<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 25, 1999________________
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE QUARTER ENDED COMMISSION FILE NUMBER
JUNE 25, 1999 1-10269
ALLERGAN, INC.
A DELAWARE CORPORATION IRS EMPLOYER IDENTIFICATION
95-1622442
2525 DUPONT DRIVE, IRVINE, CALIFORNIA 92612
TELEPHONE NUMBER 714/246-4500
Indicate by a check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
(1) [X] yes [ ] no
(2) [X] yes [ ] no
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
As of August 4, 1999, there were 65,993,759 shares of common stock outstanding.
1
<PAGE> 2
ALLERGAN, INC.
FORM 10-Q FOR THE QUARTER ENDED JUNE 25, 1999
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I - FINANCIAL INFORMATION
ITEM 1 - CONSOLIDATED FINANCIAL STATEMENTS
(A) Condensed Consolidated Statements of Earnings - 3
Three Months and Six Months Ended
June 25, 1999 and June 26, 1998
(B) Condensed Consolidated Balance Sheets - 4
June 25, 1999 and December 31, 1998
(C) Condensed Consolidated Statements of Cash Flows - 5
Six Months Ended June 25, 1999 and
June 26, 1998
(D) Notes to Consolidated Financial Statements 6-11
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 12-22
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 23-25
CERTAIN FACTORS AND TRENDS AFFECTING ALLERGAN AND
ITS BUSINESSES 26-28
PART II - OTHER INFORMATION
ITEM 5 29
ITEM 6 29
Signature 30
Exhibits
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
Allergan, Inc.
Condensed Consolidated Statements of Earnings
(In millions, except per share amounts)
<TABLE>
<CAPTION>
Three months Six months
Ended Ended
----------------------- -----------------------
June 25, June 26, June 25, June 26,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Product Sales
Net sales $ 367.8 $ 325.0 $ 679.1 $ 594.3
Cost of sales 113.5 106.3 203.2 200.0
-------- -------- -------- --------
Product gross margin 254.3 218.7 475.9 394.3
Research Services
Research service revenues 11.1 6.3 20.9 15.9
Cost of research services 10.5 5.9 19.6 14.8
-------- -------- -------- --------
Research services margin 0.6 0.4 1.3 1.1
Operating costs and expenses
Selling, general and
administrative 150.8 132.4 293.0 250.0
Research and development 38.2 35.7 69.9 59.8
Restructuring charges -- 7.0 -- 7.8
Contribution to ASTI -- -- -- 171.4
-------- -------- -------- --------
Operating income (loss) 65.9 44.0 114.3 (93.6)
Nonoperating income (expense)
Interest income 3.8 2.3 7.1 5.2
Interest expense (3.2) (4.0) (6.5) (7.0)
Gain on investments, net 0.6 5.5 2.1 53.5
Contribution to Allergan
Foundation -- -- -- (11.0)
Other, net (0.8) 1.1 -- (0.4)
-------- -------- -------- --------
0.4 4.9 2.7 40.3
-------- -------- -------- --------
Earnings (loss) from continuing
operations before income
taxes and minority interest 66.3 48.9 117.0 (53.3)
Provision for income taxes 19.4 14.1 35.1 34.2
Minority interest -- -- -- (0.1)
-------- -------- -------- --------
Net earnings (loss) $ 46.9 $ 34.8 $ 81.9 $ (87.4)
======== ======== ======== ========
Basic earnings (loss) per share $ 0.71 $ 0.53 $ 1.23 $ (1.34)
======== ======== ======== ========
Diluted earnings (loss) per share $ 0.69 $ 0.52 $ 1.20 $ (1.34)
======== ======== ======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 4
Allergan, Inc.
Condensed Consolidated Balance Sheets
(In millions, except share data)
<TABLE>
<CAPTION>
June 25, December 31,
1999 1998
-------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 215.6 $ 181.6
Trade receivables, net 227.7 226.1
Inventories 130.7 123.3
Other current assets 131.9 130.2
-------- --------
Total current assets 705.9 661.2
Investments and other assets 179.9 179.2
Property, plant and equipment, net 317.7 324.9
Goodwill and intangibles, net 158.3 169.1
-------- --------
Total assets $1,361.8 $1,334.4
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 109.4 $ 48.5
Accounts payable 78.7 67.0
Accrued expenses 208.5 213.6
Income taxes 44.8 39.4
-------- --------
Total current liabilities 441.4 368.5
Long-term debt 138.3 201.1
Other liabilities 72.6 68.8
Commitments and contingencies -- --
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 67,127,000
and 67,133,000 shares 0.7 0.7
Additional paid-in capital 234.5 223.0
Accumulated other comprehensive loss (29.7) (4.3)
Retained earnings 574.3 516.3
-------- --------
779.8 735.7
Less - treasury stock, at cost (846,000 and 1,016,000 shares) (70.3) (39.7)
-------- --------
Total stockholders' equity 709.5 696.0
-------- --------
Total liabilities and stockholders' equity $1,361.8 $1,334.4
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 5
Allergan, Inc.
Condensed Consolidated Statements of Cash Flows
(In millions)
<TABLE>
<CAPTION>
Six months
Ended
---------------------
June 25, June 26,
1999 1998
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings/(loss) $ 81.9 $ (87.4)
Non-cash items included in net earnings (loss):
Depreciation and amortization 36.3 37.6
Amortization of prepaid royalties 1.6 5.0
Gain on investments, net (2.1) (57.3)
Contribution to Allergan Foundation -- 11.0
Deferred income taxes (3.9) (4.6)
(Gain) Loss on disposal of assets (0.3) 3.8
Expense of compensation plans 6.5 4.1
Minority interest -- (0.1)
Restructuring charge -- 7.8
Adjustment in reporting foreign subsidiaries (2.4) 0.7
Changes in assets and liabilities:
Trade receivables (11.5) (32.1)
Inventories (9.5) 1.3
Accounts payable 11.4 (14.1)
Accrued liabilities 6.0 17.8
Income taxes 20.6 8.1
Other 2.6 1.6
------- -------
Net cash provided by/(used in) operating activities 137.2 (96.8)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (23.0) (17.7)
Disposals of property, plant and equipment 4.0 1.4
Proceeds from sale of investments 7.5 55.0
Other, net (22.0) (11.6)
------- -------
Net cash (used in)/provided by investing activities (33.5) 27.1
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends to stockholders (18.6) (16.8)
ASTI dividend -- (28.6)
Net (repayments) borrowings under commercial
paper obligations (13.2) 66.6
Net borrowings of notes payable 8.6 1.1
Sale of stock to employees 20.7 13.0
Increase in long term debt 3.0 45.3
Decrease in long-term debt (1.2) (1.2)
Payments to acquire treasury stock (63.0) (32.9)
------- -------
Net cash (used in)/provided by financing activities (63.7) 46.5
------- -------
Effect of exchange rates on cash and equivalents (6.0) (4.1)
------- -------
Net increase in cash and equivalents 34.0 (27.3)
Cash and equivalents at beginning of period 181.6 180.9
------- -------
Cash and equivalents at end of period $ 215.6 $ 153.6
======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE> 6
Allergan, Inc.
Notes to Condensed Consolidated Financial Statements
1. In the opinion of management, the accompanying condensed consolidated
financial statements contain all adjustments necessary (consisting only of
normal recurring accruals) to present fairly the financial information contained
therein. These statements do not include all disclosures required by generally
accepted accounting principles and should be read in conjunction with the
audited financial statements of the Company for the year ended December 31,
1998. The results of operations for the six months ended June 25, 1999 are not
necessarily indicative of the results to be expected for the year ending
December 31, 1999.
2. Components of inventory were:
<TABLE>
<CAPTION>
June 25, December 31,
1999 1998
-------- ------------
(in millions)
<S> <C> <C>
Finished goods $ 80.4 $ 75.4
Work in process 22.6 18.1
Raw materials 27.7 29.8
------- -------
Total $ 130.7 $ 123.3
======= =======
</TABLE>
3. Income taxes are determined using an estimated annual effective tax
rate, which is less than the U.S. Federal statutory rate, primarily because of
lower tax rates in Puerto Rico and in certain non U.S. jurisdictions.
Withholding and U.S. taxes have not been provided for unremitted earnings of
certain non U.S. subsidiaries because such earnings are or will be reinvested in
operations outside the United States, or will be offset by appropriate credits
for foreign income taxes paid.
4. The Company is involved in various litigation and claims arising in the
normal course of business. The Company's management believes that the ultimate
disposition of these matters would not have a material adverse effect on the
consolidated financial position and results of operations of the Company.
5. On July 28, 1999, the Board of Directors declared a quarterly cash
dividend of $0.14 per share, payable September 17, 1999 to stockholders of
record on August 27, 1999.
6
<PAGE> 7
Allergan, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
6. The reconciliations of the numerators and denominators of the basic and
diluted earnings per share computations in accordance with SFAS No. 128 are as
follows:
<TABLE>
<CAPTION>
Second Quarter
------------------------------------------------------------------------
1999 1998
(In millions, ----------------------------------- ------------------------------------
except per share Income Shares Per-Share Income Shares Per-Share
data) (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- --------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Computation of basic EPS:
Income available to common
stockholders $46.9 66.5 $0.71 $ 34.8 65.4 $ 0.53
===== ======
Effect of dilutive options 1.5 1.3
---- ----
Computation of diluted EPS:
Income available to common
stockholders assuming exercises $46.9 68.0 $0.69 $ 34.8 66.7 $ 0.52
==== ===== ==== ======
</TABLE>
<TABLE>
<CAPTION>
Six Months
------------------------------------------------------------------------
1999 1998
(In millions, ----------------------------------- ------------------------------------
except per share Income Shares Per-Share Income Shares Per-Share
data) (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- --------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Computation of basic EPS:
Income (loss) available to
common stockholders $81.9 66.5 $1.23 $(87.4) 65.4 $(1.34)
===== ======
Effect of dilutive options 1.6 0.0
---- ----
Computation of diluted EPS:
Income (loss) available to common
stockholders assuming exercises $81.9 68.1 $1.20 $(87.4) 65.4 $(1.34)
==== ===== ==== ======
</TABLE>
7
<PAGE> 8
Allergan, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
Options to purchase 1,100,000 shares of common stock at an exercise price of
$110.00 per share were outstanding at June 25, 1999. These options were not
included in the computation of diluted earnings per share at June 25, 1999
because the effect would be antidilutive.
At June 26, 1998, options to purchase 4,463,000 shares of common stock at prices
ranging from $13.50 per share to $35.13 per share were outstanding since dates
ranging from September 27, 1988 through January 29, 1998. These options were not
included in the computation of diluted earnings per share for the six months
ended June 26, 1998 because the effect would be antidilutive due to the loss for
the period.
7. The components of comprehensive income are:
<TABLE>
<CAPTION>
Second Quarter
--------------------------------------------------------------------------------------
(in millions) 1999 1998
---------------------------------------- -----------------------------------------
Tax Tax
Before-tax (expense) Net-of-tax Before-tax (expense) Net-of-tax
amount or benefit amount amount or benefit amount
---------- ---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Foreign currency
translation adjustments $ 3.0 -- $ 3.0 $ 1.5 -- $ 1.5
Unrealized holding gains/(losses)
arising during period 8.3 $ (2.9) 5.4 5.4 $ (1.9) 3.5
Reclassification adjustment
for net gains realized in
net income (0.6) 0.2 (0.4) (5.5) 2.0 (3.5)
------ ------ ------ ------ ------ ------
Other comprehensive income $ 10.7 $ (2.7) $ 8.0 $ 1.4 $ 0.1 $ 1.5
====== ====== ====== ======
Net earnings 46.9 34.8
------ ------
Total other comprehensive income $ 54.9 $ 36.3
====== ======
</TABLE>
8
<PAGE> 9
Allergan, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
<TABLE>
<CAPTION>
Six Months Ended
--------------------------------------------------------------------------------------
(in millions) June 25, 1999 June 26, 1998
---------------------------------------- -----------------------------------------
Tax Tax
Before-tax (expense) Net-of-tax Before-tax (expense) Net-of-tax
amount or benefit amount amount or benefit amount
---------- ---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Foreign currency
translation adjustments $(27.4) -- $(27.4) $ 1.2 -- $ 1.2
Unrealized holding gains/(losses)
arising during period 5.2 $ (1.8) 3.4 36.1 $(12.6) 23.5
Reclassification adjustment
for net gains realized in
net income (2.1) 0.7 (1.4) (53.5) 18.7 (34.8)
------ ------ ------ ------ ------ ------
Other comprehensive income $(24.3) $ (1.1) (25.4) $(16.2) $ 6.1 (10.1)
====== ====== ====== ======
Net earnings (loss) 81.9 (87.4)
------ ------
Total other comprehensive income (loss) $ 56.5 $(97.5)
====== ======
</TABLE>
8. 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 48.8% and
49.0% of total product net sales for the quarters ended June 25, 1999 and June
26, 1998, respectively, and 49.1% and 46.1% of total product net sales for the
six month periods ended June 25, 1999 and June 26, 1998, respectively. 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.
9
<PAGE> 10
Allergan, Inc.
Notes to Condensed Consolidated Financial Statements (continued)
Operating income attributable to each operating segment is based upon the
management assignment of costs to such regions. In 1999, operating income was
determined for each operating segment using a cost of sales amount which
included the manufacturing standard cost of goods produced by the Company's
manufacturing operations (or the cost to acquire goods from third parties),
freight, duty and local distribution costs, and royalties. In 1999, operating
income for all operating segments and manufacturing operations also included a
charge for corporate services and asset utilization. In 1998, cost of sales in
most segments outside the United States included the cost of goods produced by
the Company's manufacturing operations at the transfer price charged the
distribution operation by the manufacturing location. It is impracticable to
restate operating income amounts for 1998.
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. In 1998 corporate
costs included significant administrative costs applicable to United States
operations that are not charged to the U.S. region. Special charges in 1998 for
restructuring and the contribution to Allergan Specialty Therapeutics, Inc.
(ASTI) are also considered corporate costs.
Identifiable assets 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. Assets assigned to segments have not
changed materially since December 31, 1998.
GEOGRAPHIC OPERATING SEGMENTS
<TABLE>
<CAPTION>
Net Sales Operating Income(Loss)
---------------------- -----------------------
2nd Qtr. 2nd Qtr. 2nd Qtr. 2nd Qtr.
(in millions) 1999 1998 1999 1998
- ----------------------------------------------------------------- -----------------------
<S> <C> <C> <C> <C>
United States $ 178.0 $ 157.7 $ 69.6 $ 90.0
Europe 98.0 89.2 24.4 10.6
Asia Pacific 53.3 40.0 5.8 2.9
Other 36.7 36.5 9.2 2.2
---------------------- -----------------------
Segments total 366.0 323.4 109.0 105.7
Manufacturing operations 1.8 1.6 34.4 5.3
Research and development (38.1) (35.7)
Research services margin 0.7 0.5
Restructuring charge -- (7.0)
Elimination of inter-company profit (51.5) --
General corporate 11.4 (24.8)
---------------------- -----------------------
Total $ 367.8 $ 325.0 $ 65.9 $ 44.0
====================== =======================
</TABLE>
10
<PAGE> 11
Allergan, Inc.
Notes to Condensed Consolidated Financial Statements (continued)
GEOGRAPHIC OPERATING SEGMENTS (continued)
<TABLE>
<CAPTION>
Net Sales Operating Income(Loss)
---------------------- ----------------------
Six Months Ended Six Months Ended
June 25, June 26, June 25, June 26,
(in millions) 1999 1998 1999 1998
- ----------------------------------------------------------------- ----------------------
<S> <C> <C> <C> <C>
United States $ 330.6 $ 270.9 $ 123.9 $ 141.0
Europe 184.4 173.1 47.4 14.4
Asia Pacific 93.4 78.3 6.6 4.9
Other 67.3 68.9 12.6 5.9
------- ------- ------- -------
Segments total 675.7 591.2 190.5 166.2
Manufacturing operations 3.4 3.1 61.8 17.6
Research and development (69.9) (59.8)
Research services margin 1.3 1.1
Restructuring charge -- (7.8)
Elimination of inter-company profit (94.0) --
Contribution to ASTI -- (171.4)
General corporate 24.6 (39.5)
------- ------- ------- -------
Total $ 679.1 $ 594.3 $ 114.3 $ (93.6)
======= ======= ======= =======
</TABLE>
11
<PAGE> 12
ALLERGAN, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE QUARTER ENDED JUNE 25, 1999
RESULTS OF OPERATIONS
The following table compares 1999 and 1998 net sales by Product Line for the
second quarter and year-to-date periods:
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
---------------------- ----------------------
Net Sales by Product Line June 25, June 26, June 25, June 26,
($ millions): 1999 1998 1999 1998
-------- -------- -------- --------
Specialty pharmaceuticals
<S> <C> <C> <C> <C>
Eye Care Pharmaceuticals $ 154.1 $ 137.9 $ 283.5 $ 238.8
Skin Care 22.8 19.6 41.7 35.3
BOTOX(R)/Neuromuscular 42.7 30.1 78.8 56.2
------- ------- ------- -------
219.6 187.6 404.0 330.3
Medical devices and OTC products
Ophthalmic Surgical 56.7 48.6 104.1 91.9
Contact Lens Care 91.5 88.8 171.0 172.1
------- ------- ------- -------
Total Net Sales $ 367.8 $ 325.0 $ 679.1 $ 594.3
======= ======= ======= =======
</TABLE>
For the quarter ended June 25, 1999 total net sales increased by $42.8 million
or 13% to $367.8 million as compared to the second quarter of 1998. Net sales
for the six months ended June 25, 1999 were $679.1 million, a 14% increase from
the comparable 1998 amount.
The impact of foreign currency changes compared to the comparable prior year
period decreased net sales by $9.6 million or 3% for the quarter ended June 25,
1999 and by $14.3 million or 2% for the six months ended June 25, 1999. At
constant currency rates, sales increased $52.4 million or 16% during the
quarter, and $99.1 million or 17% for the six months ended June 25, 1999
compared with the same periods last year.
For the three months ended June 25, 1999, Eye Care Pharmaceuticals sales
increased $16.2 million or 12% from the comparable 1998 period. For the first
six months of 1999 sales increased by $44.7 million or 19% from the comparable
1998 amount. At constant currency rates, sales increased $24.8 million or 18%
during the quarter and $59.7 million or 25% for the six months ended June 25,
1999 compared with the same periods last year. Sales in the United States
increased by $7.6 million or 10% in the quarter and $34.3 million or 28% in the
first six months of 1999. Sales increased in the second quarter primarily as a
result of increased sales of Alphagan(R) ophthalmic solution. Sales increased
during the first six months of 1999 primarily as a result of growth in sales of
Alphagan(R), Ocuflox(R) and Acular(R) ophthalmic solutions. Sales of Alphagan(R)
ophthalmic solution in the United States in the second quarter were $31.0
million compared to $24.3 million in 1998. For the first six months Alphagan(R)
ophthalmic solution sales in the United States were $58.1 million compared to
$39.3 million in 1998. At constant currency rates, sales in international
markets increased by $17.2 million or 29% in the second quarter of 1999 and by
$25.4 million or 22% in the first six months of 1999 compared to 1998.
International sales growth in both the second quarter and for the first six
months of 1999 was the
12
<PAGE> 13
Allergan, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE QUARTER ENDED JUNE 25, 1999 (Continued)
RESULTS OF OPERATIONS (Continued)
result of growth in sales of Alphagan(R) ophthalmic solution. International
sales were reduced from the amounts that would have been reported at constant
currency rates by $8.6 million in the second quarter and by $15.0 million in the
first six months of 1999 primarily as a result of the devaluation of the
Brazilian real in 1999.
Skin Care Pharmaceutical sales increased $3.2 million or 16% in the second
quarter of 1999 and $6.4 million or 18% in the first six months of 1999 compared
to comparable periods in 1998. Sales growth in 1999 was primarily the result of
growth in sales of Tazorac(R) (Zorac(R)) topical gel and Azelex(R) cream.
Tazorac(R) (Zorac(R)) sales were $4.9 million in the second quarter of 1999
compared to $4.1 million in 1998. For the first six months of 1999 Tazorac(R)
(Zorac(R)) sales were $8.6 million compared to $6.2 million in 1998.
Botox(R) Purified Neurotoxin Complex sales increased by $12.6 million or 42% in
the second quarter of 1999 and $22.6 million or 40% for the first six months of
1999 compared to comparable amounts in 1998. The increase was the result of
strong growth in both the United States and international markets.
Surgical sales increased by $8.1 million or 17% in the second quarter and $12.2
million or 13% in the first six months of 1999 compared to comparable 1998
amounts. For the quarter, domestic sales increased 9% while international sales
increased 24%. For the first six months, domestic sales increased 7% while
international sales increased 19%. Domestic sales increased primarily as a
result of increases in sales of silicone intraocular lenses (IOLs).
International sales increased as a result of increased sales of silicone IOLs
and strong sales of an acrylic IOL first introduced in 1998. Such increases were
partially offset by a decrease in sales in PMMA IOLs.
Contact Lens Care net sales were $91.5 million for the three months ended June
25, 1999, an increase of $2.7 million or 3% compared to the second quarter of
1998. At constant currency rates, sales increased by $2.2 million or 2.5%. For
the first six months of 1999 Contact Lens Care net sales were $171.0 million, a
decrease of $1.1 million or 1% compared to the first six months of 1998. At
constant currency rates, sales decreased by $3.3 million or 2%. Domestic sales
decreased by $1.4 million or 7% in the second quarter, and increased $0.5
million or 1% in the first six months of 1999 compared to comparable 1998
periods. Domestic sales in the first six months of 1999 increased primarily as a
result of growth in sales of Complete(R) brand multi-purpose solution. The
increase in sales of Complete(R) brand multi-purpose solution was more than
offset by decreases in sales in ancillary contact lens care products in the
second quarter of 1999. International sales increased by $4.1 million or 6% in
the second quarter, and decreased $1.6 million or 1% in the first six months of
1999 compared to comparable 1998 periods. Sales in international markets
increased in the second quarter as a result of an increase in sales of
Complete(R) brand multi-purpose solution primarily as a result of the launch of
this product in Japan in the second quarter. International sales also increased
as a result of an increase in sales of Consept F(R) Cleaning and Disinfection
System in Japan. Such increases were partially offset by decreases in
13
<PAGE> 14
Allergan, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE QUARTER ENDED JUNE 25, 1999 (Continued)
RESULTS OF OPERATIONS (Continued)
sales of certain peroxide based disinfection products. At constant currency
rates, sales in international markets increased 5% in the second quarter of 1999
and decreased by 3% in the first six months of 1999 compared to comparable
periods in 1998.
Allergan's gross margin percentage for the second quarter of 1999 was 69.1% of
net sales, which represents a 1.8 percentage point increase from the 67.3% rate
for the second quarter of 1998. The gross margin percentage for the six months
ended June 25, 1999 was 70.1% of net sales, which represents a 3.8 percentage
point increase from the 66.3% rate for the first six months of 1998. The gross
margin percentage increased in 1999 compared to the comparable periods in 1998
primarily as a result of reductions in costs of goods sold from improvement in
manufacturing efficiency, and shifts in the mix of products sold to higher
margin products. Gross margin in dollars increased over the second quarter of
1998 by $35.6 million or 16% as a result of the 13% increase in net sales and
the 1.8 percentage point increase in gross margin percentage. For the first six
months of 1999 gross margin in dollars increased over the comparable period of
1998 by $81.6 million or 21% as a result of the 14% increase in net sales and
the 3.8 percentage point increase in gross margin percentage.
Operating income was $65.9 million in the second quarter of 1999 representing a
$21.9 million or 50% increase over the operating income of $44.0 million for the
second quarter of 1998. Such increase was the result of the $35.6 million
increase in gross margin in 1999 offset by a $18.4 million increase in selling,
general and administrative expense, and a $2.5 million dollar increase in
Research and Development. Selling, general and administrative expenses were 41%
of net sales in both 1999 and 1998. The $18.4 million increase was primarily the
result of increases in spending on promotion, selling and marketing activities
in 1999. Spending in such areas increased by 3.5 percentage points in 1999
compared to 1998. General and Administrative expenses decreased by 3 percentage
points partially offsetting the increase in promotion, selling and marketing
costs. General and administrative expenses decreased in 1999 as a result of the
reductions in staff in this area resulting from a restructuring of the Company
in 1998. Operating expenses in the second quarter of 1998 include $7.0 million
in restructuring costs.
Operating income was $114.3 million for the six months ended June 25, 1999
compared to a loss of $93.6 million for the first six months of 1998. The loss
in 1998 included a charge of $171.4 million relating to a dividend of stock of
Allergan Specialty Therapeutics, Inc. (ASTI) to Allergan stockholders. ASTI was
formed to conduct research and development of potential pharmaceutical products
based upon Allergan's retinoid and neuroprotective technologies. Allergan
contributed $200 million and certain related technologies to ASTI prior to the
dividend distribution. Excluding the effect of the charge for the dividend
distribution of ASTI stock of $171.4 million, operating income was $77.8 million
in the first six months of 1998. Operating income in 1999 of $114.3 million was
$36.5
14
<PAGE> 15
Allergan, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE QUARTER ENDED JUNE 25, 1999 (Continued)
RESULTS OF OPERATIONS (Continued)
million, or 47% higher than adjusted operating income in 1998 of $77.8 million.
Such increase was the result of the $81.6 million increase in gross margin in
1999 offset by a $43.0 million increase in selling, general and administrative
expense, and a $10.1 million dollar increase in Research and Development.
Selling, general and administrative expenses increased from 42% of sales in 1998
to 43% of sales in 1999. Such increase was primarily the result of increases in
spending on promotion, selling and marketing activities in 1999. Spending in
such areas increased by 3 percentage points in 1999 compared to 1998. General
and Administrative expenses decreased by 2.6 percentage points partially
offsetting the increase in promotion, selling and marketing costs. General and
administrative expenses decreased in 1999 as a result of the reductions in staff
in this area resulting from a restructuring of the Company in 1998. Operating
expenses in the first six months of 1998 included $7.8 million in restructuring
costs. Research and Development increased in 1999 as a result of increased
research activity. In addition, Research and Development was reduced in 1998 as
a result of a $3.8 million reimbursement to Allergan by ASTI of costs incurred
by the Company in 1997.
Net earnings were $46.9 million in the second quarter of 1999, compared to $34.8
million in the second quarter of 1998. The $12.1 million increase in net
earnings is primarily the result of the $21.9 million increase in operating
income. Results in both years also include gains on sale of stock of Ligand
Pharmaceuticals, Incorporated (Ligand) of $0.6 million in 1999 and $5.5 million
in 1998. In addition, the increase in operating income was also partially offset
by an increase in income taxes resulting from the increase in income before
income tax.
Net earnings were $81.9 million in the first six months of 1999. Allergan
recorded a net loss of $87.4 million in the first six months of 1998. The net
loss in 1998 included the $171.4 million charge relating to ASTI. Non-operating
income in 1998 included three significant items. The Company realized a gain of
$51.8 million on its investment in Ocular Science, Inc. (OSI) stock. The Company
contributed a portion of its OSI stock to The Allergan Foundation, a charitable
foundation, resulting in a charge of $11.0 million. The Company and the
Foundation sold their investments in OSI in the first quarter of 1998. The
Company recorded a charge of $3.8 million to recognize the permanent impairment
in value of certain other investments. Excluding the effect of the charge
relating to ASTI and the after tax effect of three significant non-operating
items discussed above, net earnings would have been $58.2 million in the first
six months of 1998. Thus, net earnings of $81.9 million in the first six months
of 1999 represent a $23.7 million, or 41% increase over adjusted earnings of
$58.2 million in the first six months of 1998. The 1999 increase is primarily
the result of the $36.5 million increase in adjusted operating income. Such
increase is partially offset by a $12.0 million increase in income taxes
resulting from the increase in income before income tax in 1999 compared to the
adjusted income before income tax in 1998.
15
<PAGE> 16
Allergan, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE QUARTER ENDED JUNE 25, 1999 (Continued)
LIQUIDITY AND CAPITAL RESOURCES
As of June 25, 1999, the Company had a medium term note program and seven
long-term credit facilities, one of which supports a commercial paper borrowing
arrangement. The note program allows the Company to issue up to an additional
$60 million in notes on a non-revolving basis. The credit facilities allow for
borrowings of up to $30.5 million through 2000, $39.1 million through 2001 and
$273.6 million through 2003. 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 June 25, 1999, the Company had $89.0
million in borrowings under the note program and $92.2 million in borrowings
under six of the credit facilities.
As of June 25, 1999, the Company has classified $61.7 million borrowed under the
credit facilities as long-term debt and $30.5 million as short-term debt based
upon the Company's ability to maintain such debt under terms of the credit
facilities described above. As of June 25, 1999, the Company had commercial
paper borrowings of $28.8 million.
The net cash provided by operating activities for the six months ended June 25,
1999 was $137.2 million. The net cash used in operating activities for the six
months ended June 26, 1998 was $96.8 million. Such 1998 amount includes the
$171.4 million charge relating to ASTI. Excluding such charge, cash provided by
operating activities in the first six months of 1998 was $74.6 million.
Cash used in investing activities in the first six months of 1999 was $33.5
million. Cash provided by investing activities in the first six months of 1998
was $27.1 million. Such 1998 amount included $40.8 million in proceeds from sale
of OSI stock. Excluding this transaction, cash used in investing activities was
$13.7 million in the first six months of 1998. The Company invested $23.0
million in new facilities and equipment during the six months ended June 25,
1999 compared to $17.7 million during the same period in 1998.
Cash used in financing activities was $63.7 million in the first six months of
1999 compared to cash provided by financing activities of $46.5 million in the
first six months of 1998. Repayments of debt, net of borrowings, totaled $2.8
million in the first six months of 1999. Borrowings, net of repayments of debt
totaled $111.8 million in the first six months of 1998. The borrowings in 1998
were used to make the contribution to ASTI of $200 million. The balance of the
amount contributed was provided by cash from operations, the proceeds from the
sale of OSI stock, and a reduction of cash and equivalents. The amounts in both
years include dividend outflows of $18.6 million in 1999 and $45.4 million in
1998. The 1998 dividends include $28.6 million representing the dividend of ASTI
stock to Allergan shareholders. Cash used in financing activities includes $63.0
million in 1999 and $32.9 million in 1998 used to repurchase treasury stock.
16
<PAGE> 17
Allergan, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE QUARTER ENDED JUNE 25, 1999 (Continued)
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,
governmental entities, 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, governmental entities,
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 ("IT") 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. Furthermore,
the Company participates in industry groups focusing on year 2000 issues.
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.
17
<PAGE> 18
Allergan, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE QUARTER ENDED JUNE 25, 1999 (Continued)
YEAR 2000 (Continued)
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
goal is to verify the year 2000 compliance of systems and relationships
deemed to be business critical in an appropriate manner through methods
such as testing, auditing and surveying. 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 Company has completed the Phase 1 inventory and Phase 2 assessment within
each of its business functions, although the Company's inventory and assessment
is an on-going process as the Company continues to add and delete items in the
inventory in its ordinary course of business. All business functions within
Allergan are working on Phase 3 validations of their systems and relationships
and expect to substantially complete their Phase 3 validations by the end of the
third quarter of 1999, focusing first on business critical items. As of June 30,
1999, the Company had verified, through testing, auditing, communications with
business partners and vendors and other methods, that approximately 66% of its
business critical inventory items were "year 2000 compliant." This inventory
includes both internal, Company-operated systems and applications and external
systems, applications and enterprises.
The Company's definition of year 2000 compliance for business critical hardware
and software items means that the Company's tests or other methods of
verification have shown that the items are able to process dates after December
31, 1999. For critical business partners, the Company defines a partner as year
2000 compliant if the Company believes that the partner has sufficiently planned
for the transition to the year 2000 so that the partner will not cause the
Company to experience material business interruptions. The Company has taken a
conservative approach with respect to business critical partners and has not
deemed any partner who has merely promised to be ready as year 2000 compliant.
As a result, many of the Company's business partners who have asserted that they
intend to be year 2000 compliant (but cannot demonstrate current compliance)
have been excluded from the Company's category of "year 2000 compliant."
18
<PAGE> 19
Allergan, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE QUARTER ENDED JUNE 25, 1999 (Continued)
YEAR 2000 (Continued)
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, customer service, billing,
collection, purchasing and accounts payable, human resources and general
accounting functions. This core system is represented by the vendor to be year
2000 compliant. The Company performed detailed year 2000 testing of its SAP
processes in the first quarter of 1999 and, with two minor exceptions, did not
experience adverse year 2000 issues with the software. These two minor issues
with SAP have now been resolved. The Company has installed the SAP system in
sites producing a majority of the Company's revenue. The Company expects that by
August 1999, approximately 90% of the Company's revenue will be in sites that
utilize SAP, and almost all manufacturing locations will be using SAP software.
Company sites not using SAP are utilizing software that the Company has
validated as year 2000 compliant for core processes.
Many items in the Company's year 2000 inventories are third party business
partner relationships. The Company has mailed letters to thousands of these
vendors, service providers, customers and other business partners to determine
the extent to which they are prepared for the year 2000 issue. The Company has
experienced a low response rate that has caused the Company's overall compliance
rate to be lower than expected, especially in the selling, general and
administrative areas and with respect to vendors to the manufacturing function.
The Company intends to follow up with critical partners who have either declined
to provide the requested assurances or have limited the scope of assurances to
which they are willing to commit. The Company intends to continue to focus on
these partners in the remaining months of 1999 to either confirm their
compliance or to begin initiating contingency plans.
Two Allergan products 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). All other
phacoemulsification equipment marketed by Allergan does not include a date
field, and hence, the date problem is not applicable. The Company has tested the
Sovereign(TM) system and has confirmed that it accurately processes and stores
date and time information during the transition between the years 1999 and 2000
and on February 29, 2000 (leap year). The Company has also tested the
Prestige(R) system and has confirmed that it accurately processes date and time
information on January 1, 2000 and on February 29, 2000 (leap year).
With respect to the Prestige(R) system only, Allergan has identified an
inconsistency between the display date and the hardcopy printout that occurs any
year on December 31. Allergan believes that this is not a year 2000 issue and
that it does not affect the safety or efficacy of the Prestige(R) system. On
December 31 of any given year, the date on the display is correct, but the date
on the printout reads as January 0 of the following year. Allergan is in the
process of developing a software modification to correct the anomaly and intends
to provide the modification free of charge to customers in 1999. Allergan
expects to spend less than $150,000 to develop and distribute the modification.
19
<PAGE> 20
Allergan, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE QUARTER ENDED JUNE 25, 1999 (Continued)
YEAR 2000 (Continued)
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
non-SAP out of pocket expenses through June 25, 1999 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.
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 the Company has effectively identified all business critical
systems and relationships or that third parties who have been identified 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
or making payments for products sold or purchased, 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
20
<PAGE> 21
Allergan, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE QUARTER ENDED JUNE 25, 1999 (Continued)
YEAR 2000 (Continued)
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 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 distinguishing actual demand
from stockpiling and will develop appropriate contingency plans 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, the Company has formed rapid response teams to
address year 2000 issues as they arise, notwithstanding the efforts described
above to identify and eliminate such problems. These teams are composed of both
IT and non-IT personnel.
21
<PAGE> 22
Allergan, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE QUARTER ENDED JUNE 25, 1999 (Continued)
YEAR 2000 (Continued)
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 accepted Allergan into its year 2000 recovery program, pending the
completion of an updated third party Y2K Ready Analysis, scheduled in October of
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.
22
<PAGE> 23
ALLERGAN, INC.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 results 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.
The Company's interest rate swaps outstanding at June 25, 1999 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.
23
<PAGE> 24
Allergan, Inc.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (Continued)
The impact of interest rate risk management activities on income during the
quarter ended June 25, 1999, and the amount of deferred gains and losses from
interest rate risk management transactions at June 25, 1999 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 June 25, 1999, 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 are comprised of 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 June 25, 1999, all of the Company's purchased options were entered into to
protect the value of anticipated, but not firmly committed transactions in Japan
and Europe. The premium cost of purchased foreign exchange option
24
<PAGE> 25
Allergan, Inc.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (Continued)
contracts are recorded in other current assets and amortized over the life of
the option. At June 25, 1999, 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, 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.
25
<PAGE> 26
ALLERGAN, INC.
CERTAIN FACTORS AND TRENDS AFFECTING ALLERGAN AND ITS BUSINESSES
The Company believes that certain statements made by the Company in this report
and in other reports and statements released by the Company constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995, such as comments which express the Company's
opinions about trends and factors which may impact future operating results.
Disclosures which 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 that
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 various disclosures made by the Company about its
businesses including, without limitation, the factors discussed below.
o The pharmaceutical industry and other health care-related industries
continue to experience consolidation, resulting in larger, more
diversified companies with greater resources than the Company. Among
other things, these larger companies can spread their research and
development costs over much broader revenue bases than Allergan and can
influence customer and distributor buying decisions in ways that
Allergan cannot.
o Two of the Company's ophthalmic pharmaceutical products, Betagan(R) and
Propine(R), are off patent in the U.S. and continue to face competition
from generic versions of these compounds as well as from recently
introduced new technology glaucoma products. Other significant products
such as Elimite(R) cream, Blephamide(R) ophthalmic suspension and
Pred-Forte(R) ophthalmic suspension are also off patent and may face
similar generic competition.
o The Company is currently the only manufacturer of an FDA-approved
neurotoxin. The Company is aware, however, of another company seeking
FDA approval of a neurotoxin. If such approval is granted, the Company's
sales of Botox(R) Purified Neurotoxin Complex could be materially and
negatively impacted.
o The manufacturing process to create bulk toxin raw material necessary to
produce Botox(R) Purified Neurotoxin Complex is technically complicated.
Any failure of the Company to maintain an adequate supply of bulk toxin
and finished product could result in an interruption in the supply of
Botox(R) Purified Neurotoxin Complex and a resulting decrease in sales
of the product.
o Trends in the contact lens and lens care marketplace continue to impact
the Company's Contact Lens Care business. These trends include
technological and medical advances in surgical techniques for the
correction of vision impairment such as refractive correction
procedures. One-bottle chemical disinfection systems have gained
popularity among soft contact lens wearers instead of peroxide-based
lens care products, which historically have been Allergan's strongest
family of lens care products. Also, the growing use and acceptance of
daily contact lenses, along with the other factors above, could have the
effect of reducing demand for lens care products generally. While the
26
<PAGE> 27
Allergan, Inc.
CERTAIN FACTORS AND TRENDS AFFECTING ALLERGAN AND ITS BUSINESSES (Continued)
Company believes it has established appropriate marketing and sales
plans to mitigate the impact of these trends upon its Contact Lens Care
business, no assurance can be given in this regard.
o The Company has in the past been, and continues to be, subject to
product liability claims. In addition, the Company has in the past and
may in the future recall or issue field corrections related to its
products due to manufacturing deficiencies, labeling errors or other
regulatory or safety reasons. There can be no assurance that the Company
will not experience material losses due to product liability claims or
product recalls or corrections.
o Sales of the Company's surgical and pharmaceutical products have been
and are expected to continue to be impacted by continuing pricing
pressures resulting from various government initiatives as well as from
the purchasing and operational decisions made by managed care
organizations. Failure of the Array(R) multifocal IOL to be designated
as a "new technology IOL" by the Health Care Financing Administration
could adversely affect the Company's sales and profit margin for the
product.
o There is currently a political debate in the United States regarding the
proposed expansion of Medicare coverage to pharmaceutical products. If
measures to accomplish that coverage become law, and if those measures
impose price controls on the Company's products, the Company's revenues
and financial condition are likely to be materially and adversely
affected.
o Uncertainties of the business include the success of the Company in
identifying information technology ("IT") and non-IT systems,
applications and relationships that are not year 2000 compliant, the
nature and amount of programming required to upgrade or replace each of
the affected programs, the availability, rate and magnitude of related
labor and consulting costs and the success of governmental agencies and
the Company's business partners, vendors and clients and customers in
addressing the year 2000 issue. Further uncertainties and risks include
the possibility of errors in Allergan's remediation efforts, inabilities
to obtain or delays in obtaining replacements for non-compliant systems
or equipment, delays in regulatory approvals caused by governmental
failures, the Company's ability to validate new suppliers if necessary,
failures in global banking systems and capital markets, extended
failures by utility companies or common carriers and general economic
downturn related to year 2000 failures on a global basis. If the
distributors or customers of the Company's products should stockpile
products in anticipation of possible product shortages, this stockpiling
could challenge the Company's capacity to produce and distribute
products to meet the excess demand. An even larger risk associated with
stockpiling is that 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. In addition, because
pharmaceutical products have limited expiration dating, 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. Even though the Company expects an increased ability to
avoid significant disruptions of its business as a
27
<PAGE> 28
Allergan, Inc.
CERTAIN FACTORS AND TRENDS AFFECTING ALLERGAN AND ITS BUSINESSES (Continued)
result of its year 2000 readiness program, including, for instance,
measures to address the stockpiling of products and the risk of
unexpected returns, management cannot provide an assurance that there
will be no material adverse effects to the financial condition or
results of operations of the Company as a result of year 2000 issues.
For additional information regarding year 2000 risks and issues, see the
section entitled "Year 2000" in this Quarterly Report on Form 10-Q,
which is incorporated herein by reference.
o The Company collects and pays a substantial portion of its sales and
expenditures in currencies other than the U.S. dollar. Therefore,
fluctuations in foreign currency exchange rates affect the Company's
operating results. The Company can provide no assurance that it can
effectively protect itself from adverse exchange rates or that future
exchange rate movements will not have a material adverse effect on the
Company's sales, gross profit or operating expenses.
o The Company's business is also subject to other risks generally
associated with doing business abroad, such as political unrest and
changing economic conditions with countries where the Company's products
are sold or manufactured. Management cannot provide assurances that it
can successfully avoid or manage these risks.
o The Company sells its pharmaceutical products primarily through
wholesalers. Wholesaler purchases may exceed customer demand, resulting
in reduced wholesaler purchases in later quarters. The Company can give
no assurances that wholesaler purchases will not decline as a result of
this potential excess buying.
o In the past three years, the Company has taken steps designed to improve
its gross profit margin, including continued emphasis on new products as
well as the closure of certain plants and other cost-cutting measures.
In particular, the Company announced comprehensive plans in the third
quarter of 1998 to streamline operations and reduce costs through global
G&A restructuring and manufacturing consolidation. The success of these
steps in improving gross profit margin depends in part on whether sales
of new products will result in a more favorable mix of products, and on
whether the anticipated cost savings can be achieved and sustained.
o The continuing introduction of new products supplied by the Company's
research and development efforts and in-licensing opportunities is
critical to the success of the Company. There is no assurance that any
of the research projects or pending drug marketing approval applications
will result in new products that the Company can commercialize. Delays
or failures in one or more significant research projects and pending
drug marketing approval applications could have a material adverse
impact on the future operations of the Company.
o 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 a SFAS, the terms of this Exposure Draft could require the
Company to include the financial position and results of operation of
Allergan Specialty Therapeutics, Inc. (ASTI) in its consolidated results
on a retrospective basis. The Company is currently evaluating the effect
of implementation of this proposed statement. By including the results
of operations of ASTI, the Company's consolidated results of operations
could be adversely affected.
28
<PAGE> 29
Allergan, Inc.
PART II - OTHER INFORMATION
Item 5. Other Information.
Deadline for Stockholder Proposals. Any stockholder of the Registrant
wishing to have a proposal considered for inclusion in the Registrant'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
Registrant so that it is received on or before November 17, 1999.
Item 6. Exhibits and Reports on Form 8-K
- Exhibits
(numbered in accordance with Item 601 of Regulation S-K)
27 Financial Data Schedule
- Reports on Form 8-K. None.
29
<PAGE> 30
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 9, 1999 ALLERGAN, INC.
/s/ Eric K. Brandt
----------------------------------------
Eric K. Brandt
Principal Financial Officer
30
<PAGE> 31
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description
- ------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
31
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-25-1999
<CASH> 215,600
<SECURITIES> 0
<RECEIVABLES> 235,500
<ALLOWANCES> 7,800
<INVENTORY> 130,700
<CURRENT-ASSETS> 705,900
<PP&E> 595,500
<DEPRECIATION> 277,800
<TOTAL-ASSETS> 1,361,800
<CURRENT-LIABILITIES> 441,400
<BONDS> 138,300
0
0
<COMMON> 700
<OTHER-SE> 708,800
<TOTAL-LIABILITY-AND-EQUITY> 1,361,800
<SALES> 367,800
<TOTAL-REVENUES> 378,900
<CGS> 113,500
<TOTAL-COSTS> 124,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 570
<INTEREST-EXPENSE> 3,200
<INCOME-PRETAX> 66,300
<INCOME-TAX> 19,400
<INCOME-CONTINUING> 46,900
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 46,900
<EPS-BASIC> 0.71
<EPS-DILUTED> 0.69
</TABLE>
