<PAGE> 1
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:
<TABLE>
<S> <C>
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the Commission
[X] Definitive Proxy Statement Only (as permitted by Rule 14a-6(e)(2))
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to sec. 240.14a-11(c) or sec. 240.14a-12
</TABLE>
ALLERGAN, 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] Fee not 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:
------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(4) Date Filed:
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<PAGE> 2
LOGO
2525 DUPONT DRIVE, IRVINE, CA 92612 (714) 246-4500
March 23, 1999
Dear Stockholder:
You are cordially invited to attend the annual meeting of stockholders to
be held at the corporate headquarters of Allergan, Inc., 2525 Dupont Drive,
Irvine, California, on Tuesday, April 27, 1999 at 10:00 A.M. We hope you will be
present to hear management's report to stockholders.
The attached notice of meeting and proxy statement describe the matters to
be acted upon. If you plan to attend the meeting in person, please mark the
designated box on the proxy card. Retain the bottom half of the proxy card as
your admission card and present the card upon entering the meeting.
Whether or not you plan to attend personally, and regardless of the number
of shares you own, it is important that your shares be represented at the
meeting. Accordingly, we urge you to complete the enclosed proxy and return it
to our vote tabulators promptly in the postage prepaid envelope provided. If you
do attend the meeting and wish to vote in person, you may withdraw your proxy at
that time.
<TABLE>
<S> <C>
Herbert W. Boyer David E.I. Pyott
/s/ HERBERT W. BOYER /s/ DAVID E.I. PYOTT
Chairman of the Board President and
Chief Executive Officer
</TABLE>
<PAGE> 3
LOGO
2525 Dupont Drive, Irvine, CA 92612
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
April 27, 1999
TO OUR STOCKHOLDERS:
The annual meeting of stockholders of Allergan, Inc., a Delaware
corporation, will be held at the corporate headquarters of Allergan, Inc., 2525
Dupont Drive, Irvine, California, on Tuesday, April 27, 1999 at 10:00 A.M. for
the following purposes:
1. To elect four Class I directors to serve for three-year terms ending in
2002 and until their successors are elected and qualified.
2. To approve an amendment to the Company's Amended and Restated 1989
Incentive Compensation Plan to authorize an increase in the maximum
number of shares with respect to which options may be granted to an
executive officer in any calendar year from 200,000 to 400,000.
3. To approve the Company's Executive Bonus Plan, and its performance
objectives and maximum award amount, to enable the Company to meet tax
deductibility requirements of Section 162(m) of the Internal Revenue
Code of 1986, as amended.
4. To transact such other business as may properly come before the meeting
or any adjournment thereof.
The Board of Directors has fixed March 8, 1999 as the record date for
determining the stockholders entitled to notice of and to vote at the meeting
and, consequently, only stockholders of record at the close of business on March
8, 1999 will be entitled to notice of and to vote at the meeting and any
adjournment thereof.
STOCKHOLDERS ARE CORDIALLY INVITED TO ATTEND THE MEETING IN PERSON. Even
though a stockholder may now plan to attend the meeting, he or she is urged to
complete, sign and date the enclosed proxy card and to mail it promptly in the
enclosed postage-paid envelope. Any stockholder present at the meeting may
withdraw his or her proxy and vote personally on each matter brought before the
meeting. Stockholders attending the meeting whose shares are held in the name of
a broker or other nominee should bring with them a proxy or letter from that
firm confirming their ownership of shares.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ FRANCIS R. TUNNEY, JR.
Francis R. Tunney, Jr.
Secretary
March 23, 1999
<PAGE> 4
ALLERGAN, INC.
PROXY STATEMENT
ANNUAL MEETING OF STOCKHOLDERS -- APRIL 27, 1999
INTRODUCTION
The accompanying proxy is solicited by the Board of Directors of Allergan,
Inc. ("Allergan" or the "Company"), 2525 Dupont Drive, Irvine, California 92612
for use at the annual meeting of the Company's stockholders to be held on April
27, 1999, and at any adjournment thereof, pursuant to the accompanying Notice of
Annual Meeting. This proxy statement and the accompanying proxy card are being
mailed to all stockholders on or about March 23, 1999.
The expense of this solicitation will be paid by the Company. In addition
to solicitation by mail, officers and employees of the Company may solicit
proxies by telephone, by facsimile or in person. The Company has retained
Corporate Investor Communications, Inc., a professional soliciting organization,
to aid in the solicitation of proxies to be voted at the annual meeting at an
estimated cost of $6,000 plus out-of-pocket expenses. The Company will also
reimburse brokers, nominees, fiduciaries and other custodians for reasonable
expenses incurred by them in sending proxy soliciting material to the beneficial
owners of Allergan stock.
GENERAL INFORMATION REGARDING
VOTING, CONFIDENTIALITY AND PROXIES
The persons named in the accompanying proxy will vote FOR the election of
the nominees for directors and FOR approval of proposals 2 and 3. The proxy may
be revoked by the stockholder at any time prior to its use by giving notice of
such revocation to the independent vote tabulators. As to any other business
which may properly come before the meeting, the persons named in the
accompanying proxy card will vote in accordance with their best judgment,
although the Company does not presently know of any other business.
Holders of record of the Company's Common Stock at the close of business on
March 8, 1999 are entitled to vote at the meeting. On that date Allergan had
67,129,722 shares of Common Stock outstanding. Each stockholder has one vote per
share on all business to be voted upon at the meeting. A majority of the
outstanding shares will constitute a quorum at the meeting. Abstentions and
broker non-votes are counted for purposes of determining the presence or absence
of a quorum for the transaction of business. Abstentions are counted as if they
were "no" votes in tabulations of the votes cast on proposals presented to
stockholders, whereas broker non-votes are not counted for purposes of
determining whether a proposal has been approved.
It is the Company's policy that all proxies, ballots and voting materials
that identify the particular vote of a stockholder be kept confidential, except
in the following circumstances: (1) to allow the independent election inspectors
to certify the results of the vote; (2) as necessary to meet applicable legal
requirements, including the pursuit or defense of a judicial action; (3) where
the Company concludes in good faith that a bona fide dispute exists as to the
authenticity of one or more proxies, ballots, or votes, or as to the accuracy of
the tabulation of such proxies, ballots, or votes; (4) where a stockholder
expressly requests disclosure or has made a written comment on a proxy card; (5)
where contacting stockholders by the Company is necessary to obtain a quorum,
the names of stockholders who have or have not voted (but not how they voted)
may be disclosed to the Company by the independent election inspectors; (6)
aggregate vote totals may be disclosed to the Company from time to time and
publicly announced at the meeting of stockholders at which they are relevant;
and (7) in the event of any solicitation of proxies or written consents with
respect to any of the securities of the Company by a person other than the
Company of which solicitation the Company has actual notice.
<PAGE> 5
ELECTION OF DIRECTORS
PROPOSAL 1
The Company's Restated Certificate of Incorporation provides for three
classes of directors, each class consisting, as nearly as may be possible, of
one third of the whole number of the Board of Directors. At each annual meeting
the directors elected by stockholders to succeed directors whose terms are
expiring are identified as being of the same class as those directors they
succeed and are elected for a term to expire at the third annual meeting of
stockholders after their election and until their successors are duly elected
and qualified. The Board of Directors elects directors to fill vacancies on the
Board, as they occur, as well as newly created directorships. A director elected
to fill a vacancy is elected to the same class as the director he or she
succeeds, and a director elected to fill a newly created directorship holds
office until the next election by the stockholders of the class to which such
director is elected. The Board of Directors currently consists of 12 directors
and currently four each serve as Class I, Class II and Class III directors.
UNLESS OTHERWISE DIRECTED IN THE PROXY, THE PERSONS NAMED IN THE
ACCOMPANYING PROXY INTEND TO VOTE THE SHARES REPRESENTED BY THE PROXY FOR THE
ELECTION AS DIRECTORS OF THE FOUR NOMINEES NAMED BELOW, ALL OF WHOM ARE, AT
PRESENT, CLASS I DIRECTORS OF THE COMPANY.
Directors are to be elected by a plurality of the votes cast at the meeting
in person or by proxy by the holders of shares entitled to vote in the election.
The Board of Directors is informed that all the nominees are willing to serve as
directors, but if any of them should decline or be unable to act as a director,
the persons named in the proxy will vote for such substitute nominee or nominees
as may be designated by the Board of Directors unless the Board reduces the
number of directors accordingly.
NOMINEES FOR DIRECTORS
CLASS I -- TERM EXPIRES 2002:
LESTER J. KAPLAN, PH.D., 48, has been Corporate Vice President and
President, Research and Development and Global BOTOX(R) since May 1998 and had
been Corporate Vice President, Science and Technology since July of 1996. From
1992 until 1996, he was Corporate Vice President, Research and Development. He
had been Senior Vice President, Pharmaceutical Research and Development since
1991 and Senior Vice President, Research and Development since 1989. Dr. Kaplan
is a member of the Board of Directors of ACADIA Pharmaceuticals, Inc. and
Allergan Specialty Therapeutics, Inc. and is an Advisory Board Member to the
Pediatric Cancer Research Foundation (PCRF) and to Healthcare Ventures. He first
joined the Company in 1983 and was elected to the Board in 1994 and is a member
of the Finance Committee and the Science and Technology Committee.
KAREN R. OSAR, 49, has been Vice President and Treasurer of Tenneco Inc., a
packaging and auto parts manufacturer, since 1994. Prior thereto, she served 19
years with J.P. Morgan & Company, where she held a variety of positions
including Managing Director in the investment banking group. She is a member of
the Board of Trustees of Manhattanville College in Purchase, New York and a
member of the Board of Directors of BNY Hamilton Funds, a mutual fund family
advised by The Bank of New York. Ms. Osar was elected to the Board in 1998 and
is a member of the Organization and Compensation Committee and the Finance
Committee.
LOUIS T. ROSSO, 65, is Chairman Emeritus of Beckman Coulter, Inc.
("Beckman"), a manufacturer of laboratory instruments, and had been its Chairman
of the Board until his retirement from the Board of Beckman in February 1999. He
served as Chief Executive Officer from 1988, when Beckman Instruments, Inc.
again became a publicly held company, until his retirement as a full-time
employee in September 1998. He also served as President of Beckman from 1982
until 1993, and as Vice President of SmithKline Beckman Corporation from 1982
until 1989. He is a director of American Health Properties, Inc. and is a member
of the Board of Trustees of the St. Joseph Heritage Healthcare Foundation and
the Keck Graduate Institute of
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Applied Life Sciences at the Claremont Colleges. Mr. Rosso was elected to the
Board in 1989 and is Chairman of the Board's Audit Committee and a member of the
Finance Committee.
LEONARD D. SCHAEFFER, 53, has been Chairman of the Board of Blue Cross of
California, a health insurance organization, since 1989 and Chief Executive
Officer since 1986. He has also been Chairman of the Board and Chief Executive
Officer of WellPoint Health Networks Inc., a New York Stock Exchange listed
managed health care company, since 1992. Mr. Schaeffer is a former Administrator
of the U.S. Health Care Financing Administration (HCFA). He is Chairman of the
Board of the National Health Foundation and the National Institute for Health
Care Management. Mr. Schaeffer was elected to the Board in 1993 and is a member
of the Audit Committee and the Finance Committee.
DIRECTORS CONTINUING IN OFFICE
CLASS II -- TERM EXPIRES 2000:
HERBERT W. BOYER, PH.D., 62, is a founder of Genentech, Inc., a
biotechnology company, has been a director of Genentech since 1976 and is a
consultant to Genentech. He served as Vice President of Genentech from 1976 to
1991. Dr. Boyer, a Professor of Biochemistry at the University of California at
San Francisco from 1976 to 1991, demonstrated the usefulness of recombinant DNA
technology to produce medicines economically, which laid the groundwork for
Genentech's development. Dr. Boyer received the 1993 Helmut Horten Research
Award. He also received the National Medal of Science from President Bush in
1990, the National Medal of Technology in 1989 and the Albert Lasker Basic
Medical Research Award in 1980. He is an elected member of the National Academy
of Sciences and a Fellow in the American Academy of Arts and Sciences. Dr. Boyer
was elected Chairman of the Board as of January 2, 1998 and has been a Board
member since 1994. He is the Chairman of the Board's Science and Technology
Committee and is a member of the Organization and Compensation Committee and the
Corporate Governance Committee.
PROFESSOR RONALD M. CRESSWELL, HON. D.SC., F.R.S.E., 64, has been Senior
Vice President and Chief Scientific Officer for Warner-Lambert Company, a
developer and manufacturer of health care and consumer products, since October
1998 and had been Vice President and Chairman, Parke-Davis Pharmaceutical
Research, a Warner-Lambert Company, since 1989. Prior thereto, he served as
Chief Operating Officer of Laporte Industries, an internationally oriented
chemical company, since 1987. Professor Cresswell served 25 years at Burroughs
Wellcome, a London-based international pharmaceutical firm, where he held a
broad range of research and development positions. He is a fellow of the Royal
Society of Edinburgh, the Royal Society of Medicine and the Royal Society of
Arts and Commerce, and a member of the Royal Society of Chemistry, as well as a
member of the American Chemical Society and the New York Academy of Sciences.
Professor Cresswell is a visiting Professor to the Department of Chemistry at
the University of Edinburgh. He is a non-executive Director of the Board of
Nycomed Amersham and is the former Chairman of the Science and Regulatory
Executive Committee of the Pharmaceutical Research and Manufacturers of America.
Professor Cresswell was elected to the Board in 1998 and serves on the Corporate
Governance Committee and the Science and Technology Committee.
WILLIAM R. GRANT, 74, has been Chairman of Galen Associates, Inc., a
venture capital firm in the health care industry, since 1989. From 1987 to 1989
he was Chairman of New York Life International Investment, Inc. Mr. Grant is a
director of Witco Corporation, Datamedic Corp., MiniMed, Inc., Ocular Sciences,
Inc., Vasogen, Inc., and WBN.COM. Mr. Grant was first elected to the Board in
1989, is Chairman of the Board's Organization and Compensation Committee, and is
a member of the Corporate Governance Committee.
DAVID E.I. PYOTT, 45, became President and Chief Executive Officer of the
Company in January 1998. Previously, he was head of the Nutrition Division and a
member of the Executive Committee of Novartis AG from 1996 until December 1997
and had held a similar position at Sandoz International AG, from 1995 to 1996,
prior to the merger of Sandoz and Ciba to form Novartis. Also, while at Sandoz,
Mr. Pyott was President and Chief Executive Officer of Sandoz Nutrition Corp.,
Minneapolis, Minnesota (1992-1995), General Manager of Sandoz Nutrition,
Barcelona, Spain (1990-1992) and held other positions within the
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Sandoz Nutrition group from 1980. Mr. Pyott is a member of the Executive
Advisory Council for the University of California (Irvine) Graduate School of
Management, a member of the Executive Board of Pharmaceutical Research and
Manufacturers of America (PhRMA), and a member of the Board of Directors of
California Healthcare Institute. He was elected to the Board in 1998.
CLASS III -- TERM EXPIRES 2001:
HANDEL E. EVANS, 64, is an independent consultant providing services
principally to the pharmaceutical industry. From December 1991 to August 1998,
Mr. Evans served as the Chairman of Pharmaceutical Marketing Services Inc., a
supplier of market information and specialized marketing products to the
pharmaceutical industry in the United States, Europe and Japan. From 1988 to
1996, Mr. Evans was also Chairman of Walsh International Inc., a specialized
software house providing services to the pharmaceutical industry. Prior to 1988,
Mr. Evans was a founder of and served in a variety of senior executive positions
with IMS International Inc., a pharmaceutical industry information supplier. He
was first elected to the Board in 1989 and is Chairman of the Board's Finance
Committee and a member of the Audit Committee.
MICHAEL R. GALLAGHER, 53, has been Chief Executive Officer of Playtex
Products, Inc., a personal care and consumer products manufacturer, since July
1995. Prior to that Mr. Gallagher was Chief Executive Officer/North America for
Reckitt & Colman PLC, a consumer products company based in London. Mr. Gallagher
was President and Chief Executive Officer of Eastman Kodak's subsidiary L&F
Products from 1988 until the subsidiary was sold to Reckitt & Colman PLC in
1994. Mr. Gallagher was President of the Lehn & Fink Consumer Products Division
at Sterling Drug from 1984 until its sale to Eastman Kodak in 1988. Mr.
Gallagher is a member of the Board of Directors of Fleet Bank N.A. and the
Grocery Manufacturers Association. Mr. Gallagher was elected to the Board in
1998 and is a member of the Organization and Compensation Committee and the
Corporate Governance Committee.
GAVIN S. HERBERT, 66, has been Chairman Emeritus of the Company since
January 1, 1996. He had been Chairman since 1977 and was also Chief Executive
Officer from 1977 to 1991. Prior thereto, Mr. Herbert had been President and
Chief Executive Officer of the Company since 1961. Mr. Herbert is Chairman and
Founder of Regenesis Bioremediation Products, formed in 1994, and is also a
director of Beckman Coulter, Inc. Mr. Herbert is a trustee of the University of
Southern California and is a member of the Board of Directors of Research to
Prevent Blindness. Mr. Herbert is a co-founder of the Company and retired as an
employee in 1994. He has been a director of the Company since 1950 and is a
member of the Board's Audit Committee, Finance Committee and Science and
Technology Committee.
HENRY WENDT, 65, is Chairman of Global Health Care Partners, a unit of DLJ
Merchant Banking, a Donaldson, Lufkin & Jenrette Company, specializing in
private equity investment in health care businesses worldwide. He was Chairman
of the Board of SmithKline Beecham p.l.c., a pharmaceutical company, and its
subsidiary, SmithKline Beecham Corporation, from 1989 until his retirement in
1994. Mr. Wendt is a director of Atlantic Richfield Co., of The Egypt Investment
Company, and of West Marine Products. He is a Trustee of the Trilateral
Commission and Trustee Emeritus of the American Enterprise Institute. Mr. Wendt
is the author of "Global Embrace," published in 1993. In 1994 he was awarded the
Order of the Rising Sun Gold and Silver Star by the Government of Japan, the
highest honor given to a foreigner. In 1995 he was named as Honorary Commander
of the British Empire (CBE) by HRM Queen Elizabeth II. Mr. Wendt has been a
director of the Company since 1989 and is Chairman of the Board's Corporate
Governance Committee and a member of the Audit Committee.
INFORMATION REGARDING THE BOARD OF DIRECTORS
MEETINGS AND COMMITTEES
The Board of Directors held five meetings during 1998 and its standing
committees also met from time to time to address issues within their respective
jurisdictions. Average attendance by directors at regular and special Board and
committee meetings was 90% and all directors attended 75% or more of the
meetings of the Board and committees on which they served, except Mr. Evans and
Mr. Schaeffer. It should be noted that
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directors discharge their responsibilities throughout the year not only at Board
and committee meetings, but through personal meetings and other communications,
including considerable telephone contact with the Chairman and others regarding
matters of interest and concern to the Company.
Audit Committee -- The Audit Committee, which had four meetings in 1998,
recommends to the Board of Directors the appointment of the Company's
independent auditors for the fiscal year and meets with the independent auditors
to discuss the scope and results of their audit examination and the fees related
to such work. It also meets with the Company's internal auditors and financial
management to review the internal audit department's activities; to discuss the
Company's accounting practices and procedures; to review the adequacy of the
Company's accounting and control systems; and to report to the Board any
considerations or recommendations the Audit Committee may have with respect to
such matters. The Committee also reviews the audit schedule and considers any
issues raised by its members, the independent public accountants retained to
audit the books and records of the Company, the internal audit staff, the legal
staff or management. In addition, the Committee monitors the implementation of
the Code of Ethics for the Company's employees, and receives regular reports
from the Company's Chief Ethics Officer who coordinates compliance reviews and
investigates noncompliance matters. None of the members of the Audit Committee
are officers or employees of the Company or any of its subsidiaries.
Finance Committee -- The Finance Committee, which had four meetings in
1998, reviews, approves or modifies management recommendations on corporate
financial strategy and policy and, where appropriate, makes recommendations to
the Board of Directors.
Corporate Governance Committee -- The Corporate Governance Committee held
four meetings in 1998. It recommends qualified candidates for election as
directors of the Company, including the slate of directors which the Board
proposes for election by stockholders at the annual meeting; considers the
performance of incumbent directors; considers and makes recommendations to the
Board of Directors concerning the size and composition of the Board of
Directors; develops and recommends to the Board of Directors guidelines and
criteria to determine the qualifications of directors; considers and reports
annually to the Board of Directors concerning its assessment of the Board's
performance; considers, from time to time, the current Board committee structure
and membership; and recommends changes to the amount and type of compensation of
Board members as appropriate. None of the members of the Corporate Governance
Committee are officers, employees or former employees of the Company or any of
its subsidiaries.
Organization and Compensation Committee -- The Organization and
Compensation Committee, which had four meetings in 1998, reviews and approves
corporate organizational structure; reviews performance of corporate officers;
establishes overall employee compensation policies; and recommends to the Board
of Directors major compensation programs. The Committee also reviews and
approves compensation of corporate officers, including salary and bonus awards,
and administers the 1989 Incentive Compensation Plan. No member of the
Organization and Compensation Committee is a current or former member of
management or eligible for compensation other than as a director. The report of
the Committee begins on page 19.
Science and Technology Committee -- The Science and Technology Committee
held no formal meetings in 1998. From time to time, it undertakes in-depth
reviews of the Company's research and development programs and projects to
evaluate the soundness and risks associated with the technologies in which the
Company is investing its research and development efforts, and the capabilities
of the R&D organization to develop the technology.
STOCKHOLDER NOMINATIONS
The Restated Certificate of Incorporation of the Company provides that any
stockholder entitled to vote for the election of directors at a meeting may
nominate persons for election as directors only if timely written notice of such
stockholder's intent to make such nomination is given, either by personal
delivery or United States mail, postage prepaid, to the Secretary, Allergan,
Inc., 2525 Dupont Drive, Irvine, CA 92612. To be timely, a stockholder's notice
must be delivered to, or mailed and received at, the address provided not less
than 30 days nor more than 60 days prior to the scheduled annual meeting,
regardless of any postponements,
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deferrals or adjournments of that meeting to a later date; provided, however,
that if less than 40 days' notice or prior public disclosure of the date of the
scheduled annual meeting is given or made, notice by the stockholder, to be
timely, must be so delivered or received not later than the close of business on
the tenth day following the earlier of the day on which such notice of the date
of the scheduled annual meeting was mailed or the day on which such public
disclosure was made. A stockholder's notice to the Secretary must set forth: (a)
as to each person whom the stockholder proposes to nominate for election or
re-election as a director, (i) the name, age, business address and residence
address of the person, (ii) the principal occupation or employment of the
person, (iii) the class and number of shares of capital stock of the Company
beneficially owned by the person, (iv) any other information relating to the
person that is required to be disclosed in solicitations for proxies for
election of directors pursuant to Rule 14a under the Securities Exchange Act of
1934, as amended (the "Exchange Act"); and (b) as to the stockholder giving the
notice (i) the name and address, as they appear on the Company's books, of the
stockholder and (ii) the class and number of shares of the Company's stock which
are beneficially owned by the stockholder on the date of such stockholder
notice. The Company may require any proposed nominee to furnish such other
information as may be reasonably required by the Company to determine the
eligibility of such proposed nominee to serve as director of the Company.
DIRECTOR COMPENSATION
Of the Board's current 12 members, two are officers of the Company who do
not receive additional compensation for Board or committee service. Non-employee
directors earned, during 1998, an annual $25,000 retainer plus: $1,300 for each
Board meeting attended; $1,000 for each committee meeting attended by committee
members; and $1,500 for each committee meeting presided over by the committee
chair.
Effective January 1, 1996, Mr. Herbert became Chairman Emeritus. During
1998 he provided ongoing advisory services to Allergan focusing on government
affairs and industrial relations. For those advisory services and his services
as Chairman Emeritus, he received an annual retainer of $50,000. He is also paid
retainer and attendance fees as described above, and is eligible to participate
in the 1989 Nonemployee Director Stock Plan and the Deferred Directors Fee
Program, both as described below.
Dr. Boyer became Chairman of the Board in January 1998. For such services,
he received an annual retainer of $250,000, a one-time grant of 5,000 shares of
restricted stock under the 1989 Nonemployee Director Stock Plan (approved by the
Company's stockholders in April 1998), and attendance fees as described above.
Dr. Boyer is also eligible to participate in the 1989 Nonemployee Director Stock
Plan and the Deferred Directors Fee Program on an on-going basis, both as
described below.
In 1991, the Company adopted a Deferred Directors Fee Program that permits
directors to defer all or a portion of their retainers and meeting fees until
termination of their status as a director. Deferred amounts are treated as
having been invested in Common Stock of the Company and thus are valued
according to fluctuations in the market price of the Common Stock. Distributions
will be made in cash only. Dr. Boyer and Messrs. Evans, Grant, Rosso, and Wendt
chose to defer all or a portion of their retainers and meeting fees for the
period January 1, 1998 through December 31, 1998.
In accordance with the Company's 1989 Nonemployee Director Stock Plan (the
"Director Plan"), as amended by the stockholders in April 1998, each director
who is not an employee of the Company receives grants of restricted stock upon
(a) initial election to the Board of 900 shares per year for each year,
including a partial year of the term to be served, to a maximum of three years
and (b) reelection to the Board of 900 shares per year for each of the three
years of the new term. On the date of each annual meeting of stockholders, the
vesting restrictions with respect to 900 shares lapse for each participant. If
an individual ceases to serve as a director prior to full vesting of a
restricted stock grant for reasons other than death or total disability, those
shares not then vested will be returned to the Company without payment of any
consideration to the director. The Director Plan provides that the number of
shares available for issuance under the Director Plan shall be adjusted in the
event of certain changes in capitalization, such as stock splits and stock
dividends.
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STOCK OWNERSHIP GUIDELINES
At its meeting held in January 1996, the Board approved the stock ownership
guidelines for directors recommended by the Corporate Governance Committee. Each
nonemployee director is expected to own stock, including the economic equivalent
number of shares showing on the records of the Company under the Deferred
Directors Fee Program, equal in value to the number of years the director has
served on the Board since 1989 multiplied by the retainer fee for each year
served. As of December 31, 1998, all ten nonemployee directors met their
ownership guidelines.
OTHER MATTERS
In 1997 the Company formed a new subsidiary, Allergan Specialty
Therapeutics, Inc. ("ASTI"), to conduct research and development of potential
pharmaceutical products based on the Company's retinoid and neuroprotective
technologies. In November 1997, the Company filed a registration statement with
the Securities and Exchange Commission on behalf of ASTI relating to a proposed
special distribution of ASTI Class A Common Stock to the Company's stockholders.
The distribution of the ASTI shares was completed on March 10, 1998 to
stockholders of record on February 17, 1998. Dr. Kaplan, Corporate Vice
President and President, Research and Development and Global BOTOX(R) and a
director of the Company, is on the ASTI Board of Directors. Dwight J. Yoder, the
Company's Senior Vice President, Controller and Principal Accounting Officer, is
ASTI's Chief Financial Officer, and William C. Shepherd, the Company's Chairman,
President and Chief Executive Officer through December 31, 1997, is the
Chairman, President and Chief Executive Officer of ASTI.
Prior to the distribution, the Company contributed $200 million to ASTI.
The market value of ASTI stock was approximately $29 million at the date of
distribution. The Company recorded a dividend for the amount of the market value
of ASTI stock at the distribution. The remainder of the $200 million was
recorded as a charge against operating income. The Company's stockholders
received one share of ASTI Class A Common Stock for each 20 shares of common
stock held as of the record date. Based on 65,453,805 shares of Allergan common
stock outstanding as of February 17, 1998, approximately 3,272,700 shares of
ASTI Class A Common Stock were issued in the distribution. The Company's
stockholders were not required to pay any cash or other consideration for the
ASTI Class A Common Stock received in the distribution. The distribution was
taxable as a dividend to each holder in the amount of the fair market value of
ASTI Shares distributed to such holder. As the sole holder of ASTI's outstanding
Class B Common Stock following the distribution, under the terms of ASTI's
Restated Certificate of Incorporation, the Company has the option to repurchase
all of the outstanding shares of ASTI Class A Common Stock under specified
conditions.
Under the terms of a technology license agreement and a license option
agreement between the Company and ASTI, the Company has also granted certain
technology licenses and agreed to make specified payments on sales of certain
products in exchange for the payment by ASTI of a technology fee and the option
to independently develop certain compounds funded by ASTI prior to the filing of
an Investigational New Drug application with the U.S. Food and Drug
Administration with respect thereto and to license any products and technology
developed by ASTI. During 1998, ASTI paid approximately $11.2 million in
technology fees to the Company, offset by $500,000 in licensing income credited
to ASTI from the Company.
ASTI's technology and product research and development activities take
place under a research and development agreement with the Company. During 1998
the Company provided ASTI approximately $31.3 million in R&D and administrative
services.
In July 1998, the Company entered into a multi-year research and
development collaboration with the Parke-Davis Pharmaceutical Research Division
of Warner-Lambert Company. Professor Ronald Cresswell, the Senior Vice President
and Chief Scientific Officer for Warner-Lambert Company, became a director of
Allergan in November 1998. Under the terms of the agreement, Parke-Davis
received exclusive rights to certain compounds. Allergan received the
opportunity to collect up to $104 million in technology access fees and
development milestones and will be entitled to royalties on net sales of
developed products. Allergan received $5 million from Parke-Davis in 1998. Also
in 1998, in an unrelated transaction, the Company paid Warner-Lambert
approximately $1.6 million as product license royalties.
7
<PAGE> 11
The Company paid an aggregate of approximately $325,000 to Pharmaceutical
Marketing Services, Inc. ("PMSI") and its subsidiary, Scott-Levin Associates, in
1998 for pharmaceutical marketing research data. Handel E. Evans, a director of
the Company, was the Chairman and an executive officer of PMSI through August
1998. Mr. Evans is no longer a director, employee or affiliate of PMSI.
The Company believes that these transactions were made on terms no less
favorable than that which could have been received by unaffiliated third
parties.
On December 31, 1997, in connection with his relocation from Europe to the
United States, the Company made an interest-free loan in the amount of $500,000
to David E.I. Pyott, the President and Chief Executive Officer of the Company,
to be used to purchase a residence in Orange County, California. The loan is
payable in full upon the earlier of five years or the date Mr. Pyott ceases to
be an employee of the Company. As of December 31, 1998, the outstanding balance
on the loan was $500,000.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's executive
officers, directors and persons who own more than ten percent of a registered
class of the Company's equity securities to file reports of ownership and
changes in ownership with the SEC and the New York Stock Exchange. Executive
officers, directors and greater than ten-percent stockholders are required by
SEC regulation to furnish the Company with copies of all Section 16(a) forms
they file.
Based solely on its review of the copies of such forms furnished to the
Company and written representations that no other reports were required during
the fiscal year ended December 31, 1998, its officers, directors and greater
than ten-percent beneficial owners complied with all Section 16(a) filing
requirements.
CORPORATE GOVERNANCE
GUIDELINES ON SIGNIFICANT CORPORATE GOVERNANCE ISSUES
In 1995, the Board approved "Board Guidelines on Significant Corporate
Governance Issues." The Guidelines, as amended to date, are listed below. These
guidelines are being published in this Proxy Statement to inform stockholders of
the Board's current thinking with respect to selected corporate governance
issues considered to be of significance to stockholders. The guidelines are only
guidelines, not rigid rules. Nor is it intended that publication of these
guidelines be interpreted as a representation that they will be followed in each
instance. The Board will continue to assess the appropriateness and efficacy of
the guidelines and it is likely that changes to the guidelines will be
considered from time to time.
1. SELECTION OF CHAIRMAN AND CEO
The Board should be free to make this choice any way that seems best for
the Company at a given point in time.
Therefore, the Board does not have a policy, one way or the other, on
whether or not the role of the Chief Executive Officer and Chairman should be
separate and, if it is to be separate, whether the Chairman should be selected
from the nonemployee directors or be an employee.
2. EXECUTIVE SESSIONS OF OUTSIDE DIRECTORS
The outside directors of the Board will meet in Executive Session at a
regularly scheduled meeting at least once each year. The format of these
meetings will include a discussion with the Chief Executive Officer on each
occasion. These meetings should be scheduled in conjunction with a regular Board
meeting.
It is the policy of the Board that a director be selected by the outside
directors to chair Executive Sessions or assume other responsibilities which the
outside directors as a whole might designate from time to time.
8
<PAGE> 12
3. NUMBER OF COMMITTEES
The current committee structure of the Company seems appropriate. There
will, from time to time, be occasions in which the Board may want to form a new
committee or disband a current committee depending upon the circumstances. The
current five Committees are Audit, Finance, Organization & Compensation,
Corporate Governance and Science & Technology. The Audit, Corporate Governance
and Organization & Compensation Committees will consist entirely of outside
directors.
4. ASSIGNMENT AND ROTATION OF COMMITTEE MEMBERS
The Corporate Governance Committee is responsible, after consultation with
the Chief Executive Officer and with consideration of the desires of individual
Board members, for the assignment of Board members to various committees.
It is the sense of the Board that consideration should be given to rotating
committee members periodically at about a three- to four-year interval, but the
Board does not feel that such a rotation should be mandated as policy since
there may be reasons at a given point in time to maintain an individual
director's committee membership for a longer period.
5. FREQUENCY AND LENGTH OF COMMITTEE MEETINGS
The Committee chairman, in consultation with Committee members, will
determine the frequency and length of the meetings of the Committee. Meetings
will normally be held around Board meetings.
6. COMMITTEE AGENDA
The chairman of the Committee, in consultation with the appropriate members
of management and staff, will develop the Committee's agenda.
Each Committee will issue a schedule of agenda subjects to be discussed for
the ensuing year at the beginning of each year (to the degree these can be
foreseen). This forward agenda will also be shared with the Board. Key
functional managers (i.e., CFO, CVP -- Administration) will have direct contact
with the appropriate Committee chairperson.
7. SELECTION OF AGENDA ITEMS FOR BOARD MEETINGS
The Chairman of the Board and the Chief Executive Officer (if the Chairman
is not the Chief Executive Officer) will establish the agenda for each Board
meeting.
At the beginning of the year the Chairman will establish a schedule of
agenda subjects to be discussed during the next three years.
Each Board member is free to suggest the inclusion of item(s) on the
agenda. The CEO will be proactive in encouraging Board members to submit agenda
items.
8. BOARD MATERIALS DISTRIBUTED IN ADVANCE
It is the sense of the Board that information and data that is important to
the Board's understanding of the business to be conducted at that meeting be
distributed in writing to the Board before the Board meets. Management will make
every attempt to see that this material is as brief as possible while still
providing the desired information.
9. PRESENTATIONS
As a general rule, presentations on specific subjects should be sent to the
Board members in advance so that Board meeting time may be conserved and
discussion time focused on questions that the Board has about the subject. When
there is no prior distribution of a presentation on a sensitive subject, it is
the sense of the
9
<PAGE> 13
Board that each member be advised by telephone in advance of the meeting of the
subject and the principal issues the Board will need to consider.
10. REGULAR ATTENDANCE OF NON-DIRECTORS AT BOARD MEETINGS
The Board supports the regular attendance at each Board Meeting of
non-Board members who are members of senior management.
Should the Chief Executive Officer want to add additional people as
attendees on a regular basis, it is expected that this suggestion would be made
to the Board for its concurrence.
11. BOARD ACCESS TO SENIOR MANAGEMENT
Board members have complete access to Allergan's Management.
It is assumed that Board members will use judgment to be sure that this
contact is not distracting to the business operation of the Company and that
such contact, if in writing, be copied to the Chief Executive Officer and/or the
Chairman.
Furthermore, the Board encourages the senior management to, from time to
time, bring other managers into Board meetings who: (a) can provide additional
insight into the items being discussed because of personal involvement in these
areas, and/or (b) represent managers with future potential that the senior
management believes should be given exposure to the Board.
12. BOARD COMPENSATION REVIEW
It is appropriate for the staff of the Company once every other year to
report to the Corporate Governance Committee the status of Allergan Board
compensation in relation to other U.S. companies.
Changes in Board compensation, if any, should come at the suggestion of the
Corporate Governance Committee, but with full discussion and approval by the
Board. The Corporate Governance Committee will make Board compensation change
recommendations after it has reviewed the information it considers appropriate
from the Chief Executive Officer, the Human Resources department and outside
consultants.
13. SIZE OF THE BOARD
The Board presently has 12 members. It is the sense of the Board that a
size of 12 to 14 is about right. However, the Board would be willing to go to a
somewhat larger size in order to accommodate the availability of an outstanding
candidate(s).
14. MIX OF INSIDE AND OUTSIDE DIRECTORS
The Board believes that as a matter of policy there should be a majority of
Independent Directors on the Allergan Board. A maximum ratio should be 1/4
management directors to 3/4 Independent Directors.
But the Board believes that management should encourage senior managers to
understand that Board membership is not necessary or a prerequisite to any
higher management position in the Company. Managers other than the Chief
Executive Officer currently attend Board meetings on a regular basis even though
they are not members of the Board.
15. BOARD DEFINITION OF WHAT CONSTITUTES INDEPENDENCE FOR OUTSIDE DIRECTORS
Allergan's Bylaw defining independent directors was approved by the Board
in July 1995. The Board believes there is no current relationship between any
outside director and Allergan that would be construed in any way to compromise
any Board member being designated independent. Compliance with the Bylaw is
reviewed annually by the Corporate Governance Committee.
10
<PAGE> 14
16. FORMER CHIEF EXECUTIVE OFFICER'S BOARD MEMBERSHIP
The Board believes this is a matter to be decided in each individual
instance. It is assumed that when the Chief Executive Officer resigns from that
position, he/she should offer his/her resignation from the Board at the same
time. Whether the individual continues to serve on the Board is a matter for
discussion at that time with the new Chief Executive Officer and the Board.
A former Chief Executive Officer serving on the Board will be considered an
inside director for purposes of corporate governance.
17. BOARD MEMBERSHIP CRITERIA
The Corporate Governance Committee is responsible for reviewing with the
Board on an annual basis the appropriate skills and characteristics required of
Board members in the context of the current make-up of the Board. This
assessment should include issues of diversity, age, skills such as understanding
of manufacturing technologies, international background, etc. -- all in the
context of an assessment of the perceived needs of the Board at that point in
time.
18. SELECTION OF NEW DIRECTOR CANDIDATES
The Board itself should be responsible, in fact as well as procedure, for
selecting its own members. The Board delegates the screening process involved to
the Corporate Governance Committee with the direct input from the Chairman of
the Board as well as the Chief Executive Officer and the other members of the
Board. There should be a full discussion at a Board meeting before the decision
to invite someone to join the Board is made.
19. EXTENDING THE INVITATION TO A NEW POTENTIAL DIRECTOR TO JOIN THE BOARD
The invitation to join the Board should generally be extended by the
Chairman of the Corporate Governance Committee on behalf of the Board. The new
director will receive an orientation about the Company and its Corporate
Governance philosophy.
20. ASSESSING THE BOARD'S PERFORMANCE
The Corporate Governance Committee is responsible to undertake an annual
assessment of the Board's performance. This will be discussed with the full
Board. This should be done following the end of each fiscal year and at the same
time as the report on Board membership criteria.
This assessment should be the Board's contribution as a whole and
specifically review areas in which the Board and/or the Management believes a
better contribution could be made. Its purpose is to increase the effectiveness
of the Board, not to target individual Board members.
21. DIRECTORS WHO CHANGE THEIR PRESENT JOB RESPONSIBILITY
It is the sense of the Board that individual directors who change the
responsibility they held when they were elected to the Board should volunteer to
resign from the Board.
It is not the sense of the Board that the directors who retire or change
from the position they held when they came on the Board should necessarily leave
the Board. There should, however, be an opportunity for the Board, via the
Corporate Governance Committee, to review the continued appropriateness of Board
membership under these circumstances.
22. TERM LIMITS
The Board does not believe it should establish term limits. While term
limits could help ensure that there are fresh ideas and viewpoints available to
the Board, they hold the disadvantage of losing the contribution of directors
who have been able to develop, over a period of time, increasing insight into
the Company and its operations and, therefore, provide an increasing
contribution to the Board as a whole.
11
<PAGE> 15
As an alternative to term limits, the Corporate Governance Committee, in
consultation with the Chief Executive Officer and the Chairman of the Board,
will review each director's continuation on the Board every year. This will also
allow each director the opportunity to conveniently confirm his/her desire to
continue as a member of the Board.
23. RETIREMENT AGE
It is the sense of the Board that the current retirement age of 70 is
appropriate. In the unusual case when the mandated retirement age is not in the
best interest of the Company, the Board, acting through the Corporate Governance
Committee, should be guided by factors such as whether the director has retired
from other business pursuits, the past and anticipated contributions to the
Board as well as the factors typically considered for ongoing service on the
Board.
24. FORMAL EVALUATION OF THE CHIEF EXECUTIVE OFFICER
The Organization and Compensation Committee should make this evaluation
annually, and it should be communicated to the Chief Executive Officer by the
Chairman of the Organization and Compensation Committee.
The evaluation should be based on objective criteria including performance
of the business, accomplishment of long-term strategic objectives, development
of management, etc.
The evaluation will be used by the Organization and Compensation Committee
in the course of its deliberations when considering the compensation of the
Chief Executive Officer.
25. SUCCESSION PLANNING
There should be an annual report by the Chief Executive Officer to the
Board on succession planning.
There should also be available, on a continuing basis, the Chief Executive
Officer's recommendation as to a successor should he/she be unexpectedly
disabled.
26. MANAGEMENT DEVELOPMENT
There will be an annual report to the Board by the Chief Executive Officer
on the Company's program for management development, described in detail.
This report should be given to the Board at the same time as the succession
planning report noted above.
27. BOARD INTERACTION WITH THE INVESTORS, THE MEDIA, CUSTOMERS, ETC.
The Board believes that only senior management speaks for Allergan.
Individual Board members may, with the knowledge of the management and, in most
instances, at the request of management, agree to receive input from various
constituencies that are involved with Allergan.
12
<PAGE> 16
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
BY MANAGEMENT
The following table sets forth information as of January 31, 1999 regarding
the beneficial ownership of the Common Stock of the Company by each nominee,
present directors of the Company, each of the executive officers named in the
Summary Compensation Table and all of the directors and executive officers of
the Company as a group. Except as described in footnote 4 below, no officer or
director of the Company owns beneficially 1% or more of the Common Stock
outstanding.
<TABLE>
<CAPTION>
SHARES OF RIGHTS TO
COMMON STOCK ACQUIRE
BENEFICIALLY BENEFICIAL
BENEFICIAL OWNER OWNED(1)(2) OWNERSHIP(3) TOTAL
---------------- ------------ ------------ -----------
<S> <C> <C> <C>
CLASS I DIRECTORS NOMINEES:
Lester J. Kaplan, Ph.D..................... 21,231 115,900 137,131
Karen R. Osar.............................. 900 900
Louis T. Rosso ............................ 48,192 48,192
Leonard D. Schaeffer....................... 3,300 3,300
CLASS II DIRECTORS:
Herbert W. Boyer, Ph.D. .................. 8,300 8,300
Ronald M. Cresswell........................ 1,800 1,800
William R. Grant........................... 14,911 14,911
David E.I. Pyott........................... 24,399 30,500 54,899
CLASS III DIRECTORS:
Handel E. Evans............................ 8,808 8,808
Michael R. Gallagher....................... 3,700 3,700
Gavin S. Herbert .......................... 488,828(4) 488,828
Henry Wendt................................ 41,865 41,865
OTHER NAMED EXECUTIVE OFFICERS:
Francis R. Tunney, Jr. .................... 12,999 113,000 125,999
F. Michael Ball............................ 2,331 24,300 26,631
James V. Mazzo............................. 6,941 48,700 55,641
All current directors and executive
officers (20 persons, including those
named above)............................. 720,716 504,198 1,224,914(5)
</TABLE>
- ---------------
(1) In addition to shares held in the individual's sole name, this column
includes shares held by the spouse of the named person and shares held in
various trusts. This column also includes, for employees, shares held in
trust for the benefit of the named party or group in the Company's Savings
and Investment Plan and the Employee Stock Ownership Plan as of December 31,
1998.
13
<PAGE> 17
(2) In addition to the beneficial ownership amounts described in the preceding
footnote, the Directors listed below elected to defer all or a portion of
their annual retainer and meeting fees, with such deferred amounts treated
as having been invested in Common Stock of the Company. As of January 31,
1999, such amounts constitute the economic equivalent of the following
numbers of shares of Common Stock:
<TABLE>
<CAPTION>
ECONOMIC EQUIVALENT
NUMBER OF SHARES
-------------------
<S> <C>
Herbert W. Boyer........................... 1,547.66
Ronald M. Cresswell........................ 140.44
Handel E. Evans............................ 10,729.99
Michael R. Gallagher....................... 154.97
William R. Grant........................... 11,796.17
Karen R. Osar.............................. 96.90
Louis T. Rosso............................. 8,316.87
Leonard D. Schaeffer....................... 3,608.71
Henry Wendt................................ 10,556.25
</TABLE>
(3) Shares which the party or group has the right to acquire within 60 days
after January 31, 1999 upon the exercise of stock options.
(4) Includes 4,200 shares held directly, 7,000 shares held in a limited
liability company which is owned by a charitable remainder trust in which
Mr. Herbert has a pecuniary interest, 327,588 shares beneficially owned by a
trust for which Mr. Herbert serves as trustee and beneficiary, and 150,040
shares held in two trusts for which Mr. Herbert serves as co-trustee and in
which he or his sister has a beneficial interest.
(5) Represents 1.8% of the shares outstanding as of January 31, 1999.
BY OTHERS
Management of the Company knows of no person, except as set forth below,
who is the beneficial owner of more than 5% of the Company's issued and
outstanding Common Stock.
<TABLE>
<CAPTION>
SHARES PERCENT
NAME AND ADDRESS OF BENEFICIAL OWNERS BENEFICIALLY OWNED OF CLASS(1)
------------------------------------- ------------------ -----------
<S> <C> <C>
FMR Corp. ............................................. 7,000,382(2) 10.53%
82 Devonshire Street
Boston, MA 02109-3614
State Farm Mutual
Automobile Insurance Company and its Related
Entities............................................. 3,983,140(3) 5.99%
One State Farm Plaza
Bloomington, Illinois 61710
Wellington Management Company, LLP..................... 3,939,300(4) 5.93%
75 State Street
Boston, MA 02109
Vanguard Specialized Funds --
Vanguard Health Care Fund............................ 3,579,600(5) 5.39%
P.O. Box 2600
Valley Forge, PA 19482
</TABLE>
- ---------------
(1) Based on 66,458,271 shares outstanding on January 31, 1999.
(2) Based on a Schedule 13G, dated February 10, 1999, filed with the Securities
and Exchange Commission by FMR Corp. on behalf of itself and related
entities.
(3) Based on a Schedule 13G, dated February 11, 1999, filed with the Securities
and Exchange Commission by State Farm Mutual Automobile Insurance Company on
behalf of itself and related entities.
(4) Based on a Schedule 13G, dated December 31, 1998, filed with the Securities
and Exchange Commission by the named beneficial owner on behalf of itself
and related entities.
(5) Based on a Schedule 13G, dated February 11, 1999, filed with the Securities
and Exchange Commission by the named beneficial owner on behalf of itself.
14
<PAGE> 18
EXECUTIVE COMPENSATION
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table shows the compensation for the Company's Chief
Executive Officer and the four most highly paid executive officers other than
the CEO for services rendered in all capacities to the Company and its
subsidiaries for the years ended December 31, 1996, 1997 and 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
--------------------------- -----------------------
OTHER
ANNUAL RESTRICTED SECURITIES ALL OTHER
COMPEN- STOCK UNDERLYING COMPEN-
SALARY BONUS SATION AWARD(S) OPTIONS SATION
NAME AND PRINCIPAL POSITION YEAR ($)(1) ($)(2) ($) ($)(3) (#) ($)(4)
--------------------------- ---- ------- ------- ------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
David E.I. Pyott.................................. 1998 604,615 700,000 -- -- 61,000 1,807,595
President & CEO 1997 -- -- -- 335,625 61,000 --
1996 -- -- -- -- -- --
Lester J. Kaplan, Ph.D............................ 1998 304,506 244,000 -- 175,625 30,000 929,189
Corporate Vice President 1997 283,433 135,000 -- -- 24,000 13,318
and President, Research & 1996 264,943 100,000 -- -- 31,200 13,224
Development and Global BOTOX(R)
Francis R. Tunney, Jr............................. 1998 289,949 232,000 -- -- 20,000 878,398
Corporate Vice President -- 1997 274,650 70,000 -- -- 16,000 7,911
Administration, General 1996 258,576 85,000 -- -- 20,000 8,227
Counsel and Secretary
F. Michael Ball................................... 1998 276,145 239,000 -- -- 14,400 835,983
Corporate Vice President 1997 255,500 60,000 -- -- 16,000 37,677
and President, North America 1996 225,779 27,000 -- -- 18,400 58,615
Region and Global Eye Rx Business
James V. Mazzo.................................... 1998 214,120 190,300 (5) 14,050 7,100 692,786
Corporate Vice President and 1997 188,408 62,000 (5) 10,800 27,100 10,663
President, Europe/Africa/ 1996 176,419 33,800 (5) 14,996 7,300 9,098
Middle East Region and
Global Lens Care Products
</TABLE>
- ---------------
(1) The amounts shown include cash compensation earned and received by executive
officers as well as amounts earned but deferred at the election of those
officers.
(2) The amounts shown represent bonus performance awards which were paid in
February of the following year under the Company's Management Bonus Plan for
services rendered during the fiscal year indicated.
(3) Based on the closing price of the stock on the New York Stock Exchange on
the date of grant. All shares of restricted stock granted to named executive
officers other than the CEO vest, in whole, in four years and receive
non-preferential dividends. Shares granted to the CEO in 1997 receive
non-preferential dividends and vest as follows: 2,000 shares after three
years, 3,000 shares after four years and 5,000 shares after five years. The
following number of restricted shares (and the value based on the closing
price of the stock on the New York Stock Exchange on December 31, 1998) were
held by each of the named executives as of December 31, 1998: Mr. Pyott,
10,000 ($647,500); Dr. Kaplan, 5,000 ($323,750); Mr. Ball, 400 ($25,900);
and Mr. Mazzo, 1,680 ($108,780).
15
<PAGE> 19
(4) The total amounts shown in this column for the 1998 fiscal year consist of
Company contributions to the Allergan, Inc. Savings and Investment Plan
("SIP") and the Allergan, Inc. Employee Stock Ownership Plan ("ESOP"), the
cost of term life insurance and term executive post-retirement life
insurance premiums ("Ins"), payment in lieu of vacation ("Vac"), and the
combined value of cash and stock awarded under the Allergan, Inc. Stock
Price Incentive Plan ("SPIP") as follows:
<TABLE>
<CAPTION>
SIP ESOP INS VAC SPIP
------ ------ ------ ------- ----------
<S> <C> <C> <C> <C> <C>
Mr. Pyott................. $2,558 $3,417 $1,620 $ -- $1,800,000
Dr. Kaplan................ 4,000 3,417 907 5,865 915,000
Mr. Tunney................ 4,000 3,417 981 -- 870,000
Mr. Ball ................. 3,568 3,417 998 -- 828,000
Mr. Mazzo................. 4,000 3,417 519 24,850 660,000
</TABLE>
(5) Mr. Mazzo temporarily relocated to the United Kingdom in 1998 in connection
with his election as President, Europe/Africa/Middle East Region. As a
U.S.-based employee assigned abroad, Mr. Mazzo is entitled to certain
payments that are made available generally to employees as part of the
assignment. These amounts, which typically are associated with the expenses
of maintaining two households, home visits, tax equalization and additional
education costs for such employees' children, have not been included in this
table.
STOCK OPTIONS
The following table shows information regarding stock options granted to
the named executive officers during 1998.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
% OF TOTAL
NUMBER OF OPTIONS
SECURITIES GRANTED TO
UNDERLYING EMPLOYEES EXERCISE OR GRANT DATE
OPTIONS IN FISCAL BASE PRICE EXPIRATION PRESENT
NAME GRANTED(#)(1) 1998 PER SHARE DATE VALUE($)(2)
---- ------------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
David E.I. Pyott ....................... 61,000 7.2% $34.6875 1/29/08 963,835
Lester J. Kaplan, Ph.D.................. 30,000 3.5% 34.6875 1/29/08 474,218
Francis R. Tunney, Jr................... 20,000 2.3% 34.6875 1/29/08 316,146
F. Michael Ball......................... 14,400 1.7% 34.6875 1/29/08 227,625
James V. Mazzo.......................... 7,100 0.8% 34.6875 1/29/08 112,232
</TABLE>
- ---------------
(1) All options disclosed above were granted pursuant to the 1989 Incentive
Compensation Plan (the "Incentive Plan") on January 29, 1998 and become
exercisable 25% per year beginning January 29, 1999. The exercise price and
the tax withholding obligations related to exercise may be paid by delivery
of already-owned shares. The Incentive Plan grants broad discretion to
change material terms, including the acceleration of vesting upon a "Change
in Control." See "Change in Control and Severance Arrangements" on page 18.
(2) Based on the Black-Scholes model of option valuation to determine grant date
fair value, as prescribed under Statement of Financial Accounting Standards
No. 123, Accounting for Stock-Based Compensation. The actual value, if any,
an executive may realize will depend on the excess of the stock price over
the exercise price on the date the option is exercised, so that there is no
assurance the value realized by an executive will be at or near the value
estimated by the Black-Scholes model. With respect to the 1998 option
grants, the following assumptions were used in the Black-Scholes model:
market price of stock, $34.69; exercise price of option, $34.69; expected
stock volatility, 38% (based on ten-year volatility); risk-free interest
rate, 5.7% (based on the 10-year zero coupon rate); expected life, ten
years; dividend yield, 1.5%.
16
<PAGE> 20
OPTION EXERCISES AND HOLDINGS
The following table shows stock option exercises by the named executive
officers during 1998, including the aggregate value of gains on the date of
exercise. In addition, this table includes the number of shares covered by both
exercisable and non-exercisable stock options as of December 31, 1998. Also
reported are the values for "in-the-money" options which represent the positive
spread between the exercise price of any such existing stock options and the
year-end price of the Company's Common Stock.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
SHARES AT 12/31/98(#) AT 12/31/98($)(1)
ACQUIRED ON VALUE --------------------------- ----------------------------
NAME EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ----------- ----------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
David E.I. Pyott......... -- -- 15,250 106,750 481,328.12 3,277,796.87
Lester J. Kaplan,
Ph.D. ................. 20,000 $663,320 108,400 69,600 4,348,462.50 2,266,275.00
Francis R. Tunney,
Jr. ................... 3,089 $ 50,497 108,000 46,000 4,451,170.00 1,499,000.00
F. Michael Ball.......... -- -- 20,700 38,100 701,987.50 1,251,262.50
James V. Mazzo........... -- -- 47,783 32,925 1,959,103.65 1,157,525.00
</TABLE>
- ---------------
(1) Based on the closing price of $64.75 on the New York Stock Exchange of the
Company's Common Stock.
DEFINED BENEFIT PENSION PLANS
The Company has a defined benefit retirement plan (the "Pension Plan")
which provides pension benefits to U.S. employees, including officers, based
upon the average of the highest 60 consecutive months of eligible earnings
("Final Average Pay") and years of service integrated with covered compensation
as defined by the Social Security Administration.
Allergan also has two supplemental retirement plans ("SRP") for certain
employees, including officers. These plans pay benefits directly to a
participant to the extent benefits under the Pension Plan are limited by certain
Internal Revenue Code provisions.
The following table illustrates the annual combined retirement benefits
payable under the retirement plans based on an age 62 retirement. If an employee
elects a benefit for his or her surviving spouse, the retirement benefit for the
employee is reduced to reflect this additional coverage.
PENSION PLAN TABLE
<TABLE>
<CAPTION>
YEARS OF SERVICE
FINAL --------------------------------------------------------------------------
AVERAGE
PAY 15 20 25 30 35 40 45
------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
$200,000 $ 49,000 $ 65,300 $ 81,700 $ 98,000 $114,300 $119,300 $124,300
250,000 62,000 82,600 103,300 123,900 144,600 150,800 157,100
300,000 74,900 99,900 124,900 149,900 174,900 182,400 189,900
350,000 87,900 117,200 146,500 175,800 205,100 213,900 222,600
400,000 100,900 134,500 168,200 201,800 235,400 245,400 255,400
500,000 126,800 169,100 211,400 253,700 296,000 308,500 321,000
600,000 152,800 203,700 254,700 305,600 356,500 371,500 386,500
700,000 178,700 238,300 297,900 357,500 417,100 434,600 452,100
800,000 204,700 272,900 341,200 409,400 477,600 497,600 517,600
900,000 230,600 307,500 384,400 461,300 538,200 560,700 583,200
</TABLE>
17
<PAGE> 21
The benefits shown are computed as a single life annuity beginning at age
62 with no deduction for Social Security or other offset amounts. Eligible
earnings include basic salary and bonuses earned during the year. Unreduced
benefits are payable at age 62, but employees may continue employment beyond
then and earn additional retirement benefits. Credited years of service at
normal retirement for the individuals named in the compensation table would be
as follows: Mr. Pyott, 18 years; Dr. Kaplan, 30 years; Mr. Tunney, 31 years; Mr.
Ball, 23 years; and Mr. Mazzo, 39 years.
CHANGE IN CONTROL AND SEVERANCE ARRANGEMENTS
The Company has entered into agreements with each of its executive officers
and certain other executives which provide certain benefits in the event of a
change in control of the Company. For purposes of these agreements, "change in
control" of the Company is generally defined as the acquisition by any person of
beneficial ownership of 20% or more of the voting stock of the Company, certain
business combinations involving the Company, or a change in a majority of the
incumbent members of the Board of Directors, except for changes in the majority
of such members approved by such members. If, within two years after a change in
control, the Company or, in certain circumstances, the executive, terminates his
or her employment, the executive is entitled to a severance payment equal to
one, two or three (depending on the executive in question) times (i) such
executive's highest annual salary rate within the five-year period preceding
termination, plus (ii) a bonus increment equal to the average of the two highest
of the last five bonuses paid to such executive under the Company's Management
Bonus Plan. In addition, the executive is entitled to the continuation of all
employment benefits for a one-, two- or three-year period (depending on the
executive in question), the vesting of all stock options and certain other
benefits, including payment of an amount sufficient to offset the impact of any
"excess parachute payment" excise tax payable by the executive pursuant to the
provisions of the Internal Revenue Code or any comparable provision of state
law. The multiple of salary and bonus (as calculated above) and the number of
years of continued coverage of other benefits are as follows: David E.I. Pyott,
who became the CEO in January 1998 -- three years; Dr. Kaplan and Messrs.
Tunney, Ball, Mazzo and four other corporate vice presidents -- two years; other
covered executives (33 persons) -- one year.
In addition, the Company's SRP, Incentive Plan, Savings and Investment
Plan, Employee Stock Ownership Plan, Management Bonus Plan, Executive Bonus Plan
and Nonemployee Director Stock Plan each contain provisions for the accelerated
vesting of benefits under such plans upon a change in control of the Company.
For such purposes a change in control is deemed to occur upon the acquisition by
any person of 50% or more of the combined voting power of the Company's then
outstanding voting securities, a change in composition of a majority of the
Board of Directors unless approved by incumbent directors, and certain other
acquisition related events.
The Organization and Compensation Committee has approved a severance pay
policy for Corporate Officers whose employment is terminated as a result of a
reduction in force, unacceptable performance or sale of a business unit where
the Corporate Officer is not offered similar employment with the acquiring
company. The amount of severance pay depends upon the Corporate Officer's years
of service with the Company. For Corporate Officers having 15 or more years of
service, the payment and benefits are substantially consistent with those
provided pursuant to their Change in Control Agreements described above. For
Corporate Officers having between eight and 14 years of service, the severance
pay is between 22 and 26 months of base salary, depending upon the actual full
years of service, with no additional benefits other than health care coverage
during the severance pay period. For Corporate Officers having between zero and
seven years of service, the severance pay is between 14 and 15 1/2 months of
base salary, depending upon the actual full years of service, with no additional
benefits other than health care coverage during the severance pay period.
William C. Shepherd retired from the Company on January 1, 1998. Pursuant
to the terms of a letter agreement between Mr. Shepherd and Allergan regarding
Mr. Shepherd's retirement, Allergan has agreed to pay Mr. Shepherd severance
payments totaling $3,210,000, on a semi-monthly basis, during the period
commencing January 1, 1998 and ending 36 months following such date (the
"Severance Pay Period"). In partial consideration of such severance payments,
Mr. Shepherd has agreed to provide consulting services to
18
<PAGE> 22
Allergan as requested by Allergan's Chief Executive Officer for up to a maximum
of 50 days per year during the Severance Pay Period. In addition, pursuant to
the terms of the letter agreement, the vesting of all of Mr. Shepherd's
outstanding unvested options was accelerated as of January 1, 1998. Such options
are exercisable by Mr. Shepherd at any time prior to the earlier of (a) January
1, 2003 or (b) the expiration of any such options in accordance with their
terms. Under the terms of the letter agreement, Allergan has also agreed to
provide Mr. Shepherd with continued medical, dental, group term life, disability
and flexible spending account benefits, continued pension benefit accruals and
other miscellaneous perquisites and benefits during the Severance Pay Period.
REPORT OF THE ORGANIZATION AND COMPENSATION COMMITTEE
As members of the Organization and Compensation Committee, it is our duty,
pursuant to our charter to: administer the Company's Management Bonus Plan,
Executive Bonus Plan and the 1989 Incentive Compensation Plan; review and adjust
base compensation levels; evaluate performance; and consider and approve
management succession for corporate officers.
Allergan's executive compensation programs are designed to attract,
motivate, and retain the executive talent needed to optimize stockholder value
in a competitive environment. The programs support the goal of increasing
stockholder value of the Company by achieving specific financial and strategic
objectives.
Allergan's executive compensation programs are designed to provide:
- levels of base compensation that are competitive with comparable
pharmaceutical and diversified health care companies;
- annual incentive compensation that varies in a consistent manner
with achievement of individual objectives and financial performance
objectives of the Company; and
- long-term incentive compensation that focuses executive efforts on
building stockholder value through meeting longer-term financial
and strategic goals.
In designing and administering its executive compensation program, the
Company attempts to strike an appropriate balance among these various elements,
each of which is discussed in greater detail below.
BASE SALARY
Base salary, as well as bonus, is targeted at the 50th percentile level,
consistent with comparable pharmaceutical and diversified health care companies.
The Company's Compensation Department, in an effort to obtain a broad base of
data, participates in a number of salary surveys and obtains commercially
available surveys. In conducting its analysis, the Company attempts, when data
is available, to include data from companies included in the S&P Health Care
(Diversified) Index and other S&P Health Care indices, as well as from companies
subjectively considered comparable based on such factors as size, product lines,
employment levels and market capitalization. For 1998, the executive salary
structure adjustment and merit increase guidelines were based on commercially
available surveys from the pharmaceutical and health care industries. Allergan's
salary increase program is designed to reward individual performance consistent
with the Company's overall financial performance in the context of competitive
practice. Annual performance reviews and formal merit increase guidelines
determine individual salary increases.
THE MANAGEMENT BONUS PLAN
The Management Bonus Plan is designed to reward management-level employees
for their contributions to individual and corporate objectives. Each eligible
employee's award is expressed as a percentage of the participant's year end base
salary. Bonus targets begin at 10% for managers and range from 40% to 50% for
executive officers (excluding the CEO), it being the Committee's compensation
philosophy that increasing portions of compensation should be "at risk" for
those employees with greater influence on corporate results. Individual
performance is measured against objectives that reflect what executives must do
in order for Allergan to meet its short- and long-term business goals. A
participant's individual bonus target award may be
19
<PAGE> 23
modified from 0% to 150%. In general, each eligible employee sets for himself or
herself (subject to his or her supervisor's review and approval or modification)
a number of objectives for the coming year and then receives an evaluation of
performance against these objectives as a part of the year-end compensation
review process. The individual objectives vary considerably in detail and
subject matter. Examples of objectives identified by executive officers for 1998
included identifying and pursuing new business opportunities, obtaining
regulatory approvals for new products as well as new indications for existing
products, introducing new products into designated markets and identifying and
implementing cost reduction measures. This information (or summaries thereof) is
generally considered by the Committee in an evaluation of overall performance of
the executive officers for purposes of determining the actual bonus.
The Management Bonus Plan for 1999 will be funded according to the
achievement of a pre-established 1999 Earnings Per Share ("EPS") Target, as
approved by the Committee. The EPS Target is based on corporate objectives
established as part of the annual operating plan process. The bonus pool will be
funded at 100% when the EPS Target is achieved, and the bonus pool will
automatically adjust if 1999 EPS surpasses or falls below the EPS Target, up to
a maximum funding level of 160%. Once funded, the bonus pool will be allocated
to the Company's business units based on the units' respective operating income
results compared to the 1999 budget. That is, if a business unit is above
budgeted operating income, it will receive a greater share of the bonus pool
than a business unit that is below the operating income budget. The Committee
will use the business unit allocations in its consideration of bonuses to the
executive officers, based on the performance of each executive officer's
business unit.
The Management Bonus Plan for 1998 was designed with two funding
components: Individual Objectives (accounting for 75% of target bonuses for
non-officers and 50% for officers) and a Corporate Financial component
(accounting for 25% of target bonuses for non-officers and 50% for officers).
The Corporate Financial component was based on a 1998 EPS Target.
For 1998, the EPS result was above the 1998 EPS Target. As a result, the
Committee approved a total bonus fund of approximately $14.3 million for
approximately 450 participating employees. The Committee then allocated this
bonus pool to the business functions based on the functions' respective
operating income results compared to budgeted amounts for 1998.
THE EXECUTIVE BONUS PLAN
Through 1998, the CEO's bonus was granted under the Management Bonus Plan,
discussed above. The Company approved a new Executive Bonus Plan in March 1999
to cover bonus compensation to the CEO in the years 1999 and beyond. The CEO is
the only employee eligible for awards under the Executive Bonus Plan. The
primary purpose of the Executive Bonus Plan is to reward, retain and motivate
the Company's CEO. Incentive compensation under the plan is based on the
achievement of performance objectives established by the Committee for each plan
year. For 1999, the CEO's award will be based on the Company's attainment of a
pre-established EPS target -- the same target approved for other managers of the
Company under the Management Bonus Plan discussed above. The CEO's award is
expressed as a percentage of year end annualized base salary but may not exceed
$5,000,000 in any calendar year. For 1999, the CEO will receive a bonus of up to
112% of year end annualized base salary, depending on EPS performance. The
Company is submitting the Executive Bonus Plan to the stockholders for approval
at this Annual Meeting in order to qualify bonus payments made to the CEO for
full tax deductibility. See proposal 3 at pages 30-32 of this Proxy Statement.
TOTAL ANNUAL CASH COMPENSATION (BASE SALARY PLUS BONUS)
Total cash compensation is set competitively at the 50th percentile, as
described in the section titled Base Salary, above, when annual operating plans
and targets are achieved. Top-quartile cash compensation can be attained only if
business results significantly exceed the operating plan.
20
<PAGE> 24
INCENTIVE COMPENSATION PLAN
The 1989 Incentive Compensation Plan (the "Incentive Plan") authorizes the
granting of various stock-based incentive awards to officers and key employees
of the Company and its subsidiaries. The plan has been designed to:
- focus attention on building stockholder value through meeting
longer-term financial and strategic goals;
- link management's financial success to that of the stockholders via
broad-based participation of Allergan management employees
(approximately 400 managers received grants in 1999);
- balance long-term with short-term decision making; and
- encourage and create ownership and retention of the Company's stock.
STOCK PRICE INCENTIVE PLAN
The Board of Directors of the Company approved the Stock Price Incentive
Plan ("SPIP"), effective January 1, 1998, subject to stockholder approval. On
January 2, 1998, the first trading day thereafter, the closing price of the
Company's common stock on the New York Stock Exchange was $33.125. At the April
1998 meeting the stockholders of the Company approved the SPIP. At that time,
the closing stock price on the New York Stock Exchange was $39.5625. The SPIP
was designed to focus those executives at the Corporate Vice President or higher
level on specific strategic performance targets and reward for the achievement
of specified stock price goals.
The SPIP set out two levels of performance. If the stock price reached $50
per share for 20 consecutive trading days (as measured by the closing price on
the NYSE) within a three-year performance period, each participant would receive
100% of base salary. If the stock price reached $60 under the same criteria,
each participant would receive 200% of base salary. The SPIP provided that
payments could be made in cash or Allergan Common Stock at the discretion of the
Committee.
In 1998, the stock price met both levels of performance, and the Committee
authorized payments to eligible officers in accordance with the SPIP. Footnote 4
to the Summary Compensation Table on page 16 of this Proxy Statement provides
information regarding awards for the named executive officers. Having paid all
authorized awards under the SPIP, the Committee has not awarded, and may not
award, any future compensation under the SPIP.
POLICY ON DEDUCTIBILITY OF COMPENSATION
Section 162(m) of the Internal Revenue Code of 1986, as amended, limits the
tax deductibility by a company of annual compensation in excess of $1,000,000
paid to the CEO and any of its four other most highly compensated executive
officers. However, performance-based compensation that has been approved by
stockholders is excluded from the $1,000,000 limit if, among other requirements,
the compensation is payable only upon attainment of pre-established, objective
performance goals and the Board committee that establishes such goals consists
only of "outside directors." Additionally, stock options will qualify for the
performance-based exception where, among other requirements, the exercise price
of the option is not less than the fair market value of the stock on the date of
grant, and the plan includes a per-executive limitation on the number of shares
for which options may be granted during a specified period.
All members of the Committee qualify as outside directors. While the tax
impact of any compensation arrangement is one factor to be considered, such
impact is evaluated in light of the Committee's overall compensation philosophy.
The Committee will consider ways to maximize the deductibility of executive
compensation, while retaining the discretion the Committee deems necessary to
compensate officers in a manner commensurate with performance and the
competitive environment for executive talent. However, from time to time the
Committee may award compensation which is not fully deductible if the Committee
determines that such award is consistent with its philosophy and is in the best
interests of Allergan and its stockholders.
21
<PAGE> 25
The 1989 Incentive Compensation Plan, as amended, approved by the
stockholders in April 1996, was designed to meet the performance-based criteria
of Section 162(m) of the Internal Revenue Code of 1986, as amended. A further
amendment to the Incentive Compensation Plan is being submitted for stockholder
approval at this Annual Meeting in order to make option grants of up to 400,000
options in any calendar year to any executive officer eligible as
performance-based compensation. The Allergan, Inc. Stock Price Incentive Plan,
approved by Company's stockholders in April 1998, was also designed to meet such
performance-based criteria, as was the Executive Bonus Plan, which is being
submitted for stockholder approval at this Annual Meeting in order to meet the
Section 162(m) requirements.
COMMITTEE ACTIVITIES
In 1998, the Committee had four formal meetings as well as many interim
discussions. The following summarizes the Committee's major activities:
- Evaluated CEO performance.
- Reviewed and determined 1998 salary increases for each corporate
officer based on the officer's performance.
- Determined 1997 management bonus awards for corporate officers based
on assessment of their performance against objectives. Approved the
1998 Management Bonus Plan's corporate financial objective.
- Reviewed and recommended 1998 stock awards for executive officers as
well as for other participants, totaling approximately 300.
- Reviewed management development and succession plans.
- Approved the Voluntary Early Retirement Plan and related amendments to
the Allergan, Inc. Pension Plan, Employee Stock Ownership Plan, and
Executive Deferred Compensation Plan.
- Recruited the new Corporate Vice President and President, Latin
America Region.
- Monitored stock performance and approved compensation under the Stock
Price Incentive Plan.
- Recommended the election of 1998 corporate officers and the
designation of executive officers covered under Section 16 of the
Securities Exchange Act of 1934.
- Reviewed executive stock ownership compared to the executive stock
ownership requirements established by the Committee. The President and
Chief Executive Officer is expected to hold five times his salary in
Company stock; and the guideline for Corporate Vice Presidents is two
times salary.
- Reviewed Pension Plan, Employee Stock Ownership Plan and Savings and
Investment Plan funding levels.
The Company, with the approval of the Committee, has retained the services
of Towers Perrin, a Human Resources consulting firm, since 1989 to provide
advice and review the reasonableness of compensation paid to executive officers
of the Company. The Committee has independent access to Towers Perrin. As part
of its services, Towers Perrin reviewed and, as appropriate, provided
recommendations with respect to the Incentive Plan, Management Bonus Plan and
Executive Bonus Plan.
SALARY INCREASES
The named executive officers received an average salary increase of 10.7%
effective February 1, 1999 to reflect competitive market conditions, performance
and contributions.
MANAGEMENT BONUS PLAN AWARDS
At the January 1999 meeting, the Committee approved bonus awards for
executive officers, as described above. Mr. Pyott, the President and CEO,
received a Management Bonus Plan award of $700,000, based on the Committee's
assessment of Mr. Pyott's achievements of his objectives for 1998. The Committee
noted particularly the Company's profitable growth during 1998, Mr. Pyott's
effective creation and implementation
22
<PAGE> 26
of strategic plans and organizational restructuring, his successful recruiting
efforts to fill key positions, and his efforts to reduce operating expense
ratios on a global basis.
LONG-TERM INCENTIVE GRANTS
At the January 1998 meeting, the Committee considered long-term incentive
grants for each of the executive officers of the Company. The guidelines for
each grade level are set periodically based upon a comparison of Allergan to
survey data for over 200 companies prepared and analyzed by Towers Perrin in
order to approximate the 75th percentile level compensation if the Company is
successful and that success results in increased stock prices.
The Committee approved grants to Mr. Pyott of 61,000 nonqualified stock
options and 10,000 shares of restricted stock effective in December 1997 under
the Incentive Plan in connection with Mr. Pyott's hiring. And, in January 1998,
in connection with the Company's annual grant under the Incentive Plan, Mr.
Pyott received 61,000 additional non-qualified stock options, which was equal to
the guideline amount for the position. The Committee was influenced by, among
other things, competitive compensation requirements necessary to recruit and
hire Mr. Pyott, Mr. Pyott's successful transition to Allergan, his effective
organizational and communications skills and his prompt actions to create
strategic plans for the Company.
In the case of each of the other named executives, the stock award was
within the Company's guideline and reflects the assessment of individual
performance as well as the performance of the Company as discussed in the
previous paragraph. In determining the specific award to the CEO and each of the
other named executives, the Committee considers a mix of individual and
corporate performance achievements, without attributing relative weights to the
various factors considered.
PREMIUM-PRICED OPTION GRANTS
Based on the success of the SPIP, the Committee initiated a successor
incentive plan in March 1999 for the Company's CEO and Corporate Vice
Presidents. The purpose of this plan is to solidify the Company's management
behind a common and clearly stated goal (stock performance) and to provide
aggressive incentives to achieve substantial gains. The successor plan is not a
new incentive plan but is rather a grant of premium-priced stock options under
the Incentive Plan, using shares currently available for grant. Rather than
awarding cash and/or stock upon the attainment of stock price goals (as the SPIP
was designed), this Committee awarded the recipients nonqualified stock options
with an exercise price of $110 (the "Premium Options"), which is more than $40
higher than the exercise price of options granted in January 1999 as part of the
Company's annual grant and $26 higher than the closing price of the Company's
Common Stock on the New York Stock Exchange on the date of the grant. The
Premium Options vest on the earlier of October 1, 2000 or the date that the
closing price of the Company's Common Stock on the New York Stock Exchange
reaches $120 or more. The Premium Options expire on February 28, 2001. The
Committee granted 200,000 Premium Options to the CEO and 100,000 to each of the
Company's eight Corporate Vice Presidents, with an additional 100,000 granted to
a new chief financial officer once the position is filled, effective on the
first day of his or her employment. Because the Committee granted 121,000
market-priced options to the CEO in January 1999 as part of the annual grant,
the grant of 200,000 Premium Options to the CEO is subject to the approval by
the stockholders at this meeting of the proposal to increase the maximum shares
issuable under the Incentive Plan in any one calendar year to any executive
officer from 200,000 to 400,000 shares. See Proposal 2 at pages 25-30 of this
Proxy Statement.
Organization and Compensation
Committee,
Mr. William R. Grant, Chairman
Dr. Herbert W. Boyer
Mr. Michael R. Gallagher
Ms. Karen R. Osar
23
<PAGE> 27
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No member of the Company's Organization and Compensation Committee is a
current or former officer or employee of the Company or any of its subsidiaries.
There are no compensation committee interlocks between the Company and other
entities involving Allergan executive officers and Allergan Board members who
serve as executive officers of such other entities.
STOCK PERFORMANCE GRAPH
Set forth below is a line graph comparing the yearly percentage change in
the cumulative total stockholder return on the Company's Common Stock with the
cumulative total return of the S&P 500 Stock Index and the S&P Health Care
(Diversified) Index for the period beginning December 31, 1993 and ending
December 31, 1998. The graph assumes that all dividends have been reinvested.
<TABLE>
<CAPTION>
S&P HEALTH CARE
ALLERGAN S&P 500 DIVERSIFIED
-------- ------- ---------------
<S> <C> <C> <C>
12/93 100 100 100
12/94 127 103 118
12/95 148 143 176
12/96 164 178 225
12/97 157 239 331
12/98 312 295 463
</TABLE>
24
<PAGE> 28
APPROVAL OF THE AMENDED AND RESTATED
1989 INCENTIVE COMPENSATION PLAN
PROPOSAL 2
GENERAL
The Company's Board of Directors has approved an amendment to the 1989
Incentive Compensation Plan ("Incentive Plan"), subject to approval by the
Company's stockholders. The Incentive Plan was adopted in 1989 and was amended
with stockholder approval in 1992 and 1996. The proposed amendment will modify
the Incentive Plan to increase the maximum number of shares with respect to
which options may be granted to an executive officer in any given calendar year
from 200,000 to 400,000. The purpose of the amendment is to increase this limit
in order to provide more meaningful incentive opportunities for Incentive Plan
participants. The Company is seeking stockholder approval of the amendment to
conform the amended portions of the Incentive Plan to the deductibility
requirements of Section 162(m) of the Internal Revenue Code of 1986, as amended
(the "Code").
The following is a summary of the principal features of the Incentive Plan,
as the plan has been in effect and reflecting the proposed increase in the
annual option grant maximum. This summary is qualified by and subject to the
actual provisions of the form of amended and restated Incentive Plan attached to
this Proxy Statement as Exhibit B.
PURPOSE AND ELIGIBILITY
The purpose of the Incentive Plan is to advance the interests of the
Company and its stockholders by affording to key management and any other
employees of the Company and its subsidiaries an opportunity to acquire or
increase a proprietary interest in the Company or to otherwise benefit from the
success of the Company through the grant of stock options, restricted stock,
stock appreciation rights, stock payments, performance awards or other awards
granted or sold under the Incentive Plan ("Incentive Award"). The Company
thereby seeks to attract, retain and motivate those highly competent individuals
upon whose judgment, initiative, leadership and continued efforts the success of
the Company in large measure depends.
All regular, full-time employees of the Company who are key employees of
the Company, as determined by the Committee, are eligible to receive an
Incentive Award under the Incentive Plan. Currently, it is estimated that
approximately 350 persons are eligible for selection.
ADMINISTRATION, AMENDMENT AND TERMINATION
The Incentive Plan is administered by a committee of two or more persons
appointed by the Company's Board of Directors ("Committee"). The Committee has
the authority to interpret the Incentive Plan, determine the terms and
conditions of Incentive Awards and make all other determinations necessary
and/or advisable for the administration of the Incentive Plan. The Committee
may, with the consent of a participant, amend the terms of any existing
Incentive Award previously granted to such participant. The Committee also has
authority to prescribe, amend and rescind rules and regulations relating to the
Incentive Plan. The Board of Directors has designated the Organization and
Compensation Committee as the Committee.
The Board of Directors may alter, amend, suspend or terminate the Incentive
Plan at any time. However, no such action may increase the maximum number of
shares that may be sold or issued under the Incentive Plan or alter the class of
eligible participants without the approval of the stockholders. No amendment,
suspension or termination of the Incentive Plan will, without the consent of the
participant or except as otherwise provided in the Incentive Plan or in the
statement evidencing the grant of the Incentive Award, alter, terminate, impair
or adversely affect any right or obligation under any Incentive Award previously
granted. No Incentive Award may be granted under the Incentive Plan after the
date of termination of the Incentive Plan, but such termination shall not affect
any Incentive Award previously granted.
25
<PAGE> 29
DIVIDEND EQUIVALENTS
At the discretion of the Committee, and at no additional cost, an amount
payable in cash, Common Stock or a combination thereof may be granted to a
holder of a stock option, stock appreciation right or other Incentive Award
denominated in shares of Common Stock that is equivalent to the amount of
dividends paid to stockholders with respect to a number of shares of Common
Stock equal to the number of shares upon which such Incentive Award is based.
OPTIONS
Stock options granted under the Incentive Plan may be incentive stock
options intended to qualify under the provisions of Code Section 422 ("ISO") or
nonqualified stock options which do not so qualify. The exercise price of Common
Stock that is subject to an option will be determined by the Committee at the
date such option is granted. The exercise price may be less than the fair market
value on the date of grant of the Common Stock subject to an option; however,
the exercise price for an ISO may not be less than the fair market value on the
date of grant of the Common Stock subject to such ISO. Options may be exercised
as determined by the Committee provided that an ISO may not be exercised after
ten years from the date of grant.
PERFORMANCE AWARDS
Awards, payable in cash, Common Stock or a combination thereof, the terms
and conditions of which may be determined by the Committee at the time of grant
("Performance Awards") may be granted under the Incentive Plan. The Committee
shall determine the performance criteria to be utilized to calculate the value
of the Performance Awards, the term of such Performance Awards, the event or
events giving rise to the right to payment of a Performance Award, and the form
(cash and/or Common Stock) and time of payment of Performance Awards.
RESTRICTED STOCK
An award of Common Stock which is the subject of an Incentive Award and
which is nontransferable and subject to a substantial risk of forfeiture until
specific conditions are met as set forth in the Incentive Plan and in any
statement evidencing the grant of such Incentive Award ("Restricted Stock") may
be granted by the Committee. The Committee shall determine the purchase price
(if any), terms of payment of the purchase price, restrictions upon the
Restricted Stock and when such restrictions shall lapse.
The following restrictions, among others which may be imposed upon
Restricted Stock by the Committee, will lapse in accordance with the schedule or
other conditions as are determined by the Committee: a restriction on
transferability; a requirement that certificates representing Restricted Stock
remain in the physical custody of an escrow holder or the Company; and a
requirement that each certificate representing Restricted Stock contain a
restrictive legend.
STOCK APPRECIATION RIGHTS
The Committee may approve the grant of a right to receive a number of
shares of Common Stock or, in the discretion of the Committee, an amount in cash
or a combination of shares and cash, based on the increase in the fair market
value of the shares subject to the right during such period as is specified by
the Committee ("SAR"). The Committee may approve the grant of SARs related or
unrelated to stock options. Upon exercise of an SAR granted in connection with a
stock option granted under the Incentive Plan, the holder of the related option
will surrender such option (or any portion thereof to the extent unexercised)
with respect to the number of shares as to which such SAR is exercised and will
receive payment of an amount computed pursuant to the Incentive Plan.
Subject to any conditions on the exercise of the SAR that may be imposed by
the Committee at the time such SAR is granted, an SAR granted in connection with
a stock option will be exercisable at such time or
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times, and only to the extent that, the related stock option is exercisable, and
will not be transferable except to the extent that such related option may be
transferable.
STOCK PAYMENTS
The Committee may approve payments in shares of the Company's Common Stock
to replace all or any portion of the compensation (other than base salary) that
would otherwise become payable to any regular, full-time employee of the Company
in cash.
TERMINATION OF EMPLOYMENT
Except as otherwise provided in a written agreement between the Company and
the participant, options and SARs expire (i) at the date of termination if the
participant's employment with the Company is terminated for cause; (ii) three
months following termination of employment (but in no event later than the date
of expiration of the option or SAR in accordance with its terms) in the event of
termination for any reason other than for cause, death, disability or
retirement; (iii) twelve months following termination of employment in the event
of termination for death or disability; and (iv) three years following
termination of employment (but in no event later than the date of expiration of
the option or SAR in accordance with its terms) in the event of termination for
retirement. The Committee has the authority to designate longer, and in certain
circumstances, shorter periods to exercise options or SARs following a
participant's termination of employment and may accelerate the vesting of all or
any portion of any option and/or right that is unexercisable on or prior to the
date of the participant's termination from employment.
With respect to Performance Awards, if a participant's employment with the
Company is terminated for any reason other than retirement, death or disability
prior to the event or events giving rise to the right to payment of a
Performance Award, all of the participant's rights under the Performance Award
shall expire and terminate unless otherwise determined by the Committee. The
Committee may determine what portions, if any, of a Performance Award should be
paid to a participant whose employment has been terminated by reason of death,
disability or retirement.
With respect to Restricted Stock, unless otherwise determined by the
Committee, upon a participant's termination of employment for any reason, all of
the participant's Restricted Stock remaining subject to restrictions on the date
of termination of employment shall be repurchased by the Company at the purchase
price, if any, paid by the participant for the Restricted Stock.
SECURITIES SUBJECT TO INCENTIVE PLAN
The aggregate number of shares of Common Stock issuable under the Incentive
Plan during any calendar year shall be up to 1.5% of the number of shares of
Common Stock outstanding on December 31 of the year preceding the applicable
year, plus any unused shares from prior years. Shares subject to the unexercised
portion of any Incentive Award that expire, terminate or are canceled and shares
issued pursuant to an Incentive Award that are reacquired by the Company will
again become available for the grant of further Incentive Awards under the
Incentive Plan. ISOs will be subject to the lesser of the maximum annual
percentage limitation for all Incentive Awards and a maximum cumulative
limitation of 5,000,000 shares.
The Incentive Plan, as proposed to be amended, provides that the maximum
number of shares with respect to which options may be granted under the
Incentive Plan to an executive officer in any given calendar year shall not
exceed 400,000 shares.
The Common Stock to be issued under the Incentive Plan will be made
available, at the discretion of the Board or the Committee, either from
authorized but unissued shares of Common Stock or from previously issued shares
of Common Stock reacquired by the Company, including shares purchased on the
open market.
The maximum number of shares issuable under the Incentive Plan during any
calendar year, the number and kind of shares or other securities subject to then
outstanding Incentive Awards, and the price for each share or other unit of any
other securities subject to then outstanding Incentive Awards, will be
appropriately and proportionately adjusted to reflect mergers, consolidations,
sales or exchanges of all or substantially all of
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<PAGE> 31
the properties of the Company, reorganizations, recapitalizations,
reclassifications, stock dividends, stock splits, reverse stock splits,
spin-offs or other distributions with respect to such shares of Common Stock (or
any stock or securities received with respect to such Common Stock) or a
reduction in the value of the outstanding shares of Common Stock by reason of an
extraordinary cash dividend.
Except as otherwise expressly provided in the statement evidencing the
grant of an Incentive Award, upon the occurrence of a "change in control" of the
Company, any outstanding Incentive Award not theretofore exercisable, payable or
free from restrictions as the case may be, shall immediately become exercisable,
payable or free from restrictions, as the case may be, in its entirety and any
shares of Common Stock acquired pursuant to an Incentive Award which are not
fully vested shall immediately become fully vested. A "change in control" for
this purpose occurs if: (i) any person or group becomes the beneficial owner of
50% or more of the Company's outstanding voting securities; (ii) a change occurs
in the majority of the incumbent directors (except for changes approved by such
members); (iii) a merger or other business combination involving the Company is
approved by stockholders (other than a merger or other transaction in which (A)
the Company's stockholders immediately prior to such transaction would continue
to own 50% or more of the outstanding voting securities of the Company or
successor after the transaction is consummated and (B) no person or group
becomes a 50% or more beneficial owner of Company voting securities); or (iv) a
plan of complete liquidation or the sale of all or substantially all of the
Company's assets is approved by stockholders.
On March 8, 1999, the closing price of the Company's Common Stock on the
New York Stock Exchange was $89.5625 per share.
FEDERAL INCOME TAX CONSEQUENCES
The following is a brief description of the federal income tax treatment
which will generally apply to Incentive Awards made under the Incentive Plan,
based on federal income tax laws in effect on the date hereof. The exact federal
income tax treatment of an Incentive Award will depend on the specific nature of
the Incentive Award. Such an Incentive Award may, depending on the conditions
applicable to the Incentive Award, be taxable as an option, as restricted or
unrestricted stock, as a cash payment, or otherwise. Employees that participate
in the Incentive Plan are advised to consult with their own tax advisor for
particular federal, as well as state and local, income and any other tax advice.
Incentive Stock Options. Pursuant to the Incentive Plan, employees may be
granted options which are intended to qualify as ISOs under the provisions of
Section 422 of the Code. Generally, the optionee is not taxed and the Company is
not entitled to a deduction on the grant or the exercise of an ISO. However, if
the optionee sells the shares acquired upon the exercise of an ISO ("ISO
Shares") at any time within (a) one year after the date of transfer of ISO
Shares to the optionee pursuant to the exercise of such ISO or (b) two years
after the date of grant of such ISO, then (1) the optionee will recognize
capital gain equal to the excess, if any, of the sales price over the fair
market value of the ISO Shares on the date of exercise, (2) the optionee will
recognize ordinary income equal to the excess, if any, of the lesser of the
sales price or the fair market value of the ISO Shares on the date of exercise,
over the exercise price of such ISO, (3) the optionee will recognize capital
loss equal to the excess, if any, of the exercise price of such ISO over the
sales price of the ISO Shares, and (4) the Company will generally be entitled to
a deduction equal to the amount of ordinary income recognized by the optionee.
If the optionee sells the ISO Shares at any time after the optionee has held the
ISO Shares for at least (i) one year after the date of transfer of the ISO
Shares to the optionee pursuant to the exercise of the ISO and (ii) two years
after the date of grant of the ISO, then the optionee will recognize capital
gain or loss equal to the difference between the sales price and the exercise
price of such ISO, and the Company will not be entitled to any deduction.
The amount by which the fair market value of the ISO Shares received upon
exercise of an ISO exceeds the exercise price will be included as a positive
adjustment in the calculation of an optionee's "alternative minimum taxable
income" ("AMTI") in the year of exercise. The "alternative minimum tax" imposed
on individual taxpayers is generally equal to the amount by which 28% (26% of
AMTI below certain amounts) of
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the individual's AMTI (reduced by certain exemption amounts) exceeds his or her
regular income tax liability for the year.
Nonqualified Options. The grant of an option or other similar right to
acquire stock which does not qualify for treatment as an ISO (a "Nonqualified
Option") is generally not a taxable event for the optionee. Upon exercise of the
option, the optionee will generally recognize ordinary income in an amount equal
to the excess of the fair market value of the stock acquired upon exercise
(determined as of the date of the exercise) over the exercise price of such
option, and the Company will be entitled to a tax deduction equal to such
amount. See "Special Rules for Incentive Awards Granted to Insiders,"below.
Special Rules for Incentive Awards Granted to Insiders. If the grant of an
option is not approved by the Board of Directors or a committee of the Board of
Directors that is composed solely of two or more "non-employee directors" (as
such term is defined under Rule 16b-3 of the Exchange Act), and if an optionee
is a director, officer or stockholder subject to Section 16 of the Exchange Act
(an "Insider") and exercises an option within six months of the date of grant,
the timing of the recognition of any ordinary income should be deferred until
(and the amount of ordinary income should be determined based on the fair market
value (or sales price in the case of a disposition) of the shares of Common
Stock upon) the earlier of the following two dates (the "16(b) Date"): (i) six
months after the date of grant or (ii) a disposition of the shares of Common
Stock, unless the Insider makes an election under Section 83(b) of the Code (an
"83(b) Election") within 30 days after exercise to recognize ordinary income
based on the value of the Common Stock on the date of exercise. In addition,
special rules apply to an Insider who exercises an option having an exercise
price greater than the fair market value of the underlying shares on the date of
exercise. Insiders are advised to consult their tax advisors to determine the
tax consequences to them of exercising options granted to them pursuant to the
Incentive Plan.
Restricted Stock. Incentive Awards under the Incentive Plan may also
include the grant of Restricted Stock. Unless the recipient makes an 83(b)
Election as discussed above within 30 days after the receipt of the Restricted
Stock, the recipient generally will not be taxed on the receipt of Restricted
Stock until the restrictions on such stock expire or are removed. When the
restrictions expire or are removed, the recipient will recognize ordinary income
(and the Company will be entitled to a deduction) in an amount equal to the
excess of the fair market value of the stock at that time over the purchase
price. However, if the recipient makes an 83(b) Election within 30 days of the
receipt of Restricted Stock, he or she will recognize ordinary income (and the
Company will be entitled to a deduction) equal to the excess of the fair market
value of the stock on the date of receipt (determined without regard to vesting
restrictions) over the purchase price. In the case of an Insider (as defined
above), the timing of income recognition (including the date used to compute the
fair market value of stock) with respect to Restricted Stock may be deferred
until the 16(b) Date, as described in "Special Rules for Incentive Awards
Granted to Insiders" above, unless the Insider makes a valid 83(b) Election.
Stock Appreciation Rights. Recipients of SARs generally do not recognize
income upon the grant of such rights. When a participant elects to receive
payment of an SAR, the participant recognizes ordinary income in an amount equal
to the cash and fair market value of shares of Common Stock received, and the
Company is entitled to a deduction equal to such amount.
Performance Awards, Dividends, and Dividend Equivalents. A payment made
under a Performance Award (e.g., stock and cash bonuses), dividends, and
dividend equivalent payments are taxable as ordinary income when actually or
constructively received by the recipient. As to any Performance Award paid in
Common Stock, the amount taxable as ordinary income is the aggregate fair market
value of the Common Stock determined as of the date received. The Company is
entitled to deduct the amount of a Performance Award, dividends, and dividend
equivalent payments when such amounts are taxable as compensation to the
recipient.
Miscellaneous Tax Issues. Incentive Awards may be granted under the
Incentive Plan which do not fall clearly into the categories described above.
The federal income tax treatment of these Incentive Awards will depend upon the
specific terms of such awards. Generally, the Company will be required to make
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arrangements for withholding applicable taxes with respect to any ordinary
income recognized by a participant in connection with Incentive Awards made
under the Incentive Plan.
Special rules will apply in cases where a recipient of an Incentive Award
pays the exercise or purchase price of the Incentive Award or applicable
withholding tax obligations under the Incentive Plan by delivering previously
owned shares of Common Stock or by reducing the amount of shares otherwise
issuable pursuant to the Incentive Award. The surrender or withholding of such
shares will in certain circumstances result in the recognition of income with
respect to such shares or a carryover basis in the shares acquired.
The terms of the agreements pursuant to which specific Incentive Awards are
made to employees under the Incentive Plan may provide for accelerated vesting
or payment of an Incentive Award in connection with a change in ownership or
control of the Company. In that event and depending upon the individual
circumstances of the recipient, certain amounts with respect to such awards may
constitute "excess parachute payments" under the "golden parachute" provisions
of the Code. Pursuant to these provisions, a recipient will be subject to a 20%
excise tax on any "excess parachute payments" and the Company will be denied any
deduction with respect to such payment. Recipients of Incentive Awards are
advised to consult their tax advisors as to whether accelerated vesting of an
Incentive Award in connection with a change of ownership or control of the
Company would give rise to an excess parachute payment.
The Company generally obtains a deduction equal to the ordinary income
recognized by the recipient of an Incentive Award. The Company's deduction for
such amounts (including amounts attributable to the ordinary income recognized
with respect to options, Restricted Stock, SARs, and Performance Awards) may be
limited under Code Section 162(m) to $1 million (per person) annually. The $1
million annual limit generally only applies to non-performance based
compensation paid to the Company's CEO and its other four most highly
compensated officers.
NEW PLAN AWARDS
The Committee granted the Company's CEO 121,000 market-priced options in
January 1999 as part of its annual grant under the ICP. Then, in March 1999, the
Committee granted the CEO 200,000 premium-priced options, subject to the
approval of this proposal by the Company's stockholders. See page 23 in this
Proxy Statement for a discussion of the terms of this March 1999 grant. The
200,000 premium-priced options granted to the Company's CEO are not currently
"in the money."
VOTE REQUIRED AND BOARD OF DIRECTORS' RECOMMENDATION
The affirmative vote of a majority of the shares of Common Stock
represented in person or by proxy at the Annual Meeting of Stockholders and
entitled to vote is required for approval of the proposed amendment and
restatement of the Incentive Plan.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE FOR THE PROPOSED
AMENDMENT AND RESTATEMENT OF THE 1989 INCENTIVE COMPENSATION PLAN.
APPROVAL OF THE ALLERGAN, INC. EXECUTIVE BONUS PLAN,
PERFORMANCE OBJECTIVES AND MAXIMUM AWARD AMOUNT
PROPOSAL 3
GENERAL
The Company's Board of Directors has approved an Executive Bonus Plan
("EBP") regarding annual bonuses to be paid to the Company's Chief Executive
Officer ("CEO"). Prior to 1999, the Company paid annual bonuses to the CEO under
the Management Bonus Plan. The Company's Board of Directors has approved the EBP
as a separate plan for the CEO's bonus and is seeking stockholder approval of
the EBP to enable the Company to meet the tax deductibility requirements of
Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code").
Important features of the EBP that stockholders are being requested
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to approve are the quantifiable performance objectives for the EBP and a maximum
award limit of $5,000,000 in any calendar year under the EBP.
The following is a summary of the principal features of the EBP. The
summary is qualified by and subject to the actual provisions of the form of EBP
attached to this Proxy Statement as Exhibit C.
SUMMARY OF THE EXECUTIVE BONUS PLAN
The primary purpose of the EBP is to retain and motivate the Company's CEO,
upon whose judgment, initiative, leadership and continued efforts the success of
the Company in large measure depends. In addition, a goal of the EBP is to
reward the CEO for contributions to increased stockholder value through the
successful accomplishment of specific financial objectives. The Company's Board
of Directors has approved the EBP as a separate plan for the CEO in order to
permit the Company to deduct from its taxes compensation paid to the CEO in the
form of bonus. Without stockholder approval of the EBP, bonus compensation paid
to the CEO in 2000 (for performance in 1999) and beyond will count toward the $1
million tax deductibility limit, and the Company is likely to lose a substantial
tax benefit.
The EBP is administered by the Organization & Compensation Committee of the
Board of Directors (the "Committee"). The EBP limits the constituency of the
Committee to directors who are considered outside directors for purposes of Code
Section 162(m). Under the terms of the EBP, only the CEO of the Company is
eligible for participation. Incentive compensation under the EBP is based on the
achievement of performance objectives established by the Committee for each plan
year. Until further notice and resubmission to stockholders for approval, the
performance objectives will be based on any of the following criteria, either
alone or in any combination, and measured either on an absolute basis, relative
basis against a pre-established target, and/or peer group, or prior year's
performance as the Committee determines:
- revenue (sales)
- cash flow
- earnings per share (including earnings before interest, taxes and
amortization)
- return on equity
- total stockholder return
- return on capital
- return on assets or net assets
- income or net income
- operating income or net operating income
- operating profit or net operating profit
- operating margin
- market share
- employee satisfaction
These criteria will have any reasonable definitions that the Committee may
specify, which may include or exclude any or all of the following items as the
Committee may specify:
- extraordinary, unusual or non-recurring items
- effects of accounting changes
- effects of financing activities
- expenses for restructuring or productivity initiatives
- other non-operating items
- spending for acquisitions and
- effects of divestitures
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Any such qualifying performance objectives or combination of such
objectives may apply to the CEO's award opportunity in its entirety or to any
designated portion or portions of the award opportunity, as the Committee may
specify. No later than 90 days from the beginning of each plan year, the
Committee will establish, in writing, a minimum target for the performance
objectives which must be achieved in order for any award to be earned, maximum
targets above which no additional awards will be earned, and the formula for
computing the award if such target is achieved.
Under the EBP, if the Committee determines that the established targets are
no longer suitable due to changes in circumstances affecting the Company, the
Committee will have sole discretion during the plan year to modify these
targets; provided, however, that no such adjustment will decrease the minimum
target applicable to the CEO, or otherwise have the potential effect of
increasing the amount of compensation payable to the CEO upon the attainment of
the original targets.
The CEO receives compensation under the EBP based on a formula. Pursuant to
this formula, the CEO will receive a minimum percentage of year end annualized
base salary if the minimum targeted performance objective is achieved. The
percentage of base salary increases to a maximum percentage of year end
annualized base salary if the maximum targeted performance objective is
achieved. In no event can the maximum compensation paid to the CEO under the EBP
exceed $5,000,000 in any calendar year.
If the performance objectives are satisfied, the Committee shall certify in
writing, prior to the payment of any performance award, that such objectives
were satisfied. Awards under the EBP which are based on achieving certain
performance objectives, the amount of which are determined by formula, will
qualify as performance-based compensation, assuming stockholder approval of the
EBP is obtained. However, the EBP does not limit the Committee's authority to
grant additional bonus awards to the CEO outside of the EBP. Any such additional
awards would not qualify as performance-based compensation for purposes of Code
Section 162(m) and would be subject to the $1 million deduction limitation.
Under the terms of the EBP, if the CEO's employment with the Company is
terminated for any reason other than retirement, death or disability prior to
the end of the plan year, all of the CEO's rights under the EBP shall expire
unless otherwise determined by the Committee. The Committee may determine what
portions, if any, of the CEO's bonus under the EBP should be paid if the CEO's
employment has been terminated by reason of death, disability or retirement.
If a change in control (as defined in the 1989 Incentive Compensation Plan)
occurs after the close of an EBP plan year, the CEO will be paid a bonus based
on performance in relation to the performance objectives. If a change in control
occurs during an EBP plan year, the CEO will be paid a bonus prorated to the
effective date of the change in control, and all performance objectives will be
deemed to be met at the greater of 100% of the target or the actual prorated
year-to-date performance. The CEO must be employed by the Company or its
successor on the effective date of the change in control in order to receive the
prorated payment, unless the CEO's employment is terminated for retirement,
death or disability or otherwise without cause.
VOTE REQUIRED AND BOARD OF DIRECTORS' RECOMMENDATION
The affirmative vote of a majority of the shares of Common Stock
represented in person or by proxy at the Annual Meeting of Stockholders and
entitled to vote is required for approval of the EBP, including its performance
objective criteria and maximum award limitation.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE FOR THE APPROVAL
OF THE ALLERGAN, INC. EXECUTIVE BONUS PLAN AND ITS PERFORMANCE OBJECTIVE
CRITERIA AND MAXIMUM AWARD LIMITATION.
INDEPENDENT AUDITORS
KPMG LLP, independent auditors, audited the consolidated financial
statements of the Company for the fiscal year ended December 31, 1998.
Representatives of KPMG LLP are expected to be present at the stockholders'
meeting, will have the opportunity to make a statement if they desire to do so,
and will be
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available to respond to appropriate questions. The Board of Directors selects
the independent public accountants, typically during the third or fourth quarter
of the fiscal year.
ANNUAL REPORT
The Annual Report to Stockholders for the year ended December 31, 1998
accompanies the proxy material being mailed to all stockholders. The Annual
Report is not a part of the proxy solicitation material. The Company will
provide, without change, a copy of its most recent Annual Report on Form 10-K
upon the receipt of a written request by any stockholder.
DEADLINE FOR STOCKHOLDER PROPOSALS
Any stockholder of the Company wishing to have a proposal considered for
inclusion in the Company's 2000 proxy solicitation materials must, in addition
to other applicable requirements, set forth such proposal in writing and send
the proposal to the Secretary of the Company so that it is received on or before
November 17, 1999.
OTHER BUSINESS
PRESENTED BY MANAGEMENT
As of the date of this Proxy Statement, management knows of no other
matters to be brought before the stockholders at the annual meeting. Should any
other matters properly come before the meeting, action may be taken thereon
pursuant to the proxies in the form enclosed, which confer discretionary
authority on the persons named therein or their substitutes with respect to such
matters.
PRESENTED BY STOCKHOLDERS
Pursuant to the Company's Restated Certificate of Incorporation only such
business shall be conducted at an annual meeting of stockholders as is properly
brought before the meeting. For business to be properly brought before an annual
meeting by a stockholder, in addition to any other applicable requirements,
timely notice of the matter must be first given to the Secretary of the Company.
To be timely, written notice must be received by the Secretary no less than 30
days nor more than 60 days prior to the meeting. If less than 40 days' notice or
prior public disclosure of the meeting has been given to stockholders, then
notice of the proposed business matter must be received by the Secretary not
later than ten days after the mailing of notice of the meeting or such public
disclosure. Any notice to the Secretary must include as to each matter the
stockholder proposes to bring before the meeting: (a) a brief description of the
proposal desired to be brought before the meeting and the reason for conducting
such business at the annual meeting; (b) the name and record address of the
stockholder proposing such business and any other stockholders known by such
stockholder to be supporting such proposal; (c) the class and number of shares
of the Company which are beneficially owned by the stockholder on the date of
such stockholder notice and by other stockholders known by such stockholder to
be supporting such proposal on the date of such stockholder notice; and (d) any
material interest of the stockholder in such business.
By Order of the Board of Directors
/s/ FRANCIS R. TUNNEY, JR.
Francis R. Tunney, Jr.
Secretary
March 23, 1999
Irvine, California
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EXHIBIT A
Allergan, Inc.
FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
MANAGEMENT'S DISCUSSION AND ANALYSIS........................ A-2
CONSOLIDATED BALANCE SHEETS................................. A-16
CONSOLIDATED STATEMENTS OF OPERATIONS....................... A-17
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY............. A-18
CONSOLIDATED STATEMENTS OF CASH FLOWS....................... A-19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.................. A-20
REPORT OF MANAGEMENT........................................ A-38
INDEPENDENT AUDITORS' REPORT................................ A-39
QUARTERLY RESULTS........................................... A-40
SELECTED FINANCIAL DATA..................................... A-41
</TABLE>
A-1
<PAGE> 38
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR
THE THREE-YEAR PERIOD ENDED DECEMBER 31, 1998
This financial review presents the operating results for Allergan, Inc. for
each of the three years in the period ended December 31, 1998, and its financial
condition at December 31, 1998. This review should be read in connection with
the information presented in the Consolidated Financial Statements and the
related Notes to the Consolidated Financial Statements.
Allergan, Inc. (the Company), headquartered in Irvine, California, is a
technology driven, global health care company providing specialty pharmaceutical
products worldwide. The Company develops and commercializes products in the eye
care dermatological and movement disorder pharmaceutical, ophthalmic surgical
device, and over-the-counter contact lens care markets that deliver value to our
customers, satisfy unmet medical needs, and improve patients' lives.
Incorporated in 1948, the Company employs approximately 6,000 professionals
around the world. The Company is a pioneer in specialty pharmaceutical research,
targeting products and technologies related to specific disease areas such as
glaucoma, retinal disease, cataracts, dry eye, psoriasis, acne, photodamage,
movement disorders, metabolic disease, and various types of cancer. With 1998
sales in excess of $1.25 billion, the Company is an innovative leader in
therapeutic and over-the-counter products that are sold in more than 100
countries around the world.
The Company operates in four regions: North America, Latin America, Europe
and Asia Pacific. Operations for the Europe Region also include sales to
customers in Africa and the Middle East, and operations in the Asia Pacific
Region include sales to customers in Australia and New Zealand.
In each region, the Company markets products in three product segments:
Specialty Pharmaceuticals, Ophthalmic Surgical and Contact Lens Care. The
Specialty Pharmaceutical segment produces a broad range of ophthalmic products
for glaucoma therapy, ocular inflammation, infection, allergy and dry eye; skin
care products for acne, psoriasis and other prescription and over the counter
dermatological products; and Botox(R) Purified Neurotoxin Complex for movement
disorders. The Ophthalmic Surgical segment produces intraocular lenses,
phacoemulsification equipment, viscoelastics, and other products related to
cataract surgery. The Contact Lens Care segment produces cleaning, storage and
disinfection products for the consumer contact lens market. The Company provides
global marketing strategy teams to ensure the marketing strategy for consistent
execution of products in all geographic operating segments.
In 1998, 1997 and 1996, the Company participated in the following research
and development collaboration activities:
In July 1998, the Company entered into a multi-year research and
development collaboration with the Parke-Davis Pharmaceutical Research Division
of Warner-Lambert Company to identify, develop and commercialize up to two
retinoid compounds. The Company received a payment at the time of the agreement,
and could receive a total of up to $104 million in payments relating to
development of the two compounds. In addition, the Company will receive
royalties on sales of developed products.
In July 1998, the Company entered into an agreement with Santen
Pharmaceutical Co., Ltd. (Santen) granting Santen distribution rights in Japan
for brimonidine, a compound marketed by Allergan under the brand name
Alphagan(R). The Company will manufacture brimonidine for Santen. Santen is
responsible for development, registration and approval of brimonidine in Japan.
The Company received a payment on signing the agreement, and is entitled to
receive development milestone payments and a percentage of future product sales.
In March 1998, the Company formed Allergan Specialty Therapeutics, Inc.
(ASTI) to conduct research and development of potential pharmaceutical products
based primarily upon the Company's retinoid and neuroprotective technologies.
The Company contributed $200 million and certain related technologies to ASTI.
The Company then distributed the stock of ASTI in a dividend to the Company's
stockholders.
In November 1997, the Company and Ligand Pharmaceuticals, Incorporated
(Ligand) divided the technologies within Allergan Ligand Retinoid Therapeutics,
Inc. (ALRT) after Ligand purchased ALRT
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<PAGE> 39
from its shareholders. ALRT was formed in 1995 to conduct research related to
small molecule retinoid products. The Company and Ligand provided contract
research services to ALRT during its operation.
In September 1997, the Company and ACADIA Pharmaceuticals Inc. entered into
a collaboration of discovery efforts on five potential drug targets including
the prostanoid and alpha adrenergic receptors. The Company invested $6 million
in ACADIA Pharmaceuticals, and will pay ACADIA up to $12.5 million for the first
product developed for each receptor target. Upon commercialization of products,
the Company will pay ACADIA royalties on product sales.
In November 1996, the Company and Cambridge NeuroScience, Inc. entered into
a collaboration to develop treatments for glaucoma and other ophthalmic diseases
based on ion channel blocking technology. The Company invested $3 million in
Cambridge NeuroScience common stock, and will pay Cambridge NeuroScience $3
million for collaborative research over a three-year period. The Company
assigned its collaborative rights to ASTI. ASTI is obligated to make all
payments to Cambridge NeuroScience, Inc. subsequent to the date of assignment.
In October 1996, the Company and SUGEN, Inc. entered into an exclusive
collaboration to identify compounds for the treatment of ophthalmic diseases
utilizing SUGEN's proprietary signal transduction inhibition technology. The
Company invested $7 million in SUGEN common stock, and paid SUGEN $2 million in
technology fees which were charged to research and development in 1996. In
addition, the Company will pay $4.5 million in collaborative research fees over
a three-year period. In the third quarter of 1998, the Company assigned its
collaborative rights to ASTI. ASTI is obligated to make all payments to SUGEN,
Inc. subsequent to the date of assignment.
RESULTS OF OPERATIONS
Net Sales
Net sales for 1998 were $1.262 billion, which was an increase of $123.7
million or 11% over 1997. Foreign currency fluctuations in 1998 decreased sales
by $27.8 million or 2% as compared to average rates in effect through 1997.
Excluding the impact of foreign currency fluctuations, sales increased by $151.5
million or 13% over 1997.
Net sales for 1997 were $1.138 billion, which was a decrease of $9.0
million or 1% from 1996. Foreign currency fluctuations in 1997 decreased sales
by $46.0 million or 4% as compared to average rates in effect through 1996.
Excluding the impact of foreign currency fluctuations, sales increased by $37.0
million or 3% over 1996.
The following table sets forth, for the periods indicated, net sales by
major product line.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
-------- -------- --------
IN MILLIONS
<S> <C> <C> <C>
Specialty Pharmaceuticals:
Eye Care Pharmaceuticals................... $ 505.3 $ 408.5 $ 425.1
Skin Care.................................. 80.6 80.6 64.7
Botox/Neuromuscular........................ 125.3 90.1 67.2
-------- -------- --------
Total.............................. 711.2 579.2 557.0
Medical Devices and OTC Product Lines:
Ophthalmic Surgical........................ 193.6 182.2 184.0
Contact Lens Care.......................... 356.9 376.6 406.0
-------- -------- --------
Total.............................. 550.5 558.8 590.0
-------- -------- --------
Total Product Net Sales................. $1,261.7 $1,138.0 $1,147.0
======== ======== ========
Domestic..................................... 46.2% 42.8% 41.4%
International................................ 53.8% 57.2% 58.6%
</TABLE>
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<PAGE> 40
Historically, the Company has used special sales and promotional incentives
to wholesalers to promote the sale of eye care pharmaceuticals and skin care
pharmaceuticals. A curtailment of these special programs in the United States in
1997 reduced wholesaler inventories and net sales by approximately $17 million
or 1.5% of net sales for 1997 in comparison with comparable 1996 amounts.
Eye Care Pharmaceutical Sales
Eye Care pharmaceutical sales include a broad range of products for
glaucoma therapy, ocular inflammation, infection, allergy and dry eye. Eye Care
pharmaceutical sales increased by 24% in 1998 compared to 1997 after decreasing
by 4% in 1997 compared to 1996.
United States sales increased by $76.9 million, or 41%, while international
sales increased $19.9 million, or 9%, in 1998 compared to 1997. Excluding the
impact of foreign currency changes, international sales increased $27.7 million,
or 12% in 1998, compared to 1997. U.S. sales increased primarily as a result of
increases in sales of Alphagan(R), Ocuflox(R) and Acular(R) ophthalmic
solutions. Sales of Alphagan(R) ophthalmic solution in the United States were
$87.2 million in 1998 compared to $46.3 million in 1997 and $5.0 million in
1996. Alphagan(R) was introduced in late 1996. The increase in international
sales in 1998 was primarily the result of an increase in sales of Alphagan(R)
ophthalmic solution.
United States sales decreased by $5.0 million while international sales
decreased $11.6 million in 1997 compared to 1996. Excluding the impact of
foreign currency changes, international sales were unchanged in 1997 compared to
1996. The decrease in U.S. sales was primarily the result of the reduction in
1997 in inventories held by wholesalers. In addition, sales of certain glaucoma
and anti-infective products decreased significantly due to generic competition.
The decreases were offset by growth in sales of Alphagan(R) ophthalmic solution.
Skin Care Sales
Skin Care sales include products for acne, psoriasis and other prescription
and over the counter dermatological products. Skin care product sales in 1998
were $80.6 million, the same amount as in 1997. Sales increased by $15.9 million
or 25% in 1997 compared to 1996. Sales growth in 1997 was driven by $16.2
million in sales of Tazorac(R) (Zorac(R)), a topical gel used to treat psoriasis
and acne, which was introduced in 1997. Growth in 1997 was negatively impacted
by the reduction in wholesaler inventories and a decrease in sales of
anti-fungal products.
Botox/Neuromuscular Sales
Botox(R) (Botulinum Toxin Type A) Purified Neurotoxin Complex is the
Company's product for movement disorders. Botox(R) sales increased by 39% to
$125.3 million in 1998 compared to 1997. Sales in 1997 increased by 34% from
1996. United States sales increased by 36%, while international sales increased
by 45%, in 1998 compared to 1997. Excluding the impact of foreign currency
changes, international sales increased 52% in 1998, compared to 1997. Sales in
both the U.S. and international markets increased in both years as a result of
broader therapeutic usage of Botox(R) and increased market penetration.
Ophthalmic Surgical Sales
Surgical sales represent products for the ophthalmic surgical market,
including intraocular lenses (IOLs), phacoemulsification equipment,
viscoelastics, and other products related to cataract surgery. Surgical sales
increased by 6% in 1998 compared to 1997 after decreasing by 1% in 1997 compared
to 1996. Domestic sales increased by 11% in 1998 and 2% in 1997, while sales in
international markets increased by 2% in 1998 and decreased by 3% in 1997.
Domestic sales increased primarily as a result of increased sales of IOLs. IOL
sales have increased as the product mix has shifted from PMMA IOLs to foldable
IOLs implanted using less invasive small incision surgery. During 1996, surgical
sales were negatively impacted by the initiation of a limited voluntary recall
of certain IOLs in the first quarter. Competitive pressures resulted in a
decline in average selling prices of IOLs in 1997 in both the United States and
international markets. In addition, sales
A-4
<PAGE> 41
in international markets decreased by 6 percentage points in 1998 and 8
percentage points in 1997 from the impact of foreign currency fluctuations.
Contact Lens Care Sales
Contact Lens Care sales decreased by 5% from 1997 to 1998 and decreased by
7% from 1996 to 1997. Domestic sales decreased by 13% in 1998 and by 10% in
1997. Domestic sales decreased in 1998 and 1997 as a result of decreases in
sales of ancillary contact lens care products. This decrease is the result of
increasing use of disposable and frequent replacement contact lenses.
International lens care product sales decreased by 3% in 1998 compared to 1997
and by 6% in 1997 compared to 1996. Currency fluctuations had a negative impact
on 1997 and 1998 international sales growth. Excluding currency fluctuations,
international sales increased by 1% from 1997 to 1998 and by 5% from 1996 to
1997. Sales of Consept F(R) Cleaning and Disinfecting System, a Barnes Hind
product acquired in 1995, increased international sales in 1998 and 1997. These
increases were offset by decreases in sales of peroxide based disinfection
products as consumers increased their use of lower priced one bottle cold
chemical disinfection systems.
Income and Expenses
The following table sets forth the relationship to sales of various income
statement items:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Product net sales................................... 100.0% 100.0% 100.0%
Cost of sales....................................... 32.3 35.1 33.5
----- ----- -----
Product gross margin................................ 67.7 64.9 66.5
Research services margin............................ 0.2 0.1 0.1
Other operating costs and expenses:
Selling, general and administrative............... 40.7 40.3 39.8
Research & development............................ 9.9 11.5 10.3
Restructuring charges............................. 5.9 -- 6.1
Asset write-offs.................................. 4.6 -- 0.6
Contribution to ASTI.............................. 13.6 -- --
----- ----- -----
Operating income (loss)............................. (6.9) 13.1 9.6
Gains on investments, net........................... 4.3 1.1 --
Contribution to Allergan Foundation................. (0.9) -- --
Other non-operating expense, net.................... (1.1) (0.4) (0.2)
----- ----- -----
Earnings (loss) before income taxes and minority
interest.......................................... (4.6) 13.8 9.4
===== ===== =====
Net earnings (loss)................................. (7.1)% 11.3% 6.7%
===== ===== =====
</TABLE>
Gross Margins
The Company's gross margin percentage increased by 2.8 percentage points
from 64.9% in 1997 to 67.7% in 1998. The increase in gross margin percentage was
primarily the result of shifts in the product mix of sales. Higher margin eye
care pharmaceutical and Botox(R) Purified Neurotoxin Complex sales represented a
greater percentage of 1998 sales compared to 1997. The Company's gross margin
percentage decreased by 1.6 percentage points from 66.5% in 1996 to 64.9% in
1997. The decrease in gross margin was primarily the result of the negative
impact of currency fluctuations. Partially offsetting the decrease, the gross
margin percentage was increased by sales of newly introduced higher margin
products offset by increased royalty costs.
A-5
<PAGE> 42
Selling, General and Administrative
Selling, general and administrative expenses as a percentage of net sales
increased in 1998 to 40.7% from 40.3% in 1997. The percentage increase in 1998
was primarily the result of increased product marketing costs. The increased
costs were largely offset by $11.2 million in technology fees received by
Allergan from ASTI in 1998, and $12.9 million from product development licensing
agreements.
Selling, general and administrative expenses as a percentage of product net
sales increased in 1997 to 40.3% from 39.8% in 1996. The percentage increase in
1997 was primarily the result of product launch costs relating to Alphagan(R)
ophthalmic solution and Tazorac(R)(Zorac(R)) topical gel estimated to be in
excess of $23.0 million. The increased costs were partially offset by certain
transactions including $9.6 million in income from sales of product rights, $7.5
million in income from settlement of a product related lawsuit, and $4.5 million
in income from Ligand Pharmaceuticals Incorporated (Ligand) from the sale of
rights to certain compounds in connection with the dissolution of Allergan
Ligand Retinoid Therapeutics, Inc. (ALRT).
Research and Development
Research and development expenses decreased by 4% in 1998 to $125.4 million
compared to $131.2 million in 1997 and $118.3 million in 1996. Research and
development spending does not include research and development spending
performed under contracts with ASTI in 1998 or ALRT in 1996 and 1997. Research
and development costs in 1998 were decreased by $3.8 million as a result of
recovery from ASTI of costs incurred and expensed in the fourth quarter of 1997,
primarily relating to retinoid research, after the dissolution of ALRT. The 1997
increase in research and development spending is the result of increased
spending on selected research opportunities. In addition, 1997 spending includes
$3.4 million in net cost to acquire a portion of the assets of ALRT at its
dissolution, and $3.8 million in costs of research reimbursed by ASTI in 1998,
which would have been reimbursed by ALRT had it not been dissolved. Research and
development expenditures are allocated to each product line, with higher rates
of investments allocated to Eye Care pharmaceuticals, Botox(R) and Skin Care.
Special Charges
Results for 1998 and 1996 include three special charges disclosed on
specific lines in the Consolidated Statements of Operations.
The Company recorded a charge of $171.4 million in March 1998 relating to
the dividend distribution of ASTI stock to the Company's stockholders. Such
amount represents the excess of the $200 million contributed to ASTI by the
Company over the aggregate market value of ASTI stock at the commencement of
trading as an independent company.
During 1998, the Company has recorded a $74.8 million restructuring charge,
$50.9 million after taxes. The restructuring charge represented the costs of a
comprehensive plan to streamline operations and reduce costs through reductions
in global general and administrative (G&A) staff and the closure of five of ten
manufacturing facilities in connection with the outsourcing and consolidation of
manufacturing operations. In addition, operations in many countries were
transferred to distributors, and business activities were concentrated into
regional shared service centers. The changes in operations will result in a net
workforce reduction of approximately 550 positions over a three-year period. The
reductions in G&A staff and manufacturing facilities are primarily the result of
a strategic assessment of the Company's product lines and businesses during the
first quarter of 1998, and a review of the G&A cost structure and manufacturing
capabilities during the second and third quarters.
The restructuring charge was recorded primarily in the third quarter as
most restructuring activities were announced on September 14, 1998. Certain
restructuring activities in the first and second quarters totaling $7.8 million
were previously reported as operating expenses in prior quarters. Severance
payments were made to approximately 140 terminated employees in 1998.
In 1998, management completed a critical review of its asset bases in light
of the strategic decisions made in the restructuring activities discussed above.
Management made business decisions relating to the future use
A-6
<PAGE> 43
of certain assets resulting in a reassessment of the carrying value of such
assets. As a result, the Company recorded a $58.5 million charge, $41.1 million
after taxes. Such charge reduced the value of a manufacturing facility, certain
real property, and certain product rights.
During 1996, the Company recorded a $70.1 million restructuring charge,
$49.7 million after taxes. The restructuring charge related to a comprehensive
program anticipated to streamline operations and reduce costs through management
restructuring and facilities consolidation resulting in a workforce reduction of
approximately 500 people. The restructuring and facilities consolidation
activities affected employees in various activities in 22 locations worldwide.
The restructuring charge was recorded over the last three quarters of 1996 as
employees at each location were notified of the restructuring plan and its
effect on their location. Severance payments were made to approximately 75
terminated employees in 1998, approximately 140 terminated employees in 1997,
and approximately 300 terminated employees in 1996.
As the Company implemented its streamlined business plan in 1996, certain
assets were determined to be of limited or no future value. The Company recorded
$7.4 million in write-offs, $5.3 million after taxes, of computer hardware and
software and certain intangible assets in 1996.
The following table presents the restructuring activities through December
31, 1998:
<TABLE>
<CAPTION>
FACILITY ABANDONMENT
PAYMENTS CLOSURE OF
TO EMPLOYEES AND COMPUTER
INVOLUNTARILY CONSOLIDATION SOFTWARE OTHER TOTAL
TERMINATED COSTS COSTS COSTS RESTRUCTURING
------------- ------------- ----------- ----- -------------
<S> <C> <C> <C> <C> <C>
Net additions during 1996........ 34.0 29.6 -- 6.5 70.1
Spending during 1996............. (9.9) (0.7) -- (0.2) (10.8)
Asset write-offs during 1996..... -- (25.9) -- (6.2) (32.1)
---- ----- ----- ---- -----
Balances as of December 31,
1996........................... 24.1 3.0 -- 0.1 27.2
Spending during 1997............. (7.6) (3.0) -- (0.6) (11.2)
Adjustments during 1997.......... (0.5) -- -- 0.5 --
---- ----- ----- ---- -----
Balances as of December 31,
1997........................... 16.0 -- -- -- 16.0
Net additions during 1998........ 22.7 28.9 10.6 12.6 74.8
Spending during 1998............. (8.6) -- -- (7.4) (16.0)
Asset write-offs during 1998..... -- (25.3) (11.0) (4.8) (41.1)
Adjustments during 1998.......... (0.4) -- 0.4 -- --
---- ----- ----- ---- -----
Balances as of December 31,
1998........................... 29.7 3.6 -- 0.4 33.7
==== ===== ===== ==== =====
</TABLE>
During 1998, the Company offered an early retirement program to certain
employees. The increase in pension liability resulting from this program is
included in the table above as 1998 spending of other costs.
Operating Income
Operating income was a loss of $87.1 million, or 6.9% of product net sales
in 1998. The 1998 amount includes special charges for restructuring of $74.8
million and asset write-offs of $58.5 million. In addition the 1998 amount
includes the $171.4 million charge relating to the dividend distribution of ASTI
stock to the Company's stockholders. Excluding the special charges in 1998,
operating income was $217.6 million or 17.2% of product net sales. Operating
income was $149.0 million or 13.1% of product net sales in 1997, and $110.6
million or 9.6% of product net sales in 1996. The 1996 amount included special
charges for restructuring costs of $70.1 million and asset write-offs of $7.4
million. Excluding the special charges in 1996, operating income was $188.1
million or 16.4% of product net sales in 1996.
Operating income and operating income percentage, excluding special charges
in 1998, increased by $68.6 million from $149.0 million or 13.1% of product net
sales in 1997 to $217.6 million or 17.2% of product net sales in 1998. Such
increases were the result of the $123.7 million or 11% increase in product net
sales, combined with the 2.8 percentage point increase in gross margin
percentage from 1997 to 1998. Such
A-7
<PAGE> 44
increases were partially offset by the increase in selling, general and
administrative expenses of $54.9 million or 0.4% of product net sales in 1998
compared to 1997. Operating income and the operating income percentage,
excluding special charges, decreased by $39.1 million from $188.1 million or
16.4% of product net sales in 1996 to $149.0 million or 13.1% of product net
sales in 1997. Such decreases were primarily the result of the decrease in gross
margin of $23.6 million and the increase in research and development costs of
$12.9 million.
Net Earnings
The Company recorded a net loss of $90.2 million in 1998 compared to net
earnings of $128.3 million in 1997. The 1998 results include the charge related
to the dividend of ASTI stock of $171.4 million, the restructuring charge of
$50.9 million net of income taxes, and asset write-offs of $41.1 million net of
income taxes. Excluding the charge related to the dividend of ASTI stock and the
after tax effect of the restructuring charge and asset write-offs, net earnings
were $173.2 million compared to $128.3 million in 1997. The $44.9 million
increase in net earnings in 1998, excluding the effect of the items noted, is
the result of the $68.6 million increase in operating income excluding such
items, and an increase in non-operating income of $21.3 million, offset by an
increase in income taxes of $45.1 million. The increase in non-operating income
includes gains on sales of investments in Ocular Sciences, Inc. (OSI) of $51.8
million in 1998 compared to gains of $12.4 million in 1997, and a gain on sale
of Ligand stock of $6.1 million. Such increases were offset by a charge of $11.0
million for the contribution of OSI stock to The Allergan Foundation, and a
charge of $3.8 million to recognize the permanent impairment in value of certain
other investments. Interest expense increased by $7.5 million in 1998 primarily
as a result of an increase in debt resulting from the $200 million contribution
to ASTI. Income taxes increased in 1998 as a result of the increase in income
before income taxes excluding the effects of the special charges discussed
above. In addition, income taxes in 1997 were reduced by $16.5 million as
discussed below.
Net earnings were $128.3 million in 1997 compared to $77.1 million in 1996.
The 1996 results include the restructuring charge of $49.7 million net of income
taxes, and asset write-offs of $5.3 million net of income taxes. Excluding the
after tax effect of special charges, net earnings were $128.3 million in 1997
compared to $132.1 million in 1996. The decrease in 1997 was the result of the
$39.1 million decrease in operating income, offset by a $12.4 million ($8.8
million net of income taxes) gain on sale of an investment included in other
non-operating expense and a $16.5 million one-time reduction in income taxes.
Income taxes were reduced by a tax benefit resulting from the termination of
ALRT in 1997. Such reduction was related to a portion of $50.0 million
contributed to ALRT in 1995.
LIQUIDITY AND CAPITAL RESOURCES
Management assesses the Company's liquidity by its ability to generate cash
to fund its operations. Significant factors in the management of liquidity are:
funds generated by operations; levels of accounts receivable, inventories,
accounts payable and capital expenditures; the extent of the Company's stock
repurchase program; adequate lines of credit; and financial flexibility to
attract long-term capital on satisfactory terms.
Historically, the Company has generated cash from operations in excess of
working capital requirements. The net cash provided by operating activities was
$52.7 million in 1998 compared to $209.8 million in 1997 and $175.2 million in
1996. Operating cash flow in 1998 was reduced by the contribution to ASTI of
$171.4 million. Excluding such contribution, operating cash flow was $224.1
million. Operating cash flow in 1998 was also reduced by an increase in accounts
receivable balances, and increased by a decrease in inventory and an increase in
accrued liabilities. Operating cash flow in 1997 was increased due to a
reduction in accounts receivable balances.
Net cash used in investing activities was $11.8 million in 1998 including
$50.6 million in expenditures for plant and equipment more fully described under
"Capital Expenditures" below, and $24.9 million to acquire software. Such
expenditures in 1998 were offset by $57.0 million in proceeds from sale of
investments. Net cash used in investing activities was $83.9 million in 1997
including $64.4 million in expenditures for property,
A-8
<PAGE> 45
plant and equipment, and $17.4 million to acquire software. Net cash used in
investing activities of $74.4 million in 1996 included $23.5 million to acquire
software, and $59.7 million of expenditures for plant and equipment.
Expenditures in 1997 and 1996 were partially offset by proceeds from sales of
investments and other assets.
Net cash used in financing activities was $35.9 million in 1998, composed
primarily of $33.8 million for payment of dividends, $32.9 million for purchases
of treasury stock, $37.0 million in net repayments of debt including notes
payable, commercial paper, and long-term debt, and $28.6 million representing
the portion of the $200 million contribution to ASTI not charged to operations
in 1998. Cash was provided by $60.4 million in long-term debt borrowings and
$36.0 million from sale of stock to employees. Net cash used in financing
activities was $54.5 million in 1997, composed primarily of $33.4 million for
payment of dividends, $34.0 million for purchases of treasury stock and $37.6
million in net repayments of debt including notes payable and long-term debt.
Cash was provided by $31.9 million in net borrowings under commercial paper
obligations and long-term debt, and $18.6 million in proceeds from sales of
stock to employees. Net cash used in financing activities was $93.5 million in
1996, composed primarily of $31.5 million for payment of dividends and $100.1
million in net repayments of debt including commercial paper, notes payable and
long-term debt. Cash was provided from $18.2 million in proceeds from sales of
stock to employees and $19.9 million in long-term borrowings.
As of December 31, 1998, the Company had five long-term credit facilities
and a medium term note program. The credit facilities allow for borrowings of up
to $30.1 million through 2000, $38.5 million through 2001, and $270.3 million
through 2003. The note program allows the Company to issue up to an additional
$60 million in notes on a non-revolving basis. Borrowings under the credit
facilities are subject to certain financial and operating covenants, including a
requirement that the Company maintain certain financial ratios and other
customary covenants for credit facilities of similar kind. As of December 31,
1998, the Company had $87.9 million in borrowings under certain of the credit
facilities, $89.0 million under the note program, and commercial paper
borrowings of $39.5 million. As of December 31, 1998, the Company classified
$9.5 million of its commercial paper borrowings as long-term debt based upon the
Company's ability to refinance such debt on a long-term basis under terms of the
credit facilities described above.
A substantial portion of the Company's existing cash and equivalents are
held by non-U.S. subsidiaries. These funds are planned to be utilized in the
Company's operations outside the United States. The Company has approximately
$390.3 million in unremitted earnings outside the United States for which
withholding and U.S. taxes have not been provided. Tax costs could be incurred
if these funds were remitted to the United States.
The Company believes that the net cash provided by operating activities,
supplemented as necessary with borrowings available under the Company's existing
credit facilities, will provide it with sufficient resources to meet current and
long-term working capital requirements, debt service and other cash needs.
Capital Expenditures
Expenditures for property, plant and equipment totaled $50.6 million for
1998, $64.4 million for 1997 and $59.7 million for 1996. Expenditures for 1998
include expansion of manufacturing facilities and a variety of other projects
designed to improve productivity. The Company expects to invest $55 to $60
million in property, plant and equipment in 1999.
Inflation
Although at reduced levels in recent years, inflation continues to apply
upward pressure on the cost of goods and services used by the Company. The
competitive and regulatory environments in many markets substantially limit the
Company's ability to fully recover these higher costs through increased selling
prices. The Company continually seeks to mitigate the adverse effects of
inflation through cost containment and improved productivity and manufacturing
processes.
A-9
<PAGE> 46
Foreign Currency Fluctuations
Approximately 54% of the Company's revenues in 1998 were derived from
operations outside the U.S., and a portion of the Company's international cost
structure is denominated in currencies other than the U.S. dollar. As a result,
the Company is subject to fluctuations in sales and earnings reported in U.S.
dollars as a result of changing currency exchange rates. The Company routinely
monitors its transaction exposure to currency rates and implements certain
hedging strategies to limit such exposure, as appropriate. The impact of foreign
currency fluctuations on the Company's sales was as follows: a $27.8 million
decrease in 1998, a $46.0 million decrease in 1997; and a $13.9 million decrease
in 1996. The 1998 sales decrease included decreases of $8.4 million related to
European currencies and $8.5 million related to the Japanese Yen. The 1997 sales
decrease included decreases of $31.3 million related to European currencies and
$9.7 million related to the Japanese Yen. The 1996 sales decrease included
decreases of $6.3 million related to European currencies and $7.7 million
related to the Japanese Yen. See Note 1 to the Consolidated Financial Statements
relative to the Company's accounting policy on foreign currency translation.
In the normal course of business, operations of the Company are exposed to
risks associated with fluctuations in currency exchange rates and interest
rates. The Company addresses these risks through controlled risk management that
includes the use of derivative financial instruments to hedge or reduce these
exposures. The Company does not enter into financial instruments for trading or
speculative purposes. See Note 9 to the Consolidated Financial Statements for
activities relating to foreign currency and interest rate risk management. The
recent economic instability in Asia has not had, and is not expected to have, a
material impact on the Company's operations, cash flows, or financial position.
The Company believes its assets in Asia have suffered no permanent impairment in
value as a result of recent economic events.
QUANTITATIVE AND QUALITATIVE MARKET RISK FACTORS
In the normal course of business, operations of the Company are exposed to
risks associated with fluctuations in interest rates and foreign currency
exchange rates. The Company addresses these risks through controlled risk
management that includes the use of derivative financial instruments to hedge or
reduce these exposures. The Company does not enter into financial instruments
for trading or speculative purposes.
To ensure the adequacy and effectiveness of the Company's interest rate and
foreign exchange hedge positions, the Company continually monitors its interest
rate swap positions and foreign exchange forward and option positions both on a
stand-alone basis and in conjunction with its underlying interest rate and
foreign currency exposures, respectively, from an accounting and economic
perspective. However, given the inherent limitations of forecasting and the
anticipatory nature of the exposures intended to be hedged, there can be no
assurance that such programs will offset more than a portion of the adverse
financial impact resulting from unfavorable movements in either interest or
foreign exchange rates. In addition, the timing of the accounting for
recognition of gains and losses related to mark-to-market instruments for any
given period may not coincide with the timing of gains and losses related to the
underlying economic exposures and, therefore, may adversely affect the Company's
consolidated operating results and financial position.
Interest Rate Risk
The Company's interest income and expense is most sensitive to fluctuations
in the general level of U.S. interest rates. Changes in U.S. interest rates
affect the interest earned on the Company's cash and equivalents, interest
expense on the Company's debt as well as costs associated with foreign currency
hedges.
The Company's exposure to market risk for changes in interest rates result
from the Company's long-term debt obligations and related derivative financial
instruments. The Company enters into interest rate swap agreements to reduce the
impact of interest rate changes on its floating rate long-term debt. These
derivative financial instruments allow the Company to make long-term borrowings
at floating rates and then swap them into fixed rates that are anticipated to be
lower than those available to the Company if fixed-rate borrowings were made
directly.
A-10
<PAGE> 47
The Company's interest rate swaps outstanding at December 31, 1998 qualify
as accounting hedges and generally require the Company to pay a fixed interest
rate and receive a floating rate of interest without exchanges of the underlying
notional amounts. As a result, these swaps effectively convert the Company's
floating-rate debt to fixed-rates and generally qualify for hedge accounting
treatment.
The following presents the notional amounts, maturity dates, and effective
floating and fixed interest rates related to the Company's interest rate swaps
as of December 31, 1998:
<TABLE>
<CAPTION>
INTEREST RATE
--------------------
NOTIONAL AMOUNT MATURITY DATE FLOATING PAY-FIXED
--------------- ------------- -------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
$10.0 1999 4.44% 4.75%
10.0 2000 5.22% 7.00%
20.0 1999 5.25% 6.95%
</TABLE>
The impact of interest rate risk management activities on income in 1998,
and the amount of deferred gains and losses from interest rate risk management
transactions at December 31, 1998 were not material.
Foreign Currency Risk
Overall, the Company is a net recipient of currencies other than the U.S.
dollar and, as such, benefits from a weaker dollar and is adversely affected by
a stronger dollar relative to major currencies worldwide. Accordingly, changes
in exchange rates, and in particular a strengthening of the U.S. dollar, may
negatively affect the Company's consolidated sales and gross margins as
expressed in U.S. dollars.
From time to time, the Company enters into foreign currency forward and
option contracts to reduce earnings and cash flow volatility associated with
foreign exchange rate changes to allow management to focus its attention on its
core business issues and challenges. Accordingly, the Company enters into
various contracts which change in value as foreign exchange rates change to
offset the effect of changes in the value of foreign currency assets and
liabilities, commitments and anticipated foreign currency denominated sales and
operating expenses. The Company enters into foreign currency forward and option
contracts in amounts between minimum and maximum anticipated foreign exchange
exposures, generally for periods not to exceed one year. The gains and losses on
these contracts offset changes in the value of the related exposures.
At December 31, 1998, all of the Company's outstanding foreign exchange
forward contracts were entered into to protect the value of intercompany
borrowings denominated in currencies other than the lender's functional
currency. These forward contracts qualify for hedge accounting treatment. As
such, gains and losses recognized upon settlement of the forward contracts
offset losses and gains, respectively, on the underlying intercompany
receivables being hedged.
Probable but not firmly committed transactions comprise sales of the
Company's products and purchases of raw material in currencies other than the
U.S. dollar. A majority of these sales are made through the Company's
subsidiaries in Europe, Asia (particularly Japan), Canada and Australia. The
Company purchases foreign exchange forward and option contracts to hedge the
currency exchange risks associated with these probable but not firmly committed
transactions. The Company also sells foreign exchange option contracts, in order
to partially finance the purchase of foreign exchange option contracts. The
duration of foreign exchange hedging instruments, whether for firmly committed
transactions, for probable but not firmly committed transactions, or to
partially finance the foreign currency risk management program, currently does
not exceed one year.
At December 31, 1998, all of the Company's purchased options were entered
into to protect the value of anticipated, but not firmly committed transactions
in Japan. The premium cost of purchased foreign exchange option contracts are
recorded in other current assets and amortized over the life of the option. At
December 31, 1998, the Company had sold options that were entered into to offset
the cost of entering into purchased options. Premiums received on sold options
are recorded in deferred income and amortized over the life of the option. The
Company's option contracts do not qualify for hedge accounting treatment. As
such,
A-11
<PAGE> 48
these derivative financial instruments are recorded at fair value and gains on
purchased options and losses on sold options are recognized currently in income
as a component of other non-operating expense, net.
The following table provides information about the Company's foreign
currency derivative financial instruments outstanding as of December 31, 1998.
The information is provided in U.S. dollar amounts, as presented in the
Company's consolidated financial statements.
<TABLE>
<CAPTION>
NOTIONAL AVERAGE CONTRACT
AMOUNT RATE OR STRIKE
IN MILLIONS AMOUNT
----------- ----------------
<S> <C> <C>
Foreign currency spot/forward contracts:
Spanish Pesetas........................... $ 8.7 141.05
Australian Dollars........................ 7.7 .65
Singapore Dollars......................... 5.7 1.62
French Francs............................. 5.0 5.57
Miscellaneous other currencies............ 5.2 n/a
-----
Total currency spot/forward
contracts....................... $32.3
Estimated fair value........................ $ 0.5
Foreign currency purchased put options:
Japanese Yen.............................. $43.6 130.84
Estimated fair value........................ 0.6
Foreign currency sold call options:
Japanese Yen.............................. 44.7 127.65
Estimated fair value........................ $(7.4)
</TABLE>
YEAR 2000
Introduction
Most businesses, including the Company, are faced with a potentially
serious threat to their operations, known as the "year 2000 issue" which has
been widely publicized. The year 2000 issue is a general term used to describe
the various problems arising from the inability of computers to properly
identify the year associated with information. This problem could potentially
cause system interruptions or failures or result in systems providing incorrect
data. The effect of the year 2000 issue could impact the performance of
operations within the Company as well as the Company's relationships with third
parties, including distributors, wholesalers, vendors and customers who could
also experience year 2000 compliance issues.
The Company is undergoing a process to address the year 2000 issue with
respect to computer systems and applications within the Company. In addition,
the process extends to relationships with key suppliers, customers and other
business partners who are also expected to be impacted by year 2000 issues. The
discussion below provides a description of the Company's activities to address
year 2000 compliance and minimize disruption to the Company's business.
State of Readiness
The Company has formed a task force to manage a four-phase process to
promote global year 2000 compliance. The Company's Year 2000 Task Force is
comprised of representatives from each of the Company's global functional areas.
The task force is centrally managed by co-chairs from the information technology
group and from internal audit. Each global function is sponsored by a member of
the Company's executive management. The task force reports to executive
management on a monthly basis and to the Audit Committee of the Company's Board
of Directors at its regular meetings. In addition, the Company's internal
auditors have developed a program to review progress on the year 2000 project
during all 1999 audits. The Company's internal auditors report to the Company's
Audit Committee with the results of each audit performed. The Company has also
engaged an independent third party consultant to review the Company's year 2000
processes, approaches and readiness.
A-12
<PAGE> 49
The four phases of the Company's year 2000 readiness program are:
Phase 1 is the compilation of an inventory of systems and
relationships with suppliers, key customers and other business partners.
Phase 2 is the assessment of each item identified in the inventory and
the prioritization of such items based on potential impact to the Company.
Systems and relationships are categorized as business critical, important,
limited, or not critical.
Phase 3 involves the verification of compliance with year 2000
requirements and the development of contingency plans in the event that
year 2000 issues are encountered. The extent of verification of individual
systems or relationships and of the development of contingency plans is
dependent upon the assessment of business risk. The systems and
relationships deemed to be business critical will be verified in an
appropriate manner through methods such as testing, auditing and surveying
to address year 2000 compliance. A concerted effort will be made for
systems and relationships defined as important or limited, at a minimum, to
verify by confirmation with business partners or hardware and software
suppliers that applicable systems are year 2000 compliant. If compliance is
not verified, the Company will pursue various alternatives to address
remaining year 2000 issues.
Phase 4 is the assembly during the second quarter of 1999 of rapid
response teams to be prepared to deal with any failures of systems in the
year 1999 and into the year 2000, if any.
The Phase 1 inventory and Phase 2 assessment of systems operated by the
Information Technology (IT) function have been completed. In 1994 the Company
committed to a broad-based strategy of replacement of core IT systems with
systems using SAP R/3 software. Such systems provide control and management of
manufacturing, distribution, billing, collection, purchasing and accounts
payable, human resources and general accounting functions. This core system is
represented to be, and the Company believes is, year 2000 compliant. This system
has already been installed in sites producing a majority of the Company's
revenue. The Company expects that by July 1999, approximately 90% of the
Company's revenue will be in sites which utilize SAP, and almost all
manufacturing locations will be using SAP software. Sites not using SAP will use
software that the Company will validate as year 2000 compliant for core
processes. The IT function is validating the compliance of systems and
developing contingency plans. Such process to complete Phase 3 for the critical
systems in the IT function is expected to be substantially complete by April
1999.
The Company's research and development and manufacturing functions have
completed Phases 1 and 2. These functions expect to complete their Phase 3
validations by the end of the third quarter of 1999, focusing first on business
critical items. The Company's manufacturing function has, in addition, started
its remediation efforts for systems that it has identified as non-compliant.
The selling, general and administrative areas of the Company have completed
their inventories and assessments of IT and non-IT systems and business
relationships. The Company has mailed letters to thousands of vendors, service
providers, customers and other business partners to determine the extent to
which they are prepared for the year 2000 issue. These activities are being
coordinated through the Year 2000 Task Force and sub-teams established in each
functional area. Responses have been received from many business partners, but
many other critical partners have either declined to provide the requested
assurances or have limited the scope of assurances to which they are willing to
commit. Analysis of the responses and follow-up interviews are being made to
those parties deemed critical in order to more thoroughly assess their
readiness. The Company expects to complete validation and contingency plans for
the selling, general and administrative areas of the Company by the end of the
third quarter of 1999.
Allergan sells two products that include a date field in their embedded
technology: the AMO(R)Prestige(R)Phacoemulsification System (model 7000 series)
and the Sovereign(TM) Cataract Extraction System (model SOV680300). The Company
has tested these systems and has confirmed that they accurately process and
store date and time information during the transition between the years 1999 and
2000 and on February 29, 2000 (leap year). All other phacoemulsification
equipment marketed by Allergan does not include a date field, and hence, the
date problem is not applicable.
A-13
<PAGE> 50
Costs to Address the Company's Year 2000 Issues
In 1994, the Company chose to install SAP R/3 systems in order to establish
software systems necessary to meet business needs. Costs to install SAP would
have been incurred had there been no year 2000 issue. The Company estimates that
it has spent less than $1 million in out of pocket expenses through December 31,
1998 to address the year 2000 issue. The Company does not have a method in place
to track the direct costs of internal employees working on the year 2000 issue.
Remaining costs required to complete its year 2000 compliance project are not
anticipated to be material to the Company's results of operations or financial
position. The Company has funded, and intends to complete the funding of, the
year 2000 compliance effort using cash provided by operations. While the Company
has incurred an opportunity cost for implementing its year 2000 project, the
Company has not deferred any specific IT project solely as a result of the
implementation of its year 2000 effort.
Risks of the Company's Year 2000 Issues
The greatest risks to the Company are the potential failures of any
software applications or business partner relationships that have been
identified as business critical or business important. The Company currently
believes that the most reasonably likely worst case scenario concerning the year
2000 involves potential business disruption among the third parties with whom it
conducts significant business. If a number of these third parties experience
business disruption due to a year 2000 problem, the Company's results of
operations and cash flow could be materially adversely affected. The Company's
critical business applications and relationships, including SAP and its
associated interfaces with other software and business partners, are undergoing
disaster recovery and validation testing. This testing is expected to be
substantially completed by April 1999. Once the testing and validation is
completed, a further assessment of business risks will be performed.
Because the Company's year 2000 compliance is dependent upon key third
parties also being year 2000 compliant on a timely basis, there can be no
guarantee that the Company's efforts will prevent a material adverse impact on
its results of operations, financial condition or cash flows. These third
parties include wholesalers, distributors, managed care organizations,
hospitals, suppliers, clinical researchers, research partners and government
agencies. There can be no assurance that third parties will convert their
systems in a timely manner and in a way that is compatible with the Company's
systems. If Allergan's systems or those of key third parties are not fully year
2000 compliant, the Company estimates that a disruption in operations could
occur. Such a disruption could result in delays in the distribution of finished
goods or receipt of raw materials, delays in receiving payments for products
sold, errors in customer-order taking, disruption of clinical activities or
delays in product development. In addition, the Company may also incur losses if
governmental payment systems are inoperable or if the Company's ability to
import or export products is affected by year 2000 issues in United States and
foreign governmental agencies. These consequences could have a material adverse
impact on the Company's results of operations, financial condition and cash
flows if the Company is unable to conduct its business in the ordinary course.
The Company believes that its efforts to address the year 2000 issue, including
the development of contingency plans, will significantly reduce the adverse
impact that any such disruption in business might have. In any event, even where
the Company has developed contingency plans, there can be no assurance that such
plans will address all the problems that may arise, or that such plans, even if
implemented, will be successful. Notwithstanding the foregoing, the Company has
no reason to believe that its exposure to the risks of lack of supplier and
customer year 2000 readiness is any greater than the exposure to such risk that
affects its competitors generally.
An additional year 2000 risk that is particularly applicable to the
pharmaceutical industry is that panic stemming from fears about year 2000
problems could create its own problems, namely the risk that distributors or
customers of the Company's products will stockpile products in anticipation of
possible product shortages. The effects of stockpiling could create a material
adverse effect on the Company's results of operations, financial condition and
cash flows in the year 2000 and possibly beyond. Stockpiling could challenge the
Company's capacity to produce and distribute products to meet the excess demand.
Excess demand for the Company's products in 1999 could cause the Company to
achieve stronger than expected performance in 1999, followed by weaker than
expected performance in 2000 as inventories created by stockpiling are
dissipated. And, because pharmaceutical products have limited shelf lives,
consumers who
A-14
<PAGE> 51
stockpile may risk their health by taking medicines beyond their expiration
dates. If the Company manufactures more products in 1999 to meet excess demand
and then accepts as returns a large amount of products that were not consumed
prior to their expiration dating, the resulting loss to the Company could
materially and negatively impact the Company's results of operations. The
Company is implementing a process with the goal of discerning actual demand from
stockpiling and will attempt to limit orders accordingly. There can be no
assurance, however, that the Company will be able to successfully monitor demand
and avoid the effects of stockpiling.
The Company's Contingency Plans
As discussed above, the development of contingency plans is an integral
part of the process of verification of business risk. The depth of contingency
planning will be determined by the importance of each area under assessment to
the ongoing operation of the Company's business. Contingency plans under
development are action plans to keep the Company in operation and to address the
flow of products to the consumer should there be a failure in systems despite
the testing and validation performed to determine and eliminate such risks. Such
plans may include development of backup procedures, identification of alternate
suppliers, and possible increases in inventory levels of raw materials or
finished goods.
Contingency plans are being refined for business critical IT systems. Plans
for non-IT systems will be developed as a part of the assessment and validation
work discussed above. In addition, as previously discussed, the Company will
form rapid response teams in the second quarter of 1999 to address year 2000
issues as they arise, notwithstanding the efforts described above to identify
and eliminate such problems. These teams will be composed of both IT and non-IT
personnel.
The Company has an on-going contractual relationship with a technology
service company that specializes in disaster recovery support for computer
systems. This company has preliminarily accepted Allergan into its year 2000
recovery program, pending the completion of program requirements later in 1999.
If granted full participation in the program, the Company will have access to
the vendor's recovery facilities and resources in the event of an unanticipated
hardware system failure.
FORWARD LOOKING STATEMENTS
Safe Harbor Statement Under the Private Securities Litigation Reform Act of
1995
Certain disclosures made by the Company in this report and in other reports
and statements released by the Company are and will be forward-looking in
nature, such as comments which express the Company's opinions about trends and
factors which may impact future operating results. Disclosures that use words
such as the Company "believes," "anticipates," "expects" and similar expressions
are intended to identify forward looking statements. Such statements are subject
to certain risks and uncertainties which could cause actual results to differ
materially from expectations. Any such forward-looking statements, whether made
in this report or elsewhere, should be considered in context with the Company's
disclosures about its businesses made in the Company's press releases and in the
Company's Annual Report on Form 10-K and other reports filed with the Securities
and Exchange Commission.
A-15
<PAGE> 52
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
-------- --------
IN MILLIONS,
EXCEPT SHARE DATA
<S> <C> <C>
Current assets
Cash and equivalents...................................... $ 181.6 $ 180.9
Trade receivables, net.................................... 226.1 187.0
Inventories............................................... 123.3 147.8
Other current assets...................................... 130.2 120.7
-------- --------
Total current assets.............................. 661.2 636.4
Investments and other assets................................ 179.2 191.3
Property, plant and equipment, net.......................... 324.9 357.8
Goodwill and intangibles, net............................... 169.1 213.4
-------- --------
Total assets...................................... $1,334.4 $1,398.9
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes payable............................................. $ 48.5 $ 80.5
Accounts payable.......................................... 67.0 83.3
Accrued compensation...................................... 64.8 46.2
Other accrued expenses.................................... 148.8 120.8
Income taxes.............................................. 39.4 32.5
-------- --------
Total current liabilities......................... 368.5 363.3
Long-term debt.............................................. 201.1 142.5
Other liabilities........................................... 68.8 51.4
Commitments and contingencies
Minority interest........................................... -- 0.3
Stockholders' equity
Preferred stock, $.01 par value; authorized 5,000,000
shares; none issued.................................... -- --
Common stock, $.01 par value; authorized 150,000,000
shares; issued 67,133,000 and 67,196,000 shares........ 0.7 0.7
Additional paid-in capital................................ 223.0 208.1
Accumulated other comprehensive income (loss)............. (4.3) 11.7
Retained earnings......................................... 516.3 670.8
-------- --------
735.7 891.3
Less treasury stock, at cost (1,016,000 and 1,903,000
shares)................................................ (39.7) (49.9)
-------- --------
Total stockholders' equity........................ 696.0 841.4
-------- --------
Total liabilities and stockholders' equity........ $1,334.4 $1,398.9
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
A-16
<PAGE> 53
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1998 1997 1996
--------- --------- ---------
IN MILLIONS, EXCEPT PER SHARE DATA
<S> <C> <C> <C>
Product sales
Net sales................................................... $1,261.7 $1,138.0 $1,147.0
Cost of sales............................................... 407.0 399.3 384.7
-------- -------- --------
Product gross margin...................................... 854.7 738.7 762.3
-------- -------- --------
Research services
Research service revenues................................... 34.4 11.0 9.9
Cost of research services................................... 32.1 10.4 9.2
-------- -------- --------
Research services margin.................................. 2.3 0.6 0.7
-------- -------- --------
Selling, general and administrative......................... 514.0 459.1 456.6
Research & development...................................... 125.4 131.2 118.3
Restructuring charges....................................... 74.8 -- 70.1
Asset write-offs............................................ 58.5 -- 7.4
Contribution to ASTI........................................ 171.4 -- --
-------- -------- --------
Operating income (loss)..................................... (87.1) 149.0 110.6
Interest income............................................. 11.7 8.9 13.1
Interest expense............................................ (16.4) (8.9) (12.5)
Gain on investments, net.................................... 54.1 12.4 --
Contribution to Allergan Foundation......................... (11.0) -- --
Other, net.................................................. (9.0) (4.3) (3.2)
-------- -------- --------
Earnings (loss) before income taxes and minority interest... (57.7) 157.1 108.0
Provision for income taxes.................................. 32.8 29.0 31.3
Minority interest........................................... (0.3) (0.2) (0.4)
-------- -------- --------
Net earnings (loss)......................................... $ (90.2) $ 128.3 $ 77.1
======== ======== ========
Basic earnings (loss) per common share...................... $ (1.38) $ 1.97 $ 1.18
======== ======== ========
Diluted earnings (loss) per common share.................... $ (1.38) $ 1.95 $ 1.17
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
A-17
<PAGE> 54
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL UNEARNED OTHER TREASURY STOCK
------------------ PAID-IN COMPEN- COMPREHENSIVE RETAINED ---------------
SHARES PAR VALUE CAPITAL SATION INCOME (LOSS) EARNINGS SHARES AMOUNT TOTAL
------ --------- ---------- -------- ------------- -------- ------ ------ ------
IN MILLIONS
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance December 31, 1995...... 67.3 $0.7 $224.1 $(24.4) $ 3.3 $527.4 (2.8) $(62.2) $668.9
Comprehensive income
Net earnings................. 77.1 77.1
Other comprehensive income,
net of tax.................
Foreign currency translation
adjustments................
Unrealized gains on
investments................
Minimum pension liability
adjustment.................
Other comprehensive income... 3.8 3.8
Comprehensive income...
Dividends ($0.49 per share).... (31.9) (31.9)
Stock options exercised........ 5.7 (0.2) 0.9 19.7 25.2
Activity under other stock
plans........................ (0.1) (2.1) (1.5) 2.4 0.2 4.1 2.9
Expense of compensation
plans........................ 3.8 3.8
---- ---- ------ ------ ------ ------ ---- ------ ------
Balance December 31, 1996...... 67.2 0.7 227.7 (22.1) 7.1 574.8 (1.7) (38.4) 749.8
Comprehensive income
Net earnings................. 128.3 128.3
Other comprehensive income,
net of tax.................
Foreign currency translation
adjustments................
Unrealized gains on
investments................
Other comprehensive income... 4.6 4.6
Comprehensive income...
Dividends ($0.52 per share).... (33.8) (33.8)
Stock options exercised........ 1.0 0.1 0.8 18.3 19.4
Activity under other stock
plans........................ (1.0) (1.3) 1.5 0.2 4.2 3.4
Adjustment in reporting of
subsidiaries................. (0.1) (0.1)
Purchases of treasury stock.... (1.2) (34.0) (34.0)
Expense of compensation
plans........................ 3.8 3.8
---- ---- ------ ------ ------ ------ ---- ------ ------
Balance December 31, 1997...... 67.2 0.7 227.7 (19.6) 11.7 670.8 (1.9) (49.9) 841.4
Comprehensive income
Net loss..................... (90.2) (90.2)
Other comprehensive income,
net of tax.................
Foreign currency translation
adjustments................
Unrealized losses on
investments................
Other comprehensive loss..... (16.0) (16.0)
Comprehensive loss.....
Dividends ($0.52 per share).... (34.1) (34.1)
Dividend of ASTI stock......... (28.6) (28.6)
Stock options exercised........ 12.7 (2.9) 1.5 39.2 49.0
Activity under other stock
plans........................ (0.1) (1.1) (1.1) 2.2 0.2 3.9 3.9
Adjustment in reporting of
subsidiaries................. (0.9) (0.9)
Purchases of treasury stock.... (0.8) (32.9) (32.9)
Expense of compensation
plans........................ 4.4 4.4
---- ---- ------ ------ ------ ------ ---- ------ ------
Balance December 31, 1998...... 67.1 $0.7 $239.3 $(16.3) $ (4.3) $516.3 (1.0) $(39.7) $696.0
==== ==== ====== ====== ====== ====== ==== ====== ======
<CAPTION>
COMPREHENSIVE
INCOME (LOSS)
-------------
IN MILLIONS
<S> <C>
Balance December 31, 1995......
Comprehensive income
Net earnings................. $ 77.1
Other comprehensive income,
net of tax.................
Foreign currency translation
adjustments................ (0.7)
Unrealized gains on
investments................ 3.7
Minimum pension liability
adjustment................. 0.8
-------
Other comprehensive income... 3.8
-------
Comprehensive income... $ 80.9
=======
Dividends ($0.49 per share)....
Stock options exercised........
Activity under other stock
plans........................
Expense of compensation
plans........................
Balance December 31, 1996......
Comprehensive income
Net earnings................. 128.3
Other comprehensive income,
net of tax.................
Foreign currency translation
adjustments................ (9.0)
Unrealized gains on
investments................ 13.6
-------
Other comprehensive income... 4.6
-------
Comprehensive income... $ 132.9
=======
Dividends ($0.52 per share)....
Stock options exercised........
Activity under other stock
plans........................
Adjustment in reporting of
subsidiaries.................
Purchases of treasury stock....
Expense of compensation
plans........................
Balance December 31, 1997......
Comprehensive income
Net loss..................... (90.2)
Other comprehensive income,
net of tax.................
Foreign currency translation
adjustments................ (2.1)
Unrealized losses on
investments................ (13.9)
-------
Other comprehensive loss..... (16.0)
-------
Comprehensive loss..... $(106.2)
=======
Dividends ($0.52 per share)....
Dividend of ASTI stock.........
Stock options exercised........
Activity under other stock
plans........................
Adjustment in reporting of
subsidiaries.................
Purchases of treasury stock....
Expense of compensation
plans........................
Balance December 31, 1998......
</TABLE>
See accompanying notes to consolidated financial statements.
A-18
<PAGE> 55
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1998 1997 1996
------ ------ ------
IN MILLIONS
<S> <C> <C> <C>
Cash flows provided by operating activities
Net earnings (loss)......................................... $(90.2) $128.3 $ 77.1
Non-cash items included in net earnings (loss)
Depreciation and amortization............................. 76.5 68.8 72.9
Amortization of prepaid royalties......................... 10.3 11.0 7.4
Deferred income taxes..................................... (40.4) (7.1) (8.1)
Gain on sale of investments, net.......................... (54.1) (12.4) --
Contribution to Allergan Foundation....................... 11.0 -- --
Loss on sale of assets.................................... 4.3 2.2 4.1
Expense of compensation plans............................. 8.1 7.2 5.5
Minority interest......................................... (0.3) (0.2) (0.4)
Restructuring charge...................................... 74.8 -- 70.1
Asset write-offs.......................................... 58.5 -- 7.4
Adjustment in reporting of foreign subsidiaries........... (0.9) (0.1) --
Changes in assets and liabilities
Trade receivables......................................... (40.1) 44.4 (45.3)
Inventories............................................... 18.8 (18.7) (15.0)
Accounts payable.......................................... (15.8) 9.0 19.6
Income taxes.............................................. 9.7 (12.8) 16.5
Accrued liabilities....................................... 37.3 (3.6) (28.0)
Other..................................................... (14.8) (6.2) (8.6)
------ ------ ------
Net cash provided by operating activities............ 52.7 209.8 175.2
------ ------ ------
Cash flows from investing activities
Additions to property, plant and equipment.................. (50.6) (64.4) (59.7)
Proceeds from sale of property, plant and equipment......... 8.8 10.4 7.2
Proceeds from sale of investments........................... 57.0 12.4 --
Other, net.................................................. (27.0) (42.3) (21.9)
------ ------ ------
Net cash used in investing activities................ (11.8) (83.9) (74.4)
------ ------ ------
Cash flows from financing activities
Dividends to stockholders................................... (33.8) (33.4) (31.5)
ASTI dividend............................................... (28.6) -- --
Decrease in notes payable................................... (32.9) (35.0) (12.3)
Sale of stock to employees.................................. 36.0 18.6 18.2
Net borrowings (repayments) under commercial paper
obligations............................................... (1.1) 25.6 (76.5)
Long-term debt borrowings................................... 60.4 6.3 19.9
Repayments of long-term debt................................ (3.0) (2.6) (11.3)
Payments to acquire treasury stock.......................... (32.9) (34.0) --
------ ------ ------
Net cash used in financing activities................ (35.9) (54.5) (93.5)
Effect of exchange rates on cash and equivalents............ (4.3) (2.5) 2.4
------ ------ ------
Net increase in cash and equivalents........................ 0.7 68.9 9.7
Cash and equivalents at beginning of year................... 180.9 112.0 102.3
------ ------ ------
Cash and equivalents at end of year......................... $181.6 $180.9 $112.0
====== ====== ======
Supplemental disclosure of cash flow information
Cash paid during the year for
Interest (net of amount capitalized)...................... $ 14.3 $ 13.5 $ 16.2
====== ====== ======
Income taxes.............................................. $ 65.8 $ 46.1 $ 28.6
====== ====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
A-19
<PAGE> 56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements include the accounts of Allergan,
Inc. and all of its subsidiaries. All significant transactions among the
consolidated entities have been eliminated from the financial statements. The
accounts of certain non-U.S. subsidiaries are included on the basis of their
fiscal years ended November 30.
The Company is in the process of changing financial systems in its
significant non-U.S. subsidiaries. Future results of such operations will be
accounted for on a calendar year basis. Certain non-U.S. subsidiaries underwent
this system conversion in 1997. Subsidiaries undergoing this conversion in 1998
had revenues of $1.3 million and a net loss of $0.9 million for the month of
activity not included in 1998 results. Subsidiaries undergoing this conversion
in 1997 had revenues of $4.8 million and a net loss of $0.1 million for the
month of December 1997 not included in 1997 results. Activities not included in
operating results were recorded as adjustments to retained earnings.
Use of Estimates
The financial statements have been prepared in conformity with generally
accepted accounting principles and, as such, include amounts based on informed
estimates and judgments of management with consideration given to materiality.
Actual results could differ from those estimates.
Foreign Currency Translation
The financial position and results of operations of the Company's foreign
subsidiaries are generally determined using local currency as the functional
currency. Assets and liabilities of these subsidiaries are translated at the
exchange rate in effect at each year-end. Income statement accounts are
translated at the average rate of exchange prevailing during the year.
Translation adjustments arising from the use of differing exchange rates from
period to period are included in accumulated other comprehensive income (loss)
in stockholders' equity. Gains and losses resulting from foreign currency
transactions and translation adjustments relating to foreign entities deemed to
be operating in U.S. dollar functional currency in highly inflationary economies
are included in earnings. Foreign currency transaction and translation losses
totaled $9.7 million in 1998, $5.6 million in 1997 and $3.3 million in 1996.
Cash and Equivalents
The Company considers cash and equivalents to include cash in banks and
deposits with financial institutions which can be liquidated without prior
notice or penalty.
Inventories
Inventories are valued at the lower of cost or market (net realizable
value). Cost is determined by the first-in, first-out method.
Long-Lived Assets
Property, plant and equipment are stated at cost. Additions, major renewals
and improvements are capitalized, while maintenance and repairs are expensed.
Upon disposition, the net book value of assets is relieved and resulting gains
or losses are reflected in earnings. For financial reporting purposes,
depreciation is generally provided on the straight-line method over the useful
life of the related asset. Accelerated depreciation methods are generally used
for income tax purposes.
Goodwill represents the excess of acquisition costs over the fair value of
net assets of purchased businesses and is being amortized on a straight-line
basis over periods from 7 to 30 years. Intangibles include patents, licensing
agreements and marketing rights which are being amortized over their estimated
useful lives. Amortization expense was $19.5 million in 1998, $20.0 million in
1997 and $21.6 million in 1996.
A-20
<PAGE> 57
Long-lived assets and certain identifiable intangibles are reviewed for
impairment in value based upon undiscounted future operating cash flows, and
appropriate losses are recognized, whenever the carrying amount of an asset may
not be recovered.
Revenue Recognition
The Company recognizes revenue from product sales when the goods are
shipped to the customer. Research service revenue is recognized and related
costs are recorded as services are performed under research service agreements.
Stock-Based Compensation
The Company measures stock based compensation using a method which assumes
that options granted at market price at the date of grant have no intrinsic
value. Pro forma net income and earnings per share are presented in Note 8 as if
the fair value method had been applied.
New and Proposed Accounting Standards
In June 1998, Statement of Financial Accounting Standards No.
133 -- "Accounting for Derivative Instruments and Hedging Activities" (SFAS No.
133) was issued and is effective for all periods of fiscal years beginning after
June 15, 1999. SFAS No. 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. SFAS No. 133 requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. The
Company believes that implementation of SFAS No. 133 will have no material
impact on its financial statements.
In February 1999, the Financial Accounting Standards Board released a
revised Exposure Draft of a Proposed Statement of Financial Accounting Standards
- -- Consolidated Financial Statements: Purpose and Policy. If adopted as an SFAS,
the terms of this Exposure Draft could require the Company to include the
financial position and results of operations of Allergan Specialty Therapeutics,
Inc. in its consolidated results on a retrospective basis. See Note 3 for a
description of ASTI. The Company is currently evaluating the effect of
implementation of this proposed statement.
Income Taxes
The Company recognizes deferred tax assets and liabilities for temporary
differences between the financial reporting basis and the tax basis of the
Company's assets and liabilities and expected benefits of utilizing net
operating loss and credit carryforwards. The impact on deferred taxes of changes
in tax rates and laws, if any, are applied to the years during which temporary
differences are expected to be settled and reflected in the financial statements
in the period of enactment. No provision is made for taxes on unremitted
earnings of certain non-U.S. subsidiaries which are or will be reinvested
indefinitely in such operations.
NOTE 2: SPECIAL CHARGES
During 1998, the Company has recorded a $74.8 million restructuring charge,
$50.9 million after taxes. The restructuring charge represented the costs of a
comprehensive plan to streamline operations and reduce costs through reductions
in global general and administrative (G&A) staff and the closure of five of ten
manufacturing facilities in connection with the outsourcing and consolidation of
manufacturing operations. In addition, operations in many countries were
transferred to distributors, and business activities were concentrated into
regional shared service centers. The changes in operations will result in a net
workforce reduction of approximately 550 positions over a three-year period. The
reductions in G&A staff and manufacturing facilities are primarily the result of
a strategic assessment of the Company's product lines and businesses during the
first quarter of 1998, and a review of the G&A cost structure and manufacturing
capabilities during the second and third quarters.
A-21
<PAGE> 58
The restructuring charge was recorded primarily in the third quarter as
most restructuring activities were announced on September 14, 1998. Certain
restructuring activities in the first and second quarters totaling $7.8 million
were previously reported as operating expenses in prior quarters. Severance
payments were made to approximately 140 terminated employees in 1998.
In 1998, management completed a critical review of its asset bases in light
of the strategic decisions made in the restructuring activities discussed above.
Management made business decisions relating to the future use of certain assets
resulting in a reassessment of the carrying value of such assets. As a result,
the Company recorded a $58.5 million charge, $41.1 million after taxes. Such
charge reduced the value of a manufacturing facility, certain real property, and
certain product rights.
During 1996, the Company recorded a $70.1 million restructuring charge,
$49.7 million after taxes. The restructuring charge related to a comprehensive
program anticipated to streamline operations and reduce costs through management
restructuring and facilities consolidation resulting in a workforce reduction of
approximately 500 people. The restructuring and facilities consolidation
activities affected employees in various activities in 22 locations worldwide.
The restructuring charge was recorded over the last three quarters of 1996 as
employees at each location were notified of the restructuring plan and its
effect on their location. Severance payments were made to approximately 75
terminated employees in 1998, approximately 140 terminated employees in 1997,
and approximately 300 terminated employees in 1996.
As the Company implemented its streamlined business plan in 1996, certain
assets were determined to be of limited or no future value. The Company recorded
$7.4 million in write-offs, $5.3 million after taxes, of computer hardware and
software and certain intangible assets in 1996.
The following table presents the restructuring activities through December
31, 1998:
<TABLE>
<CAPTION>
PAYMENTS
TO FACILITY ABANDONMENT
EMPLOYEES CLOSURE AND OF COMPUTER
INVOLUNTARILY CONSOLIDATION SOFTWARE OTHER TOTAL
TERMINATED COSTS COSTS COSTS RESTRUCTURING
------------- ------------- ----------- ----- -------------
<S> <C> <C> <C> <C> <C>
Net additions during 1996........ 34.0 29.6 -- 6.5 70.1
Spending during 1996............. (9.9) (0.7) -- (0.2) (10.8)
Asset write-offs during 1996..... -- (25.9) -- (6.2) (32.1)
---- ----- ----- ---- -----
Balances as of December 31,
1996........................... 24.1 3.0 -- 0.1 27.2
Spending during 1997............. (7.6) (3.0) -- (0.6) (11.2)
Adjustments during 1997.......... (0.5) -- -- 0.5 --
---- ----- ----- ---- -----
Balances as of December 31,
1997........................... 16.0 -- -- -- 16.0
Net additions during 1998........ 22.7 28.9 10.6 12.6 74.8
Spending during 1998............. (8.6) -- -- (7.4) (16.0)
Asset write-offs during 1998..... -- (25.3) (11.0) (4.8) (41.1)
Adjustments during 1998.......... (0.4) -- 0.4 -- --
---- ----- ----- ---- -----
Balances as of December 31,
1998........................... 29.7 3.6 -- 0.4 33.7
==== ===== ===== ==== =====
</TABLE>
During 1998, the Company offered an early retirement program to certain
employees. The increase in pension liability resulting from this program is
included in the table above as 1998 spending of other costs.
NOTE 3: ALLERGAN SPECIALTY THERAPEUTICS, INC. AND ALLERGAN LIGAND RETINOID
THERAPEUTICS, INC.
In 1997 the Company formed a new subsidiary, Allergan Specialty
Therapeutics, Inc. (ASTI), to conduct research and development of potential
pharmaceutical products based on the Company's retinoid and neuroprotective
technologies. On March 10, 1998, the Company made a special distribution of ASTI
Class A Common Stock to the Company's stockholders.
Prior to the distribution, the Company contributed $200 million to ASTI.
The market value of ASTI stock on March 10, 1998 was $28.6 million. The Company
recorded a dividend for the amount of the market
A-22
<PAGE> 59
value of ASTI stock at the distribution. The remainder of the $200 million,
$171.4 million, was recorded as a charge against operating income. The Company's
stockholders received one share of ASTI Class A Common Stock for each 20 shares
of common stock held as of a record date. As a result, 3,272,690 shares of ASTI
Class A Common Stock were issued in the distribution. The Company's stockholders
were not required to pay any cash or other consideration for the ASTI Class A
Common Stock received in the distribution.
As the sole holder of ASTI's outstanding Class B Common Stock following the
distribution, the Company has the option to repurchase all of the outstanding
ASTI Shares under specified conditions. The Company has also granted certain
technology licenses and agreed to make specified payments on sales of certain
products in exchange for the payment by ASTI of a technology fee and the option
to independently develop certain compounds funded by ASTI prior to the filing of
an Investigational New Drug application with the U.S. Food and Drug
Administration with respect thereto and to license any products and technology
developed by ASTI. The Company will recognize the technology fee as revenue as
it is earned and received. During 1998, $11.2 million in technology fees were
earned and are included in selling, general and administrative expense in the
accompanying Consolidated Statements of Operations.
ASTI's technology and product research and development activities take
place under a research and development agreement with the Company. The Company
recognized revenues and related costs as services are performed under such
contracts. It is expected that substantially all of ASTI's funds will be
directed toward continuing the research and development of products based on
retinoid and neuroprotective technologies. In addition, ASTI may fund the
research and development of pharmaceutical products in therapeutic categories of
interest to the Company, other than those based on retinoid and neuroprotective
technologies, that complement the Company's product pipeline or otherwise are
believed to provide a potential commercialization opportunity for the Company.
During 1998, the Company earned $34.4 million in research service revenues under
the research and development agreement with ASTI.
In 1992, the Company and Ligand Pharmaceuticals Incorporated (Ligand) began
operating a joint venture for the purpose of performing certain research and
development activities. In December 1994, Allergan and Ligand formed a new
research and development company, Allergan Ligand Retinoid Therapeutics, Inc.
(ALRT) to function as the successor to the joint venture. In June 1995, Ligand
contributed $17.5 million to ALRT for a right to acquire all of the stock of
ALRT at specified future dates and amounts. At the same time, the Company
contributed $50.0 million to ALRT in exchange for rights to acquire one half of
all technologies and other assets, or a similar right to acquire all of the
stock of ALRT if Ligand did not exercise its right. The Company also purchased
$6.0 million of Ligand common stock at the time of its contribution to ALRT. The
Company accounted for its $50.0 million contribution as a charge to operating
expense at the time of the contribution.
In November 1997 Ligand acquired all of the stock of ALRT. At the same
time, Allergan paid $8.9 million to Ligand to acquire one-half of all
technologies and cash of approximately $5.5 million. The net cost of assets
acquired was charged to research and development. At that time, Allergan and
Ligand changed their agreements so that, among other things, ALRT compounds and
development programs were divided between Allergan and Ligand, and each party
received exclusive rights to ALRT technology for use with their respective
compounds and programs.
The Company performed contract research services for ALRT from 1995 to
1997. Revenues from such services represent a recovery of the research and
development costs incurred with an amount added to compensate the Company for
general corporate overhead costs. The Company recognized revenues and related
costs as services were performed under such contracts. The Company recognized
research service revenues under its agreement with ALRT of $11.0 million and
$9.9 million in 1997 and 1996, respectively.
A-23
<PAGE> 60
NOTE 4: COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1998 1997
------ ------
IN MILLIONS
<S> <C> <C>
Trade receivables, net
Trade receivables................................ $232.8 $193.8
Less allowance for doubtful accounts............. 6.7 6.8
------ ------
$226.1 $187.0
====== ======
Inventories
Finished products................................ $ 75.4 $ 96.8
Work in process.................................. 18.1 15.7
Raw materials.................................... 29.8 35.3
------ ------
$123.3 $147.8
====== ======
Other current assets
Prepaid expenses................................. $ 53.7 $ 54.4
Deferred taxes................................... 46.8 44.8
Other............................................ 29.7 21.5
------ ------
$130.2 $120.7
====== ======
Property, plant and equipment, net
Land............................................. $ 12.6 $ 13.0
Buildings........................................ 294.1 293.8
Machinery and equipment.......................... 290.8 297.3
------ ------
597.5 604.1
Less accumulated depreciation.................... 272.6 246.3
------ ------
$324.9 $357.8
====== ======
Goodwill and intangibles, net
Goodwill......................................... $284.5 $288.5
Intangibles...................................... 27.1 37.3
------ ------
311.6 325.8
Less accumulated amortization.................... 142.5 112.4
------ ------
$169.1 $213.4
====== ======
</TABLE>
A-24
<PAGE> 61
NOTE 5: NOTES PAYABLE AND LONG-TERM DEBT
<TABLE>
<CAPTION>
1998 1997
AVERAGE AVERAGE
EFFECTIVE EFFECTIVE
INTEREST DECEMBER 31, INTEREST DECEMBER 31,
RATE 1998 RATE 1997
--------- ------------ --------- ------------
IN MILLIONS
<S> <C> <C> <C> <C>
Bank loans............................. 5.59% $ 15.9 8.24% $ 16.1
Commercial paper....................... 6.95% 39.5 7.08% 40.6
Capitalized leases..................... 4.9 5.8
4.93% -- 6.92% medium term notes due
from 2000-2003....................... 5.94% 89.0 6.54% 65.0
Yen denominated notes due from
2000-2003............................ 1.59% 86.9 1.55% 78.6
ESOP loan due 2003..................... 4.68% 12.9 4.82% 15.8
Other.................................. 0.5 1.1
------ ------
$249.6 $223.0
Less current maturities........... 48.5 80.5
------ ------
Total long-term debt.............. $201.1 $142.5
====== ======
</TABLE>
At December 31, 1998 and 1997, the Company had a domestic unused committed
line of credit of $250 million which supports general corporate purposes and
domestic commercial paper borrowing arrangements. The commitment fees under the
agreement are nominal. In addition, the Company had foreign unused committed
lines of credit of approximately $1.0 million in 1998 and $6.1 million in 1997.
At December 31, 1998, $9.5 million of commercial paper was classified as
long-term debt because the Company had the ability to refinance these debts on a
long term basis under terms of its unused committed lines of credit.
The credit facilities and medium term note program entered into by the
Company provide that the Company will maintain certain financial and operating
covenants which include, among other provisions, maintaining minimum debt to
capitalization ratios and minimum consolidated net worth. Certain covenants also
limit subsidiary debt and restrict dividend payments. The Company was in
compliance with these covenants as of December 31, 1998. The Employee Stock
Ownership Plan and related loan is discussed in Note 8 and three interest rate
swap agreements totaling $40.0 million are described in Note 9.
The aggregate maturities of debt for each of the next five years and
thereafter are as follows: 1999, $48.5 million; 2000, $68.7 million; 2001, $54.5
million; 2002, $23.9 million; 2003, $53.3 million; and $0.7 million thereafter.
Interest incurred of $0.7 million in 1998, $1.1 million in 1997 and $1.0 million
in 1996 has been capitalized and included in property, plant and equipment.
Noncash additions to capitalized leases and capital lease obligations of $1.7
million in 1997 were recorded on the Company's balance sheet and excluded from
the Consolidated Statements of Cash Flows.
NOTE 6: INCOME TAXES
The components of earnings (loss) before income taxes and minority interest
were:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1998 1997 1996
------- ------ ------
IN MILLIONS
<S> <C> <C> <C>
Earnings (loss) before income taxes and minority
interest
U.S................................................... $(144.1) $ 44.3 $ 31.9
Non-U.S............................................... 86.4 112.8 76.1
------- ------ ------
Earnings (loss) before income taxes and minority
interest.............................................. $ (57.7) $157.1 $108.0
======= ====== ======
</TABLE>
A-25
<PAGE> 62
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1998 1997 1996
------ ----- ------
IN MILLIONS
<S> <C> <C> <C>
Income tax expense (benefit)
Current
U.S. federal......................................... $ 48.4 $(4.2) $ 9.9
Non-U.S.............................................. 18.4 28.3 22.7
U.S. state and Puerto Rico........................... 13.9 3.8 6.8
------ ----- ------
Total current........................................ 80.7 27.9 39.4
------ ----- ------
Deferred
U.S. federal......................................... (31.4) (3.5) (11.5)
Non-U.S.............................................. (13.3) 4.9 5.9
U.S. state and Puerto Rico........................... (3.2) (0.3) (2.5)
------ ----- ------
Total deferred....................................... (47.9) 1.1 (8.1)
------ ----- ------
Total........................................... $ 32.8 $29.0 $ 31.3
====== ===== ======
</TABLE>
The reconciliations of the U.S. federal statutory tax rate to the combined
effective tax rate follow:
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Statutory rate of tax (benefit) expense..................... (35.0)% 35.0% 35.0%
State taxes, net of U.S tax benefit....................... (3.1) 0.7 (0.7)
Ireland and Puerto Rico income............................ (43.9) (10.7) (13.7)
U.S. tax effect of foreign earnings and dividends, net of
foreign tax credits.................................... 1.2 1.3 5.4
Other credits (R&D)....................................... (4.0) (1.7) (0.5)
Taxes on unremitted earnings of subsidiaries.............. 37.7 9.7 7.8
Valuation allowance, federal & state, on ALRT
contribution........................................... (3.9) (10.9) --
ASTI contribution......................................... 103.9 -- --
Other..................................................... 3.9 (4.9) (4.3)
----- ----- -----
Effective tax rate..................................... 56.8% 18.5% 29.0%
===== ===== =====
</TABLE>
The Company's effective tax rate exclusive of the impact of charges and
credits resulting from: the distribution of the ASTI stock to the Company's
stockholders, and the restructuring and asset write-off charges would have been
30% in 1998. The Company's effective tax rate, exclusive of the impact of
reversing the valuation allowance associated with the deferred tax benefit on
the ALRT contribution, would have been 29.0% in 1997.
Withholding and U.S. taxes have not been provided on approximately $390.3
million of unremitted earnings of certain non-U.S. subsidiaries because such
earnings are or will be reinvested in operations or will be offset by
appropriate credits for foreign income taxes paid. Such earnings would become
taxable upon the sale or liquidation of these non-U.S. subsidiaries or upon the
remittance of dividends. It is not practicable to estimate the amount of the
deferred tax liability on such unremitted earnings. Upon remittance, certain
foreign countries impose withholding taxes that are then available, subject to
certain limitations, for use as credits against the Company's U.S. tax
liability, if any.
The Company and its domestic subsidiaries file a consolidated U.S. federal
income tax return. Such returns have been audited and settled through the year
1993. The Company and its consolidated subsidiaries are not currently under
examination.
At December 31, 1998, the Company has net operating loss carryforwards in
certain non-U.S. subsidiaries, with various expiration dates, of approximately
$62.6 million.
A-26
<PAGE> 63
Temporary differences and carryforwards which give rise to a significant
portion of deferred tax assets and liabilities at December 31, 1998, 1997 and
1996 are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
IN MILLIONS
<S> <C> <C> <C>
Deferred tax assets
Net operating loss carryforwards (foreign)............. $ 15.3 $ 10.5 $ 13.0
Accrued expenses....................................... 18.2 23.4 16.0
Foreign tax credit carryforwards....................... -- -- 2.0
Capitalized expenses................................... 6.8 7.9 13.4
Pension expense........................................ 11.9 7.1 7.4
Medicaid rebates....................................... 4.3 4.2 4.9
Postretirement medical benefits........................ 7.1 6.7 6.1
Intercompany profit in inventory....................... 10.3 8.2 7.0
ALRT contribution...................................... 12.4 15.5 19.5
Asset write-off -- manufacturing facility.............. 7.0 -- --
Plant consolidation.................................... 7.1 -- --
Asset write-off........................................ 6.7 -- --
All other.............................................. 13.5 17.4 24.8
------ ------ ------
120.6 100.9 114.1
Less: valuation allowance.............................. (14.6) (16.9) (35.8)
------ ------ ------
Total deferred tax asset....................... 106.0 84.0 78.3
------ ------ ------
Deferred tax liabilities
Depreciation........................................... 9.2 13.0 13.4
All other.............................................. 3.0 25.1 17.9
------ ------ ------
Total deferred tax liabilities................. 12.2 38.1 31.3
------ ------ ------
Net deferred tax asset................................... $ 93.8 $ 45.9 $ 47.0
====== ====== ======
</TABLE>
The balances of net current deferred tax assets and net non-current
deferred tax assets at December 31, 1998 were $46.8 million and $47.0 million,
respectively. The balances of net current deferred tax assets and net
non-current deferred tax assets at December 31, 1997 were $44.8 million and $1.1
million, respectively. Such amounts are included in other current assets and
investments and other assets in the consolidated balance sheets.
The 1998 and 1997 decrease of $2.3 and $18.9 million, respectively, in the
valuation allowance relates substantially to the reversal of the valuation
allowance associated with the deferred tax benefit on the ALRT contribution.
Based on the Company's historical pre-tax earnings, management believes it
is more likely than not that the Company will realize the benefit of the
existing net deferred tax asset at December 31, 1998. Management believes the
existing net deductible temporary differences will reverse during periods in
which the Company generates net taxable income, however, there can be no
assurance that the Company will generate any earnings or any specific level of
continuing earnings in future years. Certain tax planning or other strategies
could be implemented, if necessary, to supplement income from operations to
fully realize recorded tax benefits.
NOTE 7: EMPLOYEE RETIREMENT AND OTHER BENEFIT PLANS
Pension and Postretirement Benefit Plans
The Company sponsors qualified defined benefit pension plans covering
substantially all of its employees. In addition, the Company sponsors two
supplemental nonqualified plans, covering certain management employees and
officers. U.S. pension benefits are based on years of service and compensation
during the five
A-27
<PAGE> 64
highest consecutive earnings years. The Company's funding policy for its U.S.
qualified plan is to provide currently for accumulated benefits, subject to
federal regulations. Plan assets of the qualified plan consist primarily of
fixed income and equity securities. Benefits for the nonqualified plans are paid
as they come due.
The Company has one retiree health plan that covers United States retirees
and dependents. Retiree contributions are required depending on the year of
retirement and the number of years of service at the time of retirement.
Disbursements exceed retiree contributions and the plan currently has no assets.
The accounting for the health care plan anticipates future cost-sharing changes
to the written plan that are consistent with the Company's past practice and
management's intent to manage plan costs. The Company's history of retiree
medical plan modifications indicates a consistent approach to increasing the
cost sharing provisions of the plan.
In 1998, the Company adopted SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits." SFAS No. 132 revises the
disclosures related to pension and other postretirement benefit plans. All
amounts for all periods have been restated to conform to the requirements of
SFAS No. 132. Components of net periodic benefit cost under the Company's U.S.
and major non-U.S. pension plans and retiree health plan for 1998, 1997 and 1996
were:
<TABLE>
<CAPTION>
OTHER
PENSION BENEFITS POSTRETIREMENT BENEFITS
------------------------- -----------------------
1998 1997 1996 1998 1997 1996
------ ------ ----- ----- ----- -----
IN MILLIONS
<S> <C> <C> <C> <C> <C> <C>
Service cost............................. $ 9.8 $ 9.0 $ 8.8 $ 0.9 $ 0.8 $ 0.9
Interest cost............................ 11.8 10.8 9.8 0.8 0.7 0.7
Expected return on plan assets........... (11.6) (11.5) (7.4) -- -- --
Amortization of transition amount........ (0.4) (0.2) 1.3 -- -- --
Amortization of prior service cost....... 0.2 -- -- (0.1) (0.1) (0.1)
Recognized net actuarial (gain) loss..... 1.1 2.4 0.2 (0.1) (0.2) (0.1)
Settlement loss.......................... 8.6 -- -- 0.2 -- --
Curtailment gain......................... -- -- -- (0.1) -- --
------ ------ ----- ----- ----- -----
Net periodic benefit cost................ $ 19.5 $ 10.5 $12.7 $ 1.6 $ 1.2 $ 1.4
====== ====== ===== ===== ===== =====
</TABLE>
Included in 1998 settlement loss is $7.4 million and $0.2 million for
pension benefits and other postretirement benefits, respectively, representing
the cost of enhanced termination benefits to participants of a voluntary early
retirement program. Such costs were included in the restructuring charge as more
fully described in Note 2.
A-28
<PAGE> 65
Components of the change in benefit obligation, change in plan assets and
funded status for the Company's U.S. and major non-U.S. pension plans and
retiree health plan for December 31, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
OTHER
POSTRETIREMENT
PENSION BENEFITS BENEFITS
---------------- --------------
1998 1997 1998 1997
------ ------ ----- -----
IN MILLIONS
<S> <C> <C> <C> <C>
Change in benefit obligation
Benefit obligation, beginning of period........... $149.9 $136.2 $12.1 $ 9.2
Service cost...................................... 9.8 9.0 0.9 0.8
Interest cost..................................... 11.8 10.8 0.8 0.7
Participant contributions......................... 0.9 0.8 0.1 --
Plan amendments................................... 0.1 -- -- --
Actuarial (gain) loss............................. 18.9 (4.7) (0.6) 1.7
Settlement........................................ 8.6 -- 0.2 --
Benefits paid..................................... (3.4) (2.2) (0.3) (0.3)
Impact of foreign currency translation............ (1.2) -- -- --
------ ------ ----- -----
Benefit obligation, end of period................. $195.4 $149.9 $13.2 $12.1
------ ------ ----- -----
Change in plan assets
Fair value of plan assets, beginning of period.... $124.3 $100.6 $ -- $ --
Actual return on plan assets...................... 11.7 17.6 -- --
Company contribution.............................. 8.5 7.5 0.2 0.3
Participant contributions......................... 0.9 0.8 0.1 --
Benefits paid..................................... (3.4) (2.2) (0.3) (0.3)
Impact of foreign currency translation............ (1.3) -- -- --
------ ------ ----- -----
Fair value of plan assets, end of period.......... $140.7 $124.3 $ -- $ --
------ ------ ----- -----
Funded status of plan............................. $ 54.7 $ 25.6 $13.2 $12.1
Unrecognized net actuarial loss (gain)............ (20.5) (3.0) 3.5 3.0
Unrecognized prior service cost................... (1.9) (1.1) 1.4 1.7
Unrecognized net transition obligation............ 1.9 2.3 -- --
Fourth quarter contributions...................... (1.4) (1.3) -- --
------ ------ ----- -----
Accrued benefit cost.............................. $ 32.8 $ 22.5 $18.1 $16.8
------ ------ ----- -----
</TABLE>
The funded status of other postretirement benefits presented as of December
31, 1998 was measured as of September 30, 1998. The Company adopted this
measurement date to conform to its internal cost management systems. The effect
of changing the measurement date is immaterial to the financial statements.
Weighted average assumptions as of December 31 are:
<TABLE>
<CAPTION>
OTHER
PENSION POSTRETIREMENT
BENEFITS BENEFITS
------------ --------------
1998 1997 1998 1997
---- ---- ----- -----
<S> <C> <C> <C> <C>
Discount rate used...................................... 6.46% 7.51% 6.75% 7.25%
Expected return on plan assets.......................... 8.52% 8.82% n/a n/a
Rate of compensation increase........................... 3.95% 4.92% n/a n/a
</TABLE>
A-29
<PAGE> 66
Assumed health care cost trend rates have a significant effect on the
amounts reported as other postretirement benefits. A one-percentage-point change
in assumed health care cost trend rates would have the following effects:
<TABLE>
<CAPTION>
1-PERCENTAGE-POINT 1-PERCENTAGE-POINT
INCREASE DECREASE
------------------ ------------------
IN MILLIONS
<S> <C> <C>
Effect on total service and interest cost
components............................... $0.4 $(0.4)
Effect on postretirement benefit
obligation............................... 2.9 (2.4)
</TABLE>
Cost increases of 3.6% were assumed for the indemnity medical plan and 7.5%
for the HMO medical plan in 1998. Annual cost increases were assumed to increase
gradually to 5.5% for the medical plans by 2000 and remain level thereafter.
Savings and Investment Plan
The Company has a Savings and Investment Plan, which provides for all U.S.
and Puerto Rico employees to become participants upon employment. In general,
participants' contributions, up to 5% of compensation, qualify for a 50% Company
match. Company contributions are generally used to purchase Allergan common
stock. The Company's cost of the plan was $3.3 million in 1998, $3.2 million in
1997, and $3.1 million in 1996.
NOTE 8: EMPLOYEE STOCK OWNERSHIP PLAN AND INCENTIVE COMPENSATION PLANS
Employee Stock Ownership Plan
The Company has an Employee Stock Ownership Plan (ESOP) for U.S. employees.
A related loan is guaranteed by the Company as to payment of principal and
interest and, accordingly, the unpaid balance of the loan is included in the
Company's consolidated financial statements as debt, offset by unearned
compensation included in stockholders' equity. The ESOP trust purchased
1,335,000 shares from the Company using the proceeds of the loan, all of which
are considered outstanding for purposes of calculating earnings per share.
Participants receive an allocation of shares held in the plan based on the
amortization schedule of the loan borrowed by the ESOP to purchase the shares,
and generally become vested over five years of Company service. Allocated shares
are divided among participants based on relative compensation. Allocated and
unallocated shares in the ESOP as of December 31, 1998 and 1997 are:
<TABLE>
<CAPTION>
NUMBER OF SHARES
----------------
1998 1997
------ ------
IN THOUSANDS
<S> <C> <C>
Allocated shares............................................ 780 681
Shares committed to be allocated.......................... 110 99
Unallocated shares........................................ 445 555
----- -----
Total ESOP shares................................. 1,335 1,335
===== =====
</TABLE>
The loan has a fifteen year maturity, with quarterly principal and interest
payments. Under the current repayment plan, the loan will be repaid in July
2003. Interest rates are determined at the Company's option based upon a percent
of prime or the LIBOR and the Company's consolidated debt to capitalization
ratio. The Company has entered into an interest rate swap agreement, maturing in
1999, to reduce the impact that interest rate changes have on $10 million of the
ESOP loan (see Note 9).
Dividends accrued on unallocated shares held by the ESOP are used to repay
the loan and totaled $0.6 million in 1998, $0.4 million in 1997 and $0.4 million
in 1996. Dividends received on allocated shares held by the ESOP are allocated
directly to participants' accounts. Interest incurred on ESOP debt in 1998, 1997
and 1996 was $0.7 million, $0.8 million and $1.2 million, respectively.
Compensation expense is recognized based on the amortization of the related
loan. Compensation expense for 1998, 1997 and 1996 was $2.2 million, $2.0
million and $1.9 million, respectively.
A-30
<PAGE> 67
Incentive Compensation Plans
The Company has an incentive compensation plan and a nonemployee director
stock plan. The incentive compensation plan provides for the granting of
non-qualified stock options, restricted stock and other stock-based incentive
awards for officers and key employees. As of December 31, 1998, an aggregate of
approximately 6,858,000 shares of stock have been authorized for issuance under
the incentive compensation plan and 100,000 shares have been authorized for
issuance under the nonemployee director stock plan.
Options become exercisable 25% per year beginning twelve months after the
date of grant. Options generally expire ten years after their original date of
grant. Options granted under the Company's incentive compensation plan provide
that an employee holding a stock option may exchange stock which the employee
already owns as payment against the exercise of their option. This provision
applies to all options outstanding at December 31, 1998.
Stock option activity under the Company's incentive compensation plan was
as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------------ ----------------- -----------------
WEIGHTED WEIGHTED WEIGHTED
NUMBER AVERAGE NUMBER AVERAGE NUMBER AVERAGE
OF EXERCISE OF EXERCISE OF EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------- -------- ------ -------- ------ --------
IN THOUSANDS, EXCEPT OPTION PRICE DATA
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year............. 4,471 $26.30 3,978 $25.18 4,084 $22.55
Options granted............................ 851 35.11 1,486 27.25 870 35.13
Options exercised.......................... (1,503) 24.21 (839) 21.97 (866) 22.54
Options cancelled.......................... (402) 30.65 (154) 29.86 (110) 27.05
------- ----- -----
Outstanding, end of year................... 3,417 28.90 4,471 26.30 3,978 25.18
======= ===== =====
Exercisable, end of year................... 1,577 26.15 2,149 23.64 2,423 22.13
======= ===== =====
Weighted average fair value of options
granted during the year.................. $11.70 $10.61 $14.84
====== ====== ======
</TABLE>
The fair value of each option granted during 1998, 1997 and 1996 is
estimated on the date of grant using the Black-Scholes option-pricing model with
the following assumptions: dividend yield of 1.5% in 1998, 1.9% in 1997 and 1.4%
in 1996, expected volatility of 32% for 1998, 39% for 1997 and 43% for 1996,
risk-free interest rate of 5.5% in 1998 and 6.7% in 1997 and 1996, and expected
life of 7 years for 1998, 1997 and 1996 grants.
The following table summarizes stock options outstanding at December 31,
1998 (shares in thousands):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------- -------------------------------
AVERAGE NUMBER
NUMBER REMAINING WEIGHTED AVERAGE EXERCISABLE WEIGHTED AVERAGE
RANGE OF OUTSTANDING CONTRACTUAL EXERCISE AT EXERCISE
EXERCISE PRICES AT 12/31/98 LIFE PRICE 12/31/98 PRICE
--------------- ----------- ----------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$13.50 - $23.39.......... 724 3.7 years $21.42 724 $21.42
$27.00 - $27.63.......... 1,413 7.8 years 27.15 535 27.30
$33.19 - $52.88.......... 1,280 8.4 years 35.07 318 35.00
----- -----
3,417 1,577
===== =====
</TABLE>
No compensation expense has been recognized for stock-based incentive
compensation plans other than for the restricted stock award plan and the
nonemployee director stock plan. Had compensation expense for the Company's
incentive stock option plan been recognized based upon the fair value for awards
granted, the Company's net loss would have been increased by $6.1 million or
$0.09 for both basic and diluted earnings per share in 1998, net earnings would
have been reduced by $6.6 million or $0.10 for both basic and diluted earnings
per share in 1997, and net earnings would have been reduced by $5.3 million or
$0.08 for both basic and diluted earnings per share in 1996. These proforma
effects are not indicative of future amounts. The Company expects to grant
additional awards in future years.
A-31
<PAGE> 68
Under the terms of the incentive compensation plan, the restricted stock
awards are subject to restrictions as to sale or other disposition of the shares
and to restrictions which require continuous employment with the Company. The
restrictions generally expire, and the awards become fully vested, four years
from the date of grant. The Company granted approximately 62,000, 64,000 and
89,000 shares of stock under the plan in 1998, 1997 and 1996, respectively. The
weighted average grant date exercise price of the restricted stock grants was
$34.69 in 1998, $27.97 in 1997 and $35.13 in 1996. Grants of restricted stock
are charged to unearned compensation in stockholders' equity at their intrinsic
value and recognized in expense over the vesting period. Compensation expense
recognized under the restricted stock award plan was $1.3 million, $1.3 million
and $1.4 million in 1998, 1997 and 1996, respectively.
Under the terms of the nonemployee director stock plan, each eligible
director received an initial grant of restricted stock and will receive
additional grants upon re-election to the Board. As of December 31, 1998, there
were 17,300 shares issued and outstanding under the plan.
NOTE 9: FINANCIAL INSTRUMENTS
In the normal course of business, operations of the Company are exposed to
risks associated with fluctuations in interest rates and currency exchange
rates. The Company addresses these risks through controlled risk management that
includes the use of derivative financial instruments to hedge or reduce these
exposures. The Company does not enter into financial instruments for trading or
speculative purposes.
The Company enters into derivative financial instruments with major
financial institutions that have at least an "A" or equivalent credit rating.
The Company has not experienced any losses on its derivative financial
instruments to date due to credit risk and management believes that such risk is
remote and in any event would be immaterial.
Interest Rate Risk Management
The Company enters into interest rate swap agreements to reduce the impact
of interest rate changes on its floating rate long-term debt. These derivative
financial instruments allow the Company to make long-term borrowings at floating
rates and then swap them into fixed rates that are anticipated to be lower than
rates available to the Company if fixed-rate borrowings were made directly.
Under interest rate swaps, the Company exchanges at specified intervals, certain
notional amounts of its floating rate debt which are indexed based on LIBOR,
with fixed rates.
The following table presents the notional amounts, maturity dates, and
effective floating and fixed interest rates related to the Company's interest
rate swaps as of December 31:
<TABLE>
<CAPTION>
INTEREST RATE
NOTIONAL ---------------------
AMOUNT MATURITY DATE FLOATING PAY-FIXED
------------- ------------- -------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C>
1998.................. $10.0 1999 4.44% 4.75%
10.0 2000 5.22% 7.00%
20.0 1999 5.25% 6.95%
1997.................. $10.0 1999 4.89% 4.75%
10.0 2000 5.75% 7.00%
20.0 1999 5.88% 6.95%
</TABLE>
The impact of interest rate risk management activities on income in 1998,
1997 and 1996, and the amount of deferred gains and losses from interest rate
risk management transactions at December 31, 1998 and 1997 were not material.
Foreign Exchange Risk Management
The Company enters into foreign currency forward and option contracts to
reduce earnings and cash flow volatility associated with foreign exchange rate
changes to allow management to focus its attention on its core business issues
and challenges. Accordingly, the Company enters into various contracts which
change in value
A-32
<PAGE> 69
as foreign exchange rates change to offset the effect of changes in the value of
foreign currency assets and liabilities, commitments and anticipated foreign
currency denominated sales and operating expenses. The Company enters into
foreign currency forward and option contracts in amounts between minimum and
maximum anticipated foreign exchange exposures, generally for periods not to
exceed one year. The gains and losses on these contracts offset changes in the
value of the related exposures.
The Company uses a combination of option and forward contracts, which
provide for the sale of foreign currencies to offset foreign currency exposures
expected to arise in the normal course of the Company's business. While these
instruments are subject to fluctuations in value, such fluctuations are
anticipated to offset changes in the value of the underlying exposures. The
principal currencies subject to this process are the Japanese yen, British
pound, Irish pound, French franc, German mark, and Spanish peseta. Derivative
instruments that are used to offset these probable, but not firmly committed
foreign currency exposures are carried at fair value with gains and losses
recorded currently in income as a component of other non-operating expense, net.
The Company uses a combination of option and forward contracts to hedge
foreign currency assets and intercompany borrowings. These instruments are
designated and effective as hedges. While these hedging instruments are subject
to fluctuations in value, they do not subject the Company to market risk from
exchange rate movements because such gains and losses offset losses and gains,
respectively, on the assets and intercompany borrowings being hedged.
The Company also sells option contracts to reduce the net cost of its
derivative financial instruments. Sold options are recorded at fair value with
corresponding gains and losses recorded currently in income as a component of
other, net.
At December 31, the notional principal and fair value of the Company's
outstanding foreign currency derivative financial instruments were as follows:
<TABLE>
<CAPTION>
1998 1997
------------------ ------------------
NOTIONAL FAIR NOTIONAL FAIR
PRINCIPAL VALUE PRINCIPAL VALUE
--------- ----- --------- -----
(IN MILLIONS)
<S> <C> <C> <C> <C>
Forward exchange contracts............. $32.3 $0.5 $28.3 $0.3
Foreign currency options purchased..... 43.6 0.6 8.9 0.2
Foreign currency options sold.......... 44.7 (7.4) -- --
</TABLE>
The notional principal amounts provide one measure of the transaction
volume outstanding as of year end, and do not represent the amount of the
Company's exposure to market loss. The estimates of fair value are based on
applicable and commonly used pricing models using prevailing financial market
information as of December 31, 1998 and 1997. The amounts ultimately realized
upon settlement of these financial instruments, together with the gains and
losses on the underlying exposures, will depend on actual market conditions
during the remaining life of the instruments. The impact of foreign exchange
risk management transactions on income in 1998, 1997 and 1996 was a net loss of
$5.9 million, $0.5 million and $0, respectively.
Fair Value of Financial Instruments
At December 31, 1998 and 1997, the Company's financial instruments included
cash and equivalents, trade receivables, investments, accounts payable,
borrowings and foreign exchange risk management instruments. The carrying amount
of cash and equivalents, trade receivables and accounts payable approximates
fair value due to the short-term maturities of these instruments. The fair value
of marketable investments, notes payable, long-term debt and foreign currency
contracts were estimated based on quoted market prices at year-end. The fair
values of nonmarketable equity investments, which represent either equity
investments in start-up technology companies or partnerships that invest in
start-up technology companies, are estimated based on the fair value information
provided by these ventures.
A-33
<PAGE> 70
The carrying amount and estimated fair value of the Company's financial
instruments at December 31 were as follows:
<TABLE>
<CAPTION>
1998 1997
---------------------- ----------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Cash and equivalents............. $181.6 $181.6 $180.9 $180.9
Non-current investments:
Marketable equity................ 31.4 31.4 42.5 42.5
Non-marketable equity............ 7.3 7.3 32.5 32.5
Notes payable.................... 48.5 48.5 80.5 80.5
Long-term debt................... 201.1 203.0 142.5 142.5
</TABLE>
Marketable equity amounts include unrealized holding gains of $5.0 million
at December 31, 1998 and $25.6 million at December 31, 1997; and unrealized
holding losses of $0.7 million at December 31, 1998 and $1.3 million at December
31, 1997.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to credit risk
principally consist of trade receivables. Wholesale distributors, major retail
chains, and managed care organizations account for a substantial portion of
trade receivables. This risk is limited due to the number of customers
comprising the Company's customer base, and their geographic dispersion. Ongoing
credit evaluations of customers' financial condition are performed and,
generally, no collateral is required. The Company maintains reserves for
potential credit losses and such losses, in the aggregate, have not exceeded
management's expectations.
NOTE 10: COMMITMENTS AND CONTINGENCIES
The Company leases certain facilities, office equipment and automobiles and
provides for payment of taxes, insurance and other charges on certain of these
leases. Rental expense was $25.2 million in 1998, $23.0 million in 1997 and
$18.3 million in 1996.
Future minimum rental payments under non-cancelable operating lease
commitments with a term of more than one year as of December 31, 1998, are as
follows: $22.4 million in 1999; $13.2 million in 2000; $6.6 million in 2001;
$3.5 million in 2002; $2.4 million in 2003; and $10.6 million thereafter.
The Company is involved in various litigation and claims arising in the
normal course of business. Management believes that recovery or liability with
respect to these matters will not have a material adverse effect on the
Company's consolidated financial position or results of operations.
NOTE 11: BUSINESS SEGMENT INFORMATION
In 1998, the Company adopted SFAS No. 131 -- "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131 establishes new standards
for reporting financial and descriptive information regarding an enterprise's
operating segments. As a result, amounts presented are determined on a
consistent basis in accordance with SFAS No. 131.
The Company operates in Regions or geographic operating segments. In
accordance with SFAS No. 131, the United States information is presented
separately as it is the Company's headquarters country, and U.S. sales
represented 46.2% of total product net sales in 1998. No other country, or
single customer, generates over 10% of total product net sales. Operations for
the Europe Region also include sales to customers in Africa and the Middle East,
and operations in the Asia Pacific Region include sales to customers in
Australia and New Zealand.
Operating income attributable to each operating segment is based upon the
management assignment of costs to such regions. Cost of sales in most segments
outside the United States includes the cost of goods
A-34
<PAGE> 71
produced by the Company's manufacturing operations at the transfer price charged
the distribution operation by the manufacturing location. Income from
manufacturing operations is not assigned to geographic regions because most
manufacturing operations produce products for more than one region. Research and
Development costs are general corporate costs. Corporate costs include
significant administrative costs applicable to United States operations that are
not charged to the U.S. region. Special charges in 1996 and 1998 for
restructuring, asset write-offs, and the 1998 contribution to ASTI are also
considered corporate costs.
Identifiable assets, depreciation and amortization and capital expenditures
are assigned by region based upon management responsibility for such items.
Corporate assets are primarily cash and equivalents, goodwill and intangibles,
and long-term investments.
GEOGRAPHIC OPERATING SEGMENTS
<TABLE>
<CAPTION>
NET SALES OPERATING INCOME (LOSS)
-------------------------------- -----------------------------
1998 1997 1996 1998 1997 1996
-------- -------- -------- ------- ------- -------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
United States................ $ 577.2 $ 479.9 $ 467.2 $ 301.8 $ 244.7 $ 244.6
Europe....................... 363.2 338.6 382.8 34.1 52.5 69.6
Asia Pacific................. 168.2 170.1 150.9 10.6 20.7 18.8
Other........................ 147.0 142.6 137.7 17.8 22.2 19.1
-------- -------- -------- ------- ------- -------
Segments total............... 1,255.6 1,131.2 1,138.6 364.3 340.1 352.1
Manufacturing operations..... 6.1 6.8 8.4 46.6 17.6 30.3
Research and development..... (125.4) (131.2) (118.3)
Research services margin..... 2.3 0.6 0.7
Restructuring charge......... (74.8) -- (70.1)
Asset write-offs............. (58.5) -- (7.4)
Contribution to ASTI......... (171.4) -- --
General corporate............ (70.2) (78.1) (76.7)
-------- -------- -------- ------- ------- -------
Net sales and operating
income (loss).............. $1,261.7 $1,138.0 $1,147.0 $ (87.1) $ 149.0 $ 110.6
======== ======== ======== ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
DEPRECIATION AND
IDENTIFIABLE ASSETS AMORTIZATION CAPITAL EXPENDITURES
------------------------------ ----------------------- -----------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996
-------- -------- -------- ----- ----- ----- ----- ----- -----
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
United States........................ $ 82.5 $ 59.7 $ 112.6 $ 3.0 $ 3.0 $ 3.9 $ 0.8 $ 0.3 $ 1.0
Europe............................... 164.2 153.9 159.5 6.9 5.9 6.7 1.5 4.3 3.6
Asia Pacific......................... 88.9 86.3 80.4 6.1 4.6 5.4 2.4 1.4 4.5
Other................................ 67.3 65.7 71.6 8.1 3.9 4.6 1.1 3.6 3.1
-------- -------- -------- ----- ----- ----- ----- ----- -----
Segments total....................... 402.9 365.6 424.1 24.1 17.4 20.6 5.8 9.6 12.2
Manufacturing operations............. 362.9 405.3 370.4 42.5 38.6 41.5 40.4 40.6 35.3
Adjustments and eliminations......... (38.0) (32.3) (24.7)
General Corporate.................... 606.6 660.3 580.0 9.9 12.8 10.8 4.4 14.2 12.2
-------- -------- -------- ----- ----- ----- ----- ----- -----
Total........................ $1,334.4 $1,398.9 $1,349.8 $76.5 $68.8 $72.9 $50.6 $64.4 $59.7
======== ======== ======== ===== ===== ===== ===== ===== =====
</TABLE>
In each geographic segment the Company markets products in three product
segments: Specialty Pharmaceuticals, Ophthalmic Surgical and Contact Lens Care.
The Specialty Pharmaceutical segment produces a broad range of ophthalmic
products for glaucoma therapy, ocular inflammation, infection, allergy and dry
eye; skin care products for acne, psoriasis and other prescription and over the
counter dermatological products; and Botox(R) Purified Neurotoxin Complex for
movement disorders. The Ophthalmic Surgical segment produces intraocular lenses,
phacoemulsification equipment, viscoelastics, and other products related to
cataract surgery. The Contact Lens Care segment produces cleaning, storage and
disinfection products for the consumer contact lens market. The Company provides
global marketing strategy teams to ensure the marketing strategy for consistent
execution of products in all geographic operating segments. There are no
transfers of products between product lines.
A-35
<PAGE> 72
PRODUCT NET SALES BY PRODUCT LINE
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C>
Specialty Pharmaceuticals
Eye Care Pharmaceuticals........... $ 505.3 $ 408.5 $ 425.1
Skin Care.......................... 80.6 80.6 64.7
Botox/Neuromuscular................ 125.3 90.1 67.2
-------- -------- --------
Total Specialty
Pharmaceuticals.......... $ 711.2 $ 579.2 $ 557.0
Ophthalmic Surgical.................. 193.6 182.2 184.0
Contact Lens Care.................... 356.9 376.6 406.0
-------- -------- --------
Net sales............................ $1,261.7 $1,138.0 $1,147.0
======== ======== ========
</TABLE>
NOTE 12: EARNINGS PER SHARE
The following table presents the computation of basic and diluted earnings
(loss) per share:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED 1998 FOR THE YEAR ENDED 1997
---------------------------------------- ---------------------------------------
INCOME(LOSS) SHARES PER-SHARE INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
------------ ------------- --------- ----------- ------------- ---------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Computation of basic
EPS:
Income (loss)
available to common
stockholders........ $(90.2) 65.6 $(1.38) $128.3 65.2 $1.97
====== =====
Effect of dilutive
options............. -- 0.6
---- ----
Computation of diluted
EPS:
Income (loss)
available to common
stockholders
assuming
conversions......... $(90.2) 65.6 $(1.38) $128.3 65.8 $1.95
==== ====== ==== =====
<CAPTION>
FOR THE YEAR ENDED 1996
---------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Computation of basic
EPS:
Income (loss)
available to common
stockholders........ $77.1 65.1 $1.18
=====
Effect of dilutive
options............. 1.0
----
Computation of diluted
EPS:
Income (loss)
available to common
stockholders
assuming
conversions......... $77.1 66.1 $1.17
==== =====
</TABLE>
Stock options outstanding at December 31, 1998 were not included in the
computation of diluted EPS because the Company incurred a loss, and hence, the
impact would be antidilutive. At December 31, 1997, options to purchase 733,000
shares of common stock at $35.13 per share and options to purchase 61,000 shares
of common stock at $33.19 were not included in the computation of diluted EPS
because the options' exercise price was greater than the average market price of
the common shares and, therefore, the effect would be antidilutive. At December
31, 1996 there were no options outstanding to purchase common stock with
exercise prices greater than the average market price of the common shares.
A-36
<PAGE> 73
NOTE 13: COMPREHENSIVE INCOME
In 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 requires that the components of comprehensive income be
disclosed. Such amounts are as follows:
<TABLE>
<CAPTION>
1998 1997
--------------------------------------- ---------------------------------------
BEFORE TAX TAX (EXPENSE) NET-OF-TAX BEFORE TAX TAX (EXPENSE) NET-OF-TAX
AMOUNT OR BENEFIT AMOUNT AMOUNT OR BENEFIT AMOUNT
---------- ------------- ---------- ---------- ------------- ----------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Foreign currency
translation
adjustments:
Unrealized foreign
currency
translation
adjustments........ (0.9) -- (0.9) (9.0) -- (9.0)
Less:
reclassification
adjustment for
gains (losses)
realized in net
income (loss)...... (1.2) -- (1.2) -- -- --
----- ----- ----- ---- ---- ----
Net unrealized
foreign translation
adjustments........ (2.1) -- (2.1) (9.0) -- (9.0)
Unrealized gains on
investments:
Unrealized holding
gains arising
during period...... 33.4 (11.7) 21.7 7.4 (2.6) 4.8
Less:
reclassification
adjustment for
gains realized in
net income
(loss)............. (54.1) 18.5 (35.6) 12.4 (3.6) 8.8
----- ----- ----- ---- ---- ----
Net unrealized gains
(losses) on
investments........ (20.7) 6.8 (13.9) 19.8 (6.2) 13.6
Minimum pension
liability
adjustment........... -- -- -- -- -- --
----- ----- ----- ---- ---- ----
Other comprehensive
income (loss)........ (22.8) 6.8 (16.0) 10.8 (6.2) 4.6
===== ===== ===== ==== ==== ====
<CAPTION>
1996
---------------------------------------
BEFORE TAX TAX (EXPENSE) NET-OF-TAX
AMOUNT OR BENEFIT AMOUNT
---------- ------------- ----------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Foreign currency
translation
adjustments:
Unrealized foreign
currency
translation
adjustments........ (0.7) -- (0.7)
Less:
reclassification
adjustment for
gains (losses)
realized in net
income (loss)...... -- --
---- ---- ----
Net unrealized
foreign translation
adjustments........ (0.7) -- (0.7)
Unrealized gains on
investments:
Unrealized holding
gains arising
during period...... 5.7 (2.0) 3.7
Less:
reclassification
adjustment for
gains realized in
net income
(loss)............. -- -- --
---- ---- ----
Net unrealized gains
(losses) on
investments........ 5.7 (2.0) 3.7
Minimum pension
liability
adjustment........... 0.8 -- 0.8
---- ---- ----
Other comprehensive
income (loss)........ 5.8 (2.0) 3.8
==== ==== ====
</TABLE>
NOTE 14: SUBSEQUENT EVENTS
On January 26, 1999, the Board of Directors declared a cash dividend of
$0.14 per share payable on March 9, 1999, to stockholders of record on February
16, 1999.
A-37
<PAGE> 74
REPORT OF MANAGEMENT
Management is responsible for the preparation and integrity of the
consolidated financial statements appearing in this Proxy Statement. The
consolidated financial statements were prepared in conformity with generally
accepted accounting principles appropriate in the circumstances and,
accordingly, include some amounts based on management's best judgments and
estimates.
Management is responsible for maintaining a system of internal control and
procedures to provide reasonable assurance, at an appropriate cost/benefit
relationship, that assets are safeguarded and that transactions are authorized,
recorded and reported properly. The internal control system is augmented by a
program of internal audits and appropriate reviews by management, written
policies and guidelines, careful selection and training of qualified personnel
and a written Code of Ethics adopted by the Board of Directors, applicable to
all employees of the Company and its subsidiaries. Management believes that the
Company's system of internal control provides reasonable assurance that assets
are safeguarded against material loss from unauthorized use or disposition and
that the financial records are reliable for preparing financial statements and
other data and for maintaining accountability for assets.
The Audit Committee of the Board of Directors, composed solely of Directors
who are not officers or employees of the Company, meets with the independent
auditors, management and internal auditors periodically to discuss internal
accounting controls, auditing and financial reporting matters. The Committee
reviews with the independent auditors the scope and results of the audit effort.
The Committee also meets with the independent auditors and the chief internal
auditor without management present to ensure that the independent auditors and
the chief internal auditor have free access to the Committee.
The independent auditors, KPMG LLP, were recommended by the Audit Committee
of the Board of Directors and selected by the Board of Directors. KPMG LLP was
engaged to audit the 1998, 1997 and 1996 consolidated financial statements of
Allergan, Inc. and its subsidiaries and conducted such tests and related
procedures as deemed necessary in conformity with generally accepted auditing
standards. The opinion of the independent auditors, based upon their audits of
the consolidated financial statements, is presented on Page A-39 of this Proxy
Statement.
David E. I. Pyott
President and Chief Executive Officer
Francis R. Tunney, Jr.
Corporate Vice President and
Principal Financial Officer
Dwight J. Yoder
Senior Vice President, Controller and
Principal Accounting Officer
A-38
<PAGE> 75
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors of Allergan, Inc.:
We have audited the accompanying consolidated balance sheets of Allergan,
Inc. and subsidiaries as of December 31, 1998 and 1997 and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the years in the three-year period ended December 31, 1998. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Allergan,
Inc. and subsidiaries as of December 31, 1998 and 1997 and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
Costa Mesa, California
January 27, 1999
A-39
<PAGE> 76
QUARTERLY RESULTS (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH TOTAL
QUARTER QUARTER QUARTER QUARTER YEAR
------- ------- ------- ------- --------
IN MILLIONS, EXCEPT PER SHARE DATA
<S> <C> <C> <C> <C> <C>
1998(a)
Product net sales............................ $269.3 $325.0 $321.2 $346.2 $1,261.7
Product gross margin......................... 175.6 218.7 223.1 237.3 854.7
Research service revenues.................... 9.6 6.3 8.2 10.3 34.4
Research services margin..................... 0.7 0.4 0.6 0.6 2.3
Operating income (loss)...................... (137.6) 44.0 (32.4) 38.9 (87.1)
Net earnings (loss).......................... (122.2) 34.8 (31.4) 28.6 (90.2)
Basic earnings (loss) per share.............. (1.87) 0.53 (0.48) 0.43 (1.38)
Diluted earnings (loss) per share............ (1.87) 0.52 (0.48) 0.43 (1.38)
1997(b)
Product net sales............................ $256.2 $284.5 $287.7 $309.6 $1,138.0
Product gross margin......................... 163.6 184.4 187.1 203.6 738.7
Research service revenues.................... 3.1 2.9 2.9 2.1 11.0
Research services margin..................... 0.2 0.2 0.1 0.1 0.6
Operating income............................. 24.3 31.5 49.3 43.9 149.0
Net earnings................................. 17.8 21.4 43.6 45.5 128.3
Basic earnings per share..................... 0.27 0.33 0.67 0.70 1.97
Diluted earnings per share................... 0.27 0.33 0.66 0.69 1.95
</TABLE>
- ---------------
(a) Fiscal quarters in 1998 ended on March 27, June 26, September 25 and
December 31.
(b) Fiscal quarters in 1997 ended on March 28, June 27, September 26 and
December 31.
A-40
<PAGE> 77
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
IN MILLIONS, EXCEPT PER SHARE DATA
<S> <C> <C> <C> <C> <C>
Summary of Operations
Product net sales...................... $1,261.7 $1,138.0 $1,147.0 $1,067.2 $ 947.2
Research service revenues.............. 34.4 11.0 9.9 6.4 --
Operating costs and expenses:
Cost of product sales................ 407.0 399.3 384.7 328.0 286.6
Cost of research services............ 32.1 10.4 9.2 5.9 --
Selling, general and
administrative.................... 514.0 459.1 456.6 443.4 392.5
Research & development............... 125.4 131.2 118.3 116.7 111.5
Restructuring charges................ 74.8 -- 70.1 -- --
Asset write-offs..................... 58.5 -- 7.4 -- --
Contribution to ASTI................. 171.4 -- -- -- --
Contribution to ALRT................. -- -- -- 50.0 --
-------- -------- -------- -------- --------
Operating income (loss)................ (87.1) 149.0 110.6 129.6 156.6
Non-operating income (expense)......... 29.4 8.1 (2.6) (4.4) 2.3
Earnings (loss) before income taxes and
minority interest.................... (57.7) 157.1 108.0 125.2 158.9
Net earnings (loss).................... (90.2) 128.3 77.1 72.5 110.7
Basic earnings (loss) per common
share................................ (1.38) 1.97 1.18 1.13 1.74
Diluted earnings (loss) per common
share................................ (1.38) 1.95 1.17 1.12 1.73
Cash dividends per share............... 0.52 0.52 0.49 0.47 0.42
Financial Position
Current assets......................... $ 661.2 $ 636.4 $ 599.7 $ 522.3 $ 485.5
Working capital........................ 292.7 273.1 224.4 190.7 161.8
Total assets........................... 1,334.4 1,398.9 1,349.8 1,316.3 1,059.8
Long-term debt......................... 201.1 142.5 170.0 266.7 83.7
Total stockholders' equity............. 696.0 841.4 749.8 668.9 603.3
</TABLE>
MARKET PRICES OF COMMON STOCK AND DIVIDENDS
The following table shows the quarterly price range of the common stock and
the cash dividends declared per share during the period listed.
<TABLE>
<CAPTION>
1998 1997
----------------------- -----------------------
CALENDAR QUARTER LOW HIGH DIV. LOW HIGH DIV.
---------------- --- ---- ---- --- ---- ----
<S> <C> <C> <C> <C> <C> <C>
First................................... 31 3/4 39 $.13 28 3/4 36 1/4 $.13
Second.................................. 37 1/4 47 9/16 $.13 25 7/8 33 $.13
Third................................... 45 1/4 62 7/8 $.13 29 3/4 36 1/2 $.13
Fourth.................................. 53 7/16 66 1/2 $.13 31 1/8 37 3/16 $.13
</TABLE>
Allergan Common Stock is listed on the New York Stock Exchange and is
traded under the symbol "AGN." In newspapers, stock information is frequently
listed as "Alergn."
The approximate number of stockholders of record was 11,000 as of January
15, 1999.
On January 26, 1999, the Board declared a cash dividend of $0.14 per share,
payable March 9, 1999 to stockholders of record on February 16, 1999. See Note 5
to the Consolidated Financial Statements relative to restrictions on dividend
payments.
A-41
<PAGE> 78
EXHIBIT B
ALLERGAN, INC.
1989 INCENTIVE COMPENSATION PLAN
(AS AMENDED AND RESTATED, MARCH 1999)
I. GENERAL PROVISIONS
1.1 PURPOSES OF THE PLAN
Allergan, Inc. ("Allergan") has adopted this 1989 Incentive Compensation
Plan (the "Plan") to advance the interests of Allergan and its stockholders by
affording to key management and other Employees of Allergan and its subsidiaries
an opportunity to acquire or increase a proprietary interest in the Company or
to otherwise benefit from the success of the Company through the grant to such
Employees of Incentive Awards under the terms and conditions set forth herein.
By thus encouraging such Employees to become owners of Allergan's shares and by
granting such Employees other incentive compensation that is measured by the
increased market value of Allergan's shares or another appropriate measure of
the success and profitability of the Company, the Company seeks to attract,
retain and motivate those highly competent individuals upon whose judgment,
initiative, leadership and continued efforts the success of the Company in large
measure depends.
1.2 DEFINITIONS
As used herein the following terms shall have the meanings set forth below:
(a) "Allergan" means Allergan, Inc., a Delaware corporation, or any
successor thereto.
(b) "Board" means the Board of Directors of Allergan.
(c) "Cause" means, with respect to the discharge by the Company of any
Participant, any conduct that under Company policies as set forth from time to
time in the Allergan Supervisors Manual (or any successor thereto) would be
considered to constitute "serious misconduct" that would justify immediate
termination without benefit of a counseling review or severance pay.
(d) "Change in Control" means the following and shall be deemed to occur if
any of the following events occur:
(i) Any "person," as such term is used in Sections 13(d) and 14(d) of
the Exchange Act, is or becomes the "beneficial owner" (as defined in Rule
13d-3 under the Exchange Act), directly or indirectly, of securities of
Allergan representing 50% or more of the combined voting power of
Allergan's then outstanding voting securities;
(ii) Individuals who, as of the date hereof, constitute the Board (the
"Incumbent Board"), cease for any reason to constitute at least a majority
of the Board, provided that any person becoming a director subsequent to
the date hereof whose election, or nomination for election by Allergan's
stockholders, is approved by a vote of at least a majority of the directors
then comprising the Incumbent Board (other than an election or nomination
of an individual whose initial assumption of office is in connection with
an actual or threatened election contest relating to the election of the
directors of Allergan, as such terms are used Rule 14a-11 of Regulation 14A
promulgated under the Exchange Act) shall, for the purposes of this Plan,
be considered as though such person were a member of the Incumbent Board;
(iii) The stockholders of Allergan approve a merger or consolidation
with any other corporation, other than
(A) a merger or consolidation which would result in the voting
securities of Allergan outstanding immediately prior thereto continuing
to represent (either by remaining outstanding or by being converted into
voting securities of another entity) more than 50% of the combined
voting
B-1
<PAGE> 79
power of the voting securities of Allergan or such other entity
outstanding immediately after such merger or consolidation, and
(B) a merger or consolidation effected to implement a
recapitalization of the Company (or similar transaction) in which no
person acquires 50% or more of the combined voting power of Allergan's
then outstanding voting securities; or
(iv) The stockholders of Allergan approve a plan of complete
liquidation of the Company or an agreement for the sale or other
disposition by the Company of all or substantially all of the Company's
assets.
Notwithstanding the preceding provisions of this Paragraph (d), a Change in
Control shall not be deemed to have occurred (1) if the "person" described in
the preceding provisions of this Paragraph is an underwriter or underwriting
syndicate that has acquired the ownership of 50% or more of the combined voting
power of Allergan's then outstanding voting securities solely in connection with
a public offering of Allergan's securities or (2) if the "person" described in
the preceding provisions of this Paragraph is an employee stock ownership plan
or other employee benefit plan maintained by the Company that is qualified under
the provisions of the Employee Retirement Income Security Act of 1974, as
amended.
(e) "Code" means the Internal Revenue Code of 1986, as amended. Where the
context so requires, a reference to a particular Code section shall also refer
to any successor provision of the Code to such section.
(f) "Committee" means the committee appointed by the Board to administer
the Plan. The Committee shall be composed entirely of members who meet the
requirements of Section 1.4(a) hereof.
(g) "Common Stock" means the common stock of Allergan, $0.01 par value.
(h) "Company" means Allergan and any present or future parent or subsidiary
corporations (as defined in Section 425 of the Code) with respect to Allergan,
or any successors to such corporations.
(i) "Dividend Equivalent" means an amount payable in cash, Common Stock or
a combination thereof to a holder of a Stock Option, Stock Appreciation Right or
other Incentive Award denominated in shares of Common Stock that is equivalent
to the amount of dividends paid to stockholders with respect to a number of
shares of Common Stock equal to the number of shares upon which such Incentive
Award is based.
(j) "Employee" means any regular, full-time employee of the Company.
(k) "Exchange Act" means the Securities Exchange Act of 1934, as amended.
Where the context so requires, a reference to a particular section of the
Exchange Act shall also refer to any successor provision to such section.
(l) "Fair Market Value" means the fair market value of a share of Common
Stock as determined by the Committee on the basis of such factors as it may deem
appropriate.
(m) "Incentive Award" means any Stock Option, Restricted Stock, Stock
Appreciation Right, Stock Payment, Performance Award or other award granted or
sold under the Plan.
(n) "Incentive Stock Option" means an incentive stock option, as defined
under Section 422 of the Code and the regulations thereunder.
(o) "Nonqualified Stock Option" means a stock option other than an
Incentive Stock Option.
(p) "Option" or "Stock Option" means a right to purchase Common Stock and
refers to both Incentive Stock Options and Nonqualified Stock Options.
(q) "Participant" means any Employee selected by the Committee to receive
an Incentive Award pursuant to this Plan.
(r) "Payment Event" means the event or events giving rise to the right to
payment of a Performance Award.
B-2
<PAGE> 80
(s) "Performance Award" means an award, payable in cash, Common Stock or a
combination thereof, the terms and conditions of which may be determined by the
Committee at the time the Performance Award is granted.
(t) "Plan" means the Allergan, Inc. 1989 Incentive Compensation Plan as set
forth herein, as amended from time to time.
(u) "Purchase Price" means the purchase price (if any) to be paid by a
Participant for Restricted Stock as determined by the Committee (which price
shall be at least equal to the minimum price required under applicable laws and
regulations for the issuance of Common Stock which is nontransferable and
subject to a substantial risk of forfeiture until specific conditions are met).
(v) "Restricted Stock" means Common Stock which is the subject of an
Incentive Award under this Plan and which is nontransferable and subject to a
substantial risk of forfeiture until specific conditions are met as set forth in
this Plan and in any statement evidencing the grant of such Incentive Award.
(w) "Securities Act" means the Securities Act of 1933, as amended.
(x) "Stock Appreciation Right" or "Right" means a right granted pursuant to
Section VI of the Plan to receive a number of shares of Common Stock or, in the
discretion of the Committee, an amount of cash or a combination of shares and
cash, based on the increase in the Fair Market Value of the shares subject to
the right during such period as is specified by the Committee.
(y) "Stock Payment" means a payment in shares of the Company's Common Stock
to replace all or any portion of the compensation (other than base salary) that
would otherwise become payable to any Employee of the Company.
1.3 SHARES OF COMMON STOCK SUBJECT TO THE PLAN
(a) Subject to the provisions of Section 1.3(c) and Section 8.1 of the
Plan, the maximum number of shares of Common Stock that may be issued pursuant
to Incentive Awards under the Plan shall be:
(i) During the period commencing with the inception of the Plan
through February 29, 1992 (the "Transition Date"), the aggregate number of
shares that may be issued pursuant to or issuable upon exercise of
Incentive Awards granted prior to the Transition Date shall be 5,000,000
shares.
(ii) After the Transition Date, the aggregate number of shares that
may be issued pursuant to or issuable upon exercise of Incentive Awards
granted during any calendar year shall be up to 1.5% of the Outstanding
Shares (as defined below) plus (A) with respect to calendar years 1993 and
thereafter, any unused shares available under this Section 1.3(a)(ii) from
prior years and (B) any shares issued or issuable under Incentive Awards
granted after the Transition Date which by virtue of Section 1.3(c) below
again become available for the grant of further Incentive Awards.
(For purposes of Section 1.3(a)(ii) above, the term "Outstanding Shares" means
the number of shares of Common Stock outstanding on December 31 of the year
preceding the year for which the calculation is to be made; provided that, for
purposes of determining the maximum aggregate number of shares which may be
issued pursuant to or issuable upon exercise of Incentive Awards granted during
calendar 1992 after the Transition Date, "Outstanding Shares" shall mean the
number of shares of Common Stock outstanding on the Transition Date.)
(b) The Common Stock to be issued under this Plan will be made available,
at the discretion of the Board or the Committee, either from authorized but
unissued shares of Common Stock or from previously issued shares of Common Stock
reacquired by the Company, including shares purchased on the open market.
(c) Shares of Common Stock subject to unexercised portions of any Incentive
Award granted under this Plan that expire, terminate or are cancelled, and
shares of Common Stock issued pursuant to an Incentive Award under this Plan
that are reacquired by the Company pursuant to the terms of the Incentive Award
under which such shares were issued, will again become available for the grant
of further Incentive Awards under this Plan.
B-3
<PAGE> 81
(d) Notwithstanding Section 1.3(a) (ii) above, the maximum number of shares
issuable upon the exercise of Incentive Awards granted in the form of Incentive
Stock Options after the Transition Date shall be the lesser of the amount
determined pursuant to Section 1.3 (a) (ii) above and 5,000,000 shares,
(e) The maximum number of shares of Common Stock with respect to which
Stock Options may be granted to an executive officer in any given calendar year
is 400,000 Options per executive officer.
1.4 ADMINISTRATION OF THE PLAN
(a) The Plan will be administered by the Committee, which will consist of
two or more persons appointed by the Board (i) who are not eligible to receive
Incentive Awards under the Plan and (ii) who have not been eligible at any time
within one year before appointment to the Committee for selection as persons to
whom Incentive Awards may be granted pursuant to the Plan, or to whom shares may
be allocated, or stock options, stock appreciation rights or similar rights may
be granted, pursuant to any other discretionary plan of Allergan (or any
affiliate thereof, within the meaning of the Exchange Act and the regulations
thereunder) entitling the participants therein to acquire stock, stock options,
stock appreciation rights or similar rights of Allergan (or any affiliate
thereof, within the meaning of the Exchange Act and the regulations thereunder).
Notwithstanding anything contained herein, no person shall be disqualified from
being a member of the Committee merely because such person is entitled to
receive grants of restricted stock pursuant to the Allergan, Inc. 1989
Nonemployee Director Stock Plan or any successor thereto providing for the
automatic grant, without the intervention of any administrative discretion, of
stock options, restricted stock or other stock-based incentive compensation
awards.
(b) The Committee has and may exercise such powers and authority of the
Board as may be necessary or appropriate for the Committee to carry out its
functions as described in the Plan. The Committee has authority in its
discretion to select the eligible Employees to whom, and the time or times at
which, Incentive Awards shall be granted or sold, the nature of each Incentive
Award, the number of shares of Common Stock or the number of rights that make up
each Incentive Award, the period for the exercise of each Incentive Award, the
performance criteria (which need not be identical) utilized to measure the value
of Performance Awards and such other terms and conditions applicable to each
individual Incentive Award as the Committee shall determine. The Committee may
grant at any time new Incentive Awards to a Participant who has previously
received Incentive Awards or other grants (including other stock options)
whether such prior Incentive Awards or such other grants are still outstanding,
have previously been exercised in whole or in part, or are cancelled in
connection with the issuance of new Incentive Awards. The Committee may grant
Incentive Awards singly or in combination or in tandem with other Incentive
Awards as it determines in its discretion. The purchase price or initial value
and any and all other terms and conditions of the Incentive Awards may be
established by the Committee without regard to existing Incentive Awards or
other grants. Further, the Committee may, with the consent of a Participant,
amend in a manner consistent with the Plan the terms of any existing Incentive
Award previously granted to such Participant.
(c) Subject to the express provisions of the Plan, the Committee has the
authority to interpret the Plan, to determine the terms and conditions of
Incentive Awards and to make all other determinations necessary or advisable for
the administration of the Plan. The Committee has authority to prescribe, amend
and rescind rules and regulations relating to the Plan. All interpretations,
determinations and actions by the Committee shall be final, conclusive and
binding upon all parties. Any action of the Committee with respect to the
administration of the Plan shall be taken pursuant to a majority vote or by the
unanimous written consent of its members.
(d) No member of the Board or the Committee nor any designee thereof will
be liable for any action or determination made in good faith by the Board or the
Committee with respect to the Plan or any transaction arising under the Plan.
B-4
<PAGE> 82
1.5 PARTICIPATION
(a) All Employees who are key Employees of the Company, as determined by
the Committee, are eligible to receive Incentive Awards under the Plan. In no
event may any member of the Board who is not an Employee be granted an Incentive
Award under the Plan.
(b) At the time of the grant of each Incentive Award pursuant to this Plan,
the Committee shall deliver, or cause to be delivered, to the Participant to
whom the Incentive Award is granted a written statement evidencing the Incentive
Award and setting forth such terms and conditions applicable to the Incentive
Award as the Committee may in its discretion determine consistent with the Plan.
II. DIVIDEND EQUIVALENTS
A Participant may in the discretion of the Committee be granted, at no
additional cost, Dividend Equivalents based on the dividends declared on the
Common Stock on record dates during the period between the date an Incentive
Award is granted and the date such Incentive Award is exercised or such other
period as is determined by the Committee and specified in the instrument that
evidences the grant of the Incentive Award. Such Dividend Equivalents shall be
converted to additional shares or cash by such formula as may be determined by
the Committee.
Dividend Equivalents shall be computed as of each dividend record date in
such manner as may be determined by the Committee and shall be payable to
Participants at such time or time as the Committee in its discretion may
determine.
III. OPTIONS
3.1 OPTION PRICE
The purchase price of Common Stock under each Option (the "Option Exercise
Price") will be determined by the Committee at the date such Option is granted.
The Option Exercise Price may be less than the Fair Market Value on the date of
grant of the Common Stock subject to the Option; provided, however, that in no
event shall the Option Exercise Price be less than the par value of the shares
of Common Stock subject to the Option; and further provided that in the case of
an Incentive Stock Option the Option Exercise Price shall be not less than the
Fair Market Value on the date of grant of the Common Stock subject to such
Option or such other amount as is necessary to enable such Option to be treated
as an "incentive stock option" within the meaning of Code Section 422A.
3.2 OPTION PERIOD
Options may be exercised as determined by the Committee, but, in the case
of an Incentive Stock Option, in no event after ten years from the date of grant
of such Option or such other period as is necessary to enable such Option to be
treated as an "incentive stock option" within the meaning of Code Section 422A.
3.3 EXERCISE OF OPTIONS
At the time of the exercise of an Option, the purchase price shall be paid
in full in cash or other equivalent consideration acceptable to the Committee
and consistent with the Plan's purpose and applicable law, including without
limitation Common Stock or Restricted Stock or other contingent awards
denominated in either stock or cash. Any shares of Company Stock assigned and
delivered to the Company in payment or partial payment of the purchase price
will be valued at their Fair Market Value on the exercise date. No fractional
shares will be issued pursuant to the exercise of an Option nor will any cash
payment be made in lieu of fractional shares.
3.4 LIMITATION ON EXERCISE OF INCENTIVE STOCK OPTIONS
The aggregate Fair Market Value (determined at the time the Option is
granted) with respect to which Incentive Stock Options are exercisable for the
first time by any Employee during any calendar year (under all
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stock option plans of the Company) shall not exceed $100,000 or such other limit
as is prescribed by the Code. Any Options granted as Incentive Stock Options
pursuant to the Plan in excess of such limitation shall be treated as
Nonqualified Stock Options.
3.5 TERMINATION OF EMPLOYMENT
(a) Except as otherwise provided in a written agreement between the Company
and the Participant, in the event of the termination of a Participant's
employment with the Company for Cause, all of the Participant's unexercised
Options and/or Rights shall expire as of the date of such termination.
(b) Except as otherwise provided in a written agreement between the Company
and the Participant, in the event of a Participant's termination of employment
for:
(i) Any reason other than for Cause, death, disability, or normal
retirement (as defined in the instrument evidencing the grant of the
Option), the Participant's Options and/or Rights shall expire and become
unexercisable as of the earlier of (A) the date such Options and/or Rights
expire in accordance with their terms or (B) three calendar months after
the date of termination.
(ii) Death or disability, subject to the provisions of Paragraph (c)
below, the Participant shall have twelve (12) months after the date of
termination within which to exercise Options and/or Rights that have become
exercisable on or before such date and that have not expired on or before
such date, regardless of the date upon which such Options or Rights would
otherwise expire in accordance with their terms.
(iii) Normal retirement, the Participant's Options and/or Rights shall
expire and become unexercisable as of the earlier of (A) the date such
Options and/or Rights expire in accordance with their terms or (B) three
(3) years after the date of termination.
(c) Notwithstanding anything to the contrary in Paragraphs (a) or (b)
above, the Committee may in its discretion designate such shorter or longer
periods to exercise Options and/or Rights following a Participant's termination
of employment; provided, however, that any shorter periods determined by the
Committee shall be effective only if provided for in the instrument that
evidences the grant to the Participant of such Options and/or Rights or if such
shorter period is agreed to in writing by the Participant. In the case of an
Incentive Stock Option, notwithstanding anything to the contrary herein, in no
event shall such Option be exercisable after the expiration of ten years from
the date such Option is granted (or such other period as is provided in Code
Section 422A). Notwithstanding anything to the contrary herein, Options and/or
Rights shall be exercisable by a Participant (or his successor in interest)
following such Participant's termination of employment only to the extent that
installments thereof had become exercisable on or prior to the date of such
termination; provided, however, that the Committee, in its discretion, may elect
to accelerate the vesting of all or any portion of any Options and/or Rights
that had not become exercisable on or prior to the date of such termination.
3.6 GRANT OF OPTIONS IN SUBSTITUTION FOR SMITHKLINE BECKMAN CORPORATION OPTIONS
In accordance with the provisions of Section 7.05 of that certain
Distribution Agreement dated as of April 11, 1989, among SmithKline Beckman
Corporation ("SKB"), Allergan and Beckman Instruments, Inc. (the "Distribution
Agreement") and notwithstanding anything to the contrary in this Plan, in the
event that as of the Distribution Date (as defined in the Distribution
Agreement) an Employee (or other person described in Section 7.05(b) of the
Distribution Agreement) shall hold an outstanding option granted under any
employee stock option plan of SKB (an "SKB Option") there shall be granted to
such Employee (or other person) pursuant to this Plan, in substitution for such
SKB Option, an Option to purchase Common Stock (a "Substitute Option"). The
number of shares subject to such Substitute Option, the Option Exercise Price of
such Substitute Option and the other terms and conditions of such Substitute
Option shall be determined by the Committee in accordance with Section 425(a) of
the Code or any other reasonably comparable method designed to preserve the gain
in the SKB Option at the time of the substitution.
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IV. PERFORMANCE AWARDS
4.1 GRANT OF PERFORMANCE AWARDS
The Committee shall determine the performance criteria (which need not be
identical) to be utilized to calculate the value of the Performance Awards, the
term of such Performance Awards, the Payment Event, and the form and time of
payment of Performance Awards. The specific terms and conditions of each
Performance Award shall be set forth in a written statement evidencing the grant
of such Performance Award.
4.2 PAYMENT OF AWARD; LIMITATION
Upon the occurrence of a Payment Event, payment of a Performance Award will
be made to the Participant in cash or in shares of Common Stock valued at Fair
Market Value on the date of the Payment Event or a combination of Common Stock
and cash, as the Committee in its discretion may determine. The Committee may
impose a limitation on the amount payable upon the occurrence of a Payment
Event, which limitation shall be set forth in the written statement evidencing
the grant of the Performance Award.
4.3 EXPIRATION OF PERFORMANCE AWARD
If any Participant's employment with the Company is terminated for any
reason other than normal retirement (as defined in the instrument evidencing the
grant of the Performance Award), death, or disability prior to the occurrence of
the Payment Event, all of the Participant's rights under the Performance Award
shall expire and terminate unless otherwise determined by the Committee. In the
event of termination of employment by reason of death, disability or normal
retirement, the Committee, in its discretion, may determine what portions, if
any, of the Performance Award should be paid to the Participant.
V. RESTRICTED STOCK
5.1 AWARD OF RESTRICTED STOCK
The Committee may grant awards of Restricted Stock to Employees. The
Committee shall determine the Purchase Price (if any), the terms of payment of
the Purchase Price, the restrictions upon the Restricted Stock, and when such
restrictions shall lapse. The terms and conditions of the Restricted Stock shall
be set forth in the statement evidencing the grant of such award of Restricted
Stock.
5.2 REQUIREMENTS OF RESTRICTED STOCK
All shares of Restricted Stock granted or sold, pursuant to the Plan will
be subject to the following conditions:
(a) The shares may not be sold, assigned, transferred, pledged,
hypothecated or otherwise disposed of, alienated or encumbered until the
restrictions are removed or expire;
(b) The Committee may require that the certificates representing Restricted
Stock granted or sold to a Participant pursuant to the Plan remain in the
physical custody of an escrow holder or the Company until all restrictions are
removed or expire;
(c) Each certificate representing Restricted Stock granted or sold to a
Participant pursuant to the Plan will bear such legend or legends making
reference to the restrictions imposed upon such Restricted Stock as the
Committee in its discretion deems necessary or appropriate to enforce such
restrictions; and
(d) The Committee may impose such other conditions on Restricted Stock as
the Committee may deem advisable including, without limitation, restrictions
under the Securities Act, under the Exchange Act, under the requirements of any
stock exchange upon which such Restricted Stock or shares of the same class are
then listed and under any blue sky or other securities laws applicable to such
shares.
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5.3 LAPSE OF RESTRICTIONS
The restrictions imposed upon Restricted Stock pursuant to Section 5.2
above will lapse in accordance with such schedule or other conditions as are
determined by the Committee and set forth in the statement evidencing the grant
or sale of the Restricted Stock.
5.4 RIGHTS OF PARTICIPANT
Subject to the provisions of Section 5.2 or restrictions imposed pursuant
to Section 5.2, the Participant will have all rights of a stockholder with
respect to the Restricted Stock granted or sold to such Participant under the
Plan, including the right to vote the shares and receive all dividends and other
distributions paid or made with respect thereto.
5.5 TERMINATION OF EMPLOYMENT
Unless the Committee in its discretion determines otherwise, upon a
Participant's termination of employment for any reason, all of the Participant's
Restricted Stock remaining subject to restrictions imposed pursuant to this Plan
on the date of such termination of employment shall be repurchased by the
Company at the Purchase Price (if any).
VI. STOCK APPRECIATION RIGHTS
6.1 GRANTING OF STOCK APPRECIATION RIGHTS
The Committee may approve the grant to eligible Employees of Stock
Appreciation Rights related or unrelated to Options, at any time.
(a) A Stock Appreciation Right granted in connection with an Option granted
under this Plan will entitle the holder of the related Option, upon exercise of
the Stock Appreciation Right, to surrender such Option, or any portion thereof
to the extent unexercised, with respect to the number of shares as to which such
Stock Appreciation Right is exercised, and to receive payment of an amount
computed pursuant to Section 6.1(c). Such Option will, to the extent
surrendered, then cease to be exercisable.
(b) Subject to Section 6.1(g), a Stock Appreciation Right granted in
connection with an Option hereunder will be exercisable at such time or times,
and only to the extent that, the related Option is exercisable, and will not be
transferable except to the extent that such related Option may be transferable.
(c) Upon the exercise of a Stock Appreciation Right related to an Option,
the Holder will be entitled to receive payment of an amount determined by
multiplying: (i) the difference obtained by subtracting the Option Exercise
Price of a share of Common Stock specified in the related Option from the Fair
Market Value of a share of Common Stock on the date of exercise of such Stock
Appreciation Right (or as of such other date or as of the occurrence of such
event as may have been specified in the instrument evidencing the grant of the
Stock Appreciation Right), by (ii) the number of shares as to which such Stock
Appreciation Right is exercised.
(d) The Committee may grant Stock Appreciation Rights unrelated to Options
to eligible Employees. Section 6.1(c) shall be used to determine the amount
payable at exercise under such Stock Appreciation Right, except that in lieu of
the Option Exercise Price specified in the related Option the initial base
amount specified in the Incentive Award shall be used.
(e) Notwithstanding the foregoing, the Committee, in its discretion, may
place a dollar limitation on the maximum amount that will be payable upon the
exercise of a Stock Appreciation Right under the Plan.
(f) Payment of the amount determined under the foregoing provisions of this
Section 6.2 may be made solely in whole shares of Common Stock valued at their
Fair Market Value on the date of exercise of the Stock Appreciation Right or,
alternatively, at the sole discretion of the Committee, in cash or in a
combination of cash and shares of Common Stock as the Committee deems advisable.
The Committee is hereby vested with full discretion to determine the form in
which payment of a Stock Appreciation Right will be made and
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to consent to or disapprove the election of a Participant to receive cash in
full or partial settlement of a Stock Appreciation Right. If the Committee
decides to make full payment in shares of Common Stock, and the amount payable
results in a fractional share, payment for the fractional share will be made in
cash.
(g) The Committee may, at the time a Stock Appreciation Right is granted,
impose such conditions on the exercise of the Stock Appreciation Right as may be
required to satisfy the requirements of Rule 16b-3 under the Exchange Act (or
any other comparable provisions in effect at the time or times in question).
6.2 TERMINATION OF EMPLOYMENT
Section 3.5 will govern the treatment of Stock Appreciation Rights upon the
termination of a Participant's employment with the Company.
VII. STOCK PAYMENTS
The Committee may approve Stock Payments of the Company's Common Stock to
any Employee of the Company for all or any portion of the compensation (other
than base salary) that would otherwise become payable to an Employee in cash.
VIII. OTHER PROVISIONS
8.1 ADJUSTMENT PROVISIONS
(a) Subject to Section 8.1(b) below, (i) if the outstanding shares of
Common Stock of the Company are increased, decreased or exchanged for a
different number or kind of shares or other securities, or if additional shares
or new or different shares or other securities are distributed in respect of
such shares of Common Stock (or any stock or securities received with respect to
such Common Stock), through merger, consolidation, sale or exchange of all or
substantially all of the properties of the Company, reorganization,
recapitalization, reclassification, stock dividend, stock split, reverse stock
split, spin-off or other distribution with respect to such shares of Common
Stock (or any stock or securities received with respect to such Common Stock),
or (ii) if the value of the outstanding shares of Common Stock of the Company is
reduced by reason of an extraordinary cash dividend, an appropriate and
proportionate adjustment may be made in (x) the maximum number and kind of
shares provided in Section 1.3 (including the maximum amounts referred to in
Section 1.3(d) and (e)), (y) the number and kind of shares or other securities
subject to then outstanding Incentive Awards, and (z) the price for each share
or other unit of any other securities subject to then outstanding Incentive
Awards. Adjustments under this Section 8.1(a) will be made by the Committee,
whose determination as to what adjustments will be made and the extent thereof
will be final, binding and conclusive. No fractional interests will be issued
under the Plan resulting from any such adjustments.
(b) In addition to the adjustments permitted by Section 8.1(a) above,
except as otherwise expressly provided in the statement evidencing the grant of
an Incentive Award, upon the occurrence of a Change in Control of the Company
any outstanding Incentive Awards not theretofore exercisable, payable or free
from restrictions, as the case may be, shall immediately become exercisable,
payable or free from restrictions (other than restrictions required by
applicable law or any national securities exchange upon which any securities of
the Company are then listed), as the case may be, in their entirety and any
shares of Common Stock acquired pursuant to an Incentive Award which are not
fully vested shall immediately become fully vested, notwithstanding any of the
other provisions of the Plan.
8.2 SECTION 16 PERSONS
Notwithstanding any other provisions in this Plan, any Incentive Award
granted hereunder to an Employee who is then subject to Section 16 of the
Exchange Act shall be subject to the following limitations:
(a) The Incentive Award may provide for the issuance of shares of Common
Stock as a stock bonus for no consideration other than services rendered or to
be rendered. In the event of an Incentive Award under which shares of Common
Stock are or may in the future be issued for any other type of consideration,
the amount of such consideration shall either (1) be equal to the amount (such
as the par value of such shares)
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required to be received by the Company in order to assure compliance with
applicable state law, (2) be equal to or greater than 50% of the fair market
value of such shares on the date of grant of such Incentive Award, or (3) in the
case of Stock Options granted pursuant to Section 3.6 above, be the amount
determined pursuant to the applicable substitution formula. For such purposes,
the fair market value of shares of Common Stock shall be calculated on the basis
of the closing price of stock of that class on the day in question (or, if such
day is not a trading day in the U.S. securities markets, on the nearest
preceding trading day), as reported with respect to the principal market (or the
composite of the markets, if more than one) in which such shares are then
traded, or, if no such closing prices are reported, on the basis of the mean
between the high bid and low asked prices that day on the principal market or
national quotation system on which such shares are then quoted or, if not so
quoted, as furnished by a professional securities dealer making a market in such
shares selected by the Board or the Committee.
(b) Any Stock Option or similar right (including a Stock Appreciation
Right) granted to such Employee pursuant to the Plan shall not be transferable
other than by will or the laws of descent and distribution and shall be
exercisable during such Employee's lifetime only by him or by his guardian or
legal representative. No Incentive Award granted to such Employee and no right
of such Employee under the Plan, contingent or otherwise, will be assignable or
made subject to any encumbrance, pledge or charge of any nature except that,
under such rules and regulations as the Committee may establish pursuant to the
terms of the Plan, a beneficiary may be designated with respect to an Incentive
Award in the event of death of such Employee. If such beneficiary is the
executor or administrator of the estate of the Employee, any rights with respect
to such Incentive Award may be transferred to the person or persons or entity
(including a trust) entitled thereto under the will of such Employee.
8.3 CONTINUATION OF EMPLOYMENT
(a) Nothing in the Plan or in any statement evidencing the grant of an
Incentive Award pursuant to the Plan shall be construed to create or imply any
contract of employment between any Participant and the Company, to confer upon
any Participant any right to continue in the employ of the Company, or to confer
upon the Company any right to require any Participant's continued employment.
Except as expressly provided in the Plan or in any statement evidencing the
grant of an Incentive Award pursuant to the Plan, the Company shall have the
right to deal with each Participant in the same manner as if the Plan and any
such statement evidencing the grant of an Incentive Award pursuant to the Plan
did not exist, including, without limitation, with respect to all matters
related to the hiring, discharge, compensation and conditions of the employment
of the Participant. Unless otherwise expressly set forth in a separate
employment agreement between the Company and such Participant, the Company may
terminate the employment of any Participant with the Company at any time for any
reason, with or without cause.
(b) Any question(s) as to whether and when there has been a termination of
a Participant's employment, the reason (if any) for such termination, and/or the
consequences thereof under the terms of the Plan or any statement evidencing the
grant of an Incentive Award pursuant to the Plan shall be determined by the
Committee's and the Committee's determination thereof shall be final and
binding.
8.4 COMPLIANCE WITH GOVERNMENT REGULATIONS
No shares of Common Stock will be issued pursuant to an Incentive Award
unless and until all applicable requirements imposed by federal and state
securities and other laws, rules and regulations and by any regulatory agencies
having jurisdiction and by any stock exchanges upon which the Common Stock may
be listed have been fully met. As a condition precedent to the issuance of
shares of Common Stock pursuant to an Incentive Award, the Company may require
the Participant to take any reasonable action to comply with such requirements.
8.5 ADDITIONAL CONDITIONS
The award of any benefit under this Plan may also be subject to such other
provisions (whether or not applicable to the benefit award to any other
Participant) as the Committee determines appropriate including,
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without limitation, provisions to assist the Participant in financing the
purchase of Common Stock through the exercise of Stock Options, provisions for
the forfeiture of or restrictions on resale or other disposition of shares of
Common Stock acquired under any form of benefit, provisions giving the Company
the right to repurchase shares of Common Stock acquired under any form of
benefit in the event the Participant elects to dispose of such shares, and
provisions to comply with federal and state securities laws and federal and
state income tax withholding requirements.
8.6 PRIVILEGES OF STOCK OWNERSHIP
No Participant and no beneficiary or other person claiming under or through
such Participant will have any right, title or interest in or to any shares of
Common Stock allocated or reserved under the Plan or subject to any Incentive
Award, except as to such shares of Common Stock, if any, that have been issued
to such Participant in accordance with the terms and conditions of the
applicable Incentive Award; provided, however, that Participants who have
received Restricted Stock shall have only those rights with respect to such
stock as are set forth in this Plan and the statement evidencing the grant or
sale of such Restricted Stock.
8.7 AMENDMENT AND TERMINATION OF PLAN: AMENDMENT OF INCENTIVE AWARDS
(a) The Board may alter, amend, suspend or terminate the Plan at any time.
No such action of the Board, unless taken with the approval of the stockholders
of the Company, may increase the maximum number of shares that may be sold or
issued under the Plan or alter the class of Employees eligible to participate in
the Plan. With respect to any other amendments of the Plan, the Board may in its
discretion determine that such amendments shall only become effective upon
approval by the stockholders of the Company, if the Board determines that such
stockholder approval may be advisable, such as for the purpose of obtaining or
retaining any statutory or regulatory benefits under federal or state securities
law, federal or state tax law or any other laws or for the purposes of
satisfying applicable stock exchange listing requirements.
(b) The Committee may, with the consent of a Participant, make such
modifications in the terms and conditions of an Incentive Award as it deems
advisable. Without limiting the generality of the foregoing, the Committee may,
with the consent of the Participant, from time to time to adjust or reduce the
purchase price of Options held by such Participant by cancellation of such
Options and granting of Options to purchase the same or a lesser number of
shares at lower purchase prices or by modification, extension or renewal of such
Options.
(c) Except as otherwise provided in this Plan or in the statement
evidencing the grant of the Incentive Award, no amendment, suspension or
termination of the Plan will, without the consent of the Participant, alter,
terminate, impair or adversely affect any right or obligation under any
Incentive Award previously granted under the Plan.
8.8 OTHER COMPENSATION PLANS
The adoption of the Plan shall not affect any other stock option, incentive
or other compensation plans in effect for the Company, nor shall the Plan
preclude the Company from establishing any other forms of incentive or other
compensation for Employees of the Company.
8.9 PLAN BINDING ON SUCCESSORS
The Plan shall be binding upon the successors and assigns of the Company.
8.10 SINGULAR, PLURAL; GENDER
Whenever used herein, nouns in the singular shall include the plural, and
the masculine pronoun shall include the feminine gender.
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8.11 HEADINGS, ETC., NO PART OF PLAN
Heading of Articles and Sections hereof are inserted for convenience and
reference; they constitute no part of the Plan.
8.12 PARTICIPATION BY FOREIGN EMPLOYEES
Notwithstanding anything to the contrary herein, the Committee may, in
order to fulfill the purposes of the Plan, modify grants of Incentive Awards to
Participants who are foreign nationals or employed outside of the United States
to recognize differences in applicable law, tax policy or local custom.
IX. EFFECTIVE DATE AND DURATION OF PLAN
The Plan shall become effective on the later of (a) the date of its
adoption by the Board, (b) the date of its approval by the holders of the
outstanding shares of Common Stock (either by a vote of a majority of such
outstanding shares present in person or by proxy and entitled to vote at a
meeting of stockholders of the Company or by written consent) or (c) the date of
the distribution by SKB (as defined in Section 3.6 above) of the stock of
Allergan pursuant to the terms of the Distribution Agreement (as defined in
Section 3.6 above). The Plan shall terminate at such time as the Board, in its
discretion, shall determine. No Incentive Award may be granted under the Plan
after the date of such termination, but such termination shall not affect any
Incentive Award theretofore granted.
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EXHIBIT C
ALLERGAN, INC.
EXECUTIVE BONUS PLAN
PURPOSE OF THE PLAN
The Allergan, Inc. Executive Bonus Plan (the "Plan") is designed to reward
the Chief Executive Officer (the "CEO") of Allergan, Inc. (the "Company") for
annual accomplishment of specific financial objectives that enhance value for
Allergan's stockholders.
PLAN YEAR
The Plan year runs from January 1st through December 31st.
ELIGIBILITY
The CEO is eligible to participate in the Plan.
ADMINISTRATION
The Plan is administered by the Organization and Compensation Committee of
the Board of Directors of the Company (the "Committee"). The constituency of the
Committee shall be limited to directors who are considered outside directors for
purposes of Internal Revenue Code Section 162(m).
PERFORMANCE OBJECTIVES
The bonus is based on corporate performance as outlined below. The
performance objectives can be based on any of the following criteria, either
alone or in any combination, and measured either on an absolute basis, relative
basis against a pre-established target, and/or peer group, or prior year's
performance as the Committee determines:
- revenue (sales)
- cash flow
- earnings per share (including earnings before interest, taxes and
amortization)
- return on equity
- total stockholder return
- return on capital
- return on assets or net assets
- income or net income
- operating income or net operating income
- operating profit or net operating profit
- operating margin
- market share
- employee satisfaction
These criteria will have any reasonable definitions that the Committee may
specify, which may include or exclude any or all of the following items:
- extraordinary, unusual or non-recurring items
- effects of accounting changes
- effects of financing activities
- expenses for restructuring or productivity initiatives
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- other non-operating items
- spending for acquisitions
- effects of divestitures
Any such qualifying performance objectives or combination of such
objectives may apply to the CEO's award opportunity in its entirety or to any
designated portion or portions of the award opportunity, as the Committee may
specify.
No later than 90 days from the beginning of each Plan year, the Committee
will establish, in writing, a minimum target for the performance objectives
which must be achieved in order for any award to be earned, maximum targets
above which no additional awards will be earned, and the formula for computing
the award if such target is achieved. If the performance objectives are
satisfied, the Committee shall certify in writing, prior to the payment of any
performance award, that such objectives were satisfied.
MODIFICATION OF PERFORMANCE TARGETS
If the Committee determines that the established targets are no longer
suitable due to changes in circumstances affecting the Company, the Committee
will have sole discretion during the Plan year to modify these targets;
provided, however, that no such adjustment will decrease the minimum target
applicable to the CEO, or otherwise have the potential effect of increasing the
amount of compensation payable to the CEO upon the attainment of the original
targets.
CALCULATION OF PERFORMANCE AWARD
The CEO will receive a minimum percentage of year-end annualized base
salary if the minimum targeted performance objective is achieved. The percentage
of year-end annualized base salary increases to a maximum percentage of year-end
annualized base salary if the maximum targeted performance objective is
achieved.
MAXIMUM BONUS AWARD
In no event can the maximum compensation paid to the CEO under the Plan
exceed $5,000,000 in any calendar year.
DISCRETIONARY INCENTIVE AWARD
The Plan is not the exclusive means for the Committee to award incentive
compensation to the CEO and does not limit the Committee from making additional
discretionary incentive awards upon determination of the CEO's positive direct
impact on the attainment of the performance objectives.
CHANGE IN EMPLOYMENT STATUS
If the CEO's employment with the Company is terminated for any reason other
than retirement, death or disability prior to the end of the Plan year, all of
the CEO's rights under the Plan shall expire unless otherwise determined by the
Committee. The Committee may determine what portions, if any, of the CEO's bonus
under the Plan should be paid if the CEO's employment has been terminated by
reason of death, disability or retirement.
METHOD OF PAYMENT
Cash awards are paid following the close of the Plan year after the review
and authorization of bonuses by the Committee. Bonuses will be paid within 30
days following Committee communication of the award. In the event of a Change in
Control (as defined in the Allergan, Inc. 1989 Incentive Compensation Plan, as
amended), the CEO's bonus will be paid within 30 days of the effective date of
the Change in Control.
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CHANGE IN CONTROL
If a Change in Control occurs after the close of the Plan year, the CEO
will be paid a bonus based on performance in relation to the performance
objectives. If a Change in Control occurs during the plan year, the CEO will be
paid a bonus prorated to the effective date of the Change in Control and all
performance objectives will be deemed to be met at the greater of 100% of the
target or the actual prorated year-to-date performance.
The CEO must be employed by the Company or its successor on the effective
date of the Change in Control in order to receive the prorated payment, unless
the CEO's employment is terminated for retirement, death, disability or
otherwise without cause. For purposes of this plan, "cause" shall be limited to
only three types of events: the willful refusal to comply with a lawful, written
instruction of the Board so long as the instruction is consistent with the scope
and responsibilities of the CEO's position prior to the Change in Control;
dishonesty which results in a material financial loss to the Company (or to any
of its affiliated companies) or material injury to its public reputation (or to
the public reputation of any of its affiliated companies); or conviction of any
felony involving an act of moral turpitude.
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ALLERGAN
CONFIDENTIAL PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF
THE COMPANY FOR THE ANNUAL MEETING APRIL 27, 1999
The undersigned hereby constitutes and appoints Francis R. Tunney, Jr. and Aimee
S. Weisner, and each of them, his or her true and lawful agents and proxies with
full power of substitution in each to represent the undersigned at the Annual
Meeting of Stockholders of ALLERGAN, INC. to be held at its corporate
headquarters, 2525 Dupont Drive, Irvine, California on Tuesday, April 27, 1999,
and at any adjournments thereof, on all matters coming before the meeting.
THE PROXIES WILL VOTE ON THE PROPOSALS SET FORTH IN THE NOTICE OF ANNUAL MEETING
AND PROXY STATEMENT AS SPECIFIED ON THIS CARD (SEE REVERSE SIDE) AND ARE
AUTHORIZED TO VOTE IN THEIR DISCRETION AS TO ANY OTHER BUSINESS THAT MAY COME
PROPERLY BEFORE THE MEETING. IF A VOTE IS NOT SPECIFIED, THE PROXIES WILL VOTE
IN FAVOR OF THE ELECTION OF LESTER J. KAPLAN, KAREN R. OSAR, LOUIS T. ROSSO AND
LEONARD D. SCHAEFFER AS DIRECTORS AND IN FAVOR OF PROPOSALS 2 AND 3.
If this Proxy relates to shares held for the undersigned in the Allergan, Inc.
Employee Stock Ownership Plan or the Allergan, Inc. Savings and Investment Plan,
then, when properly executed, it shall constitute instructions to the plan
trustees to vote in the manner directed herein.
THE PROXIES CANNOT VOTE YOUR SHARES UNLESS YOU SIGN AND RETURN THIS CARD.
---------------------
SEE
REVERSE SIDE
---------------------
Fold and detach here
ADMISSION TICKET
RETAIN FOR ADMITTANCE
You are cordially invited to attend the
1999 ANNUAL MEETING OF STOCKHOLDERS
of ALLERGAN, INC.
Tuesday, April 27, 1999
10:00 a.m.
(Registration begins at 9:30 a.m.)
Allergan Corporate Headquarters
2525 Dupont Drive
Irvine, California
(see map on reverse side)
If you plan to attend, please check the box on the proxy card.
This card is your admission ticket to the meeting and must be
presented at the meeting registration area.
[ALLERGAN LOGO]
<PAGE> 94
[X] Please mark your votes as
in this example 5893
-------------
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED
HEREIN. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR ELECTION
OF DIRECTORS AND FOR PROPOSALS 2 AND 3.
<TABLE>
<S> <C>
- ------------------------------------------- The Board of Directors recommends a vote FOR proposals 2 and 3.
The Board of Directors recommends a vote -------------------------------------------------------------------
FOR election of Directors
- ------------------------------------------- -------------------------------------------------------------------
FOR WITHHELD FOR AGAINST ABSTAIN
1. Election of 2. Approval of the Amended and
Directors. Restated Allergan, Inc. 1989
(see reverse) Incentive Compensation Plan.
For, except vote withheld from the 3. Approval of the Allergan, Inc.
following nominee(s): Executive Bonus Plan,
Performance Objectives and
Maximum Award Amount.
- ------------------------------------------- -------------------------------------------------------------------
Please check the box if Please check the box if you wish to have your vote disclosed
you plan to attend the [ ] to the Company. The Company's Confidential Voting Policy is [ ]
Annual Meeting described in the Proxy Statement accompanying this Proxy.
</TABLE>
NOTE: Please sign exactly as name
appears hereon. Joint owners should each
sign. When signing as attorney,
executor, administrator, trustee or
guardian, please give full title as
such.
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SIGNATURE(S) DATE
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[ALLERGAN LOGO] 2525 Dupont Drive, Irvine, California (714) 246-4500
ADMISSION TICKET
RETAIN FOR ADMITTANCE
MAP TO ALLERGAN DIRECTIONS
Allergan is located in Orange County,
just off the San Diego (405) Freeway.
Take the Jamboree exit in Irvine and
travel west; at the second traffic light
(DuPont) turn right; at the first street
(Teller) turn right; turn left at the
first gate opening. You will be directed
to parking from there.
