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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

For the transition period from __________________ to ___________________

COMMISSION FILE NUMBER 0-20045

WATSON PHARMACEUTICALS, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)

NEVADA 95-3872914
- -------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

311 BONNIE CIRCLE
CORONA, CA 92880
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(Address of principal executive offices, including zip code)

(909) 270-1400
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(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days: Yes [X] No [ ]

The number of shares of the Registrant's only class of common stock outstanding
as of November 5, 1999 was approximately 95,980,000.

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WATSON PHARMACEUTICALS, INC.

INDEX TO FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999

Page
----

PART I. FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements:

Consolidated Balance Sheets as of September 30, 1999 and
December 31, 1998...................................................... 1

Consolidated Statements of Income for the Three and Nine Months
Ended September 30, 1999 and 1998...................................... 2

Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 1999 and 1998............................................ 3

Notes to Consolidated Financial Statements................................ 4

Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................. 7

Item 3. Quantitative and Qualitative Disclosure about Market Risk................. 13

PART II. OTHER INFORMATION AND SIGNATURES

Item 1. Legal Proceedings......................................................... 14

Item 5. Other Information........................................................ 15

Item 6. Exhibits and Reports on Form 8-K......................................... 16

Signatures........................................................................ 16

WATSON PHARMACEUTICALS, INC.

CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)

SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- -----------
(UNAUDITED)

ASSETS
Current assets:
Cash and cash equivalents..................................... $ 85,572 $ 59,663
Marketable securities......................................... 28,034 32,903
Accounts receivable, net...................................... 125,193 91,329
Inventories................................................... 106,213 81,907
Prepaid expenses and other current assets..................... 14,165 27,358
Deferred tax assets........................................... 14,573 29,634
---------- ----------

Total current assets........................................ 373,750 322,794

Property and equipment, net....................................... 135,564 125,918
Investments and other assets...................................... 423,131 201,080
Product rights and other intangibles, net......................... 520,681 481,551
---------- ----------
$1,453,126 $1,131,343
========== ==========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Accounts payable and accrued expenses .................... $ 62,525 $ 70,730
Income taxes payable ..................................... 11,338 --
Current portion of long-term debt ........................ 1,924 1,843
Current liability from acquisition of product rights ..... 16,200 30,380
---------- ----------
Total current liabilities .............................. 91,987 102,953

Long-term debt ............................................... 149,695 151,083
Long-term liability from acquisition of product rights ....... 7,840 23,040
Deferred tax liabilities ..................................... 145,538 54,512
---------- ----------
Total liabilities ...................................... 395,060 331,588
---------- ----------
Commitments and contingencies

Minority interest ............................................ 400 400
---------- ----------
Stockholders' equity:
Preferred stock; no par value per share;
2,500,000 shares authorized; none outstanding ............ -- --
Common stock; $0.0033 per share par value; 500,000,000
shares authorized; 95,961,800 and 95,312,200 shares issued 317 315
Additional paid-in capital ................................. 394,076 368,777
Retained earnings .......................................... 475,958 370,119
Accumulated other comprehensive income ..................... 187,315 60,144
---------- ----------
Total stockholders' equity ............................. 1,057,666 799,355
---------- ----------
$1,453,126 $1,131,343
========== ==========

See accompanying Notes to Consolidated Financial Statements.

WATSON PHARMACEUTICALS, INC.

CONSOLIDATED STATEMENTS OF INCOME
(Unaudited, in thousands, except per share amounts)

THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
1999 1998 1999 1998
--------- --------- --------- ---------

Net revenues .......................... $ 171,217 $ 158,765 $ 500,702 $ 443,785
Cost of sales ......................... 60,727 57,194 166,151 156,969
--------- --------- --------- ---------
Gross profit .................... 110,490 101,571 334,551 286,816
--------- --------- --------- ---------
Operating expenses:
Research and development ........... 12,073 13,925 35,788 37,302
Selling, general and administrative 32,390 27,683 88,401 81,735
Amortization ....................... 7,701 5,571 21,741 15,642
Merger and related expenses (Note B) -- -- 20,467 --
Charge for acquired in-process
research and development ......... -- -- -- 13,000
--------- --------- --------- ---------
Total operating expenses ........ 52,164 47,179 166,397 147,679
--------- --------- --------- ---------

Operating income ...................... 58,326 54,392 168,154 139,137
--------- --------- --------- ---------

Other income (expense):
Equity in earnings (losses)
of joint ventures ................ (1,317) 1,898 (932) 5,688
Interest and other income .......... 1,180 2,814 3,066 6,107
Interest expense ................... (2,749) (2,820) (8,364) (4,594)
--------- --------- --------- ---------
Total other income (expense), net (2,886) 1,892 (6,230) 7,201
--------- --------- --------- ---------

Income before income tax provision .... 55,440 56,284 161,924 146,338

Provision for income taxes ............ 18,738 20,037 56,085 57,194
--------- --------- --------- ---------

Net income ............................ $ 36,702 $ 36,247 $ 105,839 $ 89,144
========= ========= ========= =========

Basic earnings per share .............. $ 0.38 $ 0.38 $ 1.11 $ 0.94
========= ========= ========= =========

Diluted earnings per share ............ $ 0.38 $ 0.37 $ 1.08 $ 0.92
========= ========= ========= =========

Weighted average shares
outstanding, no dilution ........... 95,850 94,995 95,680 94,585
========= ========= ========= =========

Weighted average shares
outstanding, diluted basis ......... 97,510 97,675 97,865 97,170
========= ========= ========= =========

See accompanying Notes to Consolidated Financial Statements.

WATSON PHARMACEUTICALS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)

NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1999 1998
--------- ---------

CASH FLOWS FROM OPERATING ACTIVITIES:

Net income ................................................. $ 105,839 $ 89,144
--------- ---------
Reconciliation to net cash provided by operating activities:
Depreciation ............................................. 9,995 9,147
Amortization ............................................. 21,741 15,642
Charge for acquired in-process research and development .. -- 13,000
Deferred income tax provision (benefit) .................. 20,686 (11,063)
Equity in earnings (losses) of joint ventures ............ 1,260 (4,779)
Tax benefits related to exercise of stock options ........ 10,587 13,336
Other .................................................... 2,130 1,398

Changes in assets and liabilities, net of acquisition:
Accounts receivable .................................. (34,732) 2,440
Inventories .......................................... (24,306) (9,164)
Prepaid expenses and other current assets ............ 10,784 (934)
Other assets ......................................... 266 (2,791)
Accounts payable and accrued expenses ................ (8,205) 2,199
Income taxes payable ................................. 11,338 1,814
--------- ---------
Total adjustments ................................. 21,544 30,245
--------- ---------
Net cash provided by operating activities ......... 127,383 119,389
--------- ---------

CASH FLOWS FROM INVESTING ACTIVITIES:

Additions to property and equipment ........................ (19,459) (21,560)
Purchases of marketable securities ......................... (55,005) (18,084)
Proceeds from maturities of marketable securities .......... 59,874 49,913
Acquisitions of product rights ............................. (64,318) (54,962)
Acquisition of business .................................... -- (71,462)
Additions to investments in joint ventures and other ....... (5,593) (7,862)
--------- ---------
Net cash used by investing activities ............. (84,501) (124,017)
--------- ---------

CASH FLOWS FROM FINANCING ACTIVITIES:

Proceeds from issuance of long-term debt ................... -- 148,662
Principal payments on long-term debt ....................... (1,307) (7,039)
Payments on liability for acquisition of product rights .... (30,380) (45,000)
Proceeds from exercise of stock options and warrants ....... 14,714 22,589
--------- ---------
Net cash (used) provided by financing activities .. (16,973) 119,212
--------- ---------
Net increase in cash and cash equivalents ......... 25,909 114,584

Cash and cash equivalents at beginning of period ........... 59,663 97,817
--------- ---------
Cash and cash equivalents at end of period ................. $ 85,572 $ 212,401
========= =========

See accompanying Notes to Consolidated Financial Statements.

WATSON PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE A - GENERAL

The accompanying unaudited consolidated financial statements of Watson
Pharmaceuticals, Inc. ("Watson" or the "Company") should be read in conjunction
with the Company's Annual Report on Form 10-K for the year ended December 31,
1998. In the opinion of management, the accompanying financial statements
contain all adjustments necessary to present fairly the Company's financial
position and results of operations for the periods presented. Unless otherwise
noted, all such adjustments are of a normal, recurring nature. In addition,
certain comparative prior year amounts in the consolidated financial statements
have been reclassified to conform to the current year presentation. The results
of operations for any interim period are not necessarily indicative of the
results of operations to be expected for the entire year.

The Company's consolidated financial statements have been restated to reflect
the January 1999 acquisition of TheraTech, Inc., now known as Watson
Laboratories, Inc.-Utah ("TheraTech" or "Watson-Utah"), as further discussed in
Note B. This acquisition was accounted for as a pooling of interests and
qualified as a tax-free merger for federal income tax purposes. The accompanying
consolidated financial statements include the results of TheraTech for all
periods presented.

In February 1998, the Company completed its acquisition of The Rugby Group, Inc.
("Rugby"), a developer and marketer of off-patent pharmaceutical products, from
Hoechst Marion Roussel, Inc. The acquisition was accounted for as a purchase and
the accompanying consolidated financial statements include Rugby's results of
operations since the date of its acquisition. Under the purchase method of
accounting, the portion of the purchase price that is allocated to an acquired
company's in-process research and development ("IPR&D") is charged to expense at
the date of acquisition. In the first quarter of 1998, the Company recorded a
charge of $13.0 million for IPR&D in connection with the Rugby acquisition.

NOTE B - ACQUISITION OF THERATECH

The Company completed its acquisition of TheraTech, a leading drug-delivery
company that develops, manufactures and markets innovative products based on its
patented and proprietary technologies and systems, in January 1999. Under the
terms of the merger agreement, each share of TheraTech common stock was
converted into the right to receive 0.2663 of a share of the Company's common
stock. Accordingly, the Company issued approximately 5.8 million common shares,
with a market value on the date of acquisition of approximately $330 million, in
exchange for all of the outstanding common shares of TheraTech.

In connection with this acquisition, during the first quarter of 1999, the
Company recorded a special charge of $20.5 million for certain merger and
related expenses. The charge consisted of transaction fees for investment
bankers, attorneys, accountants and financial printing costs ($11.1 million) and
closure costs associated with the elimination of duplicate or discontinued
products, operations and facilities ($9.4 million). The eliminated operations
were not significant to the Company. The $9.4 million of closure costs consisted
of employee termination costs ($3.9 million), non-cash facility shutdown and
asset impairment costs ($4.2 million) and lease and contract termination costs
($1.3 million). As of September 30, 1999, all of these costs had been paid or
the assets had been charged-off, with the exception of approximately $0.5
million in severance costs, which remaining accrued balance will be paid through
early 2000.

NOTE C - INVENTORIES

Inventories consisted of the following (in thousands):

September 30, December 31,
1999 1998
------------- ------------

Raw materials.......................................... $ 44,285 $25,961
Work-in-progress....................................... 10,797 12,728
Finished goods......................................... 51,131 43,218
-------- -------
$106,213 $81,907
======== =======

NOTE D - INVESTMENTS AND OTHER ASSETS

Long-term investments consist primarily of the Company's investment in Andrx
Corporation, a drug-delivery company utilizing controlled-release technologies
to develop oral pharmaceutical products. Andrx' common stock trades on the
Nasdaq Stock Market under the symbol ADRX. On June 30, 1999, Watson exercised a
warrant issued by Andrx in July 1994 and acquired approximately 674,000 Andrx
common shares for $3.0 million. As of September 30, 1999, the Company held
approximately 6.1 million common shares of Andrx, or approximately 19% of the
total Andrx common shares outstanding. Watson accounts for this investment using
the cost method, adjusted to fair market value. The unrealized gain on the
Company's investment in Andrx was $188.7 million and $60.6 million (net of
income taxes of $125.8 million and $40.4 million), at September 30, 1999 and
December 31, 1998, respectively. This unrealized gain was the primary component
of accumulated other comprehensive income in the stockholders' equity section of
Watson's consolidated balance sheets.

NOTE E - EARNINGS PER SHARE ("EPS")

The following table sets forth the computation of basic and diluted EPS:

Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
1999 1998 1999 1998
-------- -------- -------- --------
(in thousands, except for EPS)

Numerator:
Net income ........................ $ 36,702 $ 36,247 $105,839 $ 89,144
======== ======== ======== ========
Denominators:
Denominator for basic EPS, weighted
average shares outstanding ..... 95,850 94,995 95,680 94,585
Assumed exercise of dilutive stock
options and warrants ........... 1,660 2,680 2,185 2,585
-------- -------- -------- --------

Denominator for diluted EPS ....... 97,510 97,675 97,865 97,170
======== ======== ======== ========

Basic EPS ............................ $ 0.38 $ 0.38 $ 1.11 $ 0.94
======== ======== ======== ========

Diluted EPS .......................... $ 0.38 $ 0.37 $ 1.08 $ 0.92
======== ======== ======== ========

NOTE F - COMPREHENSIVE INCOME (LOSS)

Comprehensive income (loss) includes all changes in equity during a period
except those resulting from investments by and distributions to the Company's
stockholders. Watson's comprehensive income (loss) consisted of the following:

Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ---------------------
1999 1998 1999 1998
-------- -------- -------- --------
(in thousands)

Net income ..................... $ 36,702 $ 36,247 $105,839 $ 89,144
Unrealized gain (loss) on equity
securities, net of tax ...... (68,159) (694) 127,171 3,956
-------- -------- -------- --------
Comprehensive income (loss)..... $(31,457) $ 35,553 $233,010 $ 93,100
======== ======== ======== ========

NOTE G - SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

Nine Months Ended
September 30,
---------------------
(in thousands) 1999 1998
------- -------

Cash paid during the periods for:
Interest........................ $ 5,595 $ 530
Income taxes.................... 22,500 55,400

Acquisition of business:
Fair value of assets acquired... $ -- $(97,226)
Fair value of liabilities
assumed....................... -- 25,764
------- --------
Net cash paid................. $ -- $(71,462)
======= ========

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO 1998

Net revenues for the three months ended September 30, 1999 were $171.2 million
compared to $158.8 million for the 1998 period, an increase of $12.5 million or
8%. Third quarter revenue growth was attributable to increased sales of branded
products, primarily women's health products acquired in the fourth quarter of
1998 and dermatology products. These sales increases were partially offset by
lower sales of the Dilacor XR(R) product and its generic equivalent, diltiazem,
due to continuing supply interruptions at Watson's sole supplier; sales of
these products may continue to decline in future periods due to these supply
interruptions (see "Part II, Item 5. Other Information"). In addition, generic
product sales overall were lower in the 1999 quarter due to increased price
competition. In total, branded products accounted for approximately 50% of net
product sales in the third quarter of 1999, up from approximately 40% in the
1998 period. Although branded products typically generate higher margins than
generic, the overall gross profit margin was approximately 64% in both quarterly
periods due to lower generic margins in the current year period.

Research and development expenses decreased to $12.1 million in the third
quarter of 1999, compared to $13.9 million in the same period of 1998, due to
efficiencies realized upon consolidation of Watson-Utah's proprietary drug
development program into the Company-wide program during 1999, as well as
differences in the timing of various projects.

Selling, general and administrative expenses increased to $32.4 million for the
third quarter of 1999, compared to $27.7 million in the prior year period, due
to higher selling and marketing costs. This increase is attributable to a number
of factors, including higher personnel-related costs due to expansion of the
proprietary products sales force from 300 in third quarter 1998 to 360 in the
1999 period, costs and expenses related to the launch of the Company's generic
nicotine gum product and its recall due to copyright issues related to its
labeling (see "Part II, Item 1. Legal Proceedings"), and promotional expenses
associated with the female health products acquired in fourth quarter 1998. This
increase was partially offset by efficiencies realized from the consolidation of
distribution facilities subsequent to the Rugby acquisition in 1998. The
additional sales force personnel were primarily in the female health and general
products groups. The increase in selling and marketing costs was partially
offset by lower general and administrative costs due to elimination of duplicate
functions at Watson-Utah during 1999.

Third quarter amortization expense increased to $7.7 million in 1999, compared
to $5.6 million in the 1998 period, primarily due to amortization of the cost of
the women's health product rights acquired in November 1998. The balance of
the amortization increase is attributable to the recently acquired rights to
Androderm(R), a testosterone transdermal patch, and Low-Ogestrel(R), an oral
contraceptive.

Equity in earnings from joint ventures decreased significantly in the third
quarter of 1999 due to reduced earnings from the Company's 50% interest in
Somerset Pharmaceuticals, Inc., caused by lower revenues and higher research and
development costs. Currently, Somerset's sole product is an anti-Parkinson's
drug that lost Orphan Drug exclusivity in 1996, although other potential
indications for this product are under development.

Interest and other income decreased during the third quarter of 1999 compared to
1998 because cash, cash equivalents and marketable securities balances were
higher in the 1998 period following the Company's issuance of $150 million of
senior unsecured notes in May 1998.

The third quarter 1999 income tax provision reflects a lower effective tax rate
on pretax income than in 1998, 34% compared to 36%, due to June 1999 changes in
income tax regulations relating to limitations on the use of acquired net
operating loss carryforwards (see further discussion below).

NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO 1998

Net revenues for the nine months ended September 30, 1999 were $500.7 million
compared to $443.8 million for the 1998 period, an increase of $56.9 million or
13%. The revenue growth was attributable to increased sales of branded products,
primarily women's health products acquired in the fourth quarter of 1998 and
dermatology products. These sales increases were partially offset by lower sales
of the Dilacor XR(R) product and its generic equivalent, diltiazem, due to
continuing supply interruptions at Watson's sole supplier; sales of these
products may continue to decline in future periods due to these supply
interruptions (see "Part II, Item 5. Other Information.") In addition, generic
sales overall were lower in the first three quarters of 1999 compared to the
prior year period as a result of phasing-out a number of Rugby products from the
product line in mid-1998 and increased price competition in the current year. In
total, branded products accounted for approximately 50% of net product sales in
the first nine months of 1999, compared to approximately 40% in the 1998 period.
As a result of the higher margins typically generated by branded products, the
gross profit margin on product sales increased to 65% in the 1999 period from
63% in 1998.

Research and development expenses decreased to $35.8 million in the 1999 period,
compared to $37.3 million in 1998, due to efficiencies realized upon
consolidation of Watson-Utah's proprietary drug development program into the
Company-wide program during 1999, as well as differences in the timing of
various projects.

Selling, general and administrative expenses increased to $88.4 million for the
first nine months of 1999, compared to $81.7 million in the prior year period,
due to higher selling and marketing costs. This increase is attributable to a
number of factors, including higher personnel-related costs due to expansion of
the proprietary products sales force and promotional expenses associated with
the female health products acquired in fourth quarter 1998. This increase was
partially offset by efficiencies realized from the consolidation of distribution
facilities subsequent to the Rugby acquisition in 1998. The additional sales
force personnel were primarily in the female health and general products groups.
The increase in selling and marketing costs was partially offset by lower
general and administrative costs reflecting consolidation of such functions
subsequent to the Watson-Utah and Rugby acquisitions.

Amortization expense in the nine months ended September 30, 1999 increased to
$21.7 million compared to $15.6 million in the 1998 period, primarily due to
amortization of the cost of the female healthcare product rights acquired in
November 1998.

During the first quarters of 1999 and 1998, Watson recorded nonrecurring charges
relating to its acquisitions of Watson-Utah and Rugby, respectively. In
connection with the acquisition of Watson-Utah, Watson recorded a special charge
of $20.5 million for certain merger and related expenses. The charge consisted
of transaction fees for investment bankers, attorneys, accountants and financial
printing costs ($11.1 million) and closure costs associated with the elimination
of duplicate or discontinued products, operations and facilities ($9.4 million).
The eliminated operations were not

significant to the Company. The $9.4 million of closure costs consisted of
employee termination costs ($3.9 million), non-cash facility shutdown and asset
impairment costs ($4.2 million) and lease and contract termination costs ($1.3
million). As of September 30, 1999, all of these costs had been paid or the
assets had been charged-off, with the exception of approximately $0.5 million in
severance costs, which remaining accrued balance will be paid through early
2000. In the first quarter of 1998, the Company recorded a nonrecurring charge
of $13.0 million for IPR&D in connection with the Rugby acquisition.

Equity in earnings from joint ventures decreased significantly in the first nine
months of 1999 primarily due to reduced earnings from the Company's interest in
Somerset, partially offset by higher earnings from the ANCIRC joint venture.

Interest and other income decreased during the first nine months of 1999
compared to 1998 because cash, cash equivalent and marketable securities
balances were higher in the 1998 period following the Company's issuance of $150
million of senior unsecured notes in May 1998. Interest expense increased
significantly during the nine months ended September 30, 1999 as a result of
those notes.

The provision for income taxes of $56.1 million for the 1999 period reflects an
overall tax rate of 35%, while the $57.2 million provision for 1998 reflects an
overall rate of 39%. The 1999 income tax provision reflects a lower effective
tax rate on pretax income than in 1998, 34% compared to 36%, and a nonrecurring
tax benefit of $4.1 million, both of which result from June 1999 changes in
income tax regulations relating to the "separate return limitation year"
("SRLY") limitations on the use of acquired net operating loss ("NOL")
carryforwards. Previously, the Company had maintained a valuation allowance
against certain acquired deferred tax assets related to NOL carryforwards
because of uncertainty as to their future realization under the SRLY
limitations. With the recent change in the SRLY rules, management now believes
that those carryforwards will be realized and that the related valuation
allowance should be reversed, which reversal will result in a $9.8 million
reduction in the Company's 1999 income tax provision. For tax purposes, $4.1
million of that total may not be utilized until future years, and was recorded
as a one-time reduction in income tax expense during second quarter 1999. The
remaining $5.7 million will be utilized for tax purposes during 1999 and is
being recognized through a reduction in the Company's effective tax rate,
exclusive of the one-time benefit, to approximately 34% during the second, third
and fourth quarters of 1999. The lower 1999 effective tax rate also reflects a
decrease in the amount of non-deductible merger-related charges incurred during
the current year.

LIQUIDITY AND CAPITAL RESOURCES

The Company's working capital increased from $219.8 million at December 31, 1998
to $281.8 million at September 30, 1999. This $62.0 million increase was
primarily due to the Company's net income for the nine months ended September
30, 1999 and growth in its accounts receivable and inventory balances at
September 30, 1999. These working capital increases were partially offset by
cash used for the acquisition of product rights for the Androderm(R) transdermal
patch and Low-Ogestrel(R) oral contraceptive, acquisitions of property and
equipment and a scheduled payment pursuant to the purchase of product rights.

In April 1998, the Company filed a registration statement with the SEC to raise
up to $300 million from offerings of senior or subordinated debt securities,
common stock, preferred stock or a combination thereof. In May 1998, pursuant to
this shelf offering, the Company issued $150 million of 7-1/8% senior unsecured
notes due May 2008, with interest payable semi-annually in May and November. The
balance of the Company's shelf offering remains available for issuance at such
times and in such amounts as the Company deems appropriate.

In the first quarter of 1999, the Company entered into a credit facility that
provides for unsecured borrowing commitments totaling $30 million. To date, no
borrowings have been made under this credit facility.

Management believes that current cash balances and the cash provided from
operations will be sufficient to meet the Company's normal operating
requirements during the next twelve months. The Company continues to review
additional opportunities to acquire or invest in companies, technologies,
product rights and other investments that are compatible with its existing
business. Watson could use cash and financing sources discussed herein, or
financing sources that subsequently become available to the Company, to fund
additional acquisitions or investments. If a material acquisition or investment
is completed, the Company's operating results and financial condition could
change materially in future periods.

YEAR 2000 COMPLIANCE PROGRAM

The Year 2000 ("Y2K") issue arises because many computer systems and programs
recognize only the last two digits of years (and not the century designation)
and may be unable to properly recognize and process dates beyond December 31,
1999. Date sensitive systems that use two digits rather than four to identify a
year may recognize the year 2000 as 1900 or some other date, and may
consequently fail or produce erroneous data. Watson's Y2K Compliance Program is
designed to minimize the possibility of serious Y2K interruptions, and consists
of four primary phases:

Phase 1 - evaluate whether the Company's date sensitive systems are
able to interpret dates beyond the year 1999;

Phase 2 - respond to and remedy any inadequacies that may emerge from
the evaluation process in Phase 1;

Phase 3 - investigate the Year 2000 readiness of third parties that
Watson has material relationships with; and,

Phase 4 - develop a contingency plan for any of the Company's date
sensitive systems which may not be timely remedied through
procedures in Phase 2.

Watson's Y2K Compliance Program has addressed its primary business application
systems (including manufacturing, sales, distribution and finance), internal
network systems, personal computer hardware and telecommunications systems.
Other than for recently released software upgrades that will be installed before
year-end 1999, Phases 1 and 2 have been completed for these primary systems and
management believes that they are Y2K compliant. Watson expects to complete
Phases 1 and 2 for secondary systems (including certain laboratory support
equipment) before year-end 1999. Watson will complete installation of new
secondary systems for telemarketing support, voicemail and building security
systems by year-end, which systems have been selected primarily for their
enhanced features and to accommodate the Company's growth, but also because they
are Y2K compliant. During the third quarter of 1999, Watson-Utah's primary
business application systems were transitioned to the Company's primary business
application systems, that management believes are Y2K compliant, and
Watson-Utah's secondary systems are currently in Phases 1 and 2, with completion
expected before year-end 1999.

13
In the third quarter of 1998, Watson began Phase 3 of its Y2K Compliance
Program. Phase 3 procedures initially included communication with the Company's
customers, vendors and material service providers regarding their Y2K readiness
plans and progress. Substantially all of these third parties have responded that
they are now, or will be by year-end, Y2K compliant. A small number of Watson's
top 20 customers and top 20 vendors and material service providers did not
respond. In these limited instances, Watson made additional follow-up efforts to
verify the Y2K readiness of these companies, which included sending
second-request letters, attempting to contact appropriate representatives of
these companies by phone and reviewing publicly available information on these
companies, including financial statements and internet sites. Based on the
results of these follow-up procedures, the Company believes that all of its
material vendors, customers and service providers are now, or will be by
year-end, Y2K compliant. Also in Phase 3, the Company upgraded its electronic
data interchange ("EDI") system to a Y2K compliant protocol and continues to
test its EDI documents with other customers converting to the new protocol. The
Company has also made modifications to its EDI system that it believes will
allow it to continue to communicate after year-end 1999 with customers that do
not elect to upgrade to the new Y2K compliant protocol.

The cost of Watson's Y2K Compliance Program has not had, and is not expected to
have, a material effect on Watson's financial position or results of operations.
Milestones, implementation dates, contingency plans and the anticipated costs of
Watson's Y2K Compliance Program are subject to change based on new circumstances
that may arise or new information that becomes available.

It is management's opinion that any Y2K-related failures in Watson's internal
information systems and technology infrastructure will not have a material
adverse effect on the Company's results of operations, liquidity or financial
position; however, there can be no assurance that serious interruptions will not
occur. In addition, there can be no assurance that the systems or equipment of
other parties that interact with Watson's systems will be compliant on a timely
basis. Watson believes that the failure of systems or equipment of one or more
of its key third party contractors or customers is the most reasonably likely
worst case Y2K scenario, and that an extended business interruption could
possibly have a material adverse effect on the results of operations, liquidity
or financial position of the Company. In addition, the possibility exists that,
due to Y2K concerns, other businesses may increase their inventories of raw
materials and other products beyond normal levels prior to year-end, which could
result in supply shortages of such materials and subsequent production
interruptions at Watson.

Where appropriate, Watson continues to develop contingency plans in the event
that key third parties do not become Y2K compliant on a timely basis, or in the
event of unanticipated internal system failures. This effort reflects the
formalization of existing disaster recovery plans and includes the procurement
of additional raw material, packaging material and finished goods inventory, the
installation of back-up power generation systems and the implementation of
parallel procedures in key operating areas, among other measures. The Company's
management believes that an adequate program is in place in order to be Y2K
compliant, however, there can be no assurance that this program ultimately will
be successful. Any unanticipated failure in the Company's internal systems to be
Y2K compliant, or any failure by a material third party to bring its own systems
into compliance, could have a material adverse effect on Watson's business, its
financial position and its results of operations.

The foregoing represents a Y2K readiness disclosure statement pursuant to the
Year 2000 Readiness and Disclosure Act.

CAUTIONARY STATEMENT FOR PURPOSES OF THE SAFE HARBOR PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995

This report contains forward-looking statements. The Company desires to take
advantage of the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995 and is including this statement for the express purpose of
availing itself of the protections of the safe harbor with respect to all
forward-looking statements. Several important factors, in addition to the
specific factors discussed in connection with such forward-looking statements
individually, could affect the future results of the Company and could cause
those results to differ materially from those expressed in the forward-looking
statements contained herein.

The Company's estimated or anticipated future results, product performance or
other non-historical facts are forward-looking and reflect Watson's current
perspective of existing trends and information. These statements involve risks
and uncertainties that cannot be predicted or quantified and, consequently,
actual results may differ materially from those expressed or implied by such
forward-looking statements. Such risks and uncertainties include, among others,
the success of Watson's product development activities and the timeliness with
which regulatory authorizations and product roll-out may be achieved (which
often times is dependent upon successful regulatory compliance), market
acceptance of Watson's products and the impact of competitive products and
pricing, the availability on commercially reasonable terms of raw materials and
other third party sourced products, dependence on sole source suppliers and
risks associated with a production interruption or shipment delays at such
suppliers, successful compliance with extensive, costly, complex and evolving
governmental regulations and restrictions, the scope, outcome and timeliness of
any governmental, court or other regulatory action (including, without
limitation, the scope, outcome, or timeliness of any inspection or other action
of the FDA), the ability to timely and cost effectively integrate acquisitions,
exposure to product liability and other lawsuits and contingencies, the outcome
of certain litigation involving the Company and related costs and expenses and
possible diversion of management's time and attention arising from such
litigation, the successful and timely implementation of the Company's Y2K
Compliance Program, and other risks and uncertainties detailed in this report
and from time to time in Watson's other SEC filings including, without
limitation, the Company's Annual Reports on Form 10-K.

Therefore, the Company wishes to caution each reader of this report to consider
carefully these factors as well as the specific factors that may be discussed
with each forward-looking statement in this report or disclosed in the Company's
filings with the SEC as such factors, in some cases, could affect the ability of
the Company to implement its business strategy and may cause actual results to
differ materially from those contemplated by the statements expressed herein.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

As discussed in Note D to the accompanying Notes to Consolidated Financial
Statements, the Company's investment in Andrx, which was stated on Watson's
balance sheet at a fair market value of $354.6 million at September 30, 1999,
consisted of approximately 6.1 million shares of Andrx common stock. This
investment has exposure to price risk, as the Andrx common stock is a publicly
traded equity security, the market price of which has been, and may continue to
be, volatile. The following table sets forth the Andrx quarterly high and low
share market price information, based on published financial sources, for 1998
and through September 30, 1999 (adjusted for a 2-for-1 stock split effective
June 1, 1999):

HIGH LOW
------ ------

1999, by quarter:
-----------------
First.......................... $46.25 $22.25
Second......................... 78.00 30.82
Third.......................... 78.00 38.75

1998, by quarter:
-----------------
First.......................... $19.13 $12.25
Second......................... 21.32 14.07
Third.......................... 21.50 12.94
Fourth......................... 25.85 12.32

Substantially all of the Company's cash equivalents and marketable securities
are at fixed interest rates and, as such, the fair value of these instruments is
affected by changes in market interest rates. However, all of these investments
mature within one year. As a result, the Company believes that the market risk
arising from its holding of these financial instruments is minimal. The Company
believes that the fair value of its fixed-rate long-term debt approximates its
carrying value of approximately $150 million at September 30, 1999. While
changes in market interest rates may affect the fair value of the Company's
long-term debt, management believes the effect, if any, of reasonably possible
near-term changes in the fair value of such debt on the Company's financial
condition, results of operations or cash flows will not be material. The Company
has no material foreign exchange or commodity price risks.

PART II - OTHER INFORMATION AND SIGNATURES

ITEM 1. LEGAL PROCEEDINGS

The Company is party to certain lawsuits and legal proceedings, which are
described in "Part I, Item 3. Legal Proceedings," of the Company's Annual
Report on Form 10-K for the year ended December 31, 1998 and in "Part II,
Item 1. Legal Proceedings," of the Company's Quarterly Reports on Form 10-Q
for the periods ended March 31, 1999 and June 30, 1999. The following is a
description of material developments during the period covered by this
Quarterly Report and should be read in conjunction with the Annual Report and
the Quarterly Reports referenced above.

With respect to the phentermine hydrochloride product liability suits filed
against Rugby Laboratories, Inc. and other Watson entities, additional actions
raising similar issues have been filed. As of October 31, 1999, a total of
approximately 900 cases have been filed against Rugby and other Watson entities
in a number of state courts and federal court. The Company believes that it will
be fully indemnified by Rugby's former owner, Hoechst Marion Roussel, Inc.
("HMR"), for the defense of all such cases and for any liability that may arise
out of these cases. HMR is currently controlling the defense of all these cases
as the indemnifying party under its agreements with the Company.

With respect to the action filed by Watson Laboratories, Inc. against Rhone
Poulenc Rorer and certain of its affiliates and successors (collectively, "RPR")
(Watson Laboratories, Inc. vs. Rhone-Poulenc Rorer, Inc., et. al.), on September
9, 1999, RPR filed a separate complaint against the Company and certain of its
subsidiaries for declaratory relief. The RPR action, which RPR has moved to
consolidate with the original action filed by the Company, seeks a determination
that the agreements between Watson Laboratories, Inc. and RPR will not be
breached if Cardizem(R) CD is produced or sold by a corporate entity "upstream"
of Rhone Poulenc Rorer, Inc. It also seeks a determination that if a merger
between Rhone Poulenc S.A. and Hoechst A.G. (the parent companies of RPR and
HMR, respectively) would cause a breach of the agreements between Watson
Laboratories, Inc. and RPR, RPR could avoid a breach by committing to divest
Cardizem(R) CD within 12 months of the merger. The Company believes it has
substantial defenses to the claims asserted in the complaint.

On August 26, 1999, a suit was filed against the Company and certain of its
subsidiaries (SmithKline Beecham Consumer Healthcare LP v. Watson
Pharmaceuticals, Inc. et. al.) in the United States District Court for the
Southern District of New York. The suit alleges that the User Guide and
Audiocassette included with the Company's Nicotine Polacrilex Gum product
infringe SmithKline Beecham's copyrights. On September 10, 1999, the court
issued a preliminary injunction enjoining the Company, during the pendency of
the lawsuit, from selling or shipping its Nicotine Polacrilex Gum with a User
Guide or Audiocassette that is "strikingly or substantially similar" to
SmithKline Beecham's User Guide or Audiocassette. The court also ordered the
Company to recall any product it had previously shipped to customers. On October
5, 1999, at the Company's request, the court stayed all further proceedings in
the action (other than the injunction) for 45 days so that the Company could
seek FDA approval of revised labeling. The Company has submitted revised
labeling to the FDA, and FDA has agreed to review the revised labeling on an
expedited basis. The Company has not yet responded to the complaint, but
believes it has substantial defenses to the claims made by the plaintiff.

The Company is unable to predict the likelihood of the outcome of any of these
litigation matters or the potential liability, if any, to the Company that may
arise from these litigation matters.

ITEM 5. OTHER INFORMATION

In June 1997, the Company acquired exclusive United States and certain worldwide
marketing, sales and distribution rights to the Dilacor XR(R) product and its
generic equivalent, diltiazem, from RPR. In connection with this acquisition,
RPR agreed to supply Watson with all of its requirements for Dilacor XR(R)
product and its generic equivalent through June 2000. For this purpose, RPR
designated as its contract manufacturer Centeon LLC. RPR agreed to remain fully
liable to Watson for Centeon's performance.

In August 1998, Centeon ceased its manufacturing operations after an FDA
inspection. Since that time, Centeon has not manufactured any Dilacor XR(R)
product or its generic equivalent. Centeon is currently the Company's sole
source for these products. The Company has been working with the FDA to secure
the release of certain Centeon inventory existing at the time of Centeon's
production shut-down. Over the last several months, Watson has obtained releases
from time to time of this inventory and continues to work with the FDA to secure
additional releases. Although Watson intends to continue its efforts, there can
be no assurances that any additional inventory will be released from Centeon. In
such event, the Company's inability to secure additional inventory on a timely
basis could have a material adverse effect upon the Company.

Due to RPR's supply failures, the Company has accelerated its plans to establish
an alternate source of supply for the Dilacor XR(R) product and its generic
equivalent. In this regard, Watson has submitted to the FDA a request for a site
transfer of the manufacturing of the Dilacor XR(R) product and its generic
equivalent to Watson's Corona, California facility. The Company believes that
the FDA will consider approval of the Company's site transfer only after a
successful cGMP inspection of its Corona facility.

The FDA conducted an inspection of the Company's Corona, California facility
from October 12-22, 1999. At the close of the inspection, the FDA issued a Form
483 listing the FDA's observations during the inspection. The Company has
provided the FDA with its responses to the Form 483 observations and believes
these responses address the FDA's observations made in the October 1999
inspection. The Company cannot predict when the FDA will review the Company's
responses or the outcome of the Agency's review. The Company believes that the
FDA will consider approval of the Company's pending product submissions for the
Corona facility only after the FDA has reviewed the Company's responses and has
concluded that the Company's Corona facility is in substantial compliance with
cGMPs.

The process for obtaining governmental approval to manufacture and market
pharmaceutical products is rigorous, time-consuming and costly, and Watson
cannot predict the extent to which this process may be affected by legislative
and regulatory developments. Watson is dependent on receiving FDA and other
governmental approvals prior to manufacturing, marketing and shipping its
products. Consequently, there is always the possibility that the FDA or other
applicable agency will not grant such approvals, or that there will be a delay
in the rate or timing or an increase in the cost of such approvals, any of which
could adversely affect Watson's product introduction plans or results of
operations.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits:

27.1 -- Financial Data Schedule (EDGAR version only)

(b) Reports on Form 8-K filed during the quarter ended September 30,
1999:

None.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

WATSON PHARMACEUTICALS, INC.
(Registrant)

By: /s/ MICHAEL E. BOXER
----------------------------------
Michael E. Boxer
Senior Vice President - Chief
Financial Officer
(Principal Financial Officer)

By: /s/ R. CHATO ABAD
----------------------------------
R. Chato Abad
Vice President - Finance
(Principal Accounting Officer)

Dated: November 12, 1999

16
19
EXHIBIT INDEX

EXHIBIT
NUMBER DESCRIPTION
------- -----------
27.1 Financial Data Schedule