<PAGE> 1
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to sec. 240.14a-11(c) or sec. 240.14a-12
WATSON PHARMACEUTICALS, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/X/ $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1) or 14a-6(j)(2).
/ / $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
----------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
----------------------------------------------------------------------
(3) Per unit or other underlying value of transaction computed pursuant to
Exchange Act Rule 0-11:
----------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
----------------------------------------------------------------------
Set forth the amount on which the filing fee is calculated and state
how it was determined.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
----------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
----------------------------------------------------------------------
(3) Filing Party:
----------------------------------------------------------------------
(4) Date Filed:
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<PAGE> 2
WATSON PHARMACEUTICALS, INC.
311 BONNIE CIRCLE
CORONA, CALIFORNIA 91720
------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 10, 1996
------------------------
To Our Stockholders:
You are hereby notified that the 1996 Annual Meeting of Stockholders
(the "Meeting") of Watson Pharmaceuticals, Inc. (the "Company") will be held at
the Company's offices located at 311 Bonnie Circle, Corona, California at 9:00
a.m. local time, on May 10, 1996, for the following purposes:
1. To elect two (2) directors to hold office until the 1999 Annual
Meeting.
2. To amend the Articles of Incorporation to increase the number of
authorized shares of common stock from 100,000,000 to 500,000,000.
3. To amend the 1991 Stock Option Plan to increase by 1,000,000 the
number of shares authorized for issuance.
4. To ratify the selection of Price Waterhouse LLP as independent
public accountants for the Company for the current fiscal year.
5. To transact such other business as may properly come before the
Meeting or any adjournment thereof.
The Board of Directors has fixed the close of business on March 15, 1996 as
the record date for the determination of stockholders entitled to notice of and
to vote at the Meeting.
You are urged to attend the Meeting in person. Whether or not you expect to
be present in person at the Meeting, please date, sign and return the enclosed
proxy in the envelope provided.
By Order of the Board of Directors
Michel J. Feldman
Secretary
April 5, 1996
<PAGE> 3
WATSON PHARMACEUTICALS, INC.
311 BONNIE CIRCLE
CORONA, CALIFORNIA 91720
--------------------------
PROXY STATEMENT
--------------------------
GENERAL
This Proxy Statement and the accompanying proxy are furnished to
stockholders of Watson Pharmaceuticals, Inc. ("Watson" or the "Company") in
connection with the solicitation of proxies by the Company's Board of Directors
for use at the 1996 Annual Meeting of Stockholders (the "Meeting") to be held at
311 Bonnie Circle, Corona, California, at 9:00 a.m. local time, on May 10, 1996,
for the purposes set forth in the accompanying Notice of Meeting. This Proxy
Statement, the form of proxy included herewith and the Company's Annual Report
to Stockholders for the fiscal year ended December 31, 1995 are being mailed to
stockholders on or about April 5, 1996.
Stockholders of record at the close of business on March 15, 1996, are
entitled to notice of and to vote at the Meeting. On such date there were
outstanding 36,607,903 shares of the Company's common stock, par value $.0033
per share (the "Common Stock"). The presence, in person or by proxy, of the
holders of a majority of the shares of Common Stock outstanding and entitled to
vote at the Meeting is necessary to constitute a quorum. In deciding all
questions, each holder of Common Stock shall be entitled to one vote, in person
or by proxy, for each share held on the record date.
The information contained in this Proxy Statement relating to the
occupations and security holdings of directors and officers of the Company and
their transactions with the Company is based upon information received from each
individual as of March 15, 1996.
VOTING RIGHTS AND SOLICITATION OF PROXIES
All expenses incurred in the solicitation of proxies will be borne by the
Company. In addition to the use of the mails, proxies may be solicited on behalf
of the Company by directors, officers and employees of the Company. Following
the original mailing of the proxies and other soliciting materials, employees of
the company will request brokers, custodians, nominees and other record holders
to forward copies of the proxy and other soliciting materials to persons for
whom they hold shares of Common Stock and to request authority for the exercise
of proxies. In such cases, the Company, upon the request of the record holders,
will reimburse such holders for their reasonable expenses.
Votes cast by proxy or in person at the Meeting will be tabulated by the
election inspector appointed for the Meeting who will determine whether or not a
quorum is present. Neither the Company's Articles of Incorporation, By-Laws nor
Nevada corporate statutes addresses the treatment and effect of abstentions and
broker non-votes; the election inspector will treat abstentions as shares that
are present and entitled to vote for purposes of determining the presence of a
quorum but as not voted for purposes of determining the approval of any matter
submitted to the stockholders for a vote. If a broker indicates on the proxy
that it does not have discretionary authority as to certain shares to vote on a
particular matter, those shares will not be considered as present and entitled
to vote with respect to that matter.
Properly executed proxies will be voted in the manner directed by the
stockholders. If no direction is made, such proxies will be voted FOR the
election of all nominees named under the caption "Election of Directors" as set
forth therein as directors of the Company, FOR the amendment of the Articles of
Incorporation to increase the number of authorized shares of Common Stock from
100,000,000 to 500,000,000, FOR the amendment of the 1991 Stock Option Plan to
increase by 1,000,000 the number of
<PAGE> 4
shares authorized for issuance and FOR the ratification of the selection of
Price Waterhouse as independent public accountants. Any proxy may be revoked by
the stockholder at any time prior to the voting thereof by notice in writing to
the Secretary of the Company. A proxy will also be revoked if the stockholder
attends the meeting in person and votes. A later dated proxy will revoke a prior
dated proxy.
PROPOSAL NO. 1 -- ELECTION OF DIRECTORS
Two directors are to be elected by a plurality of the stockholder votes
cast at the Annual Meeting, to serve until the 1999 Annual Meeting and until
their successors are elected and qualify. The Class I directors, Michael Fedida
and Albert F. Hummel, are nominees for director. The Class II directors, Alec D.
Keith, and Ronald R. Taylor, are scheduled to serve as directors until the 1997
Annual Meeting. The Class III directors, Melvin Sharoky, Allen Chao, and Michel
J. Feldman, are scheduled to serve as directors until the 1998 Annual Meeting.
The Articles of Incorporation provide that three directors will serve in
each of the three classes. Currently, there are only two directors in Class I
who are nominated for re-election at the Annual Meeting. There are also only two
directors in Class II. The Board of Directors is currently reviewing potential
nominees for vacancies and expects to fill the remaining Class I and Class II
positions during the current year.
THE ENCLOSED PROXIES CANNOT BE VOTED FOR A GREATER NUMBER OF PERSONS THAN
TWO, BEING THE NUMBER OF NOMINEES NAMED IN THIS PROXY STATEMENT.
Information about the nominees for director and other directors whose term of
office will continue after the Annual Meeting is set forth in the following
paragraphs.
NOMINEES FOR TERMS EXPIRING AT THE 1996 ANNUAL MEETING:
MICHAEL FEDIDA Director since 1995
Michael Fedida, 49, a registered pharmacist, has served for the past five
years as an officer and director of several retail pharmacies wholly or
partially owned by him. In addition, Mr. Fedida has acted as a consultant,
without remuneration, to the Company in regard to certain marketing
concepts.
ALBERT F. HUMMEL Director since 1986
Albert F. Hummel, 51, a director of Watson since March 1986, except for a
period from July 1991 to October 1991, is a partner of Affordable
Residential Communities, a property management firm. Formerly, he was Chief
Financial Officer of Watson from October 1991 to December 1994.
The Board of Directors knows of no reason why any of the foregoing nominees
will be unavailable to serve, but, in the event of any such unavailability, the
proxies received will be voted for such substitute nominees as the Board of
Directors may recommend.
DIRECTORS WHOSE TERMS EXPIRE IN 1997:
ALEC D. KEITH, PH.D. Director since 1991
Alec D. Keith, 63, Chairman of the Board of Directors of Watson since
October 1991, a director of Watson Laboratories, Inc., a wholly-owned
subsidiary of the Company ("Watson Labs"), and a director of Circa
Pharmaceuticals, Inc., a wholly-owned subsidiary of the Company ("Circa"),
since July 1995. Mr. Keith was a co-founder of Zetachron, Incorporated
("Zetachron"), a subsidiary of Watson Labs from 1991 to 1995, and held
senior executive positions at Zetachron from 1983. He is also Adjunct
Professor of Biophysics at Pennsylvania State University. From 1978 through
1982 he was Vice President of Research and Development at Key
Pharmaceuticals, Inc. Dr. Keith has authored many scientific
2
<PAGE> 5
publications, has edited two books, and holds numerous domestic and foreign
pharmaceutical patents. He received a Ph.D. in genetics from the University
of Oregon in 1966.
RONALD R. TAYLOR Director since 1994
Ronald R. Taylor, 48, a director of Watson since November 1994, is a
founder and Chairman of Pyxis Corporation, a San Diego-based company
engaged in the development and marketing of systems to help hospitals and
other healthcare providers efficiently manage drugs and supplies.
DIRECTORS WHOSE TERMS EXPIRE IN 1998:
ALLEN CHAO, PH.D. Director since 1983
Allen Chao, 50, Chief Executive Officer of Watson since August 1983, and a
director of Circa since July, 1995. Dr. Chao was President of Watson from
August 1983 until July, 1995. He is a co-founder of Watson and has been a
director of the Company and Watson Labs since their inception. He served as
Director of Pharmaceutical Technology and Packaging Development at Searle
Laboratories, Inc. from September 1979 to August 1983, where he had overall
responsibility for new product implementation and new pharmaceutical
technology development. He received a Ph.D. in industrial and physical
pharmacy from Purdue University in 1973. He currently serves on the Board
of Directors of Circa and Somerset Pharmaceuticals, Inc. ("Somerset").
MICHEL J. FELDMAN Director since 1984
Michel J. Feldman, 53, a director of Watson since 1984 and its Secretary
since 1995, has been a partner in the law firm of D'Ancona & Pflaum,
Chicago, Illinois, since June 1991 and is counsel to Watson. He was
formerly a partner in the law firm of Keck, Mahin & Cate, Chicago,
Illinois, from 1983 to 1991. Mr. Feldman received a J.D. from Northwestern
University Law School in 1968 and is a Certified Public Accountant.
MELVIN SHAROKY, M.D. Director since 1995
Melvin Sharoky, 45, has been a director and President of the Company and a
director of Watson Labs since July 1995. Dr. Sharoky has been President and
Chief Executive Officer of Circa since February 1, 1993. Dr. Sharoky joined
Circa in 1988 as Medical Director. In April 1991, he became Circa's Senior
Vice President and Director of Research and Development. From August 1992
through January 1993, Dr. Sharoky served as Circa's Executive Vice
President and Director of Research and Development. Prior to joining Circa,
Dr. Sharoky was Senior Vice President of Contract Development for
Pharmakinetics Laboratories, Inc., a drug research and testing organization
from 1986 through June 1988. He currently serves on the Boards of Directors
of Circa, Somerset and Andrx Corporation and is the President of Somerset.
BOARD AND COMMITTEE MEETINGS
The Company has an Audit Committee composed of Michel J. Feldman, Albert F.
Hummel and Ronald R. Taylor. During the fiscal year ended December 31, 1995, the
Audit Committee met twice for the purposes of (i) reviewing the arrangements and
scope of the audit; (ii) discussing matters of concern to the Committee with
regard to the Company's financial statements or other results of the audit; and
(iii) reviewing the Company's internal accounting procedures and controls and
the activities and recommendations of the Company's independent accountants.
The Company has a Compensation Committee composed of Michael Fedida and
Ronald R. Taylor. The Compensation Committee met by telephone twice and by
unanimous consent six times during the fiscal year ended December 31, 1995. The
function of the Compensation Committee is to review and approve recommendations
concerning (i) the compensation of the Chairman of the Board, the Chief
Executive Officer
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<PAGE> 6
and the President of the Company and (ii) the grant of stock options under the
Company's 1991 Stock Option Plan.
The Company does not have a Nominating Committee. Nominations of directors
by stockholders must be in writing and delivered to the Secretary of the Company
at the principal executive offices of the Company no more than 90 days and no
less than 60 days prior to the Annual Meeting and otherwise in accordance with
the By-Laws.
The Board of Directors of the Company held four meetings during the fiscal
year ended December 31, 1995, and each director attended at least 75% of all
Board and applicable Committee meetings.
DIRECTORS' COMPENSATION
All Company directors who are not full-time employees of the Company
receive a director's fee of $20,000 per year. In addition, directors are also
paid $500 for each Committee meeting of less than one-half day, and $1,000 for
each Committee meeting of more than one-half day. All directors are reimbursed
for expenses incurred in connection with attending Board and Committee meetings.
Michel J. Feldman's law firm receives his director's fee.
The Company has also granted stock options to each non-employee director
under the 1995 Non-Employee Directors' Plan.
The following table sets forth, as of March 15, 1996, the options granted
under the 1995 Non-Employee Directors' Plan.
<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERLYING OPTIONS EXERCISE PRICE DATE OF
NAME GRANTED(#) PER SHARE($) GRANT(1)
----------------------------------------------- ------------------ -------------- --------
<S> <C> <C> <C>
Michael Fedida................................. 5,000 $37,00 7/18/95
Michel J. Feldman.............................. 5,000 $25.50 2/06/95
15,000 $37.00 7/18/95
Albert F. Hummel............................... 5,000 $25.50 2/06/95
5,000 $37.00 7/18/95
Ronald R. Taylor............................... 5,000 $25.50 2/06/95
10,000 $37.00 7/18/95
</TABLE>
- ---------------
(1) The options granted on February 6, 1995 reflect the initial shares granted
to directors serving as members of the Board at the inception of the 1995
Non-Employee Directors' Plan. The options granted on July 18, 1995 reflect
the amount of 5,000 shares times the number of years to which the director
was elected.
There have been no exercises of options granted under the 1995 Non-Employee
Directors' Plan as of March 15, 1996. For a complete description of this plan,
see "1995 Non-Employee Directors' Plan."
DIRECTOR, OFFICER AND PRINCIPAL STOCKHOLDER SECURITY OWNERSHIP REPORTING
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and officers, and persons who own more than 10% of a registered class
of the Company's equity security, to file with the Securities and Exchange
Commission reports of ownership and changes in ownership of common stock and
other equity securities of the Company. Officers, directors and greater-than-10%
stockholders are required by SEC regulation to furnish the Company with copies
of all Section 16(a) forms they file.
Based solely on review of the copies of such reports furnished to the
Company or written representations that no other reports were required, the
Company believes that, during the 1995 fiscal year, all filing requirements
applicable to its officers, directors and greater-than-10% beneficial owners
were complied with except that: Allen Chao filed two Forms 5 late which reported
two transactions and Albert F. Hummel filed one Form 5 late which reported one
transaction. Alec D. Keith filed one transaction late on an amended Form 4.
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HOLDINGS OF STOCKHOLDERS, DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth, as of March 15, 1996, the name, address
(where required) and holdings of each person (including any "group" as defined
in Section 13(d)(3) of the Securities Exchange Act of 1934) known by the Company
to be the beneficial owner of more than five percent of the Company's Common
Stock, and the amount of Common Stock beneficially owned by each of the
directors and executive officers of the Company, and by all directors and named
executive officers of the Company as a group.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF PERCENT
NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP(1) OF CLASS
----------------------------------------------------- ----------------------- --------
<S> <C> <C>
Nicholas-Applegate Capital Management................ 2,339,153(2) 6.4%
600 West Broadway
San Diego, CA 92101
Allen Chao........................................... 2,030,394(3)(4) 5.5%
311 Bonnie Circle
Corona, CA 91720
Phylis and David C. Hsia............................. 1,113,863(3)(5) 3.0%
Melvin Sharoky....................................... 525,293(6) 1.4%
Alec D. Keith........................................ 478,000(7) 1.3%
Albert F. Hummel..................................... 250,507(8) *
Michael Fedida....................................... 21,500(9) *
Michel J. Feldman.................................... 16,500(10) *
Ronald R. Taylor..................................... 5,000(11) *
All current directors and executive officers of the
Company (8 persons)................................ 4,441,057 12.1%
</TABLE>
- ---------------
* Represents less than 1%
(1) Unless otherwise indicated in the footnotes to this table and pursuant to
applicable community property laws, the Company believes the persons named
in this table have sole voting and investment power with respect to all
shares of Watson Common Stock reflected in this table.
(2) Based upon a Form 13G Report filed with the Securities and Exchange
Commission on February 10, 1996.
(3) Allen Chao and Phylis Hsia are siblings. David C. Hsia is married to Phylis
Hsia.
(4) Includes 423,794 shares of Watson Common Stock subject to outstanding
options, 805,113 shares of Watson Common Stock held by Allen Chao
Interests, Ltd., a partnership in which Dr. Chao is a controlling partner,
490,323 shares of Watson Common Stock held by MAL Investment Company, a
corporation of which Dr. Chao is a controlling stockholder, and 311,164
shares of Watson Common Stock held by the Allen Chao and Lee Hwa Chao
Family Trust.
(5) Includes 649,141 shares of Watson Common Stock held by Phylis Hsia, 240,794
shares of Watson Common Stock held by David C. Hsia, 121,428 shares of
Watson Common Stock held by Mrs. Hsia as custodian for the children of Dr.
and Mrs. Hsia, 82,500 shares of Watson Common Stock subject to outstanding
options held by Dr. Hsia and 20,000 shares of Watson Common Stock held by
David and Phylis Hsia Charitable Remainder Trust. Excludes 87,750 shares of
Watson Common Stock held in irrevocable trusts for the benefit of Dr. and
Mrs. Hsia's children over which Dr. and Mrs. Hsia have no voting or
investment power.
(6) Includes 426,534 shares of Watson Common Stock held by Dr. Sharoky of which
172,000 shares are subject to forfeiture under certain circumstances
pursuant to the terms of Dr. Sharoky's employment agreement, 86,000 shares
of Watson Common Stock subject to outstanding options, 12,348 shares of
Watson Common Stock held by Dr. Sharoky as custodian for his three
children, and 411 shares of Watson Common Stock held by Dr. Sharoky as
custodian for his niece.
5
<PAGE> 8
(7) All shares of Watson Common Stock are held by Dr. Keith. Mr. Hummel has an
option to purchase 132,000 shares of Watson Common Stock from Dr. Keith.
(8) Includes 40,291 shares of Watson Common Stock subject to outstanding
options, and options to purchase 132,000 and 66,000 shares of Watson Common
Stock from Dr. Keith and Dr. Wallace C. Snipes (a former officer of
Watson), respectively.
(9) Includes 21,500 shares of Watson Common Stock subject to outstanding
options.
(10) Includes 9,000 shares of Watson Common Stock subject to outstanding
options, 1,500 shares of Watson Common Stock owned by Ercelle Feldman, the
wife of Michel J. Feldman, for which Mr. Feldman disclaims beneficial
ownership, and an aggregate of 6,000 shares of Watson Common Stock owned by
Mr. Feldman as trustee for two of his sons, for which he disclaims
beneficial ownership.
(11) Shares of Watson Common Stock subject to outstanding options.
PROPOSAL NO. 2 -- TO AMEND THE ARTICLES OF INCORPORATION TO INCREASE
THE NUMBER OF AUTHORIZED SHARES OF COMMON STOCK
The Company's Articles of Incorporation (the "Articles") currently
authorize 100,000,000 shares of Common Stock. The Board of Directors believes it
to be advisable to increase the number of authorized shares of Common Stock to
500,000,000 in order to provide future flexibility. As of March 15, 1996, the
Company had 36,607,903 shares of Common Stock outstanding and 4,507,642 shares
reserved for issuance under the Company's option plans. A balance of 58,884,455
shares were available for all other corporate purposes. If the amendment is
approved, there will be 457,884,455 shares available for such purposes. The
additional authorized shares of Common Stock would be capable of being issued
for any proper corporate purpose by the Board of Directors at any time without
stockholder approval unless otherwise required under applicable law or by the
provisions of any listing agreement to which the Company may become a party. The
Company has no present agreements or commitments to issue any additional shares.
The Board of Directors believes it is desirable to give the Company this
flexibility in considering such matters as stock dividends, raising additional
capital, acquisitions and other corporate purposes.
Holders of Common Stock are not entitled to preemptive rights, and to the
extent that any additional shares of Common Stock or securities convertible into
Common Stock may be issued on other than a pro rata basis to current
stockholders, the present ownership portion of current stockholders may be
diluted. Depending upon the circumstances in which additional shares of Common
Stock are issued, the overall effects of such issuance may be to render more
difficult or to discourage a merger, tender offer, proxy contest or the
assumption of control by a holder of a large block of Common Stock and the
removal of incumbent management. Management is not aware of any possible
takeover attempts at this time.
The proposed amendment would amend Article V of the Articles to read in its
entirety as follows:
"ARTICLE V
The Corporation is authorized to issue a total of Five Hundred and Two
Million Five Hundred Thousand (502,500,000) shares of stock, Five Hundred
Million (500,000,000) shares of which shall be classified as common stock,
$0.0033 par value per share, and Two Million Five Hundred Thousand (2,500,000)
shares of which shall be classified as preferred stock, no par value per share.
The holders of both classes of stock shall not be entitled to exercise
cumulative voting or preemptive rights.
The voting powers, designations, preferences, limitations, restrictions,
relative rights and distinguishing designation in respect of the shares of the
preferred stock shall be as stated in the resolution or resolutions providing
for the issuance of such preferred stock adopted or to be adopted by the Board
of Directors of the Corporation pursuant to the authority hereby expressly
vested in the Board of Directors of the Corporation by these Articles of
Incorporation."
6
<PAGE> 9
VOTE REQUIRED
The affirmative vote of a majority of the outstanding shares of the
Company's Common Stock entitled to vote at the meeting is required for approval
of the amendment.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF THE AMENDMENT OF
THE ARTICLES OF INCORPORATION TO INCREASE THE NUMBER OF AUTHORIZED SHARES OF
COMMON STOCK TO 500,000,000 SHARES.
PROPOSAL NO. 3 -- TO AMEND THE 1991 STOCK OPTION PLAN
The Board of Directors recommends that the stockholders approve a proposal
to amend the 1991 Stock Option Plan (the "1991 Plan") to increase the number of
shares that can be issued under the 1991 Plan. Currently, an aggregate of
3,700,000 shares of Common Stock are authorized for issuance pursuant to the
1991 Plan. The proposed amendment would increase the number of shares authorized
for issuance to an aggregate of 4,700,000 shares. For a fuller description of
the 1991 Plan, see "Description of Stock Option Plans."
REASONS FOR THE AMENDMENT
The Board of Directors believes the 1991 Plan has been a effective tool in
attracting and retaining new executive talent, and in more closely aligning the
interests of new executives with the interests of the Corporation's
stockholders. Since its adoption, a total of 2,979,034 shares have been granted
under the 1991 Plan and the Board of Directors believes that an increase in the
aggregate number of authorized shares is necessary to allow the continued
viability of the 1991 Plan.
TEXT OF THE PROPOSED AMENDMENT
The proposed amendment would amend Section 2 of the 1991 Plan to read in
its entirety as follows:
"The phrase '4,700,000 (determined as of May 10, 1996)' is substituted for
the number '3,700,000 (determined as of May 1, 1995)' where it appears in
Paragraph 2 of the 1991 Plan."
VOTE REQUIRED
The affirmative vote of a majority of the outstanding shares of the
Corporation's Common Stock present or represented and entitled to vote at the
meeting is required for approval of the amendment.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF THE AMENDMENT TO
THE CORPORATION'S 1991 STOCK OPTION PLAN.
7
<PAGE> 10
PROPOSAL NO 4. -- RATIFICATION OF SELECTION OF
INDEPENDENT PUBLIC ACCOUNTANTS
The firm of Price Waterhouse LLP has audited the books and records of the
Company since its inception and the Board of Directors desires to continue the
services of this firm. Accordingly, the Board of Directors will recommend at the
Meeting that the stockholders ratify the selection of the firm of Price
Waterhouse LLP to audit the accounts of the Company for the current fiscal year.
Representatives of that firm are expected to be present at the Meeting with the
opportunity to make a statement if they desire to do so and are expected to be
available to respond to appropriate questions.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR RATIFICATION OF THE SELECTION
OF PRICE WATERHOUSE LLP.
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid or accrued to the
Company's Chief Executive Officer and each of the Company's executive officers
other than the Chief Executive Officer who served during 1995.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION AWARDS
ANNUAL COMPENSATION --------------------------
-------------------- SECURITIES ALL OTHER
NAME AND PRINCIPAL BONUS RESTRICTED UNDERLYING COMPENSATION
POSITION(1) YEAR SALARY($) ($)(3) STOCK($)(6) OPTIONS(#) ($)(4)
- -------------------------------- ---- --------- ------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Allen Chao, Ph.D.(5)............ 1995 300,000 150,000 100,000 2,074
Chief Executive Officer 1994 260,608 137,500 50,000 4,529
1993 195,268 125,000 50,000 16,851
Melvin Sharoky, M.D.(2)(5)...... 1995 300,000 150,000 386,000 6,494
President 1994 300,000 125,000 3,722
1993 292,345 50,000 2,250,000 3,722
Alec D. Keith, Ph.D............. 1995 175,000 25,000 75,000 4,620
Chairman of the Board 1994 160,866 52,800 35,000 4,616
1993 138,286 53,333 50,000 1,246
David C. Hsia, Ph.D............. 1995 151,730 25,408 100,000 4,373
Senior Vice President, 1994 126,218 19,566 3,741
Scientific Affairs 1993 118,501 18,750 8,880
</TABLE>
- ---------------
(1) Drs. Chao, Sharoky, Keith and Hsia have entered into employment agreements
with the Company. Please refer to "Employment Agreements" below for details.
(2) Dr. Sharoky became an officer of the Company effective July 17, 1995.
Compensation reflects amounts earned throughout fiscal 1995 and prior years
while at Circa. Dr. Sharoky's compensation is disclosed for the periods
prior to the merger because the Company's financial statements have been
restated as a result of the merger. The financial statements reflect all
compensation paid by the Company to Dr. Sharoky for the three years ended
December 31, 1995.
(3) Pursuant to bonus formulas established by the Company's Compensation
Committee, Drs. Chao and Keith received the maximum annual bonus in 1995,
1994 and 1993 as based upon net after-tax earnings of the Company. Dr.
Sharoky received a bonus for 1995, as determined by the Company's
Compensation Committee and bonuses for 1994 and 1993 as determined by
Circa's Compensation Committee. Bonuses paid to Dr. Hsia in 1995, 1994 and
1993 were based on the satisfaction of certain objective criteria set by the
Company's Chief Executive Officer and President.
(4) Amounts in 1995 and 1994 represent the Company's 401(k) contributions on
behalf of the named officers, above. In 1993, the Company's 401(k)
contribution of $3,148, $1,246 and $1,903 were made to
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<PAGE> 11
Drs. Chao, Keith and Hsia, respectively. The 1993 amount also includes
accrued vacation benefits of $13,703 and $6,977 to Drs. Chao and Hsia.
Amounts in 1995, 1994 and 1993 for Dr. Sharoky represent insurance premiums
paid by the Company on a life insurance policy in which Dr. Sharoky's wife
is the named beneficiary.
(5) Drs. Chao and Sharoky serve on the Board of Directors of Somerset a joint
venture which is 50% owned by the Company. Dr. Chao was elected to the
Somerset Board of Directors in 1995 and received a director fee of $12,000
in 1995. Dr. Sharoky has served on the Somerset Board of Directors since
1993 and received director fees of $12,000 in each of 1993, 1994 and 1995.
These fees were not paid by the Company and are not included in the Summary
Compensation Table in this Proxy Statement.
(6) Amount represents an original grant of 258,000 restricted shares of Common
Stock of the Company. Such shares are subject to forfeiture in decreasing
annual increments if Dr. Sharoky voluntarily terminates his employment, or
if his employment is terminated for cause, prior to January 31, 1997. At
March 15, 1996, forfeiture restrictions remain on 172,000 shares. The share
forfeiture clause shall be terminated under certain stated conditions. These
shares are not restricted for purposes of receiving dividends.
EMPLOYMENT AGREEMENTS
Effective May 29, 1995, the Company entered into employment agreements with
each of Drs. Allen Chao, Alec D. Keith and David C. Hsia (the "Senior
Executives"), which will terminate on May 31, 2000. These agreements provide
that, among other things, (i) Drs. Chao, Keith, and Hsia will receive minimum
annual salaries of $400,000, $175,000 and $165,000 per year, respectively; (ii)
the Company cannot terminate the Senior Executives' employment except by reason
of death, disability or for cause; (iii) in the event of termination on account
of retirement or disability, the Company will continue the Senior Executives'
major medical coverage; and (iv) in the event of termination without cause or
for good reason (as described in the employment agreements) subsequent to a
change in control, the Senior Executives are entitled to receive, among other
things, certain severance benefits, including an amount equal to 2.99 times
their base salary and incentive compensation. In addition, Dr. Chao will be
entitled to receive options to purchase 150,000 shares of the Company's Common
Stock under the 1991 Plan, 100,000 of which are to be granted in 1996, and
50,000 in 1997. Drs. Keith and Hsia will each be entitled to receive options to
purchase 75,000 and 100,000 shares, respectively of the Company's Common Stock
under the 1991 Plan. Such options to be granted to Drs. Chao, Keith and Hsia
will vest over a five year period following each grant date.
Effective July 17, 1995, the Company assumed an employment agreement
between Circa and Dr. Melvin Sharoky. Pursuant to the terms of this employment
agreement, among other things: (i) the agreement will terminate on January 31,
1997; (ii) Dr. Sharoky will receive a minimum annual salary of $350,000; (iii)
Dr. Sharoky received restricted Company Common Stock during 1991 and 1993 in the
amount of 602,000 shares; and (iv) Dr. Sharoky is entitled to certain severance
benefits including a payment of 2.99 times the sum of his base compensation and
incentive compensation. The restricted Company Common Stock will vest in equal
installments in April 1996 and January 1997. In addition to the restricted stock
granted under the employment agreement, Dr. Sharoky received 300,000 options to
purchase shares of the Company's Common Stock. These options will vest in equal
installments in July 1996, 1997 and 1998.
9
<PAGE> 12
OPTIONS
The following table sets forth certain information concerning individual
grants of stock options made during the year ended December 31, 1995, to each
named executive officer of the Company.
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
% OF TOTAL ANNUAL RATES OF
NUMBER OF OPTIONS STOCK PRICE
SHARES GRANTED TO APPRECIATION FOR
UNDERLYING EMPLOYEES EXERCISE OR OPTION TERM(1)
OPTIONS IN FISCAL BASE PRICE EXPIRATION -------------------------
NAME GRANTED(#) YEAR $ PER SHARE DATE 5%($) 10%($)
- -------------------- ------------ ---------- ------------ ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Allen Chao.......... 35,000 2.33% $28.00(2) 1/03/05 $ 488,041 $ 1,357,610
15,000 1.00% $33.00(2) 1/03/05 $ 134,161 $ 506,833
50,000 3.33% $37.25(3) 7/17/05 $1,171,316 $ 2,968,345
Melvin Sharoky...... 86,000 5.73% $18.75(4) 1/30/05 $1,924,645 $ 4,019,812
7,800 0.52% $37.25(3) 7/17/05 $ 182,725 $ 463,062
292,200 19.48% $37.25(3) 7/17/05 $6,845,172 $17,347,010
Alec D. Keith....... 7,800 0.52% $37.25(3) 7/17/05 $ 182,725 $ 463,062
67,200 4.48% $37.25(3) 7/17/05 $1,574,249 $ 3,989,456
David C. Hsia....... 11,400 0.76% $37.25(3) 7/17/05 $ 267,060 $ 676,783
88,600 5.91% $37.25(3) 7/17/05 $2,075,572 $ 5,259,908
</TABLE>
- ---------------
(1) The assumed annual rates of stock price appreciation of 5% and 10% are set
by Securities and Exchange Commission rules and are not intended as a
forecast of possible future appreciation in stock prices.
(2) These non-qualified options are immediately exercisable upon the date of
grant. The exercise prices of $28.00 and $33.00 were 8.7% and 28.2%,
respectively, above the fair market value of the Company's Common Stock as
of January 3, 1995 grant date. The higher exercise prices were established
as an incentive to encourage stock growth, as determined by the Company's
Compensation Committee.
(3) These options were granted on July 17, 1995 pursuant to the merger and are
exercisable at a rate of 20% per year over a five-year period following the
date of grant for Drs. Chao, Keith and Hsia and exercisable at a rate of 33%
per year over a three-year period following the date of grant for Dr.
Sharoky.
(4) These options were granted January 30, 1995 by Circa.
OPTION EXERCISES AND FISCAL YEAR-END VALUES
The following table sets forth certain information with respect to each
named executive officer concerning the exercise of options during the fiscal
year ended December 31, 1995, as well as any unexercised options held as of the
end of such fiscal year.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
SHARES OPTIONS AT FY-END(#) OPTIONS AT FY-END($)
ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE(#) REALIZED($) UNEXERCISABLE UNEXERCISABLE
- -------------------------- ------------ ----------- --------------------- ----------------------
<S> <C> <C> <C> <C>
Allen Chao................ 417,794/145,999 $15,471,808/$4,760,971
Melvin Sharoky............ 86,000/300,000 $2,601,500/$3,525,000
Alec D. Keith............. 130,000 $3,401,122 0/105,000 $0/$2,081,250
David C. Hsia............. 78,000/127,000 $3,417,600/$2,329,400
</TABLE>
10
<PAGE> 13
DESCRIPTION OF STOCK OPTION PLANS
1985 STOCK OPTION PLAN
In 1985, the Company's Board of Directors adopted a stock incentive plan
(the "1985 Plan"). Under terms of the 1985 Plan, the exercise price of the
options granted must be at least equal to the fair market value of the shares
underlying the option, as determined by the Board of Directors at the date of
grant. Each option granted is exercisable on a cumulative basis in five equal
annual installments commencing one year from the date of the grant. The Company
has reserved 558,967 shares of Common Stock for issuance under the 1985 Plan.
At March 15, 1996, Watson had outstanding stock options under the 1985 Plan
for an aggregate of 305,967 shares of Watson Common Stock at an average exercise
price of $3.99 per share. On March 15, 1996, the fair market value of Watson
Common Stock was $38.00 per share, the last reported sale price quoted on the
NASDAQ/NMS. All options granted under the 1985 Plan will expire by September 10,
1997, unless exercised prior to that date. The 1985 Plan terminated in August
1995.
1991 STOCK OPTION PLAN
The 1991 Plan limits the number of option shares granted in a fiscal year
to each executive officer whose compensation is required to be reported in the
annual proxy statement (an "Executive Officer") to not exceed 300,000 shares, as
amended, for the first fiscal year during which he or she becomes an Executive
Officer and to not exceed 100,000 shares, as amended, for any subsequent fiscal
year during which he or she serves as an Executive Officer. The 1991 Plan
permits the grant of incentive stock options ("ISO"s) and non-qualified stock
options and will terminate in October 2001. Officers, employees, non-employee
directors and advisors are eligible to participate under the 1991 Plan. On
February 26, 1996, subject to the approval of the stockholders of Watson, the
Board of Directors of Watson approved the proposed amendment to the 1991 Plan
described in "Proposal No. 3 to Amend the 1991 Stock Option Plan."
The 1991 Plan is administered by the Compensation Committee of the Board of
Directors which has the authority to select the persons to whom grants are to be
made, to designate the number of shares to be covered by each option, to
determine whether such option is an incentive stock option or a non-qualified
stock option, to establish vesting schedules, to determine the type of
consideration to be paid upon exercise and to specify other terms of the
options. The maximum term of options granted under the 1991 Plan is ten years.
The exercise price of all options must equal at least the fair market value
of the Company's Common Stock on the date of grant. The exercise price of
incentive options granted to any person who at the time of grant owns stock
possessing more than 10% of the total combined voting power of all classes of
stock must be at least 110% of the fair market value of such stock on the date
of grant. Shares covered by currently outstanding options under the 1991 Plan
typically are exercisable at a rate of 20% per year over a five-year period
following the date of grant. In the event of a change of control of the Company,
as defined in the 1991 Plan, all outstanding options will become immediately
exercisable and the 1991 Plan will terminate unless the 1991 Plan and
outstanding options are assumed or replaced by the successor corporation.
At March 15, 1996, the Company had outstanding stock options under the 1991
Plan for an aggregate of 1,841,693 shares of Watson Common Stock at an average
exercise price of $29.20 per share.
1995 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN
In February 1995, the Company's Board of Directors adopted a 1995
Non-Employee Director's Stock Option Plan (the "1995 Directors' Plan") which was
approved by the stockholders in July 1995. Under the terms of the 1995
Directors' Plan, the Company issued 5,000 option shares to each non-employee
director on the effective date of the plan in February 1995 and will issue to
each re-elected non-employee director 5,000 option shares of the Company's
Common Stock multiplied by the number of years for which such non-employee
director is elected to serve as a member of the Board. The stock options will be
granted at fair
11
<PAGE> 14
market value of the Common Stock on the next business day following each annual
meeting of the Company's stockholders. The options granted initially were
exercisable six months from effective date of the merger. The options granted
after the initial grant are exercisable at a rate of 5,000 shares on each
anniversary of the option grant date during the non-employee directors' term of
office. The Company has reserved 500,000 shares of Common Stock for issuance
under the 1995 Directors' Plan.
The 1995 Directors' Plan will remain in effect until February 5, 2005,
unless sooner terminated by the Board of Directors.
At March 15, 1996, Watson had outstanding stock options under the 1995
Directors' Plan for an aggregate of 50,000 shares of Watson Common Stock at an
average exercise price of $33.55 per share.
CIRCA PLANS ASSUMED IN THE MERGER
In July 1995, in conjunction with the merger with Circa, the Company
assumed certain options granted to Circa employees and directors prior to the
merger (the "Circa Options"). The Circa Options were issued under several
different plans and have been adjusted by the merger exchange ratio under the
terms of the merger agreement. The Circa Options generally become exercisable
over a three-year period and generally expire ten years from the date of grant.
No additional options will be granted under any of the Circa option plans.
FEDERAL INCOME TAX CONSEQUENCES
Incentive Stock Options. The following general rules are applicable for
federal income tax purposes under existing law to persons who receive and
exercise incentive stock options ("ISO" or "ISOs") granted under the 1985 Plan,
or the 1991 Plan (collectively, the "Stock Option Plans"):
1. Generally, no taxable income results to the optionee upon the
grant of an ISO or upon the issuance of shares to him or her upon exercise
of the ISO.
2. No tax deduction is allowed to the Company upon either grant or
exercise of an ISO under the Stock Option Plans.
3. If shares acquired upon exercise of an ISO are not disposed of (i)
within two years following the date the option was granted and (ii) within
one year following the date the shares are transferred to the optionee
pursuant to the ISO exercise, the difference between the amount realized on
any subsequent disposition of the shares and the exercise price will
generally be treated as long-term capital gain or loss to the optionee.
4. If shares acquired upon exercise of an ISO are disposed of before
the expiration of either of the requisite holding periods (a "Disqualifying
Disposition"), then in most cases the lesser of (i) any excess of the fair
market value of the shares at the time of exercise of the ISO over the
exercise price or (ii) the actual gain on disposition, will be treated as
compensation to the optionee and will be taxed as ordinary income in the
year of such disposition.
5. In any year that an optionee recognizes compensation income on a
Disqualifying Disposition of stock acquired by exercising an ISO, the
Company will generally be entitled to a corresponding deduction for income
tax purposes.
6. Any excess of the amount realized by the optionee as the result of
a Disqualifying Disposition over the sum of (i) the exercise price and (ii)
the amount of ordinary income recognized under the above rules will
generally be treated as either long-term or short-term capital gain,
depending upon the time elapsed between receipt and disposition of the
shares disposed of.
7. The bargain element at the time of exercise of an ISO, i.e., the
amount by which the fair market value of the Company Common Stock acquired
upon exercise of the ISO exceeds the exercise price, may be taxable to the
optionee under the "alternative minimum tax" provisions of the Code.
12
<PAGE> 15
Non-Qualified Stock Options. The following general rules are applicable to
holders of NSOs and to the Company for Federal income tax purposes under
existing law under the Stock Option Plans, including the 1995 Directors' Plan:
1. The optionee generally does not realize any taxable income upon
the grant of a NSO, and the Company is not allowed a business expense
deduction by reason of such grant.
2. The optionee will recognize ordinary compensation income at the
time of exercise of the option in an amount equal to the excess, if any, of
the fair market value of the shares on the date of exercise over the
exercise price. The Company may be required to withhold tax on this amount.
3. When the optionee sells the shares, he or she will generally
recognize a capital gain or loss in an amount equal to the difference
between the amount realized upon the sale of the shares and his or her
basis in the shares (generally, the exercise price plus the amount subject
to tax as compensation income). If the optionee holds the shares for longer
than one year, this gain or loss will be a long-term capital gain or loss.
4. In general, the Company will be entitled to a tax deduction when
compensation is recognized by the optionee.
The foregoing described tax consequences are based on current laws,
regulations and interpretations thereof, all of which are subject to change. In
addition, the foregoing discussion is limited to Federal income taxes and does
not attempt to described state and local tax effects which may accrue to
participants or the Company.
The following table sets forth the number of stock options granted under
the 1991 Plan described above as of March 15, 1996 (net of cancelled and expired
options) subject to shareholder approval for plan modification as described in
"Proposal No. 3 to Amend the 1991 Stock Option Plan":
<TABLE>
<CAPTION>
DOLLAR VALUE NUMBER OF SHARES
OF OPTIONS UNDERLYING OPTIONS
NAME AND POSITION GRANTED($) GRANTED(#)
-------------------------------------------------------- ------------ ------------------
<S> <C> <C>
Allen Chao, Chief Executive Officer..................... $ 6,287,340 275,000
Melvin Sharoky, President............................... $11,175,000 300,000
Alec D. Keith, Chairman of the Board.................... $ 5,677,000 235,000
David C. Hsia, Senior Vice President, Scientific
Affairs............................................... $ 3,995,000 130,000
Executive Group......................................... $27,134,340 940,000
Non-Executive Director Group............................ $ 1,655,377 175,268
Non-Executive Employee Group............................ $32,188,670 1,413,728
</TABLE>
ADDITIONAL OPTIONS
In 1991, the Company issued 330,125 non-statutory options at an exercise
price of $3.67 per share. Through December 31, 1995, 103,299 of these options
were exercised. The remaining 226,826 options are exercisable in 1996.
13
<PAGE> 16
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
This Report of the Compensation Committee shall not be deemed incorporated
by reference by any general statement incorporating this Proxy Statement into
any filing under the Securities Act of 1933 or under the Securities Exchange Act
of 1934, except to the extent that the Company specifically incorporates the
information contained herein by reference, and shall not otherwise be deemed
filed under those Acts.
The Compensation Committee of the Board of Directors is responsible for
determining the compensation arrangements for the senior executive officers of
the Company: Drs. Allen Chao, Melvin Sharoky and Alec D. Keith. Compensation for
Dr. Hsia is determined as per his employment agreement and is based on the
satisfaction of certain objective criteria set by the Company's Chief Executive
Officer and President. The Compensation Committee also administers the 1985
Stock Plan, the 1991 Stock Plan, and the 1995 Directors' Plan.
Prior to July 17, 1995, Drs. Wan-lin Kiang and Henry R. Besch, Jr.
comprised the Compensation Committee. Because Drs. Kiang and Besch were not
re-elected to the Company's Board of Directors at the 1995 Annual Meeting, the
undersigned, as newly elected directors, were appointed to serve on the
Committee on and after that date. This Report encompasses the Company's entire
fiscal year, notwithstanding the current members' midyear appointment.
COMPENSATION PHILOSOPHY
The Company does business in a highly competitive and dynamic industry. The
Company's continued success in such an environment depends, in large part, on
its ability to attract and retain talented senior executives. The Company must
also provide these executives with short-term and long-term incentives to
maximize corporate performance, and to reward successful efforts to do so. As a
result, the Committee's compensation arrangements are designed to:
1. Provide a competitive level of compensation to attract and retain
talented management.
2. Reward management for corporate performance by linking a
substantial portion of total compensation to the achievement of measurable
performance objectives; and
3. Align the interests of management with the stockholders in order
to maximize stockholder value.
The Committee's goal is to provide a competitive compensation package based
on a review of publicly available information about the compensation paid to
similarly situated executives of selected pharmaceutical companies (the "Peer
Group"). The Committee believes that a substantial portion of compensation
should be tied to the attainment of short-term and long-term objectives.
To achieve these compensation objectives, the Committee has developed
compensation packages consisting of base salary, a contingent bonus arrangement
tied to after-tax earnings or other goals, and awards of stock options.
BASE COMPENSATION
In 1995, the Committee conducted a review of the executive compensation of
members of the Peer Group. The review did not include all such companies because
the most recent data for some of the companies was not available at the time the
review was conducted. The Committee found that the compensation of the Company's
senior executives was substantially below the average and the median
compensation levels of the group reviewed. However, the Committee did not rely
exclusively on statistical compilations. Certain members of the group reviewed
were considered to be very similar to the Company in terms of market
capitalization, length of time as a publicly held company, number of employees,
and overall prospects for short- and long-term growth. These group members' cash
compensation levels were greater than the Company's previous levels, and,
consequently, their reported compensation was given substantially more weight in
setting base compensation.
14
<PAGE> 17
Based on its compensation review and the Committee's compensation
philosophy, the Committee determined that Dr. Chao's base compensation, which
increased to $300,000 as of January 1, 1995, should be further increased to
$400,000, beginning on January 1, 1996. This amount brings Dr. Chao's
compensation up to the level of the other chief executive officers within the
Peer Group.
In addition, the Committee also considered the base compensation of Drs.
Sharoky and Keith. It was determined that Dr. Sharoky's base compensation should
be increased to $350,000, and Dr. Keith's base salary should be $175,000,
effective as of January 1, 1996.
BONUS
The analysis discussed above was also used to assist the Committee in
setting short-term incentive compensation. The Committee determined that for
1995, the combination of base compensation and bonus, if earned, should place
the senior executives near the median total cash compensation of the group
reviewed.
The Committee believed that Dr. Chao's 1995 bonus should be tied to the
Company's earnings projections for 1995. Consequently, prior to 1995, the
Company developed earnings projections that were substantially above the
earnings for the previous year. The projections were then revised upward at the
beginning of the fiscal year. The Committee determined that if actual earnings
did not meet the first projection, no bonus should be payable. However, if
after-tax earnings equalled or exceeded the second projection, a full bonus
should be payable. If earnings fell between the projected earnings targets, a
pro-rata bonus would be payable.
During 1995, it became apparent to the Committee that the higher
projections would not be met for 1995 solely by reason of a certain one-time
charge relating to the Company's merger with Circa. The Committee decided that
whether or not 1995 bonus targets were met should be determined without regard
to those one-time items. Accordingly, the Company's earnings for 1995 were
calculated notwithstanding the one-time items. The revised 1995 earnings
generously exceeded the projected targets, and a full bonus of $150,000 was paid
to Dr. Chao.
The Committee determined that Dr. Sharoky and Dr. Keith should receive 1995
bonuses of $150,000 and $25,000, respectively. For 1996, the Committee decided
that a bonus formula should be used in determining the bonuses for Drs. Chao and
Sharoky. Further, the Committee decided to adopt a formula that would produce
substantially higher bonuses should 1996 earnings be substantially better than
expected. The result is that Drs. Chao and Sharoky will each receive a bonus of
$150,000 if the most conservative earnings projection is met, and up to a
$400,000 bonus if the most aggressive earnings projections are exceeded. In
between, a pro-rata bonus will be paid.
The Committee also determined that Dr. Keith's 1996 bonus should be based
on the satisfaction of certain objective criteria set by the Company's Chief
Executive Officer and President.
STOCK OPTIONS
The Committee believes that stock options provide a valuable tool for
aligning the interests of management with stockholders and focusing management's
attention on the long-term growth of the Company. The Committee expects to
continue granting options.
On July 17, 1995, the Committee granted 300,000 option shares to Dr.
Sharoky. This grant was made in order to give Dr. Sharoky a significant interest
in maximizing the Company's stock price. At the same time, grants to many
employees and officers of the Company were made, including the grant of 75,000
option shares to Dr. Keith. The Committee also authorized the issuance of
200,000 option shares to Dr. Chao. In this authorization, 50,000 option shares
were granted in 1995, 100,000 option shares will be granted in 1996 and 50,000
option shares will be granted in 1997.
15
<PAGE> 18
POLICY ON DEDUCTIBILITY OF COMPENSATION
The Internal Revenue Code provides a $1,000,000 deduction limit on
compensation paid to the reporting executives of publicly held corporations. An
exception to the limit applies to certain types of performance-based awards,
which may include stock options. The Company amended the 1991 Stock Option Plan
to comply with the performance-based compensation requirements.
The Committee's policy is to qualify bonus and option grants for the
performance-based compensation exception to the $1,000,000 deduction limitation
whenever possible.
CONCLUSION
The Committee will continue to establish base compensation at levels that
are competitive with selected members of the Peer Group. The Committee intends
for performance compensation to constitute a substantial portion of overall
compensation, and for compensation to be linked to the achievement of the
Company's short- and long-term goals as established by the Company. The
Committee intends to create incentives at the levels necessary to maintain
above-average performance within the Company's industry.
COMPENSATION COMMITTEE
Michael Fedida
Ronald R. Taylor
16
<PAGE> 19
STOCK PRICE PERFORMANCE GRAPH
The following graph compares the percentage change in the cumulative total
stockholder return on the Company's Common Stock during the period from the
Company's initial public offering on February 17, 1993 through December 31,
1995, with the cumulative total return on the NASDAQ Composite Index (Total
Return) and a group consisting of certain pharmaceutical corporations (the
"Pharmaceutical Group") over the same period.
The graph below assumes the investment of $100 in the Company's Common
Stock and in each of the other indexes on February 17, 1993, and reinvestment of
all dividends.
COMPARISON OF FIVE* YEAR CUMULATIVE TOTAL RETURN AMONG
WATSON PHARMACEUTICALS, INC.,
THE NASDAQ COMPOSITE INDEX AND THE PHARMACEUTICAL GROUP
<TABLE>
<CAPTION>
WATSON NASDAQ
PHARMACEUTICALS, COMPOSITE
MEASUREMENT PERIOD INC. INDEX PHARMACEUTICAL
(FISCAL YEAR COVERED) COMMON STOCK (TOTAL RETURN) GROUP
- --------------------- ---------------- -------------- --------------
<S> <C> <C> <C>
02/17/93 100.00 100.00 100.00
12/31/93 210.42 117.80 123.20
12/30/94 218.75 114.03 98.41
12/29/95 408.33 159.61 121.58
</TABLE>
- ---------------
* Prior to February 17, 1993, the Company's Common Stock was not publicly
traded. Comparative data is provided only for the period from that date
through December 29, 1995.
The Pharmaceutical Group, with the initial investment allocated equally
among each member, consists of Alza Corporation; A.L. Pharma, Inc.; Barr
Laboratories, Inc.; Biocraft Laboratories, Inc.; Copley Pharmaceuticals, Inc.;
Cygnus Therapeutic Systems, Inc.; Elan Corporation, p.1.c.; Forest Laboratories,
Inc.; Halsey Drug Co. Inc.; Ivax Corp.; K-V Pharmaceutical Company; Marsam
Pharmaceuticals Inc.; Mylan Laboratories Inc.; Noven Pharmaceuticals Inc.;
Pharmaceutical Resources, Inc.; Purepac Inc.; Royce Laboratories Inc.; Taro
Pharmaceuticals Industries Ltd.; Teva Pharmaceutical Industries Ltd.; and Zenith
Laboratories, Inc. Marsam Pharmaceuticals, Inc. and Zenith Laboratories, Inc.
were merged into separate, unrelated entities during 1995 and their shares no
longer trade publicly. In these two instances, the merged companies final
closing prices were used for purposes of calculating the Pharmaceutical Group
index.
17
<PAGE> 20
CERTAIN TRANSACTIONS
In 1985, the Company entered into leases for a manufacturing facility and
leasehold improvements with a family trust in which the Chief Executive Officer
and certain family members are beneficiaries for an original term of ten years,
commencing January 1, 1986. The agreement for the leasehold improvements has
expired and the obligation was paid in full at December 31, 1995. The lease for
the manufacturing facility was extended through December 31, 2000, requires
monthly payments of approximately $25,000, and includes a 5% per year escalation
factor.
The Company's research and development facility in Pennsylvania is leased
from a partnership in which the Chairman of the Board is a partner. The fifteen
year lease was entered into on March 1, 1984. Lease payments of approximately
$130,000 were made to the partnership in each of the three years ended December
31, 1995. The Company has the option, at any time during the lease period, to
purchase the building from the partnership for the partnership's cost ($1.2
million) plus the cost of any partnership improvements to the building. The
Company guarantees the partnership's mortgage on the building.
STOCKHOLDERS' PROPOSALS FOR THE 1997 ANNUAL MEETING
Proposals of stockholders intended to be presented at the 1997 Annual
Meeting of Stockholders must be made in accord with the Company's By-Laws, and
must be received by the Secretary of the Company at the Company's principal
executive offices for inclusion in the Company's Proxy Statement and form of
proxy relating to that meeting no later than December 6, 1996.
OTHER BUSINESS
As of the date of this Proxy Statement, the Board of Directors knows of no
other business that will be presented for consideration at the Meeting. If other
proper matters are presented to the Meeting, however, it is the intention of the
proxy holders named in the enclosed form of proxy to take such actions as shall
be in accordance with their best judgment.
By order of the Board of Directors
Michel J. Feldman
Secretary
April 5, 1996
18
<PAGE> 21
WATSON PHARMACEUTICALS, INC.
311 BONNIE CIRCLE
CORONA, CALIFORNIA 91720
PROXY -- SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR THE 1996 ANNUAL MEETING OF STOCKHOLDERS -- MAY 10, 1996
The undersigned hereby appoints Allen Chao, Ph.D., Melvin Sharoky M.D.,
Alec D. Keith, Ph.D. and Michel Feldman, or any of them, as proxies with full
power of substitution, and authorizes them to represent and to vote on behalf of
the undersigned all shares which the undersigned would be entitled to vote if
personally present at the 1996 Annual Meeting of Stockholders of WATSON
PHARMACEUTICALS, INC. to be held on May 10, 1996, and any adjournments or
postponements thereof, with respect to the following.
A majority of the proxies or substitutes present at the meeting, or if only one
person shall be present then that one, may exercise all powers granted hereby.
(PLEASE SIGN ON THE REVERSE SIDE)
<PAGE> 22
PLEASE MARK YOU
[X] VOTES AS IN THIS
EXAMPLE.
1. Election of Directors:
VOTE FOR
both nominees (except
as indicated to the VOTE WITHHELD
contrary below) from both nominees
[ ] [ ]
NOMINEES: Michael Fedida
Albert F. Hummel
Instruction: To withhold authority to vote for any individual nominee, write
that nominee's name in the following space:
- --------------------------------------------------------------------------------
2. Proposal to amend the Articles of Incorporation of the Company to increase
the number of authorized shares of Common Stock from 100,000,000 to
500,000,000.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
3. Approval of an amendment to the 1991 Stock Option Plan of the Company to
increase by 1,000,000 the number of shares authorized for issuance.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
4. Approval of the selection of independent Accountants for the 1996 fiscal
year.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN
BY THE UNDERSIGNED STOCKHOLDER. THE COMPANY'S DIRECTORS RECOMMEND A VOTE FOR
ALL PROPOSALS. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR THE
NOMINEES FOR DIRECTOR AND WILL BE VOTED FOR APPROVAL OF ALL PROPOSALS. IN
ADDITION, THE PROXIES MAY VOTE IN THEIR DISCRETION ON SUCH OTHER MATTERS AS MAY
PROPERLY COME BEFORE THE MEETING.
PLEASE COMPLETE, DATE, SIGN AND RETURN THIS PROXY IN THE ENVELOPE PROVIDED.
Signature or Signatures Date
------------------------------ -------------------
NOTE: Please date and sign above exactly as your name or names appear hereon.
If more than one name appears, all should sign. Joint owners each sign
personally. Corporate proxies should be signed in full corporate name by
an authorized officer and attested. Persons signing in a fiduciary
capacity should indicate their full title and authority.
