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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997
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 May 1, 1997 was 43,286,166 shares.
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WATSON PHARMACEUTICALS, INC.
INDEX TO THE FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997
PART I FINANCIAL INFORMATION PAGE NUMBER
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets
as of March 31, 1997 and
December 31, 1996 3
Consolidated Statements of
Income for Three Months Ended
March 31, 1997 and 1996 5
Consolidated Statements of Cash
Flows for the Three Months Ended
March 31, 1997 and 1996 6
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and
Analysis of Financial Condition
and Results of Operations 13
PART II OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 4. Submission of Matters to a Vote of Security
Holders 18
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
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PART I FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
WATSON PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands)
March 31, December 31,
1997 1996
--------- ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $148,302 $153,625
Marketable securities 98,079 80,966
Accounts receivable, net of allowances for
doubtful accounts of $3,117 and $2,891 35,713 29,636
Royalty receivable 12,583 5,554
Inventories:
Raw materials 13,652 10,482
Work-in-process 5,738 5,874
Finished goods 13,262 10,787
Prepaid expenses and other current assets 5,693 5,689
Deferred tax assets 11,246 9,807
-------- --------
Total current assets 344,268 312,420
Property and equipment, net 75,235 74,918
Investments in joint ventures and
other long-term investments 79,288 61,164
Other assets 6,854 6,995
-------- --------
Total assets $505,645 $455,497
======== ========
See accompanying Notes to Consolidated Financial Statements.
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WATSON PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands)
March 31, December 31,
1997 1996
--------- ------------
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 33,650 $ 29,069
Income taxes payable 1,958 472
Current portion of long-term debt 673 673
--------- ---------
Total current liabilities 36,281 30,214
Long-term debt 2,741 2,907
Deferred tax liabilities 21,540 12,226
--------- ---------
Total liabilities 60,562 45,347
--------- ---------
Commitments and contingencies
Minority interest 459 401
--------- ---------
Stockholders' equity:
Preferred stock; no par; 2,500 shares
authorized; none outstanding
Common stock; par value of $.0033; 500,000
shares authorized; 40,621 and 40,157
shares issued and outstanding 134 133
Additional paid-in capital 210,645 201,255
Retained earnings 216,445 201,899
Unrealized holding gain on available-for-sale securities 18,181 7,189
Notes receivable from stockholders (781) (727)
--------- ---------
Total stockholders' equity 444,624 409,749
--------- ---------
Total liabilities and stockholders' equity $ 505,645 $ 455,497
========= =========
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)
Three Months Ended March 31,
----------------------------
1997 1996
----------- -----------
Revenues:
Product sales $54,064 $47,845
Royalty income 7,041 5,986
------- -------
Total revenues 61,105 53,831
------- -------
Operating expenses:
Cost of revenues 21,870 21,044
Research and development 4,200 5,341
Selling, general and administrative 9,502 7,682
Merger expenses 8,897
------- -------
Total operating expenses 44,469 34,067
------- -------
Operating income 16,636 19,764
Other income:
Equity in earnings of joint ventures 4,135 4,644
Investment and other income 3,486 2,130
------- -------
Other income, net 7,621 6,774
------- -------
Income before provision
for income taxes 24,257 26,538
Provision for income taxes 9,711 7,630
------- -------
Net income $14,546 $18,908
======= =======
Per share data:
Earnings per share $ 0.35 $ 0.46
======= =======
Weighted average number of
common and common
equivalent shares outstanding 41,551 41,335
======= =======
See accompanying Notes to Consolidated Financial Statements.
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WATSON PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(UNAUDITED)
Three Months Ended March 31,
----------------------------
1997 1996
------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 14,546 $ 18,908
-------- --------
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 1,904 1,544
Amortization of unearned compensation-stock awards 251
Dividends received from Somerset 4,000 4,500
Equity in earnings of joint ventures (3,507) (3,770)
Provision for doubtful accounts 226 1,007
Deferred income tax provision 675 3,701
Tax benefit related to stock option plan 6,058 2,350
Changes in assets and liabilities:
Increase in accounts receivable (6,303) (987)
(Increase) decrease in royalty receivable (7,029) 2,219
Increase in inventories (5,509) (6,452)
(Increase) decrease in prepaid expenses and
other current assets (4) 201
Decrease in other assets 199 672
Increase (decrease) in accounts payable and
accrued expenses 4,581 (5,464)
Increase in income taxes payable 1,486 378
Decrease in other liabilities (238)
-------- --------
Total adjustments (3,223) (88)
-------- --------
Net cash provided by operating
activities 11,323 18,820
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (1,977) (3,442)
Disposals of property and equipment 4 42
Purchases of marketable securities (49,536) (26,417)
Proceeds from maturities of marketable securities 32,050 21,795
Increase in investment in joint ventures (300) (595)
-------- --------
Net cash (used) in investing
activities (19,759) (8,617)
-------- --------
See accompanying Notes to Consolidated Financial Statements.
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WATSON PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Three Months Ended March 31,
----------------------------
1997 1996
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt (166) (152)
Proceeds from exercise of stock options 3,279 2,725
--------- ---------
Net cash provided by
financing activities 3,113 2,573
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (5,323) 12,776
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 153,625 95,216
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 148,302 $ 107,992
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the periods for:
Interest $ 70 $ 84
Income taxes $ 1,496 $ 986
See accompanying Notes to Consolidated Financial Statements.
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WATSON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED)
NOTE A - MERGER WITH OCLASSEN PHARMACEUTICALS, INC. ("OCLASSEN")
On February 26, 1997, the stockholders of Oclassen approved the merger which
resulted in Oclassen becoming a wholly owned subsidiary of the Company. Under
the terms of the Oclassen merger agreement, Oclassen stockholders received
approximately 0.37 of a share of the Company's common stock for each Oclassen
share.
Oclassen develops specialty prescription pharmaceuticals to prevent and treat
skin diseases, and markets these products to dermatologists. The merger was
consummated on February 27, 1997 and Watson issued approximately 3.3 million
shares of Watson common stock for all of the outstanding common shares of
Oclassen. The merger qualified as a tax-free reorganization for federal income
tax purposes and was accounted for as a pooling of interests. The Company's
financial statements have been retroactively restated to include the results of
Oclassen for all periods presented.
NOTE B - GENERAL
The unaudited consolidated financial statements as of March 31, 1997 and for the
three months ended March 31, 1997 and 1996, 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, 1996.
In the opinion of management, the accompanying consolidated financial statements
contain all adjustments (consisting of only normal recurring adjustments),
necessary to present fairly the Company's financial position as of March 31,
1997, and the results of operations for the three months ended March 31, 1997
and 1996 and cash flows for the three months ended March 31, 1997 and 1996. The
results of operations and cash flows for the three months ended March 31, 1997
are not necessarily indicative of the results of operations or cash flows which
may be reported for the remainder of 1997. The accounting policies followed
during the three months ended March 31, 1997 were the same as those disclosed in
the Company's Annual Report on Form 10-K for the year ended December 31, 1996.
NOTE C - MERGER WITH ROYCE LABORATORIES, INC. ("ROYCE")
On April 16, 1997, the stockholders of Royce approved the merger which resulted
in Royce becoming a wholly owned subsidiary of the Company. Under the terms of
the Royce merger agreement, Royce stockholders received approximately 0.19 of a
share of the Company's common stock for each Royce share.
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WATSON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Royce develops, manufactures and markets off-patent prescription drugs in solid
dosage forms (tablets and capsules). The merger was consummated on April 16,
1997 and Watson issued approximately 2.6 million shares of Watson common stock
for all of the outstanding common shares of Royce. The merger qualified as a
tax-free reorganization for federal income tax purposes and was accounted for as
a pooling of interests. Royce's common stock has been de-registered under the
Securities Exchange Act of 1934, and consequently, Royce will not file a Form
10-Q for the quarter ended March 31, 1997. The following unaudited pro forma
information is presented for illustrative purposes only and is not necessarily
indicative of the operating results or financial position that would have
occurred if the merger had been consummated as of January 1, 1997, nor is it
necessarily indicative of future operating results or financial position.
The following table sets forth unaudited pro forma combined financial
information of the Company as if the merger with Royce had been consummated on
January 1, 1997 (in thousands):
Pro Forma
Watson Royce Adjustments Combined
------ ----- ----------- --------
Net revenues $ 61,105 $ 4,782 $ 65,887
Net income (loss) 14,546 (495) 14,051
Total assets 505,645 18,393 524,038
Total liabilities 60,562 5,275 65,837
Minority interest 459 459
Common stock 134 68 $ (59) 143
Total stockholders' equity 444,624 13,118 457,742
In connection with the Royce merger, the Company expects to record a one-time
charge of approximately $6.5 million for merger-related expenses in the second
quarter of 1997. These expenses include investment banking fees and other costs
related to the merger.
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WATSON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
NOTE D - JOINT VENTURES
Somerset Pharmaceuticals, Inc. ("Somerset")
The Company maintains a 50% interest in the outstanding common stock of Somerset
and utilizes the equity method to account for this investment. Somerset
manufactures and markets the product Eldepryl(R), which is used in the treatment
of Parkinson's disease. Income recognized from Somerset was approximately $4.5
million and $ 5.2 million for the three months ended March 31, 1997 and 1996,
respectively. Income is composed of Watson's 50% share of Somerset's earnings
and management fees, offset by amortization of goodwill. At March 31, 1997 and
December 31, 1996, the net excess cost of this investment over its net assets
was $7.2 million and $7.4 million, respectively. Goodwill is being amortized on
a straight-line basis over 15 years.
Orphan drug exclusivity expired for Eldepryl(R) in June 1996. During 1996, the
Company experienced a decrease in earnings from Somerset due to increased
competition for Eldepryl(R) and increased research and development spending.
Management anticipates that the Company's equity in earnings from Somerset will
be reduced by approximately 30% to 50% in 1997 from prior year levels due to
increased competition for Eldepryl(R) and anticipated increased research and
development expenditures in connection with the development of several new
products.
Condensed income statements and balance sheets of Somerset are as follows (in
thousands):
Three Months Ended March 31,
1997 1996
------- -------
Net revenues $22,271 $25,460
Costs and expenses 9,934 11,489
Income taxes 4,375 4,767
------- -------
Net income $ 7,962 $ 9,204
======= =======
March 31, December 31,
1997 1996
------- -------
Current assets $49,445 $45,871
Other assets 6,758 7,006
------- -------
Total assets $56,203 $52,877
======= =======
Current liabilities $22,439 $19,075
Stockholders' equity 33,764 33,802
------- -------
Total liabilities
and stockholders' equity $56,203 $52,877
======= =======
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WATSON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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. The Company utilizes the equity method to account
for this joint venture and recognized losses from ANCIRC of approximately $0.4
million and $0.5 million for the quarters ended March 31, 1997 and 1996,
respectively.
Condensed income statements and balance sheets of ANCIRC are as follows (in
thousands):
Three Months Ended March 31,
1997 1996
------- -------
Research and development expenses $ 814 $ 1,090
======= =======
Net loss $ (806) $(1,089)
======= =======
March 31, December 31,
1997 1996
------- -------
Current assets $ 1,217 $ 701
Other assets 24 25
------- -------
Total assets $ 1,241 $ 726
======= =======
Current liabilities $ 1,769 $ 1,048
Partners' deficit (528) (322)
------- -------
Total liabilities and
stockholders' equity $ 1,241 $ 726
======= =======
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WATSON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
NOTE E - RECENT PRONOUNCEMENT
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings per Share." SFAS
128 specifies the computation, presentation and disclosure requirements for
earnings per share ("EPS") and will become effective for both interim and annual
periods ending after December 15, 1997. Earlier application to the Company's
financial statements is prohibited, however disclosure of pro forma EPS computed
using SFAS 128 is permitted in the notes to the financial statements. The
following table sets forth unaudited pro forma EPS data computed utilizing the
provisions of SFAS 128:
Three Months Ended March 31,
1997 1996
------- --------
Basic EPS $ 0.36 $ 0.49
======= =========
Diluted EPS $ 0.35 $ 0.46
======= =========
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SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The Company cautions readers that certain important factors may affect the
Company's actual results and could cause such results to differ materially from
forward-looking statements which may be deemed to have been made in this Report,
or which are otherwise made by or on behalf of the Company. Such factors
include, but are not limited to, changing market conditions; the availability
and cost of raw materials; the timely development, FDA approval and market
acceptance of the Company's products, the products producing royalties for the
Company and the products being developed and marketed by the Company's joint
ventures; risks associated with the potential acquisition of businesses,
technologies or products, including costs which may be incurred in connection
with such acquisitions; and other risks detailed herein or detailed from time to
time in the Company's Securities and Exchange Commission filings. In addition,
the U.S. drug industry is highly competitive, with pricing determined by many
factors including the number and timing of product introductions. Although the
price of an off-patent product generally declines over time as competitors
introduce additional versions of the product, the actual degree and timing of
price competition is not predictable.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Watson Pharmaceuticals, Inc. ("Watson" or the "Company") is engaged in the
research and development, production, marketing and distribution of off-patent
and proprietary pharmaceutical products. The Company has historically derived
its revenues from the manufacture and sale of off-patent pharmaceutical
products. While sales of off-patent products continue to be the primary revenue
source, certain developments have occurred which have augmented the Company's
revenue mix. These developments include the Company's 1995 merger with Circa
Pharmaceuticals, Inc. ("Circa"), the establishment of Watson's brand product
division in 1996 and the Company's 1997 mergers with Oclassen and Royce.
A significant portion of the Company's net income is derived from joint ventures
and a royalty arrangement. In addition, the Company is involved in developing
controlled-release technology primarily through a joint venture. The Company
does not have control of these joint ventures, which involve several partners,
or the commercial exploitation of the licensed products they manufacture.
Further, there can be no assurance that such joint ventures will be profitable.
In certain of these arrangements, products developed or marketed by the Company
may be competitive with products developed by such joint ventures or the joint
venture partners. The Company's joint venture arrangement with Rhone-Poulenc
Rorer, Inc. ("RPR") has certain restrictions which may limit the development or
marketing of future products competitive with the Dilacor XR(R) product line as
stated in the agreement. To the extent any such restrictions are enforced, such
restrictions could affect future revenues.
RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 1997 AND 1996
Revenues for the three months ended March 31, 1997 were $61.1 million compared
to $53.8 million for the three months ended March 31, 1996, an increase of $7.3
million or 13.5%. The increase in revenues was composed of a $6.2 million
increase in product sales and a $1.1 million
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increase in royalty income. The increase in product sales was due primarily to
increased sales of the Company's core products and brand products introduced in
1997. These increases were partially offset by decreased sales of certain
strengths of Hydrocodone products.
Royalty income from sales of Dilacor XR(R) by RPR was $7.0 million for the three
months ended March 31, 1997 and represented 29.0% of pre-tax income compared to
$6.0 million or 22.6% of pre-tax income for the year-ago quarter. Royalty income
increased 17.6% in the three months ended March 31, 1997 as compared with the
year-ago period, primarily due to the increased royalty percentage in 1997.
Watson's royalty percentage on RPR's sales of Dilacor XR(R) increased from 20%
in 1996 to 22% of sales in 1997, as defined. This royalty percentage will remain
in effect through the year ended December 31, 2000 and will decline to 3%
thereafter. In May 1995, patent exclusivity expired for Dilacor XR(R). The
Company is aware of one competitor with a generic formulation of Dilacor XR(R)
under review by the U.S. Food and Drug Administration. To date, the loss of
exclusivity on Dilacor XR(R) has not had a significant impact on Watson's
royalty income, or sales of Dilacor XR(R) by RPR. However, the introduction of
generic versions by one or more competitors is likely to cause a decrease in
sales of Dilacor XR(R), resulting in a corresponding decrease in the Company's
royalty income.
Cost of revenues increased $0.8 million, or 3.9%, to $21.9 million for the
quarter ended March 31, 1997 from $21.0 million for the quarter ended March 31,
1996. Gross profit margins increased to 59.5% in 1997 from 56.0% in 1996. This
favorable increase was due to higher than average gross margins earned on sales
of the Company's brand products and a new product introduced during the first
quarter of 1997. Management expects that the gross profit margin will decrease
in the second quarter of 1997, due in part to the merger with Royce in April
1997. Royce's sales are composed exclusively of off-patent products and the
Company's resulting sales mix will reflect a larger proportion of lower margin,
off-patent product sales.
Research and development expenses decreased from $5.3 million in the three
months ended March 31, 1996 to $4.2 million in the 1997 period. The Company
expects that total 1997 research and development ("R&D") expenses will be
approximately the same as 1996 R&D expenses. Certain R&D functions of the merged
companies are planned to be consolidated into Watson during 1997. Any savings
realized from this consolidation are expected to offset the increased R&D
activities related to off-patent and brand product development.
Selling, general and administrative expenses were $9.5 million for the first
quarter of 1997, compared to $7.7 million in the year-ago period. The increase
is composed of a $2.5 million increase in sales and marketing expenses, offset
by a $0.7 million decrease in general and administrative costs. The increased
sales and marketing expenses were incurred by Watson in support of the
newly-formed brand product division. The Company has hired approximately 70
sales and marketing personnel, the majority of which were added during the
fourth quarter of 1996 and through the first quarter of 1997. The decrease in
general and administrative expenses of $0.7 million reflected Watson's
continuing efforts to control costs. As a percentage of revenues, general and
administrative costs decreased from 6.9% in the first quarter of 1996 to 4.9% in
the first quarter of 1997.
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In connection with the merger with Oclassen, during the first quarter of 1997,
the Company recorded a one-time charge of $8.9 million for costs incurred
related to the merger. These costs included investment banking fees and other
costs related to the consolidation of operations between the two companies. No
such expenses were incurred in 1996.
Equity in earnings from joint ventures decreased $0.5 million or 11.0% to $4.1
million in 1997 compared to $4.6 million in 1996. The two most significant
ventures included in this earnings amount are Somerset, a 50% owned joint
venture, and ANCIRC, a 50% owned joint venture with Andrx Corporation. Equity in
earnings from Somerset decreased from $5.2 million in 1996 to $4.5 million in
1997 due to the loss of exclusivity for Eldepryl(R) in June 1996, and to
increased research and development expenditures in support of the Phase III
clinical trials on a transdermal Eldepryl(R) patch. During 1996, three
competitors introduced generic tablets to compete with Eldepryl(R) capsules. The
introduction by other companies of additional competitive products could have a
material adverse effect on the operating results and financial condition of the
Company. Equity in earnings of Somerset represented 18.7% of pre-tax income in
1997 compared to 19.7% of pre-tax income for the year-ago quarter. Management
expects that Watson's 1997 earnings from Somerset will decline by approximately
30% to 50% from the prior year levels. Watson's portion of ANCIRC's losses
decreased slightly from $0.5 million in 1996 to $0.4 million in 1997.
Investment and other income increased $1.4 million to $3.5 million in 1997 from
$2.1 million in 1996. This increase was due to higher short-term interest rates
on a larger base of invested cash.
The provision for income taxes increased to $9.7 million in 1997, compared to
$7.6 million in 1996. The effective income tax rates were 40.0% and 28.8% for
the three months ended March 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 recognized in
1997.
Net income decreased to $14.5 million in 1997 from $18.9 million in 1996,
principally due to the one-time merger expenses related to the merger with
Oclassen in 1997. As a percentage of revenues, net income decreased to 23.7% in
1997 from 35.1% in 1996. Exclusive of the Oclassen merger expenses of $8.9
million, pro forma net income for the first quarter would have been $21.9
million, or $0.53 per share, an increase of 16% from the first quarter of 1996.
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WATSON PHARMACEUTICALS, INC.
LIQUIDITY AND CAPITAL RESOURCES
As the Company has grown during the last three years, its overall liquidity
requirements have increased. The significant increase in accounts receivable,
inventories, property and equipment and investment in joint ventures and other
long term investments have been financed primarily by cash flows from operating
activities and from the Company's public offerings in 1993. The net proceeds
from these offerings were used primarily for working capital, property and
equipment additions and investments in Andrx and other joint ventures. The
balance was invested in short-term marketable securities.
The growth in Watson's accounts receivable balances has been caused primarily by
increased product sales. The Company performs ongoing credit evaluations of its
customers and maintains reserves for potentially uncollectible accounts.
Actual losses have been within management's expectations.
The Company's working capital increased from $282.2 million at December 31, 1996
to $308.0 million at March 31, 1997. This $25.8 million increase was primarily
the result of cash flow from operations and increased receivable and inventory
balances in support of the Company's increased sales levels. Net cash used in
the quarter ended March 31, 1997 was $5.3 million compared to a cash increase of
$12.8 million in the year ago quarter. The decrease in cash during the first
quarter of 1997 was primarily attributable to increased purchases of marketable
securities. During the three months ended March 31, 1997, Watson purchased a net
total of $17.5 million of marketable securities. The balance of the net decrease
in cash was due to capital additions of $2.0 million, offset by cash provided by
operations of $11.3 million and proceeds from the exercise of stock options of
$3.3 million.
The Company expects to invest approximately $13.0 million in capital
expenditures during 1997. In the three months ended March 31, 1997, Watson had
approximately $2.0 million of property and equipment additions.
At March 31, 1997, the Company had a note payable outstanding of approximately
$3.4 million. This is comprised of a single, unsecured term loan with interest
at a fixed rate of 8.1% and payments due monthly through August 2001. In
addition, a credit facility of $36.0 million is currently available to the
Company, comprised of (i) a $20.0 million revolving, unsecured line of credit,
(ii) a $6.0 million revolving unsecured equipment line of credit with a term
repayment option and (iii) a $10.0 million non-revolving line of credit with a
term repayment option. The Company has made no borrowings against this credit
facility.
The Company's cash and marketable securities totaled $246.4 million at March 31,
1997. The Company anticipates that its current cash and amounts available under
its bank financing agreement will be sufficient to fund its short-term working
capital requirements and enable the Company to continue its operations on a
long-term basis. To the extent that additional capital resources are required,
such capital may be raised through bank borrowings, equity offerings, or other
means.
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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 business. The Company could use sources other than
cash, such as 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.
Management believes inflation does not have, and has not had, a significant
impact on the Company's revenues or operations.
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WATSON PHARMACEUTICALS, INC.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in various disputes and litigation matters
which 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 financial position or results of operations. There have
been no significant developments in any legal matter since the filing of the
Company's 1996 Annual Report on Form 10-K, except as noted below.
In April 1997, the Securities and Exchange Commission announced the
settlement of all outstanding actions against five individuals, including three
employees of Royce, who allegedly traded securities of Royce while in the
possession of material non-public information. See the disclosure under "Other
Legal Proceedings" in Royce's 1996 Annual Report on Form 10-K. The settlements
involved payments by the defendants of disgorgement, fines and interest.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the registrant's annual meeting of stockholders held on May 5, 1997,
several proposals were set before the stockholders for their vote.
PROPOSAL ONE: Election of two directors to hold office until the 2000 Annual
- ------------- Meeting
Director - Class II VOTE FOR VOTE WITHHELD
- ------------------- -------- -------------
Alec D. Keith Ph.D. 29,114,727 346,206
Ronald R. Taylor 29,163,881 297,052
PROPOSAL TWO: To amend the 1991 Stock Option Plan to increase by 1,000,000 the
- ------------- number of shares authorized for issuance
For: 27,423,487
Against: 1,759,415
Abstain: 278,031
PROPOSAL THREE: Ratification of the selection of Price Waterhouse LLP as
- --------------- independent public accountants for the Company for the current
year
For: 29,354,390
Against: 50,272
Abstain: 56,271
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.6(a) Amendment to the 1991 Stock Option Plan
27.1 Financial Data Schedule (EDGAR version only)
(b) Reports on Form 8-K:
On January 9, 1997, the Company filed a Form 8-K Report to
disclose the execution of the Royce Merger Agreement. On March
14, 1997, the Company filed a Form 8-K Report to disclose the
consummation of the Oclassen Merger. On May 1,1997 the Company
filed a Form 8-K Report to disclose the consummation of the
Royce Merger.
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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 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)
By: /s/ CHATO ABAD
------------------------------------
Chato Abad
Vice President - Finance
(Principal Accounting Officer)
Dated: May 13,1997
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