Allergan Finance LLC DEF 14A 2007
Pursuant to Section 14(a) of
April 4, 2007
To Our Stockholders:
You are cordially invited to attend the 2007 Annual Meeting of Stockholders of Watson Pharmaceuticals, Inc. The meeting will be held at the Westin South Coast Plaza Hotel located at 686 Anton Boulevard, Costa Mesa, California on Friday, May 4, 2007 at 9:00 a.m. local time.
The Secretarys Notice of Meeting and the proxy statement, which follow, describe the matters to come before the meeting. During the meeting, we will also review the activities of the past year and items of general interest about the company.
We appreciate your continued interest and support as a Watson Pharmaceuticals, Inc. stockholder. We hope that you will be able to attend the meeting in person and we look forward to seeing you. For your convenience, we are also offering a webcast of the meeting. The webcast will be available by accessing www.watson.com shortly before the meeting time. You may also listen to a replay of the webcast on our website beginning May 5, 2007.
Whether or not you plan to attend the annual meeting, please vote your shares: (i) by calling the toll-free telephone number on your proxy card, (ii) via the Internet, by following the instructions on your proxy card, or (iii) by marking, dating and signing the enclosed proxy card and returning it in the accompanying postage paid envelope as quickly as possible.
2007 ANNUAL MEETING OF STOCKHOLDERS
MAY 4, 2007
Notice of Annual Stockholders Meeting:
You are hereby notified that the 2007 Annual Meeting of Stockholders (the Meeting) of Watson Pharmaceuticals, Inc. (the Company) will be held at the Westin South Coast Plaza Hotel, located at 686 Anton Boulevard, Costa Mesa, California at 9:00 a.m. local time, on Friday, May 4, 2007, for the following purposes:
1. To elect three (3) directors to hold office until the 2010 Annual Meeting or until their respective successors are duly elected and qualified.
2. To approve the Second Amendment and Restatement of the 2001 Incentive Award Plan of Watson Pharmaceuticals, Inc.
3. To ratify the appointment of PricewaterhouseCoopers LLP as the Companys independent registered public accounting firm for the fiscal year ending December 31, 2007.
4. 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, 2007 as the record date for the determination of stockholders entitled to notice of and to vote at the Meeting. Only stockholders of record at the close of business on March 16, 2007 will be entitled to notice of and to vote at the Meeting or any adjourned meeting thereof. Your attention is directed to the attached proxy statement for more complete information regarding the matters to be acted upon at the Meeting.
Whether or not you plan to attend the annual meeting, please vote your shares: (i) by calling the toll-free telephone number on your proxy card, (ii) via the Internet, by following the instructions on your proxy card, or (iii) by marking, dating and signing the enclosed proxy card and returning it in the accompanying postage paid envelope as quickly as possible.
WATSON PHARMACEUTICALS, INC.
2007 ANNUAL MEETING OF STOCKHOLDERS
MAY 4, 2007
This proxy statement and the accompanying proxy are furnished to stockholders of Watson Pharmaceuticals, Inc. (Watson, we, us and our) in connection with the solicitation of proxies by our Board of Directors for use at the 2007 Annual Meeting of Stockholders (the Meeting) to be held at the Westin South Coast Plaza Hotel, located at 686 Anton Boulevard, Costa Mesa, California at 9:00 a.m. local time on May 4, 2007 for the purposes set forth in the accompanying Notice of Annual Stockholders Meeting. This proxy statement, the enclosed form of proxy, and our 2006 Annual Report to Stockholders are being mailed to stockholders on or about April 6, 2007.
Stockholders of record at the close of business on March 16, 2007 (the record date) are entitled to notice of and to vote at the Meeting. On such date, there were outstanding 102,510,189 shares of our common stock, par value $.0033 per share. 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 method of voting by proxy differs for shares held as a record holder and shares held in street name. If you hold your shares of common stock as a record holder, you may vote by completing, dating and signing the enclosed proxy card and promptly returning it in the enclosed, preaddressed, postage paid envelope or otherwise mailing it to us, or by submitting a proxy over the Internet or by telephone by following the instructions on the enclosed proxy card. You may also vote by attending the annual meeting and voting in person.
If you hold your shares of common stock in street name, which means your shares are held of record by a broker, bank or nominee, you will receive instructions from your broker, bank or other nominee that you must follow in order to vote your shares. Your broker, bank or nominee may allow you to deliver your voting instructions over the Internet or by telephone. Please see the voting instructions from your broker, bank or nominee that accompany this proxy statement. If you hold your shares in street name, you will need to obtain a legal proxy from your bank, broker or nominee in order for you to vote in person at the annual meeting.
Your vote is very important. Accordingly, please complete, sign and return the enclosed proxy card or voting instruction card whether or not you plan to attend the annual meeting in person. You should vote your proxy even if you plan to attend the annual meeting. Voting instructions are included on your proxy card. If you properly give your proxy and submit it to us in time to vote, one of the individuals named as your proxy will vote your shares as you have directed.
All expenses incurred in the solicitation of proxies will be borne by us. In addition to the use of the mail, proxies may be solicited on our behalf by our directors, officers and employees, who will receive no
additional consideration for such services. Brokers, custodians, nominees and other stockholders of record will forward copies of the proxy statement and other soliciting materials to persons for whom they hold shares of our common stock and to request authority for the exercise of proxies. In such cases, we, upon the request of the stockholders of record, will reimburse brokers, custodians and nominees for their reasonable expenses. We have engaged The Proxy Advisory Group, LLC, to assist in the solicitation of proxies and provide related advice and informational support, for a services fee and the reimbursement of customary disbursements that are not expected to exceed $20,000 in the aggregate.
At the close of business on March 16, 2007, 102,510,189 shares of our common stock were outstanding and entitled to vote. Votes cast by proxy (including through the Internet or by telephone) 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. The presence, in person or by proxy, of the holders of a majority of our common stock outstanding and entitled to vote at a meeting of stockholders is necessary in order to constitute a quorum for the conduct of business at the Meeting. Brokers or other nominees who hold shares of common stock in street name for a beneficial owner of those shares typically have the authority to vote in their discretion on routine proposals when they have not received instructions from beneficial owners. However, brokers are not allowed to exercise their voting discretion with respect to the approval of matters which the New York Stock Exchange (the NYSE) determines to be non-routine, without specific instructions from the beneficial owner. If a proxy is received but marked abstention or if a broker indicates on the proxy that it does not have discretionary authority as to certain shares to vote on a particular matter and has not been instructed on how to vote (i.e. broker non-votes), those shares will be considered as present and entitled to vote for purposes of determining the presence of a quorum.
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 three nominees named under the caption Election of Directors as set forth therein as our directors, FOR the approval of the Second Amendment and Restatement of the 2001 Incentive Award Plan of Watson Pharmaceuticals, Inc. and FOR the ratification of the appointment of PricewaterhouseCoopers LLP as our independent registered public accounting firm.
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. However, if other proper matters are presented at the Meeting, 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.
A stockholder of record may revoke his or her proxy in one of four ways at any time before the proxy is voted at the Meeting.
1. The stockholder may send a notice in writing to our Secretary revoking the proxy.
2. The stockholder may attend the Meeting in person and vote.
3. The stockholder may execute a proxy with a later date and deliver it to our Secretary before the voting at the Meeting.
4. The stockholder may submit another proxy by telephone or the Internet (we will follow your latest telephone or Internet voting instructions).
Any such notices and new proxies should be sent to Watson Pharmaceuticals, Inc., Corporate Secretary, 311 Bonnie Circle, Corona, California 92880. Persons who hold their shares through a bank or
brokerage firm may revoke their proxy by following the requirements of their bank or broker, or may vote in person at the Meeting by obtaining a legal proxy from their bank or broker.
If your shares are registered in the name of a bank or brokerage firm, you may be eligible to vote your shares electronically over the Internet or by telephone. A large number of banks and brokerage firms are participating in the ADP Investor Communication Services (ADP) online program. This program provides eligible stockholders who receive a paper copy of the Annual Report and Proxy Statement the opportunity to vote via the Internet or by telephone. If your bank or brokerage firm is participating in ADPs program, your voting form will provide instructions. The Internet and telephone voting facilities will close at 6:00 a.m. PDT on May 4, 2007. Stockholders who vote through the Internet or telephone should be aware that they may incur costs to access the Internet, such as usage charges from telephone companies or Internet service providers, and that these costs must be borne by the stockholder. Stockholders who vote by Internet or telephone need not return a proxy card by mail. If your voting form does not reference Internet or telephone information, please complete and return the paper Proxy in the self-addressed postage paid envelope provided.
In an effort to reduce printing costs and postage fees, we have adopted a practice approved by the Securities and Exchange Commission (SEC) called householding. Under this practice, stockholders of record who have the same address and last name and do not participate in the electronic delivery of proxy materials will receive only one copy of our proxy materials, unless one or more of these stockholders notifies us that he or she wishes to continue receiving individual copies. Stockholders who participate in householding will continue to receive separate proxy cards. If you share an address with another stockholder and prefer to receive separate copies of our proxy materials, please mail your request to Watson Pharmaceuticals, Inc., Investor Relations, 311 Bonnie Circle, Corona, California 92880.
Information on our website, other than our proxy statement and form of Proxy, is not part of the proxy soliciting material and is not incorporated into this proxy statement by reference.
Our Articles of Incorporation provide that the Board of Directors will be divided into three classes. One class is elected each year for a three-year term, expiring at our annual meeting of stockholders. At the Meeting, three directors, who will comprise the Class III directors, are to be elected to serve until the 2010 annual meeting or until their successors are duly elected and qualified.
Based upon the recommendation of the Nominating and Corporate Governance Committee, the Board of Directors has nominated the following three current directors for re-election as Class III directors: Allen Chao, Ph.D., Michel J. Feldman and Fred G. Weiss, each of whom were elected by the stockholders to their present term. The Class I directors, Michael J. Fedida, Albert F. Hummel and Catherine M. Klema are scheduled to serve as directors until the 2008 Annual Meeting. The Class II directors: Ronald R. Taylor, Andrew L. Turner and Jack Michelson are scheduled to serve as directors until the 2009 Annual Meeting. There are no vacant positions on the Board of Directors.
Information about the nominees for director and our directors, whose term of office will continue after the Meeting, is set forth in the following paragraphs and is based on information provided to us as of March 16, 2007.
Allen Chao, Ph.D. Director since 1985
Allen Chao, Ph.D., age 61, a co-founder of Watson, has been our Chief Executive Officer since 1985, Chairman since May 1996 and President since November 2004. Dr. Chao also served as our President from February 1998 to October 2002.
Michel J. Feldman Director since 1985
Michel J. Feldman, age 64, is a member of the law firm of Seyfarth Shaw LLP, where he has practiced since October 2003. Previously, Mr. Feldman was a member of the law firm of DAncona & Pflaum LLC, where he practiced from June 1991 to October 2003. Effective October 2003, DAncona & Pflaum LLC merged with Seyfarth Shaw LLP. From time to time in the past, Seyfarth Shaw LLP provided legal services to us. Mr. Feldman also served as our Secretary from 1995 to 1998 and Acting Secretary and Interim General Counsel from May 2002 to November 2002.
Fred G. Weiss Director since 2000
Fred G. Weiss, age 65, has been the managing director of FGW Associates, Inc., a consulting firm, since 1997. Mr. Weiss served as Vice President, Planning, Investment and Development of Warner-Lambert from 1983 to 1996 and prior to that served as Vice President and Treasurer of Warner-Lambert from 1979 to 1983, where he was involved in both strategic planning and corporate development. Mr. Weiss is also an Independent Chairman of the Board and Chairman of the Audit Committee of numerous BlackRock-sponsored mutual funds. Mr. Weiss is also a director and Chairman of the Audit Committee of BTG International, plc, a London Stock Exchange traded company. Additionally, Mr. Weiss has been a Director of the Michael J. Fox Foundation for Parkinsons Research since 2000.
The Board of Directors knows of no reason why any of the foregoing nominees will be unavailable to serve, but in the event of any such unavailability, the proxies received will be voted for such substitute nominees as the Board of Directors may recommend.
Directors will be elected by a favorable vote of a plurality of the shares of our common stock present and entitled to vote, in person or by proxy, at the Meeting. Thus, the three nominees receiving the largest number of votes will be elected. Accordingly, abstentions will not affect the outcome of the election of directors. In addition, the election of directors is a matter on which a broker or other nominee generally has discretionary voting authority, and thus broker non-votes are not expected to result from this proposal.
The Board of Directors recommends a vote FOR the election of all three nominees.
Michael J. Fedida Director since 1995
Michael J. Fedida, age 60, a registered pharmacist, has served for the past twenty-six years as an officer and director of several retail pharmacies wholly or partially owned by him, including J&J Saint Michaels Pharmacy from 2005 to present; J&J Pharmacy and Classic Pharmacy from 1987 to present; Perfect Pharmacy from 1980 to 2000; and Phoster Pharmacy from 1985 to 2000. Mr. Fedida served on the Board of Directors of Circa Pharmaceuticals, Inc. (Circa), from 1988 to 1995, at which time Circa was acquired by us. Mr. Fedida has been a Director of Bradley Pharmaceuticals, Inc., a specialty pharmaceutical company, since April 2004.
Albert F. Hummel Director since 1986
Albert F. Hummel, age 62, has been our director since March 1986, except for a period from July 1991 to October 1991. Mr. Hummel has been President of Pentech Pharmaceuticals, Inc., a development stage pharmaceutical company, since July 1998. Since November 2005, Mr. Hummel has been a director for Obagi Medical Products, Inc., a specialty pharmaceutical company focused on the aesthetic and therapeutic skin health markets. Additionally, Mr. Hummel served as a partner in Affordable Residential Communities, a property management firm from January 1994 through March 2006.
Catherine M. Klema Director since 2004
Catherine M. Klema, age 48, has been our director since March 2004. Ms. Klema is currently President of Nettleton Advisors LLC, a consulting firm established by Ms. Klema in 2001. Ms. Klema served as Managing Director, Healthcare Investment Banking, at SG Cowen Securities from 1997 to 2001. While at SG Cowen, Ms. Klema advised us on investment banking matters. Ms. Klema also served as Managing Director, Healthcare Investment Banking, at Furman Selz LLC from 1994 until 1997, and was employed by Lehman Brothers from 1987 until 1994. Ms. Klema has been a director of Pharmaceutical Product Development, Inc., a global contract research organization, since 2000.
Jack Michelson Director since 2002
Jack Michelson, age 72, has been our director since February 2002 and provided consulting services to us from February 2001 to June 2003. Mr. Michelson served as an officer of G.D. Searle & Co., a pharmaceutical company, for twenty-four years, of which Mr. Michelson was Corporate Vice President and President, Technical Operations from 1993 to 2001; Senior Vice President of Technical Operations from 1981 to 1993; and Vice President of Production and Engineering from 1977 to 1981.
Ronald R. Taylor Director since 1994
Ronald R. Taylor, age 59, has been President of Tamarack Bay, LLC, a private consulting firm, since 2001. Mr. Taylor has been a director of Red Lion Hotels Corporation, a hotel operating company, since 1998 and a director of ResMed Inc., a medical device manufacturer, since 2005. Mr. Taylor was a limited partner of Enterprise Partners Venture Capital (Enterprise), a venture capital firm, from April 2001 until September 2002, and was formerly a general partner of Enterprise from April 1998 to March 2001. Mr. Taylor is a limited partner of several Enterprise funds. Mr. Taylor was also a consultant to Cardinal Health, Inc., a provider of healthcare products and services, from May 1996 to May 2002.
Andrew L. Turner Director since 1997
Andrew L. Turner, age 60, currently serves as Chairman of the Board of EnduraCare Therapy Management, Inc. (formerly known as EnduraCare, LLC), a provider of rehabilitation and therapy management services founded by Mr. Turner in 2000. Mr. Turner has also been a director of The Sports Club Company, Inc., an upscale workout company, since September 1994.
Our Board of Directors has adopted Corporate Governance Guidelines. These guidelines address the make-up and functioning of the Board of Directors and its committees, which include determining director
independence, criteria for Board membership, and authority to retain independent advisors. On June 1, 2006, we submitted to the NYSE the Annual CEO Certification required pursuant to Section 303A.12(a) of the NYSEs Listed Company Manual certifying without qualification that Dr. Chao was not aware of any violation by us of the NYSEs corporate governance listing standards.
Our Board of Directors has also adopted a Code of Conduct which applies to all of our Board members and all of our officers and employees. The code sets forth and summarizes certain of our policies related to legal compliance and honest and ethical business practices. The code is intended to comply with the standards set forth in Section 303A.10 of the NYSEs Listed Company Manual and SEC rules and regulations. Any amendments to, or waivers from, provisions of the Code of Conduct that apply to our directors or executive officers, including our Chief Executive Officer and Chief Financial Officer and persons performing similar functions, will be promptly posted on our website at http://www.watson.com.
You can find links to our Corporate Governance Guidelines and our Code of Conduct under the Investors section of our website at http://www.watson.com. Copies of these materials are available to stockholders without charge upon request sent to Investor Relations at Watson Pharmaceuticals, Inc., 311 Bonnie Circle, Corona, CA 92880.
On an annual basis our Board of Directors reviews the independence of all directors and affirmatively makes a determination as to the independence of each director. For a director to be considered independent, the Board must determine that the director does not have any direct or indirect material relationship with Watson. To assist in making this determination, the Board has adopted independence guidelines which are designed to conform to, or be more exacting than, the independence requirements set forth in the listing standards of the NYSE. These guidelines are attached as Appendix A to this proxy statement. In addition to applying these guidelines, the Board considers any and all additional relevant facts and circumstances in making an independence determination.
Our Board has determined that at least a majority of its directors has no direct or indirect material relationship with us (other than as our director) and such directors are independent within the meaning of the independence standards promulgated by the SEC and the NYSE. Specifically, in January 2007, the Board determined, based on the NYSE standards for independence and our independence guidelines, that Michael Fedida, Michel Feldman, Albert Hummel, Catherine Klema, Jack Michelson, Ronald Taylor, Andrew Turner and Fred Weiss, or eight out of our nine directors, had no material relationship with us and are independent directors. Dr. Chao was determined to be not independent, because he is our President and Chief Executive Officer and Dr. David Hsia, our Senior Vice President, Scientific Affairs, is Dr. Chaos brother-in-law.
In the course of its review, the Board also considered
(i) Mr. Fedidas ownership of pharmacies that from time to time purchase pharmaceuticals from Anda, Inc., a wholesaler distributor we acquired in November 2006,
(ii) Mr. Feldmans partnership with Seyfarth Shaw LLP, a law firm which has provided services to us in the past,
(iii) Ms. Klemas directorship with Pharmaceutical Product Development, Inc., a contract research organization that has provided services to us in the past, and
(iv) Mr. Taylors directorship of 3e Company, a compliance information services company that has provided services for us in the past,
and determined that these transactions were made in the ordinary course, were below the thresholds set forth in our director independence standards and did not affect the independence of the directors involved.
We schedule regular executive sessions in which non-management directors meet without management participation. The Chairman of the Nominating and Corporate Governance Committee presides at these meetings.
Any interested party, including any stockholder, wishing to contact the Board of Directors, the presiding director of the non-management director meetings, or any other individual director may do so in writing by sending a letter to:
Chairman, Nominating and Corporate Governance Committee
Our Corporate Secretary reviews all such written correspondence and regularly forwards to the Board of Directors a summary of all correspondence and copies of correspondence that, in the opinion of the Corporate Secretary, deal with the functions of the Board of Directors or its committees, or that the Corporate Secretary otherwise determines requires Board attention.
The Nominating and Corporate Governance Committee considers director candidates from diverse sources, including suggestions from stockholders. From time to time, the Nominating and Corporate Governance Committee may engage a third party for a fee to assist in identifying potential director candidates. The Nominating and Corporate Governance Committee looks for candidates who (a) bring not only direct experience, but also a variety of experience and background, both professionally and personally, (b) will represent the balanced, best interests of the stockholders as a whole rather than special interest groups or constituencies, and (c) have a reputation for integrity and satisfy the independence requirements of the NYSE, our director independence standards and applicable law. The Nominating and Corporate Governance Committees goal is to have a diverse, balanced and engaged board whose members possess the skills and background necessary to maximize stockholder value in a manner consistent with all legal requirements and the highest ethical standards. The Nominating and Corporate Governance Committees Charter and our Corporate Governance Guidelines, which are published on our website at http://www.watson.com under the Investors section, set forth in further detail the criteria that guide the Committee in assessing potential candidates for the Board of Directors.
In determining whether to recommend a director for re-election, the Nominating and Corporate Governance Committee considers the directors contributions to the Board and the Committees on which such person serves, participation in and attendance at meetings, and any changes in employment status, health, community activity or other factors may affect the directors continuing contributions to the Board. The Nominating and Corporate Governance Committee evaluates each individual in the context of the Board as a whole, with the objective of recommending a group that can best perpetuate the success of the
business and represent stockholder interests through the exercise of sound judgment using its diversity of experience in these various areas.
The Nominating and Corporate Governance Committee initially evaluates a candidate for nomination to the Board based on information supplied by the party recommending the candidate and any additional public information that may be available. If the initial evaluation is favorable, the Nominating and Corporate Governance Committee gathers additional information on the candidates qualifications, availability, probable level of interest and any potential conflicts of interest. If the subsequent evaluation is also favorable, the Nominating and Corporate Governance Committee contacts the candidate directly to better determine each partys level of interest in pursuing the candidacy and checks the candidates references. If, after discussions and meetings, the candidate and the Nominating and Corporate Governance Committee establish a mutual interest in pursuing the candidacy, the Committee makes a final recommendation to the Board to nominate the candidate for election by the stockholders (or to select the candidate to fill a vacancy, as applicable). The Nominating and Corporate Governance Committee employs the same process for evaluating all candidates, including those properly submitted by stockholders and will consider stockholder recommendations of candidates on the same basis as it considers all other candidates.
Stockholders wishing to recommend a director candidate for consideration by the Nominating and Corporate Governance Committee may do so by sending the candidates name, biographical information and qualifications, together with a consent in writing signed by the recommended nominee that he or she is willing to be considered as a nominee and, if nominated and elected, he or she will serve as a director, to the Chair of the Nominating and Corporate Governance Committee in care of the Corporate Secretary, Watson Pharmaceuticals, Inc., 311 Bonnie Circle, Corona, California 92880. The submission of a recommendation by a stockholder in compliance with these procedures does not guarantee the selection of the stockholders candidate or the inclusion of the candidate in our proxy statement; however, the Nominating and Corporate Governance Committee will consider any such candidate in accordance with the procedures and guidelines as described above and as set forth in the Charter of our Nominating and Corporate Governance Committee and in our Corporate Governance Guidelines.
During the fiscal year ended December 31, 2006, the Board of Directors held eighteen meetings and executed six unanimous written consents in lieu of meetings. Each director attended at least 75% of all Board of Directors and applicable Committee meetings. We do not have a policy with regard to board members attendance at annual meetings. With the exception of Mr. Weiss, all members of the Board attended our 2006 Annual Meeting of Stockholders. Mr. Weiss attended telephonically due to travel delays.
The Board of Directors has created four standing committees: the Audit Committee, the Compensation Committee, the Nominating and Corporate Governance Committee and the Regulatory Compliance Committee. The Board of Directors has adopted a charter for each of the four committees. The charters for each committee and other materials related to corporate governance are available under the Investors section of our website at http://www.watson.com. A copy is also available to stockholders upon request sent to Investor Relations at Watson Pharmaceuticals, Inc., 311 Bonnie Circle, Corona, CA 92880.
The Audit Committee
We have an Audit Committee composed of Catherine M. Klema, Ronald R. Taylor, Andrew L. Turner and Fred G. Weiss. Mr. Weiss serves as the Chairman of the Audit Committee. All of the members
of the Audit Committee have been determined by the Board of Directors to be independent and meet the audit committee requirements of the NYSE listing standards and the rules and regulations of the SEC. The Board of Directors has determined that all of the current members of the Audit Committee are financial experts within the meaning of the SEC rules, and have accounting or related financial management expertise required under the NYSE listing standards. The functions of the Audit Committee and its activities during fiscal 2006 are described below under the heading Report of the Audit Committee. The Audit Committee is directly responsible for the engagement, compensation and oversight of the work of PricewaterhouseCoopers LLP (including resolution of disagreements between management and PricewaterhouseCoopers LLP regarding financial reporting) for the purpose of preparing or issuing an audit report or related work. During the fiscal year ended December 31, 2006, the Audit Committee met four times and executed three unanimous written consents in lieu of a meeting.
The Board of Directors and Audit Committee will take appropriate action, including reviewing and reassessing the adequacy of the Audit Committee charter annually and periodically, as appropriate, and as conditions dictate.
The Compensation Committee
We have a Compensation Committee composed of Catherine M. Klema, Ronald R. Taylor and Fred G. Weiss. Mr. Taylor serves as the Chairman of the Compensation Committee. All of the members of the Compensation Committee have been determined by the Board of Directors to be independent and meet the independence requirements of the NYSE listing standards. The primary purpose of the Compensation Committee is to review, approve and evaluate director and senior executive compensation plans, policies and programs for us. The Compensation Committee has engaged Towers Perrin, an independent compensation consulting firm, to advise the Compensation Committee on an ongoing basis. The consultant reports directly to the Compensation Committee and the Compensation Committee retains the right to terminate or replace the consultant at any time. The consultant conducts an annual review of our total compensation program for our executive officers and advises the Compensation Committee on such compensation matters as are requested by the Compensation Committee. Additional information on the Compensation Committees processes and procedures for consideration of executive compensation, including the role of the chief executive officer, are addressed in the Compensation Discussion and Analysis on page 11. The Compensation Committee met ten times and executed one unanimous written consent in lieu of a meeting during the fiscal year ended December 31, 2006.
The Nominating and Corporate Governance Committee
We have a Nominating and Corporate Governance Committee composed of Ronald R. Taylor, Andrew L. Turner and Fred G. Weiss. Mr. Turner serves as the Chairman of the Nominating and Corporate Governance Committee. All of the members of the Nominating and Corporate Governance Committee have been determined by the Board of Directors to be independent and meet the independence requirements of the NYSE listing standards. The key functions of the Nominating and Corporate Governance Committee are to identify and present qualified candidates to the Board of Directors for election or reelection as directors of the Board and Board of Directors committees, ensure that the size and composition of the Board of Directors, its committees, and our Charter and Bylaws are structured in a way that best serves our practices and objectives, develop and recommend to the Board of Directors a set of corporate governance guidelines and principles and periodically review and recommend changes to such guidelines and principles as deemed appropriate, and oversee the evaluation of the Board of Directors and senior management. The Nominating and Corporate Governance Committee met two times during the fiscal year ended December 31, 2006.
The Regulatory Compliance Committee
We have a Regulatory Compliance Committee composed of Michael J. Fedida, Albert F. Hummel, Michel J. Feldman and Jack Michelson. Mr. Michelson serves as the Chairman of the Regulatory Compliance Committee. The primary purpose of the Regulatory Compliance Committee is to assist the Board of Directors with the Boards oversight responsibilities regarding our compliance with applicable regulatory requirements related to product safety and quality and environmental, health and safety matters. The Regulatory Compliance Committee met four times during the fiscal year ended December 31, 2006.
The Compensation Committee (for purposes of this analysis, the Committee) of our Board of Directors is responsible for establishing, implementing and continually monitoring our adherence with our compensation philosophy for our executive officers, including Dr. Allen Chao, our chief executive officer. The Committee ensures that the total compensation paid to our executive officers is fair, reasonable and competitive. The Committee also administers the Amendment and Restatement of the 2001 Incentive Award Plan of Watson Pharmaceuticals, Inc. (the Incentive Award Plan).
Throughout this proxy statement, the individuals who served as our chief executive officer and chief financial officer during fiscal 2006, as well as the other individuals included in the Summary Compensation Table on page 20, are referred to as the named executive officers.
The Committee believes that its primary objectives with respect to named executive officer compensation are to:
· tie our named executive officers total compensation to the achievement of measurable individual and corporate performance goals;
· align our named executive officers incentives with the creation of stockholder value; and
· attract and retain the most talented and dedicated executives possible.
To these ends the Committee believes that the most effective executive compensation program is one that (i) links a substantial portion of an executives total compensation to the achievement of specific individual and corporate annual, long-term and strategic goals and (ii) provides such compensation in a mix of both cash and equity-based compensation such that our executives continue to have the creation of short- and long-term stockholder value as a primary objective. The Committee evaluates individual and corporate performance and determines the proper mix of executive total compensation with the goal of setting executive total compensation at levels the Committee believes are competitive relative to the total compensation paid to similarly situated executives of our peer companies.
Our chief executive officer annually reviews the performance of each named executive officer (other than the chief executive officer, whose performance is reviewed by the Committee). The Committee considers the recommendations of our chief executive officer in determining the base salaries, adjustments to base salaries, cash incentive awards and equity-based awards for our named executive officers, other than the chief executive officer. The conclusions reached and recommendations based on these reviews, including with respect to salary adjustments and annual award amounts, are presented to the Committee. The Committee may exercise its discretion in modifying any recommended adjustments or awards to executives.
The Committee has structured our annual and long-term incentive-based cash and non-cash executive compensation to motivate our executives to achieve our business goals and reward our named executive officers for achieving such goals. In furtherance of achieving its objectives, the Committee has engaged Towers Perrin, an independent global professional services consulting firm, to conduct an annual review of
its total compensation program for our chief executive officer as well as for our named executive officers. Towers Perrin provides the Committee with relevant market data and alternatives to consider when making compensation decisions for our chief executive officer and on the recommendations being made for named executive officers other than our chief executive officer.
In making compensation decisions, the Committee compares elements of total compensation against similarly situated executives of our peer group companies, as discussed more fully below. Certain members of the peer group reviewed are considered to be very similar to us in terms of market capitalization, number of employees, and overall prospects for short- and long-term growth. The compensation paid by these peer group companies to their executive officers is given greater weight in setting base salaries for our named executive officers.
We compete with many larger companies for top executive-level talent. As such, the Committee generally sets target direct compensation (salary, bonus and equity) for our named executive officers at the 50th percentile of compensation paid to similarly situated executives of our peer group companies. The Committee does not rely exclusively on statistical compilations and may vary on a case-by-case basis from our compensation target objectives as dictated by the experience of the individual and market factors.
In 2006 our consultant conducted a 2005 competitive pay assessment, to assist us in determining compensation for fiscal 2006. The consultant used three sources of competitive pay data in its analysis presented to the Compensation Committee: (i) a pharmaceutical industry database including many of the major pharmaceutical and biotechnology companies; (ii) survey cut of companies with over $1 billion in annual revenues and (iii) benchmarks from proxy-reported positions in 11 selected proxy peer group companies. The peer group companies consisted of: Amgen Inc., Forest Laboratories, Inc., Allergan, Inc., Alpharma Inc., Barr Pharmaceuticals, Inc., King Pharmaceutical, Inc., Mylan Laboratories Inc., Perrigo Company, Biovail Corporation, Andrx Corporation and Valeant Pharmaceuticals International. Based on our 2005 compensation, the consultant found that, on average, the survey data comparisons indicated that relative to market 50th percentile (excluding our chief executive officer):
· our base salaries and target total cash compensation were within the range of competitive practice;
· our actual total cash compensation was slightly below the range of competitive practice; and
· our actual and target total director compensation was below the range of competitive practice.
The consultant recommended, among other things, that we (i) increase our standard merit based salary increase from 4% to 4.5% and (ii) increase equity grant levels in order to bring our long-term incentive and total director compensation values into a closer relationship with market 50th percentile.
Our acquisition of Andrx Corporation, completed on November 3, 2006, will impact our 2006 competitive market analysis by adding approximately $1 billion to our revenues and as a result our executives compensation may need to be adjusted to reflect such acquisition and the new market competitive pay rates.
A significant percentage of total compensation is allocated to incentives as a result of our compensation objectives outlined above. We have no pre-established policy or target for the allocation between either cash and non-cash or short-term and long-term incentive compensation. Rather, the Committee reviews many factors, including information provided by Towers Perrin, to determine the appropriate level and mix of incentive compensation.
For the fiscal year ended December 31, 2006, the principal components of compensation for our named executive officers were:
· base salary;
· annual cash incentive awards that recognize individual and Company performance and are tied to measurable short-term business objectives and corporate financial goals;
· long-term equity incentive compensation; and
· perquisites and other personal benefits.
A significant component of our named executive officers compensation is base salary, which provides our named executive officers with a degree of financial certainty and stability. In setting base salaries for our named executive officers the Committee takes into account a variety of factors, including:
· level of responsibility;
· individual and team performance;
· internal review of the named executive officers compensation, individually and relative to other officers and relative to similarly situated executives at the Peer Group companies;
· general levels of market and Peer Group salary increases; and
· our overall financial results.
With regard to individual and team performance, the Committee relies to a large extent on our chief executive officers evaluation of each other named executive officers individual performance. Salary levels are typically considered annually as part of our performance review process as well as upon a promotion or other change in job responsibility. Merit based increases to salaries of our named executive officers are based on the Committees and the chief executive officers assessment of the individuals performance.
In June 2006, in accordance with the recommendations of the consultant, the Compensation Committee approved increases in base salaries that ranged from 2% to 4.66% for our named executive officers, other than our chief executive officer. Dr. Chaos salary was not increased from its 2005 rate. In November 2006 the Compensation Committee, upon the recommendation of our chief executive officer, approved a $25,308 increase in Mr. Buchens base salary and an additional payment of $10,000 per month to Mr. Joyce in addition to his current base salary until such time as a permanent chief financial officer is named or until such time as Mr. Joyce is no longer acting as our interim principal financial officer.
Annual Cash Incentive Awards
The purpose of our annual cash incentive plan is to provide cash compensation on an annual basis that is at-risk and contingent on the achievement of annual individual, business and strategic objectives. These cash incentives are intended to link a substantial portion of executive compensation to our performance and provide executive officers with a competitive level of compensation when they achieve their objectives.
Annual Cash Incentive Awards for our Chief Executive Officer.
On an annual basis, the Committee adopts a formula for determining whether to award a cash bonus to our chief executive officer based on our company and his individual performance during the fiscal year.
The formula is not contained in a formal written plan. In fiscal year 2006, Allen Chao, Ph.D., our Chairman of the Board, President and Chief Executive Officer, was eligible to receive a targeted cash bonus of up to $1,200,000. Of this amount, $800,000 of Dr. Chaos available bonus was based upon our achieving target operating cash flow (two thirds of the eligible target amount) and target gross profit (one third of the eligible target amount). The remaining $400,000 of Dr. Chaos available bonus was at the discretion of the Committee, taking into account Dr. Chaos individual performance as follows:
· success in developing and executing plans acceptable to the Committee for retaining key executives, recruiting key executives as necessary, and further developing a succession plan for key executives;
· success in continuing to implement our quality improvement initiatives designed to enhance and improve our quality systems;
· success in implementing our strategic action plan; and
· such other relevant factors as the Committee determines, in its sole discretion.
Dr. Chaos operating cash flow and gross profit targets were the same as those set under our 2006 Senior Executive Compensation Program for our other named executive officers in our Shared Services business group, which includes all of our named executive officers, except for Edward F. Heimers, our Executive Vice President, President of Brand Division and Dr. Charles Ebert, our Senior Vice President, Research and Development.
The Compensation Committee determined that a bonus of $773,000 would be awarded to Dr. Chao based on our 2006 operating cash flow and gross profit, and a discretionary bonus of $220,000 would be awarded to Dr. Chao based on the factors discussed above.
For 2007, the Compensation Committee approved a similar bonus program providing for a cash target bonus of up to $1,200,000. Of this amount, up to $800,000 targeted amount will be based upon us achieving a target earnings before interest, taxes, depreciation and amortization, as adjusted by certain charges, gains and losses, and up to $400,000 will be at the discretion of the Committee based on factors similar to those enumerated above for 2006.
Annual Cash Incentive Awards for our Named Executive Officers other than our Chief Executive Officer.
Each year, the Committee adopts a program that provides guidelines pursuant to which it calculates the annual cash incentive awards available to our named executive officers, subject to the Committees oversight and modification. The Committee believes that our annual incentive plan provides our named executive officers with a team incentive to both enhance our financial performance and perform at the highest level. The terms of these programs are not contained in a formal written plan.
Pursuant to our 2006 Senior Executive Compensation Program and the terms of their employment agreements, our named executive officers (other than our chief executive officer) are eligible to receive annual cash incentive awards ranging from twenty five percent (25%) to fifty percent (50%) of his or her base salary, depending on his or her position with us. For 2006, the Committee approved an annual incentive target bonus of forty five percent (45%) of base salary for our presidents, including Edward F. Heimers, our Executive Vice President, President Brand Division, forty percent (40%) for our executive vice presidents, including Charles P. Slacik, our Former Executive Vice President and Chief Financial Officer, thirty five percent (35%) of base salary for our senior vice presidents, including David A. Buchen, our Senior Vice President, General Counsel and Secretary, and Charles D. Ebert, our Senior Vice President, Research and Development and twenty five percent (25%) for R. Todd Joyce, our Vice President, Corporate Controller and Treasurer.
Each named executive officers (other than our chief executive officer) annual cash incentive award for 2006 may range from zero percent (0%) to one hundred fifty percent (150%) of his or her target bonus, based upon:
· with respect to Mr. Buchen and Mr. Joyce, who are in the Shared Services business group, forty percent (40%) of the cash incentive award is based upon our actual performance against the target operating cash flow, twenty percent (20%) of the cash incentive award is based upon our actual performance against the target gross profit and forty percent (40%) of the cash incentive award is based upon the executives departmental performance; and
· with respect to Mr. Heimers and Dr. Ebert, who are in our Brand Division, fifty percent (50%) of the cash incentive award is based upon our actual performance against target operating cash flow and fifty percent (50%) of the cash incentive award is based on the contribution and gross profit of their division.
Our chief executive officer may recommend that a named executive officers annual cash incentive award be increased or decreased based on such officers individual performance for the year. The calculations of the cash incentive awards and the recommendation of our chief executive officer are submitted to the Committee for consideration and approval. The Committee determines whether and to what extent cash incentive awards will be paid for a fiscal year after the end of that fiscal year.
Generally, we set our annual financial performance targets at or above our annual budget targets. In making its annual determination of our target levels, the Committee considers the specific circumstances we may face during the coming year and how such circumstances may affect our performance. Generally, the Committee sets our annual financial performance targets such that the relative difficulty of achieving the target level is consistent from year to year.
Awards made to our named executive officers pursuant to our 2006 Senior Executive Compensation Program on February 26, 2007 for performance in 2006 are reflected in column (g) of the Summary Compensation Table on page 20.
Long-Term Equity Incentives
In accordance with our Incentive Award Plan, our long term equity incentive program is a performance based program that provides for discretionary equity awards of restricted stock, stock appreciation rights, dividend equivalents, restricted stock units, deferred stock, stock payment awards and stock options to our named executive officers. Prior to 2005, our long-term equity compensation awards were generally stock option awards. Since 2005, our long-term equity compensation awards have taken the form of a mix of restricted stock grants and stock option awards. Restricted stock awards have comprised approximately 50% of the total value of our typical long-term equity awards, with stock options accounting for the remaining value, based on the Black-Scholes pricing model for stock option valuation and the fair market value of our common stock for restricted stock valuations. We believe that a long-term incentive program that includes a mix of restricted stock grants and stock option awards provides our executive officers with a balanced equity compensation arrangement. The Compensation Committee determines the mix of long-term incentive awards after considering cost and dilution impact, market trends relating to long-term incentive compensation and other relevant factors. The Compensation Committee may in the future adjust this mix of award types or approve different awards types as part of our overall long-term equity incentive program.
Our named executive officers generally receive grants of restricted stock and stock options when they join us, upon promotions and generally thereafter as part of the Compensation Committees determination of the executive officers annual total compensation on an annual basis on cycle dates scheduled in advance. All equity awards are approved before or on the date of grant. In determining the size of equity-
based grants, the Committee considers the number of shares available under our Incentive Award Plan, the potential dilutive impact of such grants, the individuals position with us, the appropriate allocation of such grants based on individual and corporate performance, and the level of grants awarded by our peers.
While we do not require our employees to maintain any minimum ownership interest in our stock, the Committee believes that equity-based awards provide a valuable tool for aligning the interests of management with our stockholders and focusing managements attention on our long-term growth. In addition, the Committee believes that equity-based awards are essential to attract and retain the talented professionals and managers needed for our continued success.
Our restricted stock awards generally have scheduled vesting dates on the second and fourth anniversaries of the grant date. On each of those dates 50% of the total award vests, contingent on the continued employment of the named executive officer with us. In the future, the Committee may adjust our restricted stock vesting schedule and may make the vesting of restricted stock awards contingent on our named executive officers achieving certain performance goals.
We award stock options with an exercise price equal to the last closing price of our common stock on the NYSE prior to the award grant, in accordance with the terms of our 2001 Incentive Award Plan. If our stockholders approve the proposed amendment and restatement of this plan the exercise price will equal the closing price of our common stock on the date of grant. These options generally have a term of 10 years and generally are subject to a four-year ratable vesting schedule. Vesting rights cease upon termination of employment and exercise rights generally cease ninety (90) days after the date of termination, except in the case of death (subject to a one year limitation), disability or retirement. In the case of vice-presidents who have been employed by us for more than five (5) continuous years, exercise rights cease two (2) years after the vice-presidents termination of employment for awards made on or after July 25, 2005. Prior to the exercise of an option, the holder has no rights as a stockholder with respect to the shares subject to such option, including voting rights and the right to receive dividends or dividend equivalents.
We believe the term and vesting schedule of our stock options, and the vesting schedule for our restricted stock awards, provide additional incentive to management to focus on long-term growth and market performance of our stock.
Perquisites and Other Personal Benefits
We provide our named executive officers with perquisites and other personal benefits that we and the Committee believe are reasonable and consistent with our overall compensation program and better enable us to attract and retain superior employees for key positions. The Compensation Committee believes these benefits and perquisites provide a more tangible incentive than an equivalent amount of cash compensation. The Committee periodically reviews the levels of perquisites and other personal benefits provided to our named executive officers.
The named executive officers are provided with an annual car allowance, financial planning assistance and participation in the plans and programs described below under the heading Other BenefitsGenerally Available Benefits. Upon relocation, named executive officers may receive, at the discretion of the Committee, a relocation allowance paid in installments.
Attributed costs of the personal benefits described above for the named executive officers for the fiscal year ended December 31, 2006, are included in column (i) of the Summary Compensation Table on page 20.
Generally Available Benefits
We provide the following benefits to our named executive officers generally on the same basis as the benefits provided to all employees:
· Health, dental and vision insurance;
· Life insurance;
· Short- and long-term disability;
· Educational assistance; and
· 401(k) plan.
These benefits are consistent with those offered by our peer companies.
Executive Compensation Deferral Program
Our named executive officers, in addition to certain other U.S.-based eligible management level employees, are entitled to participate in our Executive Deferred Compensation Plan. Pursuant to our Executive Deferred Compensation Plan, eligible employees may defer from 1% to 80% of their salary and from 1% to 80% of their annual cash incentive award, if any.
We match 50% of the first 2% an employee defers in accordance with this Plan. Vesting of the matched amount is based on an employees years of service with us. If an employee has been with us for less than one year, none of the matched amount is vested. Vesting thereafter occurs 33% per year, such that employees who have been with us for more than 3 years are 100% vested in the matched amount.
All contributions to our Executive Deferred Compensation Plan have a guaranteed fixed interest rate of return. This guaranteed rate is adjusted annually based on the Prime interest rate published in the Wall Street Journal on the first business day of December of each year for the upcoming plan year. In 2006 the guaranteed interest rate was 7%. In 2007 the guaranteed interest rate is 8.25%.
Our Executive Deferred Compensation Plan is discussed in further detail under the heading Nonqualified Deferred Compensation on page 27.
We may terminate each of our named executive officers employment at any time with or without cause, or by reason of death or disability. Additionally, each named executive officer may voluntarily resign at any time with or without good reason. Pursuant to each of our named executive officers respective employment agreements, in the event of termination of employment without cause, or if the named executive officer resigns for good reason, we will provide the named executive officer with severance compensation and benefits, including a lump sum severance payment (based on two times salary and bonus), continued group health insurance benefits for two years and outplacement services for certain periods subsequent to the executive officers termination. The severance benefits are designed to retain our executive officers by providing them with security in the event of a termination of employment without cause or resignation for good reason.
In the event we experience a change of control, and if a named executive officer is terminated without cause or a named executive officer resigns for good reason within ninety (90) days prior to or twenty-four (24) months following such change of control, we generally provide to each such named executive officer the severance benefits discussed above plus any unvested options and restricted stock held by the named executive officer will vest in full as of the date of termination. Each named executive officer is also entitled to receive a gross-up payment to compensate for any excise tax imposed on the named executive officer under the Internal Revenue Code. These agreements are designed to retain our executive officers and provide continuity of management in the event of an actual or threatened change in the control and to ensure that our executive officers compensation and benefits expectations would be satisfied in such event. The benefits are only payable upon a double trigger, which we believe is the most reasonable approach and does not result in any windfall based on the closing of a transaction. Additional information regarding applicable payments and benefits provided under our agreements to our named executive officers is provided under the heading Potential Payments Upon Termination or Change-in-Control on page 28.
Policy on Deductibility of Executive Compensation
Section 162(m) of the Internal Revenue Code provides a $1,000,000 deduction limit on compensation paid to the reporting executives of publicly held corporations, unless the compensation qualifies as performance based compensation based on certain performance, disclosure, stockholder approval and other requirements being met. The options granted under the Incentive Award Plan generally comply with these performance-based compensation requirements. We have not historically designed our restricted stock awards and the cash bonus programs to comply with the performance-based compensation requirements.
We periodically review the potential consequences of Section 162(m) and may structure the performance-based portion of our executive compensation to comply with certain exemptions of Section 162(m). However, we reserve the right to use our judgment to authorize compensation payments that do not comply with the exemptions of Section 162(m) when we believe that such payments are appropriate and in the best interests of our stockholders.
Nonqualified Deferred Compensation
Section 409A of the Internal Revenue Code requires that nonqualified deferred compensation be deferred and paid under plans or arrangements that satisfy the requirements of the statute with respect to the timing of deferral elections, timing of payments and certain other matters. Failure to satisfy these requirements can expose employees and other service providers to accelerated income tax liabilities and penalty taxes and interest on their vested compensation under such plans. Accordingly, as a general matter, it is our intention to design and administer our compensation and benefits plans and arrangements for all of our employees and other service providers, including the named executive officers, so that they are either exempt from, or satisfy the requirements of, Section 409A. With respect to our compensation and benefit plans that are subject to Section 409A, in accordance Section 409A and regulatory guidance issued by the IRS, we are currently operating such plans in compliance with Section 409A based upon our good faith, reasonable interpretation of the statute and the IRSs regulatory guidance.
Change of Control Tax Gross-Ups
Sections 280G and 4999 of the Internal Revenue Code impose certain adverse tax consequences on compensation treated as excess parachute payments. An executive is treated as having received excess parachute payments if he receives compensatory payments or benefits that are contingent on a change in control, and the aggregate amount of such payments and benefits equal or exceeds three times the
executives base amount. The portion of the payments and benefits in excess of one times base amount are treated as excess parachute payments and are subject to a 20% excise tax, in addition to any applicable federal income and employment taxes. Also, our compensation deduction in respect of the executives excess parachute payments is disallowed. If we were to be subject to a change of control, certain amounts received by our executives (for example, amounts attributable to the accelerated vesting of stock options) could be excess parachute payments under Sections 280G and 4999 of the Internal Revenue Code. As discussed above under Potential Payments Upon Termination or Change-in-Control, we provide our executive officers with tax gross up payments in event of a change of control.
Accounting for Share-Based Compensation
Beginning on January 1, 2006, we began accounting for our share-based payments in accordance with the requirements of Financial Accounting Standards Board Statement of Financial Accounting Standards No. 123 (revised 2004).
The Compensation Committee of Watson has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K with management and, based on such review and discussions, the Compensation Committee recommended to the Board that the Compensation Discussion and Analysis be included in this proxy statement and our Annual Report on Form 10-K for the fiscal year ended December 31, 2006.
Submitted on March 30, 2007, by the members of the Compensation Committee of the Board of Directors.
The Compensation Committee was composed of Catherine M. Klema, Ronald R. Taylor and Fred G. Weiss during the fiscal year ended December 31, 2006. None of the members of the Compensation Committee is our employee. In addition, none of these individuals serves as a member of our board of directors or on the compensation committee of any company that has an executive officer serving on our board of directors or its compensation committee.
The following table sets forth certain information regarding the annual and long-term compensation for services rendered to us in all capacities for the fiscal year ended December 31, 2006 of those persons who were, at any time during the year, (i) our principal executive officer, (ii) our interim principal financial officer and our former principal financial officer, and (iii) the three most highly compensated executive officers other than the principal executive officer and principal financial officer (each, a named executive officer and collectively, the named executive officers). For purposes of determining the three most highly compensated executive officers, the amounts shown in column (h) below were excluded.
(1) Salary for 2006 includes annual salary and cash paid in lieu of vacation. Amounts include cash salary earned but deferred, as applicable, under our deferred compensation plans. Participants in these plans may defer receipt of portions of salary and/or annual non-equity incentive plan compensation earned for the year into Watsons Executive Deferred Compensation Plan. Watsons Executive Deferred Compensation Plan is discussed in further detail above under the heading Compensation Discussion and Analysis on page 11 and below under the heading Nonqualified Deferred Compensation on page 27.
(2) Dr. Chao, our President and Chief Executive Officer, received a discretionary bonus for his individual performance as discussed in more detail under Annual Cash Incentive Awards above under the heading Compensation Discussion and Analysis on page 11.
(3) Stock awards represent the compensation expense recognized by us for financial statement reporting purposes for the fiscal year ended December 31, 2006 in accordance with Financial Accounting Standards Board Statement of Financial Accounting Standards No. 123 (revised 2004), Share Based Payment, as amended (SFAS 123(R)) for restricted stock awards granted in and prior to 2006. We recognize the compensation expense associated with the fair value of restricted stock awards granted in and prior to 2006 over the period restrictions are eliminated for those awards. Fair value is based on the fair market value on the date of grant. For additional discussion on the determination of share-based compensation expense, see Share-Based Compensation in Note 2 and Note 3 to the audited consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2006.
(4) Option awards represent the compensation expense recognized by us for financial statement reporting purposes for the fiscal year ended December 31, 2006 in accordance with SFAS 123(R) for stock options granted in and prior to 2006. Upon the implementation of SFAS 123(R) on January 1, 2006, we recognize the compensation expense associated with the fair value of stock options granted in and prior to 2006 over the vesting term of those awards. Grant date fair value is based on the Black-Scholes option pricing model on the date of grant. For additional discussion on the valuation assumptions used in determining the compensation expense, see Share-Based Compensation in Note 2 and Note 3 to the audited consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2006.
(5) Non-equity incentive plan compensation represents payment for 2006 performance made in March 2007 under our annual cash incentives awards programs. For additional discussion on our annual cash incentive award programs, see Annual Cash Incentive Awards above under the heading Compensation Discussion and Analysis on page 11 and below under the heading Grants of Plan-Based Awards on page 22.
(6) Amounts reflect the amount of interest paid on deferred compensation balances that is considered to be earned at above-market interest rates. In 2006 the guaranteed interest rate was 7%. Interest on deferred compensation is deemed to be above-market if it exceeds 120% of the applicable federal long-term rate. Watsons Executive Deferred Compensation Plan is discussed in further detail above under the heading Compensation Discussion and Analysis on page 11 and below under the heading Nonqualified Deferred Compensation on page 27.
(7) All other compensation includes a car allowance, registrant contributions under our 401(k) plan and deferred compensation plan, group life insurance coverage and other perquisites as follows:
(8) Mr. Slacik resigned as our Chief Financial Officer effective October 20, 2007. In connection with his termination, unvested stock options and restricted stock awards for which restrictions had not been removed were forfeited. Vested stock options were forfeited effective January 20, 2007.
The following table provides information about equity and non-equity awards granted to named executive officers for 2006:
(1) We provide performance-based annual cash incentive awards to our chief executive officer under a compensation plan administered by the Compensation Committee and for our executive officers under the 2006 Senior Executive Compensation Program. These columns indicate the ranges of possible payouts targeted for 2006 performance under the applicable annual cash incentive award plan for each named executive officer listed above. Actual cash incentive awards paid in 2007 for 2006 performance are set forth in columns (d) and (g) above in the Summary Compensation Table. For additional discussion on our annual cash incentive award programs, see Annual Cash Incentive Awards above under the heading Compensation Discussion and Analysis on page 11.
(2) Grant date fair value of restricted stock grants is based on the fair market value of our common stock on the respective grant dates in accordance with SFAS 123(R). The weighted average per share grant date fair value of all named executive officer restricted stock grants was $25.64 except for Dr. Chaos restricted stock grant which was $28.77 per weighted average share. The grant date fair value of stock option grants is based on the Black-Scholes option pricing model on the date of grant, in accordance with SFAS 123(R). The weighted average per share fair value of all named executive officer stock option grants was $8.62 except for Dr. Chaos stock option grant which was $9.68 per weighted average share. For additional discussion on the accounting for restricted stock awards, see Share-Based Compensation in Note 2 and Note 3 to the audited consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2006. For additional discussion on the valuation assumptions used in determining the grant date fair value and the accounting for stock options, see Share-Based Compensation in Note 2 and Note 3 to the audited consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2006.
(3) The restricted stock awards granted to Dr. Chao on March 24, 2006 were authorized in connection with Dr. Chaos performance during the year ended December 31, 2005 under our Incentive Award Plan. Restrictions lapse equally on the restricted stock grants on the second and fourth anniversaries of the grant date.
(4) The stock option awards granted to Dr. Chao on March 24, 2006 were also authorized in connection with Dr. Chaos performance during the year ended December 31, 2005 under our Incentive Award Plan. The option grant has a ten year term and become exercisable in four equal annual installments commencing March 24, 2007. Once exercisable, the options remain exercisable for the shorter of the original term of the options or two years after cessation as our employee.
(5) The restricted stock awards granted on September 1, 2006 were authorized in connection with the annual long term equity incentive grant under our Incentive Award Plan. Restrictions lapse equally on the restricted stock grants on the second and fourth anniversaries of the grant date.
(6) The stock option awards granted on September 1, 2006 were authorized in connection with the annual long term equity incentive grant under our Incentive Award Plan. The option grant has a ten year term and become exercisable in four equal annual installments commencing September 1, 2007.
(7) In connection with his resignation, Mr. Slaciks 2006 stock option and restricted stock awards were forfeited effective October 20, 2006.
The following table sets forth the outstanding equity awards for our named executive officers at December 31, 2006: