<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 30, 2000
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 30, 2000 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, 2000, there were 131,364,063 shares of common stock outstanding.
<PAGE> 2
ALLERGAN, INC.
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2000
INDEX
Page
----
PART I - FINANCIAL INFORMATION
ITEM 1 - CONSOLIDATED FINANCIAL STATEMENTS
(A) Condensed Consolidated Statements of Earnings --
Three Months and Six Months Ended
June 30, 2000 and June 25, 1999 3
(B) Condensed Consolidated Balance Sheets -
June 30, 2000 and December 31, 1999 4
(C) Condensed Consolidated Statements of Cash Flows -
Six Months Ended June 30, 2000 and June 25, 1999 5
(D) Notes to Condensed Consolidated Financial Statements 6-11
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 12-15
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 16-17
CERTAIN FACTORS AND TRENDS AFFECTING ALLERGAN AND
ITS BUSINESSES 18-20
PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K 21
Signature 22
Exhibits
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 30, June 25, June 30, June 25,
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Product Sales
Net sales $ 404.1 $ 367.8 $ 780.3 $ 679.1
Cost of sales 112.2 113.5 215.6 203.2
------- ------- ------- -------
Product gross margin 291.9 254.3 564.7 475.9
Research Services
Research service revenues,
primarily from a related party 13.8 11.1 29.4 20.9
Cost of research services 13.0 10.5 27.8 19.6
------- ------- ------- -------
Research services margin 0.8 0.6 1.6 1.3
Operating costs and expenses
Selling, general and
administrative 168.1 152.5 333.6 296.4
Research and development 51.7 38.2 97.4 69.9
Technology fees from
related party (0.8) (1.7) (1.6) (3.4)
------- ------- ------- -------
Operating income 73.7 65.9 136.9 114.3
Nonoperating income (expense)
Interest income 4.9 3.8 8.8 7.1
Interest expense (5.5) (3.2) (10.4) (6.5)
Gain on investments, net 0.6 0.6 0.6 2.1
Other, net 0.6 (0.8) 0.5 --
------- ------- ------- -------
0.6 0.4 (0.5) 2.7
------- ------- ------- -------
Earnings before income taxes
and minority interest 74.3 66.3 136.4 117.0
Provision for income taxes 22.3 19.4 40.9 35.1
Minority interest expense 0.1 -- 0.1 --
------- ------- ------- -------
Net earnings $ 51.9 $ 46.9 $ 95.4 $ 81.9
======= ======= ======= =======
Basic earnings per share $ 0.40 $ 0.35 $ 0.73 $ 0.62
======= ======= ======= =======
Diluted earnings per share $ 0.39 $ 0.34 $ 0.72 $ 0.60
======= ======= ======= =======
</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 30, December 31,
2000 1999
--------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 302.4 $ 162.9
Trade receivables, net 283.0 253.2
Inventories 120.7 130.7
Other current assets 127.9 150.7
-------- --------
Total current assets 834.0 697.5
Investments and other assets 157.5 160.8
Property, plant and equipment, net 335.3 330.3
Goodwill and intangibles, net 143.4 150.5
-------- --------
Total assets $1,470.2 $1,339.1
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 84.1 $ 85.3
Accounts payable 76.3 80.5
Accrued expenses 159.7 170.7
Income taxes 63.5 83.4
-------- --------
Total current liabilities 383.6 419.9
Long-term debt 259.1 208.8
Other liabilities 79.6 75.8
Commitments and contingencies -- --
Minority interest 0.2 0.1
Stockholders' equity:
Preferred stock, $.01 par value; authorized
5,000,000 shares; none issued -- --
Common stock, $.01 par value; authorized
300,000,000 shares; issued 134,255,000 1.3 1.3
Additional paid-in capital 266.4 245.5
Accumulated other comprehensive loss (54.7) (49.3)
Retained earnings 701.8 651.1
-------- --------
914.8 848.6
Less - treasury stock, at cost
(3,273,000 and 4,436,000 shares) (167.1) (214.1)
-------- --------
Total stockholders' equity 747.7 634.5
-------- --------
Total liabilities and
stockholders' equity $1,470.2 $1,339.1
======== ========
</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 30, June 25,
2000 1999
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 95.4 $ 81.9
Non-cash items included in net earnings:
Depreciation and amortization 40.8 36.3
Amortization of prepaid royalties 1.8 1.6
Gain on investments, net (0.6) (2.1)
Deferred income taxes 3.8 (3.9)
Loss (Gain) on disposal of assets 0.9 (0.3)
Expense of stock compensation plans 3.8 6.5
Adjustment in reporting foreign subsidiaries (3.2) (2.4)
Changes in assets and liabilities:
Trade receivables (35.5) (11.5)
Inventories 8.8 (9.5)
Accounts payable (5.1) 11.4
Accrued expenses (5.1) 6.0
Income taxes (1.9) 20.6
Other 9.4 2.6
------ ------
Net cash provided by operating activities 113.3 137.2
------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (27.9) (23.0)
Disposals of property, plant and equipment 0.4 4.0
Proceeds from sale of investments 2.6 7.5
Other, net (6.2) (22.0)
------ ------
Net cash used in investing activities (31.1) (33.5)
------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends to stockholders (20.9) (18.6)
Net borrowings (repayments) under commercial
paper obligations 65.2 (13.2)
Net (repayments) borrowings of notes payable (9.4) 8.6
Sale of stock to employees 94.8 20.7
Increase in long term debt -- 3.0
Decrease in long-term debt (1.8) (1.2)
Payments to acquire treasury stock (69.6) (63.0)
------ ------
Net cash provided by (used in) financing activities 58.3 (63.7)
------ ------
Effect of exchange rates on cash and equivalents (1.0) (6.0)
------ ------
Net increase in cash and equivalents 139.5 34.0
Cash and equivalents at beginning of period 162.9 181.6
------ ------
Cash and equivalents at end of period $302.4 $215.6
====== ======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the six months ended for
Interest (net of capitalization) $ 10.5 $ 5.4
====== ======
Income taxes $ 27.8 $ 19.2
====== ======
</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 unaudited 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,
1999. The results of operations for the six months ended June 30, 2000 are not
necessarily indicative of the results to be expected for the year ending
December 31, 2000.
2. In December 1999, the United States Securities and Exchange Commission issued
Staff Accounting Bulletin (SAB) No. 101 - "Revenue Recognition in Financial
Statements," as amended, effective October 1, 2000. SAB No. 101 summarizes
certain of the staff's views in applying generally accepted accounting
principles to revenue recognition in financial statements. During the quarter
ended June 30, 2000, the Company implemented SAB No. 101 and there was no
material impact on its financial statements.
3. On October 21, 1999, the Company's Board of Directors approved a two for one
stock split in the form of a 100% stock dividend, effective on December 9, 1999.
All share and per share data is stated to reflect the split. Additionally, at
the Annual Meeting on April 26, 2000, the stockholders approved an amendment to
the Company's Certificate of Incorporation to increase the aggregate number of
common stock shares authorized from 150,000,000 to 300,000,000.
4. Components of inventories were:
June 30, December 31,
2000 1999
-------- ------------
(in millions)
Finished goods $ 81.4 $ 87.5
Work in process 22.3 13.3
Raw materials 17.0 29.9
------ ------
Total $120.7 $130.7
====== ======
5. 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.
6. 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 any of the currently pending lawsuits would not have a material
adverse effect on the consolidated financial position and results of operations
of the Company.
6
<PAGE> 7
Allergan, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
7. On July 25, 2000, the Board of Directors declared a quarterly cash dividend
of $0.08 per share, payable September 15, 2000 to stockholders of record on
August 25, 2000.
8. The following table presents the computation of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
Second Quarter
--------------------------------------------------------------------------------------
2000 1999
(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 $51.9 130.3 $0.40 $46.9 133.0 $0.35
===== =====
Effect of dilutive options 3.5 3.1
----- -----
Computation of diluted EPS:
Income available to common
stockholders assuming exercises $51.9 133.8 $0.39 $46.9 136.1 $0.34
====== ===== ====== =====
</TABLE>
<TABLE>
<CAPTION>
Six Months
--------------------------------------------------------------------------------------
2000 1999
(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 $95.4 130.1 $0.73 $81.9 132.9 $0.62
===== =====
Effect of dilutive options 3.1 3.2
----- -----
Computation of diluted EPS:
Income available to common
stockholders assuming exercises $95.4 133.2 $0.72 $81.9 136.1 $0.60
====== ===== ====== =====
</TABLE>
7
<PAGE> 8
Allergan, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
Options to purchase 6,800 shares of common stock at an exercise price of $72.13
per share were outstanding at June 30, 2000. Additionally, options to purchase
2,200,000 shares of common stock at an exercise price of $55.00 were outstanding
as of June 25, 1999. The 6,800 options at June 30, 2000 and the 2,200,000
options at June 25, 1999 were not included in the computation of diluted
earnings per share at June 30, 2000 and June 25, 1999, respectively, because the
effect would be antidilutive.
9. The following table summarizes components of comprehensive income for the
quarters and six months ended:
<TABLE>
<CAPTION>
Second Quarter
-------------------------------------------------------------------------------------
(in millions) 2000 1999
---------------------------------------- ---------------------------------------
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 $(3.1) $ -- $(3.1) $ 3.0 $ -- $ 3.0
Unrealized holding gains
arising during period 0.6 (0.2) 0.4 8.3 (2.9) 5.4
Reclassification adjustment for
net gains realized in net income (0.6) 0.2 (0.4) (0.6) 0.2 (0.4)
----- ----- ----- ----- ------ -----
Other comprehensive income (loss) $(3.1) $ -- (3.1) $10.7 $(2.7) 8.0
===== ===== ===== =====
Net earnings 51.9 46.9
----- -----
Total other comprehensive income $48.8 $54.9
===== =====
</TABLE>
8
<PAGE> 9
Allergan, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
<TABLE>
<CAPTION>
(in millions) June 30, 2000 June 25, 1999
----------------------------------------- --------------------------------------
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 $(5.5) $ -- $(5.5) $(27.4) -- $(27.4)
Unrealized holding gains
arising during period 0.7 (0.2) 0.5 5.2 $(1.8) 3.4
Reclassification adjustment
for net gains realized in
net income (0.6) 0.2 (0.4) (2.1) 0.7 (1.4)
----- ----- ----- ------ ----- -----
Other comprehensive loss $(5.4) $ -- (5.4) $(24.3) $(1.1) (25.4)
===== ===== ====== =====
Net earnings 95.4 81.9
----- -----
Total other comprehensive income $90.0 $56.5
===== =====
</TABLE>
10. Business Segment Information
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 50.0% and
48.8% of total product net sales for the quarters ended June 30, 2000 and June
25, 1999, respectively, and 52.5% and 49.1% of total product net sales for the
six month periods ended June 30, 2000 and June 25, 1999, 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.
Operating income attributable to each operating segment is based upon the
management assignment of costs to such regions. 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, royalties and charges for corporate services and asset
utilization.
9
<PAGE> 10
Allergan, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
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.
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, 1999.
GEOGRAPHIC OPERATING SEGMENTS
<TABLE>
<CAPTION>
Net Sales Operating Income
------------------------- ------------------------
2nd Qtr. 2nd Qtr. 2nd Qtr. 2nd Qtr.
(in millions) 2000 1999 2000 1999
------------------------------------------------------------------- ------------------------
<S> <C> <C> <C> <C>
United States $201.0 $178.0 $ 84.6 $ 69.6
Europe 96.5 98.0 28.7 24.4
Asia Pacific 63.0 53.3 11.3 5.8
Other 42.7 36.7 7.7 9.2
----------------------- ----------------------
Segments total 403.2 366.0 132.3 109.0
Manufacturing operations 0.9 1.8 32.8 34.4
Research and development (51.7) (38.1)
Research services margin 0.8 0.7
Elimination of inter-company profit (48.4) (51.5)
General corporate 7.9 11.4
------------------------ ----------------------
Total $404.1 $367.8 $ 73.7 $ 65.9
======================= ======================
</TABLE>
<TABLE>
<CAPTION>
Net Sales Operating Income
------------------------ -----------------------
Six Months Ended Six Months Ended
------------------------ -----------------------
June 30, June 25, June 30, June 25,
(in millions) 2000 1999 2000 1999
------------------------------------------------------------------- -----------------------
<S> <C> <C> <C> <C>
United States $407.9 $330.6 $176.0 $ 123.9
Europe 180.2 184.4 45.8 47.4
Asia Pacific 109.6 93.4 10.6 6.6
Other 80.5 67.3 11.3 12.6
----------------------- ----------------------
Segments total 778.2 675.7 243.7 190.5
Manufacturing operations 2.1 3.4 67.5 61.8
Research and development (97.4) (69.9)
Research services margin 1.6 1.3
Elimination of inter-company profit (96.5) (94.0)
General corporate 18.0 24.6
----------------------- ----------------------
Total $780.3 $679.1 $136.9 $114.3
======================= ======================
</TABLE>
11. Special Charges
The Company maintains specific current and non-current liabilities at June 30,
2000 for restructuring charges recognized in 1998 and 1996. For the three and
six month periods ended June 30, 2000, the Company utilized approximately $0.7
million and $3.3 million, respectively, of accrued
10
<PAGE> 11
Allergan, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
liabilities specific to both the 1998 and 1996 restructuring. This spending is
primarily associated with payments made to involuntarily terminated employees
related to continued workforce reductions in identified manufacturing
facilities. At June 30, 2000, the Company maintained approximately $9.1 million
of accrued liabilities related to the 1998 and 1996 restructurings.
12. New and Proposed Accounting Standard
In June 1998, Statement of Financial Accounting Standards No. 133 - "Accounting
for Derivative Instruments and Hedging Activities" (SFAS No. 133) was issued, as
amended, and is effective for all periods of fiscal years beginning after June
15, 2000. SFAS No. 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. SFAS No. 133 requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. The
Company has not determined the impact that SFAS No. 133 will have on its
financial statements and believes that such determination will not be meaningful
until closer to the date of initial adoption.
11
<PAGE> 12
ALLERGAN, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE QUARTER ENDED JUNE 30, 2000
RESULTS OF OPERATIONS
The following table compares 2000 and 1999 net sales by Product Line for the
second quarter and year-to-date periods:
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
---------------------- ----------------------
Net Sales by Product Line June 30, June 25, June 30, June 25,
($ millions): 2000 1999 2000 1999
-------- -------- ------- --------
<S> <C> <C> <C> <C>
Specialty pharmaceuticals
Eye Care Pharmaceuticals $173.9 $154.1 $353.0 $283.5
Skin Care 16.5 22.8 32.2 41.7
BOTOX(R)/Neuromuscular 60.1 42.7 112.1 78.8
------ ------ ------ ------
250.5 219.6 497.3 404.0
Medical devices and OTC products
Ophthalmic Surgical 65.1 56.7 121.6 104.1
Contact Lens Care 88.5 91.5 161.4 171.0
------ ------ ------ ------
Total Net Sales $404.1 $367.8 $780.3 $679.1
====== ====== ====== ======
</TABLE>
For the quarter ended June 30, 2000 total net sales increased by $36.3 million
or 10% to $404.1 million as compared to the second quarter of 1999. Net sales
for the six months ended June 30, 2000 were $780.3 million, a 15% increase from
the comparable 1999 amount.
The impact of foreign currency changes compared to the comparable prior year
period decreased net sales by $7.4 million or 2% for the quarter ended June 30,
2000 and by $12.7 million or 2% for the six months ended June 30, 2000. At
constant currency rates, sales increased $43.7 million or 12% during the
quarter, and $113.9 million or 17% for the six months ended June 30, 2000
compared with the same periods last year.
Sales in the U.S. were 50% of total product net sales for the quarter ended June
30, 2000, which represents a 1.2 percentage point increase over the 48.8% rate
for the second quarter of 1999. For the six months ended June 30, 2000, sales in
the U.S. were 52.5% of total product net sales which represents a 3.4 percentage
point increase over the 49.1% rate for the first six months of 1999. The
increase in the mix of U.S. sales as a percentage of total product net sales was
primarily attributable to the increase in U.S. Eye Care Pharmaceutical sales.
Eye Care Pharmaceutical and Botox(R) Purified Neurotoxin Complex sales were
reduced from the amounts that would have been reported at constant currency
rates by $5.2 million and $1.0 million, respectively, in the second quarter and
by $7.8 million and $1.6 million, respectively, in the first six months of 2000.
This was primarily a result of the weakness in the Euro denominated currencies
in 2000. Ophthalmic Surgical and Contact Lens Care sales were reduced from the
amounts that would have been reported at constant currency rates by $0.8 million
and $0.4 million, respectively, in
12
<PAGE> 13
Allergan, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE QUARTER ENDED JUNE 30, 2000 (Continued)
RESULTS OF OPERATIONS (Continued)
the second quarter and by $1.9 million and $1.4 million, respectively, in the
first six months of 2000. This was primarily a result of the weakness in Euro
denominated currencies partially offset by the strengthening of the Japanese yen
in 2000.
The $36.3 million increase in net sales in the second quarter and the $101.2
million increase in the first six months of 2000 were primarily the result of
increases in sales in three product lines. Eye Care Pharmaceutical sales
increased by $19.8 million in the second quarter and $69.5 million in the first
six months of 2000. Sales of Botox(R) Purified Neurotoxin Complex increased by
$17.4 million in the second quarter and $33.3 million in the first six months of
2000. Surgical sales increased by $8.4 million in the second quarter and $17.5
million in the first six months of 2000. Eye Care Pharmaceutical sales increased
primarily because of growth in sales of Alphagan(R) ophthalmic solution.
Botox(R) sales increased as a result of strong growth in both the United States
and international markets. Allergan believes it currently possesses over 80
percent of the worldwide market for neurotoxins including Botox(R). Later this
year, a competitor is expected to introduce a competing neurotoxin. While
Allergan expects this new competition to cause the market for neurotoxins to
expand, the rate of growth of Botox(R) sales may decrease in the future as a
result of this new competition. Surgical sales increased primarily as a result
of increased sales of silicone intraocular lenses (IOLs) and strong sales of
Allergan's acrylic IOL.
Allergan's gross margin percentage for the second quarter of 2000 was 72.2% of
net sales, which represents a 3.1 percentage point increase from the 69.1% rate
for the second quarter of 1999. The gross margin percentage for the six months
ended June 30, 2000 was 72.4% of net sales, which represents a 2.3 percentage
point increase from the 70.1% rate for the first six months of 1999. The gross
margin percentage increased in 2000 compared to the comparable periods in 1999
primarily as a result of shifts in the mix of products sold to higher margin
products. Higher margin Eye Care Pharmaceutical and Botox(R) Purified Neurotoxin
Complex sales represented a greater percentage of 2000 sales compared to 1999.
Gross margin in dollars increased over the second quarter of 1999 by $37.6
million or 15% as a result of the 10% increase in net sales and the 3.1
percentage point increase in gross margin percentage. For the first six months
of 2000 gross margin in dollars increased over the comparable period of 1999 by
$88.8 million or 19% as a result of the 15% increase in net sales and the 2.3
percentage point increase in gross margin percentage.
Operating income in the second quarter of 2000 of $73.7 million was $7.8
million, or 12%, higher than operating income in the second quarter of 1999 of
$65.9 million. The increase was the result of the $37.6 million increase in
gross margin in the second quarter of 2000 offset by a $16.5
13
<PAGE> 14
Allergan, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE QUARTER ENDED JUNE 30, 2000 (Continued)
RESULTS OF OPERATIONS (Continued)
million increase in selling, general and administrative expense, and a $13.5
million increase in research and development. Operating income for the six
months ended June 30, 2000 of $136.9 million was $22.6 million, or 20% higher
than operating income in the first six months of 1999 of $114.3 million. The
increase was the result of the $88.8 million increase in gross margin in 2000
offset by a $39.0 million increase in selling, general and administrative
expense, and a $27.5 million increase in research and development. Selling,
general, and administrative expenses increased for the second quarter and for
the six months ended June 30, 2000 primarily as a result of increases in
spending on promotion, selling and marketing activities in 2000. Research and
development increased for the second quarter and for the six months ended June
30, 2000 as a result of increased research activity.
Net earnings of $51.9 million in the second quarter of 2000 increased by $5.0
million or 11% over net earnings of $46.9 million for the second quarter of
1999. The increase was the result of the $7.8 million increase in operating
income and a $2.4 million favorable change in the effects of foreign exchange
gains and losses. This was somewhat offset by a $1.2 million increase in net
interest expense, and an increase in income taxes of $2.9 million resulting from
the increase in earnings before income tax.
Net earnings of $95.4 million in the first six months of 2000 represent a $13.5
million, or 17% increase over net earnings of $81.9 million in the first six
months of 1999. The 2000 increase is primarily the result of the $22.6 million
increase in operating income and a $2.5 million favorable change in the effects
of foreign currency exchange gains and losses. This was partially offset by a
$2.2 million increase in net interest expense, an increase in the loss on fixed
asset disposals of $1.2 million, a decrease in the gains on sales of investments
of $1.5 million, and a $5.8 million increase in income taxes resulting from the
increase in earnings before income tax.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2000, the Company had long-term credit facilities and a medium
term note program. The credit facilities allow for borrowings of up to $63.3
million through 2001, $14.1 million through 2002, and $276.5 million through
2003. The note program allows the Company to issue up to an additional $35
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 June 30, 2000,
the Company had $102.4 million in borrowings under six of the credit facilities,
$89.0 million in borrowings under the note program, and commercial paper
borrowings of $112.3 million. As of June 30, 2000, the Company has classified
$112.3 million of commercial paper borrowings as long-term debt based upon the
Company's
14
<PAGE> 15
Allergan, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE QUARTER ENDED JUNE 30, 2000
LIQUIDITY AND CAPITAL RESOURCES (Continued)
ability to maintain such debt under terms of the credit facilities described
above.
The net cash provided by operating activities for the six months ended June 30,
2000 was $113.3 million. The net cash provided by operating activities for the
six months ended June 25, 1999 was $137.2 million. The decrease in net cash
provided by operating activities of $23.9 million is primarily the result of an
increase in trade accounts receivable of $35.5 million offset by the increase in
net earnings of $13.5 million.
Cash used in investing activities for the six months ended June 30, 2000 was
$31.1 million. Cash used in investing activities for the six months ended June
25, 1999 was $33.5 million. The Company invested $27.9 million in new facilities
and equipment during the six months ended June 30, 2000 compared to $23.0
million during the same period in 1999.
Cash provided by financing activities was $58.3 million for the six months ended
June 30, 2000 compared to cash used in financing activities of $63.7 million
during the same period in 1999. The increase in net cash provided by financing
activities of $122 million is primarily the result of the sale of stock to
employees of $94.8 million. The Company is uncertain as to the level of future
stock purchases by employees. Commercial paper borrowings, net of repayments of
debt totaled $65.2 million for the six months ended June 30, 2000. Commercial
paper repayments of debt, net of borrowings, totaled $13.2 million for the six
months ended June 25, 1999. The amounts in both years include dividend outflows
of $20.9 million in 2000 and $18.6 million in 1999. The 2000 amount of cash used
in financing activities includes $69.6 million used to repurchase treasury
stock.
The Company believes that the net cash provided by operating activities,
supplemented as necessary with the $286.5 million of available borrowings under
the Company's existing credit facilities, will provide it with sufficient
resources to meet working capital requirements, debt service and other cash
needs over the next year. The Company believes it will spend approximately $9.1
million on accrued restructuring costs during the remainder of 2000 and 2001.
15
<PAGE> 16
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. and Japan interest rates. Changes in U.S. and Japan
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 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 impact of interest rate risk management activities on income during the
quarter ended June 30, 2000, and the amount of deferred gains and losses from
interest rate risk management transactions at June 30, 2000 were not material.
16
<PAGE> 17
Allergan, Inc.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (Continued)
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.
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 duration of foreign exchange hedging instruments, whether for
firmly committed transactions or for probable but not firmly committed
transactions, currently does not exceed one year.
All of the Company's purchased options were entered into to protect the value of
anticipated, but not firmly committed transactions in Japan, Europe, Australia
and Canada. The premium cost of purchased foreign exchange option contracts are
recorded in Other Current Assets and amortized over the life of the option.
In January 2001, the Company is required to adopt Statement of Financial
Accounting Standards No. 133 - "Accounting for Derivative Instruments and
Hedging Activities" (SFAS 133), as amended. The Company has not determined the
impact that SFAS No. 133 will have on its financial statements and believes that
such determination will not be meaningful until closer to the date of initial
adoption.
17
<PAGE> 18
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 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 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.
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 The Company's Contact Lens Care business continues to be impacted by trends
in the contact lens and lens care marketplace, including technological and
medical advances in surgical techniques for the correction of vision
impairment. Cheaper one-bottle chemical disinfection systems continue to
gain 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 and laser-correction procedures, along with the other
factors above, could have the effect of reducing demand for lens care
products generally. While the 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.
18
<PAGE> 19
Allergan, Inc.
CERTAIN FACTORS AND TRENDS AFFECTING ALLERGAN AND ITS BUSINESSES (Continued)
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 safety or regulatory
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.
o A current political issue of debate in the United States is the propriety
of expanding Medicare coverage to include pharmaceutical products. If
measures to accomplish that coverage become law, and if these 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 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 future
exchange rate movements will not have a material adverse effect on the
Company's sales, gross profit or operating expenses.
o Patent protection is generally important in the pharmaceutical industry.
Therefore, Allergan's future financial success may depend in part on
obtaining patent protection for technologies incorporated into products. No
assurance can be given that patents will be issued covering any products,
or that any existing patents or patents issued in the future will be of
commercial benefit. In addition, it is impossible to anticipate the breadth
or degree of protection that any such patents will afford, and there can be
no assurance that any such patents will not be successfully challenged in
the future. If the Company is unsuccessful in obtaining or preserving
patent protection, or if any products rely on unpatented proprietary
technology, there can be no assurance that others will not commercialize
products substantially identical to such products. Furthermore, although
Allergan has a corporate policy not to infringe the valid and enforceable
patents of others, Allergan cannot provide assurances that its products
will not infringe patents held by third parties. In such event, licenses
from such third parties may not be available or may not be available on
commercially attractive terms.
19
<PAGE> 20
Allergan, Inc.
CERTAIN FACTORS AND TRENDS AFFECTING ALLERGAN AND ITS BUSINESSES (Continued)
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
manage these risks or avoid their effects.
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 Future performance of the Company will be affected by the introduction of
new products and FDA approval of new indications for current products such
as Botox(R) Purified Neurotoxin Complex. The Company has allocated
significant resources to the development and introduction of new products
and indications. The successful development, regulatory approval and market
acceptance of the products and indications cannot be assured.
o There are intrinsic uncertainties associated with research & development
efforts and the regulatory process both of which are discussed in greater
details in the "Research and Development" and the "Government Regulation"
sections of Allergan's Annual Report on Form 10-K for the year ending
December 31, 1999, which are incorporated herein by reference.
20
<PAGE> 21
Allergan, Inc.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
-- Exhibits
(numbered in accordance with Item 601 of Regulation S-K)
3 Certificate of Amendment of Certificate of Incorporation of Allergan,
Inc., as filed with the State of Delaware on May 4, 2000.
10.1 Allergan, Inc. Employee Stock Ownership Plan (Restated 2000).
10.2 Allergan, Inc. Employee Stock Ownership Plan Trust Agreement, dated
July 1, 2000, between Allergan, Inc. and UMB Bank, N.A.
10.3 Allergan, Inc. Savings and Investment Plan (Restated 2000).
10.4 Allergan, Inc. Savings and Investment Plan Trust Agreement, dated July
1, 2000, between Allergan, Inc. and UMB Bank, N.A.
10.5 First Amendment to Allergan, Inc. Executive Deferred Compensation Plan
(restated 2000)
27 Financial Data Schedule
-- Reports on Form 8-K
None.
21
<PAGE> 22
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 11, 2000 ALLERGAN, INC.
/s/ Eric K. Brandt
--------------------------------
Eric K. Brandt
Principal Financial Officer
22
<PAGE> 23
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
3 Certificate of Amendment of Certificate of Incorporation of
Allergan, Inc., as filed with the State of Delaware on May 4,
2000.
10.1 Allergan, Inc. Employee Stock Ownership Plan (Restated 2000).
10.2 Allergan, Inc. Employee Stock Ownership Plan Trust Agreement,
dated July 1, 2000, between Allergan, Inc. and UMB Bank, N.A.
10.3 Allergan, Inc. Savings and Investment Plan (Restated 2000).
10.4 Allergan, Inc. Savings and Investment Plan Trust Agreement,
dated July 1, 2000, between Allergan, Inc. and UMB Bank, N.A.
10.5 First Amendment to Allergan, Inc. Executive Deferred
Compensation Plan (restated 2000)
27 Financial Data Schedule
