1997 and lower earnings
from Somerset which are partially exempt from tax.
LIQUIDITY AND CAPITAL RESOURCES
The company's working capital increased to $219.8 million at December 31, 1998
from $171.7 million at December 31, 1997. This $48.1 million increase was
primarily due to cash flows from operations ($118.7 million) and proceeds from
the offering of senior notes ($148.4 million), offset by the acquisition of
women's health products ($120.0 million), the acquisition of Rugby ($67.5
million) and capital expenditures ($27.2 million). The company's $27.2 million
of capital investment in 1998 consisted primarily of additions to land,
buildings and manufacturing and laboratory equipment. Watson expects to invest
approximately $40.0 million in capital expenditures during 1999.
In April 1998, the company filed a registration statement with the Securities
and Exchange Commission which allows Watson to raise up to $300.0 million from
offerings of senior or subordinated debt securities, common stock, preferred
stock or a combination thereof, at such times and in such amounts as Watson
deems appropriate. In May 1998, pursuant to this registration statement, the
company issued $150.0 million of 7 1/8% senior unsecured notes (the "Senior
Notes"). The company had notes payable outstanding of approximately $152.9
million at December 31, 1998. These notes consist of the Senior Notes and other
notes payable of approximately $4.4 million. The Senior Notes are due May 2008,
with interest-only payments due semi-annually in November and May.
18
<PAGE>
In January 1999, the company made a scheduled payment of $30.0 million pursuant
to the purchase of the product rights to Dilacor XR(R). Additional payments of
$15.0 million and $5.0 million will be due in January 2000 and January 2001,
respectively.
The company's cash and marketable securities totaled $92.6 million at
December 31, 1998. Management believes that the company's cash and marketable
securities, plus cash flow from operations will be sufficient to meet its 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 sources other than cash,
such as offerings under the registration statement discussed herein or other
such registration statements, to fund additional acquisitions or investments. If
any such acquisition or investment is completed, the company's operating results
and financial condition could change materially in future periods.
Management believes inflation does not have, and has not had, a significant
impact on the company's revenues or operations.
19
<PAGE>
<TABLE>
<CAPTION>
INDEX TO FINANCIAL STATEMENTS PAGE
----
<S> <C>
Reports of Independent Accountants........................................................................ F-2
Consolidated Balance Sheets as of December 31, 1998 and 1997.............................................. F-6
Consolidated Statements of Income
for each of the three years in the period ended December 31, 1998................................... F-7
Consolidated Statements of Stockholders' Equity
for each of the three years in the period ended December 31, 1998................................... F-8
Consolidated Statements of Cash Flows
for each of the three years in the period ended December 31, 1998................................... F-9
Notes to Consolidated Financial Statements................................................................ F-11
</TABLE>
All financial statement schedules are omitted because they are not
applicable or the required information is included in the Consolidated
Financial Statements or notes thereto.
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Watson Pharmaceuticals, Inc.
In our opinion, based upon our audits and the reports of other auditors, the
accompanying consolidated financial statements listed in the accompanying index
on page F-1 present fairly, in all material respects, the financial position of
Watson Pharmaceuticals, Inc. and its subsidiaries at December 31, 1998 and 1997,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We did not audit the
financial statements of TheraTech, Inc. (TheraTech), a wholly owned subsidiary,
which statements reflect total assets of $57,690,000 and $61,861,000 at December
31, 1998 and 1997, respectively, and total net revenues of $40,045,000,
$38,206,000 and $34,708,000 for the years ended December 31, 1998, 1997 and
1996, respectively. We did not audit the financial statements of Somerset
Pharmaceuticals, Inc. (Somerset), an entity which is 50% owned by the Company,
as of December 31, 1997 and for the years ended December 31, 1997 and 1996. The
Company's investment in Somerset aggregated $27,643,000 at December 31, 1997,
and its equity in the earnings of Somerset totaled $12,672,000 and $20,100,000
for the years ended December 31, 1997 and 1996, respectively. In addition, we
did not audit the financial statements of Oclassen Pharmaceuticals, Inc.
(Oclassen), a wholly owned subsidiary, for the year ended December 31, 1996,
which statements reflect total revenues of $34,421,000 for the year ended
December 31, 1996. Those statements were audited by other auditors whose reports
thereon have been furnished to us, and our opinion expressed herein, insofar as
it relates to the amounts included for TheraTech, Somerset and Oclassen, is
based solely on the reports of each of the respective other auditors. We
conducted our audits of these statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits and the respective reports of other auditors provide a reasonable basis
for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Los Angeles, California
February 17, 1999
F-2
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Stockholder
TheraTech, Inc.
We have audited the consolidated balance sheets of TheraTech, Inc. and
subsidiaries as of December 31, 1998 and 1997, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1998 (not presented separately
herein). These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements referred to above present
fairly, in all material respects, the financial position of TheraTech, Inc. and
subsidiaries as of December 31, 1998, and the results of their operations and
their cash flows for the three years in the period ended December 31, 1998 in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Salt Lake City, Utah
February 5, 1999
F-3
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Somerset Pharmaceuticals, Inc.:
We have audited the consolidated balance sheet of Somerset Pharmaceuticals, Inc.
and subsidiaries as of December 31, 1997, and the related consolidated
statements of income, stockholders' equity, and cash flows for the year then
ended (not presented separately herein). These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Somerset
Pharmaceuticals, Inc. and subsidiaries as of December 31, 1997, and the results
of their operations and their cash flows for the year then ended in conformity
with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Pittsburgh, Pennsylvania
February 4, 1998
F-4
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Oclassen Pharmaceuticals, Inc.:
We have audited the balance sheet of Oclassen Pharmaceuticals, Inc. (a Delaware
corporation) as of December 31, 1996, and the related statements of income,
stockholders' equity (deficit) and cash flows for the year then ended (not
presented herein). These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We have conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Oclassen Pharmaceuticals, Inc.
as of December 31, 1996, and the results of its operations and its cash flows
for the year then ended in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Oakland, California
January 17, 1997
F-5
<PAGE>
WATSON PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------------------ -----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................................. $ 59,663 $ 97,817
Marketable securities.................................................. 32,903 41,500
Accounts receivable, net of allowances for doubtful
accounts of $4,150 and $2,190..................................... 91,329 62,909
Inventories............................................................ 81,907 49,798
Prepaid expenses and other current assets.............................. 27,358 7,488
Deferred tax assets.................................................... 29,634 19,398
------------- ------------
Total current assets................................................. 322,794 278,910
Property and equipment, net................................................ 125,918 107,322
Investments and other assets............................................... 201,080 137,999
Product rights and other intangibles, net.................................. 481,551 296,245
------------- ------------
$ 1,131,343 $ 820,476
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses.................................. $ 70,730 $ 50,436
Income taxes payable................................................... --- 9,553
Current portion of long-term debt...................................... 1,843 1,882
Current liability from acquisition of product rights................... 30,380 45,380
------------- ------------
Total current liabilities............................................ 102,953 107,251
Long-term debt............................................................. 151,083 9,857
Long-term liability from acquisition of product rights..................... 23,040 53,420
Deferred tax liabilities................................................... 54,512 36,887
------------- ------------
Total liabilities.................................................... 331,588 207,415
------------- ------------
Commitments and contingencies..............................................
Minority interest.......................................................... 400 859
------------- ------------
Stockholders' equity:
Preferred stock; no par value per share;
2,500,000 shares authorized; none outstanding.......................... --- ---
Common stock; $0.0033 per share par value; 500,000,000
shares authorized; 95,312,200 and 93,479,000 shares issued............. 315 308
Additional paid-in capital............................................... 368,777 327,432
Retained earnings........................................................ 370,119 251,437
Accumulated other comprehensive income................................... 60,144 33,025
------------- ------------
Total stockholders' equity........................................... 799,355 612,202
------------- ------------
$ 1,131,343 $ 820,476
============= ============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-6
<PAGE>
WATSON PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------
1998 1997 1996
---------- --------- ---------
<S> <C> <C> <C>
Net revenues............................................... $ 596,193 $ 362,221 $ 258,347
Cost of sales.............................................. 210,405 131,037 107,157
---------- --------- ---------
Gross profit.......................................... 385,788 231,184 151,190
---------- --------- ---------
Royalty income............................................. --- 14,249 27,162
---------- --------- ---------
Operating expenses:
Research and development................................ 50,706 35,007 40,981
Selling, general and administrative..................... 109,347 60,967 46,599
Amortization............................................ 22,469 7,213 386
Merger expenses ........................................ --- 14,718 ---
Charge for acquired in-process
research and development.............................. 13,000 --- ---
---------- --------- ---------
Total operating expenses.............................. 195,522 117,905 87,966
---------- --------- ---------
Operating income........................................... 190,266 127,528 90,386
---------- --------- ---------
Other income (expense):
Equity in earnings of joint ventures.................... 6,788 10,694 17,909
Investment and other income............................. 8,011 13,511 11,935
Interest expense........................................ (8,136) (1,284) (1,527)
---------- --------- ---------
Total other income, net............................... 6,663 22,921 28,317
---------- --------- ---------
Income before income tax provision......................... 196,929 150,449 118,703
Provision for income taxes................................. 78,247 54,799 35,521
---------- --------- ---------
Net income................................................. $ 118,682 $ 95,650 $ 83,182
========== ========= =========
Basic earnings per share................................... $ 1.25 $ 1.03 $ 0.92
========== ========= =========
Diluted earnings per share................................. $ 1.22 $ 1.01 $ 0.89
========== ========= =========
Weighted average shares
outstanding, no dilution................................ 94,745 92,525 90,430
========== ========= =========
Weighted average shares
outstanding, diluted basis.............................. 97,425 95,115 93,830
========== ========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-7
<PAGE>
WATSON PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
Accumulated
Additional Other Total
Common Stock Paid-in Comprehensive Retained Comprehensive Stockholders'
Shares Amount Capital Income Earnings Income Equity
------ ------ ------- ------ -------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 89,502 $296 $281,998 $ --- $ 72,605 $ (155) $354,744
Exercise of options/warrants................. 1,407 4 10,942 --- --- --- 10,946
Tax benefits related to exercise of options.. --- --- 7,762 --- --- --- 7,762
Other........................................ --- --- (126) --- --- --- (126)
Net income................................... --- --- --- 83,182 83,182 --- 83,182
Other comprehensive income:
Amortization of unearned
compensation............................. --- --- --- 856 --- --- ---
Unrealized gains on securities............ --- --- --- 6,488 --- --- ---
--------
Other comprehensive income................ --- --- --- 7,344 --- 7,344 7,344
--------
Comprehensive income...................... --- --- --- 90,526 --- --- ---
------ ---- -------- ======== -------- ------- --------
Balance at December 31, 1996 90,909 300 300,576 --- 155,787 7,189 463,852
Exercise of options/warrants................. 2,570 8 16,018 --- --- --- 16,026
Tax benefits related to exercise of options.. --- --- 10,882 --- --- --- 10,882
Other........................................ --- --- (44) --- --- --- (44)
Net income................................... --- --- --- 95,650 95,650 --- 95,650
Unrealized gains on securities............ --- --- --- 25,836 --- 25,836 25,836
--------
Comprehensive income...................... --- --- --- 121,486 --- --- ---
------ ---- -------- ======== -------- ------- --------
Balance at December 31, 1997 93,479 308 327,432 --- 251,437 33,025 612,202
Exercise of options/warrants................. 1,833 7 27,593 --- --- --- 27,600
Tax benefits related to exercise of options.. --- --- 13,593 --- --- --- 13,593
Other........................................ --- --- 159 --- --- --- 159
Net income................................... --- --- --- 118,682 118,682 --- 118,682
Unrealized gains on securities............ --- --- --- 27,119 --- 27,119 27,119
--------
Comprehensive income...................... --- --- --- 145,801 --- --- ---
------ ---- -------- ======== -------- ------- --------
Balance at December 31, 1998 95,312 $315 $368,777 $ --- $370,119 $60,144 $799,355
====== ==== ======== ======== ======== ======= ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-8
<PAGE>
WATSON PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------------
1998 1997 1996
----------------- ----------------- ----------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................. $ 118,682 $ 95,650 $ 83,182
--------- --------- ----------
Reconciliation to net cash provided by
operating activities:
Depreciation ........................................... 12,708 10,438 9,637
Amortization............................................ 22,469 7,213 1,342
Charge for acquired in-process research 13,000 --- ---
and development........................................
Deferred income tax provision (benefit)................. 1,593 (1,563) 20,004
Dividends received from Somerset........................ --- 8,000 18,000
Equity in earnings of joint ventures ................... (5,706) (9,012) (14,684)
Provision for (recovery of) doubtful accounts 762 (66) 604
and allowances........................................
Tax benefits related to exercise of options............. 13,593 10,882 7,753
Other................................................... 667 333 ---
Changes in assets and liabilities, net of acquisitions:
Accounts receivable................................... (17,061) (32,254) (4,425)
Royalty receivable.................................... --- 5,554 2,651
Inventories........................................... (18,607) (15,091) (2,191)
Prepaid expenses and other current assets............. (12,327) 6,249 (644)
Other assets.......................................... (1,981) (2,155) (2,386)
Accounts payable and accrued expenses................. 412 10,955 (5,390)
Income taxes payable.................................. (9,553) 9,081 (2,512)
--------- --------- ----------
Total adjustments................................... (31) 8,564 27,759
--------- --------- ----------
Net cash provided by operating activities .......... 118,651 104,214 110,941
--------- --------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment..................... (27,219) (16,318) (16,003)
Purchases of marketable securities...................... (77,880) (142,776) (846,615)
Proceeds from maturities of marketable securities 84,262 185,227 811,064
Acquisitions of product rights.......................... (177,322) (146,587) (108)
Acquisitions of businesses.............................. (71,559) --- ---
Investment in Andrx..................................... --- (15,307) ---
Additions to investment in joint ventures............... (10,207) (5,804) (2,330)
--------- --------- ----------
Net cash used in investing activities.............. $(279,925) $(141,565) $ (53,992)
--------- --------- ----------
</TABLE>
F-9
<PAGE>
WATSON PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------------
1998 1997 1996
----------- ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt........................ $ 148,418 $ --- $ 1,043
Principal payments on long-term debt............................ (7,231) (3,566) (3,537)
Payments on liability for acquisition of product rights......... (45,000) (55,000) ---
Proceeds from issuance of common stock.......................... --- 1,396 1,612
Proceeds from exercises of stock options
and warrants.................................................. 26,933 15,000 9,210
--------- ---------- ---------
Net cash provided by (used in) financing activities........... 123,120 (42,170) 8,328
--------- ---------- ---------
Net (decrease) increase in cash and cash equivalents.......... (38,154) (79,521) 65,277
Cash and cash equivalents at beginning of year...................... 97,817 177,338 112,061
--------- ---------- ---------
Cash and cash equivalents at end of year............................ $ 59,663 $ 97,817 $ 177,338
========= ========== =========
Supplemental disclosures of cash flow information:
Cash paid during the years for:
Interest........................................................ $ 5,895 $ 335 $ 420
Income taxes.................................................... $ 82,915 $ 36,735 $ 10,375
Supplemental disclosures of noncash
investing and financing activities:
Acquisitions of product rights:
Fair value of assets acquired................................. $ -- $ (294,171) $ --
Fair value of liabilities assumed............................. -- 150,000 --
--------- ---------- ---------
Net cash paid................................................. $ -- $(144,171) $ --
========= ========== =========
Acquisitions of businesses:
Fair value of assets acquired................................. $ (97,323) $ -- $ --
Fair value of liabilities assumed............................. 25,764 -- --
--------- ---------- ---------
Net cash paid................................................. $ (71,559) $ -- $ --
========= ========== =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-10
<PAGE>
WATSON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business and Significant Accounting Policies
Description of business and principles of consolidation
Watson Pharmaceuticals, Inc. ("Watson" or the "Company") is engaged in the
development, production, marketing and distribution of branded and off-patent
pharmaceutical products. The consolidated financial statements include the
accounts of wholly owned and majority-owned subsidiaries after elimination of
intercompany accounts and transactions. The preparation of consolidated
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts in the financial statements and accompanying notes. Actual results could
differ from those estimates.
The Company's significant wholly owned subsidiaries include Watson Laboratories,
Inc., Circa Pharmaceuticals, Inc. ("Circa"), Oclassen Pharmaceuticals, Inc.
("Oclassen"), Royce Laboratories, Inc. ("Royce"), The Rugby Group, Inc.
("Rugby") and TheraTech, Inc. ("TheraTech"). Watson acquired certain of these
subsidiaries, including TheraTech in January 1999, through acquisitions that
occurred between 1995 and January 1999. The accompanying consolidated financial
statements have been restated to include the results of TheraTech for all
periods presented. See Note 2 for further information on the Company's merger
and acquisition activities.
Investments are accounted for under the equity method where the Company can
exert significant influence and ownership does not exceed 50% (primarily
Somerset Pharmaceuticals, Inc.). Investments in which the Company
holds less than a 20% interest and does not exert significant influence are
accounted for under the cost method, adjusted to fair value. The Company's
investment in Andrx Corporation ("Andrx") is accounted for under the cost
method.
Cash equivalents and marketable securities
Cash equivalents are highly liquid investments with original maturities of three
months or less at the date of acquisition. Marketable securities consist
primarily of time deposits, commercial paper, U.S. and state and local
government debt with original maturities between three and twelve months.
The Company accounts for investments in accordance with Financial Accounting
Standards No. 115 ("FAS 115"), "Accounting for Certain Investments in Debt and
Equity Securities." Under FAS 115, debt securities that the Company does not
have the positive intent and ability to hold to maturity and all marketable
equity securities are carried at fair market value and are classified as either
trading or available-for-sale securities. Debt securities that the Company has
the intent and ability to hold to maturity are classified as held-to-maturity
securities. All of the Company's cash equivalents and marketable securities are
classified as either available-for-sale or held-to-maturity securities.
Available-for-sale securities are recorded at fair value based on quoted market
prices. Unrealized gains or losses on available-for-sale securities are excluded
from earnings and are reported as a separate component of stockholders' equity,
net of applicable income taxes, until realized. Realized gains and losses are
determined on the specific identification method and are reported in investment
and other income. Realized gains and losses were not material for the years
ended December 31, 1998, 1997 and 1996.
Held-to-maturity securities are recorded at amortized cost, adjusted for the
amortization of premiums or discounts. Premiums and discounts are amortized over
the life of the related security.
F-11
<PAGE>
The fair value of cash, cash equivalents and marketable securities is summarized
as follows:
<TABLE>
<CAPTION>
December 31,
---------------------
1998 1997
---------- ----------
(in thousands)
<S> <C> <C>
Available-for-sale:
U.S. government debt............................................. $14,824 $ 27,996
State and local government debt.................................. 23,143 2,300
Corporate and other non-government debt.......................... 7,317 45,972
Equity securities................................................ 1,500 3,006
Money market funds and cash...................................... 37,421 47,604
------- --------
$84,205 $126,878
======= ========
Held-to-maturity:
U.S. government debt............................................. $ 1,503 $ 999
Corporate debt................................................... 6,858 11,440
------- --------
$ 8,361 $ 12,439
======= ========
</TABLE>
Of held-to-maturity securities owned at December 31, 1998, $4.5 million have a
maturity of less than one year and $3.9 million have a maturity of one to five
years.
Fair value of other financial instruments
The carrying amounts of accounts receivable, accounts payable and accrued
expenses approximate fair value. The fair value of the Company's investment in
Andrx is based on quoted market prices at December 31, 1998 and 1997.
Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or
market.
Property and equipment
Property and equipment are stated at cost, less accumulated depreciation. Major
renewals and improvements are capitalized, while routine maintenance and repairs
are expensed as incurred. At the time properties are retired from service, the
cost and accumulated depreciation are removed from the respective accounts and
the related gains or losses are reflected in income.
Depreciation expense is computed principally on the straight-line basis, over
estimated useful lives of two to ten years for furniture, fixtures and equipment
and twenty to thirty years for buildings and building improvements. Leasehold
improvements are amortized on the straight-line basis over the shorter of the
respective lease terms or the estimated useful life of the assets, and generally
range from five to thirty years.
F-12
<PAGE>
Product rights and other intangible assets
Product rights are stated at cost, less accumulated amortization, and are
amortized on the straight-line basis over their estimated useful lives ranging
from seventeen to twenty-five years. Goodwill is amortized on the straight-line
basis over twenty years or less and is primarily related to the Company's
acquisition of Rugby (Note 2). Other intangible assets are amortized over their
estimated useful lives, using the straight-line method. Accumulated amortization
was $39.7 million and $15.8 million at December 31, 1998 and 1997, respectively.
Potential impairment of long-lived assets
The Company annually evaluates its long-lived assets, including product rights,
for potential impairment. When circumstances indicate that the carrying amount
of the asset may not be recoverable, as demonstrated by estimated future cash
flows, an impairment loss would be recorded based on fair value.
Revenue recognition
The Company recognizes revenue, net of sales discounts and allowances, from the
sale of its pharmaceutical products upon shipment.
The Company has entered into various collaborative research and development,
product licensing and marketing agreements with certain pharmaceutical and other
companies. These agreements provide for the Company to receive payments in
various forms which can include: (i) licensing fees and other payments upon
execution of an agreement; (ii) milestone payments upon achievement of certain
technical and regulatory goals; and (iii) periodic cost reimbursements, which
costs include a portion of general and administrative expenses, for product
development and clinical evaluation. Research, development and licensing
revenues are recognized as earned based on terms in the specific contracts.
Milestone payments are included in revenues during the period in which the
applicable milestone is achieved.
Sales to major customers
In 1998, two customers accounted for 16% and 11%, individually of the Company's
net revenues. In 1997, two customers accounted for 11% and 10%, individually, of
the Company's net revenues. In 1996, no customers accounted for more than 10% of
the Company's net revenues.
F-13
<PAGE>
Research and development activities
Research and development expenditures are expensed as incurred and consist of
self-funded research and development costs and the costs associated with work
performed under collaborative research and development agreements. Research and
development expenses include direct and allocated expenses and exclude
reimbursable general and administrative costs. Research and development expenses
incurred under collaborative agreements were approximately $11,900,000,
$12,600,000 and $14,800,000 for the years ended December 31, 1998, 1997 and
1996, respectively.
Income taxes
Income taxes are accounted for using an asset and liability approach that
requires the recognition of deferred tax assets and liabilities for the expected
future tax consequences of temporary differences between the financial statement
and tax bases of assets and liabilities at the applicable tax rates. A valuation
allowance is provided when it is more likely than not that some portion or all
of the deferred tax assets will not be realized.
Earnings per share ("EPS")
Basic earnings per share is computed by dividing net income by the weighted
average number of common shares outstanding in each year. Diluted earnings per
share is computed by dividing net income by the weighted average number of
common shares outstanding plus any potential dilution that could occur if
options and warrants were converted into common stock in each year.
In 1997, the Company adopted Financial Accounting Standards No. 128, "Earnings
per Share" (FAS 128). In accordance with the implementation provisions of FAS
128, the Company has restated earnings per share in its consolidated statements
of income for the year ended December 31, 1996. The unaudited quarterly data
for the first three quarters of 1997 presented in Note 10 have also been
restated to comply with the provisions of FAS 128. A reconciliation of the
numerators and the denominators of basic and diluted earnings per share for the
years ended December 31, 1998, 1997, and 1996 is as follows (in thousands,
except for EPS):
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------------------
1998 1997 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Numerator:
Net income...................................... $118,682 $95,650 $83,182
======== ======= =======
Denominators:
Denominator for basic EPS, weighted
average shares outstanding................... 94,745 92,525 90,430
Assumed exercise of dilutive stock
options and warrants......................... 2,680 2,590 3,400
-------- ------- -------
Denominator for diluted EPS..................... 97,425 95,115 93,830
======== ======= =======
Basic EPS.......................................... $ 1.25 $ 1.03 $ 0.92
======== ======= =======
Diluted EPS........................................ $ 1.22 $ 1.01 $ 0.89
======== ======= =======
</TABLE>
In October 1997, the Company effected a two-for-one stock split in the form of a
100% stock dividend. All share and per share amounts for the reported periods
have been restated to reflect the stock split.
F-14
<PAGE>
Concentration of credit risk
The Company is subject to a concentration of credit risk with respect to its
accounts receivable balance, all of which is due from service providers,
distributors, wholesalers and chain drug stores in the health care and
pharmaceutical industries throughout the United States. At December 31, 1998 and
1997, approximately 57% and 27%, respectively, of the trade receivable balances
represented amounts due from four customers in 1998 and two customers in 1997.
The Company performs ongoing credit evaluations of its customers and maintains
reserves for potential uncollectible accounts. Actual losses from uncollectible
accounts have been minimal.
Recent accounting pronouncements
In 1998, the Company adopted Financial Accounting Standards No.131, "Disclosures
about Segments of an Enterprise and Related Information," ("FAS 131"). FAS 131
supercedes FAS 14, "Financial Reporting for Segments of a Business Enterprise,"
and replaces the "industry segment" approach with the "management" approach. The
management approach designates the internal organization that is used by
management for making operating decisions and assessing performance as the
source of the Company's reportable segments. Watson has one reportable segment,
pharmaceutical products.
In 1998, the Company adopted Financial Accounting Standards No. 130, "Reporting
Comprehensive Income," ("FAS 130"). FAS 130 established new rules for the
reporting and display of comprehensive income and its components in the
financial statements. Comprehensive income includes all changes in equity during
a period except those resulting from investments by and distributions to the
Company's stockholders. Watson's comprehensive income is comprised of net income
and the unrealized gain on equity securities. The adoption of FAS 130 had no
effect on the Company's consolidated results of operations, financial position
or cash flows.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use," ("SOP 98-1"). This SOP provides
guidance on accounting for certain costs in connection with obtaining or
developing computer software for internal use and requires that entities
capitalize such costs once certain criteria are met. The Company is required to
adopt SOP 98-1 as of January 1, 1999.
Reclassifications
Certain amounts in the 1996 and 1997 financial statements have been reclassified
to conform with the 1998 presentation. These reclassifications had no effect on
net income or retained earnings.
F-15
<PAGE>
2. Mergers and Acquisitions
Subsequent event - acquisition of TheraTech
In January 1999, Watson's acquisition of TheraTech was completed. TheraTech is a
leading drug-delivery company that developed, manufactured and marketed
innovative products based on its patented and proprietary technologies and
systems. 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 having a market value of approximately $329 million on the
date of acquisition in exchange for all of the outstanding common shares of
TheraTech. The acquisition qualified as a tax-free merger for federal income tax
purposes and was accounted for as a pooling of interests. In the first quarter
of 1999, Watson expects to incur a one-time charge related to this acquisition
of approximately $20.0 million. This charge will include investment banking
fees, professional fees and other costs related to consolidating the operations
of the two companies.
Combined and separate selected financial data of Watson and TheraTech for the
three years in the period ended December 31, 1998 are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------------------------------------
Adjust-
Watson TheraTech ments Combined
------------- -------------- ------------ --------------
<S> <C> <C> <C> <C>
1998
Net revenues............................... $ 556,148 $40,045 $ -- $ 596,193
============= ============== =========== =============
Net income (loss).......................... $ 120,829 $(2,147) $ -- $ 118,682
============= ============== =========== =============
1997
Net revenues............................... $ 324,015 $38,206 $ -- $ 362,221
============= ============== =========== =============
Net income................................. $ 90,184 $ 5,851 $ (385) $ 95,650
============= ============== =========== =============
1996
Net revenues............................... $ 223,639 $34,708 $ -- $ 258,347
============= ============== ============ ==============
Net income................................. $ 78,562 $ 4,225 $ 395 $ 83,182
============= ============== ============ ==============
</TABLE>
The combined financial results of the Company and TheraTech include certain
reclassifications to conform the financial statement presentations of the
companies.
1998 acquisition of oral contraceptive products from Searle
In November 1998, Watson acquired the U.S. rights to three Searle oral
contraceptive products for $120.0 million in cash. Watson and Searle have
entered into a supply agreement whereby Watson has the right to purchase from
Searle the products in finished form for two years and in bulk form for an
additional one year period.
F-16
<PAGE>
Acquisition of Rugby
In February 1998, Watson completed its acquisition of Rugby from Hoechst Marion
Roussel, Inc. Rugby developed, manufactured and marketed a wide array of off-
patent pharmaceutical products. Under the terms of the agreement, the Company
acquired Rugby and its abbreviated new drug applications, which included several
licensed products, plus Rugby's sales and marketing operations for U.S. off-
patent and over-the-counter pharmaceutical products. The transaction also
included Rugby's product development group and product development pipeline.
Under the terms of the acquisition agreement, the Company paid approximately
$67.5 million in cash at closing and agreed to contingent payments based on
future sales and operating results. The acquisition was accounted for as a
purchase and Rugby's results of operations have been recorded in the Company's
consolidated financial statements since the date of acquisition. The excess of
the aggregate purchase price over the fair value of the assets acquired was
approximately $30.9 million and is being amortized over 20 years.
Under the purchase method of accounting, the purchase price is generally
allocated to the acquired assets and liabilities based on their estimated fair
values at the date of acquisition. However, the portion of the purchase price
that is allocated to in-process research and development ("IPR&D") is not an
asset, but instead, represents the valuation of acquired, to-be-completed
research projects. As such, the amount that is determined to be IPR&D is charged
to expense at the date of acquisition. In the first quarter of 1998, in
connection with the Rugby acquisition, the Company charged $18.8 million to
IPR&D. This amount was subsequently adjusted to $13.0 million to reflect a
recently revised Securities and Exchange Commission-preferred methodology for
valuing IPR&D.
Watson acquired 13 separate IPR&D projects from Rugby, none of which were
material on an individual basis to the Company. Rugby commenced work on these
projects, all of which relate to the development of off-patent pharmaceutical
drugs, at various dates beginning in late 1994. The Company, in conjunction with
an independent valuation firm, determined the allocation of purchase price to
acquired IPR&D. At the acquisition date, it was estimated that the acquired
projects, on an overall basis, were approximately 70% complete and would require
approximately $8.8 million to complete. The primary factor considered in
determining the amount charged to IPR&D was the estimated future cash flows of
each project. Discount rates that ranged from 16% to 20% were assigned to each
project based on identified risk factor assumptions. The discounted cash flows
were then adjusted by the completion percentages of each project, as of the
acquisition date. The individual project completion percentages were estimated
by dividing project costs incurred through the acquisition date by the costs
expected to complete each project.
The development of pharmaceutical products is subject to numerous risks and
uncertainties including formulation and manufacturing issues, the FDA approval
and monitoring process and competitive risks in the marketplace, among others.
There can be no assurance that any of these projects will achieve full
development, receive the required regulatory approvals or contribute in any
significant manner to Watson's future sales.
F-17
<PAGE>
Significant acquisitions in 1997 and earlier years are summarized below:
1997 acquisition of oral contraceptive products from Searle
In October 1997, the Company acquired the U.S. rights to certain existing and
future Searle branded off-patent oral contraceptive products. In accordance with
this agreement, cash payments of $51.5 million and $85.0 million were made to
Searle in 1998 and 1997, respectively. Watson and Searle entered into a supply
agreement whereby Watson has the right to purchase the products for two years
from the date of acquisition and, at the Company's election, for an additional
two-year period. Payment for future products is contingent and due upon receipt
of FDA approval. If the FDA approves these future products, the maximum
aggregate acquisition cost for the remaining future products will be
approximately $33.8 million plus certain contingent payments based on the
technology transfer and net aggregate annual sales of certain of the acquired
products.
1997 acquisition of product rights to Dilacor XR(R)
In June 1997, the Company acquired from Rhone-Poulenc Rorer Pharmaceuticals,
Inc. ("RPR") the exclusive U.S. and certain worldwide marketing, sales, and
distribution rights to Dilacor XR(R) for $190.0 million in cash and future
royalties. Watson and RPR entered into a supply agreement whereby Watson has the
right to purchase finished product from RPR through June 1999 and for an
additional one-year period under certain conditions. Prior to the acquisition of
the rights to Dilacor XR(R), the Company earned royalties from RPR sales of
Dilacor XR(R). The Company earned royalties from this product of $14.2 million
for the first six months of 1997 and $27.2 million for the full year of 1996.
Dilacor XR(R) has been available in the U.S. for the treatment of hypertension
since June 1992 and was approved for the treatment of chronic stable angina in
March 1995.
1997 acquisition of Royce
In April 1997, the Company acquired Royce for approximately 5.2 million shares
of its common stock having a market value of approximately $98.0 million at the
date of acquisition. Royce developed and manufactured off-patent prescription
drugs in solid dosage forms (tablets and capsules). The acquisition was
accounted for as a pooling of interests and the transaction qualified as a tax-
free merger.
1997 acquisition of Oclassen
In February 1997, the Company acquired Oclassen for approximately 6.6 million
shares of its common stock having a market value of approximately $135.0 million
at the date of acquisition. The acquisition was accounted for as a pooling of
interests for accounting purposes and qualified as a tax-free merger for federal
income tax purposes. Oclassen marketed dermatology products used to prevent and
treat skin diseases. In connection with the acquisition, the Company obtained
the rights to the following five Oclassen products: Monodox(R) (doxycycline
monohydrate), Condylox(R) (podofilox 0.5%), Cordran(R) (flurandrenolide),
Cinobac(R) (cinoxacin) and Cormax(TM) (clobetasol propionate).
F-18
<PAGE>
1995 acquisition of Circa
In July 1995, the Company acquired Circa for approximately 37.4 million shares
of its common stock having a market value of approximately $698.0 million at the
date of acquisition. Circa manufactured off-patent pharmaceutical products and
held investments in Somerset and Andrx. The acquisition qualified as a tax-free
merger for federal income tax purposes and was accounted for as a pooling of
interests.
3. Balance Sheet Components
Selected balance sheet components consisted of the following:
<TABLE>
<CAPTION>
December 31,
--------------------------------
1998 1997
------------- -------------
(in thousands)
<S> <C> <C>
Inventories
Raw materials.............................. $ 25,961 $ 19,474
Work-in-progress........................... 12,728 9,452
Finished goods............................. 43,218 20,872
-------- --------
$ 81,907 $ 49,798
======== ========
Property and equipment
Buildings and improvements................. $ 58,682 $ 57,507
Leasehold improvements..................... 14,432 9,529
Land and land improvements................. 9,674 5,261
Machinery and equipment.................... 72,031 65,489
Research and laboratory equipment.......... 20,778 9,707
Furniture and fixtures..................... 4,607 3,183
-------- --------
180,204 150,676
Less accumulated depreciation and
amortization......................... (66,926) (55,906)
-------- --------
113,278 94,770
Construction in progress................... 12,640 12,552
-------- --------
$125,918 $107,322
======== ========
Accounts payable and accrued expenses
Trade accounts payable..................... $ 35,382 $24,272
Royalties payable.......................... 8,227 6,420
Accrued payroll and benefits............... 8,170 6,881
Other accrued liabilities.................. 18,951 12,863
-------- --------
$ 70,730 $ 50,436
======== ========
</TABLE>
F-19
<PAGE>
4. Investments and Other Assets
Investments and other assets consisted of the following:
<TABLE>
<CAPTION>
December 31,
----------------------------
1998 1997
---------- -----------
(in thousands)
<S> <C> <C>
Long-term investments ...................... $138,514 $ 92,233
Investments in joint ventures............... 46,232 31,626
Other assets................................ 16,334 14,140
-------- --------
$201,080 $137,999
======== ========
</TABLE>
Long-term investments
Long-term investments consist primarily of the Company's investment in Andrx.
Andrx is 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. At December 31, 1998, the Company owned 2.7
million common shares of Andrx, which represents approximately 17.7% of the
total Andrx common shares outstanding. The Company also has a warrant to acquire
337,100 shares of Andrx, exercisable in whole or in part until July 8, 1999 at
an exercise price of $8.90 per share. The Company's unrealized gain on this
investment was $60.6 million and $33.1 million (net of income taxes of $40.4
million and $22.1 million), at December 31, 1998 and 1997, respectively. The
unrealized gain on Andrx is the primary component of accumulated other
comprehensive income in the stockholders' equity section of Watson's
consolidated balance sheets.
Investment in Somerset joint venture
The Company owns 50% of the outstanding common stock of Somerset and utilizes
the equity method to account for this investment. Somerset manufactures and
markets the product Eldepryl(R), which is used in the treatment of Parkinson's
disease. Earnings from Somerset were approximately $7.4 million, $12.7 million,
and $20.1 million in 1998, 1997, and 1996, respectively. The Somerset joint
venture earnings reported by Watson are comprised of 50% of Somerset's earnings
and management fees, offset by amortization of goodwill. The net excess of the
cost of this investment over the fair value of net assets acquired was $5.4
million and $6.4 million at December 31, 1998 and 1997, respectively. Such
goodwill is amortized on the straight-line basis over 15 years.
The Internal Revenue Service ("IRS") has notified Somerset that it may be
subject to additional income taxes and interest for its 1993, 1994, and 1995 tax
years. The IRS has proposed adjustments relating to tax credits claimed under
Internal Revenue Code Section 936. The proposed adjustments amount to
approximately $14.0 million of additional income tax and interest charges, 50%
of which would be Watson's share. Management of Somerset believes that it has
met all of the requirements to qualify for the tax credits claimed and intends
to vigorously defend its position on this matter.
F-20
<PAGE>
Combined results for unconsolidated investments in joint ventures
The following aggregate financial information is provided for unconsolidated
investments in joint ventures accounted for using the equity method:
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------------------------------
1998 1997 1996
---------------- ------------ --------------
(in thousands)
<S> <C> <C> <C>
Net revenues........................... $ 51,564 $73,489 $ 101,512
======== ======= =========
Gross profit........................... $ 43,108 $63,858 $ 88,840
======== ======= ========
Net income............................. $ 13,108 $20,925 $ 31,564
======== ======= ========
</TABLE>
<TABLE>
<CAPTION>
December 31,
-------------------------------
1998 1997
---------- ----------
(in thousands)
<S> <C> <C>
Current assets....................................... $ 79,155 $ 60,604
Other assets......................................... 7,092 8,508
-------- --------
Total assets......................................... $ 86,247 $ 69,112
======== ========
Current liabilities.................................. $ 20,893 $ 18,300
Other liabilities.................................... 723 1,309
Stockholders' equity................................. 64,631 49,503
-------- --------
Total liabilities and stockholders' equity........... $ 86,247 $ 69,112
======== ========
</TABLE>
5. Debt
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------------
1998 1997
----------- ----------
(in thousands)
<S> <C> <C>
Senior unsecured notes, 7.125%, face
amount of $150.0 million, due 2008
(effective rate of 7.25%).......................... $ 148,489 $ ---
Unsecured note, 8.1%, due August 2001................ 2,174 2,904
Other notes payable.................................. 2,263 8,835
-------- ---------
152,926 11,739
Less current portion................................. (1,843) (1,882)
-------- ---------
$ 151,083 $ 9,857
======== =========
</TABLE>
In May 1998, the Company issued $150.0 million of 7.125% senior unsecured notes.
These notes are due in May 2008, with interest-only payments due semi-annually
in November and May. The Company must maintain specified financial ratios and
comply with certain restrictive covenants.
Annual maturities of notes payable, other than the senior unsecured notes, are
as follows: $1.8 million in 1999, $2.0 million in 2000 and $0.6 million in 2001.
F-21
<PAGE>
6. Income Taxes
The provision for income taxes is summarized as follows:
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------------------
1998 1997 1996
-------------- ------------- --------------
(in thousands)
<S> <C> <C> <C>
Current provision:
Federal............................ $ 67,314 $ 46,990 $ 11,059
State.............................. 9,340 9,372 4,458
---------- --------- ----------
76,654 56,362 15,517
---------- --------- ----------
Deferred provision (benefit):
Federal............................ 958 (2,228) 17,364
State.............................. 635 665 2,640
---------- --------- ----------
1,593 (1,563) 20,004
---------- --------- ----------
Provision for income taxes............. $78,247 $54,799 $35,521
========== ========= ==========
</TABLE>
The exercise of stock options represents a tax benefit and has been reflected as
a reduction of income taxes payable and an increase to additional paid-in
capital. Such benefits recorded were $13.6 million, $10.9 million and $7.8
million for the years ended December 31, 1998, 1997 and 1996, respectively.
Income taxes of $2.3 million have been provided for the possible distribution of
approximately $29.0 million of undistributed earnings related to the Company's
investments in joint ventures.
Reconciliations between the statutory federal income tax rate and the Company's
effective income tax rate were as follows:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Expected tax at federal statutory rates............ 35% 35% 35%
State income taxes, net of federal benefit......... 3 4 5
Non-deductible IPR&D charge........................ 2
Dividends received deduction....................... --- (2) (4)
Non-deductible merger expenses..................... 2
Research tax credits and other credits............. --- --- (1)
Other.............................................. --- (3) (5)
--------- --------- --------
Provision for income taxes......................... 40% 36% 30%
========= ========= ========
</TABLE>
F-22
<PAGE>
Deferred tax assets and liabilities are measured based on the difference between
the financial statement and tax bases of assets and liabilities at the
applicable tax rates. The significant components of the Company's net deferred
tax assets and liabilities were:
<TABLE>
<CAPTION>
December 31,
---------------------------------
1998 1997
------------- -------------
(in thousands)
<S> <C> <C>
Benefits from NOL carryforwards...................... $18,574 $ 19,737
Differences in financial statement and tax
accounting for:
Inventory and receivables........................ 21,633 8,900
Research and development......................... 1,732 746
Property, equipment and intangible assets........ (11,487) (7,351)
Investments in joint ventures.................... (2,241) (1,590)
Unrealized gains - FAS 115........................... (40,605) (22,093)
Valuation allowance.................................. (23,755) (23,400)
Credits.............................................. 2,833 2,594
Other................................................ 8,438 4,969
--------- ---------
$ (24,878) $ (17,488)
========= =========
</TABLE>
The Company had net operating loss ("NOL") carryforwards at December 31, 1998 of
approximately $58 million. During 1998, Watson utilized NOL carryforwards of
approximately $7.0 million to offset federal income. Due to restrictions imposed
as a result of ownership changes to acquired subsidiaries, the amount of the NOL
carryforward available to offset future taxable income is subject to limitation.
The annual NOL utilization may be further limited if additional changes in
ownership occur. The Company's NOL carryforwards will begin to expire in 2001.
7. Stockholders' Equity
Preferred stock
In 1992, the Company authorized 2.5 million shares of no par preferred stock.
The Board of Directors has the authority to fix the rights, preferences,
privileges and restrictions, including dividend rates, conversion and voting
rights, terms and prices of redemptions and liquidation preferences without vote
or action by the stockholders. At December 31, 1998, no preferred stock was
issued.
F-23
<PAGE>
Stock option plans
The Company has adopted several stock option plans that authorize the granting
of options to purchase the Company's common stock subject to certain conditions.
At December 31, 1998, the Company had reserved 10.5 million shares of its common
stock for issuance upon exercise of options granted or to be granted under these
plans. The options are granted at the fair market value of the shares underlying
the options at the date of the grant, generally become exercisable over a
five-year period and expire in ten years. In conjunction with certain of the
Company's acquisitions, Watson assumed stock option and warrant plans from the
acquired companies. The options and warrants in these plans were adjusted by the
individual exchange ratios specified in each transaction. No additional options
or warrants will be granted under any of the assumed plans.
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"), and related
interpretations, which require compensation expense for options to be recognized
when the market price of the underlying stock exceeds the exercise price on the
date of the grant. Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("FAS 123"), permits companies to apply existing
accounting rules under APB 25 and provide pro forma disclosures of net income
and earnings per share as if the fair value method (as defined in FAS 123) had
been applied. Had compensation cost been determined using the fair value method
prescribed by FAS 123, the Company's net income and earnings per share would
have been as follows:
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------------
1998 1997 1996
----------- ---------- ----------
(in thousands, except per share amounts)
<S> <C> <C> <C>
Pro forma net income........................ $ 105,426 $ 86,779 $ 75,443
=========== ========== ==========
Pro forma basic earnings per share.......... $ 1.11 $ 0.94 $ 0.83
=========== ========== ==========
Pro forma diluted earnings per share........ $ 1.08 $ 0.91 $ 0.80
=========== ========== ==========
</TABLE>
The weighted average fair value of the options has been estimated on the date of
grant using the Black-Scholes option pricing model with the following weighted
average assumptions used for grants in 1998, 1997 and 1996, respectively: no
dividend yield; expected volatility of 41%, 49% and 51%, risk-free interest rate
of 5.14%, 6.15% and 6.18% per annum; and expected terms ranging from
approximately seven to eight years. Weighted averages are used because of
varying assumed exercise dates.
F-24
<PAGE>
A summary of the Company's stock option plans as of December 31, 1998, 1997 and
1996, and for the years then ended is presented below (shares in thousands):
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------------------------------------------------------
1998 1997 1996
-------------------------- -------------------------- -----------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding-beginning of
year........................... 7,580 $ 18.92 8,138 $ 13.62 8,887 $12.18
Granted........................ 1,272 $ 42.26 2,520 $ 23.88 1,296 $19.45
Exercised ..................... (1,643) $ 14.49 (2,500) $ 6.14 (1,288) $ 7.77
Cancelled...................... (425) $ 20.63 (578) $ 19.00 (757) $16.34
------ ------ ------
Outstanding-end of year............ 6,784 $ 24.26 7,580 $ 19.09 8,138 $13.65
====== ====== ======
Weighted average fair
value of options granted........... $ 20.42 $ 12.31 $ 8.89
======== ======= =======
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1998 (shares in thousands):
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------- ------------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Prices Shares Life in Years Exercise Price Shares Exercise Price
--------------- ------ ------------- -------------- ------ --------------
<S> <C> <C> <C> <C> <C>
$ 2.91 to $ 12.75............. 1,148 4.4 $ 7.13 1,017 $ 7.13
$ 12.88 to $ 18.63............. 2,195 7.1 $ 17.31 1,037 $ 17.34
$ 18.94 to $ 33.00............. 1,781 8.1 $ 25.38 491 $ 25.13
$ 33.50 to $ 56.75............. 1,660 8.9 $ 43.07 361 $ 38.46
----- -----
6,784 7.3 $ 22.46 2,906 $ 17.71
===== =====
</TABLE>
F-25
<PAGE>
8. Related Parties
The Company leases a portion of its facilities from a trust in which Watson's
Chairman and Senior Vice President, Scientific Affairs have beneficial
interests. The aggregate rent expense paid to related parties in 1998, 1997 and
1996 was $345,000, $332,000 and $432,000, respectively, and was allocated to
cost of sales, research and development and selling, general and administrative
expenses.
One of TheraTech's former directors is also a director of Palatin Technologies,
Inc. ("Palatin"). During 1998, the Company entered into a licensing and
development agreement with Palatin to develop oral transmucosal delivery systems
for peptide products. Under this agreement the Company earned research and
development revenues of $860,000. Additionally, the Company also made a $2.0
million equity investment in Palatin, a publicly traded company, under a stock
purchase agreement.
The Company had notes receivable due from executive officers in the amounts of
$760,000 and $2.0 million at December 31, 1998 and 1997, respectively. The notes
will mature in the second and third quarters of 1999. The $2.0 million note was
repaid in March 1998.
9. Commitments and Contingencies
Facility and equipment leases
The Company has entered into operating leases for certain facilities and
equipment. The terms of the operating leases for the Company's facilities
require the Company to pay property taxes, normal maintenance expenses and
maintain minimum insurance coverage. Total rental expense for operating leases
in 1998, 1997 and 1996, including rent paid to related parties, was $6.6
million, $3.7 million and $3.1 million, respectively.
At December 31, 1998, future minimum lease payments under all noncancelable
operating leases consisted of the following (in thousands):
<TABLE>
For The Years Ending December 31,
<S> <C>
1999................ $ 5,400
2000................ 4,200
2001................ 1,300
2002................ 400
2003 and after...... 3,900
------
$15,200
=======
</TABLE>
Employee retirement plans
The Company maintains certain 401(k) retirement plans covering substantially all
employees. The Company makes contributions to the plan based upon the employee
contributions. The Company contributed approximately $1.3 million, $860,000 and
$760,000 to these retirement plans for the years ended December 31, 1998, 1997,
and 1996, respectively.
Legal matters
The Company is involved in various disputes and litigation matters that arise in
the ordinary course of business. The litigation process is inherently uncertain
and it is possible that the resolution of these disputes and lawsuits may
adversely affect the Company. Management believes, however, that the ultimate
resolution of such matters will not have a material adverse impact on the
Company's consolidated financial position or results of operations.
F-26
<PAGE>
10. Quarterly Financial Data (Unaudited)
Unaudited quarterly financial and market price information follows (in
thousands, except per share data):
<TABLE>
<CAPTION>
Fourth Third Second First
1998 Quarter Quarter Quarter Quarter
---- -------- -------- -------- -------
<S> <C> <C> <C> <C>
Net revenues........................ $152,408 $158,765 $152,684 $132,336
Cost of sales....................... 53,436 57,194 54,135 45,640
-------- -------- -------- --------
Gross profit.................... 98,972 101,571 98,549 86,696
-------- -------- -------- --------
Operating expenses.................. 47,843 47,179 47,434 53,066
Other income (expense), net......... (538) 1,892 2,490 2,819
Provision for income taxes 21,053 20,037 19,407 17,750
-------- -------- -------- --------
Net income...................... $ 29,538 $ 36,247 $ 34,198 $ 18,699
======== ======== ======== ========
Basic earnings per share........ $ 0.31 $ 0.38 $ 0.36 $ 0.20
======== ======== ======== ========
Diluted earnings per share...... $ 0.30 $ 0.37 $ 0.35 $ 0.19
======== ======== ======== ========
Market price per share:......... High $63.00 $ 52.88 $49.50 $ 42.94
Low $42.00 $ 40.25 $36.25 $ 30.50
Fourth Third Second First
1997 Quarter Quarter Quarter Quarter
---- ------- ------- ------- -------
<S> <C> <C> <C> <C>
Net revenues........................ $120,022 $102,476 $ 72,560 $ 67,163
Cost of sales....................... 39,714 35,930 28,372 27,021
-------- -------- -------- --------
Gross profit.................... 80,308 66,546 44,188 40,142
-------- -------- -------- --------
Royalty income...................... -- -- 7,208 7,041
Operating expenses.................. 34,825 26,759 25,900 30,421
Other income, net................... 3,236 4,403 7,495 7,787
Provision for income taxes.......... 17,438 14,900 12,698 9,763
-------- -------- -------- --------
Net income...................... $ 31,281 $ 29,290 $ 20,293 $ 14,786
======== ======== ======== ========
Basic earnings per share........ $ 0.34 $ 0.31 $ 0.22 $ 0.16
======== ======== ======== ========
Diluted earnings per share...... $ 0.33 $ 0.31 $ 0.21 $ 0.16
======== ======== ======== ========
Market price per share:......... High $ 34.13 $30.38 $22.25 $ 23.06
Low $ 27.00 $21.63 $16.00 $ 17.69
</TABLE>
The quarterly data above were restated, as applicable, to reflect the adoption
of FAS 128 and for acquisitions in 1997 (Oclassen and Royce) and January 1999
(TheraTech), accounted for under the pooling of interests method as further
discussed in Note 2. In addition, a first quarter 1998 charge for acquired in-
process research and development ("IPR&D") was restated to reflect a recently
revised Securities and Exchange Commission-preferred methodology for valuing
IPR&D. The restated amount is $13.0 million, as compared to $18.8 million as
originally reported, and was determined in conjunction with an independent
valuation firm.
F-27
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The only expenses incurred in connection with this transaction are the
following, all of which are estimated, except for the SEC filing fee.
<TABLE>
<S> <C>
SEC filing fee......................................... $ 687.08
Accounting fees and expenses........................... 8,000.00
Legal fees and expenses..................................25,000.00
Financial printing and other..............................4,000.00
----------
Total ................................................ $37,687.08
==========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 78.751 of the Nevada Revised Statutes authorizes a corporation,
under certain circumstances, to indemnify its directors and officers (including
reimbursement for expenses incurred). The registrant has provided for
indemnification to the fullest extent permitted by the provisions of the Nevada
statute in its Articles of Incorporation and Bylaws.
The registrant maintains a directors' and officers' liability insurance
policy that, subject to the terms and conditions of the policy, provides
coverage up to $30,000,000 in the aggregate (subject to a $250,000 retention per
loss) arising from any wrongful act (as defined by the policy) committed by a
director or officer in his or her capacity as a director or officer. The policy
reimburses the registrant for amounts spent in lawful indemnification of a
director or officer or amounts provided by registrant to indemnify its directors
and officers as required or permitted by law.
ITEM 16. EXHIBITS
2.1 Agreement and Plan of Merger, among Watson Pharmaceuticals, Inc.,
TheraTech, Inc. and The Jazz Merger Corp. dated as of October 23,
1998, incorporated by reference to Appendix A of the Proxy
Statement/Prospectus included in the Registration Statement on
S-4, Reg. No. 333-68007 and hereby incorporated by reference.
3.1 Articles of Incorporation of Watson and all amendments thereto,
filed as Exhibit 3.1 to Watson's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1995 and Exhibit 3.1 (A) to
Watson's Quarterly Report on Form 10-Q for the quarter ended June
30, 1996 and hereby incorporated by reference.
3.2 Bylaws of Watson, as amended as of December 11, 1998, filed as
Exhibit 3.2 to Watson's Registration Statement on Form S-8 filed
on January 21, 1999 and hereby incorporated by reference.
4.1 TheraTech, Inc. 1992 Amended and Restated Directors' Stock Option
Plan, incorporated by reference to TheraTech's Proxy Statement
filed in connection with its 1994 Annual Meeting of Stockholders,
and hereby incorporated by reference.
5.1 Opinion of D'Ancona & Pflaum LLC as to the legality of the common
stock being offered.
5.2 Opinion of Kummer, Kaempfer, Bonner & Renshaw as to the legality
of the common stock being offered.
23.1 Consent of D'Ancona & Pflaum LLC (included in exhibit 5.1).
<PAGE>
23.2 Consent of Kummer, Kaempfer, Bonner & Renshaw (included in
exhibit 5.2).
23.3 Consent of PricewaterhouseCoopers LLP.
23.4 Consent of Deloitte & Touche LLP.
23.5 Consent of Arthur Andersen LLP.
23.6 Consent of Ernst & Young LLP.
*24.1 Power of Attorney.
_______________________
*Previously filed.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the Registration Statement (or
the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the Registration
Statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the
Registration Statement or any material change to such
information in the Registration Statement;
Provided, however, that paragraphs (1)(i) and (1)(ii) do not apply if
the information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed with or furnished to the
Securities and Exchange Commission by the registrant pursuant to section 13 or
section 15(d) of the Securities Exchange Act of 1934 that are incorporated by
reference in the Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall
be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of the offering.
(4) That, for purposes of determining any liability under the
Securities Act of 1933, each filing of the registrant's annual
report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 that is incorporated by reference
in the registration statement shall be deemed to be a new
registration statement relating to the securities offered
therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions (see Item 15 above), or
otherwise, the registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
<PAGE>
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
The undersigned registrant hereby further undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as
part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be
deemed to be part of this registration statement as of the time it was
declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Corona, State of California, on the 6th day of
January, 2000.
WATSON PHARMACEUTICALS, INC.
(registrant)
By: /s/ ALLEN Y. CHAO
-------------------------------
Allen Y. Chao, Ph.D.
Chairman, Chief Executive
Officer and President
(Principal Executive Officer)
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signatures Titles Date
---------- ------ ----
<S> <C> <C>
Chairman, Chief Executive Officer and
/s/ ALLEN Y. CHAO President (Principal Executive Officer) January 6, 2000
-----------------------------------------------
Allen Y. Chao, Ph.D.
/s/ MICHAEL E. BOXER
----------------------------------------------- Senior Vice President and Chief
Michael E. Boxer Financial Officer (Principal Financial
Officer) January 6, 2000
/s/ R. CHATO ABAD Vice President-Finance (Principal
----------------------------------------------- Accounting Officer) January 6, 2000
R. Chato Abad
* Director January 6, 2000
-----------------------------------------------
Michel J. Fedida
* Director January 6, 2000
-----------------------------------------------
Michael J. Feldman
* Director January 6, 2000
-----------------------------------------------
Albert F. Hummel
* Director January 6, 2000
-----------------------------------------------
Alec D. Keith, Ph.D.
* Director January 6, 2000
-----------------------------------------------
Ronald R. Taylor
* Director January 6, 2000
-----------------------------------------------
Andrew L. Turner
*By: /s/ ALLEN Y. CHAO Attorney-in-fact January 6, 2000
-----------------------------------------------
Allen Y. Chao, Ph.D.
</TABLE>
<PAGE>
WATSON PHARMACEUTICALS, INC.
EXHIBIT INDEX
PRE-EFFECTIVE AMENDMENT NO. 2 TO FORM S-3
2.1 Agreement and Plan of Merger, among Watson Pharmaceuticals, Inc.,
TheraTech, Inc. and The Jazz Merger Corp. dated as of October 23,
1998, incorporated by reference to Appendix A of the Proxy
Statement/Prospectus included in the Registration Statement on
S-4, Reg. No. 333-68007 and hereby incorporated by reference.
3.1 Articles of Incorporation of Watson and all amendments thereto,
filed as Exhibit 3.1 to Watson's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1995 and Exhibit 3.1 (A) to
Watson's Quarterly Report on Form 10-Q for the quarter ended June
30, 1996 and hereby incorporated by reference.
3.2 Bylaws of Watson, as amended as of December 11, 1998, filed as
Exhibit 3.2 to Watson's Registration Statement on Form S-8 filed
on January 21, 1999 and hereby incorporated by reference.
4.1 TheraTech, Inc. 1992 Amended and Restated Directors' Stock Option
Plan, incorporated by reference to TheraTech's Proxy Statement
filed in connection with its 1994 Annual Meeting of Stockholders
and hereby incorporated by reference.
5.1 Opinion of D'Ancona & Pflaum LLC as to the legality of the common
stock being offered.
5.2 Opinion of Kummer, Kaempfer, Bonner & and Renshaw as to the
legality of the common stock being offered.
23.1 Consent of D'Ancona & Pflaum LLC (included in exhibit 5.1).
23.2 Consent of Kummer, Kaempfer, Bonner & Renshaw (included in
exhibit 5.2).
23.3 Consent of PricewaterhouseCoopers LLP.
23.4 Consent of Deloitte & Touche LLP.
23.5 Consent of Arthur Andersen LLP.
23.6 Consent of Ernst & Young LLP.
*24.1 Power of Attorney.
________________________
* Previously filed.
<PAGE>
EXHIBIT 5.1
D'ANCONA
ATTORNEYS
December 23, 1999
Watson Pharmaceuticals, Inc.
311 Bonnie Circle
Corona, CA 91720
Ladies & Gentlemen:
We have acted as counsel for Watson Pharmaceuticals, Inc. (the
"Company") in connection with the filing with the Securities and Exchange
Commission of a Registration Statement on Form S-3 (the "Registration
Statement") relating to the offer and proposed sale of 55,587 shares of the
Company's common stock, $.0033 par value ("Common Stock"), under the terms of
the TheraTech, Inc. 1992 Amended and Restated Directors' Stock Option Plan
("Plan") described in the Registration Statement ("Stock Options") and the
proposed issuance of 20,000 shares of the Company's Common Stock under a
Technology Purchase Agreement with Innovative Devices, LLC, a North Carolina
limited liability company, described in the Registration Statement.
In arriving at this opinion, we have examined the Company's Articles of
Incorporation, its Bylaws, the records of the corporate proceedings of the
Company authorizing the issuance and sale of the shares of Common Stock covered
by the Registration Statement, the Stock Options, the Technology Purchase
Agreement, an opinion of Nevada Counsel, and such other instruments and
documents as we have deemed appropriate.
Based upon the foregoing, we are of the opinion that all necessary
corporate action for the authorization, reservation and issuance of the shares
of Common Stock to be offered and sold by the Company pursuant to the Stock
Options and the Technology Purchase Agreement have been taken; and that said
shares of Common Stock are duly authorized, and upon delivery of same to the
participants under the Stock Options against payment therefor upon the terms set
forth in the Stock Options and upon delivery of the same in accordance with the
Technology Purchase Agreement, said shares of Common Stock will be validly
issued, fully paid and non-assessable shares of Common Stock of the Company.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to our firm in such Registration
Statement.
Very truly yours,
D'ANCONA & PFLAUM LLC
By: /s/ Steve Curtis
------------------------------------
Steve Curtis, Member
<PAGE>
EXHIBIT 5.2
[LETTERHEAD OF KUMMER KAEMPFER BONNER & RENSHAW APPEARS HERE]
January 6, 2000
D'ANCONA & PFLAUM LLC
111 E. Wacker Drive
Suite 2800
Chicago, Illinois 60601-4205
RE: WATSON PHARMACEUTICALS, INC.
Ladies and Gentlemen:
You have requested our opinion as special Nevada counsel for Watson
Pharmaceuticals, Inc., a Nevada corporation ("Watson"), in connection with
the filing of a Pre-Effective Amendment No. 2 on Form S-3 to a Registration
Statement (the "Registration Statement") relating to the registration of
(i) an aggregate of 55,587 shares (the "TheraTech Shares") of Watson's
common stock, par value $.0033 ("Watson Common Stock") that may be issued
upon the exercise of options issued under the TheraTech, Inc. 1992 Amended
and Restated Employees' Stock Option Plan (the "Directors Plan") and (ii)
an aggregate of 20,000 shares (the "Purchase Agreement Shares") of Watson
Common Stock which could be issued under a Technology Purchase Agreement by
and between TheraTech, Inc., a wholly-owned subsidiary of Watson and
Innovative Devices, LLC. The TheraTech Shares and the Purchase Agreement
Shares shall be collectively referred to as the "Shares." We are not
general counsel to Watson, and we have been retained specially to represent
Watson in this transaction for the purpose of rendering this opinion to
you. Any opinions expressed herein shall be limited to the extent that we
have been retained as special Nevada counsel.
In connection with this opinion, we have examined the following
documents (collectively, the "Documents"):
1. Articles of Incorporation of Watson as filed with the Nevada
Secretary of State on January 2, 1985, as amended on September
28, 1987, as amended on August 27, 1991, as amended on February
20, 1992, as amended on July 18, 1995, and as amended on May 30,
1996.
2. Bylaws of Watson, certified by Watson to be currently in full
force and effect as of October 26, 1999.
<PAGE>
3. A executed copy of the Merger Agreement.
4. Certificate of the Secretary of Watson dated as of October 26,
1999, and that certain letter dated as of January 6, 2000.
5. Draft of the Registration Statement, Registration No. 333-70943,
to be filed with the Securities and Exchange Commission.
In our examination of the Documents, we have assumed the genuineness
of all signatures, the legal capacity of natural persons who signed the
Documents, the authenticity of all Documents submitted to us as originals, the
conformity to the originals of all Documents submitted to us as copies and the
authenticity of the originals of such latter Documents. We assume the due
authorization of each Document by each party thereto. We assume that the
Documents have not been rescinded, modified, or altered in any manner whatsoever
as of the date hereof.
In rendering the following opinions, we have relied without
investigation on the certificates of officers of Watson, and we have not
independently verified any of the factual matters set forth in any other
Documents upon which we have relied. Furthermore, we have been provided with a
copy of the Registration Statement, and we have relied without investigation
upon the representations contained therein. We have not been asked, nor have we
endeavored, to review, revise or in any manner comment upon the contents of the
Registration Statement.
We are admitted to the Bar of the state of Nevada. In rendering our
opinions hereinafter stated, we have relied upon the applicable laws of the
state of Nevada as those laws presently exist and as they have been applied and
interpreted by courts having jurisdiction within the state of Nevada. We express
no opinion as to the laws of any other jurisdiction or of the United States of
America.
Based on such examination and subject to the limitations and
assumptions herein provided, we are of the opinion that Watson has the full
power and authority under the laws of the State of Nevada, and under its
Articles of Incorporation and Bylaws, as amended, to issue the Shares and that
the Shares are validly authorized shares of Watson Common Stock, and when
issued, will be legally issued, fully paid and nonassessable and not subject to
any preemptive or similar rights.
These opinions are effective as of the date hereof. No extensions of
our opinion may be made by implication or otherwise. We express no opinion other
than as herein expressly set forth. We understand that you will rely on our
opinion in rendering your separate opinion addressed to the Securities and
Exchange Commission in connection with the Registration Statement. Our opinions
are not to be otherwise quoted in whole or in part without the express written
consent of this firm.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement, and any and all amendments thereto.
Very truly yours,
KUMMER KAEMPFER BONNER & RENSHAW
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Amendment No. 2 to the Registration
Statement on Form S-3 (No. 333-70943) of our report dated February 17, 1999
relating to the financial statements of Watson Pharmaceuticals, Inc., which
appears in such Registration Statement. We also consent to the reference to us
under the heading "Experts" in such Registration Statement.
/s/ PricewaterhouseCoopers LLP
Los Angeles, California
January 4, 2000
<PAGE>
EXHIBIT 23.4
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of Watson Pharmaceuticals,
Inc. on Form S-3 of our report dated February 4, 1998, appearing in the
Prospectus, relating to the consolidated financial statements of Somerset
Pharmaceuticals, Inc. and subsidiaries as of December 31, 1997, and for the year
then ended, and to the reference to us under the heading "Experts" in the
Prospectus, which is part of this Registration Statement.
/s/ DELOITTE & TOUCHE LLP
Pittsburgh, Pennsylvania
January 4, 2000
<PAGE>
EXHIBIT 23.5
CONSENT OF ARTHUR ANDERSEN LLP
As independent public accountants, we hereby consent to the incorporation by
reference in this Registration Statement No. 333-70943 of our report on Oclassen
Pharmaceuticals, Inc., dated January 17, 1997, and to all references to our Firm
included in this Registration Statement on Pre-Effective Amendment No. 2 to Form
S-3. It should be noted that we have not audited any financial statements of
Oclassen Pharmaceuticals, Inc. subsequent to December 31, 1996 or performed any
audit procedures subsequent to the date of our report.
/s/ ARTHUR ANDERSEN LLP
San Francisco, California
January 4, 2000
<PAGE>
EXHIBIT 23.6
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated February 5, 1999, with respect to the consolidated
financial statements of TheraTech, Inc. for the year ended December 31, 1998, in
Amendment No. 2 to the Registration Statement (Form S-3 No. 333-70943) and
Related Prospectus of Watson Pharmaceuticals, Inc. for the registration of
75,587 shares of its common stock.
/s/ Ernst & Young LLP
Salt Lake City, Utah
January 3, 2000
