**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-Q/A**

**Amendment No. 1**

 

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**ý****QUARTERLY REPORT PURSUANTTO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**FOR THE QUARTERLY PERIOD ENDED MARCH31, 2003**

 

**or**

 

**o****TRANSITION REPORT PURSUANTTO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the transition period from          to         **

 

**Commission file number 0-20045**

 

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**WATSONPHARMACEUTICALS, INC.**

(Exact name ofregistrant as specified in its charter)

 

| **Nevada**                                                      |   | **95-3872914**                        |
|-----------------------------------------------------------------|--------|---------------------------------------|
| (State or other jurisdiction of  incorporation or organization) |   | (I.R.S. Employer  Identification No.) |
|                                                            |
| **311 Bonnie Circle  Corona,  CA  92880-2882**        |
| (Address of  principal executive offices, including zip code)   |
|                                                            |
| **(909) 493-5300**                                              |
| (Registrant’s  telephone number, including area code)      |

 

Indicate by check markwhether 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 ý  No o

 

Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule 12b-2 of theExchange Act).  Yes ý  No o

 

The number of sharesoutstanding of the Registrant’s only class of common stock as of May 9,2003 was approximately 107,056,517.

 

 

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**WATSON PHARMACEUTICALS, INC.**

 

**TABLE OF CONTENTS**

 

**FORM 10-Q FOR THE QUARTERLY PERIODENDED MARCH 31, 2003**

 

**EXPLANATORY NOTE**

 

This Amendment No. 1 onForm 10-Q/A to our quarterly report on Form 10-Q for the three months endedMarch 31, 2003 revises Note J — “Impairment of Securities” in the accompanyingNotes to Consolidated Financial Statements contained herein. As amended, Note Jon page 13 reads as follows:

 

At March 31, 2003, investments and other assetsincluded an investment in 3 million shares of the common stock of GenelabsTechnologies, Inc. (Genelabs), a publicly traded company, with an adjusted costbasis of $3.9 million.  This investmenthas been classified as available-for-sale, pursuant to SFAS No. 115,“Accounting for Certain Investments in Debt and Equity Securities.”  Available-for-sale securities are carried atfair value, based on quoted market prices, with unrealized gains and lossesreported as a separate component of stockholders’ equity.  During the first quarter of 2003, managementdetermined that an other than temporary decline in the fair value of Genelabs’common stock existed and, as a result, wrote down the initial cost basis of theinvestment to its fair value at March 31, 2003 of $3.9 million.  In connection with this write-down, an assetimpairment charge of $13.0 million was recorded and recognized inearnings.  This impairment should havebeen recognized in the first quarter of 2002, as the investment had been in anunrealized loss position for an extended period.  Recognition of the impairment in the first quarter of 2003 was anerror.  However, this charge would nothave been material to the Company’s 2002 financial statements, and is notexpected to be material to the Company’s 2003 earnings or trend of earnings.

 

For the convenience of the reader, we have included our quarterlyreport on Form 10-Q in its entirety.

 
| **PART I.  FINANCIAL INFORMATION**                                                                    |
|------------------------------------------------------------------------------------------------------------|
|                                                                                                       |
| Item 1.  Consolidated Financial Statements:                                                           |
|                                                                                                       |   |
|                                                                                                       | Consolidated Balance  Sheets as of March 31, 2003 and December 31, 2002 |
|                                                                                                       |   |
|                                                                                                       | Consolidated  Statements of Income for the Three Months Ended March 31, 2003 and 2002 |
|                                                                                                       |   |
|                                                                                                       | Consolidated  Statements of Cash Flows for the Three Months Ended March 31, 2003 and 2002 |
|                                                                                                       |   |
|                                                                                                       | Notes to  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 6.  Exhibits and Reports on Form 8-K                                                             |
|                                                                                                       |   |
| Signatures                                                                                                 |
|                                                                                                       |

 

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**WATSONPHARMACEUTICALS, INC.**

**CONSOLIDATEDBALANCE SHEETS**

**(Unaudited;in thousands, except share amounts)**

 
|                                                                                                                      |   | **March 31,  2003** |      | **December 31,  2002** |   |
|---------------------------------------------------------------------------------------------------------------------------|--------|---------------------|-----------|------------------------|--------|
| **ASSETS**                                                                                                                |   |                |      |                   |   |
| Current assets:                                                                                                           |   |                |      |                   |   |
| Cash and cash equivalents                                                                                                 |   | $                   | 415,676   |                   | $      | 230,155 |   |
| Marketable securities                                                                                                     |   | 34,659              |      | 42,649                 |   |
| Accounts receivable, net                                                                                                  |   | 157,075             |      | 178,563                |   |
| Inventories                                                                                                               |   | 364,740             |      | 348,773                |   |
| Prepaid expenses and other current assets                                                                                 |   | 27,787              |      | 35,895                 |   |
| Deferred tax assets                                                                                                       |   | 81,959              |      | 77,416                 |   |
| Total current assets                                                                                                      |   | 1,081,896           |      | 913,451                |   |
| Property and equipment, net                                                                                               |   | 317,880             |      | 304,667                |   |
| Investments and other assets                                                                                              |   | 83,462              |      | 75,435                 |   |
| Deferred tax assets                                                                                                       |   | 33,919              |      | 34,596                 |   |
| Product rights and other intangibles, net                                                                                 |   | 1,048,830           |      | 889,027                |   |
| Goodwill                                                                                                                  |   | 446,288             |      | 446,288                |   |
| Total assets                                                                                                              |   | $                   | 3,012,275 |                   | $      | 2,663,464 |   |
|                                                                                                                      |   |                |      |                   |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                             |   |                |      |                   |   |
| Current liabilities:                                                                                                      |   |                |      |                   |   |
| Accounts payable and accrued expenses                                                                                     |   | $                   | 200,457   |                   | $      | 177,812 |   |
| Income taxes payable                                                                                                      |   | 83,421              |      | 111,565                |   |
| Current portion of long-term debt                                                                                         |   | —              |      | 83,360                 |   |
| Other current liabilities                                                                                                 |   | 1,719               |      | 2,728                  |   |
| Total current liabilities                                                                                                 |   | 285,597             |      | 375,465                |   |
|                                                                                                                      |   |                |      |                   |   |
| Long-term debt                                                                                                            |   | 722,426             |      | 331,877                |   |
| Other long-term liabilities                                                                                               |   | 7,881               |      | 5,948                  |   |
| Deferred tax liabilities                                                                                                  |   | 142,252             |      | 151,890                |   |
| Total liabilities                                                                                                         |   | 1,158,156           |      | 865,180                |   |
|                                                                                                                      |   |                |      |                   |   |
| Commitments and contingencies                                                                                             |   |                |      |                   |   |
|                                                                                                                      |   |                |      |                   |   |
| Stockholders’ equity:                                                                                                |   |                |      |                   |   |
| Preferred stock; no par value per share; 2,500,000  shares authorized; none issued                                        |   | —              |      | —                 |   |
| Common stock; $0.0033 par value per share;  500,000,000 shares authorized; 106,964,800 and 106,878,900 shares outstanding |   | 353                 |      | 353                    |   |
| Additional paid-in capital                                                                                                |   | 799,067             |      | 797,097                |   |
| Retained earnings                                                                                                         |   | 1,046,679           |      | 998,850                |   |
| Accumulated other comprehensive income                                                                                    |   | 8,020               |      | 1,984                  |   |
| Total stockholders’ equity                                                                                           |   | 1,854,119           |      | 1,798,284              |   |
| Total liabilities and stockholders’ equity                                                                           |   | $                   | 3,012,275 |                   | $      | 2,663,464 |   |

 

*See accompanying Notes to Consolidated FinancialStatements.*

 

1

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**WATSONPHARMACEUTICALS, INC.**

**CONSOLIDATEDSTATEMENTS OF INCOME**

**(Unaudited;in thousands, except per share amounts)**

 
|                                          |   | **Three Months Ended  March 31,** |    |
|-----------------------------------------------|--------|-----------------------------------|---------|
|                                          |   | **2003**                          |    | **2002** |   |
|                                          |   |                              |    |   |   |
| Net revenues                                  |   | $                                 | 336,922 |   | $ | 285,690 |   |
| Cost of sales                                 |   | 149,601                           |    | 135,687 |   |
| Gross profit                                  |   | 187,321                           |    | 150,003 |   |
|                                          |   |                              |    |   |   |
| Operating expenses:                           |   |                              |    |   |   |
| Research and development                      |   | 22,484                            |    | 18,519 |   |
| Selling, general and administrative           |   | 67,659                            |    | 62,263 |   |
| Amortization                                  |   | 18,435                            |    | 13,294 |   |
| Total operating expenses                      |   | 108,578                           |    | 94,076 |   |
| Operating income                              |   | 78,743                            |    | 55,927 |   |
|                                          |   |                              |    |   |   |
| Other income (expense):                       |   |                              |    |   |   |
| Equity in earnings (losses) of joint ventures |   | 117                               |    | (1,059 | ) |
| Impairment of securities                      |   | (13,042                           | )       | — |   |
| Gain on sale of securities                    |   | 1,089                             |    | — |   |
| Gain on sale of subsidiary                    |   | 15,676                            |    | — |   |
| Loss on early extinguishment of debt          |   | (2,807                            | )       | — |   |
| Interest income                               |   | 1,242                             |    | 1,599 |   |
| Interest expense                              |   | (5,341                            | )       | (5,160 | ) |
| Other income (expense)                        |   | (594                              | )       | 29 |   |
| Total other income (expense), net             |   | (3,660                            | )       | (4,591 | ) |
|                                          |   |                              |    |   |   |
| Income before income taxes                    |   | 75,083                            |    | 51,336 |   |
| Provision for income taxes                    |   | 27,254                            |    | 19,251 |   |
| Net income                                    |   | $                                 | 47,829  |   | $ | 32,085 |   |
|                                          |   |                              |    |   |   |
| Earnings per share:                           |   |                              |    |   |   |
| Basic                                         |   | $                                 | 0.45    |   | $ | 0.30 |   |
| Diluted                                       |   | $                                 | 0.44    |   | $ | 0.30 |   |
|                                          |   |                              |    |   |   |
| Weighted average shares outstanding:          |   |                              |    |   |   |
| Basic                                         |   | 106,942                           |    | 106,467 |   |
| Diluted                                       |   | 107,622                           |    | 107,423 |   |

 

*See accompanying Notes to Consolidated FinancialStatements.*

 

2

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**WATSONPHARMACEUTICALS, INC.**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

(Unaudited; inthousands)

 
|                                                         |   | **Three Months Ended****March 31,** |    |
|--------------------------------------------------------------|--------|-------------------------------------|---------|
|                                                         |   | **2003**                            |    | **2002** |   |
| **CASH FLOWS FROM OPERATING  ACTIVITIES:**                   |   |                                |    |   |   |
| Net income                                                   |   | $                                   | 47,829  |   | $ | 32,085 |   |
| Reconciliation to net cash provided by operating  activites: |   |                                |    |   |   |
| Depreciation                                                 |   | 6,926                               |    | 6,026 |   |
| Amortization                                                 |   | 18,435                              |    | 13,294 |   |
| Deferred income tax benefit                                  |   | (9,019                              | )       | (1,272 | ) |
| Equity in (earnings) losses of joint ventures                |   | (117                                | )       | 1,101 |   |
| Gain on sale of securities                                   |   | (1,089                              | )       | — |   |
| Gain on sale of subsidiary                                   |   | (15,676                             | )       | — |   |
| Loss on early extinguishment of debt                         |   | 2,807                               |    | — |   |
| Charge for impairment of securities                          |   | 13,042                              |    | — |   |
| Tax benefits related to exercises of stock options           |   | 50                                  |    | 140 |   |
| Other                                                        |   | (1,005                              | )       | 317 |   |
| Changes in assets and liabilities:                           |   |                                |    |   |   |
| Accounts receivable                                          |   | 19,292                              |    | (1,335 | ) |
| Inventories                                                  |   | (16,941                             | )       | 3,276 |   |
| Prepaid expenses and other current assets                    |   | 8,071                               |    | (850 | ) |
| Accounts payable and accrued expenses                        |   | 24,629                              |    | (6,774 | ) |
| Income taxes payable                                         |   | (28,172                             | )       | 43,160 |   |
| Other assets                                                 |   | (778                                | )       | 2,703 |   |
| Total adjustments                                            |   | 20,455                              |    | 59,786 |   |
| Net cash provided by operating activities                    |   | 68,284                              |    | 91,871 |   |
| **CASH FLOWS FROM INVESTING  ACTIVITIES:**                   |   |                                |    |   |   |
| Additions to property and equipment                          |   | (21,580                             | )       | (14,750 | ) |
| Acquisitions of product rights                               |   | (178,238                            | )       | (70,204 | ) |
| Proceeds from sales of securities                            |   | 3,829                               |    | — |   |
| Proceeds from sale of subsidiary                             |   | 16,368                              |    | — |   |
| Other investing activities, net                              |   | 1,212                               |    | 1,060 |   |
| Net cash used in investing activities                        |   | (178,409                            | )       | (83,894 | ) |
| **CASH FLOWS FROM FINANCING  ACTIVITIES:**                   |   |                                |    |   |   |
| Proceeds from issuance of debt, net of issuance  costs       |   | 560,625                             |    | — |   |
| Proceeds from borrowings under revolving credit  facility    |   | 60,000                              |    | — |   |
| Principal payments on credit facility                        |   | (325,940                            | )       | (31,604 | ) |
| Principal payments on acquisition liabilities                |   | (1,009                              | )       | — |   |
| Proceeds from stock plans                                    |   | 1,970                               |    | 387 |   |
| Net cash provided by (used in) financing  activities         |   | 295,646                             |    | (31,217 | ) |
| Net increase (decrease) in cash and cash  equivalents        |   | 185,521                             |    | (23,240 | ) |
| Cash and cash equivalents at beginning of period             |   | 230,155                             |    | 193,731 |   |
| Cash and cash equivalents at end of period                   |   | $                                   | 415,676 |   | $ | 170,491 |   |

 

*See accompanying Notes to Consolidated FinancialStatements.*

 

3

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**WATSON PHARMACEUTICALS, INC.**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

**NOTE A – GENERAL**

 

Watson Pharmaceuticals, Inc. (Watson or the Company) is primarilyengaged in the development, manufacture, marketing, sale and distribution ofbranded and off-patent (generic) pharmaceutical products.  Watson was incorporated in 1985 and beganoperations as a manufacturer and marketer of generic pharmaceuticals. TheCompany also develops advanced drug delivery systems designed to enhance thetherapeutic benefits of existing drug forms. Watson operates manufacturing, distribution, research and developmentand administrative facilities primarily in the United States of America (U.S.).

 

The accompanying consolidated financial statements should be read inconjunction with the Company’s Annual Report on Form 10-K for the yearended December 31, 2002.  Certaininformation and footnote disclosures normally included in annual financialstatements prepared in accordance with generally accepted accounting principleshave been condensed or omitted from the accompanying consolidated financialstatements.  The accompanying interimfinancial statements are unaudited, but reflect all adjustments which are, inthe opinion of management, necessary to present fairly Watson’s consolidatedfinancial position, results of operations and cash flows for the periodspresented.  Unless otherwise noted, allsuch adjustments are of a normal, recurring nature.  Certain reclassifications, none of which affected net income orretained earnings, have been made to prior period amounts to conform to currentperiod presentation.  The Company’sresults of operations and cash flows for the interim periods are notnecessarily indicative of the results of operations and cash flows that it mayachieve in future periods or for the full year.

 

*Comprehensive income*

 

Comprehensive income includes all changes in equity during a periodexcept those that resulted from investments by or distributions to theCompany’s stockholders.  Othercomprehensive income refers to revenues, expenses, gains and losses that, undergenerally accepted accounting principles, are included in comprehensive income,but excluded from net income as these amounts are recorded directly as anadjustment to stockholders’ equity. Watson’s other comprehensive income (loss) is comprised of unrealizedgains (losses) on its holdings of publicly traded equity securities, net ofrealized gains included in net income. The components of comprehensive income and related income taxesconsisted of the following (in thousands):

 

|                                               |   | **Three Months Ended  March 31,** |   |
|----------------------------------------------------|--------|-----------------------------------|--------|
|                                               |   | **2003**                          |   | **2002** |   |
|                                               |   |                              |   |   |   |
| Net income                                         |   | $                                 | 47,829 |   | $ | 32,085 |   |
|                                               |   |                              |   |   |   |
| Other comprehensive income (loss):                 |   |                              |   |   |   |
| Unrealized holding gain (loss) on securities       |   | (2,632                            | )      | (46,617 | ) |
| Less related income taxes                          |   | 1,053                             |   | 18,647 |   |
| Total unrealized gain (loss) on securities, net    |   | (1,579                            | )      | (27,970 | ) |
|                                               |   |                              |   |   |   |
| Reclassification for losses included in net income |   | 11,953                            |   | — |   |
| Less related income taxes                          |   | (4,338                            | )      | — |   |
| Total reclassification, net                        |   | 7,615                             |   | — |   |
| Total other comprehensive income (loss)            |   | 6,036                             |   | (27,970 | ) |
| Total comprehensive income                         |   | $                                 | 53,865 |   | $ | 4,115 |   |

 

4

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*Earnings per share*

 

Basic earnings per share is computed by dividing net income by theweighted average common shares outstanding during a period.  Diluted earnings per share is based on thetreasury stock method and is computed by dividing net income by the weightedaverage number of common shares and common share equivalents outstanding duringthe periods presented assuming the exercise of all in-the-money stockoptions.  Common share equivalents havebeen excluded where their inclusion would be anti-dilutive.  A reconciliation of the numerators anddenominators of basic and diluted earnings per share consisted of the following(in thousands, except per share amounts):

 
|                                               |   | **Three Months Ended  March 31,** |   |
|----------------------------------------------------|--------|-----------------------------------|--------|
|                                               |   | **2003**                          |   | **2002** |   |
|                                               |   |                              |   |   |   |
| **Numerator:**                                     |   |                              |   |   |   |
| Net income                                         |   | $                                 | 47,829 |   | $ | 32,085 |   |
| **Denominator:**                                   |   |                              |   |   |   |
| Basic weighted average common shares outstanding   |   | 106,942                           |   | 106,467 |   |
| Effect of dilutive stock options                   |   | 680                               |   | 956 |   |
| Diluted weighted average common shares outstanding |   | 107,622                           |   | 107,423 |   |
|                                               |   |                              |   |   |   |
| **Basic earnings per share**                       |   | $                                 | 0.45   |   | $ | 0.30 |   |
|                                               |   |                              |   |   |   |
| **Diluted earnings per share**                     |   | $                                 | 0.44   |   | $ | 0.30 |   |

 

Excluded from the computation of diluted earnings per share areoutstanding common stock options with an exercise price greater than theaverage market price of the common shares for the period reported.  For the three month periods ended March 31,2003 and 2002, excluded from the computation were stock options to purchase 9.9million and 9.7 million common shares, respectively.

 

If all of the convertible contingent debentures (as described in NoteH) were converted as of March 31, 2003, an additional 14,357,054 shares ofWatson’s common stock would be outstanding.

 

*Stock-based compensation*

 

The Company accounts for its stock-based employee compensation plansusing the recognition and measurement principles of Accounting Principles BoardOpinion No. 25, “Accounting for Stock Issued to Employees” and relatedinterpretations.  No stock-basedemployee compensation expense has been recognized for the options in theaccompanying consolidated statements of income, as all options granted underthe plans had an exercise price equal to the market value of the underlyingcommon stock on the date of grant.

 

5

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Had the Company determined compensation expense for all prior periodsusing the fair value method prescribed by Statement of Financial AccountingStandards (SFAS) No. 123, “Accounting for Stock-Based Compensation”, theCompany’s net income and earnings per share would have been as follows (inthousands, except EPS amounts):

 

|                                                                                                     |   | **Three Months Ended  March 31,** |   |
|----------------------------------------------------------------------------------------------------------|--------|-----------------------------------|--------|
|                                                                                                     |   | **2003**                          |   | **2002** |   |
|                                                                                                     |   |                              |   |   |   |
| Net income                                                                                               |   | $                                 | 47,829 |   | $ | 32,085 |   |
| Total stock-based employee compensation expense  determined under fair value based method for all awards |   | 8,338                             |   | 13,931 |   |
| Tax effect of compensation expense                                                                       |   | (3,027                            | )      | (5,224 | ) |
| Pro forma net income                                                                                     |   | $                                 | 42,518 |   | $ | 23,378 |   |
|                                                                                                     |   |                              |   |   |   |
| Basic EPS - as reported                                                                                  |   | $                                 | 0.45   |   | $ | 0.30 |   |
| Basic EPS - pro forma                                                                                    |   | $                                 | 0.40   |   | $ | 0.22 |   |
|                                                                                                     |   |                              |   |   |   |
| Diluted EPS - as reported                                                                                |   | $                                 | 0.44   |   | $ | 0.30 |   |
| Diluted EPS - pro forma                                                                                  |   | $                                 | 0.40   |   | $ | 0.22 |   |
|                                                                                                     |   |                              |   |   |   |
| Weighted average shares outstanding:                                                                     |   |                              |   |   |   |
| Basic                                                                                                    |   | 106,942                           |   | 106,467 |   |
| Diluted                                                                                                  |   | 107,622                           |   | 107,423 |   |

 

The weighted average fair value of the options has been estimated onthe date of grant using the Black-Scholes option-pricing model.  Weighted averages are used because ofvarying assumed exercise dates.  Thefollowing weighted average assumptions were used for options granted during therespective periods:

 

|                    |   | **Three Months Ended  March 31,** |   |
|-------------------------|--------|-----------------------------------|--------|
|                    |   | **2003**                          |   | **2002** |   |
|                    |   |                              |   |   |   |
| Dividend yield          |   | None                              |   | None |   |
| Expected volatility     |   | 44%                               |   | 38% |   |
| Risk-free interest rate |   | 3.48%                             |   | 4.21% |   |
| Expected term           |   | 5.2 years                         |   | 5.1 years |   |

 

*Recent accounting pronouncements*

 

In July 2002, the Financial Accounting Standards Board (FASB) issuedSFAS No. 146, “Accounting for Costs Associated with Exit or DisposalActivities.”  SFAS No. 146 requiresrecognition of a liability for a cost associated with an exit or disposalactivity when the liability is incurred, as opposed to when the entity commitsto an exit plan under previous guidance. This statement is effective for exitor disposal activities initiated after December 31, 2002. The Company adoptedSFAS No. 146 on January 1, 2003, which had no material impact on the Company’sresults of operations or financial position.

 

6

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In December 2002, the FASB issued SFAS No. 148, “Accounting forStock-Based Compensation — Transition and Disclosure.”  SFAS No. 148 amends SFAS No. 123,“Accounting for Stock-Based Compensation,” to provide alternative methods oftransition for a voluntary change to the fair value based method of accountingfor stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No.123 to require prominent disclosures in both annual and interim financialstatements about the method of accounting for stock-based employee compensationand the effect of the method used on reported results.  The Company adopted SFAS No. 148 on January1, 2003, which had no material impact on the Company’s results of operations orfinancial position.

 

In January 2003, the FASB issued Interpretation No. (FIN) 46,“Consolidation of Variable Interest Entities.” FIN 46 requires reporting entities to perform an evaluation in order todetermine whether the reporting entity has a controlling financial interest ina variable interest entity, and if that interest requires consolidation and/ordisclosure by the reporting entity.  FIN46 is effective immediately for all new variable interest entities created oracquired after January 31, 2003.  Forvariable interest entities created or acquired prior to February 1, 2003, theprovisions of FIN 46 must be applied for the first interim or annual periodbeginning after June 15, 2003.  TheCompany does not believe that the adoption of FIN 46 will have a materialimpact on its results of operations or financial position.

 

**NOTE B – ACQUISITIONS OF PRODUCTRIGHTS**

 

In February 2003, Watson acquired the U.S. rights to the Fioricetâand Fiorinalâ product lines from Novartis PharmaceuticalsCorporation (Novartis).  These productsare indicated for the treatment of tension headaches.  The Company paid approximately $178 million in cash for therights to these products.

 

**NOTE C – MARKETABLE SECURITIES**

 

Marketable securities include Watson’s investment in the common stockof Andrx Corporation — Andrx Group (Andrx) and Dr. Reddy’s Laboratories,Limited (Dr. Reddy).  The Companyaccounts for these investments at fair market value as available-for-salesecurities.

 

Andrx is primarily engaged in the formulation and commercialization ofcontrolled-release pharmaceutical products using proprietary drug deliverytechnologies.  Andrx common stock tradeson the Nasdaq National Market System under the symbol ADRX.  As of March 31, 2003, Watson ownedapproximately 1.5 million shares of Andrx common stock (approximately 2%of the total Andrx common stock then outstanding) with a market value of $18.1million.  The unrealized gain on theCompany’s investment in Andrx was $8.4 million and $11.0 million (net ofincome taxes of $5.6 million and $7.4 million) at March 31, 2003 and December31, 2002, respectively.  Watson sold noshares of Andrx common stock during the three months ended March 31, 2003 and2002.

 

Dr. Reddy is a developer and manufacturer of active pharmaceuticalingredients and pharmaceutical products. Dr. Reddy’s shares trade on the Bombay Stock Exchange and on the NewYork Stock Exchange in the form of American Depositary Shares.  As of March 31, 2003, Watson owned approximately850,000 shares of Dr. Reddy common stock (approximately 1% of the total Dr.Reddy common shares then outstanding) with a market value of $16.5million.  The unrealized gain on theCompany’s investment in Dr. Reddy was $2.6 million and $3.0 million (net ofincome taxes of $1.7 million and $2.0 million), at March 31, 2003 and December31, 2002, respectively.

 

During the three months ended March 31, 2003, Watson sold 190,000shares of Dr. Reddy common stock and recorded a pre-tax gain of $1.1million.  The Company did not sell anyof its shares of Dr. Reddy common stock during the three months ended March 31,2002.

 

7

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**NOTE D – OPERATING SEGMENTS**

 

Watson has two reportable operating segments: branded and genericpharmaceutical products.  The brandedproducts segment includes the Company’s lines of Women’s Health,Urology/General Products and Nephrology products. Watson has aggregated itsbranded product lines in a single segment because of similarities in regulatoryenvironment, manufacturing processes, methods of distribution and types ofcustomer.  This segment includespatent-protected products and trademarked generic products that Watson promotesdirectly to healthcare professionals as branded pharmaceutical products.  The generic products segment includesoff-patent pharmaceutical products that are therapeutically equivalent toproprietary products.  The Company sellsits branded and generic products primarily to pharmaceutical wholesalers, drugdistributors and chain drug stores.

 

The accounting policies of the segments are the same as those describedin the Company’s Annual Report on Form 10-K for the year ended December 31,2002.  Watson primarily evaluates theperformance of its segments based on net revenues and gross profit.  The “other” classification consistsprimarily of contingent payments received from the settlement of a legaldispute and revenues from research, development and licensing fees.  The Company does not report depreciationexpense, total assets, and capital expenditures by segment as such informationis not used by management, nor accounted for at the segment level.  Net revenues and gross profit informationfor the Company’s segments consisted of the following (in thousands):

 

|                            |   | **Three Months Ended  March 31,** |    |
|---------------------------------|--------|-----------------------------------|---------|
|                            |   | **2003**                          |    | **2002** |   |
|                            |   |                              |    |   |   |
| **Net revenues:**               |   |                              |    |   |   |
| Branded pharmaceutical products |   | $                                 | 183,761 |   | $ | 161,527 |   |
| Generic pharmaceutical products |   | 143,199                           |    | 116,083 |   |
| Other                           |   | 9,962                             |    | 8,080 |   |
| Total net revenues              |   | $                                 | 336,922 |   | $ | 285,690 |   |
| **Gross profit:**               |   |                              |    |   |   |
| Branded pharmaceutical products |   | $                                 | 140,697 |   | $ | 120,581 |   |
| Generic pharmaceutical products |   | 36,662                            |    | 21,342 |   |
| Other                           |   | 9,962                             |    | 8,080 |   |
| Total gross profit              |   | $                                 | 187,321 |   | $ | 150,003 |   |

 

**NOTE E – INVENTORIES**

 

Inventories consist of finished goods held for distribution, rawmaterials and work in process. Additionally, at March 31, 2003, the Company held approximately $29million in inventory relating to products that are pending approval by the FDAor have not been launched due to contractual restrictions.  Inventories are stated at the lower of cost(first-in, first-out method) or market (net realizable value) and consisted ofthe following (in thousands):

 

|              |   | **March 31,  2003** |    | **December 31,  2002** |   |
|-------------------|--------|---------------------|---------|------------------------|--------|
|              |   |                |    |                   |   |
| Raw materials     |   | $                   | 119,227 |                   | $      | 116,806 |   |
| Work-in-process   |   | 86,981              |    | 80,062                 |   |
| Finished goods    |   | 158,532             |    | 151,905                |   |
| Total inventories |   | $                   | 364,740 |                   | $      | 348,773 |   |

 

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# **NOTE F – ASSETS HELD FORDISPOSITION**

 

In connection with the acquisition of Schein Pharmaceutical, Inc.(Schein), Watson acquired two injectable pharmaceutical manufacturingfacilities, Steris Laboratories, Inc. (Steris), located in Phoenix, Arizona andMarsam Pharmaceuticals, Inc. (Marsam), located in Cherry Hill, New Jersey.  Upon acquisition, Watson’s intent was todispose of these facilities, and therefore these assets were reported as assetsheld for disposition in the Company’s Consolidated Balance Sheets.  Watson recorded these assets held fordisposition at estimated fair value. The operating expenses associated with the facilities were recordedseparately in the Company’s Consolidated Statements of Income as loss on assetsheld for disposition.

 

At December 31, 2002, the Company had approximately $6 million ofproperty related to Marsam and approximately $22 million of inventories andapproximately $1 million of fixed assets related to Steris.

 

On January 1, 2003 Watson reclassified its assets held for dispositionas held and used.  This reclassificationwas made as a result of the absence of a completed sale transaction or bindingoffer for each of the facilities, in accordance with SFAS No. 144.  The related assets were reclassified asinventories and property and equipment, as appropriate, in the Company’sConsolidated Balance Sheets.  Theoperating expenses of the Steris facility for the first quarter of 2003 wererecorded in the Company’s Consolidated Statements of Income as cost of sales,research and development expenses and selling, general and administrativeexpenses, as appropriate.

 

The following table illustrates the changes made to the consolidatedbalance sheet as of December 31, 2002 and the consolidated statement of incomefor the three months ended March 31, 2002, included in this Quarterly Report,as a result of the reclassification (in thousands):

 
|                                         |   | **As  Previously  Reported** |    | **As  Currently  Reported** |   |
|----------------------------------------------|--------|------------------------------|---------|-----------------------------|--------|
| **Consolidated Balance Sheet:**              |   |                         |    |                        |   |
|                                         |   |                         |    |                        |   |
| Assets held for disposition                  |   | $                            | 29,362  |                        | $      | — |   |
| Inventories                                  |   | $                            | 326,741 |                        | $      | 348,773 |   |
| Property and equipment, net                  |   | $                            | 297,337 |                        | $      | 304,667 |   |
|                                         |   |                         |    |                        |   |
| **Consolidated Statement of Income:**        |   |                         |    |                        |   |
|                                         |   |                         |    |                        |   |
| Loss on assets held for disposition          |   | $                            | 6,986   |                        | $      | — |   |
| Cost of sales                                |   | $                            | 129,535 |                        | $      | 135,687 |   |
| Gross profit                                 |   | $                            | 156,155 |                        | $      | 150,003 |   |
| Research and development expenses            |   | $                            | 18,382  |                        | $      | 18,519 |   |
| Selling, general and administrative expenses |   | $                            | 61,566  |                        | $      | 62,263 |   |

 

 

Although the assets were reclassified as held and used, the Companycontinues its efforts to dispose of the remaining Marsam property and theSteris facility through sale or otherwise.

 

**NOTE G – GOODWILL AND OTHER INTANGIBLE ASSETS**

 

Watson tests its goodwill and intangible assets with indefinite livesby comparing the fair value of each of the Company’s reporting units to therespective carrying value of the reporting units.  The Company performs this impairment testing annually during thesecond quarter.  The Company’s reportingunits have been identified by Watson as branded and generic pharmaceuticalproducts.  The carrying value of eachreporting unit is 

 

9

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determined by assigningthe assets and liabilities, including the existing goodwill and intangibleassets, to those reporting units. Goodwill is considered impaired if the carrying amount exceeds the fairvalue of the asset.

 

There was no impairment of or additions to goodwill recorded during thethree months ended March 31, 2003.  AtMarch 31, 2003, goodwill for the Company’s reporting units consisted of thefollowing (in thousands):

 

| Branded pharmaceutical  products |   | $      | 358,798 |   |
|----------------------------------|--------|--------|---------|--------|
| Generic pharmaceutical products  |   | 87,490 |    |
| Total goodwill                   |   | $      | 446,288 |   |

 

Other intangible assets consist primarily of product rights.  The original cost and accumulatedamortization of these intangible assets is as follows (in thousands):

 
|                                              |   | **March 31,  2003** |      | **December 31,  2002** |   |
|---------------------------------------------------|--------|---------------------|-----------|------------------------|--------|
|                                              |   |                |      |                   |   |
| Product rights and related intangibles            |   | $                   | 1,285,438 |                   | $      | 1,107,200 |   |
| Less accumulated amortization                     |   | (236,608            | )         | (218,173               | )      |
| Total product rights and related intangibles, net |   | $                   | 1,048,830 |                   | $      | 889,027 |   |

 

Assuming no additions, disposals or adjustments are made to thecarrying values and/or useful lives of the assets, annual amortization expenseon product rights and related intangibles is estimated to be approximately$71.7 million in 2003, $71.4 million in 2004 and $71.7 million in each of 2005,2006 and 2007.  The Company’s currentproduct rights and related intangibles have a weighted average useful life ofapproximately nineteen years.

 

**NOTE H –LONG-TERM DEBT**

Long-term debt consisted of the following (in thousands):

 
|                                                                          |   | **March 31,  2003** |    | **December 31,  2002** |   |
|-------------------------------------------------------------------------------|--------|---------------------|---------|------------------------|--------|
|                                                                          |   |                |    |
| Senior unsecured notes, 7.125%, face amount of  $150 million, due 2008        |   | $                   | 149,062 |                   | $      | 149,023 |   |
| Term loan facility, due 2005                                                  |   | —              |    | 265,928                |   |
| Convertible contingent debentures, face amount of  $575 million due 2023      |   | 575,000             |    | —                 |   |
| Less:   Unamortized discount on debentures                               |   | (1,910              | )       | —                 |   |
| Convertible contingent debentures, face amount of  $575 million due 2023, net |   | 573,090             |    | —                 |   |
| Other notes payable                                                           |   | 274                 |    | 286                    |   |
| Total debt                                                                    |   | $                   | 722,426 |                   | $      | 415,237 |   |
| Less current portion                                                          |   | —              |    | (83,360                | )      |
| Total long-term debt                                                          |   | $                   | 722,426 |                   | $      | 331,877 |   |

 

In May 1998, Watson issued $150 million of senior unsecured notes (1998Senior Notes).  These notes are due inMay 2008, with interest only payments due semi-annually in May andNovember at an effective rate of 7.2%, but may be redeemed earlier undercertain circumstances.

 

10

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The 1998 Senior Notes were issued pursuant to a shelf registrationstatement authorizing up to $300 million in debt securities, preferred stock orcommon stock.  On April 2, 2003, theCompany determined that it did not intend to offer any additional debtsecurities, preferred stock or common stock under the registration statement,and filed an amendment with the Securities and Exchange Commissionderegistering the remaining unsold $150 million aggregate amount of debtsecurities, preferred stock and common stock covered by the registrationstatement.

 

In March 2003, the Company issued $575 million of convertiblecontingent senior debentures (CODES). These CODES, which are convertible into shares of Watson’s common stockupon the occurrence of certain events, are due in March 2023, with interestpayments due semi-annually in March and September at an effective annualinterest rate of 2.1%.

 

The CODES are convertible into Watson’s common stock at a conversionprice of approximately $40.05 per share (subject to certain adjustments).  These CODES may be converted, at the optionof the holders, prior to maturity under any of the following circumstances:

 

•                  duringany quarterly conversion period (period from and including the thirtiethtrading day in a fiscal quarter to, but not including, the thirtieth tradingday in the immediately following fiscal quarter) if the closing sale price pershare of Watson’s common stock for a period of at least 20 consecutive tradingdays during the 30 consecutive trading-day period ending on the first day ofsuch conversion period is more than 125% of the conversion price in effect onthat thirtieth day;

 

•                  onor before March 15, 2018, during the five business-day period following any 10consecutive trading-day period in which the daily average trading price for theCODES for such ten-day period was less than 105% of the average conversionvalue for the debentures during that period. This conversion feature represents an embedded derivative.  However, based on the de minimis valueassociated with this feature, no value has been assigned at issuance and atMarch 31, 2003;

 

•                  duringany period, following the earlier of (a) the date the CODES are rated by bothStandard & Poor’s Rating Services and Moody’s Investor Services, Inc., and(b) April 21, 2003, when the long-term credit rating assigned to the CODES byeither Standard & Poor’s or Moody’s (or any successors to these entities)is lower than “BB” or “Ba3”, respectively, or when either of these ratingagencies does not have a rating then assigned to the CODES for any reason,including any withdrawal or suspension of a rating assigned to the CODES.  This conversion feature represents an embeddedderivative.  However, based on the deminimis value associated with this feature, no value has been assigned atissuance and at March 31, 2003;

 

•                  ifthe CODES have been called for redemption; or

 

•                  uponthe occurrence of specified corporate transactions.

 

The Company may redeem some or all of the CODES for cash, on or afterMarch 20, 2008 for a price equal to 100% of the principal amount of the CODESplus accrued and unpaid interest (including contingent interest) to, butexcluding, the redemption date.

 

The CODES contain put options which may require the Company torepurchase for cash all or a portion of the CODES on March 15 of 2010, 2015 and2018 at a repurchase price equal to 100% of the principal amount of the CODESplus any accrued and unpaid interest (including contingent interest) to, butexcluding, the date of repurchase.

 

11

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In addition, the holders have the right to receive contingent interestpayments during any six-month period from March 15 to September 14 and fromSeptember 15 to March 14, commencing on September 15, 2003, if the averagetrading price of the CODES for the five trading days ending on the secondtrading day immediately preceding the relevant six-month period equals 120% ormore of the principal amount of the CODES. The interest rate used to calculate the contingent interest is thegreater of 5% of the Company’s then-current estimated per annum borrowing ratefor senior non-convertible fixed-rate debt with a maturity date and other termscomparable to that of the CODES or 0.33% per annum.  This contingent interest payment feature is an embeddedderivative and has been bifurcated and recorded separately in the ConsolidatedBalance Sheets in other long-term liabilities. The initial fair value assigned to the embedded derivative was $1.9million, which is recorded as a discount to the CODES.

 

The Company used a portion of the proceeds from the issuance of theCODES to retire the outstanding balance of the Company’s term loan andrevolving credit facility it entered into in July 2000 (2000 Facility).  The total outstanding balance of the 2000Facility consisted of a $246 million term loan balance and a $60 millionrevolving credit balance. The Company terminated the 2000 Facility in March2003 upon repayment of the outstanding balance.  As a result of the early retirement of the 2000 Facility, theCompany incurred a charge in the amount of $2.8 million for the unamortizedbank fees associated with this debt. This charge is reported separately in the Consolidated Statements ofIncome.

 

**NOTE I – FINANCIAL INSTRUMENTS**

 

*Fair value of financial instruments*

 

The Company’s financial instruments consist primarily of cash and cashequivalents, marketable securities, accounts and other receivables,investments, trade accounts payable, senior subordinated notes, CODES andembedded derivatives related to the issuance of the CODES.  The carrying amounts of cash and cashequivalents, marketable securities, accounts and other receivables and tradeaccounts payable are representative of their respective fair values due totheir relatively short maturities.  Thefair values of investments in companies that are publicly traded are based onquoted market prices.  The fair value ofinvestments in privately held companies, or cost-method investments, are basedon historical cost, adjusted for any write-down related to impairment.  The Company estimates the fair value of itsfixed rate long-term obligations based on quoted market rates of interest andmaturity schedules for similar issues. The carrying value of these obligations approximates their fairvalue.  The fair value of the embeddedderivatives related to the CODES is based on a present value technique usingdiscounted expected future cash flows.

 

*Derivative financial instruments*

 

The Company’s derivative financial instruments consist of embeddedderivatives related to its CODES.  Theseembedded derivatives include certain conversion features and a contingentinterest feature.   See Note H for amore detailed description of these features of the CODES.  Although the conversion features representembedded derivative financial instruments, based on the de minimis value ofthese features at the time of issuance and at March 31, 2003, no value has beenassigned to these instruments.  Thecontingent interest feature provides unique tax treatment under the InternalRevenue Service’s Contingent Debt Regulations. In essence, interest accrues, for tax purposes, on the basis of theinstrument’s comparable yield (the yield at which the issuer would issue afixed rate instrument with similar terms). This embedded derivative is reportedon the Company’s consolidated balance sheets at fair value and the changes inthe fair value of the embedded derivative are reported as gains or losses inthe Company’s Consolidated Statements of Income.

 

At March 31, 2003 and 2002, the carrying amounts and estimated fairvalues of the Company’s derivative financial instruments were as follows (inthousands): 

 

12

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|                |   | **March 31,**        |   |
|---------------------|--------|----------------------|--------|
|                |   | **2003**             |   | **2002** |   |
|                |   | **Carrying  Amount** |   | **Fair  Value** |   | **Carrying  Amount** |   | **Fair  Value** |   |
|                |   |                 |   |   |   |   |   |   |   |
| Embedded derivative |   | $                    | 1,993  |   | $ | 1,993 |   | $ | — |   | $ | — |   |
|                     |        |                      |        |  |  |  |  |  |  |  |  |  |  |

 

**NOTE J – IMPAIRMENT OF SECURITIES**

 

At March 31, 2003, investments and other assetsincluded an investment in 3 million shares of the common stock of GenelabsTechnologies, Inc. (Genelabs), a publicly traded company, with an adjusted costbasis of $3.9 million.  This investmenthas been classified as available-for-sale, pursuant to SFAS No. 115,“Accounting for Certain Investments in Debt and Equity Securities.”  Available-for-sale securities are carried atfair value, based on quoted market prices, with unrealized gains and lossesreported as a separate component of stockholders’ equity.  During the first quarter of 2003, managementdetermined that an other than temporary decline in the fair value of Genelabscommon stock existed and, as a result, wrote down the initial cost basis of theinvestment to its fair value at March 31, 2003 of $3.9 million.  In connection with this write-down, an assetimpairment charge of $13.0 million was recorded and recognized inearnings.  This impairment should havebeen recognized in the first quarter of 2002, as the investment had been in anunrealized loss position for an extended period.  Recognition of the impairment in the first quarter of 2003 was anerror.  However, this charge would nothave been material to the Company’s 2002 financial statements, and is notexpected to be material to the Company’s 2003 earnings or trend of earnings.

 

**NOTE K – SALE OF SUBSIDIARY**

 

During the first quarter of 2003, the Company completed the sale of itssubsidiary located in the United Kingdom (UK). The Company received proceeds from this sale of approximately $16.4million and recorded a pre-tax gain of approximately $15.7 million.  During 2002, the subsidiary had netrevenues, gross profit and net income of $10.8 million, $6.3 million and $3.2million, respectively.

 

In connection with the sale, the Company has provided certainwarranties and indemnifications to the buyer including an indemnificationrelating to web-site content. The buyer must give written notice to the Companywithin 18 months of the completion of the sale transaction of any claim arisingout of these indemnifications.  TheCompany does not expect any liability arising out of a claim, if any, to have amaterial adverse impact on its results of operations, financial position orcash flows.  No liability has beenrecorded in relation to these indemnifications at March 31, 2003.

 

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**ITEM2.  MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

The following discussion of our financial condition and the results ofour operations should be read in conjunction with the consolidated financialstatements and notes thereto included elsewhere in this Quarterly Report.  This discussion contains forward-lookingstatements that are subject to known and unknown risks, uncertainties and otherfactors that may cause our actual results to differ materially from thoseexpressed or implied by such forward-looking statements.  These risks, uncertainties and other factorsinclude, among others, those identified under “Cautionary Note RegardingForward-Looking Statements” and elsewhere in this Quarterly Report and under“Risk Factors” in our Annual Report on Form 10-K for the year ended December31, 2002.

 

**Results of Operations**

 

***Net Revenues***

 
|                              |   | **Three  Months Ended  March 31,** |    |
|-----------------------------------|--------|------------------------------------|---------|
|                              |   |                               |    |   |   | **Change** |   |
| **($ in thousands):**             |   | **2003**                           |    | **2002** |   | **$** |   | **%** |   |
|                              |   |                               |    |   |   |   |   |   |   |
| Net  Revenues by Segment:         |   |                               |    |   |   |   |   |   |   |
| Branded  pharmaceutical products  |   | $                                  | 183,761 |   | $ | 161,527 |   | $ | 22,234 |   | 13.8 | % |
| *% of total product net revenues* |   | *56.2*                             | *%*     | *58.2* | % |   |   |   |   |
| Generic  pharmaceutical products  |   | 143,199                            |    | 116,083 |   | 27,116 |   | 23.4 | % |
| *% of total product net revenues* |   | *43.8*                             | *%*     | *41.8* | % |   |   |   |   |
| Other                             |   | 9,962                              |    | 8,080 |   | 1,882 |   | 23.3 | % |
| Total  net revenues               |   | $                                  | 336,922 |   | $ | 285,690 |   | $ | 51,232 |   | 17.9 | % |

 

Total net revenuesfor the three months ended March 31, 2003 increased compared to the corresponding2002 period due to increases in both our branded and generic segments.  Other net revenues also increased due totiming of research and development activities resulting in increasedrecognition of previously deferred revenue.

 

*Branded Pharmaceutical Products*

 

The increase innet revenues from our branded pharmaceutical products is primarily attributableto product sales within our Women’s Health and Urology/General Productsdivisions. The increase in net revenues from our Women’s Health division wasdue to the introduction of new oral contraceptive products and higher sales ofour existing oral contraceptive products. Our Necon® 7/7/7 and Mononessa® oral contraceptive products accountedfor the majority of the increase.

 

The increase innet revenues from our Urology/General Products division was primarily due tohigher unit sales of our Androderm® testosterone patch as a result of focusedproduct promotions and prescription growth. Our Fioricet® and Fiorinal® product lines, which we acquired during thefirst quarter of 2003, also contributed to the increase.

 

The overallincrease in net revenues from our branded segment was impacted by a decrease innet revenues within our Nephrology division as a result of unit sales declinesand increased competition.  We expectnet revenues for our branded segment to increase as a result of new productsintroduced in 2003, including our Oxytroläproduct.

 

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*Generic Pharmaceutical Products*

 

The increase innet revenues for our generic segment is primarily related to new productslaunched and products reintroduced during, or subsequent to, the first quarterof 2002 and price increases on certain products.  Additionally, during the first quarter of 2002 we grantedsignificant price concessions to customers in connection with the launch ofmetformin, which resulted in lower net revenues for the first quarter of 2002.

 

*Net Revenue Mix*

 

The change in product net revenue mix is primarily related to the priceconcessions granted to customers during the first quarter of 2002, discussedabove.  In addition, the launch ofcertain generic products during 2002 led to increased generic product netrevenues in the current period.

 

***Gross Profit Margin on Product Net Revenues (Gross Margin)***

 
|                                  |   | **Three  Months Ended  March 31,** |   |
|---------------------------------------|--------|------------------------------------|--------|
|                                  |   | **2003**                           |   | **2002** |   | **Change** |   |
|                                  |   |                               |   |   |   |   |   |
| Gross  Margin by Segment:             |   |                               |   |   |   |   |   |
| Branded  pharmaceutical products      |   | 76.6                               | %      | 74.7 | % | 1.9 | % |
| Generic  pharmaceutical products      |   | 25.6                               | %      | 18.4 | % | 7.2 | % |
| Gross  margin on product net revenues |   | 54.2                               | %      | 51.1 | % | 3.1 | % |

 

The increase inour overall gross margin on product net revenues is primarily attributable toour generic segment.  The increase ingeneric gross margin in the first quarter of 2003 is a result of lower grossmargins in the first quarter of 2002 due to price concessions granted tocustomers.  Gross margins from ourbranded segment remained relatively unchanged. We expect our gross margins to remain consistent with the currentquarter.

 

***Research and Development (R&D) Expenses***

 
|                   |   | **Three  Months Ended  March 31,** |   |
|------------------------|--------|------------------------------------|--------|
|                   |   |                               |   |   |   | **Change** |   |
| **($ in thousands):**  |   | **2003**                           |   | **2002** |   | **$** |   | **%** |   |
|                   |   |                               |   |   |   |   |   |   |   |
| R&D  expenses      |   | $                                  | 22,484 |   | $ | 18,519 |   | $ | 3,965 |   | 21.4 | % |
| *as % of net revenues* |   | *6.7*                              | *%*    | *6.5* | *%* |   | * * |   | * * |
|                        |        |                                    |        |  |  |  |  |  |  |  |  |  |

 

Research anddevelopment expenses increased as a result of increased spending on clinicalstudies for both branded and generic products and increased headcount withinour research and development department. We expect research and development expenses to continue to increaseslightly as a result of our efforts in both the branded and generic productdevelopment.

 

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***Selling, General and Administrative (SG&A) Expenses***

 
|                   |   | **Three  Months Ended  March 31,** |   |
|------------------------|--------|------------------------------------|--------|
|                   |   |                               |   |   |   | **Change** |   |
| **($ in thousands):**  |   | **2003**                           |   | **2002** |   | **$** |   | **%** |   |
|                   |   |                               |   |   |   |   |   |   |   |
| SG&A  expenses     |   | $                                  | 67,659 |   | $ | 62,263 |   | $ | 5,396 |   | 8.7 | % |
| *as % of net revenues* |   | *20.1*                             | *%*    | *21.8* | *%* |   | * * |   | * * |
|                        |        |                                    |        |  |  |  |  |  |  |  |  |  |

 

The increase inselling, general and administrative expenses for the three month period wasprimarily due to increased corporate insurance premiums on policy renewals,expenses associated with the implementation of our Enterprise Resource Planning(ERP) system and costs associated with the future launch of Oxytrolä.  We expect these expenses to continue toincrease, primarily as a result of the Oxytroläproduct launch.

 

***Amortization Expense***

 
|                  |   | **Three  Months Ended  March 31,** |   |
|-----------------------|--------|------------------------------------|--------|
|                  |   |                               |   |   |   | **Change** |   |
| **($ in thousands):** |   | **2003**                           |   | **2002** |   | **$** |   | **%** |   |
|                  |   |                               |   |   |   |   |   |   |   |
| Amortization  expense |   | $                                  | 18,435 |   | $ | 13,294 |   | $ | 5,141 |   | 38.7 | % |
|                       |        |                                    |        |  |  |  |  |  |  |  |  |  |

 

The increase inamortization expense was due primarily to amortization associated with  the nifedipine ER product rights acquired inAugust 2002 and the Fiorinalâand Fioricetâ product lines acquired in February 2003.  See Note B in the accompanying Notes toConsolidated Financial Statements in this Quarterly Report.

 

***Equity in Earnings (Losses) of Joint Ventures***

 
|                                           |   | **Three  Months Ended  March 31,** |   |
|------------------------------------------------|--------|------------------------------------|--------|
|                                           |   |                               |   |   |   | **Change** |   |
| **($ in thousands):**                          |   | **2003**                           |   | **2002** |   | **$** |   | **%** |   |
|                                           |   |                               |   |   |   |   |   |   |   |
| Equity  in earnings (losses) of joint ventures |   | $                                  | 117    |   | $ | (1,059 | ) | $ | 1,176 |   | -111.0 | % |
|                                                |        |                                    |        |  |  |  |  |  |  |  |  |  |

 

Our earnings fromjoint ventures for the three months ended March 31, 2003 is primarily theresult of income from our interest in ANCIRC Pharmaceuticals (ANCIRC), a jointventure with Andrx Corporation.  Theincome from ANCIRC was substantially offset by losses from our interest inSomerset Pharmaceuticals, Inc. (Somerset), a joint venture with MylanLaboratories, Inc.  Our loss on jointventures for the 2002 period was primarily related to losses from our interestin Somerset.  We expect our ANCIRCearnings to continue to partially offset Somerset losses.

 

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***Impairment of Securities***

 
|                      |   | **Three  Months Ended  March 31,** |    |
|---------------------------|--------|------------------------------------|---------|
|                      |   |                               |    |   |   | **Change** |   |
| **($ in thousands):**     |   | **2003**                           |    | **2002** |   | **$** |   | **%** |   |
|                      |   |                               |    |   |   |   |   |   |   |
| Impairment  of securities |   | $                                  | (13,042 | ) | $ | — |   | $ | (13,042 | ) | n/a |   |
|                           |        |                                    |         |  |  |  |  |  |  |  |  |  |

 

During the firstquarter of 2003, we recorded a $13.0 million asset impairment charge related toour investment in Genelabs.  See Note Jin the accompanying Notes to Consolidated Financial Statements in this QuarterlyReport.

 

***Gain on Sale of Securities***

 
|                        |   | **Three  Months Ended March 31,** |       |
|-----------------------------|--------|-----------------------------------|------------|
|                        |   |                              | ** ** |   | ** ** | **Change** | ** ** |
| **($ in thousands):**       |   | **2003**                          | ** ** | **2002** | ** ** | **$** |   | **%** | ** ** |
|                        |   |                              |       |   |   |   |   |   |   |
| Gain  on sale of securities |   | $                                 | 1,089      |   | $ | — |   | $ | 1,089 |   | n/a |   |
|                             |        |                                   |            |  |  |  |  |  |  |  |  |  |

 

During the firstquarter of 2003, we sold approximately 190,000 shares of Dr. Reddy common stockand recorded a pre-tax gain of $1.1 million.

 

***Gain on Sale of Subsidiary***

 
|                        |   | **Three  Months Ended March 31,** |       |
|-----------------------------|--------|-----------------------------------|------------|
|                        |   |                              | ** ** |   | ** ** | **Change** | ** ** |
| **($ in thousands):**       |   | **2003**                          | ** ** | **2002** | ** ** | **$** |   | **%** | ** ** |
|                        |   |                              |       |   |   |   |   |   |   |
| Gain  on sale of subsidiary |   | $                                 | 15,676     |   | $ | — |   | $ | 15,676 |   | n/a |   |
|                             |        |                                   |            |  |  |  |  |  |  |  |  |  |

 

During the firstquarter of 2003, we sold our subsidiary located in the United Kingdom.  As a result of the sale, we recorded apre-tax gain of $15.7 million.   During2002, the subsidiary had net revenues, gross profit and net income of $10.8million, $6.3 million and $3.2 million, respectively.  See Note K in the accompanying Notes to Consolidated FinancialStatements in this Quarterly Report.

 

***Loss on Early Extinguishment of Debt***

 
|                                  |   | **Three  Months Ended March 31,** |       |
|---------------------------------------|--------|-----------------------------------|------------|
|                                  |   |                              | ** ** |   | ** ** | **Change** | ** ** |
| **($ in thousands):**                 |   | **2003**                          | ** ** | **2002** | ** ** | **$** |   | **%** | ** ** |
|                                  |   |                              |       |   |   |   |   |   |   |
| Loss  on early extinguishment of debt |   | $                                 | (2,807     | ) | $ | — |   | $ | (2,807 | ) | n/a |   |
|                                       |        |                                   |            |  |  |  |  |  |  |  |  |  |

 

During the firstquarter of 2003, as a result of the retirement of our previous credit facility,we incurred a charge for the unamortized bank fees associated with thefacility.  See Note H in theaccompanying Notes to Consolidated Financial Statements in this QuarterlyReport.

 

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**Liquidity and Capital Resources**

 

We assess liquidityby our ability to generate cash to fund our operations.  Significant factors that affect themanagement of our liquidity include: current balances of cash, cash equivalentsand value of marketable securities; expected cash flows provided by operations;current levels of our accounts receivable, inventory and accounts payablebalances; our expected investment in capital; access to financing sources,including credit and equity arrangements; and the financial flexibility toattract long-term capital on satisfactory terms.

 

We generated cashin excess of our working capital requirements for the three months ended March31, 2003.  Our cash flows provided byoperations were $68.3 million, a decrease of approximately $23.6 million fromthe previous year’s period.  Thedecrease in cash flow from operations was primarily due to the change, yearover year, in balances of inventories and income tax payable.  The change in inventories resulted from thebuild-up of inventories in support of expected new product launches andmarketing initiatives.  These decreaseswere partially offset by the change, year over year, in net income and balancesof accounts receivable and accounts payable and accrued expenses.

 

In addition to theincrease in inventories ($16.9 million), other significant uses of cashincluded the acquisition of product rights ($178.2 million), additions toproperty and equipment ($21.6 million) and principal payments on our creditfacility ($325.9 million, of which $306.1 million was paid from proceeds of theissuance of debentures as discussed below). We currently expect to spend between $125 million to $135 millionfor property and equipment additions in 2003, of which we expect approximately$25 million to be related to the installation and implementation of our new ERPsystem.

 

In May 1998, weissued $150 million of senior unsecured notes due May 2008 (1998 Senior Notes),with interest payable semi-annually in May and November at an effective rate of7.2%, pursuant to a shelf registration statement authorizing up to $300 millionin debt securities, preferred stock or common stock.  On April 2, 2003, we determined that we did not intend to offerany additional debt securities, preferred stock or common stock under theregistration statement, and filed an amendment with the Securities and ExchangeCommission deregistering the remaining unsold $150 million aggregate amount ofdebt securities, preferred stock and common stock covered by the registrationstatement.  In March 2003, we issued$575 million of convertible contingent senior debentures (CODES) due in 2023.As of March 31, 2003, the entire amount of the CODES remained outstanding at aneffective annual interest rate of approximately 2.1%.

 

We used a portionof the proceeds from the issuance of the CODES to pay the $306.1 millionbalance on our term loan and revolving credit facility we entered into in July2000 (2000 Facility).  We terminated the2000 Facility in March 2003 upon our repayment of this balance. 

 

We are currentlyin negotiations with a consortium of prospective lenders to enter into a newfive year, $300 million revolving credit facility which we would use forworking capital and other general corporate purposes.  If we enter into a new revolving credit facility, its terms mayrequire each of our subsidiaries, other than minor subsidiaries, to provide afull and unconditional guarantee on a joint and several basis.  In order to provide subsidiary guarantees inconnection with a new credit facility, we will be required to issue similarguarantees to the 1998 Senior Note holders.

 

Our cash andmarketable securities totaled $450.3 million at March 31, 2003.  The fair value of our marketable securitiesmay fluctuate significantly due to volatility of the stock market and changesin general economic conditions.  SeeItem 3. in this Quarterly Report on Form 10-Q. We believe that our cash and marketable securities balance and ourexpected cash flows from operations will be sufficient to meet our normaloperating requirements during the next twelve months.  However, we continue to review opportunities to acquire or investin companies, technologies, product rights and other investments that arecompatible with our existing business. We could use cash and financing sources discussed herein, or financingsources that subsequently become available, to fund additional acquisitions orinvestments.  In addition, we mayconsider issuing additional debt or equity securities in the future to fundpotential acquisitions or investment, to refinance existing debt, or forgeneral corporate purposes.  If amaterial acquisition or investment is completed, our operating results andfinancial condition could change materially in future periods.  However, no assurance can be given thatadditional funds will be available on satisfactory terms, or at all, to fundsuch activities.

 

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**CAUTIONARYNOTE REGARDING FORWARD-LOOKING STATEMENTS**

 

Any statementsmade in this report that are not statements of historical fact or that refer toestimated or anticipated future events are forward-looking statements.  Such forward-looking statements reflect ourcurrent perspective of existing trends and information as of the date of thisfiling.  These include, but are notlimited to, prospects related to our strategic initiatives and businessstrategies, express or implied assumptions about government regulatory actionor inaction, anticipated product approvals and launches, business initiativesand product development activities, assessments related to clinical trialresults, product performance and competitive environment, and anticipatedfinancial performance. Without limiting the generality of the foregoing, wordssuch as *“may,”“will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “would,”“estimate,” “continue,” or “pursue,”* or the negative othervariations thereof or comparable terminology are intended to identifyforward-looking statements.

 

We caution thereader that certain important factors may affect our actual operating resultsand could cause such results to differ materially from those expressed orimplied by forward-looking statements. We believe the following important risks, uncertainties and otherfactors, among others, may affect our actual results:

 

• thesuccess of our product development activities and uncertainties related to thetiming or outcome of such activities;

 

• thetiming and unpredictability of regulatory authorizations and product rollout,which is particularly sensitive in our generic business;

 

• theoutcome of our litigation (including, without limitation, patent, trademark andcopyright litigation), and the costs, expenses and possible diversion ofmanagement’s time and attention arising from such litigation;

 

• ourability to retain key personnel;

 

• ourability to adequately protect our technology and enforce our intellectualproperty rights;

 

• ourability to obtain and maintain a sufficient supply of products to meet marketdemand in a timely manner;

 

• ourdependence on sole source suppliers and the risks associated with a productioninterruption or supply delays at such third party suppliers or at our ownmanufacturing facilities;

 

• thescope, outcome and timeliness of any governmental, court or other regulatoryaction that may involve us (including, without limitation, the scope, outcomeor timeliness of any inspection or other action of the FDA);

 

• oursuccess in divesting assets or facilities we intend to dispose of;

 

• theincreasing costs of insurance, and limitations on obtaining insurance coverage;

 

• thescope, outcome and effect of investigations, actions or legislation related toour product pricing and reimbursement practices;

 

• theavailability to us, on commercially reasonable terms, of raw materials andother third party sourced products;

 

• our exposure to product liability and otherlawsuits and contingencies;

 

• our mix of product sales between branded products, which typically havehigher margins, and generic products;

 

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• ourdependence on revenues from significant products, in particular, Ferrlecit®,for which first quarter 2003 net revenues are approximately 10% of our totalnet revenues;

 

•our dependence on revenue from significant customers;

 

• theability of third parties to assert patents or other intellectual propertyrights against us which, among other things, could cause a delay or disruptionin the manufacture, marketing or sale of our products;

 

• our ability to license patents or otherintellectual property rights from third parties on commercially reasonableterms;

 

• theexpiration of patent and regulatory exclusivity on certain of our products thatwill result in competitive and pricing pressures;

 

•difficulties and delays inherent in product development, manufacturing andsale, such as:

 

•products that may appear promising in the development stage may fail to reachmarket for numerous reasons, including efficacy or safety concerns;

 

• theinability to obtain necessary regulatory approvals and the difficulty orexcessive cost to manufacture;

 

•seizure or recall of products;

 

• thefailure to obtain, the imposition of limitations on the use of, or loss ofpatent and other intellectual property rights;

 

•manufacturing or distribution problems;

 

• oursuccessful compliance with extensive, costly, complex and evolving governmentalregulations and restrictions;

 

•market acceptance of and continued demand for our products and the impact ofcompetitive products and pricing;

 

• ourability to successfully compete in both the branded and generic pharmaceuticalproduct sectors;

 

• our timely and successful implementation ofstrategic initiatives, including integrating companies and products we acquireand new enterprise resource planning systems; and

 

•other risks and uncertainties detailed herein and from time to time in ourSecurities and Exchange Commission filings.

 

We disclaim anyobligation to publicly update any forward-looking statements, whether as aresult of new information, future events or otherwise.  We also may make additional disclosures inour Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and CurrentReports on Form 8-K that we may file from time to time with the Securities andExchange Commission (SEC).  Please alsonote that we provided a cautionary discussion of risks and uncertainties underthe section entitled “Risk Factors” in our Annual Report on Form 10-K for theyear ended December 31, 2002.  Thefactors identified above and those set forth in our SEC filings are the factorsthat we think could cause our actual results to differ materially from expectedresults.  Other factors besides thoselisted here could also adversely affect us. This discussion is provided as permitted by the Private SecuritiesLitigation Reform Act of 1995.

 

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**ITEM3.  QUANTITATIVE AND QUALITATIVEDISCLOSURE 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.

 

**Investment Risk**

 

As of March 31,2003, our total investment in equity securities of other companies was$85.5 million.  Of this amount, wehad equity-method investments of $37.5 million and publicly traded equitysecurities (available-for-sale securities) at fair value totaling $48.0 million($34.7 million that was included in “Marketable securities” and $13.3 millionthat was included in “Investments and other long-term 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, 2003, 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 $12 million, $19 million and$24 million, respectively.

 

As discussed inNote C in the accompanying Notes to Consolidated Financial Statements in thisQuarterly Report, our investment in Andrx consisted of approximately 1.5million shares of Andrx common stock with a fair market value of $18.1 millionat March 31, 2003.  Because Andrx is apublicly traded equity security, our holdings of Andrx have exposure toinvestment risk.   The market price ofAndrx common shares has been, and may continue to be, volatile.  For example, on March 31, 2003, the finaltrading day of the quarter, the closing price of Andrx was $11.80.  On May 8, 2003, before completing this Form10-Q, the closing price of Andrx common stock was $16.20.  The following table sets forth the Andrxhigh and low market price per share information, based on published financialsources, for 2003 and 2002:

 

|                 |   | **High** |   | **Low** |   |
|----------------------|--------|----------|--------|---------|--------|
| **2003, by quarter** |   |     |   |    |   |
| First                |   | $        | 16.83  |    | $      | 7.68 |   |
|                 |   |     |   |    |   |
| **2002, by quarter** |   |     |   |    |   |
| First                |   | $        | 71.27  |    | $      | 31.13 |   |
| Second               |   | $        | 48.20  |    | $      | 25.80 |   |
| Third                |   | $        | 27.89  |    | $      | 16.61 |   |
| Fourth               |   | $        | 23.19  |    | $      | 10.75 |   |

 

In addition, ourmarketable securities include shares of common stock of Dr. Reddy’sLaboratories, Limited (Dr. Reddy).  Asof March 31, 2003, Watson owned 850,000 common shares of Dr. Reddy with amarket value of approximately $16.5 million. Dr. Reddy’s shares trade on the Bombay Stock Exchange (BSE) and on theNew York Stock Exchange in the form of American depositary shares.  However, the shares of Dr. Reddy common stockthat we hold are currently tradable only on the BSE, since our shares are notpresently in the form of American depositary shares.  The liquidity of our Dr. Reddy investment may be limited due tothe current Dr. Reddy daily trading volume on the BSE, among other factors.

 

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The followingtable sets forth the Dr. Reddy high and low market price per share information,based on published financial sources, for 2003 and 2002:

 

|                 |   | **High** |   | **Low** |   |
|----------------------|--------|----------|--------|---------|--------|
| **2003, by quarter** |   |     |   |    |   |
| First                |   | $        | 21.00  |    | $      | 18.03 |   |
|                 |   |     |   |    |   |
| **2002, by quarter** |   |     |   |    |   |
| First                |   | $        | 23.76  |    | $      | 18.91 |   |
| Second               |   | $        | 24.00  |    | $      | 18.40 |   |
| Third                |   | $        | 21.64  |    | $      | 16.00 |   |
| Fourth               |   | $        | 19.47  |    | $      | 14.26 |   |

 

We regularlyreview the carrying value of our investments and identify and recognize losses,for income statement purposes, when events and circumstances indicate that anydeclines in the fair values of such investments, below our accounting basis,are other than temporary.  During thefirst quarter 2003, we made such a determination with respect to our investmentin Genelabs resulting in an impairment charge of $13.0 million (see Note J inthe accompanying Notes to Consolidated Financial Statements in this QuarterlyReport).

 

**Interest Rate Risk**

 

Our exposure tointerest rate risk relates primarily to our non-equity investmentportfolio.  Our cash is invested inA-rated money market mutual funds and short-term securities. Consequently, ourinterest rate and principal risk are minimal.

 

Based on quotedmarket rates of interest and maturity schedules for similar debt issues, weestimate that the fair values of our CODES and our fixed-rate senior unsecurednotes approximated their carrying values March 31, 2003.  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.

 

**ITEM4.  CONTROLS AND PROCEDURES**

 

The Companymaintains disclosure controls and procedures that are designed to ensure thatinformation required to be disclosed in the Company’s Exchange Act reports isrecorded, processed, summarized and reported within the time periods specifiedin the SEC’s rules and forms, and that such information is accumulated andcommunicated to the Company’s management, including its Principal ExecutiveOfficer and Principal Financial Officer, as appropriate, to allow timelydecisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures,management recognized that any controls and procedures, no matter how welldesigned and operated, can provide only reasonable assurance of achieving thedesired control objectives, and management necessarily was required to applyits judgment in evaluating the cost-benefit relationship of possible controlsand procedures.  Also, the Company hasinvestments in certain unconsolidated entities.  As the Company does not control or manage these entities, itsdisclosure controls and procedures with respect to such entities arenecessarily substantially more limited than those it maintains with respect toits consolidated subsidiaries.

 

Within 90 daysprior to the date of this report, the Company carried out an evaluation, underthe supervision and with the participation of the Company’s management,including the Company’s Principal Executive Officer and Principal FinancialOfficer, of the effectiveness of the design and operation of the Company’sdisclosure controls and procedures. Based on the foregoing, the Company’sPrincipal Executive Officer and Principal Financial Officer concluded that theCompany’s disclosure controls and procedures were effective.

 

There have been nosignificant changes in the Company’s internal controls or in other factors thatcould significantly affect the internal controls subsequent to the date theCompany completed its evaluation.

 

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**PART II.  OTHER INFORMATION AND SIGNATURES**

 

**ITEM1.  LEGAL PROCEEDINGS**

 

The Company isparty to certain lawsuits and legal proceedings, which are described in “PartI, Item 3. Legal Proceedings,” of our Annual Report on Form 10-K for the yearended December 31, 2002.  There were nomaterial changes in these legal proceedings during the first quarter of 2003.

 

The Company andits affiliates are involved in various disputes, governmental and/or regulatoryinspections, investigations and proceedings, and litigation matters that arisefrom time to time in the ordinary course of business.  The process of resolving matters through litigation or othermeans is inherently uncertain and it is possible that the resolution of thesematters will adversely affect the Company, its results of operations, financialposition and/or cash flows.

 

**ITEM6.  EXHIBITS AND REPORTS ON FORM 8-K**

 

(a) Exhibits:

 

Reference is hereby made to the Exhibit Index on page28.

 

(b) Reports onForm 8-K filed during the quarter ended March 31, 2003:

 

On March 5, 2003, the Company filed a Current Reporton Form 8-K with the Securities and Exchange Commission reporting, under Item5, its plans to offer convertible senior debentures due 2023 in a privateplacement transaction.

 

On March 6, 2003, the Company filed a Current Reporton Form 8-K with the Securities and Exchange Commission reporting, under Item5, that it increased the size of its offering of convertible senior debenturesdue 2023 and announced the pricing of the private placement.

 

On March 12, 2003, the Company filed a Current Reporton Form 8-K with the Securities and Exchange Commission reporting, under Item5, it closed its offering of convertible contingent senior debentures due 2023.

 

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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/  CHARLES P. SLACIK**                            |
|                  |   | Charles P.  Slacik                                         |
|                  |   | Executive Vice  President – Chief Financial Officer   |
|                  |   | (Principal  Financial Officer)                             |
|                  |   |                                                       |
|                  |   |                                                       |
|                  | By:    | **/s/  R. TODD JOYCE**                                |
|                  |   | R. Todd Joyce                                              |
|                  |   | Vice President –  Corporate Controller and  Treasurer |
|                  |   | (Principal  Accounting Officer)                            |
|                  |   |                                                       |
| Dated:  July 31, 2003 |   |                                                       |

 

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**WATSON PHARMACEUTICALS, INC.**

 

**EXHIBIT INDEX TO FORM 10-Q**

**For the Quarterly Period Ended March31, 2003**

 
| **Exhibit  No.** |   | **Description**                                                                                                                                                                                                                                                                                        |
|------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.2*             |   | Indenture dated March  7, 2003 between the Company and Wells Fargo Bank, National Association as  Trustee for the issuance of the Company’s 1.75% Convertible Contingent Senior  Debentures.                                                                                                      |
|             |   |                                                                                                                                                                                                                                                                                                   |
| 10.16*           |   | Resale Registration  Rights Agreement dated as of March 7, 2003 among the Company and Lehman  Brothers Inc., Morgan Stanley & Co., Incorporated, CIBC World Markets  Corp., Wachovia Securities, Inc., Banc of America Securities LLC, Comerica  Securities, Inc. and Wells Fargo Securities, LLC. |
|             |   |                                                                                                                                                                                                                                                                                                   |
| 31.1             |   | Certification of  Chairman and Chief Executive Officer pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                                                     |
|             |   |                                                                                                                                                                                                                                                                                                   |
| 31.2             |   | Certification of  Executive Vice President and Chief Financial Officer pursuant to Section 302  of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                     |
|             |   |                                                                                                                                                                                                                                                                                                   |
| 32.1             |   | Certification of  Chairman and Chief Executive Officer pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                                                     |
|             |   |                                                                                                                                                                                                                                                                                                   |
| 32.2             |   | Certification of  Executive Vice President and Chief Financial Officer pursuant to Section 906  of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                     |

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*              PreviouslyFiled

 

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