**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

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**FORM 10-Q**

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** **

**x** QUARTERLY REPORT PURSUANT TO SECTION 13OR 15(d)

**OF THE SECURITIES EXCHANGE ACT OF 1934**

** **

**FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2007**

**or**

**o** TRANSITION REPORT PURSUANT TO SECTION 13OR 15(d)

**OF THE SECURITIES EXCHANGE ACT OF 1934**

**For the transition period from                          to                           **

**Commissionfile number 001-13305**

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**WATSON PHARMACEUTICALS, INC.**

(Exact name of registrantas specified in its charter)

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| **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) |
|                                                          |
| **(951)  493-5300**                                           |
| (Registrant’s  telephone number, including area code)    |

 

Indicate by checkmark whether the Registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that the registrantwas required to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.   Yes x   No o

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Checkone):

Large accelerated filer  x                   Accelerated filer  o                             Non-acceleratedfiler  o

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).  Yes o  No x

The number ofshares outstanding of the Registrant’s only class of common stock as of May 3,2007 was approximately 102,530,000.

 

 

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**WATSON PHARMACEUTICALS, INC.****TABLE OF CONTENTS****FORM 10-Q FOR THEQUARTERLY PERIOD ENDED MARCH 31, 2007**

** **
| **Part I. FINANCIAL INFORMATION**                                                                   | ** **                                                                                            |
|-----------------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------|
| ** **                                                                                          | ** **                                                                                            |
|                                                                                                |                                                                                                  |   |
| Item 1. Condensed Consolidated Financial Statements  (Unaudited):                                   | ** **                                                                                            | ** ** |
|                                                                                                |                                                                                                  |   |
|                                                                                                | Condensed Consolidated Balance Sheets as of March 31,  2007 and   December 31, 2006                   |   |   |
|                                                                                                |                                                                                                  |   |
|                                                                                                |                                                                                                  |   |   |
|                                                                                                | Condensed Consolidated Statements of Income for the  Three Months  Ended March 31, 2007 and 2006      |   |   |
|                                                                                                |                                                                                                  |   |
|                                                                                                |                                                                                                  |   |   |
|                                                                                                | Condensed Consolidated Statements of Cash Flows for  the Three Months   Ended March 31, 2007 and 2006 |   |   |
|                                                                                                |                                                                                                  |   |
|                                                                                                |                                                                                                  |   |   |
|                                                                                                | Notes to Condensed Consolidated Financial Statements                                                  |   |   |
|                                                                                                |                                                                                                  |
| Item 2. Management’s Discussion and Analysis of  Financial Condition and Results of Operations |                                                                                                  |   |
|                                                                                                |                                                                                                  |   |
| Item 3. Quantitative and Qualitative Disclosure about  Market Risk                                  |                                                                                                  |   |
|                                                                                                |                                                                                                  |   |
| Item 4. Controls and Procedures                                                                     |                                                                                                  |   |   |   |
|                                                                                                |                                                                                                  |   |
|                                                                                                |                                                                                                  |   |   |
| **Part  II. OTHER INFORMATION AND SIGNATURES**                                                      |
|                                                                                                |                                                                                                  |   |   |   |
| Item  1. Legal Proceedings                                                                          |                                                                                                  |   |   |   |
|                                                                                                |                                                                                                  |   |   |   |
| Item 1A. Risk Factors                                                                               |                                                                                                  |   |   |   |
|                                                                                                |                                                                                                  |   |   |   |
| Item 2. Unregistered Sales of Equity Securities and  Use of Proceeds                                |                                                                                                  |   |
|                                                                                                |                                                                                                  |   |   |   |
| Item 6. Exhibits                                                                                    |                                                                                                  |   |   |   |
|                                                                                                |                                                                                                  |   |   |   |
| Signatures                                                                                          |                                                                                                  |   |   |   |
|                                                                                                     |                                                                                                       |  |  |  |  |

 

 

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**WATSON PHARMACEUTICALS, INC.**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(Unaudited; in thousands)**

 
| ** **                                       | ** ** | **March 31,  2007 ** | ** ** | **December 31,  2006 ** | ** ** |
|--------------------------------------------------|------------|--------------------------------|------------|-----------------------------------|------------|
| **ASSETS**                                       |       |                           |       |                              |       |
| Current assets:                                  |       |                           |       |                              |       |
| Cash and cash  equivalents                       |       | $                              | 73,550     |                              | $          | 154,171 |   |
| Marketable  securities                           |       | 8,981                          |       | 6,649                             |       |
| Accounts  receivable, net                        |       | 375,608                        |       | 384,692                           |       |
| Inventories                                      |       | 492,345                        |       | 517,236                           |       |
| Prepaid expenses  and other current assets       |       | 63,130                         |       | 86,115                            |       |
| Deferred tax  assets                             |       | 88,055                         |       | 112,813                           |       |
| Total current  assets                            |       | 1,101,669                      |       | 1,261,676                         |       |
| Property and equipment,  net                     |       | 696,119                        |       | 697,415                           |       |
| Investments and other  assets                    |       | 73,497                         |       | 76,377                            |       |
| Deferred tax assets                              |       | 63,351                         |       | 55,348                            |       |
| Product rights and  other intangibles, net       |       | 735,503                        |       | 779,284                           |       |
| Goodwill                                         |       | 875,443                        |       | 890,477                           |       |
| Total assets                                     |       | $                              | 3,545,582  |                              | $          | 3,760,577 |   |
|                                             |       |                           |       |                              |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**   |       |                           |       |                              |       |
| Current liabilities:                             |       |                           |       |                              |       |
| Accounts payable  and accrued expenses           |       | $                              | 429,112    |                              | $          | 516,875 |   |
| Income taxes  payable                            |       | —                         |       | 46,773                            |       |
| Current portion  of long-term debt               |       | 5,479                          |       | 107,059                           |       |
| Deferred revenue                                 |       | 17,048                         |       | 19,222                            |       |
| Total current  liabilities                       |       | 451,639                        |       | 689,929                           |       |
|                                             |       |                           |       |                              |       |
| Long-term debt                                   |       | 1,074,210                      |       | 1,124,145                         |       |
| Deferred revenue                                 |       | 57,209                         |       | 58,086                            |       |
| Other long-term  liabilities                     |       | 8,358                          |       | 4,169                             |       |
| Other taxes payable                              |       | 45,328                         |       | —                            |       |
| Deferred tax  liabilities                        |       | 194,962                        |       | 203,860                           |       |
| Total  liabilities                               |       | 1,831,706                      |       | 2,080,189                         |       |
|                                             |       |                           |       |                              |       |
| Commitments and  contingencies                   |       |                           |       |                              |       |
|                                             |       |                           |       |                              |       |
| Stockholders’ equity:                       |       |                           |       |                              |       |
| Preferred stock                                  |       | —                         |       | —                            |       |
| Common stock                                     |       | 369                            |       | 369                               |       |
| Additional paid-in  capital                      |       | 941,903                        |       | 937,308                           |       |
| Retained earnings                                |       | 1,070,317                      |       | 1,041,638                         |       |
| Accumulated other  comprehensive income          |       | 1,287                          |       | 1,073                             |       |
| Treasury stock, at cost                          |       | (300,000                       | )          | (300,000                          | )          |
| Total  stockholders’ equity                 |       | 1,713,876                      |       | 1,680,388                         |       |
| Total liabilities and  stockholders’ equity |       | $                              | 3,545,582  |                              | $          | 3,760,577 |   |

* *

*See accompanying Notes to Condensed ConsolidatedFinancial Statements.*

1

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**WATSONPHARMACEUTICALS, INC.CONDENSED CONSOLIDATED STATEMENTS OF INCOME(Unaudited; in thousands, except per share amounts)**
| ** **                                              | ** ** | **Three Months Ended  March 31, ** | ** ** |
|---------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                              | ** ** | **2007**                                               | ** ** | **2006** | ** ** |
| ** **                                              | ** ** | ** **                                             | ** ** | **Restated** | ** ** |
|                                                    |       |                                                   |       |   |   |
| Net revenues                                            |       | $                                                      | 671,605    |   | $ | 407,233 |   |
| Cost of sales  (excludes amortization, presented below) |       | 424,720                                                |       | 234,754 |   |
| Gross profit                                            |       | 246,885                                                |       | 172,479 |   |
|                                                    |       |                                                   |       |   |   |
| Operating  expenses:                                    |       |                                                   |       |   |   |
| Research and development                                |       | 37,808                                                 |       | 29,837 |   |
| Selling and marketing                                   |       | 55,163                                                 |       | 41,913 |   |
| General and administrative                              |       | 48,055                                                 |       | 24,837 |   |
| Amortization                                            |       | 43,933                                                 |       | 41,100 |   |
| Total operating expenses                                |       | 184,959                                                |       | 137,687 |   |
| Operating income                                        |       | 61,926                                                 |       | 34,792 |   |
|                                                    |       |                                                   |       |   |   |
| Other income  (expense):                                |       |                                                   |       |   |   |
| Loss on early extinguishment of debt                    |       | (2,729                                                 | )          | (720 | ) |
| Interest income                                         |       | 2,929                                                  |       | 6,252 |   |
| Interest expense                                        |       | (13,876                                                | )          | (3,301 | ) |
| Other income                                            |       | 3,403                                                  |       | 3,515 |   |
| Total other (expense) income, net                       |       | (10,273                                                | )          | 5,746 |   |
|                                                    |       |                                                   |       |   |   |
| Income before  income taxes                             |       | 51,653                                                 |       | 40,538 |   |
| Provision for  income taxes                             |       | 20,041                                                 |       | 15,364 |   |
| Net income                                              |       | $                                                      | 31,612     |   | $ | 25,174 |   |
|                                                    |       |                                                   |       |   |   |
|                                                    |       |                                                   |       |   |   |
| Earnings per  share:                                    |       |                                                   |       |   |   |
| Basic                                                   |       | $                                                      | 0.31       |   | $ | 0.25 |   |
| Diluted                                                 |       | $                                                      | 0.29       |   | $ | 0.23 |   |
|                                                    |       |                                                   |       |   |   |
| Weighted average  shares outstanding:                   |       |                                                   |       |   |   |
| Basic                                                   |       | 101,928                                                |       | 101,615 |   |
| Diluted                                                 |       | 116,612                                                |       | 116,541 |   |

* *

*See accompanying Notes to Condensed ConsolidatedFinancial Statements.*

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**WATSONPHARMACEUTICALS, INC.CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS****(Unaudited;in thousands)**

 
| ** **                                                           | ** ** | **Three Months Ended   March 31, ** | ** ** |
|----------------------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                                                           | ** ** | **2007**                                                     | ** ** | **2006** | ** ** |
| ** **                                                           | ** ** | ** **                                                   | ** ** | **Restated** | ** ** |
| **CASH  FLOWS FROM OPERATING ACTIVITIES:**                           |       |                                                         |       |   |   |
| Net income                                                           |       | $                                                            | 31,612     |   | $ | 25,174 |   |
| Reconciliation  to net cash provided by operating activities:        |       |                                                         |       |   |   |
| Depreciation                                                         |       | 18,029                                                       |       | 12,074 |   |
| Amortization                                                         |       | 43,933                                                       |       | 41,100 |   |
| Deferred income tax provision (benefit)                              |       | 250                                                          |       | (18,101 | ) |
| Provision for inventory reserve                                      |       | 11,427                                                       |       | 5,484 |   |
| Restricted stock and stock option compensation                       |       | 3,402                                                        |       | 2,850 |   |
| Losses (earnings) on equity method investments                       |       | (1,439                                                       | )          | 285 |   |
| Gain on sale of securities                                           |       | (1,789                                                       | )          | (3,695 | ) |
| Loss on early extinguishment of debt                                 |       | 2,729                                                        |       | 720 |   |
| Tax benefits from employee stock plans                               |       | 66                                                           |       | 185 |   |
| Mark to market on derivative                                         |       | 23                                                           |       | (453 | ) |
| Other                                                                |       | 369                                                          |       | (879 | ) |
| Changes in assets and liabilities (net of  acquisition of business): |       |                                                         |       |   |   |
| Accounts receivable, net                                             |       | 12,083                                                       |       | 64,440 |   |
| Inventories                                                          |       | 9,063                                                        |       | (23,698 | ) |
| Prepaid expenses and other current assets                            |       | 32,222                                                       |       | 1,698 |   |
| Accounts payable and accrued expenses                                |       | (83,596                                                      | )          | (4,524 | ) |
| Deferred revenue                                                     |       | (1,792                                                       | )          | (1,253 | ) |
| Income taxes payable                                                 |       | 10,319                                                       |       | 34,129 |   |
| Other assets                                                         |       | 1,328                                                        |       | 174 |   |
| Total adjustments                                                    |       | 56,627                                                       |       | 110,536 |   |
| Net cash provided by operating activities                            |       | 88,239                                                       |       | 135,710 |   |
|                                                                 |       |                                                         |       |   |   |
| **CASH  FLOWS FROM INVESTING ACTIVITIES:**                           |       |                                                         |       |   |   |
| Additions to  property and equipment                                 |       | (16,744                                                      | )          | (9,600 | ) |
| Acquisition of  product rights                                       |       | (153                                                         | )          | (165 | ) |
| Acquisition of  business, net of cash acquired                       |       | —                                                       |       | (29,578 | ) |
| Proceeds from  sale of marketable equity securities                  |       | 699                                                          |       | 893 |   |
| Proceeds from  sale of investments                                   |       | —                                                       |       | 4,695 |   |
| Additions to  marketable securities                                  |       | (1,099                                                       | )          | (898 | ) |
| Additions to  long-term investments                                  |       | (1,144                                                       | )          | (12,500 | ) |
| Other investing  activities, net                                     |       | 115                                                          |       | (16 | ) |
| Net cash used in investing activities                                |       | (18,326                                                      | )          | (47,169 | ) |
|                                                                 |       |                                                         |       |   |   |
| **CASH  FLOWS FROM FINANCING ACTIVITIES:**                           |       |                                                         |       |   |   |
| Payments on term  debt                                               |       | (151,661                                                     | )          | — |   |
| Principal  payments on acquisition liabilities                       |       | —                                                       |       | (3 | ) |
| Proceeds from  stock plans                                           |       | 1,127                                                        |       | 3,745 |   |
| Net cash (used in) provided by financing activities                  |       | (150,534                                                     | )          | 3,742 |   |
| Net (decrease) increase in cash and cash equivalents                 |       | (80,621                                                      | )          | 92,283 |   |
| Cash and cash  equivalents at beginning of period                    |       | 154,171                                                      |       | 467,451 |   |
| Cash and cash  equivalents at end of period                          |       | $                                                            | 73,550     |   | $ | 559,734 |   |

* *

*See accompanying Notes toCondensed Consolidated Financial Statements.*

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**WATSON PHARMACEUTICALS, INC.****NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

**NOTE 1 — GENERAL**

Watson Pharmaceuticals, Inc. (“Watson” or the “Company”)is primarily engaged in the development, manufacture, marketing, sale anddistribution of brand and off-patent (generic) pharmaceutical products.  Watson was incorporated in 1985 and beganoperations as a manufacturer and marketer of off-patent pharmaceuticals.  Through internal product development andsynergistic acquisitions of products and businesses, the Company has grown intoa diversified specialty pharmaceutical company. Watson operates manufacturing, distribution, research and developmentand administrative facilities primarily in the United States of America (“U.S.”).

The accompanying Condensed Consolidated FinancialStatements should be read in conjunction with the Company’s Annual Report onForm 10-K for the year ended December 31, 2006.  Certain information and footnote disclosuresnormally included in annual financial statements prepared in accordance withgenerally accepted accounting principles have been condensed or omitted fromthe accompanying Condensed Consolidated Financial Statements.  The year end balance sheet was derived fromthe audited financial statements.  Theaccompanying interim financial statements are unaudited, but reflect alladjustments which are, in the opinion of management, necessary to presentfairly Watson’s consolidated financial position, results of operations and cashflows for the periods presented.  Unlessotherwise noted, all such adjustments are of a normal, recurring nature.  Certain reclassifications, none of whichaffected net income or retained earnings, have been made to prior periodamounts to conform to current period presentation.  The Company’s results of operations and cashflows for the interim periods are not necessarily indicative of the results ofoperations and cash flows that it may achieve in future periods or for the fullyear.

*Merger Agreement with Andrx Corporation*

OnNovember 3, 2006, the Company acquired all the outstanding shares of commonstock of Andrx Corporation (“Andrx”) in an all-cash transaction for $25 pershare, or total consideration of approximately $1.9 billion (the “AndrxAcquisition”).  Andrx distributespharmaceutical products primarily to independent and chain pharmacies andphysicians’ offices and is considered a leader in formulating andcommercializing difficult-to-replicate controlled-release pharmaceuticalproducts and selective immediate-release products.  As a result of the Andrx Acquisition, Watsonnow has three operating segments: Generic, Brand and Distribution.

Prior to the Andrx Acquisition the Company held common shares in Andrx,which were previously classified as available-for-sale securities and recordedat fair value based upon quoted market prices with temporary differencesbetween cost and fair value presented as accumulated other comprehensive incomewithin stockholders’ equity, net of any related tax effect.  As required by Accounting Research Bulletin (“ARB”)No. 51, “Consolidated Financial Statements” (“ARB 51”), earnings (loss) onequity method investments has been restated for the three months endedMarch 31, 2006 to account forour investment in common shares of Andrx prior to the Andrx Acquisition usingthe equity method of accounting in accordance with Accounting Principles Board(“APB”) Opinion No. 18, “The Equity Method of Accounting for Investments inCommon Stock” (“APB 18”).  Accumulatedother comprehensive income has also been restated for the three monthsended March 31, 2006 to reflect thesechanges.

*Comprehensive Income*

Comprehensive income includes all changes in equityduring a period except those that resulted from investments by or distributionsto the Company’s stockholders.  Othercomprehensive income refers to revenues, expenses, gains and losses that, undergenerally accepted accounting principles, are included in comprehensive 

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income, but excluded from net income as these amounts are recordeddirectly as an adjustment to stockholders’ equity.  Watson’s other comprehensive income iscomprised of unrealized (losses) gains on its holdings of publicly traded debtand equity securities, net of realized (losses) gains included in net income andforeign currency translation adjustments. The components of comprehensive income including attributable incometaxes consisted of the following (in thousands):

 
| ** **                                      | ** ** | **Three Months Ended March 31,**          | ** ** |
|-------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                      | ** ** | **2007**                                                      | ** ** | **2006** | ** ** |
| ** **                                      | ** ** | ** **                                                    | ** ** | **Restated** | ** ** |
| Net income                                      |       | $         31,612 |       | $         25,174 |   |
|                                            |       |                                                          |       |   |   |
| Other  comprehensive income:                    |       |                                                          |       |   |   |
| Unrealized (loss) gain on securities            |       | (10                                                           | )          | 1,125 |   |
| Less related income taxes                       |       | 4                                                             |       | (426 | ) |
| Total unrealized (loss) gain on securities, net |       | (6                                                            | )          | 699 |   |
|                                            |       |                                                          |       |   |   |
| Translation gains                               |       | 218                                                           |       | 165 |   |
| Total other  comprehensive income               |       | 212                                                           |       | 864 |   |
| Total comprehensive  income                     |       | $         31,824 |       | $         26,038 |   |

 

*Preferred and Common Stock*

As of March 31,2007 and December 31, 2006, 2,500,000 shares of no par value per sharepreferred stock were authorized, with none issued.  As of March 31, 2007 and December 31, 2006,500,000,000 shares of $0.0033 par value per share common stock were authorized,with 111,901,000 and 111,867,000 shares issued and 102,502,000 and 102,467,000outstanding, respectively.  Of the issuedshares, 9,399,800 shares were held as treasury shares as of March 31, 2007 andDecember 31, 2006, respectively.

On February 15, 2006, the Company’s Board of Directors authorized theexpenditure of $300.0 million to repurchase shares of the Company’s outstandingcommon stock (the “2006 Repurchase Program”). No common stock was repurchased under the 2006 Repurchase Program whichexpired on February 15, 2007.

*Provisions for Sales Returns andAllowances*

As customary in thepharmaceutical industry, the Company’s gross product sales are subject to avariety of deductions in arriving at reported net product sales.  When the Company recognizes revenue from thesale of its products, an estimate of sales returns and allowances (“SRA”) isrecorded which reduces product sales and accounts receivable. These adjustmentsinclude estimates for chargebacks, rebates, cash discounts and returns andother allowances.  These provisions are estimated based onhistorical payment experience, historical relationship to revenues, estimatedcustomer inventory levels and current contract sales terms with direct andindirect customers.  The estimationprocess used to determine our SRA provision has been applied on a consistentbasis and no material adjustments have been necessary to increase or decreaseour reserves for SRA as a result of a significant change in underlyingestimates.  The Company uses a variety of methods to assessthe adequacy of our SRA reserves to ensure that our financial statements arefairly stated.  This includes periodicreviews of customer inventory data, customer contract programs and productpricing trends to analyze and validate the SRA reserves.

The provision forchargebacks is our most significant sales allowance.  A chargeback represents an amount payable inthe future to a wholesaler for the difference between the invoice price paid tothe Company by our wholesale customer for a particular product and thenegotiated contract price that the wholesaler’s customer pays for thatproduct.  The Company’s chargebackprovision and related reserve vary with changes in product mix, changes incustomer pricing and changes to estimated wholesaler inventory.  The provision for chargebacks 

5

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also takes into account an estimate of theexpected wholesaler sell-through levels to indirect customers at contractprices.  The Company validates thechargeback accrual quarterly through a review of the inventory reports obtainedfrom our largest wholesale customers. This customer inventory information is used to verify the estimatedliability for future chargeback claims based on historical chargeback andcontract rates.  These large wholesalersrepresent 85% - 90% of the Company’s chargeback payments.  The Company continually monitors currentpricing trends and wholesaler inventory levels to ensure the liability forfuture chargebacks is fairly stated.  The following table summarizes the activityin the Company’s major categories of SRA (in thousands):
| ** **                                                   | ** ** | **Chargebacks**                  | ** ** | **Rebates**                      | ** ** | **Returns and  Other  Allowances**     | ** ** | **Cash  Discounts**                         | ** ** | **Total**                        | ** ** |
|--------------------------------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|---------------------------------------------|------------|---------------------------------------------|------------|----------------------------------|------------|
|                                                         |       |                             |       |                             |       |                                        |       |                                        |       |                             |       |
| Balance at  December 31, 2005                                |       | $    139,605 |       | $    128,293 |       | $      45,293 |       | $      12,094 |       | $    325,285 |       |
| First quarter 2006 provision                                 |       | 255,933                          |       | 90,199                           |       | 38,771                                      |       | 15,479                                      |       | 400,382                          |       |
| Credits and payments                                         |       | (258,087                         | )          | (110,058                         | )          | (46,868                                     | )          | (16,058                                     | )          | (431,071                         | )          |
| Balance at March  31, 2006                                   |       | 137,451                          |       | 108,434                          |       | 37,196                                      |       | 11,515                                      |       | 294,596                          |       |
| Add: Andrx opening balances                                  |       | 15,911                           |       | 27,667                           |       | 8,992                                       |       | 1,601                                       |       | 54,171                           |       |
| Provision related to three quarters ended December  31, 2006 |       | 934,521                          |       | 331,201                          |       | 134,438                                     |       | 55,206                                      |       | 1,455,366                        |       |
| Credits and payments                                         |       | (923,403                         | )          | (286,764                         | )          | (138,137                                    | )          | (54,250                                     | )          | (1,402,554                       | )          |
| Balance at  December 31, 2006                                |       | 164,480                          |       | 180,538                          |       | 42,489                                      |       | 14,072                                      |       | 401,579                          |       |
| First quarter 2007 provision                                 |       | 291,831                          |       | 122,766                          |       | 56,133                                      |       | 18,436                                      |       | 489,166                          |       |
| Credits and payments                                         |       | (321,751                         | )          | (124,215                         | )          | (33,960                                     | )          | (16,894                                     | )          | (496,820                         | )          |
| Balance at March 31,  2007                                   |       | $    134,560 |       | $    179,089 |       | $      64,662 |       | $      15,614 |       | $    393,925 |       |

* *

*Earnings Per Share*

Basic earnings per share is computed by dividing netincome by the weighted average common shares outstanding during a period.  Diluted earnings per share is based on thetreasury stock method and includes the effect from potential issuance of commonstock, such as shares issuable upon conversion of the $575 million convertiblecontingent senior debentures (“CODES”), and the dilutive effect of stockoptions and restricted stock awards outstanding during the period.  Common share equivalents have been excludedwhere their inclusion would be anti-dilutive. In accordance with Emerging Issues Task Force (“EITF”) Issue No. 04-8, “TheEffect of Contingently Convertible Debt on Diluted Earnings per Share,” theCompany is required to add approximately 14.4 million shares associated withthe conversion of the CODES to the number of shares outstanding for thecalculation of diluted earnings per share for all periods in which thesecurities were outstanding.  Areconciliation of the numerators and denominators of basic and diluted earningsper share consisted of the following (in thousands, except per share amounts):
| ** **                                         | ** ** | **Three months ended   March 31, ** | ** ** |
|----------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                                         | ** ** | **2007**                                                     | ** ** | **2006** | ** ** |
| ** **                                         | ** ** | ** **                                                   | ** ** | **Restated** | ** ** |
|                                               |       |                                                         |       |   |   |
| **Earnings  per share - basic**                    |       |                                                         |       |   |   |
| Net income                                         |       | $ 31,612                                                |       | $ 25,174 |   |
|                                               |       |                                                         |       |   |   |
| Basic weighted average common shares outstanding   |       | 101,928                                                      |       | 101,615 |   |
|                                               |       |                                                         |       |   |   |
| Earnings per share - basic                         |       | $     0.31                          |       | $     0.25 |   |
|                                               |       |                                                         |       |   |   |
| **Earnings  per share - assuming dilution**        |       |                                                         |       |   |   |
| Net income                                         |       | $ 31,612                                                |       | $ 25,174 |   |
| Add: Interest expense on CODES, net of tax         |       | 1,943                                                        |       | 1,675 |   |
| Net income, adjusted                               |       | $ 33,555                                                |       | $ 26,849 |   |
|                                               |       |                                                         |       |   |   |
| Basic weighted average common shares outstanding   |       | 101,928                                                      |       | 101,615 |   |
| Effect of dilutive securities:                     |       |                                                         |       |   |   |
| Conversion of CODES                                |       | 14,357                                                       |       | 14,357 |   |
| Dilutive stock options                             |       | 327                                                          |       | 569 |   |
| Diluted weighted average common shares outstanding |       | 116,612                                                      |       | 116,541 |   |
|                                               |       |                                                         |       |   |   |
| Earnings per  share - diluted                      |       | $     0.29                          |       | $     0.23 |   |

 

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Stock awards to purchase 10.1 million and 7.9 millioncommon shares for the three month periods ended March 31, 2007 and 2006,respectively, were outstanding but were not included in the computation ofdiluted earnings per share because the options were antidilutive.

*Recent Accounting Pronouncements*

InJuly 2006, the Financial Accounting Standards Board (“FASB”) issuedInterpretation No. 48, “Accounting for Uncertainty in Income Taxes — AnInterpretation of FASB Statement No. 109” (“FIN 48”).  FIN 48 clarifies the accounting for theuncertainty in recognizing income taxes in an organization in accordance withFASB Statement No. 109 by providing detailed guidance for financial statementrecognition, measurement and disclosure involving uncertain tax positions.  FIN 48 requires an uncertain tax position tomeet a more-likely-than-not recognition threshold at the effective date to berecognized both upon the adoption of FIN 48 and in subsequent periods.  FIN 48 is effective for fiscal yearsbeginning after December 15, 2006.  Asthe provisions of FIN 48 will be applied to all tax positions upon initialadoption, the cumulative effect of applying the provisions of FIN 48 will bereported as an adjustment to the opening balance of retained earnings for thatfiscal year.  As a result of the adoptionof FIN 48, the Company recorded a $2.9 million increase in the liability forunrecognized tax benefits resulting in a decrease to the January 1, 2007retained earnings balance of $2.9 million (for additional information on theadoption of FIN 48, see NOTE 9 — INCOME TAXES).

InSeptember 2006, the FASB issued Statement of Financial Accounting Standards(“SFAS”) No. 157, “Fair-Value Measurements” (“SFAS 157”) which defines fairvalue, establishes a framework for measuring fair value in generally acceptedaccounting principles and expands disclosures about fair-value measurements.SFAS 157 is effective for financial statements issued for fiscal yearsbeginning after November 15, 2007. The Company is currently reviewing thisstatement and has not yet determined the impact on its consolidated financialstatements.

**NOTE 2 —SHARE-BASED COMPENSATION**

Effective January1, 2006, the Company adopted the modified prospective method of SFAS No. 123 (revised 2004), “Share-BasedPayment” (“SFAS 123R”) which requires the measurement and recognition ofcompensation expense for all share-based compensation awards made to employeesand directors based on estimated fair values.

7

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*Stock Option Plans*

As a result of adopting SFAS123R, the Company’s operating income and income before income tax provision wasreduced by $1.8 million and net income was reduced by $1.1 million ($0.01 perbasic share, $0.01 per diluted share) for the three months ended March 31,2007, related to the Company’s employee stock option plans.  For the three months ended March 31, 2006,the Company’s operating income and income before income tax provision wasreduced by $1.8 million and net income was reduced by $1.1 million ($0.02 perbasic share, $0.01 per diluted share), related to the Company’s employee stockoption plans.  Total stock option costcapitalized as part of inventory was $0.5 million and $0.3 for three monthsended March 31, 2007 and 2006, respectively.

A summary of the changes inthe Company’s stock option plans during the three months ended March 31, 2007is presented below (in thousands, except per share amounts):

|                                                      | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise  Price**                 | ** ** | **Weighted  Average  Remaining  Contractual  Term (Years)** | ** ** | **Aggregate  Intrinsic  Value**                                        | ** ** |
|------------------------------------------------------|------------|------------|------------|--------------------------------------------------------|------------|------------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|
|                                                 |       |       |       |                                                   |       |                                                             |       |                                                                   |       |
| Outstanding at  December 31, 2006                    |       | 10,985     |       | $        36.39 |       |                                                             |       |                                                                   |       |
| Granted                                              |       | 37         |       | 28.07                                                  |       |                                                             |       |                                                                   |       |
| Exercised                                            |       | (48        | )          | 23.40                                                  |       |                                                             |       |                                                                   |       |
| Cancelled                                            |       | (405       | )          | 33.94                                                  |       |                                                             |       |                                                                   |       |
| Outstanding at  March 31, 2007                       |       | 10,569     |       | $        36.51 |       | 5.3                                                              |       | $        1,650                 |       |
|                                                 |       |       |       |                                                   |       |                                                             |       |                                                                   |       |
| Vested and  expected to vest at  March 31, 2007 |       | 9,991      |       | $        36.96 |       | 5.1                                                              |       | $        1,489                 |       |
|                                                 |       |       |       |                                                   |       |                                                             |       |                                                                   |       |
| Options exercisable at  March 31, 2007               |       | 8,078      |       | $        38.94 |       | 4.5                                                              |       | $           941 |       |

 

As of March 31, 2007, theCompany had $8.3 million of total unrecognized compensation expense, net ofestimated forfeitures, related to stock option grants, which will be recognizedover the remaining weighted average period of 1.5 years.  Total intrinsic value of stock optionsexercised for the three months ended March 31, 2007 and 2006 was $0.2 millionand $0.3 million, respectively.

*Restricted Stock*

The Company’s operatingincome and income before income tax provision was reduced by $1.3 million andnet income was reduced by $0.8 million ($0.01 per basic share, $0.01 perdiluted share) for the three months ended March 31, 2007, related to theCompany’s restricted stock plans.  Forthe three months ended March 31, 2006, the Company’s operating income andincome before income tax provision was reduced by $0.5 million and net incomewas reduced by $0.3 million ($0.00 per basic share, $0.00 per diluted share)related to the Company’s restricted stock plans.  Total restricted stock cost capitalized aspart of inventory was $0.5 million and $0.2 million for three months endedMarch 31, 2007 and 2006, respectively.

8

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A summary of the changes inrestricted stock grants during the three months ended March 31, 2007 ispresented below (in thousands, except per share amounts):

|                                                     | ** ** | **Shares** | ** ** | **Weighted  Average  Grant Date  Fair Value** | ** ** | **Weighted  Average  Remaining  Contractual  Term (Years)** | ** ** | **Aggregate  Intrinsic  Value**             | ** ** |
|-----------------------------------------------------|------------|------------|------------|---------------------------------------------------------|------------|------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                          | ** ** | ** ** | ** ** | ** **                                              | ** ** | ** **                                                       | ** ** | ** **                                  | ** ** |
| Restricted  shares outstanding at December 31, 2006 |       | 568.8      |       | $        30.26  |       | 1.9                                                              |       | $      17,211 |       |
| Granted                                             |       | 12.4       |       | 28.07                                                   |       |                                                             |       | 349                                         |       |
| Vested                                              |       | —     |       | —                                                  |       |                                                             |       | —                                      |       |
| Cancelled                                           |       | (26.3      | )          | 31.60                                                   |       |                                                             |       | (831                                        | )          |
| Restricted  shares outstanding at March 31, 2007    |       | 554.9      |       | $        30.15  |       | 1.7                                                              |       | $      16,729 |       |

 

As of March 31, 2007, theCompany had $6.4 million of total unrecognized compensation expense, net ofestimated forfeitures, related to restricted stock grants, which will berecognized over the remaining weighted average period of 1.7 years.

**NOTE 3 —ACQUISITIONS**

*Acquisition of Andrx Corporation*

On November 3, 2006, the Company acquired all the outstanding shares ofcommon stock of Andrx in an all-cash transaction for $25 per share, or total considerationof approximately $1.9 billion.  Andrx,whose capabilities both augment and complement those of Watson, distributespharmaceutical products primarily to independent and chain pharmacies andphysicians’ offices and is considered a leader in formulating andcommercializing difficult-to-replicate controlled-release pharmaceuticalproducts and selective immediate-release products.  As a result of the Andrx Acquisition, Watsonnow has three operating segments: Generic, Brand and Distribution.

 

 

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*Acquisition of SekhsariaChemicals Ltd.*

On March 16, 2006, theCompany acquired Sekhsaria Chemicals Ltd. (“Sekhsaria”), a private companylocated in Mumbai, India that provides active pharmaceutical ingredient andfinished dosage formulation expertise to the global pharmaceuticalindustry.  The Company acquired all theoutstanding shares of Sekhsaria for approximately $29.5 million plusacquisition costs.  The transaction wasaccounted for as a purchase in accordance with SFAS No. 141 and accordingly,the tangible assets acquired were recorded at fair value on acquisition datebased on reasonable assumptions.

The results of operations ofSekhsaria have been included in the Company’s Condensed Consolidated FinancialStatements subsequent to the date of acquisition.

*Additional Investment in Scinopharm*

The Company holds an equityinterest in Scinopharm Taiwan Ltd. (“Scinopharm”).  In January 2006, we made an additionalinvestment in Scinopharm of approximately $12.0 million which increased ourownership share to approximately 31%. Additionally, we have an option, which expires in October 2007, toacquire an additional 44% interest in Scinopharm at a cost of approximately $80million.

**NOTE 4 —OTHER INCOME (EXPENSE)**

Other income(expense) consisted of the following (inthousands):

 
| ** **                                                 | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                 | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
|                                                       |       |                                             |       |   |   |
| Earnings  (losses) on equity method investments - restated |       | $                                           | 1,439      |   | $  | (285 | ) |
| Gain on sale of  securities                                |       | 1,789                                            |       | 3,695 |   |
| Other income                                               |       | 175                                              |       | 105 |   |
|                                                       |       | $                                                | 3,403      |   | $ | 3,515 |   |

 

**NOTE 5 —OPERATING SEGMENTS**

Watson has three reportable operating segments: Generic, Brand andDistribution.  The Generic segmentincludes off-patent pharmaceutical products that are therapeutically equivalentto proprietary products.  The Brandsegment includes the Company’s lines of Specialty Products and Nephrologyproducts. Watson has aggregated its Brand product lines in a single segmentbecause of similarities in regulatory environment, methods of distribution andtypes of customer.  This segment includespatent-protected products and certain trademarked off-patent products thatWatson sells and markets as Brand pharmaceutical products.  The Company sells its Brand and Genericproducts primarily to pharmaceutical wholesalers, drug distributors and chaindrug stores in the U.S.  Following theAndrx Acquisition, a third operating segment was added representing the Andadistribution business.  The Distributionsegment mainly distributes generic pharmaceutical products manufactured bythird parties, as well as by Watson, primarily to independent pharmacies, pharmacychains, pharmacy buying groups and physicians’ offices in the U.S.  Sales are principally generated through anin-house telemarketing staff and through internally developed orderingsystems.  The Distribution segmentoperating results are included in Watson results since the date of the AndrxAcquisition and exclude sales by Anda of Watson Generic and Brand products,which are included in their respective segment results.

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The “other”revenue classification for the three month period ended March 31, 2007 and 2006consists primarily of royalties and revenues from research, development andlicensing fees.  For the three month period ended March31, 2007, the “other” classificationwithin the Generic segment includes commission revenue earned as a sales agent,from the sale of fentanyl citrate troche. Also for the three month period ended March 31, 2007, the “other” classification within the Brandsegment includes deferred revenue related to certain contract manufacturingarrangements as a result of the Andrx Acquisition.  Net revenues and segment contributioninformation for the Company’s Generic, Brand and Distribution segments,consisted of the following:

 
| ** **                  | ** ** | **Three Months Ended March 31, 2007** | ** ** | **Three Months Ended March 31, 2006** | ** ** |
|-----------------------------|------------|----------------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                  | ** ** | **Generic**                                                    | ** ** | **Brand**                                                      | ** ** | **Distribution** | ** ** | **Total** | ** ** | **Generic** | ** ** | **Brand** | ** ** | **Total** | ** ** |
|                        |       |                                                           |       |                                                           |       |   |   |   |   |   |   |   |   |   |   |
| Product sales               |       | $                                                              | 411,475    |                                                           | $          | 90,638 |   | $ | 145,440 |   | $ | 647,553 |   | $ | 321,415 |   | $ | 83,237 |   | $ | 404,652 |   |
| Other                       |       | 13,150                                                         |       | 10,902                                                         |       | — |   | 24,052 |   | 675 |   | 1,906 |   | 2,581 |   |
|                        |       |                                                           |       |                                                           |       |   |   |   |   |   |   |   |   |   |   |
| Net revenues                |       | 424,625                                                        |       | 101,540                                                        |       | 145,440 |   | 671,605 |   | 322,090 |   | 85,143 |   | 407,233 |   |
| Cost of sales (1)           |       | 272,623                                                        |       | 25,215                                                         |       | 126,882 |   | 424,720 |   | 217,384 |   | 17,370 |   | 234,754 |   |
| Gross profit                |       | 152,002                                                        |       | 76,325                                                         |       | 18,558 |   | 246,885 |   | 104,706 |   | 67,773 |   | 172,479 |   |
| Gross margin                |       | 36                                                             | %          | 75                                                             | %          | 13 | % | 37 | % | 33 | % | 80 | % | 42 | % |
|                        |       |                                                           |       |                                                           |       |   |   |   |   |   |   |   |   |   |   |
| Research and  development   |       | 26,513                                                         |       | 11,295                                                         |       | — |   | 37,808 |   | 20,495 |   | 9,342 |   | 29,837 |   |
| Selling and marketing       |       | 14,549                                                         |       | 26,411                                                         |       | 14,203 |   | 55,163 |   | 12,938 |   | 28,975 |   | 41,913 |   |
| Contribution                |       | 110,940                                                        |       | 38,619                                                         |       | 4,355 |   | 153,914 |   | 71,273 |   | 29,456 |   | 100,729 |   |
| Contibution  margin         |       | 26                                                             | %          | 38                                                             | %          | 3 | % | 23 | % | 22 | % | 35 | % | 25 | % |
|                        |       |                                                           |       |                                                           |       |   |   |   |   |   |   |   |   |   |   |
| General and  administrative |       |                                                           |       |                                                           |       |   |   | 48,055 |   |   |   |   |   | 24,837 |   |
| Amortization                |       |                                                           |       |                                                           |       |   |   | 43,933 |   |   |   |   |   | 41,100 |   |
| Operating income            |       |                                                           |       |                                                           |       |   |   | $ | 61,926 |   |   |   |   |   | $ | 34,792 |   |
| Operating margin            |       |                                                           |       |                                                           |       |   |   | 9 | % |   |   |   |   | 9 | % |
|                             |            |                                                                |            |                                                                |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

----

(1)  Excludes amortization of acquired intangiblesincluding product rights.

**NOTE 6 — INVENTORIES**

Inventories consist offinished goods held for sale and distribution, raw materials andwork-in-process. Included in inventory at March 31, 2007 and December 31, 2006is approximately $35.7 and $34.2 million, respectively, of inventory that ispending approval by the U.S. Food and Drug Administration (“FDA”) or has notbeen launched due to contractual restrictions. This inventory consists of generic pharmaceutical products that arecapitalized only when the bioequivalence of the product is demonstrated or theproduct is already FDA approved and is awaiting a contractual triggering eventto enter the marketplace.

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Inventories are stated atthe lower of cost (first-in, first-out method) or market (net realizable value)and consisted of the following (inthousands):

|               | ** ** | **March 31,  2007 ** | ** ** | **December 31,  2006 ** | ** ** |
|--------------------|------------|--------------------------------|------------|-----------------------------------|------------|
|               |       |                           |       |                              |       |
| Raw materials      |       | $                              | 105,448    |                              | $          | 113,603 |   |
| Work-in-process    |       | 80,700                         |       | 69,621                            |       |
| Finished goods     |       | 306,197                        |       | 334,012                           |       |
| Total  inventories |       | $                              | 492,345    |                              | $          | 517,236 |   |

 

**NOTE 7 — GOODWILL**

Changesin our goodwill balances for the three months ended March 31, 2007 were asfollows (in thousands):

 
|                             | ** ** | **December 31, 2006** | ** ** | **Goodwill Adjustment** | ** ** | **Foreign Currency Translation** | ** ** | **March 31, 2007** | ** ** |
|----------------------------------|------------|----------------------------|------------|-------------------------|------------|---------------------------------------|------------|-------------------------|------------|
|                             | ** ** | ** **                 | ** ** | ** **              | ** ** | ** **                            | ** ** | ** **              | ** ** |
| Brand pharmaceutical  products   |       | $                          | 368,105    |                    | $          | (1,800                                | )          | $                       | —     |   | $ | 366,305 |   |
| Generic pharmaceutical  products |       | 433,774                    |       | (10,347                 | )          | (92                                   | )          | 423,335                 |       |
| Distributed products             |       | 88,598                     |       | (2,795                  | )          | —                                |       | 85,803                  |       |
| Total goodwill                   |       | $                          | 890,477    |                    | $          | (14,942                               | )          | $                       | (92        | ) | $ | 875,443 |   |

 

The $14.9 million decrease in goodwill primarily relates to an adjustment to acquiredincome tax contingencies.

**NOTE 8 — LONG-TERM DEBT**

Long-termdebt consisted of the following (in thousands):

|                                                                                                        | ** ** | **March 31,  2007 ** | ** ** | **December 31,  2006 ** | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|-----------------------------------|------------|
|                                                                                                        | ** ** | ** **                     | ** ** | ** **                        | ** ** |
| Senior Credit  Facility, due 2011, bearing interest at LIBOR plus 0.75% (“2006 Credit  Facility”) |       | $                         | 500,000    |                              | $     | 650,000 |   |
| CODES, face  amount of $575 million, due 2023, net of unamortized discount                                  |       | 574,194                        |       | 574,125                           |       |
| Other notes  payable                                                                                        |       | 5,495                          |       | 7,079                             |       |
|                                                                                                        |       | 1,079,689                      |       | 1,231,204                         |       |
| Less: Current  portion                                                                                      |       | 5,479                          |       | 107,059                           |       |
| Total long-term debt                                                                                        |       | $                              | 1,074,210  |                              | $          | 1,124,145 |   |

 

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*Senior Credit Facility*

During the quarter ended March 31, 2007, the Company prepaid $150million of the amount outstanding under the Term Facility.  As a result of this pre-payment, our resultsfor the first quarter of 2007 reflect a $2.7 million non-cash charge for debtrepurchase charges.  As of March 31,2007, $500 million is outstanding under the Term Facility.

**NOTE 9 — INCOME TAXES**

On January 1, 2007, the Company adopted the provisions of FIN 48.  Differences between the amount recognized inthe consolidated financial statements prior to the adoption of FIN 48 and theamounts reported as a result of adoption have been accounted for as acumulative effect adjustment recorded to the January 1, 2007 retained earningsbalance.  The adoption of FIN 48 decreasedthe January 1, 2007, balance of retained earnings by $2.9 million. In addition,the Company reclassified tax reserves for which a cash tax payment is notexpected in the next twelve months from current to non-current liabilities.

As of the adoption date, the liability for income tax associated withuncertain tax positions was $69.2 million. This amount is reduced for timing differences and amounts primarilyarising from business combinations which, if recognized, would be recorded togoodwill.  The net amount of $32.5million, if recognized, would favorably affect the Company’s effective taxrate.

As of March 31, 2007, the liability for income tax associated withuncertain tax positions was $46.7 million. This amount is reduced for timing differences and amounts primarilyarising from business combinations which, if recognized, would be recorded togoodwill.  The net amount of $29.3million, if recognized, would favorably affect the Company’s effective taxrate.

The Company’s continuingpractice is to recognize interest and penalties related to uncertain taxpositions in tax expense.  At adoption,the Company had accrued $6.5 million of interest and penalties (net of taxbenefit) related to uncertain tax positions and, as of March 31, 2007, the Companyhad accrued $5.4 million of interest and penalties (net of tax benefit) relatedto uncertain tax positions.

We conduct business globally and, as a result, the company or one ormore of our subsidiaries files income tax returns in the U.S. federal jurisdictionand various state and foreign jurisdictions. In the normal course of 

13

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businesswe are subject to examination by taxing authorities.  With few exceptions, we are no longer subjectto U.S. federal, state and local, or non-U.S. income tax examinations for yearsbefore 2000. While it is often difficult to predict the final outcome or thetiming of resolution of any particular uncertain tax position, we believe ourreserves for income taxes represent the most probable outcome.  We adjust these reserves, as well as therelated interest, in light of changing facts and circumstance.

The Company anticipates that the total amount of liability forunrecognized tax benefits may change due to the settlement of audits and theexpiration of statute of limitations in the next 12 months.  In the first quarter of 2007, the Companypaid $4.8 million (net of tax benefit) in settlement of uncertain tax benefitsand accrued interest and penalties.

**NOTE 10 — STOCKHOLDERS’ EQUITY**

A summary of the changes in stockholders’ equity for thethree months ended March 31, 2007 consisted of the following (in thousands):

| Stockholders’ equity,  December 31, 2006                                              |   | $         | 1,680,388 |   |
|--------------------------------------------------------------------------------------------|--------|-----------|-----------|--------|
| Adoption of FIN  48                                                                        |   | (2,931    | )         |
|                                                                                       |   | 1,677,457 |      |
| Common stock  issued under employee plans                                                  |   | 1,127     |      |
| Increase in  additional paid-in capital for restricted stock and stock option compensation |   | 3,402     |      |
| Net income                                                                                 |   | 31,612    |      |
| Comprehensive  income                                                                      |   | 212       |      |
| Other                                                                                      |   | 66        |      |
|                                                                                       |   |      |      |
| Stockholders’ equity,  March 31, 2007                                                 |   | $         | 1,713,876 |   |

 

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**NOTE 11 — CONTINGENCIES**

*Legal Matters*

*Phen-fen litigation.  *Beginning in late 1997, a number of productliability suits were filed against Watson, The Rugby Group (“Rugby”) andcertain other Watson affiliates, as well as numerous other manufacturingdefendants, for personal injuries allegedly arising out of the use ofphentermine hydrochloride. The plaintiffs allege various injuries, ranging fromminor injuries and anxiety to heart damage and death. As of May 4, 2007,approximately 27 cases, with a total of approximately 187 plaintiffs, werepending against Watson and its affiliates in numerous state and federal courts.Most of the cases involve multiple plaintiffs, and several were filed orcertified as class actions. The Company believes it will be fully indemnifiedby Rugby’s former owner, Aventis Pharmaceuticals (“Aventis”, formerly known asHoechst Marion Roussel, Inc., and now known as Sanofi Aventis) for thedefense of all such cases and for any liability that may arise out of thesecases. Aventis is currently controlling the defense of all these matters as theindemnifying party under its agreements with the Company. Additionally, Watsonmay have recourse against the manufacturing defendants in these cases.

*Cipro® Litigation.  *Beginning in July 2000, a number ofsuits were filed against Watson, Rugby and other company affiliates in variousstate and federal courts alleging claims under various federal and statecompetition and consumer protection laws. Several plaintiffs have filed amendedcomplaints and motions seeking class certification. As of March 8, 2006,approximately 42 cases had been filed against Watson, Rugby and other Watsonentities. Twenty-two of these actions have been consolidated in the U.S.District Court for the Eastern District of New York (*In re: Ciprofloxacin Hydrochloride Antitrust Litigation,MDL Docket No. 001383* ). On May 20, 2003, the courthearing the consolidated action granted Watson’s motion to dismiss and maderulings limiting the theories under which plaintiffs can seek recovery againstRugby and the other defendants. On March 31, 2005, the court hearing theconsolidated action granted summary judgment in favor of the defendants on allof plaintiffs’ claims, denied the plaintiffs’ motions for class certification,and directed the clerk of the court to close the case. On May 7, 2005,three groups of plaintiffs from the consolidated action (the direct purchaserplaintiffs, the indirect purchaser plaintiff purchasers and plaintiffs Rite Aidand CVS) filed notices of appeal in the United States Court of Appeals for theSecond Circuit, appealing, among other things, the May 20, 2003 order dismissingWatson and the March 31, 2005 order granting summary judgment in favor ofthe defendants. The three appeals were consolidated by the appellate court. Thedefendants have moved to transfer the appeal to the United States Court ofAppeals for the Federal Circuit on the ground that patent issues are involvedin the appeal. The plaintiffs have opposed the motion to transfer. As ofFebruary 26, 2007, the appellate court had not ruled on the motion or thepending appeal. Other actions are pending in various state courts, includingNew York, California, Kansas, Tennessee, Florida and Wisconsin. The actionsgenerally allege that the defendants engaged in unlawful, anticompetitiveconduct in connection with alleged agreements, entered into prior to Watson’sacquisition of Rugby from Aventis, related to the development, manufacture andsale of the drug substance ciprofloxacin hydrochloride, the generic version ofBayer’s brand drug, Cipro® . The actions generally seek declaratory judgment,damages, injunctive relief, restitution and other relief on behalf of certainpurported classes of individuals and other entities. The courts hearing thecases in New York have dismissed the actions. Plaintiffs have sought leave toappeal the dismissal of the New York action. In Wisconsin, the plaintiffsappealed and on May 9, 2006, the appellate court reversed the order ofdismissal. On June 8, 2006, the defendants filed a petition for review inthe Wisconsin Supreme Court. On July 26, 2006, the Wisconsin Supreme Courtgranted the petition for review. The Court heard oral argument on the petitionon December 12, 2006. As of Feburary 26, 2007, the Court had not ruled onthe petition. In the action pending in Kansas, the court has stayed the matterpending the outcome of the appeal in the consolidated case. In the actionpending in the California Superior Court for the County of San Diego (*In re: Cipro Cases I & II, JCCP ProceedingNos. 4154 & 4220* ), on July 21, 2004, the CaliforniaCourt of Appeal granted in part and denied in part the defendants’ petition fora writ of mandate seeking to reverse the trial court’s order granting theplaintiffs’ motion for class certification. Pursuant to the appellate court’sruling, the majority of the plaintiffs will be permitted to pursue their claimsas a class. On April 13, 2005, the Superior Court granted the parties’joint application to stay the California case pending the outcome of the appealof the consolidated case. In addition to the pending actions, Watsonunderstands that various state and federal agencies are investigating theallegations made in these actions. Aventis has agreed to defend and indemnifyWatson and its affiliates in connection with the claims and investigationsarising from the conduct and agreements allegedly undertaken by Rugby and itsaffiliates prior to Watson’s acquisition of Rugby, and is currently controllingthe defense of these actions.

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*Governmental Reimbursement Investigations and DrugPricing Litigation*  In November 1999, Schein Pharmaceutical, Inc., now known asWatson Pharma, Inc. (“Watson Pharma”) was informed by theU.S. Department of Justice that Watson Pharma, along with numerous otherpharmaceutical companies, is a defendant in a qui tam action brought in 1995under the U.S. False Claims Act currently pending in the U.S. District Courtfor the Southern District of Florida. Watson Pharma has not been served in thequi tam action. A qui tam action is a civil lawsuit brought by an individualfor an alleged violation of a federal statute, in which the U.S. Department ofJustice has the right to intervene and take over the prosecution of the lawsuitat its option. Pursuant to applicable federal law, the qui tam action is underseal and, at this time, no details are available concerning, among other things,the various theories of liability against Watson Pharma or the amount ofdamages sought from it. The Company believes that the qui tam action relates towhether allegedly improper price reporting by pharmaceutical manufacturers ledto increased payments by Medicare and/or Medicaid. The qui tam action may seekto recover damages from Watson Pharma based on its price reporting practices.Watson Pharma subsequently also received and responded to notices or subpoenasfrom the Attorneys General of various states, including Florida, Nevada, NewYork, California and Texas, relating to pharmaceutical pricing issues andwhether allegedly improper actions by pharmaceutical manufacturers led toexcessive payments by Medicare and/or Medicaid. On June 26, 2003, the Companyreceived a request for records and information from the U.S. House Committee onEnergy and Commerce in connection with that committee’s investigation intopharmaceutical reimbursements and rebates under Medicaid. The Company produceddocuments in response to the request. Other state and federal inquiriesregarding pricing and reimbursement issues are anticipated.

Beginning in July 2002, the Company and certain of itssubsidiaries, as well as numerous other pharmaceutical companies, were named asdefendants in various state and federal court actions alleging improper orfraudulent reporting practices related to the reporting of average wholesaleprices and wholesale acquisition costs of certain products, and that thedefendants committed other improper acts in order to increase prices and marketshares. Some of these actions have been consolidated in the U.S. DistrictCourt for the District of Massachusetts (*Inre: Pharmaceutical Industry Average Wholesale Price Litigation, MDL DocketNo. 1456*). The consolidated amended complaint in that casealleges that the defendants’ acts improperly inflated the reimbursement amountspaid by various public and private plans and programs. The amended complaintalleges claims on behalf of a purported class of plaintiffs that paid anyportion of the price of certain drugs, which price was calculated based on itsaverage wholesale price, or contracted with a pharmacy benefit manager toprovide others with such drugs. The Company filed an Answer to the AmendedConsolidated Class Action Complaint on April 9, 2004. Defendants inthe consolidated litigation have been divided into two groups. The Company andits named subsidiaries are contained in a large group of defendants that iscurrently awaiting a ruling on the plaintiffs’ request for certification ofclasses of plaintiffs to maintain a class action against the drug companydefendants. Certain other defendants, referred to as the “first-tier”defendants, are scheduled to proceed on a more expedited basis, and a trial hasbeen completed with respect to some of the claims against this group ofdefendants. The defendants in that trial are awaiting the judge’s ruling ontheir case. The court has granted class certification with respect to thefirst-tier defendants.

The Company and certain of its subsidiaries also are named asdefendants in various lawsuits filed by the Attorneys General of numerousstates, including Nevada, Montana, Massachusetts, Wisconsin, Kentucky, Alabama,Illinois, Mississippi, Florida, Arizona, Missouri, Alaska, Hawaii, Idaho, andSouth Carolina. *State of Nevada v. AmericanHome Products, et al., Civil Action No. 02-CV-12086-PBS,United States District Court for the District of Massachusetts; State ofMontana v. Abbott Laboratories, et al., Civil Action No. 02-CV-12084-PBS,United States District Court for the District of Massachusetts; Commonwealth ofMassachusetts v. Mylan Laboratories, et al., Civil ActionNo. 03-CV-11865-PBS, United States District Court for the District ofMassachusetts; State of Wisconsin v. Abbott Laboratories, et al., CaseNo. 04-cv-1709, Wisconsin Circuit Court for Dane County; Commonwealth ofKentucky v. Alpharma, Inc., et al., Case Number 04-CI-1487, KentuckyCircuit Court for Franklin County; State of Alabama v. Abbott Laboratories, Inc.et al., Civil Action No. CV05-219, Alabama Circuit Court for MontgomeryCounty; State of Illinois v. Abbott Laboratories, Inc. et al., Civil*

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*Action No. 05-CH-02474, Illinois Circuit Court for CookCounty; State of Mississippi v. Abbott Laboratories, Inc. et al., CivilAction No. G2005-2021 S/2, Mississippi Chancery Court of Hinds County;State of Florida ex rel. Ven-A-Care, Civil Action No 98-3032G, FloridaCircuit Court in Leon County; State of Arizona ex rel. Terry Goddard, No. CV2005-18711, Arizona Superior Court for Maricopa County; State of Missouri exrel. Jeremiah W. (Jay) Nixon v. Mylan Laboratories, et al, Case no. 054-2486,Missouri Circuit Court of St. Louis. State of Alaska v. Alpharma BrandedProducts Division Inc., et al., In the Superior Court for the State of AlaskaThird Judicial District at Anchorage, C.A. No. 3AN-06-12026 CI. Stateof Idaho v. Alpharma USPD Inc. et al., In the District Court of the FourthJudicial District of the State of Idaho, in and for the County of Ada, C.A.No. CV-0C-0701847. State of South Carolina and Henry D. McMaster v. WatsonPharmaceuticals (New Jersey), Inc., In the Court of Common Pleas forthe Fifth Judicial Circuit, State of South Carolina, County of Richland, C.A.No. 2006-CP-40-7152. State of South Carolina and Henry D. McMaster v.Watson Pharmaceuticals (New Jersey), Inc., In the Court of Common Pleasfor the Fifth Judicial Circuit, State of South Carolina, County of Richland,C.A. No. 2006-CP-40-7155. State of Hawaii v. Abbott Laboratories, Inc.et al., In the Circuit Court of the First Circuit, State of Hawaii, C.A.No. 06-1-0720-04 EEH.*

These cases generally allege that the defendants caused the states tooverpay pharmacies and other providers for prescription drugs under stateMedicaid Programs by inflating the reported Average Wholesale Price orWholesale Acquisition Cost, and by reporting false prices to the United Statesgovernment under the Best Prices rebate program. Several of these cases alsoallege that state residents were required to make inflated copayments for drugpurchases under the federal Medicare program, and companies were required tomake inflated payments on prescription drug purchases for their employees.These cases, some of which have been removed to federal court, are in the earlystages of pleading or are proceeding through pretrial discovery. OnJanuary 20, 2006, the Company was dismissed without prejudice from theactions brought by the States of Montana and Nevada because the Company was nottimely served.

The City of New York filed an action in the United States DistrictCourt for the Southern District of New York on August 4, 2004, against theCompany and numerous other pharmaceutical defendants alleging similar claims.The case was transferred to the United States District Court for the Districtof Massachusetts, and was consolidated with several similar cases filed byindividual New York counties. A corrected Consolidated Complaint was filedon June 22, 2005 (*City of New York v.Abbott Laboratories, Inc., et al., Civil Action No. 01-CV-12257-PBS,United States District Court for the District of Massachusetts*). TheConsolidated Complaint included as plaintiffs the City of New York and 30 NewYork counties.  Since the filing of the Consolidated Complaint, casesbrought by a total of 14 additional New York counties have been transferred tothe District of Massachusetts. The Company is now named as a defendant in casesbrought by the City of New York and 44 New York counties, consolidated in theDistrict of Massachusetts case. Anadditional action raising similar allegations was filed by Orange County, NewYork, on April 5, 2007, and the Company was served with a copy of the Complaintin that case on April 25, 2007.  (*County of Orange v. Abbott Laboratories, Inc., et al.*,United States District Court for the Southern District of New York, Case No.07-CV-2777).

Additional actions by other states, cities and/or counties areanticipated. These actions, if successful, could adversely affect the Companyand may have a material adverse effect on the Company’s business, results ofoperations, financial condition and cash flows.

*FDA Matters.  *In May 2002, Watson reached an agreementwith the FDA on the terms of a consent decree with respect to its Corona,California manufacturing facility. The court approved the consent decree onMay 13, 2002 (*United States of Americav. Watson Laboratories, Inc., and Allen Y. Chao* , United StatesDistrict Court for the Central District of California, EDCV-02-412-VAP). Theconsent decree with the FDA does not require any fine, a facility shutdown,product recalls or any reduction in production or service at the Company’sCorona facility. The consent decree applies only to the Corona facility and notother manufacturing sites. The decree requires Watson to ensure that itsCorona, California facility complies with the FDA’s cGMP regulations. Pursuantto the agreement, Watson hired an independent expert to conduct inspections ofthe Corona facility at least once each year. In February 2003,February 2004, January 2005, and January 2006 andJanuary 2007, 

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respectively,the first, second, third, fourth and fifth annual inspections were completedand the independent expert submitted its report of the inspection to the FDA.In each instance, the independent expert reported its opinion that, based onthe findings of the audit of the facility, the FDA’s applicable cGMPrequirements, applicable FDA regulatory guidance, and the collective knowledge,education, qualifications and experience of the expert’s auditors andreviewers, the systems at Watson’s Corona facility audited and evaluated by theexpert are in compliance with the FDA’s cGMP regulations. However, the FDA isnot required to accept or agree with the independent expert’s opinion. The FDAconducted an inspection of that facility from March 31, 2004 untilMay 6, 2004. At the conclusion of the inspection, the FDA issued aForm 483 listing the observations made during the inspection, includingobservations related to certain laboratory test methods and other procedures inplace at the facility. In June 2004 the Company submitted its response tothe FDA Form 483 inspectional observations and met with FDA officials todiscuss its response, including the corrective actions the Company had taken,and intended to take, to address the inspectional observations. The FDAconducted another inspection of the facility from April 5, 2005 throughApril 13, 2005. At the conclusion of the inspection no formal observationswere made and no FDA Form 483 was issued. The FDA conducted anotherinspection of the facility from July 9, 2006 through July 21, 2006.At the conclusion of the inspection no formal observations were made and no FDAForm 483 was issued.  From February20, 2007 through March 9, 2007, the FDA conducted another inspection of thefacility.  At the conclusion of theinspection, the FDA issued a Form 483 listing the observations made during theinspection.  In April 2007 the Companysubmitted its response to the FDA Form 483 inspectional observations, includingthe corrective actions the Company has taken to address the inspectionalobservations.  If, in the future, the FDAdetermines that, with respect to its Corona facility, Watson has failed tocomply with the consent decree or FDA regulations, including cGMPs, or hasfailed to adequately address the observations in the Form 483, the consentdecree allows the FDA to order Watson to take a variety of actions to remedythe deficiencies. These actions could include ceasing manufacturing and relatedoperations at the Corona facility, and recalling affected products. Suchactions, if taken by the FDA, could adversely affect the Company, its resultsof operations, financial position and/or cash flows.

*Securities Litigation.  *Beginning in November 2003, severalsecurities class action lawsuits were commenced in the United States DistrictCourt for the Central District of California against Watson and certain of itspresent and former officers and directors. On February 9, 2004, thefederal court issued an order consolidating all of the federal actions (In re:Watson Pharmaceuticals, Inc. Securities Litigation, CaseNo. CV-03-8236 AHM). In addition to the federal consolidated actions, twoshareholder derivative actions were filed in California Superior Court for theCounty of Riverside (*Philip Orlando v.Allen Chao, et al., Case No. 403717; and Charles Zimmerman v. Allen Chao,et al, Case No. 403715* ). These federal and state cases allrelate to the drop in the price of the Company’s common stock inNovember 2001, and allege generally that the Company failed to timelyadvise investors about matters such as falling inventory valuations, increasedcompetition and manufacturing difficulties, and therefore, the Company’s publishedfinancial statements and public announcements during 2000 and 2001 were falseand misleading. The shareholder derivative actions were dismissed withoutprejudice on November 16, 2004. On August 2, 2004, the United StatesDistrict Court for the Central District of California court granted thedefendants’ motion to dismiss the federal consolidated action, and allowedplaintiffs until August 30, 2004 to file an amended complaint. OnAugust 30, 2004, the lead plaintiff in the federal consolidated actionnotified the court that it did not intend to file an amended complaint inresponse to the court’s order granting the defendants’ motion to dismiss. OnSeptember 2, 2004, the District Court entered a judgment of dismissal infavor of the defendants. On October 1, 2004, one of the non-leadplaintiffs in the consolidated action filed a Notice of Appeal of the dismissalof the action with the United States Court of Appeals for the Ninth Circuit(Pension Fund v. Watson Pharmaceuticals, Inc., USCA Docket No. 04-56791).The court heard oral argument on the appeal on November 17, 2006. OnDecember 1, 2006, the court ordered appellants to file a new and separateaction against defendants within 28 days or show cause why they had not doneso. Appellants did not file a new and separate action, responding that such afiling would be time-barred and requesting a ruling on their appeal. As of May4, 2007, the appellate court had not ruled on the matter. The Company believesthat it has substantial meritorious defenses and intends to defend the mattersvigorously. However, these actions, if successful, could adversely affect theCompany and could have a material adverse effect on the Company’s business,results of operations, financial condition and cash flows.

 

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*Securities Litigation Against Andrx Corporation.  *On October 11,2005, Jerry Lowry filed a class action complaint on behalf of purchasers of theAndrx’s common stock during the class period (March 9, 2005 throughSeptember 5, 2005) in the U.S. District Court for the Southern District ofFlorida against Andrx Corporation and its then Chief Executive Officer, ThomasRice (*Jerry Lowry v. Andrx Corporation, etal.,* Case No. 05-61640). The complaint seeks damages under theSecurities Exchange Act of 1934, and alleges that during the class period,Andrx failed to disclose that its manufacturing facilities were not incompliance with current Good Manufacturing Practices (“cGMP”). The complaintfurther alleges that Andrx’s failure to be cGMP compliant led to the FDAplacing Andrx on Official Action Indicated status, which resulted in not beingeligible for approvals of Andrx’s Abbreviated New Drug Applications. OnJuly 24, 2006, the defendants moved to dismiss the action. On December 8,2006, the court granted in part and denied in part the defendants’ motion todismiss. Discovery is ongoing. Though we are not in a position to determine theultimate outcome of this matter, an adverse determination of this action couldhave a material adverse effect on the Company’s business, results ofoperations, financial condition and cash flows.

*Naproxen Sodium (Naprelan).  *In October 1998, Elan Corporation Plc suedAndrx in the United States District Court for the Southern District of Florida,alleging that Andrx’s pending ANDA for a generic version of Elan’s Naprelan®infringed Elan’s patent No. 5,637,320. (*Elan Corporation PLC v. Andrx Pharmaceuticals, Inc.,* CaseNo. 98-7164). In March 2002, the District Court issued an order thatElan’s patent was invalid, and in September 2002, Andrx commenced sellingthe 500mg strength of naproxen sodium, its generic version of Naprelan®. InMarch 2003, the District Court issued an order denying, among otherthings, (i) Elan’s motion for consideration of the March 2002 orderinvalidating its patent, and (ii) Andrx’s motion asking the District Courtfor a ruling on its non-infringement defenses. Both parties appealed thatMarch 2003 decision. (*Elan CorporationPLC v. Andrx Pharmaceuticals, Inc.,* Case No. 03-1354). OnMay 5, 2004, the Federal Circuit Court of Appeals reversed the DistrictCourt’s determination that the Elan patent was invalid, and remanded the caseback to the District Court for a determination as to whether Andrx’s productinfringes the Elan patent. On July 12, 2005, the Federal Circuit Court ofAppeals issued a decision, in an unrelated case, on how a court should addressissues of claim construction, and the District Court instructed the parties tofile briefs on how the District Court should proceed in this matter in light ofthe Federal Circuit Court of Appeals decision. The parties filed their briefsand are awaiting the court’s decision.

In January 2005, Elan filed a complaint in the U.S. District Courtfor the Southern District of Florida seeking willful damages as a result ofAndrx’s sale of its generic version of Naprelan®. (*Elan Corporation PLC v. Andrx Pharmaceuticals, Inc.,*Case No. 058-60158). In February 2005, Andrx filed its answer to Elan’sJanuary 2005 complaint and filed a counterclaim for declaratory relief forunenforceability due to inequitable conduct and for non-infringement andinvalidity of the applicable patent. This matter has been stayed pendingresolution of the infringement action. Andrx has sold and is continuing to sellits generic version of the 500mg strength of Naprelan®. Therefore, an adversedetermination could have a material adverse effect on the Company’s business,results of operations, financial condition and cash flows.

*Mallinckrodt Claim.  *On February 17, 2006, Andrx filed acomplaint against Mallinckrodt in the U.S. District Court for the SouthernDistrict of Florida. (*Andrx Therapeutics,Inc v. Mallinckrodt, Inc..,* Case No. 06-60210). Thecomplaint results from a dispute over certain agreements, including a supplyand marketing agreement entered into between Andrx and Mallinckrodt. Thecomplaint seeks to establish the parties’ rights under the agreements, ajudgment declaring that the agreements are still in force and that Andrx hasnot defaulted in its obligations. In the alternative, Andrx seeks a judgmentfor either breach of contract for anticipatory repudiation or for breach ofduty of good faith. On March 10, 2006, Mallinckrodt filed suit againstAndrx in state court in Missouri, arising from the same dispute referenced above.(*Mallinckrodt, Inc. v. AndrxLaboratories, Inc., et al.,* Case No. 06-1000). In itssuit, Mallinckrodt alleges breach of contract, breach of implied covenant ofgood faith and fair dealing and seeks damages of $9.5 million, along with adeclaratory judgment and injunctive relief. This matter is set for trial on May21, 2007.

*Department of Health and Human ServicesSubpoena.  *InDecember 2003, the Company’s subsidiary, Watson Pharma, received asubpoena from the Office of the Inspector General (“OIG”) of the Department ofHealth and Human Services. The subpoena requested documents relating tophysician meetings conducted during 

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2002and 2003 related to Watson Pharma’s Ferrlecit® intravenous iron product. WatsonPharma provided the requested documents and has not been contacted again by theOIG for several years. However, the Company cannot predict what additionalactions, if any, may be taken by the OIG, Department of Health and HumanServices, or other governmental entities.

*Hormone Replacement Therapy Litigation.  *Beginning in early 2004, a number of productliability suits were filed against the Company and certain Company affiliates,for personal injuries allegedly arising out of the use of hormone replacementtherapy products, including but not limited to estropipate and estradiol. Thesecomplaints also name numerous other pharmaceutical companies as defendants, andallege various injuries, including ovarian cancer, breast cancer and bloodclots. As of February 26, 2007, approximately ninety cases were pendingagainst Watson and/or its affiliates in state and federal courts representingclaims by approximately 815 plaintiffs. Many of the cases involve multipleplaintiffs. The majority of the cases have been transferred to and consolidatedin the United States District Court for the Eastern District of Arkansas (*In re: Prempro Products Liability Litigation, MDLDocket No. 1507* ). Discovery in these cases is ongoing. TheCompany maintains product liability insurance against such claims. However,these actions, if successful, or if insurance does not provide sufficientcoverage against the claims, could adversely affect the Company and could havea material adverse effect on the Company’s business, results of operations,financial condition and cash flows.

Watson and its affiliates are involved in various other disputes,governmental and/or regulatory inspections, inquires, investigations andproceedings, and litigation matters that arise from time to time in theordinary course of business. The process of resolving matters throughlitigation or other means is inherently uncertain and it is possible that anunfavorable resolution of these matters will adversely affect the Company, itsresults of operations, financial condition and cash flows.

**NOTE 12 — SUBSEQUENT EVENT**

OnMay 4, 2007 our stockholders approved the Second Amendment and Restatement ofthe Watson Pharmaceuticals, Inc. Incentive Award Plan (the “Amendment”).  The Amendment provides for, among otherthings, (i) the replacement of certain shares available for grant that wereonly available to former Andrx employees and new-hires with shares availablefor grant to all Watson employees, (ii) the elimination of a cap on theaggregate number of shares that we may issue as restricted stock, (iii) theconcept of a “full value award,” which reduces the number of shares availablefor grant by two shares for every one share of restricted stock granted and(iv) the extension of the term of the Incentive Award Plan to March 23, 2017.

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**ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF OPERATIONS**

The followingdiscussion of our financial condition and the results of operations should beread in conjunction with the Condensed Consolidated Financial Statements andnotes thereto included elsewhere in this Quarterly Report on Form 10-Q (“QuarterlyReport”).  This discussion containsforward-looking statements that are subject to known and unknown risks,uncertainties and other factors that may cause our actual results to differmaterially from those expressed or implied by such forward-lookingstatements.  These risks, uncertaintiesand other factors include, among others, those identified under “CautionaryNote Regarding Forward-Looking Statements” and elsewhere in this QuarterlyReport and under “Risks Related to our Business” in our Annual Report on Form10-K for the year ended December 31, 2006.

**Overview**

Watson Pharmaceuticals, Inc.(“Watson”, the “Company” “we”, “us” or “our”) was incorporated in 1985 and isengaged in the development, manufacture, marketing, sale and distribution ofbrand and off-patent (generic) pharmaceutical products. Watson operatesmanufacturing, distribution, research and development, and administrativefacilities primarily in the United States (“U.S.”).

Prescription pharmaceuticalproducts in the U.S. are generally marketed as either generic or brandpharmaceuticals.  Generic pharmaceuticalproducts are bioequivalents of their respective brand products and provide acost-efficient alternative to brand products. Brand pharmaceutical products aremarketed under brand names through programs that are designed to generatephysician and consumer loyalty.

OnNovember 3, 2006, the Company acquired all the outstanding shares ofcommon stock of Andrx Corporation (“Andrx”) in an all-cash transaction for $25per share, or total consideration of approximately $1.9 billion (the “AndrxAcquisition”). Andrx distributes pharmaceutical products primarily toindependent and chain pharmacies and physicians’ offices and is considered aleader in formulating and commercializing difficult-to-replicatecontrolled-release pharmaceutical products and selective immediate-releaseproducts.

Watson has three reportableoperating segments: Generic, Brand and Distribution.  The Generic segment includes off-patentpharmaceutical products that are therapeutically equivalent to proprietaryproducts.  The Brand segment includes theCompany’s lines of Specialty Products and Nephrology products. Watson has aggregatedits Brand product lines in a single segment because of similarities inregulatory environment, methods of distribution and types of customer.  This segment includes patent-protectedproducts and certain trademarked off-patent products that Watson sells andmarkets as Brand pharmaceutical products. The Company sells its Brand and Generic products primarily topharmaceutical wholesalers, drug distributors and chain drug stores.  The Distribution segment was acquired as partof the Andrx Acquisition representing the Andrx “Anda” division.  The Distribution segment mainly distributesgeneric pharmaceutical products manufactured by third parties, as well as byWatson, primarily to independent pharmacies, pharmacy chains, pharmacy buyinggroups and physicians’ offices.  Salesare principally generated through an in-house telemarketing staff and throughinternally developed ordering systems. The Distribution segment operating results exclude sales by Anda ofproducts reported in Watson’s Generic and Brand segments.

Priorto the Andrx Acquisition the Company held common shares in Andrx, which werepreviously classified as available-for-sale securities and recorded at fairvalue based upon quoted market prices with temporary differences between costand fair value presented as accumulated other comprehensive income withinstockholders’ equity, net of any related tax effect. As required by AccountingResearch Bulletin (“ARB”) No. 51, “Consolidated Financial Statements” (“ARB51”), earnings (loss) on equity method investments has been restated for thethree months ended March 31, 2006 toaccount for our investment in common shares of 

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Andrxusing the equity method of accounting in accordance with Accounting PrinciplesBoard (“APB”) Opinion No. 18, “The Equity Method of Accounting forInvestments in Common Stock” (“APB 18”). Accumulated other comprehensive incomehas also been restated for the three months ended March 31, 2006 to reflect these changes.

**Resultsof Operations**

 
| ** **                  | ** ** | **Three Months Ended March 31, 2007** | ** ** | **Three Months Ended March 31, 2006** | ** ** |
|-----------------------------|------------|----------------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                  | ** ** | **Generic**                                                    | ** ** | **Brand**                                                      | ** ** | **Distribution** | ** ** | **Total** | ** ** | **Generic** | ** ** | **Brand** | ** ** | **Total** | ** ** |
|                        |       |                                                           |       |                                                           |       |   |   |   |   |   |   |   |   |   |   |
| Product sales               |       | $                                                              | 411,475    |                                                           | $          | 90,638 |   | $ | 145,440 |   | $ | 647,553 |   | $ | 321,415 |   | $ | 83,237 |   | $ | 404,652 |   |
| Other                       |       | 13,150                                                         |       | 10,902                                                         |       | — |   | 24,052 |   | 675 |   | 1,906 |   | 2,581 |   |
| Net revenues                |       | 424,625                                                        |       | 101,540                                                        |       | 145,440 |   | 671,605 |   | 322,090 |   | 85,143 |   | 407,233 |   |
| Cost of sales(1)            |       | 272,623                                                        |       | 25,215                                                         |       | 126,882 |   | 424,720 |   | 217,384 |   | 17,370 |   | 234,754 |   |
| Gross profit                |       | 152,002                                                        |       | 76,325                                                         |       | 18,558 |   | 246,885 |   | 104,706 |   | 67,773 |   | 172,479 |   |
| Gross margin                |       | 35.8                                                           | %          | 75.2                                                           | %          | 12.8 | % | 36.8 | % | 32.5 | % | 79.6 | % | 42.4 | % |
|                        |       |                                                           |       |                                                           |       |   |   |   |   |   |   |   |   |   |   |
| Research and  development   |       | 26,513                                                         |       | 11,295                                                         |       | — |   | 37,808 |   | 20,495 |   | 9,342 |   | 29,837 |   |
| Selling and  marketing      |       | 14,549                                                         |       | 26,411                                                         |       | 14,203 |   | 55,163 |   | 12,938 |   | 28,975 |   | 41,913 |   |
| Contribution                |       | 110,940                                                        |       | 38,619                                                         |       | 4,355 |   | 153,914 |   | 71,273 |   | 29,456 |   | 100,729 |   |
| Contibution margin          |       | 26.1                                                           | %          | 38.0                                                           | %          | 3.0 | % | 22.9 | % | 22.1 | % | 34.6 | % | 24.7 | % |
|                        |       |                                                           |       |                                                           |       |   |   |   |   |   |   |   |   |   |   |
| General and  administrative |       |                                                           |       |                                                           |       |   |   | 48,055 |   |   |   |   |   | 24,837 |   |
| Amortization                |       |                                                           |       |                                                           |       |   |   | 43,933 |   |   |   |   |   | 41,100 |   |
| Operating income            |       |                                                           |       |                                                           |       |   |   | $ | 61,926 |   |   |   |   |   | $ | 34,792 |   |
| Operating margin            |       |                                                           |       |                                                           |       |   |   | 9.2 | % |   |   |   |   | 8.5 | % |
|                             |            |                                                                |            |                                                                |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)  Excludes amortization of acquired intangiblesincluding product rights.

**GenericSegment**

*NetRevenues*

Our generic pharmaceutical business develops, manufactures, markets,sells and distributes generic products that are the therapeutic equivalent totheir brand name counterparts and are generally sold at prices significantlyless than the brand product. As such, generic products provide an effective andcost-efficient alternative to brand products. When patents or other regulatoryexclusivity no longer protect a brand product, opportunities exist to introduceoff-patent or generic counterparts to the brand product. Our portfolio ofgeneric products includes products we have internally developed, products wehave licensed from third parties, and products we distribute for third parties.

Other revenues include royalties and commission revenue earned as asales agent from the sale of fentanyl citrate troche.

Our Generic segment develops, manufactures, markets, sells anddistributes products within two product lines: Generics and Generic OralContraceptives.  Our Generics productline includes oral dosage, transdermal, injectible and transmucosal productsused for a variety of indications including pain management, depression,hypertension and smoking cessation.

Net revenues from our Generic segment for the three months ended March31, 2007 increased $102.5 million or 31.8% over net revenues from the prioryear period.  This increase in netrevenues was mainly attributable to sales of certain authorized genericproducts including oxycodone HCl controlled-release tablets, 

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launched during the fourth quarter of 2005, and pravastatin sodiumtablets, launched during the second quarter of 2006, the addition of productsfrom the Andrx Acquisition and an increase in other revenue.  The increase in net revenues from these authorizedgenerics, the Andrx Acquisition and other revenues for the three months endedMarch 31, 2007 totaled $105.7 million. Generic segment sales of oxycodone HCl controlled-release tablets endedin the first quarter of 2007 as the supply and distribution agreement to sellthis product terminated during the quarter.

The increase in other revenues in the three months ended March31, 2007 for the Generic segment was primarily related to commission revenuesearned on sales of fentanyl citrate troche (which commenced during the thirdquarter of 2006) and royalties earned on GlaxoSmithKline’s (“GSK’s”) sales ofWellbutrin XL® 150mg(which commenced during the first quarter of 2007).

*Gross Profit (Gross Margin)*

Gross profitrepresents net revenues less cost of sales. Cost of sales includes production and packaging costs for products wemanufacture, third party acquisition costs for products manufactured by others,profit-sharing or royalty payments for products sold pursuant in licensingagreements, inventory reserve charges, and excess capacity utilization charges,when applicable.  Cost of sales does notinclude amortization costs for acquired product rights.  

Gross profit forour Generic segment increased $47.3 million to $152.0 million in the threemonths ended March 31, 2007 from $104.7 million in the prior year period.  This year over year increase in gross profitwas due to the following factors:

·        Gross profit from authorized generic products oxycodone HClcontrolled-release tablets and pravastatin sodium tablets increased $18 millionprimarily as a result of price increases realized in the current year periodand more favorable commercial terms on sales of oxycodone HClcontrolled-release tablets.  Ouragreement to sell oxycodone HCl controlled-release tablets ended during thefirst quarter of 2007.  Going forward, weexpect to realize minimal gross profit from the sale of pravastatin sodiumtablets.

 

·        Other revenue increased $12.5 million as a result ofcommission revenue earned from the sale of fentanyl citratetroche and royalties earned inconnection with the licensing of a patent to GSK during the quarter.

 

·        Gross profit from products acquired in connection with theAndrx Acquisition, production cost improvements and new products alsocontributed to the year over year gross profit increase.

 

Going forward, quarterly gross profit will be negatively impactedby the termination of the oxycodone HCl controlled release distributionagreement.  However, we expect thisnegative impact to be partially offset by an increase in royalty revenues fromthe sale of metoprolol succinate 50 mg. extended release tablets (the genericversion of Toprol XL®) and a full quarter of royalties earned onGSK’s sales of Wellbutrin XL® 150mg.

 

Gross margins for our Generic segment increased to 35.8% for thethree months ended March 31, 2007 from 32.5% in the prioryear period.  The increase in grossmargins is primarily due to an increase in other revenue and production costimprovements realizedduringthe first quarter of 2007 offset in part by price erosion within our genericbusiness.  We expect further improvementin gross margins due to the termination of the oxycodone HCl controlled releasedistribution agreement and anticipated royalty revenue from  the sale of metoprolol succinate extended release tablets.

*Researchand Development Expenses*

Research anddevelopment (“R&D”) expenses consist predominantly of personnel costs,contract research, development and facilities costs associated with thedevelopment of our products.

R&D expenseswithin our Generic segment increased $6.0 million or 29% during the threemonths ended March 31, 2007, as compared to the same period of the prior year,due to the inclusion of R&D expenditures from the Andrx Acquisition.

*Sellingand Marketing Expenses*

Selling andmarketing expenses consist mainly of personnel costs, facilities costs,insurance and professional services costs, which support our sales, marketing,human resources, finance and administration functions.

Generic segment selling and marketing expenses increased slightlyduring the three months ended March 31, 2007 as compared to the same period ofthe prior year due partly to the Andrx Acquisition.

23

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**BrandSegment**

*NetRevenues*

Our brandpharmaceutical business develops, manufactures, markets, sells and distributesproducts within two sales and marketing groups: Specialty Products andNephrology.

Our Specialty Products product line includes urology and a number ofother non-promoted products.

Our Nephrologyproduct line consists of products for the treatment of iron deficiency anemiaand is generally marketed to nephrologists and dialysis centers.  The key product of the Nephrology group isFerrlecit®, which is used to treat low iron levels in patients undergoinghemodialysis in conjunction with erythropoietin therapy.

Other revenues in the Brand segment consist of co-promotion revenue,royalties, and revenue (including the amortization of deferred revenue)relating to our obligation to manufacture and supply two brand products to athird party. This contract manufacturing agreement was assumed as part of theAndrx Acquisition.

Other revenue also includes revenue recognized from research,development and licensing agreements (including milestone payments and deferredrevenue related to certain contract manufacturing arrangements). Revenue fromdevelopment agreements is deferred and recognized over the entire contractperformance period, starting with the contract’s commencement, but not prior tothe removal of any contingencies for each individual milestone. We recognizethis revenue based upon the pattern in which the revenue is earned or theobligation is fulfilled.

Net revenues from our Brand segment for the three months ended March31, 2007 increased $16.4 million or 19.3% over net revenues from the prior yearperiod.  The increase in net revenues wasattributable to a $9.0 million increase in other revenues related to royaltiesand deferred revenues recognized from a contract manufacturing agreementassumed from the Andrx Acquisition and our share of profits on the AndroGel®co-promotion agreement, which commenced in the fourth quarter of 2006.  Brand segment product sales also increasedfor certain non-promoted products within our Specialty Products product linefrom the prior year period as the prior year period was impacted by a reductionin wholesaler inventory levels.

*Gross Profit (Gross Margin)*

Gross margin fromour Brand segment decreased to 75.2% during the three months ended March 31,2007 from 79.6% in the prior year period. The decrease in gross margins is primarily due to the sale of productsfrom the Andrx Acquisition and a change in product mix as compared to the prioryear period.

*Researchand Development Expenses*

R&D expenseswithin our Brand segment increased $2.0 million or 21% during the three monthsended March 31, 2007, as compared to the same period of the prior year,primarily due to an increase in costs related to Phase III studies on the gelformulation of oxybutynin for overactive bladder.

*Sellingand Marketing Expenses*

Brand segment selling and marketing expenses decreased $2.6 million or9% during the three months ended March 31, 2007 as compared to the same periodof the prior year primarily due to lower product spending for Oxytrol® andFerrlecit® during the current quarter.

24

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***Distribution Segment***

*NetRevenues*

Our Distribution segment mainly distributes generic pharmaceuticalproducts manufactured by third parties, as well as by Watson, primarily toindependent pharmacies, pharmacy chains, pharmacy buying groups and physicians’offices.  Sales are principally generatedthrough an in-house telemarketing staff and through internally developed orderingsystems.  The Distribution segmentoperating results exclude sales of products reported in Watson’s Generic andBrand segments.

*Gross Profit (Gross Margin)*

Gross margins within the Distribution segment have been adverselyimpacted due to acquisition accounting inventory charges of approximately $2.5million during the period.

***SegmentContribution***

|                                 | ** ** | **Three Months Ended March 31,** | ** ** | **Change** | ** ** |
|---------------------------------|------------|------------------------------------------------------|------------|------------|------------|
| **($ in thousands):** | ** ** | **2007**                                             | ** ** | **2006**   | ** ** | **Dollars** | ** ** | **%** | ** ** |
|                            |       |                                                 |       |       |       |   |   |   |   |
| Segment  contribution           |       |                                                 |       |       |       |   |   |   |   |
| Generic                         |       | $                                                    | 110,940    |       | $          | 71,273 |   | $ | 39,667 |   | 55.7 | % |
| Brand                           |       | 38,619                                               |       | 29,456     |       | 9,163 |   | 31.1 | % |
| Distribution                    |       | 4,355                                                |       | —     |       | 4,355 |   | 100.0 | % |
|                            |       | $                                                    | 153,914    |       | $          | 100,729 |   | $ | 53,185 |   | 52.8 | % |
| *as % of  net revenues*         | * *   | *22.9*                                               | *%*        | *24.7*     | *%*        | * * | * * | * * | * * |

 

Generic segmentcontribution increased for the three months ended March 31, 2007, as comparedto the same period of the prior year, due to higher net revenues and grossprofit from the sale of certain authorized generics and higher levels of otherrevenues partially offsetby higher R&D and selling and marketing costs as a result of the AndrxAcquisition.

Brand segmentcontribution increased for the three months ended March 31, 2007, as comparedto the same period of the prior year, primarily due to an increase in other revenues and an increase innet product revenues related to certain non-promoted products within ourSpecialty Products product line which was partially offset by a decline insales from our Nephrology product line.

For moreinformation on segment contribution, refer to above Management’s Discussion andAnalysis of Financial Condition and Results of Operations and Note 5 in theaccompanying Notes to Condensed Consolidated Financial Statements in thisQuarterly Report.

***CorporateGeneral and Administrative Expenses***

|                                                  | ** ** | **Three Months Ended March 31,** | ** ** | **Change** | ** ** |
|--------------------------------------------------|------------|------------------------------------------------------|------------|------------|------------|
| **($ in thousands):**                  | ** ** | **2007**                                             | ** ** | **2006**   | ** ** | **Dollars** | ** ** | **%** | ** ** |
|                                             |       |                                                 |       |       |       |   |   |   |   |
| Corporate  general and administrative   expenses |       | $                                                    | 48,055     |       | $          | 24,837 |   | $ | 23,218 |   | 93.5 | % |
| *as a %  of net revenues*                        | * *   | *7.2*                                                | *%*        | *6.1*      | *%*        | * * | * * | * * | * * |
|                                                  |            |                                                      |            |            |            |  |  |  |  |  |  |  |

 

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Corporate generaland administrative expenses consist mainly of personnel costs, facilitiescosts, insurance and professional services costs, which support our sales,R&D, marketing, human resources, finance and administration functions.

Corporate generaland administrative expenses increased$23.2 million or 93% during the three months ended March 31, 2007 as comparedto the same period of the prior year due to the inclusion of corporate generaland administrative costs related to the Andrx Acquisition.  Additional costs include higher personnelcosts, depreciation, facility costs and management information system costs.

***Amortization***

|                                 | ** ** | **Three Months Ended March 31,** | ** ** | **Change** | ** ** |
|---------------------------------|------------|------------------------------------------------------|------------|------------|------------|
| **($ in thousands):** | ** ** | **2007**                                             | ** ** | **2006**   | ** ** | **Dollars** | ** ** | **%** | ** ** |
|                            |       |                                                 |       |       |       |   |   |   |   |
| Amortization                    |       | $                                                    | 43,933     |       | $          | 41,100 |   | $ | 2,833 |   | 6.9 | % |
| *as a %  of net revenues*       | * *   | *6.5*                                                | *%*        | *10.1*     | *%*        | * * | * * | * * | * * |
|                                 |            |                                                      |            |            |            |  |  |  |  |  |  |  |

 

The Company’samortizable assets consist primarily of acquired product rights.  For the three months ended March 31, 2007amortization expense includes intangible assets from the Andrx Acquisition

***Losson Early Extinguishment of Debt***

|                                       | ** ** | **Three Months Ended March 31,** | ** ** | **Change** | ** ** |
|---------------------------------------|------------|------------------------------------------------------|------------|------------|------------|
| **($ in thousands):**       | ** ** | **2007**                                             | ** ** | **2006**   | ** ** | **Dollars** | ** ** | **%** | ** ** |
|                                  |       |                                                 |       |       |       |   |   |   |   |
| Loss on early  extinguishment of debt |       | $                                               | 2,729      |       | $     | 720 |   | $  | 2,009 |   | 279.0 | % |
| *as a %  of net revenues*             | * *   | *0.4*                                                | *%*        | *0.2*      | *%*        | * * | * * | * * | * * |
|                                       |            |                                                      |            |            |            |  |  |  |  |  |  |  |

 

During the quarter ended March 31, 2007, the Company pre-paid $150million of the Term Facility under the terms of the Senior Credit Facility(together the “2006 Credit Facility”). The Company entered into the 2006 Credit Facility in November 2006 toprovide financing for the Andrx Acquisition. As a result of this pre-payment, our results for the first quarter of2007 reflect a $2.7 million debt repurchase charge.

On March 31, 2006,the Company initiated a redemption notice to the holders of all of itsoutstanding senior unsecured 7 1/8% notes (“1998 Senior Notes”).  The 1998 Senior Notes were redeemed on May23, 2006.  As a result, the Companyincurred costs representing redemption fees, expenses, and a premium on theredemption.

***InterestIncome***

|                                 | ** ** | **Three Months Ended March 31,** | ** ** | ** ** | ** ** |
|---------------------------------|------------|------------------------------------------------------|------------|------------|------------|
| **($ in thousands):** | ** ** | **2007**                                             | ** ** | **2006**   | ** ** | **Change** | ** ** |
|                            |       |                                                 |       |       |       |   |   |
| Interest income                 |       | $                                                    | 2,929      |       | $          | 6,252 |   | $ | (3,323 | ) |
| *as a % of net revenues*        | * *   | *0.4*                                                | *%*        | *1.5*      | *%*        | * * | * * |
|                                 |            |                                                      |            |            |            |  |  |  |  |  |

 

Interest incomedecreased during the three month period ended March 31, 2007, as compared tothe prior year period due to the use of available cash, cash equivalents andmarketable securities to finance the Andrx Acquisition.

 

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***InterestExpense***

|                                                                                           | ** ** | **Three Months Ended March 31,** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|------------|------------|------------|------------|
| **($ in thousands):**                                                           | ** ** | **2007**                                             | ** ** | **2006**   | ** ** | **Change** | ** ** | **%** | ** ** |
|                                                                                      |       |                                                 |       |       |       |       |       |   |   |
| Interest expense - 2006  Credit Facility                                                  |       | $                                                    | 10,374     |       | $          | —     |       | $ | 10,374 |   |   |   |
| Interest expense -  convertible contingent senior debentures due 2023 (“CODES”) |       | 3,151                                                |       | 3,151      |       | —     |       |   |   |
| Interest expense - 1998  Senior Notes                                                     |       | —                                               |       | 256        |       | (256       | )          |   |   |
| Interest and fees on  credit facility                                                     |       | —                                               |       | 247        |       | (247       | )          |   |   |
| Change in derivative  value                                                               |       | 24                                                   |       | (453       | )          | 477        |       |   |   |
| Interest expense -  other                                                                 |       | 327                                                  |       | 100        |       | 227        |       |   |   |
| Interest expense                                                                          |       | $                                                    | 13,876     |       | $          | 3,301      |       | $ | 10,575 |   | 320.4 | % |
| *as a %  of net revenues*                                                                 | * *   | *2.1*                                                | *%*        | *0.8*      | *%*        |       |       |   |   |

 

Interest expenseincreased for the three month period ended March 31, 2007 due to interestexpense incurred on debt issued to finance the Andrx Acquisition.

***OtherIncome (Expense)***

|                                                            | ** ** | **Three Months Ended March 31,**                                               | ** ** | ** **                                                                                         | ** ** | ** ** | ** ** |
|------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------|------------|------------|------------|
| **($ in thousands):**                            | ** ** | **       2007        ** | ** ** | **       2006        ** | ** ** | **Change** | ** ** | **%** | ** ** |
|                                                       |       |                                                                                               |       |                                                                                               |       |       |       |   |   |
| Earnings (losses) on  equity method investments - restated |       | $                                                                                             | 1,439      |                                                                                               | $     | (285       | )          | $  | 1,724 |   |   |   |
| Gain on sale of  securities                                |       | 1,789                                                                                              |       | 3,695                                                                                              |       | (1,906     | )          |   |   |
| Other income                                               |       | 175                                                                                                |       | 105                                                                                                |       | 70         |       |   |   |
|                                                       |       | $                                                                                                  | 3,403      |                                                                                               | $          | 3,515      |       | $ | (112 | ) | (3.2 | )% |
| *as a % of net revenues*                                   | * *   | *0.5*                                                                                              | *%*        | *0.9*                                                                                              | *%*        |       |       |   |   |

 

*Earnings(Losses) on Equity Method Investments*

The Company’sequity investments are accounted for under the equity-method when the Company’sownership does not exceed 50% and when the Company can exert significantinfluence over the management of the investee.  Asrequired by ARB 51, earnings (losses) on equity method investments have beenrestated for the three months ended March 31, 2006 to account for our investment in commonshares of Andrx prior to the Andrx Acquisition using the equity method ofaccounting in accordance with APB 18.

The earningsrecorded during the three months ended March 31, 2007 primarily represent ourshare of earnings in Somerset Pharmaceuticals, Inc., our joint venture withMylan Laboratories, Inc.

*Gain onSale of Securities*

The 2006 and 2007gain on sale of securities resulted from the sale of our investment in Adheris,Inc.  During the three months ended March31, 2006, we received cash proceeds of $4.7 million from our sale of ourinvestment in Adheris, Inc. and certain contingent consideration.  During the three months ended March 31, 2007,all contingencies were removed relating to the contingent considerationreceived on the sale of our investment in Adheris, Inc.  Accordingly, the Company received commonshares of inVentivHealth, Inc. (‘inVentiv”) during the quarter ended March 31, 2007 as additionalproceeds on our sale of ourinvestment in Adheris, Inc. which was recorded as a gain on sale of securitiesin the quarter ended March 31, 2007.

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***Provisionfor Income Taxes***
|                                 | ** ** | **Three Months Ended March 31,** | ** ** | ** ** | ** ** |
|---------------------------------|------------|------------------------------------------------------|------------|------------|------------|
| **($ in thousands):** | ** ** | **2007**                                             | ** ** | **2006**   | ** ** | **% Change** | ** ** |
|                            |       |                                                 |       |       |       |   |   |
| PrProvision for income taxes    |       | $                                                    | 20,041     |       | $          | 15,364 |   |   |   |
| *as a % of net revenues*        | * *   | *3.0*                                                | *%*        | *3.8*      | *%*        | * * | * * |
| *Effective  tax rate*           | * *   | *38.8*                                               | *%*        | *37.9*     | *%*        | 0.9 | % |
|                                 |            |                                                      |            |            |            |  |  |  |  |

 

The provision forincome taxes differs from the amount computed by applying the statutory U.S.federal income tax rate primarily due to state taxes and other factors which,combined, increases the effective tax rate.

The provision forincome taxes increased in the three months ended March 31, 2007 due to higherlevels of income before income taxes. The higher effective tax rate for the three months ended March 31, 2007,as compared to the same period of the prior year, primarily reflect an increasein the level of permanent differences relative to income before income taxes.

**Liquidityand Capital Resources**

***WorkingCapital Position***

Working capital atMarch 31, 2007 and December 31, 2006 is summarized as follows:
| **($ in thousands):**        | ** ** | **March 31,  2007** | ** ** | **December 31,  2006** | ** ** | **Increase  (Decrease)** | ** ** |
|----------------------------------------|------------|--------------------------|------------|-----------------------------|------------|--------------------------|------------|
|                                   | ** ** | ** **               | ** ** | ** **                  | ** ** | ** **               | ** ** |
| Current Assets:                        | ** ** | ** **               | ** ** | ** **                  |       |                     |       |
| Cash and cash equivalents              |       | $                        | 73,550     |                        | $          | 154,171                  |       | $ | (80,621 | ) |
| Marketable securities                  |       | 8,981                    |       | 6,649                       |       | 2,332                    |       |
| Accounts receivable, net of allowances |       | 375,608                  |       | 384,692                     |       | (9,084                   | )          |
| Inventories                            |       | 492,345                  |       | 517,236                     |       | (24,891                  | )          |
| Other                                  |       | 151,185                  |       | 198,928                     |       | (47,743                  | )          |
| Total current assets                   |       | 1,101,669                |       | 1,261,676                   |       | (160,007                 | )          |
| Current  liabilities:                  |       |                     |       |                        |       |                     |       |
| Accounts payable and accrued expenses  |       | 429,112                  |       | 516,875                     |       | (87,763                  | )          |
| Current portion of long-term debt      |       | 5,479                    |       | 107,059                     |       | (101,580                 | )          |
| Other                                  |       | 17,048                   |       | 65,995                      |       | (48,947                  | )          |
| Total current liabilities              |       | 451,639                  |       | 689,929                     |       | (238,290                 | )          |
|                                   |       |                     |       |                        |       |                     |       |
| Working Capital                        |       | $                        | 650,030    |                        | $          | 571,747                  |       | $ | 78,283 |   |
|                                   |       |                     |       |                        |       |                     |       |
| Current Ratio                          |       | 2.44                     |       | 1.83                        |       |                     |       |

 

Watson’s primary sourceof liquidity is cash from operations. Net working capital at March 31, 2007 was $650.0 million compared to$571.7 million at December 31, 2006 and $1.12 billion at March 31, 2006.

During the first quarterof 2007, our working capital increased by $78.3 million primarily related tonet cash provided by operating activities. The decrease in other current assets at March 31, 2007 was due primarilyto the collection of a $35 million legal settlement during the quarter.  Current portion of long-term debt decreasedat March 31, 2007 as we pre-paid the current portion and an additional $50million of debt incurred to finance the Andrx Acquisition during thequarter.  Accounts payable and accruedliabilities decreased during the quarter 

28

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due to payments of tradepayables, royalties payable, accrued severance and retention and bonusaccruals.  Other current liabilitiesdecreased primarily due to a reclassification of income tax payable fromcurrent to long term as a result of the implementation of FIN 48.

We expect that 2007 cash flows from operatingactivities will continue to exceed net income. In addition, management expects that 2007 cash flows from operatingactivities and available cash balances will be sufficient to fund our operatingliquidity needs.

***Cash Flows from Operations***

Summarized cash flow from operations is as follows:

|                                            | ** ** | **Three months ended March 31,** | ** ** |
|--------------------------------------------|------------|------------------------------------------------------|------------|
| **($ in thousands):**            | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
|                                       | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Net cash provided by  operating activities |       | $                                                    | 88,239     |   | $ | 135,710 |   |
|                                            |            |                                                      |            |  |  |  |  |

 

Cashflows from operations represents net income adjusted for certain operatingrelated non-cash items and changes in assets and liabilities.  For the three months ended March 31,2007, cash provided by operatingactivities was $88.2 million, compared to $135.7 million in the threemonths ended March 31, 2006.  Net cash provided by operations was higher inthe three months ended March 31, 2006compared to the three months ended March 31, 2007 primarily due to higher reductions in accounts receivable balancesduring 2006 and higher reductions in accounts payable and accrued liabilitiesduring 2007 which were partially offset by reductions in inventory balances andprepaid and other current asset balances during the 2007 quarter.

***Investing Cash Flows***

Our cash flows from investing activities are summarized as follows:

|                                        | ** ** | **Three months ended March 31,** | ** ** |
|----------------------------------------|------------|------------------------------------------------------|------------|
| **($ in thousands):**        | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
|                                   | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Net cash used in  investing activities |       | $                                                    | (18,326    | ) | $ | (47,169 | ) |
|                                        |            |                                                      |            |  |  |  |  |

 

Investing cash flows consist of expenditures related to acquisitions,capital expenditures, investment and marketable security additions as well asproceeds from investment and marketable security sales.  We used $18.3 million in net cash forinvesting activities during the three months ended March 31, 2007 compared to $47.2 million used ininvesting activities during the three months ended March 31, 2006.  Thehigher net cash used in investing activities during the three monthsended March 31, 2006 related to ouracquisition of Sekhsaria Chemicals Ltd. during 2006.

***Financing Cash Flows***

Our cash flows from financing activities are summarized as follows:

|                                                      | ** ** | **Three months ended March 31,** | ** ** |
|------------------------------------------------------|------------|------------------------------------------------------|------------|
| **($ in thousands):**                      | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
|                                                 | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Net cash (used in)  provided by financing activities |       | $                                                    | (150,534   | ) | $ | 3,742 |   |
|                                                      |            |                                                      |            |  |  |  |  |

 

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Financing cash flows consist primarily of borrowings and repayments ofdebt, repurchases of common stock and proceeds from exercising of stockawards.  For the three monthsended March 31, 2007, net cashused in financing activities was $150.5 compared to $3.7 million provided byfinancing activities during the three months ended March 31, 2006. As indicated above we pre-paid $150 million of debt originallyincurred to finance the Andrx Acquisition during the quarter.

***Debtand Borrowing Capacity***

Our debt at March 31,2007 and December 31, 2006 is summarized as follows:

| ($ in thousands):        | ** ** | **March 31,  2007** | ** ** | **December 31,  2006** | ** ** | **Increase  (Decrease)** | ** ** |
|------------------------------------|------------|--------------------------|------------|-----------------------------|------------|--------------------------|------------|
|                               | ** ** | ** **               | ** ** | ** **                  | ** ** | ** **               | ** ** |
| Current portion  of long-term debt |       | $                        | 5,479      |                        | $          | 107,059                  |       | $ | (101,580 | ) |
| Long-term debt                     |       | 1,074,210                |       | 1,124,145                   |       | (49,935                  | )          |
| Total debt                         |       | $                        | 1,079,689  |                        | $          | 1,231,204                |       | $ | (151,515 | ) |
| Debt to capital  ratio             |       | 38.6                     | %          | 42.3                        | %          |                     |       |

 

In March 2003, we issued$575 million of our CODES.  As of March31, 2007, the entire amount of the CODES remained outstanding at an effectiveannual interest rate of approximately 2.1%.

InMay 1998, we issued $150 million of our 1998 Senior Notes.  On March 31, 2006 the Company initiated aredemption notice to the holders of all of its outstanding 1998 SeniorNotes.  As a result, the remaining 1998Senior Notes were redeemed on May 23, 2006.

In November 2006, we entered into the 2006 Credit Facility with asyndicate of banks.  The 2006 CreditFacility provides an aggregate of $1.15 billion of senior financing to Watson,consisting of a $500 million revolving credit facility (“Revolving Facility”)and a $650 million senior term loan facility (“Term Facility”).  The 2006 Credit Facility was entered into inconnection with the Andrx Acquisition.

The 2006 Credit Facility has a five year term and will bear interestequal to LIBOR plus 0.75% (subject to certain adjustments)  The indebtedness under the 2006 CreditFacility is guaranteed by Watson’s material domestic subsidiaries.  The Revolving Facility is available forworking capital and other general corporate requirements subject to thesatisfaction of certain conditions. Indebtedness under the 2006 Credit Facility may be pre-payable, andcommitments reduced at the election of Watson without premium (subject tocertain conditions).  As of March 31,2007, the Company had not drawn any funds from the Revolving Facility.

30

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During the quarter ended March 31, 2007, the Company prepaid $150million of the amount outstanding under the Term Facility.  As of March 31, 2007, $500 million isoutstanding under the Term Facility.  Asa result of this pre-payment, our results for the first quarter of 2007 reflecta $2.7 million non-cash charge for debt repurchase charges.

Underthe terms of the 2006 Credit Facility, each of our subsidiaries, other thanminor subsidiaries, entered into a full and unconditional guarantee on a jointand several basis.  We are subject to,and, as of March 31, 2007, were in compliance with financial and operationcovenants under the terms of the Credit Facility.  The agreement currently contains thefollowing financial covenants:

·                  maintenance of a minimum net worth of atleast $1.33 billion;

·                  maintenance of a maximum leverage ratio notgreater than 3.25 to 1.0; and

·                  maintenance of a minimum interest coverageratio of at least 5.0 to 1.0.

AtMarch 31, 2007, our net worth was $1.71 billion, and our leverage ratio was2.24 to 1.0.   Our interest coverageratio for the three months ended March 31, 2007 was 8.3 to 1.0.

Underthe 2006 Credit Facility, interest coverage ratio, with respect to any financialcovenant period, is defined as the ratio of EBITDA for such period to interestexpense for such period.  The leverageratio, for any financial covenant period, is defined as the ratio of theoutstanding principal amount of funded debt for the borrower and itssubsidiaries at the end of such period, to EBITDA for such period.  EBITDA under the Credit Facility, for anycovenant period, is defined as net income plus (1) depreciation andamortization, (2) interest expense, (3) provision for income taxes, (4)extraordinary or unusual losses, (5) non-cash portion of nonrecurring lossesand charges, (6) other non-operating, non-cash losses, (7) minority interestexpense in respect of equity holdings in affiliates, (8) non-cash expensesrelating to stock-based compensation expense and (9) any one-time chargesrelated to the Andrx Acquisition; minus (1) extraordinary gains, (2) interestincome and (3) other non-operating, non-cash income.

***Long-termObligations***

The followingtable lists our enforceable and legally binding obligations as of March 31,2007.  Some of the amounts includedherein are based on management’s estimates and assumptions about theseobligations, including their duration, the possibility of renewal, anticipatedactions by third parties, and other factors. Because these estimates and assumptions are necessarily subjective, theenforceable and legally binding obligation we will actually pay in futureperiods may vary from those reflected in the table:
| ** **                                                        | ** ** | **Payments Due by Period (Including Interest)** | ** ** |
|-------------------------------------------------------------------|------------|--------------------------------------------------------------------------|------------|
| **(in thousands):**                                          | ** ** | **Total**                                                                | ** ** | **Less than   1 year** | ** ** | **1-3 years** | ** ** | **4-5 years** | ** ** | **Other** | ** ** | **After 5  years** | ** ** |
| Long-term and other  debt                                         |       |                                                                     |       |   |   |   |   |   |   |   |   |   |   |
|                                                              |       | $                                                                        | 1,321,443  |   | $ | 42,098 |   | $ | 228,750 |   | $ | 375,816 |   | $ | — |   | $ | 674,779 |   |
| Liabilities incurred  for acquisitions of products and businesses |       | 1,488                                                                    |       | 1,197 |   | — |   | — |   | — |   | 291 |   |
| Other taxes payable                                               |       | 45,328                                                                   |       | — |   | — |   | — |   | 45,328 |   | — |   |
| Operating lease  obligations                                      |       | 146,393                                                                  |       | 14,641 |   | 44,105 |   | 15,980 |   | — |   | 71,667 |   |
| Total contractual cash obligations                                |       | $                                                                        | 1,514,652  |   | $ | 57,936 |   | $ | 272,855 |   | $ | 391,796 |   | 45,328 |   | $ | 746,737 |   |
|                                                                   |            |                                                                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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The Company is involved in certain minor joint venture arrangementsthat are intended to complement the Company’s core business and markets.  The Company has the discretion to providefunding on occasion for working capital or capital expenditures.  The Company makes an evaluation of additionalfunding based on an assessment of the venture’s business opportunities.  The Company believes that any possiblecommitments arising from the current arrangements will not be significant tothe Company’s financial condition or results of operations.

The Company does not have any material off-balance sheet arrangementsthat have, or are reasonably likely to have, a current or future effect on ourfinancial condition, changes in financial conditions, revenues or expenses,results of operations, liquidity, capital expenditures or capital resources.

*Recent accounting pronouncements*

InJuly 2006, the Financial Accounting Standards Board (“FASB”) issuedInterpretation No. 48, “Accounting for Uncertainty in Income Taxes — AnInterpretation of FASB Statement No. 109” (“FIN 48”).  FIN 48 clarifies the accounting for theuncertainty in recognizing income taxes in an organization in accordance withFASB Statement No. 109 by providing detailed guidance for financial statementrecognition, measurement and disclosure involving uncertain tax positions.  FIN 48 requires an uncertain tax position tomeet a more-likely-than-not recognition threshold at the effective date to berecognized both upon the adoption of FIN 48 and in subsequent periods.  FIN 48 is effective for fiscal yearsbeginning after December 15, 2006.  Asthe provisions of FIN 48 will be applied to all tax positions upon initial adoption,the cumulative effect of applying the provisions of FIN 48 will be reported asan adjustment to the opening balance of retained earnings for that fiscalyear.  As a result of the adoption of FIN48, the Company recorded a $2.9 million increase in the liability forunrecognized tax benefits resulting in a decrease to the January 1, 2007retained earnings balance of $2.9 million (for additional information on theadoption of FIN 48, see NOTE 9 — INCOME TAXES in the accompanying Notesto Condensed Consolidated Financial Statements in this quarterly report on Form10-Q).

In September 2006, theFASB issued Statement of Financial Accounting Standards (“SFAS”) No. 157,“Fair-Value Measurements” (“SFAS 157”) which defines fair value, establishes aframework for measuring fair value in generally accepted accounting principlesand expands disclosures about fair-value measurements. SFAS 157 is effectivefor financial statements issued for fiscal years beginning after November 15,2007. The Company is currently reviewing this statements and has not yetdetermined the impact on its consolidated financial statements.

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**ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK**

We are exposed tomarket risk for changes in the market values of our investments (“InvestmentRisk”) and the impact of interest rate changes (“Interest Rate Risk”).  We have not used derivative financialinstruments in our investment portfolio. The quantitative and qualitative disclosures about market risk are setforth below.

**InvestmentRisk**

As of March 31,2007, our total holdings in equity securities of other companies, includingequity-method investments and available-for-sale securities, were $51.8million.  Of this amount, we hadequity-method investments of $48.2 million and publicly traded equitysecurities (available-for-sale securities) at fair value totaling $3.3 million($1.9 million that was included in “Marketable securities” and $1.4 millionthat was included in “Investments and other assets”).  The fair values of these investments aresubject to significant fluctuations due to volatility of the stock market andchanges in general economic conditions. Based on the fair value of the publicly traded equity securities we heldat March 31, 2007, an assumed 25%, 40% and 50% adverse change in themarket prices of these securities would result in a corresponding decline intotal fair value of approximately $0.8 million, $1.3 million and $1.7 million,respectively.

We regularly review the carrying value of ourinvestments and identify and recognize losses, for income statement purposes,when events and circumstances indicate that any declines in the fair values ofsuch investments, below our accounting basis, are other than temporary.

**Interest Rate Risk**

Our exposure to interest rate risk relates primarilyto our non-equity investment portfolio. Our cash is invested in A-rated money market mutual funds, short-termsecurities and auction rate securities. Consequently, our interest rate andprincipal risk are minimal.

During 2004, we acquired a significant amount of U.S.Treasury securities classified as available-for-sale securities, with nosecurity having a maturity in excess of two years.  These securities are exposed to interest ratefluctuations.  Because of the short-termnature of these investments, we are subject to minimal interest rate risk anddo not believe that an increase in market rates would have a significantnegative impact on the realized value of our portfolio.

Based on quotedmarket rates of interest and maturity schedules for similar debt issues, weestimate that the fair values of our CODES, our 2006 Credit Facility and ourother notes payable approximated their carrying values on March 31, 2007.  While changes in market interest rates mayaffect the fair value of our fixed-rate debt, we believe the effect, if any, ofreasonably possible near-term changes in the fair value of such debt on ourfinancial condition, results of operations or cash flows will not be material.

At this time, weare not party to any interest rate or derivative hedging contracts and have nomaterial foreign exchange or commodity price risks.

We do not believethat inflation has had a significant impact on our revenues or operations.

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**ITEM4.  CONTROLS AND PROCEDURES**

The Company maintainsdisclosure controls and procedures that are designed to ensure that informationrequired to be disclosed in the Company’s Exchange Act reports is recorded,processed, summarized and reported within the time periods specified in the SEC’srules and forms, and that such information is accumulated and communicated tothe Company’s management, including its Principal Executive Officer andPrincipal Financial Officer, as appropriate, to allow timely decisionsregarding required disclosure.  Indesigning and evaluating the disclosure controls and procedures, managementrecognized that any controls and procedures, no matter how well designed andoperated, can provide only reasonable assurance of achieving the desiredcontrol objectives, and management necessarily was required to apply itsjudgment in evaluating the cost-benefit relationship of possible controls andprocedures.  Also, the Company hasinvestments in certain unconsolidated entities. As the Company does not control or manage these entities, its disclosurecontrols and procedures with respect to such entities are necessarilysubstantially more limited than those it maintains with respect to itsconsolidated subsidiaries.

As required by SEC Rule13a-15(b), the Company carried out an evaluation, under the supervision andwith the participation of the Company’s management, including the Company’sPrincipal Executive Officer and Principal Financial Officer, of theeffectiveness of the design and operation of the Company’s disclosure controlsand procedures as of the end of the quarter covered by this Report. Based onthe foregoing, the Company’s Principal Executive Officer and PrincipalFinancial Officer concluded that the Company’s disclosure controls andprocedures were effective.

There have been nochanges in the Company’s internal control over financial reporting, during thethree months ended March 31, 2007, that has materially affected, or isreasonably likely to materially affect, the Company’s internal control overfinancial reporting.

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**PART II. OTHER INFORMATION AND SIGNATURES**

**ITEM 1. LEGAL PROCEEDINGS**

For information regarding legal proceedings, refer to “PARTI, ITEM 3. LEGAL PROCEEDINGS,” of our Annual Report on Form 10-K for the yearended December 31, 2006 and *Legal Matters*in NOTE 11 — CONTINGENCIES in the accompanying Notes to Condensed ConsolidatedFinancial Statements in this quarterly report on Form 10-Q.

**ITEM 1A. RISK FACTORS**

In addition to the other information set forth in thisreport, you should carefully consider the risk factors previously disclosed inItem 1A. to Part 1 of our Annual Report on Form 10-K for the year ended December 31,2006. There were no material changes from these risk factors during the firstquarter of 2007.

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**ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**

**(a) Recent Sales of Unregistered Securities**

There were nounregistered sales of equity securities.

**(b) Use of Proceeds**

N/A.

**(c) Issuer Purchases of Equity Securities**

On February 15, 2006, the Board authorized the expenditure of $300.0million to repurchase shares of the Company’s outstanding common stock (the “2006Repurchase Program”).

No common stock wasrepurchased under the 2006 Repurchase Program which expired on February 15,2007.

**ITEM 6. EXHIBITS**

(a) Exhibits:

Reference is hereby made to theExhibit Index on page 38.

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**SIGNATURES**

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.

 
|            | ** ** | **WATSON  PHARMACEUTICALS, INC.**                               |
|------------|------------|-----------------------------------------------------------------|
| ** ** | ** ** | **(Registrant)**                                                |
| ** ** | ** ** | ** **                                                      |
|       | By:        | **/s/ R.  Todd Joyce**                                          |
|       |       | R. Todd Joyce                                                   |
|       |       | Vice President —  Corporate Controller and Treasurer       |
|       |       |                                                            |
|       |       | (Principal Financial Officer and Principal  Accounting Officer) |

 

Date:  May 9, 2007

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**WATSON PHARMACEUTICALS, INC.**

**EXHIBIT INDEX TO FORM 10-Q****For the Quarterly Period Ended March 31, 2007**

 
| Exhibit  No. | ** ** | **Description**                                                                                                                           | ** ** |
|--------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------|------------|
| 10.1         |       | Second Amendment and Restatement of the 2001 Incentive Award Plan of  Watson Pharmaceuticals, Inc.                                        |       |
|         |       |                                                                                                                                      |       |
| 31.1         |       | Certification of Chairman and Chief Executive Officer pursuant to  Rule 13a-14a of the Securities Exchange Act of 1934.                   |       |
|         |       |                                                                                                                                      |       |
| 31.2         |       | Certification of Executive Vice President and Chief Financial Officer  pursuant to Rule 13a-14a of the Securities Exchange Act of 1934.   |       |
|         |       |                                                                                                                                      |       |
| 32.1         |       | Certification of Chairman and Chief Executive Officer pursuant to  Rule 13a-14(d) of the Securities Exchange Act of 1934.                 |       |
|         |       |                                                                                                                                      |       |
| 32.2         |       | Certification of Executive Vice President and Chief Financial Officer  pursuant to Rule 13a-14(d) of the Securities Exchange Act of 1934. |       |

 

 

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