<PAGE>
================================================================================
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement [_] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 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] No fee required.
[_] 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:
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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):
-------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
-------------------------------------------------------------------------
(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:
-------------------------------------------------------------------------
(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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Notes:
<PAGE>
WATSON PHARMACEUTICALS, INC.
311 Bonnie Circle
Corona, California 91720
----------------
March 31, 1999
Notice of Annual Stockholders Meeting:
You are hereby notified that the 1999 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 Monday, May 3, 1999, for the following purposes:
1. To elect two (2) directors to hold office until the 2002 Annual
Meeting.
2. To ratify the selection of PricewaterhouseCoopers LLP as the Company's
independent accountants for the year ending December 31, 1999.
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 15, 1999 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 vote, sign and date the enclosed
proxy and return it in the envelope provided.
By Order of the Board of Directors
Robert C. Funsten
Secretary
<PAGE>
WATSON PHARMACEUTICALS, INC.
311 Bonnie Circle
Corona, California 91720
----------------
1999 ANNUAL MEETING OF STOCKHOLDERS
MAY 3, 1999
----------------
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 1999 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 3, 1999, 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 ended December 31, 1998 are being mailed to stockholders on or about
March 31, 1999.
Stockholders of record at the close of business on March 15, 1999 are
entitled to notice of and to vote at the Meeting. On such date there were
outstanding 95,592,406 shares of the Company's common stock, par value $0.0033
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, 1999. All shares of Common Stock and options
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.
1
<PAGE>
A properly executed proxy will be voted in the manner directed by the
stockholder submitting the proxy. If no direction is made, such proxy 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 PricewaterhouseCoopers LLP 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.
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 2002 Annual Meeting and until their
successors are elected and qualify. The Class I directors, Michael J. Fedida
and Albert F. Hummel, are nominees for director. 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 Class III directors, Allen Y.
Chao, Ph.D. and Michel J. Feldman, are scheduled to serve as directors until
the 2001 Annual Meeting.
The Articles of Incorporation provide that three directors will serve in
each of the three classes. There are only two directors in Class I who are
nominated for election at the Annual Meeting. The Board has been engaged in an
ongoing process of considering potential nominees for vacancies. When the
Board has located qualified candidates, it expects to either fill the
remaining Class I and Class III positions or to nominate appropriate
candidates for election at a subsequent meeting of stockholders.
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 1999 MEETING:
Michael J. Fedida Director since 1995
Michael J. Fedida, 52, 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. Mr. Fedida served on the Board of Directors of Circa
Pharmaceuticals, Inc. ("Circa") from 1988 to 1995, at which time Circa was
acquired by the Company.
Albert F. Hummel Director since 1986
Albert F. Hummel, 54, 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 pharmaceutical 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.
2
<PAGE>
The Board of Directors knows of no reason why either 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 2000:
Alec D. Keith, Ph.D. Director since 1991
Alec D. Keith, 66, was Chairman of the Company from October 1991 until he
retired from that office in May 1996. 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 manufacturer of blood products,
from November 1996 to January 1998. Dr. Keith was a co-founder of
Zetachron, Incorporated ("Zetachron"), which was acquired by the Company in
1991. Zetachron was a research and development company engaged in the
development of advanced drug-delivery systems. Dr. Keith held senior
executive positions at Zetachron from 1991 through 1995, at which time
Zetachron merged into Watson Laboratories, Inc. 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, 51, has been a consultant to Cardinal Health, Inc.
("Cardinal Health"), a leading provider of health-care products and
services, since May 1996. Mr. Taylor was a founder and was formerly
Chairman of Pyxis Corporation, a developer and marketer of systems designed
to manage drugs and supplies, from 1987 until 1996, at which time Pyxis
Corporation became a wholly owned subsidiary of Cardinal Health. Since
April 1, 1998, Mr. Taylor has been a general partner of Enterprise Partners
Venture Capital, a venture capital firm. He has been a Board member of
Cavanaugh's Hospitality Corporation, a hotel company, since April 1998.
Andrew L. Turner Director since 1997
Andrew L. Turner, 52, is the founder of Sun Healthcare Group, Inc. ("Sun
Healthcare"), a diversified international long-term care provider, and has
been the Chairman and Chief Executive Officer of Sun Healthcare since its
formation in 1989. Mr. Turner also founded and previously served as Chief
Operating Officer of Horizon Healthcare Corporation, also a health care
services provider, from 1986 to 1989. Mr. Turner is the President of Rio
Ranchito, Inc. and serves on the board of directors of the U.S. Olympic
Committee for the state of New Mexico, Omnicell Technologies, The Sports
Club Co., Sun Health Systems, Alpha Healthcare (Australia), and The Armand
Hammer United World College.
DIRECTORS WHOSE TERMS EXPIRE IN 2001:
Allen Y. Chao, Ph.D. Director since 1985
Allen Y. Chao, 53, a co-founder of the Company, has been Chief Executive
Officer of the Company since August 1985, Chairman of the Company since May
1996 and President of the Company since February 1, 1998. Dr. Chao also
serves on the Board of Directors of Somerset Pharmaceuticals, Inc.
("Somerset"), which is fifty percent (50%) owned by the Company. Dr. Chao
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.
3
<PAGE>
Michel J. Feldman Director since 1985
Michel J. Feldman, 56, is a member of the law firm of D'Ancona & Pflaum
LLC, Chicago, Illinois, where he has practiced since June 1991. D'Ancona &
Pflaum LLC provides legal services to the Company. Mr. Feldman served as
the Secretary of the Company from 1995 to 1998. 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 is also a director of Neff Motivation, Inc., a
private corporation which manufactures and markets award recognition
products. Mr. Feldman received a J.D. from the Northwestern University
School of Law in 1968 and is a Certified Public Accountant.
BOARD AND COMMITTEE MEETINGS
The Company has an Audit Committee composed of Michael J. Fedida, Albert F.
Hummel, Ronald R. Taylor and Andrew L. Turner. During the fiscal year ended
December 31, 1998, 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 J. Fedida,
Ronald R. Taylor and Andrew L. Turner. The Compensation Committee met three
times and executed eight Unanimous Consents in Lieu of Special Meetings during
the fiscal year ended December 31, 1998. 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 compensation policies applicable to the
other senior executive officers of the Company; (iii) the grant of stock
options under the Company's 1991 Stock Option Plan and (iv) the administration
of 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 meetings, and executed two
Unanimous Consents in Lieu of Special Meeting, during the fiscal year ended
December 31, 1998. 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
received a director's fee of $25,000 for 1998. 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.
4
<PAGE>
From time to time, the Company has granted stock options to non-employee
directors under the 1995 Plan. The following table sets forth the options
granted under the 1995 Plan from January 1, 1998 to December 31, 1998.
<TABLE>
<CAPTION>
Number of Shares
Underlying Options Exercise
Name Granted (1) Price Per Share Date of Grant
---- ------------------ --------------- -------------
<S> <C> <C> <C>
Michel J. Feldman........... 30,000 $43.00 5/4/98
</TABLE>
- --------
(1) Reflects the amount of 10,000 shares for each year of the three year term
to which the director was elected.
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 securities, 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
regulations 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 1998 fiscal year all filing requirements
applicable to its officers, directors and greater-than-10% beneficial owners
were complied with.
5
<PAGE>
HOLDINGS OF STOCKHOLDERS, DIRECTORS
AND EXECUTIVE OFFICERS
The following table sets forth, as of March 15, 1999, 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 executive officers (including 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>
American Express Financial Corporation...... 5,048,122(2) 5.2%
IDS Tower 10
Minneapolis, MN 55440
Allen Y. Chao, Ph.D......................... 4,034,126(3)(4) 4.2%
David C. Hsia, Ph.D......................... 2,014,912(4)(5) 2.1%
Alec D. Keith, Ph.D......................... 502,600(6) *
Albert F. Hummel............................ 474,766(7) *
Michael J. Fedida........................... 57,200(8) *
Michel J. Feldman........................... 46,000(9) *
Ronald R. Taylor............................ 20,000(10) *
Andrew L. Turner............................ 35,120(11) *
G. Frederick Wilkinson...................... 70,350(12) *
Melvin Sharoky, M.D......................... 303,065(13) *
Patrick J. McEnany.......................... 84,900(14) *
Michael E. Boxer............................ -- *
All current directors and executive
officers of the Company (14 persons)....... 8,127,067(4)-(15) 8.4%
</TABLE>
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* 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 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 January 29, 1999.
(3) Includes 609,800 shares of Common Stock subject to exercisable options,
1,556,426 shares of Common Stock held by Allen Chao Interests, Ltd., a
partnership in which Dr. Chao is a controlling partner, 950,646 shares of
Common Stock held by MAL Investment Company, a corporation of which Dr.
Chao is a controlling stockholder, and 917,254 shares of Common Stock
held by the Allen Chao and Lee Hwa Chao Family Trust.
(4) Allen Y. Chao and Phylis Hsia are siblings. David C. Hsia is married to
Phylis Hsia.
(5) Includes 186,000 shares of Common Stock subject to exercisable options
held by Dr. Hsia, 40,000 shares of Common Stock held by David and Phylis
Hsia Charitable Remainder Trust, 1,095,468 shares of Common Stock held by
Hsia Interests, Ltd., a family partnership, and 693,444 shares of Common
Stock 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 20,000 shares of Common Stock subject to exercisable options and
482,600 shares of Common Stock held by Dr. Keith. Mr. Hummel, a director
of the Company, also has an exercisable option to purchase 264,000 shares
of Common Stock from Dr. Keith.
6
<PAGE>
(7) Includes 450,534 shares of Common Stock subject to exercisable options
and 24,232 shares of Common Stock held by Mr. Hummel. Mr. Hummel has
exercisable options to purchase 264,000 and 132,000 shares of Common
Stock from Dr. Keith and Dr. Wallace C. Snipes (a former officer of
Watson), respectively.
(8) Includes 48,600 shares of Common Stock subject to exercisable options and
8,600 shares of Common Stock held by Mr. Fedida.
(9) Includes 45,000 shares of Common Stock subject to exercisable options and
1,000 shares of Common Stock held by Ercelle Feldman, the wife of Michel
J. Feldman, for which Mr. Feldman disclaims beneficial ownership.
(10) Comprises shares of Common Stock subject to exercisable options.
(11) Includes 10,000 shares of Common Stock subject to exercisable options and
25,120 shares of Common Stock held by the Andrew L. and Nora L. Turner
Trust, of which Andrew L. Turner is Trustee.
(12) Includes 69,000 shares of Common Stock subject to exercisable options and
1,350 shares of Common Stock held by Mr. Wilkinson.
(13) Includes 272,341 shares of Common Stock held by Dr. Sharoky, 29,142
shares of Common Stock held by Dr. Sharoky as custodian for his children
and 1,582 shares of Common Stock held by Dr. Sharoky as custodian for his
niece.
(14) Includes 80,000 shares of Common Stock subject to exercisable options and
4,900 shares of Common Stock held by Mr. McEnany's wife.
(15) Excludes Mr. Hummel's options to acquire 264,000 shares from Dr. Keith.
PROPOSAL NO. 2--RATIFICATION OF SELECTION OF
INDEPENDENT PUBLIC ACCOUNTANTS
The firm of PricewaterhouseCoopers LLP 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
PricewaterhouseCoopers 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 PRICEWATERHOUSECOOPERS LLP.
7
<PAGE>
EXECUTIVE COMPENSATION
The following table summarizes the compensation paid or accrued to Allen Y.
Chao, Ph.D., for services rendered for the year ended December 31, 1998 as the
Company's President, Chairman and Chief Executive Officer, and to each of the
other executive officers of the Company whose total annual salary and bonus
exceeded $100,000 ("Named Executive Officers") for services in the capacity
indicated.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Compensation
Awards
Annual ------------
Compensation Securities
Name and Principal ----------------- Underlying All Other
Position (1) Year Salary Bonus Options Compensation
--------------------------- ---- -------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Allen Y. Chao, Ph.D........... 1998 $500,000 $400,000 100,000 $ 15,392
President, Chairman of the 1997 400,000 400,000 100,000 8,650
Board and Chief Executive 1996 400,000 300,000 200,000 4,750
Officer(1)(2)(3)(4)
David C. Hsia, Ph.D........... 1998 $219,475 $ 35,000 10,000 $ 5,911
Senior Vice President, 1997 200,000 50,000 0 4,750
Scientific Affairs(1)(2)(5) 1996 165,000 20,000 15,000 4,750
G. Frederick Wilkinson........ 1998 $211,000 $ 52,750 25,000 $ 10,828
Vice-President(3)(6) 1997 200,000 100,000 60,000 10,750
Michael E. Boxer.............. 1998 $ 88,462 $ 30,000 100,000 $ 86,269
Chief Financial Officer(1)(7)
Melvin Sharoky, M.D.(8)....... 1998 $115,392 $ 0 0 $1,082,079
1997 375,000 100,000 0 13,224
1996 350,000 300,000 -- 158,595
Patrick J. McEnany(9)......... 1998 $ 29,406 $ 0 0 $ 320,833
1997 200,000 140,625 202,226 10,119
1996 169,250 24,906 5,832 44,818
</TABLE>
- --------
(1) Dr. Chao, Dr. Hsia, and Michael E. Boxer have entered into employment
agreements with the Company. The Company's employment agreements with Dr.
Sharoky and Mr. McEnany expired during 1998. Please refer to "Employment
Agreements" below for details.
(2) Pursuant to bonus formulas established by the Company's Compensation
Committee, Dr. Chao received annual bonuses in 1998, 1997, and 1996, based
upon net after-tax earnings of the Company and at the discretion of the
Compensation Committee. Bonuses paid to Dr. Hsia in 1998, 1997, and 1996
were based on the satisfaction of certain criteria set by the Company's
Chief Executive Officer.
(3) Dr. Chao 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 1998, 1997 and 1996. In 1997, Mr. Wilkinson joined the
Board of Directors of Somerset. In 1997 he received directors fees from
Somerset in the amount of $6,000 and in 1998 he received directors fees
from Somerset in the amount of $12,000. These fees to Dr. Chao and
Mr. Wilkinson were not paid by the Company and so have not been included
in the Summary Compensation Table.
(4) Other compensation to Dr. Chao in 1998, 1997 and 1996 includes the
Company's 401(k) contributions on behalf of Dr. Chao. Additionally, other
compensation in 1998 and 1997 to Dr. Chao includes car allowances of
$7,800 and $3,900, respectively.
(5) Other compensation to Dr. Hsia in 1998, 1997 and 1996 includes the
Company's 401(k) contributions on behalf of Dr. Hsia.
8
<PAGE>
(6) Mr. Wilkinson became an officer of the Company effective July 14, 1997. He
has been employed by the Company since June 24, 1996. Other compensation
in 1998 and 1997 to Mr. Wilkinson includes the Company's 401(k)
contributions on his behalf, and car allowances of $5,500 and $6,000,
respectively.
(7) Mr. Boxer has been employed by the Company since July 27, 1998. Other
compensation paid to Mr. Boxer includes the imputed value of interest on
an interest free loan taken by Mr. Boxer from the Company in the amount of
$600,000 for the purpose of purchasing a home. Other compensation paid to
Mr. Boxer also includes the Company's 401(k) contributions on his behalf,
as well as a reimbursement of $60,000 for relocation expenses in
connection with his employment by the Company.
(8) Dr. Sharoky resigned from the Company effective January 31, 1998. Somerset
reimbursed the Company for salary paid to Dr. Sharoky in the amounts of
$87,500, $300,000 and $300,000 in each of the years ended December 31,
1998, 1997 and 1996, respectively. Other compensation in 1998, 1997 and
1996 to Dr. Sharoky includes the Company's 401(k) contributions on his
behalf. Other compensation to Dr. Sharoky in 1998 also includes a
$1,080,000 severance payment in connection with the termination of his
employment with the Company.
(9) Mr. McEnany's employment agreement with the Company expired as of January
31, 1998. Other compensation to Mr. McEnany for 1998 includes a $320,833
severance payment in connection with the termination of his employment
with the Company. In addition, other compensation to Mr. McEnany in 1997
and 1996 includes the Company's 401(k) contributions on his behalf.
Employment Agreements
Effective May 29, 1995, the Company entered into employment agreements with
each of Drs. Allen Y. 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 Senior Executives'
employment may be terminated for cause, or by reason of death or disability;
(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 the event the Company terminates Dr. Hsia's
employment for reasons other than cause, disability, retirement or death, and
such termination is not related to a change in control, the Company will
provide Dr. Hsia with severance pay in an amount equal to one times his annual
salary as of the last day worked. In addition, Dr. Chao was entitled to
receive options to purchase 300,000 shares of the Company's Common Stock under
the 1991 Plan, all of which were granted in 1997 and 1996. Such options vest
over a five year period following the grant date. See "Report of the
Compensation Committee on Executive Compensation."
Effective July 27, 1998, the Company entered into an employment agreement
with Michael E. Boxer whereby Mr. Boxer agreed to serve as the Chief Financial
Officer of the Company. The agreement provides that, among other things, (i)
Mr. Boxer's employment shall be at will; (ii) he will receive a base annual
salary of $199,992 per year, subject to adjustment at the discretion of the
President of the Company; (iii) he may receive a bonus, the amount of which is
to be determined at the end of each calendar year, of up to 30 percent of his
base salary, (iv) he will receive reimbursement for certain relocation
expenses, and (v) in the event of termination of his employment for reasons
other than death, disability or cause, and if such termination is not related
to a change in control, the Company will provide Mr. Boxer with severance pay
by continuing his base salary as of his last day worked for a period of 52
weeks. If Mr. Boxer's employment is terminated due to a change in control, he
will be entitled to a lump sum payment in a gross amount equal to his base
salary for a period of twelve (12) months. In addition, Mr. Boxer received a
stock option grant under the Plan of 100,000 shares at the time he signed his
employment agreement with the Company, and is entitled to an additional stock
option grant under the Plan of 50,000 shares on April 27, 1999. All such
options vest over a five year period following each grant date. Mr. Boxer is
also entitled to receive additional stock option grants as are determined by
the
9
<PAGE>
Compensation Committee of the Board in accordance with its policies regarding
stock option grants to executive employees generally. See "Report of the
Compensation Committee on Executive Compensation."
On January 31, 1998, the employment agreement between the Company and Dr.
Sharoky expired, and he received certain severance benefits, which included
the sum of $1,350,000, payable in five installments through January 1999 (of
which $1,080,000 was paid in 1998).
On January 31, 1998, the employment agreement between the Company and Mr.
McEnany expired, and he received certain severance benefits, which included
the sum of $350,000, payable in twelve installments through January 1999 (of
which $320,833 was paid in 1998).
Options
The following table sets forth certain information concerning individual
grants of stock options made during the year ended December 31, 1998 to each
Named Executive Officer of the Company who received such a grant under the
Company's 1991 Stock Option Plan.
Option Grants in Last Fiscal Year
Individual Grants
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Number of % of Total Annual Rates of Stock
Shares Options Price Appreciation
Underlying Granted to Exercise or for Option Term (1)
Options Employees in Base Price Expiration ---------------------
Name Granted Fiscal Year Per Share Date 5% 10%
---- ---------- ------------ ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Allen Y. Chao, Ph.D..... 100,000 8.55% $36.19 2/24/08 $2,275,798 $5,767,345
David C. Hsia, Ph.D..... 10,000 0.85% $43.00 7/27/08 $ 270,423 $ 685,307
G. Frederick Wilkinson.. 25,000 2.14% $43.00 7/27/08 $ 676,057 $1,713,270
Michael E. Boxer........ 100,000 8.55% $43.00 7/27/08 $2,704,230 $6,853,081
</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.
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, 1998, as well as 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
Shares Unexercised Options at In-the-Money Options at
Acquired December 31, 1998 December 31, 1998
on Value ------------------------- -------------------------
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ---- -------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Allen Y. Chao, Ph.D..... 0 $ 0 589,800 340,000 $26,445,811 $11,098,348
David C. Hsia, Ph.D..... 0 $ 0 186,002 98,998 $ 8,049,916 $ 3,617,981
G. Frederick Wilkinson.. 15,000 $ 266,250 61,002 168,998 $ 2,322,295 $ 5,822,026
Michael E. Boxer........ 0 $ 0 0 100,000 $ 0 $ 1,418,999
Melvin Sharoky, M.D..... 622,000 $13,316,290 0 0 $ 0 $ 0
Patrick J. McEnany...... 123,378 $ 2,548,837 40,000 160,000 $ 1,635,099 $ 6,540,399
</TABLE>
10
<PAGE>
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 policies for the senior executive officers of the
Company including Dr. Allen Y. Chao, its Chief Executive Officer, and the
actual compensation of Dr. Chao. It also administers the 1991 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.
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 a
compensation philosophy 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.
11
<PAGE>
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 1999 base
compensation should be increased to $600,000.
Bonus
The Committee believes that a significant portion of Dr. Chao's bonus should
be tied to the Company's meeting or exceeding its goals for earnings per
share. 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 $300,000 in 1999 based upon the Company meeting certain
earnings per share goals for the 1998 fiscal year. In addition, Dr. Chao was
eligible to earn up to $200,000 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. After considering the factors
previously established by the Committee, the Committee awarded Dr. Chao an
additional discretionary bonus of $100,000.
The Committee has decided that a formula should again be used in determining
the 1999 bonus for Dr. Chao. For 1999, Dr. Chao will receive a bonus of up to
$400,000 to be determined based upon the Company satisfying certain
established earnings per share goals for the 1999 fiscal year. The Committee
also determined that Dr. Chao should be eligible for an additional 1999 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 1999,
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
expects to continue granting options.
The Committee granted 100,000 option shares to Dr. Chao in 1998.
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.
12
<PAGE>
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 J. Fedida
Ronald R. Taylor
Andrew L. Turner
13
<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
December 31, 1993 through December 31, 1998, with the cumulative total return
on the Standard & Poor's ("S&P") 500 Composite Index, and the Dow Jones
Pharmaceutical Index over the same period. 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.
The graph herein assumes the investment of $100 in the Company's Common Stock
and in each of the other indexes on December 31, 1993.
Comparison of Five Year Cumulative Total Return Among
Watson Pharmaceuticals, Inc., the S&P 500 Composite Index, and
the Dow Jones Pharmaceutical Index
[PERFORMANCE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
12/31/93 12/30/94 12/29/95 12/31/96 12/31/97 12/31/98
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Watson Pharmaceuticals,
Inc. Common Stock...... 100.00 103.96 194.06 177.97 256.93 499.01
S&P 500 Composite
Index.................. 100.00 98.46 132.05 158.80 208.05 263.53
Dow Jones Pharmaceutical
Index.................. 100.00 110.17 172.52 215.58 329.76 484.55
</TABLE>
14
<PAGE>
CERTAIN TRANSACTIONS
The Company leases a portion of its facilities from a trust and other
entities of which Drs. Chao, Hsia and certain family members are among the
beneficiaries. The aggregate rent expense for 1998, 1997 and 1996 was
$345,000, $332,000, and $432,000, respectively, and was allocated to cost of
sales, research and development and selling, general and administrative
expenses.
During 1998, Michael E. Boxer, the Company's Chief Financial Officer,
entered into an agreement to borrow $600,000 from the Company, interest free,
for the purpose of purchasing a home. The loan is due in July 1999. Any unpaid
balance will bear interest at 10% per annum, compounded annually.
Prior to Michael E. Boxer's employment with the Company he worked for The
Enterprise Group, a consulting entity that provided various financial services
to the Company. During 1998, but prior to Mr. Boxer's employment with the
Company, the Company paid $138,601 to The Enterprise Group.
In 1998, Mr. Feldman's law firm received fees for legal services rendered to
the Company in the amount of $1,802,187.
STOCKHOLDERS' PROPOSALS FOR THE 2000 ANNUAL MEETING
Proposals of stockholders intended to be presented at the 2000 Annual
Meeting of Stockholders under SEC Rule 14a-8 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 2,
1999.
Notice of stockholder matters intended to be submitted at the next annual
meeting outside the processes of Rule 14a-8 will be considered untimely if not
received by the Company by February 15, 2000.
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.
Robert C. Funsten
Secretary
15
<PAGE>
Please Detach and Mail in the Envelope Provided
8888
WATSON PHARMACEUTICALS, INC.
311 BONNIE CIRCLE
CORONA, CALIFORNIA 91720
PROXY -- SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR THE 1999 ANNUAL MEETING OF STOCKHOLDERS -- MAY 3, 1999
The undersigned hereby appoints Alec D. Keith, Ph.D., Ronald R. Taylor,
Andrew L. Turner, Allen Y. Chao, Ph.D. and Michel J. 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 1999 Annual Meeting of
Stockholders of WATSON PHARMACEUTICALS, INC. to be held on May 3, 1999, 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 date, sign and mail your
proxy card back as soon as possible!
Annual Meeting of Stockholders
WATSON PHARMACEUTICALS, INC.
May 3, 1999
Please Detach and Mail in the Envelope Provided
[X] Please mark your
votes as in this
example.
VOTE FOR
both nominees
(except as VOTE
indicated to WITHHELD
the contrary from both
below) nominees
1. Election
of the following [_] [_] NOMINEES: Michael J. Fedida
nominees as Albert F. Hummel
Directors:
Instruction: To withhold authority to vote for any individual
- -----------
nominee, write that nominee's name in the following space:
- --------------------------------------------------------------
FOR AGAINST ABSTAIN
2. Approval of the selection of [_] [_] [_]
PricewaterhouseCoopers LLP as
independent accountants for
the 1999 fiscal year.
THIS PROXY IF PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED BY THE
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 PRICEWATERHOUSECOOPERS LLP AS
INDEPENDENT ACCOUNTANTS. IN ADDITION, THE PROXIES MAY VOTE IN THEIR DISCRETION
ON SUCH OTHER MATTERS AS MAY PROPERLY COME BEFORE THIS MEETING.
PLEASE COMPLETE, DATE, SIGN AND RETURN THE PROXY IN THE ENVELOPE PROVIDED.
Signature or Signature(s) ___________________________________ 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.
