1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q/A
AMENDMENT NO. 1
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996
COMMISSION FILE NUMBER 0-20045
WATSON PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
NEVADA 95-3872914
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
311 BONNIE CIRCLE
CORONA, CA 91720
(Address of principal executive offices) (Zip Code)
909-270-1400
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days:
YES X NO
The number of shares outstanding of the Registrant's only class of common stock
as of October 21, 1996 was 36,804,371 shares.
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PART I FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
WATSON PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands)
September 30, December 31,
1996 1995
------------------- -------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $112,111 $ 92,214
Marketable securities 71,308 26,038
Accounts receivable, net of allowances for
doubtful accounts of $1,856 and $1,320 25,721 25,081
Royalty receivable 7,255 8,205
Inventories:
Raw materials 11,780 11,483
Work-in-process 6,413 5,112
Finished goods 8,110 6,042
Prepaid expenses and other current assets 2,805 2,344
Current deferred tax assets 11,106 21,115
-------- --------
Total current assets 256,609 197,634
Property and equipment, net 73,010 69,999
Investments in joint ventures and
other long-term investments 60,148 49,355
Other assets 5,427 5,133
-------- --------
Total assets $395,194 $322,121
======== ========
See accompanying Notes to Consolidated Financial Statements.
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WATSON PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
September 30, December 31,
1996 1995
---------------- ------------
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 24,320 $ 25,215
Income taxes payable 9,984 2,985
Current portion of long-term debt 621 622
--------- ---------
Total current liabilities 34,925 28,822
Long-term debt 3,116 3,577
Other liabilities 687
--------- ---------
Total liabilities 38,041 33,086
--------- ---------
Commitments and contingencies
Stockholders' equity:
Preferred stock; no par; 2,500,000 shares
authorized; none outstanding
Common stock; par value of $.0033; 500,000,000
shares authorized; 36,804,371 and 36,368,725
shares issued and outstanding 121 120
Additional paid-in capital 155,031 146,439
Retained earnings 196,328 142,711
Unrealized holding gain on marketable securities 5,813 621
Unearned compensation-stock awards (140) (856)
--------- ---------
Total stockholders' equity 357,153 289,035
--------- ---------
Total liabilities and stockholders' equity $ 395,194 $ 322,121
========= =========
See accompanying Notes to Consolidated Financial Statements.
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WATSON PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Earnings Per Share)
(UNAUDITED)
Nine months ended Three months ended
September 30, September 30,
1996 1995 1996 1995
---------- ----------- --------- ----------
Revenues:
Product sales $122,155 $ 93,626 $41,609 $ 33,001
Royalty income 19,862 16,013 7,260 5,520
-------- --------- ------- --------
Total revenues 142,017 109,639 48,869 38,521
-------- --------- ------- --------
Operating expenses:
Cost of revenues 56,842 47,005 19,193 16,831
Research and development 12,467 13,922 4,009 4,232
Selling, general and
administrative 13,371 12,528 4,480 4,017
Merger expenses -- 13,939 -- 13,939
-------- --------- ------- --------
Total operating expenses 82,680 87,394 27,682 39,019
-------- --------- ------- --------
Operating income (loss) 59,337 22,245 21,187 (498)
Other income (expense):
Equity in earnings of joint ventures 14,156 15,857 4,803 5,653
Investment and other income 5,844 4,067 2,276 1,507
Gain on sale of Marsam stock -- 6,126 -- 6,126
-------- --------- ------- --------
Other income, net 20,000 26,050 7,079 13,286
-------- --------- ------- --------
Income before provision
for income taxes 79,337 48,295 28,266 12,788
Provision for income taxes 25,720 17,284 9,600 7,481
-------- --------- ------- --------
Net income $ 53,617 $ 31,011 $18,666 $ 5,307
======== ========= ======= ========
Per share data:
Earnings per share $ 1.43 $ 0.84 $ 0.50 $ 0.14
======== ========= ======= ========
Weighted average number of
common and common
equivalent shares outstanding 37,624 36,987 37,560 37,301
======== ========= ======= ========
See accompanying Notes to Consolidated Financial Statements.
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WATSON PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(UNAUDITED)
Nine months ended
September 30,
1996 1995
---------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 53,617 $ 31,011
-------- ---------
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 4,514 3,892
Provision for doubtful accounts 536 152
Amortization of unearned compensation-stock awards 716 1,214
Amortization of deferred income (687) (687)
Equity in earnings of joint ventures (11,415) (14,112)
Dividends received from Somerset 10,500 13,500
Decrease in deferred partnership liability (14,033)
Gain on sale of Marsam stock (6,126)
Increase in deferred tax liabilities 2,173
Tax benefit related to stock option plan 3,764 1,981
Changes in assets and liabilities:
(Increase) in accounts receivable (1,176) (5,752)
(Increase) decrease in royalty receivable 950 (1,976)
(Increase) in inventories (3,666) (3,699)
(Increase) decrease in other current assets (461) 286
Decrease in deferred tax assets 10,009 5,939
(Increase) in other assets (294) (2,510)
Increase (decrease) in accounts payable and
accrued expenses (895) 7,639
Increase in income taxes payable 6,999 805
-------- ---------
Total adjustments 19,394 (11,314)
-------- ---------
Net cash provided by operating
activities 73,011 19,697
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (7,526) (14,913)
Purchase of marketable securities (574,661) (254,595)
Proceeds from sale of marketable securities 528,561 265,455
Investment in joint ventures (3,857) (1,000)
Proceeds from sale of Marsam Stock 7,005
-------- ---------
Net cash (used) provided in investing
activities (57,483) 1,952
-------- ---------
See accompanying Notes to Consolidated Financial Statements.
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WATSON PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(UNAUDITED)
Nine months ended
September 30,
1996 1995
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 4,830 2,788
Principal payments on long-term debt (461) (533)
--------- --------
Net cash provided by
financing activities 4,369 2,255
--------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 19,897 23,904
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 92,214 71,165
--------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 112,111 $ 95,069
========= ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the periods for:
Interest $ 243 $ 279
Income taxes $ 4,882 $ 5,673
See accompanying Notes to Consolidated Financial Statements.
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WATSON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(UNAUDITED)
NOTE A - GENERAL
The unaudited, consolidated financial statements as of September 30, 1996 and
for the three and nine months ended September 30, 1996 and 1995, as well as
related notes, should be read in conjunction with the Company's Annual Report on
Form 10-K for the year ended December 31, 1995.
In the opinion of management, the accompanying consolidated financial statements
contain all adjustments (consisting of only normal recurring adjustments),
necessary to present fairly the Company's financial position as of September 30,
1996, and the results of operations for the three and nine months ended
September 30, 1996 and 1995 and cash flows for the nine months ended September
30, 1996 and 1995. The results of operations and cash flows for the three and
nine months ended September 30, 1996 are not necessarily indicative of the
results of operations or cash flows which may be reported for the remainder of
1996. The accounting policies followed during the three and nine months ended
September 30, 1996 were the same as those disclosed in the Company's Annual
Report on Form 10-K for the year ended December 31, 1995.
NOTE B - MERGER AGREEMENT
On September 25, 1996, the Company entered into a definitive merger agreement
with Oclassen Pharmaceuticals, Inc. ("Oclassen"). The merger is a
stock-for-stock transaction, expected to be accounted for as a "pooling of
interests" in which Oclassen will become a wholly-owned subsidiary of the
Company. Oclassen is a privately held company which primarily markets
dermatology related pharmaceutical products.
Under the terms of the merger agreement signed by both companies, Oclassen
stockholders will receive common shares of Watson valued at $135.0 million. The
actual number of Watson common shares to be issued will be based on the average
of the Watson closing price for the 10 days prior to the Oclassen stockholder
meeting, subject to a "collar" of $27.00 to $35.00 per share. Under the proposed
agreement, the maximum number of Watson shares to be issued would be 5.0 million
(based on an average closing price of $27.00 per share). The minimum number of
Watson shares to be issued would be 3.9 million (based on an average closing
price of $35.00 per share). The ultimate completion of this proposed transaction
is subject to a number of conditions, including, but not limited to, the
approval of the merger by the stockholders of Oclassen and receipt of regulatory
approvals. It is anticipated that this transaction will close in late 1996 or
early 1997.
NOTE C - JOINT VENTURES
Somerset Pharmaceuticals Inc. ("Somerset"). The Company maintains a 50%
interest in the outstanding common stock of Somerset and utilizes the equity
interest method to account for this investment. Somerset markets the product
Eldepryl(R), which is used in the treatment of Parkinson's disease. Income
recognized from Somerset was $5.2 million for the quarter ended September 30,
1996 and $15.7 million for the nine months ended September 30, 1996. Income
includes 50% of Somerset's earnings, ongoing management fees and amortization
of deferred income, offset by goodwill. The excess cost of this investment over
the Company's proportionate share of Somerset's net assets was $8.7 million at
September 30, 1996 and $9.4 million at December 31, 1995 and is being amortized
on a straight-line basis over 15 years.
Condensed balance sheets and income statements of Somerset are as follows:
(in thousands) Sep 30, 1996 Dec 31, 1995
------------ ------------
Cash $ 47,274 $ 43,993
Other assets 18,583 7,127
------------ -----------
Total assets $ 65,857 $ 51,120
============ ===========
Current liabilities $ 25,457 $ 17,057
Other liabilities 0 63
Stockholders' equity 40,400 34,000
------------ -----------
Total liabilities
and stockholders' equity $ 65,857 $ 51,120
============ ===========
Three Months Ended September 30, Nine Months Ended September 30,
1996 1995 1996 1995
----------- ----------- ----------- -----------
Net revenues $ 26,224 $ 27,181 $ 81,826 $ 75,450
Costs and expenses 11,734 11,340 39,516 30,582
Income taxes 5,336 5,151 14,911 14,500
----------- ----------- ----------- -----------
Net income $ 9,154 $ 10,690 $ 27,399 $ 30,368
=========== =========== =========== ===========
ANCIRC. In July 1994, the Company and Andrx Corporation ("Andrx") formed a
joint venture, ANCIRC, to develop off-patent pharmaceutical products utilizing
Andrx's controlled-release technology. During 1995, the terms of the joint
venture were amended whereby the Company and Andrx became equal partners in
sharing of costs and profits in the ANCIRC joint venture. Previously, the
Company was responsible for 40% of the costs and profits of ANCIRC. The Company
utilizes the equity method to account for this joint venture and recognized
losses from ANCIRC of approximately $353,000 for the quarter ended September
30, 1996 and $1.4 million for the nine months ended September 30, 1996.
Condensed balance sheets and income statements of ANCIRC are as follows:
(in thousands) Sep 30, 1996 Dec 31, 1995
------------ ------------
Cash $ 518 $ 85
Other assets 26 0
------------ ------------
Total assets $ 544 $ 85
============ ============
Current liabilities $ 612 $ 1,285
Partners' deficit (68) (1,200)
------------ ------------
Total liabilities and
partners' deficit $ 544 $ 85
============ ============
Three Months Ended September 30, Nine Months Ended September 30,
1996 1995 1996 1995
------------- ------------ -------------- ------------
Research & development expenses $ 711 $ 812 $ 2,776 $ 2,172
============= ============ ============== ============
Net loss $ (706) $ (806) $ (2,768) $ (2,163)
============= ============ ============== ============
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WATSON PHARMACEUTICALS, INC.
LIQUIDITY AND CAPITAL RESOURCES
Cash, Cash Equivalents and Marketable Securities
Cash equivalents are defined as highly liquid debt instruments with original
maturities of three months or less. Cash, cash equivalents and marketable
securities increased $65.1 million to $183.4 million at September 30, 1996 from
$118.3 million at December 31, 1995. Cash flows from operating activities
provided $73.0 million for the nine months ended September 30, 1996, an increase
of $53.3 from the 1995 nine-month period. This net inflow was supplemented by
proceeds from the exercise of stock options ($4.8 million) and offset by net
purchases of marketable securities ($46.1 million), capital expenditures ($7.5
million) and additional investments in joint ventures ($3.9 million).
Working Capital
Current assets increased $59.0 million to $256.6 million at September 30, 1996,
compared to December 31, 1995, due primarily to a combination of the increase
in cash and marketable securities of $65.1 million, an increase in inventories
of $3.7 million and a decrease in deferred tax assets of $10.0 million. Current
liabilities increased $6.1 million to $34.9 million at September 30, 1996. This
increase was due primarily to an increase in income taxes payable of $7.0
million. As a result, working capital increased $52.9 million to $221.7 million
at September 30, 1996 from $168.8 million at December 31, 1995.
Investments in Joint Ventures and Other Long-Term Investments
The Company owns approximately 19.5% of the outstanding common shares of Andrx
Corporation ("Andrx"). Andrx completed its initial public offering in June 1996.
Pursuant to Statement of Financial Accounting Standards No. 115 "Accounting for
Certain Investments in Debt and Equity Securities", the Company considers its
investment in Andrx as an "available-for-sale" security and has recorded an
unrealized holding gain of $6.0 million to adjust the cost of this investment to
its fair value at September 30, 1996. This increase was a balance sheet
adjustment only which did not affect the Company's net income. The $6.0 million
unrealized holding gain, plus the net changes in Watson's investment in joint
ventures (primarily Somerset), account for the $10.8 million increase in these
long-term assets from December 31, 1995 to September 30, 1996.
Capital Resources
The Company believes that its current cash resources, future operating cash
flows and funds available under a bank credit agreement will be sufficient to
fund its current and anticipated working capital needs.
The Company regularly reviews potential opportunities to acquire or invest in
technologies, products or product rights. The Company also regularly reviews
potential acquisitions, investments or combinations involving businesses
compatible with its existing businesses and corporate objectives. The Company
could use sources other than cash, such as the issuance of debt or equity
securities, to finance any such acquisition or investment. If such an
acquisition or investment was completed, the Company's operating results and
financial condition could change materially in future periods.
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WATSON PHARMACEUTICALS, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this amended report to be signed on its behalf by the
undersigned, thereunto duly authorized.
WATSON PHARMACEUTICALS, INC.
(Registrant)
By: /s/ ALLEN CHAO, PH.D
-----------------------------------------
Allen Chao, Ph.D.
Chairman and Chief Executive Officer
(Principal Executive and Financial
Officer)
Dated: January 10, 1997