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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-20045
WATSON PHARMACEUTICALS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEVADA 95-3872914
(State or other jurisdiction of (I.R.S. Employer)
incorporation or organization) Identification No.)
311 BONNIE CIRCLE
CORONA, CA 91720
(Address of principal executive offices) (Zip Code)
909-270-1400
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days:
YES X NO
----- -----
The number of shares outstanding of the Registrant's only class of common stock
as of September 30, 1995 was 36,060,344 shares.
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WATSON PHARMACEUTICALS, INC.
INDEX
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995
PAGE NUMBER
-----------
PART I. FINANCIAL INFORMATION
Item 1. Unaudited Consolidated Financial Statements
Consolidated Balance Sheets
As of September 30, 1995 and
December 31, 1994 3 and 4
Consolidated Statements of
Income for the Three Months and
Nine Months Ended September 30, 1995 and 1994 5
Consolidated Statements of Cash
Flows for the Nine Months Ended
September 30, 1995 and 1994 6 and 7
Notes to Unaudited Consolidated
Financial Statements for the
Nine Months Ended September 30, 1995 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 9 to 12
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
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Part I - Financial Information
Item 1 - Unaudited Consolidated Financial Statements
WATSON PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
(Unaudited)
September 30, December 31,
1995 1994
------------ -----------
ASSETS
Current Assets:
Cash and cash equivalents $ 95,069 $ 71,165
Marketable securities 24,585 35,531
Accounts receivable, net of allowances for
doubtful accounts of $1,110 and $903, respectively 21,727 16,128
Royalty receivable 1,976
Inventories 20,060 16,361
Prepaid expenses and other current assets 4,080 2,732
Current deferred tax assets 25,056 30,995
-------- --------
Total current assets 192,553 172,912
Property and equipment, net 65,063 54,115
Investments in joint ventures 33,320 31,824
Other assets 4,430 3,465
-------- --------
Total assets $295,366 $262,316
======== ========
The accompanying notes, together with the Notes to Consolidated Financial
Statements included in the Company's Form 10-K for 1994 and unaudited pro forma
financial information on a combined basis as filed in Form S-4, are an integral
part of the Unaudited Consolidated Financial Statements.
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WATSON PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
(Unaudited)
September 30, December 31,
1995 1994
------------ -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 25,172 $ 17,533
Income taxes payable 775
Current portion of long-term debt 662 718
-------- --------
Total current liabilities 26,609 18,251
Deferred partnership liability 14,033
Other liabilities 3,088 1,604
Long-term debt 4,582 5,058
-------- --------
Total liabilities 34,279 38,946
-------- --------
Stockholders' Equity:
Preferred stock; no par; 2,500,000 shares
authorized; none outstanding
Common stock; par value of $.0033; 100,000,000
shares authorized; 36,060,344 and 35,782,704
shares issued and outstanding, respectively 119 118
Additional paid-in capital 136,884 132,115
Retained earnings 125,832 94,821
Unrealized holding loss on marketable securities (147) (870)
Unearned compensation-stock awards (1,601) (2,814)
-------- --------
Total stockholders' equity 261,087 223,370
-------- --------
Total liabilities and stockholders' equity $295,366 $262,316
======== ========
The accompanying notes, together with the Notes to Consolidated Financial
Statements included in the Company's Form 10-K for 1994 and unaudited pro forma
financial information on a combined basis as filed in Form S-4, are an integral
part of the Unaudited Consolidated Financial Statements.
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WATSON PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Per Share Data)
(Unaudited)
For the nine months ended For the three months ended
September 30, September 30,
------------------------- ---------------------------
1995 1994 1995 1994
---------- ---------- ------------ -----------
Revenues:
Product sales $ 93,626 $65,640 $33,001 $23,460
Royalty income 16,013 717 5,520 356
-------- ------- ------- -------
109,639 66,357 38,521 23,816
Operating expenses:
Cost of revenues 47,005 34,982 16,831 12,469
Research and development 13,922 13,408 4,232 5,089
Selling, general and administrative 12,528 9,090 4,017 3,353
-------- ------- ------- -------
Total operating expenses 73,455 57,480 25,080 20,911
-------- ------- ------- -------
Operating income 36,184 8,877 13,441 2,905
Merger expenses 13,939 13,939
Gain on sale of Marsam stock 6,126 2,749 6,126 1,586
Equity in earnings of joint ventures 15,857 17,264 5,653 6,223
Investment and other income, net 4,067 2,397 1,507 794
-------- ------- ------- -------
Income before provision
for income taxes 48,295 31,287 12,788 11,508
Provision for income taxes 17,284 7,145 7,481 2,630
-------- ------- ------- -------
Net income $ 31,011 $24,142 $ 5,307 $ 8,878
======== ======= ======= =======
Per share data:
Earnings per common and
common equivalent share $ .84 $ .66 $ .14 $ .24
======== ======= ======= =======
Weighted average number of
common and common equivalent
shares outstanding 36,987 36,466 37,301 36,565
======== ======= ======= =======
The accompanying notes, together with the Notes to Consolidated Financial
Statements included in the Company's Form 10-K for 1994 and unaudited pro forma
financial information on a combined basis as filed in Form S-4, are an integral
part of the Unaudited Consolidated Financial Statements.
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WATSON PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
(In Thousands)
(Unaudited)
For the nine months ended
September 30,
-----------------------------
1995 1994
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 31,011 $ 24,142
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 3,892 3,209
Provision for doubtful accounts 152 366
Amortization of unearned compensation-stock awards 1,214 869
Amortization of deferred income (687)
Changes in assets and liabilities:
(Increase) in accounts receivable (5,752) (1,413)
(Increase) in royalty receivable (1,976)
(Increase) in inventories (3,699) (4,065)
(Increase) decrease in prepaid expenses
and other current assets 286 (991)
(Increase) decrease in deferred tax assets 5,939 (1,400)
(Increase) in other assets (2,510) (295)
Increase (decrease) in accounts payable and
accrued expenses 7,639 (2,214)
Legal settlements paid (4,557)
Equity in earnings of joint ventures (14,112) (16,519)
Dividends received from Somerset 13,500 13,500
Decrease in deferred partnership liability (14,033) (717)
Gain on sale of Marsam stock (6,126) (2,749)
Increase in deferred tax liabilities 2,173
Increase in income taxes payable 805
Tax benefit relating to stock option plan 1,981 498
--------- --------
Total adjustments (11,314) (16,478)
--------- --------
Net cash provided by operating activities 19,697 7,664
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (14,913) (11,620)
Purchase of marketable securities (254,595) (11,281)
Proceeds from sale of marketable securities 265,455 28,523
Investment in Andrx (1,000) (6,000)
Proceeds from sale of Marsam stock 7,005 3,335
--------- --------
Net cash provided by investing activities 1,952 2,957
--------- --------
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WATSON PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
(In Thousands)
(Unaudited)
For the nine months ended
September 30,
----------------------------
1995 1994
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options $ 2,788 $ 418
Proceeds from issuance of long-term debt 5,000
Principal payments on long-term debt (533) (1,738)
Net collections from notes receivable
from stockholders 20
--------- --------
Net cash provided by financing activities 2,255 3,700
--------- --------
Net increase in cash and cash equivalents 23,904 14,321
Cash and cash equivalents at beginning of period 71,165 45,087
--------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 95,069 $ 59,408
========= ========
The accompanying notes, together with the Notes to Consolidated Financial
Statements included in the Company's Form 10-K for 1994 and unaudited pro forma
financial information on a combined basis as filed in Form S-4, are an integral
part of the Unaudited Consolidated Financial Statements.
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WATSON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995
UNAUDITED
NOTE A - WATSON PHARMACEUTICALS, INC. AND CIRCA PHARMACEUTICALS, INC. MERGER
On July 17, 1995, the stockholders of Watson Pharmaceuticals, Inc. (the
"Company") and Circa Pharmaceuticals, Inc. ("Circa") approved the merger
between these companies and the transaction was consummated through the
issuance of approximately 18.7 million shares of the Company's common stock.
The merger was accounted for on a pooling of interest basis. Accordingly, the
historical financial statements of the Company have been restated to include
Circa.
NOTE B - GENERAL
In the opinion of the management of the Company, the accompanying unaudited
consolidated financial statements contain all adjustments (consisting of only
normal recurring adjustments) necessary to present fairly the financial
position of the Company as of September 30, 1995, and the results of operations
for the three and nine months ended September 30, 1995. The results of
operations and of cash flows for the nine months ended September 30, 1995 are
not necessarily indicative of the results of operations or cash flows which may
be reported for the remainder of 1995.
While the Company believes that the disclosures presented are adequate to make
the information not misleading, it is suggested that these unaudited
consolidated financial statements be read in conjunction with the following
information: The Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1994 and the Company's Quarterly Report on Form 10-Q for the
three months ended September 30, 1994, Circa's Annual Report on Form 10-K for
the fiscal year ended December 31, 1994, Circa's Quarterly Report on Form 10-Q
for the three months ended September 30, 1994, and the Company's Form S-4 filed
on June 14, 1995 (Registration No. 33-60211).
The accounting policies followed during the nine months ended September 30,
1995 are the same as those disclosed in Note 1 of the Notes to the Consolidated
Financial Statements contained in the Company's Form 10-K for 1994.
NOTE C - SUBSEQUENT EVENT
On October 30, 1995, the Company signed an agreement to purchase approximately
13% of the common stock of Andrx Corporation ("Andrx") for $15.5 million. This
investment together with the Company's prior investment in Andrx, brings the
Company's total ownership to 19.5% of Andrx's common stock. The Company has
agreed to amend the terms of its joint venture agreement with Andrx whereby the
parties will become equal partners in the ANCIRC joint venture they formed in
July 1994 and have committed to add two new products to the ANCIRC portfolio.
(See discussion in the Liquidity, Capital Resources and Financial Condition
Section).
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Part I - Financial Information
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
INTRODUCTORY NOTE: THE FOLLOWING DISCUSSION GIVES EFFECT TO THE MERGER BETWEEN
THE COMPANY AND CIRCA UNDER POOLING OF INTEREST ACCOUNTING AS MORE FULLY
DESCRIBED IN NOTE A TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
NINE MONTHS ENDED SEPTEMBER 30, 1995 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1994
Results of Operations
- ---------------------
Revenues for the nine months ended September 30, 1995 were $109.6 million
compared to $66.4 million for the nine months ended September 30, 1994, an
increase of 65.1%. The increase in revenues is comprised of a $28.0 million
increase in product sales and a $15.3 million increase in royalty income.
Product sales increased primarily due to increased sales of the Company's
existing core products. In addition, the Company introduced four new products
during 1995, which accounted for approximately 6% of product sales for the nine
months ended September 30, 1995. The increase in royalty income is
attributable to the royalty percentage, as contractually specified, on sales of
Dilacor XR(R) by Rhone Poulenc Rorer Inc. ("RPR") increasing from 1% in 1994 to
20% in 1995. RPR and Circa jointly developed of Dilacor XR(R), a drug used in
the treatment of hypertension and angina. The level of product sales and
royalty income recognized during this period may not be indicative of the level
of revenue to be attained during the balance of fiscal 1995.
Cost of revenues were $47.0 million or 50.2% of product sales for the nine
months ended September 30, 1995 compared to $35.0 million or 53.3% of product
sales for the nine months ended in 1994. The decrease in cost of revenues as a
percentage of product sales is mainly due to favorable changes in the sales
mix.
Research and development expenses were $13.9 million and $13.4 million for the
nine months ended September 30, 1995 and September 30, 1994, respectively, and
declined as a percentage of revenues to 12.7% from 20.2% in the comparable 1994
period. This slight increase in dollars was primarily due to increased
bioequivalence studies and purchases of raw material and laboratory supplies
for products under development. The percentage decrease in such expenses was
largely attributable to the overall growth in the Company's revenues exceeding
the rate of growth in research and development expenses.
Selling, general and administrative expenses were $12.5 million (11.4% of
revenues) for the nine months ended September 30, 1995 compared to $9.1 million
(13.7% of revenues) for the nine months ended September 30, 1994. The increase
in such expenses is largely attributable to increased marketing and selling
expenses associated with new product introductions and an increase in
administrative support attributable to the overall growth of the Company's
operations.
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Equity in earnings of joint ventures decreased 8.1% to $15.9 million for the
nine months of 1995 from $17.2 million for the same 1994 period. The Company
recognized income from Somerset Pharmaceuticals, Inc. ("Somerset") of $17.0 and
$16.8 million for the nine month period ended September 30, 1995 and 1994,
respectively. The income from Somerset for the nine months ended September 30,
1995 was offset primarily by the Company's share of the losses from ANCIRC, a
joint venture with Andrx, of approximately $865,000 and $61,000 in 1995 and
1994, respectively. In accordance with the joint venture agreement with Andrx,
the Company shared 40% of the research and development expenses of certain
products. This agreement was amended on October 30, 1995, whereby the Company
will become equal partners in the joint venture. (See Note C to the Unaudited
Consolidated Financial Statements included herein.) Equity in earnings of joint
ventures in 1994 included income from American Triamvirate Insurance Company
("ATIC") of approximately $542,000. The Company's ownership interest in ATIC
was sold in December 1994.
In connection with the Company's merger with Circa, the Company recorded a
one-time $13.9 million charge for costs incurred resulting from the merger.
(See Note A to the Unaudited Consolidated Financial Statements included
herein). In addition, the Company realized a $6.1 million gain from the sale
of Marsam Pharmaceuticals, Inc. ("Marsam") common stock as compared to $2.7
million gain recognized in the comparable period of 1994. As of September 30,
1995, the Company has disposed of its entire investment in Marsam common stock.
Investment and other income increased significantly over the prior year
comparable period due to higher yields realized from increased cash provided by
operations during the first nine months of 1995.
The effective tax rates for the nine months ended September 30, 1995 and
September 30, 1994 were 35.9% and 22.8%, respectively. This increase is
primarily due to increased taxable income and non-deductibility of a
significant portion of merger expenses recognized in 1995.
Earnings per share increased from $.66 to $.84 over the prior year comparable
period primarily as a result of the increase in revenues and the gain from the
sale of Marsam stock. Earnings increased despite the $13.9 million charge
($.38 per share) for the one-time merger expense. This increase in per share
earnings occurred on an increased weighted average number of common and common
equivalent shares outstanding.
THREE MONTHS ENDED SEPTEMBER 30, 1995 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1994.
Results of Operations
- ---------------------
Revenues for the three months ended September 30, 1995 were $38.5 million, an
increase of 61.7% over the revenues of $23.8 million for the three months ended
September 30, 1994. The increase in revenues is comprised of a $9.5 million
increase
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in product sales and $5.2 million increase in royalty income. Product sales
increased primarily due to increased sales of the Company's existing core
products. New product introductions accounted for 7.3% of product sales for
the three months ended September 30, 1995. The increase in royalty income is
attributable to the royalty percentage, as contractually specified, on sales of
Dilacor XR(R) by RPR increasing from 1% in 1994 to 20% in 1995.
Cost of revenues were $16.8 million or 51.0% of product sales for the three
months ended September 30, 1995 compared to $12.5 million or 53.2% of product
sales for the three months ended September 30, 1994. The decrease in cost of
revenues as a percentage of product sales was mainly attributable to favorable
changes in the sales mix.
Research and development costs were $4.2 million (11.0% of revenues) for the
three months ended September 30, 1995 as compared to $5.1 million (21.4% of
revenues) for the three months ended September 30, 1994. This decrease was
largely attributable to a decrease in expenses caused by the integration of
research and development activities of the combined companies.
Selling, general and administrative costs increased to $4.0 million for the
three months ended September 30, 1995 from $3.4 million for the prior year
comparable period, an increase of 19.8%, but declined as a percentage of net
revenues to 10.4% from 14.1%, respectively. The increase was largely
attributable to increased selling and marketing expenses associated with new
product introductions and increased administrative support attributable to
growth in the Company's operations.
Equity in earnings of joint ventures decreased 9.2% to $5.7 million for the
three months ended September 30, 1995 from $6.2 million for the comparable 1994
period. The Company recognized income from Somerset of $6.0 and $6.1 million
for the three month period ended September 30, 1995 and 1994, respectively.
The income from Somerset was offset by the Company's share of the losses from
ANCIRC, of approximately $323,000 and $61,000 in 1995 and 1994, respectively.
Equity in earnings of joint ventures in 1994 included income from ATIC of
approximately $161,000. The Company's ownership interest in ATIC was sold in
December 1994.
The merger of Circa with the Company resulted in a one-time $13.9 million
merger expense which was charged against income for the quarter ended September
30, 1995. In addition, the Company realized a $6.1 million gain from sale of
Marsam common stock as compared to a $1.6 million gain recognized in the
comparable period of 1994. As of September 30, 1995, the Company has disposed
of its entire investment in Marsam common stock.
Investment and other income increased significantly over the prior year
comparable period due primarily to higher yields realized from increased cash
provided by operations.
The effective tax rates for the three months ended September 30, 1995 and 1994
were 58.5% and 22.9%, respectively. The significant variance is due to a
significant portion of the merger expenses not being deductible for tax
purposes.
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Earnings per share decreased from $.24 to $.14 over the prior year comparable
period primarily as a result of the effect of the one time merger expenses of
$13.9 million or $.37 per share.
Liquidity, Capital Resources and Financial Condition
- ----------------------------------------------------
Working capital increased from $154.7 million at December 31, 1994 to $165.9
million at September 30, 1995 primarily attributable to increased cash flow
from operations.
Net cash provided by operating activities was $19.7 million for the nine months
ended September 30, 1995 compared to $7.7 million for the same period last
year. The change was caused primarily by increased net income for the nine
months ended September 30, 1995 as compared to the same nine month period of
the prior year.
In 1995, the Company has planned for total capital expenditures of
approximately $20 million, including equipment and plant expansion projects in
Corona, California. Additions to property and equipment amounted to $14.9
million for the nine months ended September 30, 1995, and $11.6 million for the
same period a year ago.
The Company believes current cash resources, including marketable securities,
of approximately $120 million at September 30, 1995, anticipated operating cash
flows and funds available under the revolving credit and loan arrangement with
a bank will be sufficient to fund its current and anticipated working capital
needs. On October 30, 1995, the Company signed an agreement to purchase
approximately 13% of the common stock of Andrx for $15.5 million. This
investment, together with the Company's prior investment in Andrx, brings the
Company's total ownership to 19.5% of Andrx's common stock. (See Note C to the
Unaudited Consolidated Financial Statements included herein.)
The Company continues to evaluate potential acquisitions of product rights,
technologies and companies in the pharmaceutical field. The Company could use
sources other than cash from operations and existing cash resources, such as
issuance of debt or equity securities to finance any such acquisition. If such
an acquisition was completed, the Company's operating results and financial
condition could change materially in future periods.
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Part II - Other Information
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits:
10.1 Second Amendment to Lease Agreement between Hsi-Hsiung and Hsu
Hwa Chao Trust I and Watson Pharmaceuticals, Inc. dated
August 8, 1995.
11.1 Statement of Computation of Per Share Earnings
27.1 Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter for which
this report is filed that have not been previously reported by
the Registrant.
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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WATSON PHARMACEUTICALS, INC.
(Registrant)
By:
Signature Title(s) Date
--------- -------- ----
/s/ Allen Chao, Ph.D. Chief Executive November 10, 1995
- --------------------------- Officer and Director
Allen Chao, Ph.D (Principal Executive
and Financial Officer)
/s/ Chato Abad Vice President - Corporate November 10, 1995
- --------------------------- Controller (Principal
Chato Abad Accounting Officer)
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