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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________
FORM 10-Q
___________________
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _________
Commission file number 0-20045
____________________
WATSON PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
_____________________
Nevada 95-3872914
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
311 Bonnie Circle
Corona, CA 92880-2882
(Address of principal executive offices, including zip code)
(909) 270-1400
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days: Yes [X] No [_]
The number of shares outstanding of the Registrant's only class of common stock
as of August 9, 2001 was approximately 106,333,300.
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WATSON PHARMACEUTICALS, INC.
INDEX TO FORM 10-Q
FOR THE
QUARTERLY PERIOD ENDED JUNE 30, 2001
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets as of June 30, 2001 and
December 31, 2000........................................... 1
Consolidated Statements of Income for the
Three and Six Months Ended June 30, 2001 and 2000........... 2
Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 2001 and 2000..................... 3
Notes to Consolidated Financial Statements..................... 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................. 10
Item 3. Quantitative and Qualitative Disclosure about Market Risk...... 15
PART II. OTHER INFORMATION AND SIGNATURES
Item 1. Legal Proceedings.............................................. 16
Item 4. Submission of Matters to a Vote of Security Holders............ 17
Item 6. Exhibits and Reports on Form 8-K............................... 17
Signatures.............................................................. 18
WATSON PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited; in thousands, except share amounts)
June 30, December 31,
2001 2000
---------- ------------
ASSETS
Current assets:
Cash and cash equivalents.......................................... $ 62,745 $ 66,194
Marketable securities.............................................. 163,046 171,452
Accounts receivable, net........................................... 199,258 85,703
Assets held for disposition........................................ 67,187 142,067
Inventories........................................................ 264,788 248,945
Prepaid expenses and other current assets.......................... 34,532 30,084
Deferred tax assets................................................ 50,508 86,900
---------- ----------
Total current assets............................................. 842,064 831,345
Property and equipment, net........................................... 214,126 194,487
Investments and other assets.......................................... 101,524 109,521
Product rights and other intangibles, net............................. 1,441,652 1,444,545
---------- ----------
$2,599,366 $2,579,898
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses.............................. $ 174,492 $ 200,965
Income taxes payable............................................... --- 18,935
Current portion of long-term debt.................................. 56,027 52,882
Current liability from acquisitions of products and businesses..... 6,708 7,658
---------- ----------
Total current liabilities........................................ 237,227 280,440
Long-term debt........................................................ 455,502 483,272
Long-term liability from acquisitions of products and businesses...... 12,249 12,249
Deferred tax liabilities.............................................. 203,826 255,968
---------- ----------
Total liabilities................................................ 908,804 1,031,929
---------- ----------
Commitments and contingencies
Stockholders' equity:
Preferred stock; no par value per share; 2,500,000 shares --- ---
authorized; none outstanding.......................................
Common stock; $0.0033 par value per share; 500,000,000 shares
authorized; 106,235,600 and 105,600,200 shares outstanding......... 351 348
Additional paid-in capital............................................ 783,060 758,760
Retained earnings..................................................... 835,394 706,693
Accumulated other comprehensive income................................ 71,757 82,168
---------- ----------
Total stockholders' equity....................................... 1,690,562 1,547,969
---------- ----------
$2,599,366 $2,579,898
========== ==========
See accompanying Notes to Consolidated Financial Statements.
-1-
WATSON PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited, in thousands, except earnings per share)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------- --------------------------------
2001 2000 2001 2000
-------- -------- -------- --------
Net revenues................................... $298,978 $200,204 $595,824 $377,438
Cost of sales.................................. 109,980 72,101 242,738 134,066
-------- -------- -------- --------
Gross profit.............................. 188,998 128,103 353,086 243,372
-------- -------- -------- --------
Operating expenses:
Research and development.................... 14,159 12,697 28,504 25,800
Selling, general and administrative......... 54,516 34,427 104,709 66,905
Amortization................................ 20,327 8,767 40,263 17,436
-------- -------- -------- --------
Total operating expenses.................. 89,002 55,891 173,476 110,141
-------- -------- -------- --------
Operating income............................... 99,996 72,212 179,610 133,231
-------- -------- -------- --------
Other income (expense):
Equity in loss of joint ventures............ (770) (1,658) (1,780) (3,711)
Gain on sales of securities................. 16,398 81,465 47,673 248,395
Interest and other income................... 611 5,753 1,603 8,747
Interest expense............................ (6,960) (2,539) (14,678) (5,307)
-------- -------- -------- --------
Total other income, net................... 9,279 83,021 32,818 248,124
-------- -------- -------- --------
Income before income tax provision
and cumulative effect of change in
accounting principle........................ 109,275 155,233 212,428 381,355
Provision for income taxes..................... 43,030 58,428 83,727 142,398
-------- -------- -------- --------
Income before cumulative effect of
change in accounting principle.............. 66,245 96,805 128,701 238,957
Cumulative effect of change in accounting
principle, net of taxes of $7,208........... --- --- --- (12,013)
-------- -------- -------- --------
Net income..................................... $ 66,245 $ 96,805 $128,701 $226,944
======== ======== ======== ========
Earnings per share:
Basic....................................... $0.63 $0.97 $ 1.22 $ 2.28
======== ======== ======== ========
Diluted..................................... $0.61 $0.96 $ 1.19 $ 2.24
======== ======== ======== ========
Weighted average shares outstanding:
Basic....................................... 105,965 99,420 105,836 99,445
======== ======== ======== ========
Diluted..................................... 108,367 101,300 108,231 101,165
======== ======== ======== ========
See accompanying Notes to Consolidated Financial Statements.
-2-
WATSON PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
Six Months Ended June 30,
--------------------------------------
2001 2000
-------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................................................... $ 128,701 $ 226,944
--------- ---------
Reconciliation to net cash provided by operating activities:
Depreciation.................................................... 12,744 6,761
Amortization.................................................... 40,263 17,436
Cumulative effect of change in accounting principle............. --- 12,013
Deferred income tax provision................................... 18,303 4,725
Equity in loss of joint ventures................................ 1,919 3,931
Gain on sales of securities..................................... (47,673) (248,395)
Tax benefits related to exercises of stock options.............. 7,400 4,824
Other........................................................... (271) 3,659
Changes in assets and liabilities:
Accounts receivable........................................... (113,555) 48,200
Assets held for disposition................................... (7,679) ---
Inventories................................................... (27,486) (42,167)
Prepaid expenses and other current assets..................... (4,448) (9,184)
Accounts payable and accrued expenses......................... (22,121) 10,137
Income taxes payable.......................................... 15,284 5,714
--------- ---------
Total adjustments....................................... (127,320) (182,346)
--------- ---------
Net cash provided by operating activities............... 1,381 44,598
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment................................ (32,734) (15,342)
Purchases of marketable securities................................. --- (26,879)
Proceeds from maturities of marketable securities.................. 253 15,523
Acquisitions of product rights..................................... (11,341) (3,875)
Contingent payment related to acquisition of The Rugby Group....... --- (23,407)
Issuance of note receivable........................................ (2,000) (9,000)
Proceeds from sales of securities.................................. 49,664 269,630
Additions to investments in joint ventures......................... --- (437)
--------- ---------
Net cash provided by investing activities............... 3,842 206,213
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt........................... --- 1,000
Principal payments on long-term debt............................... (24,625) (1,896)
Payment on liability for acquisition of product rights............. (950) (15,000)
Distributions to stockholders...................................... --- (805)
Proceeds from exercises of stock options........................... 16,903 14,955
--------- ---------
Net cash used in financing activities................... (8,672) (1,746)
--------- ---------
(Decrease) increase in cash and cash equivalents................... (3,449) 249,065
Cash and cash equivalents at beginning of period................... 66,194 108,172
--------- ---------
Cash and cash equivalents at end of period......................... $ 62,745 $ 357,237
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the periods for:
Income taxes............................................ $ 14,676 $ 128,257
Interest (including capitalized interest of $4,631)..... $ 17,361 $ 5,425
See accompanying Notes to Consolidated Financial Statements.
-3-
WATSON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - GENERAL
The accompanying unaudited consolidated financial statements of Watson
Pharmaceuticals, Inc. and its subsidiaries (Watson or the company) should be
read in conjunction with the company's Annual Report on Form 10-K for the year
ended December 31, 2000 and its Quarterly Report on Form 10-Q for the quarter
ended March 31, 2001. In the opinion of management, the accompanying financial
statements contain all adjustments necessary to present fairly Watson's
consolidated financial position, results of operations and cash flows for the
periods presented. Unless otherwise noted, all such adjustments are of a
normal, recurring nature. The results of operations and cash flows for any
interim period are not necessarily indicative of the results of operations and
cash flows that Watson may achieve for any other interim period or for the
entire year.
The company completed its acquisition of Makoff R&D Laboratories, Inc. (Makoff)
in November 2000, as further discussed in Note B to the Consolidated Financial
Statements in this Form 10-Q. This acquisition was accounted for as a pooling
of interests and, accordingly, the accompanying consolidated financial
statements have been restated to reflect the results of operations of Makoff for
all periods presented (as if the two companies had always operated as one).
Marketable securities
Marketable securities consist primarily of Watson's investment in the common
stock of Andrx Corporation - Andrx Group (Andrx). Andrx is primarily engaged in
the formulation and commercialization of controlled-release pharmaceuticals
using proprietary drug delivery technologies. Andrx' common stock trades on the
NASDAQ National Market System under the symbol ADRX. During the three months
ended June 30, 2001, Watson sold approximately 300,000 shares of Andrx common
stock for $17.1 million and recorded a pre-tax gain of $16.4 million. During
the six months ended June 30, 2001, Watson sold approximately 900,000 shares of
Andrx common stock for $49.7 million and recorded a pre-tax gain of $47.7
million.
As of June 30, 2001, Watson owned 1.8 million common shares of Andrx
(approximately 3% of the total Andrx common shares outstanding) with a market
value of approximately $138 million. The company accounts for this investment
at fair value as an available-for-sale security. The unrealized gain on the
company's investment in Andrx was approximately $79.8 million and $88.9 million
(net of income taxes of $53.2 million and $59.3 million), at June 30, 2001 and
December 31, 2000, respectively. This unrealized gain was the primary component
of accumulated other comprehensive income in the stockholders' equity section of
Watson's consolidated balance sheets.
Recent accounting pronouncements
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 141, "Business Combinations" and
SFAS No. 142, "Goodwill and Intangible Assets." SFAS No. 141 requires that the
purchase method of accounting be used for all business combinations, establishes
specific criteria for recognizing intangible assets separately from goodwill and
requires certain disclosures regarding reasons for a business combination and
the allocation of the purchase price paid. SFAS No. 141 is effective for all
business combinations initiated after June 30, 2001 and for all business
combinations accounted for using the purchase accounting method for which the
date of acquisition is after June 30, 2001. SFAS No. 142 establishes that
goodwill and certain intangible assets will no longer be amortized to earnings,
but instead tested for impairment at least annually. Except for business
combinations initiated after June 30, 2001, the company is required to adopt the
provisions of SFAS No. 141 and SFAS No. 142 on January 1, 2002. The company is
currently evaluating the impact of these pronouncements on its consolidated
financial statements.
-4-
Effective January 1, 2000, the company adopted Staff Accounting Bulletin 101
(SAB 101) issued by the Securities and Exchange Commission in December 1999.
The adoption of SAB 101 required Watson to change the methods in which revenue
was recognized from product sales and research, development and licensing
agreements.
In accordance with SAB 101, the company records revenue from product sales when
title and risk of ownership have been transferred to the customer, which is
typically upon delivery to the customer.
Revenues recognized from research, development and licensing agreements
(including milestone payments) are now recorded on the "contingency-adjusted
performance model," which requires deferral of revenue until such time as
contract milestone requirements, as specified in the individual agreements, have
been met and cash has been received from the customer. Therefore, once
contingencies for individual milestones (e.g. government approval of a New Drug
Application) have been eliminated, revenue is recognized based on the percentage
of completion method.
The cumulative effect of this change in accounting principle, through December
31, 1999, was $12 million and was recorded in the first quarter of 2000. In
addition, the retroactive effect of this change on the accompanying consolidated
statement of income for the three months ended June 30, 2000 was to increase
net revenues and gross profit by $5.0 million and $1.7 million, respectively.
The retroactive effect for the six months ended June 30, 2000, was to reduce net
revenues and gross profit by $0.5 million and $1.6 million, respectively.
In January 2001, Watson adopted Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS No.
133), issued by the Financial Accounting Standards Board in June 1998. SFAS No.
133 requires all derivative instruments on the balance sheet to be recorded at
their fair values. Gains and losses resulting from changes in the fair values of
those derivatives are accounted for depending on the use of the derivative and
other criteria. The adoption of SFAS No. 133 had no material impact on the
company's results of operations or financial position.
-5-
Earnings per share (EPS)
Basic earnings per share is computed by dividing net income by the weighted
average common shares outstanding during a period. Diluted earnings per share is
based on the treasury stock method and computed by dividing net income by the
weighted average common shares and common share equivalents outstanding during
the periods presented assuming the exercise of all in-the-money stock options. A
reconciliation of the numerators and denominators of basic and diluted earnings
per share for the three and six months ended June 30, 2001 and 2000 is as
follows (in thousands, except for EPS):
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- ---------------------
2001 2000 2001 2000
-------- -------- --------- --------
Numerator:
Income before cumulative effect of
change in accounting principle............................... $ 66,245 $ 96,805 $128,701 $238,957
Cumulative effect of change in accounting
principle, net of taxes...................................... --- --- --- (12,013)
-------- -------- -------- --------
Net income............................................ $ 66,245 $ 96,805 $128,701 $226,944
======== ======== ======== ========
Denominators:
Denominator for basic EPS, weighted
average shares outstanding................................... 105,965 99,420 105,836 99,445
Assumed exercise of dilutive stock options...................... 2,402 1,880 2,395 1,720
-------- -------- -------- --------
Denominator for diluted EPS........................... 108,367 101,300 108,231 101,165
======== ======== ======== ========
Basic EPS:
Income before cumulative effect of
change in accounting principle............................... $ 0.63 $ 0.97 $ 1.22 $ 2.40
Cumulative effect of change in accounting
principle, net of taxes...................................... --- --- --- (0.12)
-------- -------- -------- --------
Basic earnings per share.............................. $ 0.63 $ 0.97 $ 1.22 $ 2.28
======== ======== ======== ========
Diluted EPS:
Income before cumulative effect of
change in accounting principle............................... $ 0.61 $ 0.96 $ 1.19 $ 2.36
Cumulative effect of change in accounting
principle, net of taxes...................................... --- --- --- (0.12)
-------- -------- -------- --------
Diluted earnings per share............................ $ 0.61 $ 0.96 $ 1.19 $ 2.24
======== ======== ======== ========
NOTE B - ACQUISITIONS OF BUSINESSES
Schein Pharmaceutical, Inc.
During the third quarter of 2000, Watson completed its acquisition of Schein
Pharmaceutical, Inc. (Schein). Schein has a branded pharmaceutical business
focused in the area of nephrology for the management of iron deficiency and
anemia and also develops, manufactures and markets a broad line of generic
products. The aggregate purchase price of $825 million to acquire all the
outstanding Schein shares consisted of (a) approximately $510 million in cash,
(b) the issuance of approximately 5.4 million Watson common shares, having a
market value on the date of acquisition of approximately $300 million, and (c)
direct transaction costs of $15 million. In addition, short-term liabilities
with a fair value of approximately $375 million (principally debt that was
subsequently retired) and long-term liabilities with a fair value of
approximately $5 million were assumed by the company. Watson accounted for
this acquisition under the purchase method of accounting. Accordingly, Schein's
results of operations are included in the consolidated financial statements from
the date of acquisition.
Approximately $500 million of the purchase price was allocated to Schein's
existing product rights. These product rights are amortized on the straight-
line method over periods of two to 20 years, with the weighted
-6-
average life of all product rights approximating 19.5 years. The remaining
excess of the purchase consideration over the fair value of the tangible net
assets acquired of approximately $400 million was recorded as goodwill, which is
amortized on the straight-line method over 25 years.
In connection with the acquisition of Schein, the company acquired two
injectable pharmaceutical manufacturing facilities, Steris Laboratories, Inc.
(Steris), located in Phoenix, Arizona, and Marsam Pharmaceuticals, Inc.
(Marsam), located in Cherry Hill, New Jersey. At the time of the Schein
acquisition, the company decided to dispose of these facilities. Accordingly,
these facilities were recorded as "Assets Held for Disposition" on the company's
consolidated balance sheet at their estimated fair market values based on the
reports of an independent appraiser less an estimate of costs expected to be
incurred through the projected date of disposition for each facility.
During the first quarter of 2001, following unsuccessful negotiations with
several potential buyers, Watson decided to close Marsam and liquidate the
assets at the facility. At March 31, 2001, the company wrote down the value of
the assets at the Marsam facility to liquidation value and accrued additional
severance and closure costs of $6.3 million. The company also realized a $65
million tax benefit associated with the liquidation of Marsam. This tax benefit
was reclassified from Assets Held for Disposition to current deferred tax
assets. As of June 30, 2001, the accrual for additional closure costs was $3.9
million.
During the first six months of 2001, the company incurred operating losses from
Steris and Marsam of $5.9 million and $1.6 million, respectively, which were
applied against the accrual for estimated future losses established at the
acquisition date. In addition, during the first six months of 2001, interest
expense of $2.5 million, net of tax, was capitalized and allocated to the
carrying amount of Assets Held for Disposition. The company intends to continue
its efforts to dispose of the Steris facility through sale or otherwise.
Beginning in the third quarter of 2001, the company will record all costs
related to Assets Held for Disposition as operating expenses in its Consolidated
Statement of Income.
At the date of the Schein acquisition, Watson established a severance accrual of
$33.6 million for termination costs associated with approximately 80 duplicative
Schein employees. As of June 30, 2001, the accrual had a remaining balance of
$8.2 million.
Makoff R&D Laboratories, Inc.
In November 2000, Watson completed its acquisition of Makoff, a developer,
licensor and marketer of pharmaceutical products related principally to the
management of kidney disease. Watson issued approximately 2.8 million common
shares, having a market value on the date of acquisition of approximately $155
million, in exchange for all the outstanding shares of Makoff. The acquisition
was accounted for as a pooling of interests for accounting purposes and
accordingly, Makoff's results of operations are included in the accompanying
Consolidated Statements of Income (as if the two companies had always operated
as one). The acquisition also qualified as a tax-free merger for federal income
tax purposes.
During the fourth quarter of 2000, the company recorded a special charge of
$22.4 million for certain merger and related expenses associated with the Makoff
acquisition. This charge consisted of transaction costs for investment banking
fees, professional fees, printing and other costs of $13.6 million and closure
costs of $8.8 million. The $8.8 million consisted of employee termination costs
for approximately 50 employees (approximately $4.7 million) which were paid
pursuant to existing employment agreements, asset impairment costs
(approximately $2.5 million) and lease and contract termination costs
(approximately $1.6 million). As of June 30, 2001, the company had paid all
material transaction and closure costs and had charged-off the impaired assets.
-7-
NOTE C - OPERATING SEGMENTS
Watson is a manufacturer and marketer of pharmaceutical products with two
reportable operating segments: branded and generic pharmaceutical products. The
branded products segment includes the company's lines of women's health, general
products and nephrology products. Watson has aggregated its branded product
lines in a single operating segment because of similarities in regulatory
environment, manufacturing processes, methods of distribution and types of
customer. This segment includes patent-protected products and trademarked
generic products that Watson promotes directly to healthcare professionals as
branded pharmaceutical products. The generic products segment includes off-
patent pharmaceutical products that are therapeutically equivalent to
proprietary products. The company sells its branded and generic products
primarily to pharmaceutical wholesalers, drug distributors and chain drug
stores.
The accounting policies of each of the operating segments are the same as those
described in the company's Annual Report on Form 10-K for the year ended
December 31, 2000. Watson primarily evaluates its operating segments based on
net revenues and gross profit. The "other" classification includes revenues
from research, development and licensing agreements. The company does not
report depreciation expense, total assets, and capital expenditures by segment
as such information is not used by management, nor accounted for at the
operating segment level. Net revenues and gross profit information for the
company's operating segments for the three and six months ended June 30, 2001
and 2000 are summarized as follows (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------- ----------------------------------
2001 2000 2001 2000
-------------- -------------- --------------- ---------------
Net revenues:
Branded pharmaceutical products..... $125,160 $121,951 $276,065 $224,014
Generic pharmaceutical products..... 171,008 71,000 315,786 139,200
Other............................... 2,810 7,253 3,973 14,224
-------- -------- -------- --------
Total net revenues........ $298,978 $200,204 $595,824 $377,438
======== ======== ======== ========
Gross profit:
Branded pharmaceutical products..... $ 95,789 $ 97,100 $216,119 $182,198
Generic pharmaceutical products..... 90,399 23,750 132,994 46,950
Other............................... 2,810 7,253 3,973 14,224
-------- -------- -------- --------
Total gross profit........ $188,998 $128,103 $353,086 $243,372
======== ======== ======== ========
NOTE D - INVENTORIES
Inventories consisted of the following (in thousands):
June 30, December 31,
2001 2000
--------- ------------
Raw materials.................................. $ 89,579 $100,859
Work-in-process................................ 51,654 52,529
Finished goods................................. 123,555 95,557
-------- --------
$264,788 $248,945
======== ========
-8-
NOTE E - LONG-TERM DEBT
Long-term debt consisted of the following (in thousands):
June 30, December 31,
2001 2000
----------- ------------
Term loan facility, due 2005................... $361,186 $385,000
Senior unsecured notes, 7.125%,
face amount of $150 million, due 2008
(effective rate of 7.25%)................... 148,804 148,737
Other notes payable............................ 1,539 2,417
-------- --------
511,529 536,154
Less current portion........................... 56,027 52,882
-------- --------
$455,502 $483,272
======== ========
In July 2000, the company entered into a credit agreement that provided for a
$500 million term loan facility and a $200 million revolving credit facility for
working capital and other needs. In connection with the company's acquisition
of Schein, the $500 million term loan was drawn upon in its entirety. Watson
prepaid $100 million of borrowings under the term loan facility in September
2000. In addition, the company paid required principal payments of
approximately $24 million on the term loan facility during the six months ended
June 30, 2001.
The interest rate under this credit agreement is based on a margin over the
London Interbank Offered Rate (LIBOR). The margin is determined based on a
leverage test, with the margin increasing and decreasing in 1/8% increments
based on an interest rate grid. The interest rate is subject to adjustment each
quarter, based on a leverage ratio. The LIBOR rate, which is subject to market
fluctuations, may also change. At June 30, 2001, the interest rate on this
credit agreement was approximately 5.6%. Watson is subject to customary
financial and operational covenants. As of June 30, 2001, the company had not
drawn any funds from the $200 million revolving credit facility.
In May 1998, Watson issued $150 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, but may be redeemed earlier under certain circumstances.
Pursuant to the indenture under which the notes were issued, the company is
subject to customary financial and operational covenants.
NOTE F - COMPREHENSIVE INCOME
Comprehensive income includes all changes in equity during a period except those
resulting from investments by and distributions to the company's stockholders.
Watson's comprehensive income consisted of the following (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------------- ------------------------------------
2001 2000 2001 2000
--------------- --------------- --------------- ----------------
Net income..................................... $ 66,245 $ 96,805 $128,701 $ 226,944
-------- -------- -------- ---------
Other comprehensive income, net of tax:
Unrealized holding gains on securities...... 25,887 9,871 19,289 198,540
Reclassification for gains included
in net income............................. (10,696) (50,915) (29,700) (155,747)
-------- -------- -------- ---------
Other comprehensive (loss) income.............. 15,191 (41,044) (10,411) 42,793
-------- -------- -------- ---------
Comprehensive income........................... $ 81,436 $ 55,761 $118,290 $ 269,737
======== ======== ======== =========
-9-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
Watson is a pharmaceutical company primarily engaged in the development,
production, marketing and distribution of both branded and generic (off-patent)
pharmaceutical products. The company was incorporated in 1985 and began
operations as a manufacturer and marketer of generic pharmaceuticals. Through
internal product development and synergistic acquisitions of products and
businesses, we have grown into a diversified specialty pharmaceutical company.
Results of Operations - Three Months Ended June 30, 2001 Compared to the 2000
Period
Net revenues for the three months ended June 30, 2001 were $299 million compared
to $200.2 million for the 2000 period, an increase of $98.8 million or 49%. Our
second quarter 2001 revenue growth was primarily the result of increased sales
of generic products, due to sales of the generic products acquired in the Schein
acquisition and the April 2001 launch of buspirone, the generic equivalent to
Bristol-Myers Squibb's Buspar(R). Sales of branded products in the quarter
increased slightly from the year ago period. During the three month period
ended June 30, 2001, branded product sale increases in our Nephrology and
Women's Health product lines were offset by lower product sales from our General
Products division. The decrease in sales of General Products was primarily due
to continuing generic competition in dermatology and pain management products
and slower than expected prescription growth from recent launches of certain
pain management products. However, we continue to experience improved
prescription growth from these products since the end of the second quarter of
2001.
Continued net revenue growth for the remainder of 2001 is dependent upon
continued growth from our branded product division and the timing of regulatory
approvals, successful product launches and continued favorable market conditions
for certain generic products. We expect sales of buspirone to decline in the
fourth quarter of this year, as a result of the expiration of the 180 day
marketing exclusivity for this product at the end of the third quarter of 2001.
Our overall gross profit margin on product sales increased slightly to 62.9% in
the second quarter 2001 from 62.6% in the prior year period. This increase was
primarily due to higher margins from generic product sales as a result of our
buspirone exclusivity (which will expire at the end of the third quarter of
2001). We expect our gross margin for the year of 2001 to be approximately 60%.
However, achieving this gross margin target depends upon the timing and success
of expected product introductions that are required to offset the anticipated
decline in margin from the expiration of buspirone market exclusivity.
Research and development expenses increased to $14.2 million in the second
quarter of 2001, compared to $12.7 million in the same period of 2000. Branded
product development continued to be our focus, while spending on certain generic
projects declined. In this regard, spending on clinical studies for branded
products increased significantly in the second quarter 2001, while
administrative costs were lower due to efficiencies realized from the
consolidation of our branded product development program. We expect our
research and development spending to increase through 2001, with a continued
emphasis on the development of branded products.
Selling, general and administrative expenses increased to $54.5 million in the
second quarter of 2001, compared to $34.4 million in the prior year period, due
primarily to expenses attributable to the addition of the sales, marketing and
administrative personnel of Schein. We have continued to expand our sales force
for our Women's Health product line and, overall, incurred higher advertising
and promotional expenses. In addition, we incurred higher professional fees in
2001, primarily due to increased legal costs associated with certain patent-
related and litigation matters. We expect our selling, general and
administrative expenses to remain consistent, at approximately 18% of net
revenue for the remainder of 2001.
-10-
Amortization expense for the three months ended June 30, 2001 increased to $20.3
million, compared to $8.8 million for the prior year period. We recorded
additional amortization in 2001 related to intangible assets recorded in the
Schein acquisition. For the balance of 2001, we expect quarterly amortization
expense to remain consistent with the level of expense recorded in research and
development and the second quarter of 2001.
Our loss from joint ventures was approximately $0.8 million in the second
quarter of 2001, compared with a loss of $1.7 million in the 2000 period. This
improvement resulted from a lower net loss in the 2001 period for the Somerset
Pharmaceuticals, Inc. (Somerset) joint venture, caused primarily by reduced
research and development costs. For the third and fourth quarters of 2001, we
expect to record losses from the Somerset joint venture of approximately $1
million per quarter, due largely to Somerset's anticipated increase in research
and development and marketing expenses for the remainder of 2001.
In the second quarter of 2001, we sold approximately 300,000 shares of Andrx
common stock. The proceeds from these sales totaled approximately $17.1
million. We recorded a pre-tax gain on sales of securities in the second
quarter of 2001 of $16.4 million, compared to a pre-tax gain of $81.5 million
in the prior year period. See Notes to Consolidated Financial Statements,
"Note A - General - Marketable Securities" in this Form 10-Q.
Interest and other income in the second quarter of 2001 decreased to $0.6
million from $5.7 million in 2000. The decrease in interest and other income
was caused by lower average cash balances, which was primarily due to cash used
in the Schein acquisition.
Interest expense in the second quarter of 2001 increased to $7.0 million from
$2.5 million in 2000 due to interest expense on debt acquired in connection with
the Schein acquisition, offset by capitalized interest of $2 million related to
the carrying value of Assets Held for Disposition and construction in progress.
We borrowed $500 million in July 2000 in the form of a term loan facility and
reduced the outstanding principal balance to $361 million at June 30, 2001.
Our income tax provision for the second quarter ended June 30, 2001 reflected a
39% effective tax rate on pre-tax income, compared to 38% for the same period in
2000. The difference in the effective tax rate from 2001 to 2000 was primarily
the result of non-deductible amortization expense related to goodwill from the
Schein acquisition.
Six Months Ended June 30, 2001 Compared to the 2000 Period
Net revenues for the six months ended June 30, 2001 were $595.8 million,
compared to $377.4 million for the 2000 period, an increase of $218.4 million or
58%. The revenue growth was primarily the result of increased sales of generic
products, due to sales of the generic products acquired in the Schein
acquisition and the April 2001 launch of buspirone. Sales of branded products
for the first half of 2001 increased by $52 million from the same period in the
prior year. During the six month period ended June 30, 2001, product sale
increases in both our Nephrology and Women's Health product lines were offset in
part by lower product sales from our General Products division. The decrease in
product sales in our General Products line was primarily due to continuing
generic competition in dermatology and pain management products and slower than
expected prescription growth from recent launches of certain pain management
products. However, we continue to experience improved prescription growth from
these products since the end of the second quarter of 2001.
Continued net revenue growth for the remainder of 2001 is dependent upon
continued growth from our branded products division and the timing of regulatory
approvals, successful product launches and continued favorable market conditions
for certain generic products. We expect sales of buspirone to decline in the
fourth quarter of this year, as a result of the expiration of the 180 day
marketing exclusivity for this product at the end of the third quarter of 2001.
-11-
Our overall gross profit margin on product sales decreased to 59% in the first
six months of 2001 from 64% in the year ago period primarily due to the change
in our product sales mix, which resulted in a higher proportion of lower-margin
generic product sales compared with the first six months of 2000. We expect our
gross margin for the year of 2001 to be approximately 60%. However, achieving
this gross margin target depends upon the timing and success of expected product
introductions that are required to offset the expected decline in margin
from the loss of buspirone market exclusivity.
Research and development expenses increased slightly to $28.5 million in the
first six months of 2001, compared to $25.8 million in the same period of 2000.
Branded product development continued to be our focus, while spending on certain
generic projects declined.
Selling, general and administrative expenses increased to $104.7 million for the
first half of 2001, compared to $66.9 million in the prior year period, due
primarily to higher selling and marketing costs. This increase was primarily due
to the expenses attributable to the addition of the sales, marketing and
administrative personnel of Schein. In addition, we incurred higher professional
fees in 2001, primarily due to increased legal costs associated with certain
patent-related and litigation matters.
Amortization expense in the six months ended June 30, 2001 increased to $40.3
million, compared to $17.4 million in the 2000 period. This increase related to
the amortization of intangible assets recorded in the Schein acquisition.
Our $1.8 million loss from joint ventures in the first half of 2001 compared to
a $3.7 million loss in the prior year period. Our joint venture losses resulted
primarily from our 50% interest in Somerset, which reported a higher net loss in
the 2000 period caused by higher research and development costs. For the second
half of 2001, we expect to record a loss from the Somerset joint venture of
approximately $2 million, due largely to Somerset's anticipated increase in
research and development and marketing expenses for the remainder of 2001.
In the first six months of 2001, we sold approximately 900,000 shares of Andrx
common stock. The proceeds from these sales totaled approximately $49.7 million.
We recorded a pre-tax gain on sales of securities in the first half of 2001 of
$47.7 million, compared to a pre-tax gain of $248.4 million in the prior year
period. See Notes to Consolidated Financial Statements "Note A - General -
Marketable Securities" in this Form 10-Q.
Interest and other income in the first half of 2001 decreased to $1.6 million
from $8.7 million in 2000 due to lower 2001 cash balances, primarily as a result
of cash used in the Schein acquisition.
Interest expense in the first six months of 2001 increased to $14.7 million from
$5.3 million in 2000 due primarily to interest expense on debt acquired in
connection with the Schein acquisition, offset by capitalized interest of $4.6
million related to the carrying value of Assets Held for Disposition and
construction in progress.
Our income tax provision for the six months ended June 30, 2001 reflected a 39%
effective tax rate on pre-tax income, compared to 37% for the same period in
2000. The difference in the effective tax rate from 2001 to 2000 was primarily
the result of non-deductible amortization expense related to goodwill from the
Schein acquisition.
Liquidity and Capital Resources
The company's working capital increased to $604.8 million at June 30, 2001 from
$550.9 million at December 31, 2000, primarily due to an increase in accounts
receivable and inventory balances. The most significant sources of non-operating
cash during the first six months of 2001 were proceeds from sales of Andrx
common stock ($49.7 million) and proceeds from the exercise of stock options
($16.9 million). Significant uses of cash included the increase in accounts
receivable balances ($113.6 million) due to increased sales in the
-12-
first six months of 2001, principal payments on long-term debt ($24.6 million)
and additions to property and equipment ($32.7 million). We expect to spend
approximately $55 to $65 million for property and equipment additions during
2001.
As discussed in Note B to the Consolidated Financial Statements in this Form 10-
Q, we acquired Marsam in connection with our acquisition of Schein. At the time
of acquisition, we determined to dispose of the facility through a sale or plant
closure. Following unsuccessful negotiations with potential buyers, we decided
to close the Marsam facility and recorded estimated liabilities of $6.3 million
for severance and other costs expected to be incurred in connection with the
closing of this facility. As of June 30, 2001, the accrual for additional
closure expenses was $3.9 million.
As further discussed in Note E to the Consolidated Financial Statements in this
Form 10-Q, we entered into a credit agreement with a bank and a consortium of
lenders that included a $500 million term loan facility and a $200 million
revolving credit facility. The $200 million facility was available for working
capital and other needs as of June 30, 2001. In connection with the Schein
acquisition, the $500 million term loan was drawn upon in its entirety and, as
of June 30, 2001, approximately $361 million was outstanding under this term
loan.
In April 1998, we filed a shelf registration statement with the Securities and
Exchange Commission that would allow us, from time to time, to raise up to $300
million from offerings of senior or subordinated debt securities, common stock,
preferred stock or a combination thereof. In May 1998, pursuant to this
registration statement, we issued $150 million of 7.125% senior unsecured notes
due May 2008, with interest payable semi-annually in May and November. Subject
to preparation of a supplement to the existing prospectus and certain other
matters, the balance of this registration statement remains available for
issuance at our discretion.
Our cash and marketable securities, consisting primarily of our ownership of
Andrx common stock, totaled approximately $226 million at June 30, 2001. We
believe that our cash and marketable securities balance, our cash flow from
operations and the financing sources discussed herein, will be sufficient to
meet our normal operating requirements during the next twelve months. However,
we continue to review opportunities to acquire or invest in companies,
technologies, product rights and other investments that are compatible with our
existing business. We could use cash and financing sources discussed herein, or
financing sources that subsequently become available, to fund additional
acquisitions or investments. In addition, we may consider issuing additional
debt or equity securities in the future to fund potential acquisitions or growth
or to refinance existing debt. If a material acquisition or investment is
completed, our operating results and financial condition could change materially
in future periods. However, no assurance can be given that additional funds
will be available on satisfactory terms, or at all. In addition, our marketable
securities consist primarily of holdings of a publicly traded company which
stock could fluctuate significantly in price. See Item 3 in this Form 10-Q.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
We caution the reader that certain important factors may affect our actual
results and could cause such results to differ materially from any forward-
looking statement which may have been deemed to have been made in this report or
which are otherwise made by us or on our behalf. For this purpose any
statements contained in this report that are not statements of historical fact
may be deemed to be forward-looking statements. Without limiting the generality
of the foregoing, words such as "may", "will", "expect", "believe",
"anticipate", "intend", "could", "would", "estimate", "continue" or "pursue",
or the negative other variations thereof or comparable terminology are intended
to identify forward-looking statements.
-13-
Forward-looking statements involve risks and uncertainties that cannot be
predicted or quantified and, consequently, actual results may differ materially
from those expressed or implied by such forward-looking statements. Such risks
and uncertainties include, among other things:
. the success of our product development activities and uncertainties
related to the timing or outcome of such activities;
. the timing with which regulatory authorizations and product roll-out may
be achieved, if at all;
. our ability to retain key personnel;
. our ability to adequately protect our technology and enforce our
intellectual property rights;
. our success in acquiring or licensing proprietary technologies that are
necessary for our product development activities;
. the outcome of litigation involving Watson (including patent, trademark
and copyright litigation), and the costs, expenses and possible diversion
of management's time and attention arising from such litigation;
. our ability to obtain and maintain a sufficient supply of products to meet
market demand in a timely manner;
. our ability to timely and cost effectively integrate into our operations
the companies that we acquire;
. our dependence on sole source suppliers and the risks associated with a
production interruption or shipment delays at such suppliers;
. 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 Food and Drug
Administration);
. the availability on commercially reasonable terms of raw materials and
other third party sourced products;
. our exposure to product liability and other lawsuits and contingencies;
. our mix of product sales between branded, which typically have higher
margins, and generic products;
. the expiration of patent and regulatory exclusivity on certain of our
products that will result in competitive and pricing pressures;
. our successful compliance with extensive, costly, complex and evolving
governmental regulations and restrictions;
. market acceptance of and continued demand for our products and the impact
of competitive products and pricing;
. our ability to successfully compete in both the branded and generic
pharmaceutical product sectors;
-14-
. the timely and successful implementation of strategic initiatives;
. the uncertainty associated with the identification of and successful
consummation and execution of external business and product development
transactions; and
. other risks and uncertainties detailed herein and from time to time in our
Securities and Exchange Commission filings.
The information in this Form 10-Q is as of June 30, 2001 or, where clearly
indicated, as of the date of this filing. We undertake no obligation to publicly
update any forward-looking statements, whether as a result of new information,
future events or otherwise. We also may make additional disclosures in our
Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports
on Form 8-K that we may file from time to time with the Securities and Exchange
Commission. Please also note that we provide a cautionary discussion of risks
and uncertainties under the section entitled "Risk Factors" in our Annual Report
on Form 10-K for the year ended December 31, 2000. These are factors that we
think could cause our actual results to differ materially from expected results.
Other factors besides those listed here could also adversely affect us. This
discussion is provided as permitted by the Private Securities Litigation Reform
Act of 1995.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
As discussed in Note A to the Consolidated Financial Statements in this Form 10-
Q, our investment in Andrx consisted of 1.8 million Andrx common shares with a
fair market value of approximately $138 million at June 30, 2001. As a publicly
traded equity security, this investment has exposure to price risk. The market
price of Andrx common shares has been, and may continue to be, volatile. For
example, on June 29, 2001, the last trading day of the second quarter of 2001,
the Andrx closing price was $77.00. On August 10, 2001, prior to our filing of
this Form 10-Q, the Andrx closing price was $66.85. The following table sets
forth the Andrx high and low market price per share information, based on
published financial sources, through June 30, 2001 and for 2000:
2001, by quarter High Low
---------------- ------------- -------------
First................. $72.25 $38.50
Second................ $77.00 $44.94
2000, by quarter
----------------
First................. $65.50 $20.13
Second................ $68.31 $43.63
Third................. $95.88 $63.94
Fourth................ $94.88 $50.82
In addition to Andrx, we own approximately 3% of the outstanding shares of Dr.
Reddy's Laboratories, Limited (Dr. Reddy), a developer and manufacturer of
active pharmaceutical ingredients and products. Our investment in Dr. Reddy,
which trades on the Bombay Stock Exchange and on the New York Stock Exchange in
the form of American depositary shares, had a market value of approximately
$24.7 million at June 30, 2001 and was included in marketable securities. Other
than our investments in Andrx and Dr. Reddy, substantially all of our cash
equivalents and marketable securities are held in variable interest rate
instruments. Accordingly, we believe that the market risk arising from our
holding of these investments is not material. We believe that the fair value of
our fixed-rate long-term debt approximates its carrying value of approximately
$150 million at June 30, 2001. While changes in market interest rates may affect
the fair value of our fixed-rate long-term debt, we believe the effect, if any,
of reasonably possible near-term changes in the fair value of such debt on our
financial condition, results of operations or cash flows will not be material.
As discussed in Note E to the Consolidated Financial Statements in this Form 10-
Q, as of June 30, 2001 we had approximately $361 million outstanding under a
LIBOR-based, variable interest rate term loan. A
-15-
hypothetical 100 basis point increase in interest rates, based on the June 30,
2001 term loan balance, would reduce our annual net income by approximately $2.2
million. Any future gains or losses may differ materially from this hypothetical
amount based on actual changes in the timing and amount of interest rate
movements and the actual term loan balance.
At this time, we are not party to any interest rate or derivative hedging
contracts and have no material foreign exchange or commodity price risks.
PART II - OTHER INFORMATION AND SIGNATURES
ITEM 1. LEGAL PROCEEDINGS
The company is party to certain lawsuits and legal proceedings, which are
described in "Part I, Item 3. Legal Proceedings," of our Annual Report on Form
10-K for the year ended December 31, 2000, and in "Part II, Item 1. Legal
Proceedings," of our Quarterly Report on Form 10-Q for the period ended March
31, 2001. The following is a description of material developments during the
period covered by this Quarterly Report and should be read in conjunction with
the Annual Report and Quarterly Report referenced above.
Phentermine hydrochloride lawsuits. With respect to the phentermine
- ----------------------------------
hydrochloride product liability lawsuits filed against the company, certain
company subsidiaries, and others, additional actions raising similar issues have
been filed, and a number of actions have been settled and/or otherwise
dismissed. As of August 1, 2001, a total of approximately 740 actions were
pending against the company and other company entities in a number of state and
federal courts. The company believes that it will be fully indemnified by
Rugby's former owner, Aventis Pharmaceuticals (Aventis, formerly known as
Hoechst Marion Roussel, Inc.) for the defense of all such cases and for any
liability that may arise out of these cases. Aventis is currently controlling
the defense of all these cases as the indemnifying party under its agreements
with the company.
Higuchi v. Watson Pharmaceuticals, Inc. The trial concluded in May 2001. The
- --------------------------------------
court took the matter under submission and has not yet rendered its decision.
Cipro lawsuits. In June, July and August 2001 the company responded to document
- --------------
subpoenas and civil investigative demands from various state and federal
agencies. The company is continuing to defend both the consolidated federal
cases as well as the non-consolidated cases pending in various state courts.
Watson Pharma, Inc. v. Bristol-Myers Squibb Company (BMS). In July 2001 the
- ---------------------------------------------------------
Judicial Panel on Multi-District litigation heard oral arguments on the pending
motions to consolidate the company's action against Bristol-Myers Squibb with
similar cases filed against Bristol-Myers Squibb by other third parties, and
with the patent infringement actions filed by Bristol-Myers Squibb against the
company and other third parties. The panel has not yet rendered a decision.
The company and its affiliates are involved in various other disputes,
governmental and/or regulatory inspections, investigations and proceedings, and
litigation matters that arise from time to time in the ordinary course of
business. The process of resolving matters through litigation or other means is
inherently uncertain and it is possible that the resolution of these matters
will adversely affect the company.
-16-
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At our Annual Meeting of Stockholders held on May 7, 2001, the following
proposals were set before the stockholders for their vote.
PROPOSAL ONE: Election of three directors to hold office until the 2004
Annual Meeting:
DIRECTORS - CLASS III Votes For Votes Withheld
--------------------- ---------- --------------
Allen Chao, Ph.D............. 85,674,569 950,361
Michel J. Feldman............ 85,674,115 950,815
Fred G. Weiss................ 85,674,615 950,315
PROPOSAL TWO: Approval of the Watson Pharmaceuticals, Inc. Employee Stock
Purchase Plan:
For.......................... 69,959,578
Against...................... 1,055,288
Abstain...................... 380,340
Broker non-votes............. 15,229,724
PROPOSAL THREE: Approval of the Watson Pharmaceuticals, Inc. 2001 Incentive
Award Plan:
For.......................... 47,780,626
Against...................... 23,194,881
Abstain...................... 411,347
Broker non-votes............. 15,238,076
PROPOSAL FOUR: Ratification of the selection of PricewaterhouseCoopers LLP as
the company's independent accountants for the year ending December 31, 2001:
For.......................... 83,691,436
Against...................... 2,620,398
Abstain...................... 313,096
Broker non-votes............. ---
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Reference is hereby made to the Exhibit Index on page 19.
(b) Reports on Form 8-K filed during the quarter ended June 30, 2001:
None.
-17-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
WATSON PHARMACEUTICALS, INC.
(Registrant)
By: /s/ MICHAEL E. BOXER
---------------------------------------------------
Michael E. Boxer
Senior Vice President - Chief Financial Officer
(Principal Financial Officer)
By: /s/ R. TODD JOYCE
---------------------------------------------------
R. Todd Joyce
Vice President - Corporate Controller and Treasurer
(Principal Accounting Officer)
Dated: August 14, 2001
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WATSON PHARMACEUTICALS, INC.
EXHIBIT INDEX
Exhibit
No. Description
------- --------------------------------------------------------------------
3.2 The company's By-laws, as amended and restated as of July 27, 2001.
*10.1 Watson Pharmaceuticals, Inc. Employee Stock Purchase Plan effective
as of February 12, 2001, filed with the Form 10-Q for the quarterly
period ended March 31, 2001.
*10.2 Watson Pharmaceuticals, Inc. 2001 Incentive Award Plan effective as
of February 12, 2001, filed with the Form 10-Q for the quarterly
period ended March 31, 2001.
First amendment to the 2001 Incentive Award Plan of Watson, filed as
Exhibit 10.2 to the company's Form S-8 (Reg. No. 333-61844) filed on
May 30, 2001 and hereby incorporated by reference.
10.3 First amendment to the Employee Stock Purchase Plan of Watson.
- ---------------------------------
* Compensation Plan or Agreement
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