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 ss.240.14a-11(c) or ss.240.14a-12
WATSON PHARMACEUTICALS, INC.
(Name of Registrant as Specified in Its Charter)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction
applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (Set forth the
amount on which the filing fee is calculated and state how it
was determined):
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<PAGE>
(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[ ] Fee paid previously with preliminary materials.
[ ] 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:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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<PAGE>
WATSON PHARMACEUTICALS, INC.
311 BONNIE CIRCLE
CORONA, CALIFORNIA 91720
March 31, 1998
Notice of Annual Stockholders Meeting:
You are hereby notified that the 1998 Annual Meeting of Stockholders
(the "Meeting") of Watson Pharmaceuticals, Inc. (the "Company") will be held at
the Hyatt Regency Irvine located at 17900 Jamboree Road, Irvine, California at
9:00 a.m. local time, on May 4, 1998, for the following purposes:
1. To elect two directors to hold office until the 2001 Annual Meeting.
2. To ratify the selection of Price Waterhouse LLP as the Company's
independent accountants for the fiscal year ending December 31,
1998.
3. 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 16,
1998 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
<PAGE>
WATSON PHARMACEUTICALS, INC.
311 BONNIE CIRCLE
CORONA, CALIFORNIA 91720
1998 ANNUAL MEETING OF STOCKHOLDERS
MAY 4, 1998
-----------------------------
PROXY STATEMENT
-----------------------------
GENERAL
This Proxy Statement and the accompanying proxy are furnished to
stockholders of Watson Pharmaceuticals, Inc. (the "Company") in connection with
the solicitation of proxies by the Company's Board of Directors for use at the
1998 Annual Meeting of Stockholders (the "Meeting") to be held at the Hyatt
Regency Irvine located at 17900 Jamboree Road, Irvine, California, at 9:00 a.m.
local time, on May 4, 1998, 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, 1997 are being mailed to stockholders on or about March 31, 1998.
Stockholders of record at the close of business on March 16, 1998 are
entitled to notice of and to vote at the Meeting. On such date there were
outstanding 89,026,973 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 16, 1998. All shares of Common Stock and options and or
warrants to acquire Common Stock reported in this Proxy Statement reflect the
two for one stock split, effected in the form of a 100% stock dividend on
October 29, 1997.
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.
<PAGE>
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 and FOR the ratification of the
selection of Price Waterhouse LLP ("Price Waterhouse") as independent
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.
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.
2
<PAGE>
PROPOSAL NO. 1 - ELECTION OF DIRECTORS
Two directors are to be elected by a plurality of the stockholder votes
cast at the Meeting to serve until the 2001 Annual Meeting and until their
successors are elected and qualify. The Class III directors, Allen Chao, Ph.D.
and Michel J. Feldman, are nominees for director. The Class I directors, Michael
Fedida and Albert F. Hummel, are scheduled to serve as directors until the 1999
Annual Meeting. The Class II directors, Alec D. Keith, Ph.D., Ronald R. Taylor
and Andrew L. Turner are scheduled to serve as directors until the 2000 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
III who are nominated for re-election at the Annual Meeting. The Board is
currently considering potential nominees for vacancies and expects to fill the
remaining Class I and Class III positions during the current year. On December
15, 1997, the Board of Directors appointed Andrew L. Turner to serve as a Class
II director until the 2000 Annual Meeting.
THE ENCLOSED PROXY 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 1998 MEETING:
ALLEN CHAO, PH.D. Director since 1983
Allen Chao, 52, has been President of the Company since February 1,
1998 and previously served in that capacity from August 1983 until July
1995. Dr. Chao has also been Chief Executive Officer of the Company
since August 1983 and Chairman of the Company since May 1996, and a
director of Circa Pharmaceuticals, Inc. ("Circa") since July 1995. Dr.
Chao also serves on the Board of Directors of Somerset Pharmaceuticals,
Inc. ("Somerset"). He is a co-founder of the Company and has been a
director of the Company and Watson Laboratories, Inc. ("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.
MICHEL J. FELDMAN Director since 1984
Michel J. Feldman, 55, has been Secretary of the Company since 1995.
Mr. Feldman has also been a partner at the law firm of D'Ancona &
Pflaum, Chicago, Illinois, since June 1991, and is counsel to the
Company. From 1977 to 1981, Mr. Feldman was President and Chief
Executive Officer of Avanti Communications, a cellular antenna
manufacturer, which was acquired in 1981 by The Allen Group, Inc. Mr.
Feldman received a J.D. from Northwestern University Law School in 1968
and is a Certified Public Accountant.
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.
3
<PAGE>
DIRECTORS WHOSE TERMS EXPIRE IN 1999:
MICHAEL FEDIDA Director since 1995
Michael Fedida, 51, a registered pharmacist, has served for the past
eleven 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 with regard to
certain marketing concepts. From 1988 to 1995, Mr. Fedida served on the
Board of Directors of Circa.
ALBERT F. HUMMEL Director since 1986
Albert F. Hummel, 53, has been a director of the Company since March
1986, except for a period from July 1991 to October 1991, and is
currently a partner in Affordable Residential Communities, a property
management firm. Additionally, Mr. Hummel is President of Pentech
Pharmaceuticals, Inc., a development stage company which is not
affiliated with the Company. Mr. Hummel received a B.S. from St.
Joseph's College in 1967 and an M.B.A. from the University of Chicago
in 1969.
DIRECTORS WHOSE TERMS EXPIRE IN 2000:
ALEC D. KEITH, PH.D. Director since 1991
Alec D. Keith, 65, was Chairman of the Company from October 1991 until
he retired from that office in May 1996, and has been a director of
Circa since July 1995. He is presently a consultant to Watson pursuant
to a consulting agreement which he entered into with Watson in July
1996. Dr. Keith also served as a member and as Chairman of the Board of
Polydex Pharmaceuticals, Ltd., a Canadian company, from November 1996
to January 1998. Dr. Keith was a co-founder of Zetachron, Incorporated
("Zetachron"), a subsidiary of the Company from 1991 to 1995, and held
senior executive positions at Zetachron from 1983 to 1996. He is also
Adjunct Professor of Biophysics at Pennsylvania State University. Dr.
Keith has authored many scientific 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, 50, has been a consultant to Cardinal Health, Inc.
("Cardinal Health") since May 1996. Mr. Taylor was a founder and was
formerly 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,
from 1987 until 1996, when Pyxis became a wholly owned subsidiary of
Cardinal Health. In 1997, Mr. Taylor became a director of
Cardiodynamics, Inc., a California corporation which develops,
manufactures and markets non-invasive digital heart monitoring devices.
ANDREW L. TURNER Director since 1997
Andrew L. Turner, 51, has been Chairman and Chief Executive Officer of
Sun Healthcare Group, Inc. ("Sun Healthcare") since its formation in
1989 and was the founder of Sun Healthcare. Mr. Turner also was a
founder of and previously served as Chief Operating Officer of Horizon
Healthcare Corporation, a health care services provider, from 1986 to
1989. Prior to 1986, Mr. Turner served as a Senior Vice President of
Operations of Hillhaven Corporation. Mr. Turner is also on the board of
directors of the U.S. Olympic Committee for the state of New Mexico.
4
<PAGE>
BOARD AND COMMITTEE MEETINGS
The Company has an Audit Committee composed of Michael Fedida, Albert
F. Hummel, Ronald R. Taylor and, effective February 20, 1998, Andrew L. Turner.
During the fiscal year ended December 31, 1997, the Audit Committee met twice
for the purposes of (i) reviewing the arrangements and scope of the audit; (ii)
discussing any matters of concern to the Committee with regard to the Company's
financial statements or 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,
Ronald R. Taylor and, effective February 20, 1998, Andrew L. Turner. The
Compensation Committee met twice and executed nine (9) Unanimous Consents in
Lieu of Special Meeting during the fiscal year ended December 31, 1997. 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 and the President of the Company: (ii) the grant of stock
options under the Company's 1991 Stock Option Plan and (iii) administer the 1995
Non-Employee Directors' Plan ("1995 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 eleven (11) regular
meetings, and executed three (3) Unanimous Consents in Lieu of Special Meeting
during the fiscal year ended December 31, 1997. Each director attended at least
75% of all Board and applicable Committee meetings.
5
<PAGE>
DIRECTORS' COMPENSATION
All Company directors who are not full-time employees of the Company
received a director's fee of $25,000 per year for 1997. 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.
Additionally, Alec D. Keith has a consulting agreement with the Company in which
Dr. Keith provides two days of consulting services to the Company each month in
exchange for $2,000, plus an additional $1,000 for each additional day his
services are required.
The Company has also granted stock options to each non-employee
director under the 1995 Plan. The following table sets forth the options granted
under the 1995 Plan from January 1, 1997 to December 31, 1997.
<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERLYING OPTIONS EXERCISE PRICE
NAME GRANTED (1) PER SHARE DATE OF GRANT
---- ----------- --------- -------------
<S> <C> <C> <C>
Alec D. Keith, Ph.D 30,000 $18.22 05/06/97
Ronald R. Taylor 30,000 $18.22 05/06/97
Andrew L. Turner 20,000 $30.06 12/19/97
</TABLE>
(1) Reflects the amount of 10,000 shares for each year of the three year term to
which the director was elected. Andrew L. Turner was appointed by the Board of
Directors in December 1997 to fill a vacancy in the Class II directors.
SECTION 16(A) BENEFICIAL OWNERSHIP
REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 ("Exchange Act")
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 ("SEC") 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 1997 fiscal year, all filing requirements
applicable to its officers, directors and greater-than-10% beneficial owners
were complied with, except as follows: (i) David Hsia failed to report on Form 5
four (4) transactions which occurred on December 29, 1996 and (ii) Andrew L.
Turner failed to report on Form 3 that he had become a director of the Company
within the requisite ten (10) day period.
6
<PAGE>
HOLDINGS OF STOCKHOLDERS, DIRECTORS
AND EXECUTIVE OFFICERS
The following table sets forth, as of March 16, 1998, the name, address
(where required) and holdings of each person (including any "group" as defined
in Section 13(d)(3) of the Exchange Act) known by the Company to be the
beneficial owner of more than 5% of the Company's Common Stock, and the amount
of Common Stock beneficially owned by each of the directors and Named Executive
Officers (as defined under "Executive Compensation") of the Company, and by all
directors and Named Executive Officers of the Company as a group.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF PERCENT OF
NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP (1) CLASS
------------------------ ------------------------ -----
<S> <C> <C>
INVESCO PLC, Et al............................ 5,405,050 (2) 6.2%
1315 Peachtree St. NE
Atlanta, GA 30309
Allen Chao, Ph.D............................... 3,970,246 (3) 4.4%
311 Bonnie Circle
Corona, CA 91720
David C. Hsia, Ph.D............................ 2,014,856 (4)(5) 2.4%
Melvin Sharoky, M.D............................ 303,603 (6) *
Alec D. Keith, Ph.D............................ 532,600 (7) *
Albert F. Hummel............................... 464,966 (8) *
Michael Fedida................................. 38,600 (9) *
Michel J. Feldman.............................. 32,000 (10) *
Ronald R. Taylor............................... 10,000 (9) *
Andrew L. Turner............................... 30,000 (11) *
Patrick J. McEnany............................. 185,535 (12) *
Frederick Wilkinson............................ 26,350 (13) *
All current directors and executive officers of 7,213,256 (3)-(14) 8.0%
the Company (11 persons)
</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 Schedule 13G filed by a group, as defined by Section
13(d)(3) of the Exchange Act, with the SEC on February 12, 1998, and as
amended on February 17, 1998.
7
<PAGE>
(3) Includes 509,800 shares of Watson Common Stock subject to outstanding
options, 1,556,426 shares of Watson Common Stock held by Allen Chao
Interests, Ltd., a partnership in which Dr. Chao is a controlling
partner, 950,646 shares of Watson Common Stock held by MAL Investment
Company, a corporation of which Dr. Chao is a controlling stockholder,
and 953,374 shares of Watson Common Stock held by the Allen Chao and
Lee Hwa Chao Family Trust.
(4) Allen Chao and Phylis Hsia are siblings. David C. Hsia is married to
Phylis Hsia.
(5) Includes 143,000 shares of Common Stock subject to outstanding options
held by Dr. Hsia, 40,000 shares of Common Stock held by David and
Phylis Hsia Charitable Remainder Trust, 1,095,468 shares held by Hsia
Interests, Ltd., a family partnership, and 736,388 shares held by the
Hsia Family Trust. Excludes 87,750 shares of 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 272,879 shares of Common Stock held by Dr. Sharoky, 29,142
shares of Common Stock held by Dr. Sharoky as custodian for his three
children and 1,582 shares of Watson Common Stock held by Dr. Sharoky as
custodian for his niece.
(7) Includes 10,000 shares of Common Stock subject to outstanding options.
Mr. Hummel has an option to purchase 264,000 shares of Watson Common
Stock from Dr. Keith.
(8) Includes 44,534 shares of Watson Common Stock subject to outstanding
options, and options to purchase 264,000 and 132,000 shares of Watson
Common Stock from Dr. Keith and Dr. Wallace C. Snipes (a former officer
of Watson), respectively.
(9) Comprises shares of Watson Common Stock subject to outstanding options.
(10) Includes 25,000 shares of Watson Common Stock subject to outstanding
options, 1,000 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) All shares are held by the Andrew L. and Nora L. Turner Trust, of which
Andrew L. Turner is Trustee.
(12) Includes 56,728 shares which are held by Equisource Capital, Inc., of
which Patrick J. McEnany is the sole shareholder.
(13) Includes 25,000 shares of Common Stock subject to outstanding options.
(14) Excludes Mr. Hummel's options to acquire 264,000 and 132,000 shares
from each of Drs. Keith and Snipes, respectively.
PROPOSAL NO. 2 - RATIFICATION OF SELECTION OF
INDEPENDENT PUBLIC ACCOUNTANTS
The firm of Price Waterhouse has audited the books and records of the
Company since its inception and the Board of Directors will recommend at the
Meeting that the stockholders ratify the selection of Price Waterhouse 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.
8
<PAGE>
EXECUTIVE COMPENSATION
The following table summarizes the compensation paid or accrued to
Allen Chao, Ph.D., for services rendered for the year ended December 31, 1997 as
the Company's Chairman and Chief Executive Officer, and to each of the other
executive officers of the Company whose total annual salaries and bonuses
exceeded $100,000 ("Named Executive Officers") for services in the capacity
indicated.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------- AWARDS
------------
SECURITIES
NAME AND PRINCIPAL POSITION YEAR UNDERLYING ALL OTHER
POSITION (1) YEAR SALARY BONUS (2) OPTIONS COMPENSATION (3)
------------ ---- ------ --------- ------- ----------------
<S> <C> <C> <C> <C> <C>
Allen Chao, Ph.D. (3)(4) 1997 $ 400,000 $ 400,000 100,000 $ 8,650
Chairman of the Board and 1996 400,000 300,000 200,000 4,750
Chief Executive Officer 1995 300,000 150,000 200,000 2,074
Melvin Sharoky, M.D. 1997 375,000 100,000 0 13,224
(3)(4)(5)(6) 1996 350,000 300,000 0 158,595
President 1995 300,000 150,000 772,000 6,494
David C. Hsia, Ph.D. 1997 200,000 50,000 0 4,750
Senior Vice President, 1996 165,000 20,000 15,000 4,750
Scientific Affairs 1995 151,730 25,408 200,000 4,373
Frederick Wilkinson (7) 1997 200,000 100,000 10,750
Vice- President 60,000
Patrick J. McEnany (3)(8) 1997 200,000 140,625 202,226 10,119
Vice -President, Corporate 1996 169,250 24,906 5,832 44,818
Development 1995 164,237 0 4,166 9,050
</TABLE>
- ----------
(1) Drs. Chao and Hsia have entered into employment agreements with the
Company. Dr. Sharoky and Mr. McEnany each had an employment agreement
with the Company which expired on January 31, 1998 and are no longer
employees of the Company. Please refer to "Employment Agreements" below
for details.
(2) Pursuant to bonus formulas established by the Company's Compensation
Committee, Dr. Chao received the maximum annual bonuses in 1997, 1996
and 1995, based upon net after-tax earnings of the Company. Dr. Sharoky
received a bonus for 1997, 1996 and 1995 as determined by the Company's
Compensation Committee. Bonuses paid to Dr. Hsia in 1997, 1996 and 1995
were based on the satisfaction of certain objective criteria set by the
Company's Chief Executive Officer.
9
<PAGE>
(3) Amounts in 1997, 1996 and 1995 represent the Company's 401(k)
contributions on behalf of the Named Executive Officers above. Amounts
in 1997, 1996 and 1995 for Dr. Sharoky represented insurance premiums
paid by the Company on a life insurance policy in which Dr. Sharoky's
wife is the named beneficiary. In addition, other compensation to Dr.
Sharoky in 1997 included $2,574 for the personal use of a Company auto
and amounts in 1996 include reimbursement for relocation expenses in
the amount of $144,777. Amounts in 1997 for Mr. McEnany represent
$6,000 paid directly to Mr. McEnany as a car allowance and $3,639 for
premiums paid on a life insurance policy in which his wife is the named
beneficiary. Amounts in 1996 for Mr. McEnany include reimbursement of
an administrative fine under the indemnification provisions of Royce's
Articles of Incorporation and By-laws. Other compensation in 1997 paid
to Dr. Chao and Mr. Wilkinson includes car allowances of $3,900 and
$6,000, respectively.
(4) Drs. Chao and Sharoky and Mr. Wilkinson serve on the Board of Directors
of Somerset, a joint venture which is 50% owned by the Company. Dr.
Chao has served on the Somerset Board of Directors since 1995 and
received director fees of $12,000 in each of 1997, 1996 and 1995. Dr.
Sharoky has served on the Somerset Board of Directors since 1993 and
received director fees of $12,000 in each of 1997, 1996 and 1995. In
1997, Mr. Wilkinson joined the Board of Directors of Somerset and
received directors fees of $6,000. In addition, in 1997 Dr. Sharoky
received a bonus of $300,000 from Somerset directly. These fees and the
bonus paid to Dr. Sharoky were not paid by the Company and are not
included in the Summary Compensation Table above. Of the salary paid to
Dr. Sharoky in each of 1997 and 1996, $300,000 was reimbursed by
Somerset.
(5) Dr. Sharoky became an officer of the Company effective July 17, 1995.
Compensation reflects amounts earned since that time and for the prior
period while at Circa. Dr. Sharoky's compensation is disclosed for the
period prior to the merger between the Company and Circa 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, 1997.
(6) Dr. Sharoky received an original grant of 516,000 restricted shares of
Common Stock of the Company. Such shares were subject to forfeiture in
decreasing annual increments if Dr. Sharoky voluntarily terminated his
employment, or if his employment was terminated for cause, prior to
January 1997. Such forfeiture provisions are no longer in effect. Dr.
Sharoky was elected to the Board of Directors of Andrx Corporation in
November 1995 and received options to purchase 8,250 shares of Andrx
common stock.
(7) Mr. Wilkinson became an officer of the Company effective July 14, 1997.
He has been employed by the Company since June 24, 1996.
(8) Mr. McEnany became an officer of the Company effective April 17, 1997.
Compensation reflects amounts earned throughout fiscal 1997 and for
prior years while at Royce. Mr. McEnany's compensation is disclosed for
the periods prior to the merger between the Company and Royce 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 Mr. McEnany for the three years ended December 31, 1997.
10
<PAGE>
EMPLOYMENT AGREEMENTS
Effective May 29, 1995, the Company entered into employment agreements
with each of Drs. Allen Chao and David C. Hsia (the "Senior Executives"), which
will terminate on May 31, 2000. These agreements provide that, among other
things, (i) Drs. Chao and Hsia will receive minimum annual salaries of $300,000
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 was entitled to receive options to
purchase 300,000 shares of the Company's Common Stock under the 1991 Plan,
100,000 of which were granted in 1997 and 200,000 of which were granted in 1996.
Under Dr. Hsia's employment agreement, Dr. Hsia was entitled to receive options
to purchase 200,000 shares of the Company's Common Stock under the 1991 Plan,
all of which were granted in 1995. Such options granted to Drs. Chao and Hsia
vest over a five year period following each grant date. See "Report of the
Compensation Committee on Executive Compensation."
On January 31, 1998, the employment agreement between the Company and
Dr. Sharoky expired. In 1997, Dr. Sharoky received (i) base compensation of
$375,000; (ii) a bonus of $100,000, based upon the Company's 1997 earnings per
share, as well as a discretionary bonus based upon the performance of Somerset
which was paid by Somerset in the amount of $300,000. On January 31, 1998, he
received certain severance benefits, which included the sum of $1,350,000 which
is payable in five installments over a twelve month period. Additional terms of
the severance agreement between the Company and Dr. Sharoky, such as insurance
benefits and terms of a non-compete provision, remain under negotiation as of
the date of this Proxy Statement.
On January 31, 1998, the employment agreement between the Company and
Mr. McEnany expired. In 1997, Mr. McEnany received (i) base compensation of
$200,000 and (ii) a bonus of $140,625. On January 31, 1998, he received certain
severance benefits, which included the sum of $350,000 which is payable over a
twelve month period.
OPTIONS
The following table sets forth certain information concerning
individual grants of stock options made during the year ended December 31, 1997
to each Named Executive Officer of the Company under the Company's 1991 Stock
Option Plan.
<TABLE>
<CAPTION>
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
POTENTIAL REALIZABLE VALUE
AT ASSUMED ANNUAL RATES
NUMBER OF % OF TOTAL OF STOCK PRICE
SHARES OPTIONS APPRECIATION
UNDERLYING GRANTED TO EXERCISE OR FOR OPTION TERM (1)
OPTIONS EMPLOYEES IN BASE PRICE PER EXPIRATION -------------------
NAME GRANTED FISCAL YEAR PER SHARE DATE 5% 10%
---- ------- ----------- --------- ---- -- ---
<S> <C> <C> <C> <C> <C> <C> <C>
Allen Chao, Ph.D. 100,000 4.22% $ 24.375 7/17/07 $ 1,532,921 $ 3,884,740
Frederick Wilkinson 40,000 1.69% $ 16.562 4/17/07 $ 416,639 $ 1,055,852
20,000 .84% $ 21.187 6/24/07 $ 266,492 675,347
Patrick J. McEnany 200,000 8.45% $ 16.312 4/30/98 $ 163,124 $ 326,249
2,226 .09% $ 17.115 4/30/98 $ 3,681 $ 5,670
</TABLE>
- ----------
(1) The assumed annual rates of stock price appreciation of 5% and 10% are
set by SEC rules and are not intended as a forecast of possible future
appreciation in stock prices.
11
<PAGE>
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, 1997, as well as unexercised options held as of the end
of such fiscal year.
<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING IN-THE-MONEY OPTIONS
ACQUIRED ON UNEXERCISED OPTIONS AT AT FY-END
ON VALUE FY-END EXERCISABLE/ EXERCISABLE/
NAME EXERCISE REALIZED UNEXERCISABLE UNEXERCISABLE
---- -------- -------- ------------- -------------
<S> <C> <C> <C> <C>
Allen Chao Ph.D. 537,786 $ 9,967,503 509,800/320,000 $10,789,287 /$ 4,114,999
Melvin Sharoky, 0 0 572,000/200,000 $ 9,491,750 /$ 2,762,500
M.D.
David C. Hsia, Ph.D. 150,000 $ 2,577,000 143,000/132,000 $ 2,837,312 /$ 1,881,750
Frederick Wilkinson 0 0 32,000/188,000 $ 404,999 /$ 2,479,999
Patrick J. McEnany 6,358 $ 168,996 123,378/200,000 $ 2,009,094 /$ 3,224,999
</TABLE>
REPORT OF THE COMPENSATION COMMITTEE
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 ("Securities Act") or
under the Exchange Act, 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, which for 1997 were Drs. Allen Chao and Melvin Sharoky. It also
administers the 1991 Stock Option Plan and the 1995 Plan.
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 provide executives with long- and short-term incentives to maximize
corporate performance, and reward successful efforts to do so. As a result, the
Committee's compensation policies are designed to:
1. Provide a competitive level of compensation to attract and
retain talented management;
2. Reward senior executives for corporate performance by linking
a substantial portion of total compensation to the achievement
of measurable performance objectives; and
3. Align the interests of senior executives with the stockholders
in order to maximize stockholder value.
12
<PAGE>
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 long- and short-term objectives.
To achieve these compensation objectives, the Committee has developed
compensation packages for senior executive officers consisting of base salary, a
contingent bonus arrangement tied to after-tax earnings or other goals and
awards of stock options.
BASE COMPENSATION
From time to time, the Committee conducts a review of the executive
compensation paid by members of the Peer Group. The Committee reviews the salary
data for the average and median levels of compensation. However, the Committee
does not rely exclusively on statistical compilations. Certain members of the
group reviewed are 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. The
compensation paid by these Peer Group companies is given substantially more
weight in setting base compensation. In prior years, the Committee has raised
the compensation levels of its senior executives to competitive levels in
relation to the other members of the Peer Group.
Based on its compensation review and the Committee's compensation
philosophy, and taking into account the Company's actual and projected revenues
and income, the Committee has determined that Dr. Chao's 1998 base compensation
should be increased to $500,000.
Dr. Sharoky resigned from the Company effective January 31, 1998, and,
thus, the Committee has not recommended any change in his base compensation for
the portion of 1998 during which he was employed.
BONUS
The Committee believes that a significant portion of Dr. Chao's and Dr.
Sharoky's bonuses should be tied to the Company's meeting or exceeding its goals
for earnings per share. In addition, Dr. Chao was eligible to earn up to
$150,000 to be paid at the discretion of the Committee related to certain
subjective goals set by the Committee and such other factors as the Committee
deemed relevant. The Committee determined that a bonus would be paid upon
earnings per share meeting a certain threshold and the bonus would increase as
earnings per share increased, up to a cap. Pursuant to the formula so devised,
Dr. Chao was paid a bonus of $250,000 and Dr. Sharoky was paid a bonus of
$100,000 for 1997. In addition, the Committee determined that Dr. Chao satisfied
the criteria to earn his full discretionary bonus of $150,000.
The Committee has decided that a formula should again be used in
determining the 1998 bonus for Dr. Chao. As noted above, Dr. Chao will receive a
bonus of between $50,000 and $400,000 if earnings per share exceeds the
threshold goal.
The Committee also determined that Dr. Chao should be eligible for an
additional 1998 bonus of up to $200,000 at the discretion of the Committee.
Whether or not this discretionary bonus will be paid will be determined after
the end of 1998, based on factors determined by the Committee.
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 granted 100,000
options shares to Dr. Chao in 1998. The Committee expects to continue to grant
options in the future.
13
<PAGE>
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
granted under plans approved by the Company's stockholders, which may include
stock options. The Company's 1991 Stock Option Plan has previously been amended
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.
Michael Fedida
Ronald R. Taylor
14
<PAGE>
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,
1997, with the cumulative total return on the NASDAQ Composite Index (Total
Return), the Standard & Poor's ("S&P") 500 Composite Index, the Dow Jones
Pharmaceutical Index and a group consisting of certain pharmaceutical
corporations (the "Pharmaceutical Group") over the same period. On September 17,
1997 the Common Stock commenced trading on the New York Stock Exchange and
ceased trading on the Nasdaq National Market System. The Company believes that a
comparison of its stock performance with the S&P 500 Composite Index and the Dow
Jones Pharmaceutical Index provides a better indication of the stock's relative
performance, and so has decided to use such indices for future comparisons.
However, the Nasdaq Composite Index and the Pharmaceutical Group have also been
included in this year's table. The following graph shall not be deemed
incorporated by reference by any general statement incorporating by reference
this Proxy Statement into any filing under the Securities Act or the Exchange
Act, except to the extent the Company specifically incorporates the information
contained therein by reference, and shall not otherwise be deemed filed under
such Acts.
15
<PAGE>
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 S&P 500 COMPOSITE INDEX, THE DOW JONES PHARMACEUTICAL INDEX,
THE NASDAQ COMPOSITE INDEX AND THE PHARMACEUTICAL GROUP
[GRAPHIC OMITTED]
<TABLE>
<CAPTION>
2/17/93* 12/31/93 12/30/94 12/29/95 12/31/96 12/31/97
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Watson Pharmaceuticals, Inc. Common 100.00 210.42 218.75 408.33 374.48 540.63
Stock
S&P 500 Composite Index 100.00 107.65 105.99 142.15 170.95 223.96
Dow Jones Pharmaceutical Index 100.00 103.74 114.28 182.08 223.63 342.08
Nasdaq Composite Index 100.00 117.93 115.27 163.03 200.51 246.06
Pharmaceutical Group 100.00 123.02 98.64 129.98 114.50 157.32
</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 31, 1997.
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.l.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 Pharmaceuticals Industries Ltd.; and
Zenith Laboratories, Inc. During 1995 and 1996, Marsam Pharmaceuticals, Inc.,
Zenith Laboratories, Inc. and Biocraft Laboratories, Inc. were merged into
separate unrelated entities and their shares no longer trade publicly. In April
1997 Royce Laboratories, Inc. merged with the Company and its shares no longer
trade publicly. In these instances, the merged companies final closing prices
were used for purposes of calculating the Pharmaceutical Group index.
16
<PAGE>
CERTAIN TRANSACTIONS
The Company leases a portion of its facilities from related parties.
The aggregate rent expense for 1997, 1996 and 1995 was $309,000, $432,000 and
$432,000, respectively, and was allocated to cost of revenues, research and
development and selling, general and administrative expenses. In 1997, $11,200
of this expense related to a building Dr. Keith owned but sold in January 1997.
The remaining $297,800 related to rent on a building which is in part
beneficially owned by Drs. Chao and Hsia.
In February 1996, Dr. Sharoky entered into an agreement to borrow
$1,431,298 from the Company, interest free, for the payment of federal and state
income taxes on the exercise of certain expiring stock options. This loan was
increased to $3,559,436 in January 1997 for the same purpose and was paid off in
September 1997.
In April 1997, Dr. Chao entered into an agreement to borrow $2,000,000
from the Company, interest free, for the payment of federal and state income
taxes on the exercise of certain expiring stock options. This loan was paid in
March 1998.
In 1997, Mr. Feldman's law firm received fees for legal services
rendered to the Company in the amount of $1,605,600.
STOCKHOLDERS' PROPOSALS FOR THE 1998 ANNUAL MEETING
Proposals of stockholders intended to be presented at the 1999 Annual
Meeting of Stockholders must be made in accordance 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 1, 1998.
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 at 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
17
<PAGE>
WATSON PHARMACEUTICALS, INC.
311 BONNIE CIRCLE
CORONA, CALIFORNIA 91720
PROXY -- SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR THE 1998 ANNUAL MEETING OF STOCKHOLDERS -- MAY 4, 1998
The undersigned hereby appoints Michael Fedida, Albert F. Hummel and
Ronald R. Taylor, 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 1998 Annual Meeting of Stockholders of WATSON PHARMACEUTICALS, INC. to be
held on May 4, 1998, 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)
PLEASE MARK YOUR [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: Allen Chao, Ph.D.
Michel J. Feldman
INSTRUCTION: To withhold authority to vote for any individual nominee, write
that nominee's name in the following space:
2. Approval of the selection of Price Waterhouse LLP as independent accountants
for the 1998 fiscal year.
<PAGE>
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 BOTH
PROPOSALS. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR THE NOMINEES
FOR DIRECTOR AND WILL BE VOTED FOR APPROVAL OF THE SELECTION OF PRICE WATERHOUSE
LLP AS INDEPENDENT ACCOUNTANTS. 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.
