<PAGE> 1
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE
SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO. )
Filed by the Registrant [ ]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
<TABLE>
<S> <C>
[X] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only
(as permitted by Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to sec.240.14a-11(c) or 240.14a-12
</TABLE>
ALLERGAN, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
- --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
- --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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<PAGE> 2
LOGO
2525 DUPONT DRIVE, IRVINE, CA 92612 (714) 246-4500
March 16, 2000
Dear Stockholder:
You are cordially invited to attend the annual meeting of stockholders to
be held at the Irvine Marriott Hotel, 18000 Von Karman Avenue, Irvine,
California, on Wednesday, April 26, 2000 at 10:00 A.M. We hope you will be
present to hear management's report to stockholders.
The attached notice of meeting and proxy statement describe the matters to
be acted upon. If you plan to attend the meeting in person, please mark the
designated box on the proxy card. Or, as an alternative, this year we are
offering telephone and internet voting. When using either of these alternative
methods of voting, please indicate your plans to attend the meeting when
prompted to do so by the system. If you are a shareowner of record, you should
bring the enclosed bottom half of the proxy card as your admission card and
present the card upon entering the meeting. If you are planning to attend the
meeting and your shares are held in street name (by a bank or broker, for
example), you should ask the record owner for a legal proxy or bring your most
recent account statement to the meeting so that we can verify your ownership of
Allergan stock.
Whether or not you plan to attend personally, and regardless of the number
of shares you own, it is important that your shares be represented at the
meeting. Accordingly, we urge you to complete the enclosed proxy and return it
to our vote tabulators promptly in the postage prepaid envelope provided, or to
promptly use the new telephone or internet voting system. If you do attend the
meeting and wish to vote in person, you may withdraw your proxy at that time.
<TABLE>
<S> <C>
/s/ HERBERT W. BOYER /s/ DAVID E.I. PYOTT
--------------------------------------------- ---------------------------------------------
Herbert W. Boyer David E.I. Pyott
Chairman of the Board President and
Chief Executive Officer
</TABLE>
<PAGE> 3
[ALLERGAN LOGO]
2525 DUPONT DRIVE, IRVINE, CA 92612
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
APRIL 26, 2000
TO OUR STOCKHOLDERS:
The annual meeting of stockholders of Allergan, Inc., a Delaware
corporation, will be held at the Irvine Marriott Hotel, 18000 Von Karman Avenue,
Irvine, California, on Wednesday, April 26, 2000 at 10:00 A.M. for the following
purposes:
1. To elect four Class II directors to serve for three-year terms ending in
2003 and until their successors are elected and qualified.
2. To approve an amendment to the Company's 1989 Nonemployee Director Stock
Plan that will extend the term of the plan through December 31, 2009 and
will authorize an additional 50,000 shares for issuance under the plan.
3. To approve an amendment to the Company's Certificate of Incorporation
that will increase the aggregate number of shares of Common Stock which
the Company shall have authority to issue from 150,000,000 shares to
300,000,000 shares.
4. To transact such other business as may properly come before the meeting
or any adjournment thereof.
The Board of Directors has fixed March 3, 2000 as the record date for
determining the stockholders entitled to notice of and to vote at the meeting
and, consequently, only stockholders of record at the close of business on March
3, 2000 will be entitled to notice of and to vote at the meeting and any
adjournment thereof.
STOCKHOLDERS ARE CORDIALLY INVITED TO ATTEND THE MEETING IN PERSON. Even
though a stockholder may now plan to attend the meeting, he or she is urged to
complete, sign and date the enclosed proxy card and to mail it promptly in the
enclosed postage-paid envelope, or to use our telephone or internet voting
system. Any stockholder present at the meeting may withdraw his or her proxy and
vote personally on each matter brought before the meeting. Stockholders
attending the meeting whose shares are held in the name of a broker or other
nominee should bring with them a proxy or letter from that firm confirming their
ownership of shares.
By Order of the Board of Directors
/s/ FRANCIS R. TUNNEY, JR.
Francis R. Tunney, Jr.
Secretary
March 16, 2000
<PAGE> 4
ALLERGAN, INC.
PROXY STATEMENT
ANNUAL MEETING OF STOCKHOLDERS -- APRIL 26, 2000
INTRODUCTION
The accompanying proxy is solicited by the Board of Directors of Allergan,
Inc. ("Allergan" or the "Company"), 2525 Dupont Drive, Irvine, California 92612
for use at the annual meeting of the Company's stockholders to be held on April
26, 2000, and at any adjournment thereof, pursuant to the accompanying Notice of
Annual Meeting. This proxy statement and the accompanying proxy card are being
mailed to all stockholders on or about March 16, 2000.
The expense of this solicitation will be paid by the Company. In addition
to solicitation by mail, officers and employees of the Company may solicit
proxies by telephone, by facsimile or in person. The Company has retained
Corporate Investor Communications, Inc., a professional soliciting organization,
to aid in the solicitation of proxies to be voted at the annual meeting at an
estimated cost of $6,000 plus out-of-pocket expenses. The Company will also
reimburse brokers, nominees, fiduciaries and other custodians for reasonable
expenses incurred by them in sending proxy soliciting material to the beneficial
owners of Allergan stock.
GENERAL INFORMATION REGARDING
VOTING, CONFIDENTIALITY AND PROXIES
The persons named in the accompanying proxy will vote FOR the election of
the nominees for directors and FOR approval of Proposals 2 and 3. The proxy may
be revoked by the stockholder at any time prior to its use by giving notice of
such revocation to the independent vote tabulators. As to any other business
which may properly come before the meeting, the persons named in the
accompanying proxy card will vote in accordance with their best judgment,
although the Company does not presently know of any other business.
Holders of record of the Company's Common Stock at the close of business on
March 3, 2000 are entitled to vote at the meeting. On that date Allergan had
134,254,722 shares of Common Stock outstanding (including 4,192,174 shares held
in treasury). Each stockholder has one vote per share on all business to be
voted upon at the meeting. A majority of the outstanding shares will constitute
a quorum at the meeting. Abstentions and broker non-votes are counted for
purposes of determining the presence or absence of a quorum for the transaction
of business. Abstentions are counted as if they were "no" votes in tabulations
of the votes cast on proposals presented to stockholders, whereas broker
non-votes are not counted for purposes of determining whether a proposal has
been approved.
It is the Company's policy that all proxies, ballots and voting materials
that identify the particular vote of a stockholder be kept confidential, except
in the following circumstances: (1) to allow the independent election inspectors
to certify the results of the vote; (2) as necessary to meet applicable legal
requirements, including the pursuit or defense of a judicial action; (3) where
the Company concludes in good faith that a bona fide dispute exists as to the
authenticity of one or more proxies, ballots, or votes, or as to the accuracy of
the tabulation of such proxies, ballots, or votes; (4) where a stockholder
expressly requests disclosure or has made a written comment on a proxy card; (5)
where contacting stockholders by the Company is necessary to obtain a quorum,
the names of stockholders who have or have not voted (but not how they voted)
may be disclosed to the Company by the independent election inspectors; (6)
aggregate vote totals may be disclosed to the Company from time to time and
publicly announced at the meeting of stockholders at which they are relevant;
and (7) in the event of any solicitation of proxies or written consents with
respect to any of the securities of the Company by a person other than the
Company of which solicitation the Company has actual notice.
<PAGE> 5
ELECTION OF DIRECTORS
PROPOSAL 1
The Company's Restated Certificate of Incorporation provides for three
classes of directors, each class consisting, as nearly as may be possible, of
one third of the whole number of the Board of Directors. At each annual meeting
the directors elected by stockholders to succeed directors whose terms are
expiring are identified as being of the same class as those directors they
succeed and are elected for a term to expire at the third annual meeting of
stockholders after their election and until their successors are duly elected
and qualified. The Board of Directors elects directors to fill vacancies on the
Board, as they occur, as well as newly created directorships. A director elected
to fill a vacancy is elected to the same class as the director he or she
succeeds, and a director elected to fill a newly created directorship holds
office until the next election by the stockholders of the class to which such
director is elected. The Board of Directors currently consists of 12 directors
and currently four each serve as Class I, Class II and Class III directors.
UNLESS OTHERWISE DIRECTED IN THE PROXY, THE PERSONS NAMED IN THE
ACCOMPANYING PROXY INTEND TO VOTE THE SHARES REPRESENTED BY THE PROXY FOR THE
ELECTION AS DIRECTORS OF THE FOUR NOMINEES NAMED BELOW, ALL OF WHOM ARE, AT
PRESENT, CLASS II DIRECTORS OF THE COMPANY.
Directors are to be elected by a plurality of the votes cast at the meeting
in person or by proxy by the holders of shares entitled to vote in the election.
The Board of Directors is informed that all the nominees are willing to serve as
directors, but if any of them should decline or be unable to act as a director,
the persons named in the proxy will vote for such substitute nominee or nominees
as may be designated by the Board of Directors unless the Board reduces the
number of directors accordingly.
NOMINEES FOR DIRECTORS
CLASS II -- TERM TO EXPIRE AT THE ANNUAL MEETING IN 2003:
HERBERT W. BOYER, PH.D., 63, is a founder of Genentech, Inc., a
biotechnology company, has been a director of Genentech since 1976 and is a
consultant to Genentech. He served as Vice President of Genentech from 1976 to
1991. Dr. Boyer, a Professor of Biochemistry at the University of California at
San Francisco from 1976 to 1991, demonstrated the usefulness of recombinant DNA
technology to produce medicines economically, which laid the groundwork for
Genentech's development. Dr. Boyer received the 1993 Helmut Horten Research
Award. He also received the National Medal of Science from President Bush in
1990, the National Medal of Technology in 1989 and the Albert Lasker Basic
Medical Research Award in 1980. He is an elected member of the National Academy
of Sciences and a Fellow in the American Academy of Arts and Sciences. Dr. Boyer
was elected Chairman of the Board as of January 2, 1998 and has been a Board
member since 1994. He is a member of the Organization and Compensation
Committee, Corporate Governance Committee, and Science and Technology Committee.
PROF. RONALD M. CRESSWELL, HON. D.SC., F.R.S.E., 65, retired in 1999 from
Warner-Lambert Company, a developer and manufacturer of health care and consumer
products, where he had been Senior Vice President and Chief Scientific Officer
since October 1998. Prof. Cresswell was formerly Vice President and Chairman,
Parke-Davis Pharmaceutical Research, a Warner-Lambert Company, since 1989. Prior
thereto, he served as Chief Operating Officer of Laporte Industries, an
internationally oriented chemical company, since 1987. Prof. Cresswell served 25
years at Burroughs Wellcome, a London-based international pharmaceutical firm,
where he held a broad range of research and development positions, culminating
in being the main board member for global research and development. He is a
fellow of the Royal Society of Edinburgh, the Royal Society of Medicine and the
Royal Society of Arts and Commerce, and a member of the Royal Society of
Chemistry, as well as a member of the American Chemical Society and the New York
Academy of Sciences. Prof. Cresswell is a visiting Professor to the Department
of Chemistry at the University of Edinburgh. He is a non-executive Director of
the Board of Nycomed Amersham. Professor Cresswell was elected to the Board in
1998, serves as the Chairman of the Science and Technology Committee and is a
member of the Corporate Governance Committee.
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WILLIAM R. GRANT, 75, is co-founder of Galen Associates, Inc., a venture
capital firm in the health care industry, and has been its Chairman since 1989.
Mr. Grant has over 40 years of experience in the investment banking and
risk-capital fields, including substantial experience in the healthcare
industry. From 1987 to 1989 he was Chairman of New York Life International
Investment, Inc. Mr. Grant is a Director of MiniMed, Inc., Ocular Sciences,
Inc., Vasogen Inc., Quest Diagnostics Incorporated and Westergaard.com, Inc. He
is a member of the General Electric Equity Advisory Board, Trustee of the Center
for Blood Research (Harvard), and Trustee Emeritus of the Mary Flagler Cary
Charitable Trust. Mr. Grant was elected to the Board in 1989, is Chairman of the
Board's Organization and Compensation Committee, and is a member of the
Corporate Governance Committee.
DAVID E.I. PYOTT, 46, became President and Chief Executive Officer of the
Company in January 1998. Previously, he was head of the Nutrition Division and a
member of the executive committee of Novartis AG from 1995 until December 1997.
From 1992 to 1995 Mr. Pyott was President and Chief Executive Officer of Sandoz
Nutrition Corp., Minneapolis, Minnesota and General Manager of Sandoz Nutrition,
Barcelona, Spain from 1990 to 1992. Prior to that, Mr. Pyott held various
positions within the Sandoz Nutrition group from 1980. He is a member of the
Executive Advisory Council for the University of California (Irvine) Graduate
School of Management, a member of the Executive Board of Pharmaceutical Research
and Manufacturers of America (PhRMA), and a member of the Board of Directors of
Avery-Dennison Corporation, California Healthcare Institute, and Edwards
Lifesciences Corporation, the former Cardiovascular Division of Baxter
International, Inc. expected to be spun off from Baxter in 2000. Mr. Pyott was
elected to the Board in 1998.
DIRECTORS CONTINUING IN OFFICE
CLASS III -- TERM TO EXPIRE AT THE ANNUAL MEETING IN 2001:
HANDEL E. EVANS, 65, is an independent consultant providing services
principally to the pharmaceutical industry. He also serves as Chairman of Equity
Growth Research Ltd., a privately-held Internet company that produces original
financial research on small-to medium-capitalized companies. From December 1991
to August 1998, Mr. Evans served as the Chairman of Pharmaceutical Marketing
Services Inc., a supplier of market information and specialized marketing
products to the pharmaceutical industry in the United States, Europe and Japan.
From 1988 to 1996, Mr. Evans was also Chairman of Walsh International Inc., a
specialized software house providing services to the pharmaceutical industry.
Prior to 1988, Mr. Evans was a founder of and served in a variety of senior
executive positions with IMS International Inc., a pharmaceutical industry
information supplier. He is a member of the Board of Trustees of the British
Urological Foundation. Mr. Evans was elected to the Board in 1989 and is
Chairman of the Board's Finance Committee and a member of the Audit Committee.
MICHAEL R. GALLAGHER, 54, has been Chief Executive Officer and a Director
of Playtex Products, Inc., a personal care and consumer products manufacturer,
since July 1995. Prior to that Mr. Gallagher was Chief Executive Officer of
North America for Reckitt & Colman PLC, a consumer products company based in
London. Mr. Gallagher was President and Executive Officer of Eastman Kodak's
subsidiary L&F Products from 1988 until the subsidiary was sold to Reckitt &
Colman PLC in 1994. Mr. Gallagher held various executive positions with the Lehn
& Fink Products group of Sterling Drug from 1984 until its sale to Eastman Kodak
in 1988. In addition to Playtex, Mr. Gallagher is a member of the Board of
Directors of the Grocery Manufacturers Association. Mr. Gallagher was elected to
the Allergan Board in 1998 and is a member of the Organization and Compensation
Committee and the Corporate Governance Committee.
GAVIN S. HERBERT, 67, is founder of the Company and Chairman Emeritus as of
January 1, 1996. He had been Chairman since 1977 and was also Chief Executive
Officer from 1977 to 1991. Prior thereto, Mr. Herbert had been President and
Chief Executive Officer of the Company since 1961. He is Chairman and Founder of
Regenesis Bioremediation Products, formed in 1994. Mr. Herbert is a trustee of
the University of Southern California and is a director of Beckman Coulter,
Inc., Research to Prevent Blindness, and the Doheny Eye Institute. In 1994, Mr.
Herbert retired as an employee of the Company. He has been a director
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<PAGE> 7
since 1950 and is a member of the Board's Audit Committee, Finance Committee and
Science and Technology Committee.
HENRY WENDT, 66, is Chairman of Global Health Care Partners, a unit of DLJ
Merchant Banking, a Donaldson, Lufkin & Jenrette Company, specializing in
private equity investment in health care businesses worldwide. He was Chairman
of the Board of SmithKline Beecham p.l.c., a pharmaceutical company, and its
subsidiary, SmithKline Beecham Corporation, from 1989 until his retirement in
1994. Mr. Wendt is a director of Atlantic Richfield Co., The Egypt Investment
Company, and West Marine Products. He is a Trustee of the Trilateral Commission
and Trustee Emeritus of the American Enterprise Institute. Mr. Wendt is the
author of "Global Embrace," published in 1993. In 1994 he was awarded the Order
of the Rising Sun Gold and Silver Star by the Government of Japan, the highest
honor given to a foreigner. In 1995 he was named as Honorary Commander of the
British Empire (CBE) by HRM Queen Elizabeth II. Mr. Wendt has been a director of
the Company since 1989 and is Chairman of the Board's Corporate Governance
Committee and a member of the Audit Committee. Mr. Wendt has notified the
Company that he will resign from the Board for personal reasons effective May 1,
2000. The Board will thereafter pursue a suitable replacement.
CLASS I -- TERM TO EXPIRE AT THE ANNUAL MEETING IN 2002:
LESTER J. KAPLAN, PH.D., 49, has been Corporate Vice President and
President, Research and Development and Global BOTOX(R) since May 1998 and had
been Corporate Vice President, Science and Technology since July of 1996. From
1992 until 1996, he was Corporate Vice President, Research and Development. He
had been Senior Vice President, Pharmaceutical Research and Development since
1991 and Senior Vice President, Research and Development since 1989. Dr. Kaplan
is a member of the Board of Directors of Acadia Pharmaceuticals Inc., Allergan
Specialty Therapeutics, Inc., and the Orange County Performing Arts Center. He
is a member of the Advisory Board of Pediatric Cancer Research Foundation (PCRF)
and Healthcare Ventures. He first joined the Company in 1983, was elected to the
Board in 1994 and is a member of the Finance Committee and the Science and
Technology Committee.
KAREN R. OSAR, 50, is Senior Vice President and Chief Financial Officer of
Westvaco Corporation, a producer of packaging, paper and specialty chemicals,
since November 1999. She formerly served as Vice President and Treasurer of
Tenneco, Inc., a packaging and auto parts manufacturer, since 1994. Prior
thereto, Ms. Osar served 19 years with J.P. Morgan & Company, where she held a
variety of positions including Managing Director in the investment banking
group. She is a member of the Board of Trustees of Manhattanville College in
Purchase, New York and a member of the Board of Directors of BNY Hamilton Funds,
a mutual fund family advised by The Bank of New York. Ms. Osar was elected to
the Board in 1998 and is a member of the Organization and Compensation Committee
and Finance Committee.
LOUIS T. ROSSO, 66, is Chairman Emeritus of Beckman Coulter, Inc., a
manufacturer of laboratory instruments, and had been its Chairman of the Board
until his retirement in February 1999. He served as Chief Executive Officer from
1988, when Beckman Instruments, Inc. again became a publicly held company, until
his retirement as a full-time employee in September 1998. He also served as
President from 1982 until 1993, and as Vice President of SmithKline Beckman
Corporation from 1982 until 1989. He is a member of the Board of Trustees of the
St. Joseph Heritage Healthcare Foundation and the Keck Graduate Institute of
Applied Life Sciences at Claremont. Mr. Rosso was elected to the Board in 1989
and is Chairman of the Board's Audit Committee and a member of the Finance
Committee.
LEONARD D. SCHAEFFER, 54, has been Chairman of the Board of Blue Cross of
California, a health insurance organization, since 1989 and Chief Executive
Officer since 1986. He has also been Chairman of the Board and Chief Executive
Officer of WellPoint Health Networks Inc., a New York Stock Exchange listed
health care company, since 1992. Mr. Schaeffer was the Administrator of the U.S.
Health Care Financing Administration (HCFA) from 1978 to 1980. He is Chairman of
the Board of the National Health Foundation and the National Institute for
Health Care Management and a member of the Institute of Medicine. Mr. Schaeffer
was elected to the Board in 1993 and is a member of the Audit Committee and the
Finance Committee.
4
<PAGE> 8
INFORMATION REGARDING THE BOARD OF DIRECTORS
MEETINGS AND COMMITTEES
The Board of Directors held five meetings during 1999 and its standing
committees also met from time to time to address issues within their respective
jurisdictions. Average attendance by directors at regular and special Board and
committee meetings was 95% and all directors attended 75% or more of the
meetings of the Board and committees on which they served. It should be noted
that directors discharge their responsibilities throughout the year not only at
Board and committee meetings, but through personal meetings and other
communications, including considerable telephone contact with the Chairman and
others regarding matters of interest and concern to the Company.
Audit Committee -- The Audit Committee, which had four meetings in 1999,
recommends to the Board of Directors the appointment of the Company's
independent auditors for the fiscal year and meets with the independent auditors
to discuss the scope and results of their audit examination and the fees related
to such work. It also meets with the Company's internal auditors and financial
management to review the internal audit department's activities; to discuss the
Company's accounting practices and procedures; to review the adequacy of the
Company's accounting and control systems; and to report to the Board any
considerations or recommendations the Audit Committee may have with respect to
such matters. The Committee also reviews the audit schedule and considers any
issues raised by its members, the independent public accountants retained to
audit the financial statements of the Company, the internal audit staff, the
legal staff or management. In addition, the Committee monitors the
implementation of the Code of Ethics for the Company's employees, and receives
regular reports from the Company's Chief Ethics Officer who coordinates
compliance reviews and investigates noncompliance matters. None of the members
of the Audit Committee are officers or employees of the Company or any of its
subsidiaries.
Finance Committee -- The Finance Committee, which had four meetings in
1999, reviews, approves or modifies management recommendations on corporate
financial strategy and policy and, where appropriate, makes recommendations to
the Board of Directors.
Corporate Governance Committee -- The Corporate Governance Committee held
five meetings in 1999. It recommends qualified candidates for election as
directors of the Company, including the slate of directors which the Board
proposes for election by stockholders at the annual meeting; considers the
performance of incumbent directors; considers and makes recommendations to the
Board of Directors concerning the size and composition of the Board of
Directors; develops and recommends to the Board of Directors guidelines and
criteria to determine the qualifications of directors; considers and reports
annually to the Board of Directors concerning its assessment of the Board's
performance; considers, from time to time, the current Board committee structure
and membership; and recommends changes to the amount and type of compensation of
Board members as appropriate. None of the members of the Corporate Governance
Committee are officers, employees or former employees of the Company or any of
its subsidiaries.
Organization and Compensation Committee -- The Organization and
Compensation Committee, which had five meetings in 1999, reviews and approves
corporate organizational structure; reviews performance of corporate officers;
establishes overall employee compensation policies; and recommends to the Board
of Directors major compensation programs. The Committee also reviews and
approves compensation of corporate officers, including salary and bonus awards,
and administers the 1989 Incentive Compensation Plan. No member of the
Organization and Compensation Committee is a current or former member of
management or eligible for compensation other than as a director. The report of
the Committee begins on page 19.
Science and Technology Committee -- The Science and Technology Committee
held two meetings in 1999. It undertakes in-depth reviews of the Company's
research and development programs and projects to evaluate the soundness and
risks associated with the technologies in which the Company is investing its
research and development efforts, and the capabilities of the R&D organization
to develop the technology.
5
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STOCKHOLDER NOMINATIONS
The Restated Certificate of Incorporation of the Company provides that any
stockholder entitled to vote for the election of directors at a meeting may
nominate persons for election as directors only if timely written notice of such
stockholder's intent to make such nomination is given, either by personal
delivery or United States mail, postage prepaid, to the Secretary, Allergan,
Inc., 2525 Dupont Drive, Irvine, CA 92612. To be timely, a stockholder's notice
must be delivered to, or mailed and received at, the address provided not less
than 30 days nor more than 60 days prior to the scheduled annual meeting,
regardless of any postponements, deferrals or adjournments of that meeting to a
later date; provided, however, that if less than 40 days' notice or prior public
disclosure of the date of the scheduled annual meeting is given or made, notice
by the stockholder, to be timely, must be so delivered or received not later
than the close of business on the tenth day following the earlier of the day on
which such notice of the date of the scheduled annual meeting was mailed or the
day on which such public disclosure was made. A stockholder's notice to the
Secretary must set forth: (a) as to each person whom the stockholder proposes to
nominate for election or re-election as a director, (i) the name, age, business
address and residence address of the person, (ii) the principal occupation or
employment of the person, (iii) the class and number of shares of capital stock
of the Company beneficially owned by the person, (iv) any other information
relating to the person that is required to be disclosed in solicitations for
proxies for election of directors pursuant to Rule 14a under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"); and (b) as to the
stockholder giving the notice (i) the name and address, as they appear on the
Company's books, of the stockholder and (ii) the class and number of shares of
the Company's stock which are beneficially owned by the stockholder on the date
of such stockholder notice. The Company may require any proposed nominee to
furnish such other information as may be reasonably required by the Company to
determine the eligibility of such proposed nominee to serve as director of the
Company.
DIRECTOR COMPENSATION
Of the Board's current 12 members, two are officers of the Company who do
not receive additional compensation for Board or committee service. Non-employee
directors other than the Chairman earned, during 1999, an annual $25,000
retainer. All non-employee directors received $2,000 for each Board meeting
attended; $1,000 for each committee meeting attended by committee members; and
$1,500 for each committee meeting presided over by the committee chair.
Effective January 1, 1996, Mr. Herbert became Chairman Emeritus of the
Company. During 1999, he received retainer and attendance fees as described
above, and is eligible to participate in the 1989 Nonemployee Director Stock
Plan and the Deferred Directors Fee Program, both as described below, on an
on-going basis. Additionally, in his role as Chairman Emeritus, Mr. Herbert
received $47,000 to cover the cost of secretarial support and office expenses.
Dr. Boyer became Chairman of the Board in January 1998. For such services
in 1999, he received an annual retainer of $250,000 and attendance fees as
described above. Dr. Boyer is also eligible to participate in the 1989
Nonemployee Director Stock Plan and the Deferred Directors Fee Program on an
on-going basis, both as described below.
In 1991, the Company adopted a Deferred Directors' Fee Program that permits
directors to defer all or a portion of their retainers and meeting fees until
termination of their status as a director. Deferred amounts are treated as
having been invested in Common Stock of the Company and thus are valued
according to fluctuations in the market price of the Common Stock. Distributions
will be made in common stock of the Company. Dr. Boyer and Messrs. Cresswell,
Evans, Gallagher, Grant, Osar, Rosso, and Wendt chose to defer all or a portion
of their retainers and meeting fees for the period January 1, 1999 through
December 31, 1999.
In accordance with the Company's 1989 Nonemployee Director Stock Plan (the
"Director Plan"), as amended by the stockholders in April 1998 and reflecting
the Company's 1999 stock split, each director who is not an employee of the
Company receives grants of restricted stock upon (a) initial election to the
Board of 1,800 shares per year for each year, including a partial year of the
term to be served, to a maximum of three years and (b) reelection to the Board
of 1,800 shares per year for each of the three years of the new term. On the
date of each annual meeting of stockholders, the vesting restrictions with
respect to 1,800 shares lapse for
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each participant. If an individual ceases to serve as a director prior to full
vesting of a restricted stock grant for reasons other than death or total
disability, those shares not then vested will be returned to the Company without
payment of any consideration to the director. The Director Plan provides that
the number of shares available for issuance under the Director Plan shall be
adjusted in the event of certain changes in capitalization, such as stock splits
and stock dividends. The Director Plan, as adopted in 1989, provided that it
would expire on December 31, 1999. The Board of Directors has approved an
amendment to the Director Plan, subject to stockholder approval at this annual
meeting, to extend the Director Plan through December 31, 2009 and to authorize
an additional 50,000 shares of Common Stock for issuance under the plan. Please
see Proposal 2 in this proxy statement for further details.
STOCK OWNERSHIP GUIDELINES
At its meeting held in January 1996, the Board approved the stock ownership
guidelines for directors recommended by the Corporate Governance Committee. Each
nonemployee director is expected to own stock, including the economic equivalent
number of shares showing on the records of the Company under the Deferred
Directors Fee Program, equal in value to the number of years the director has
served on the Board since 1989 multiplied by the retainer fee for each year
served. As of December 31, 1999, all ten nonemployee directors met their
ownership guidelines.
OTHER MATTERS
In 1997 the Company formed a new subsidiary, Allergan Specialty
Therapeutics, Inc. ("ASTI"), to conduct research and development of potential
pharmaceutical products based on the Company's retinoid and neuroprotective
technologies. In March 1998, the Company distributed all ASTI Class A Common
Stock to the Company's stockholders. Dr. Kaplan, Corporate Vice President and
President, Research and Development and Global BOTOX(R) and a director of the
Company, is on the ASTI Board of Directors. Dwight J. Yoder, the Company's
Senior Vice President and Principal Accounting Officer, is ASTI's Chief
Financial Officer, and William C. Shepherd, the Company's Chairman, President
and Chief Executive Officer through December 31, 1997, is the Chairman,
President and Chief Executive Officer of ASTI.
Under the terms of a technology license agreement and a license option
agreement between the Company and ASTI, the Company has granted certain
technology licenses and agreed to make specified payments on sales of certain
products in exchange for the payment by ASTI of a technology fee and the option
to independently develop certain compounds funded by ASTI prior to the filing of
an Investigational New Drug application with the U.S. Food and Drug
Administration with respect thereto and to license any products and technology
developed by ASTI. During 1999, ASTI paid approximately $6.1 million in
technology fees to the Company, offset by $400,000 in licensing income credited
to ASTI from the Company.
ASTI's technology and product research and development activities take
place under a research and development agreement with the Company. During 1999
the Company provided ASTI approximately $47.2 million in R&D and administrative
services.
Prof. Ronald Cresswell, an Allergan director, was the Senior Vice President
and Chief Scientific Officer for Warner-Lambert Company until late 1999. In
1999, the Company paid Warner-Lambert approximately $860,000 as product license
royalties and approximately $1.4 million in raw material purchases.
The Company believes that these transactions were made on terms no less
favorable than that which could have been received by unaffiliated third
parties.
On December 31, 1997, in connection with his relocation from Europe to the
United States, the Company made an interest-free loan in the amount of $500,000
to David E.I. Pyott, the President and Chief Executive Officer of the Company,
to be used to purchase a residence in Orange County, California. The loan is
payable in full upon the earlier of five years or the date Mr. Pyott ceases to
be an employee of the Company. As of December 31, 1999, the outstanding balance
on the loan was $500,000.
On August 11, 1999, the Company made an interest free loan in the amount of
$500,000 to Eric Brandt, the Company's Corporate Vice President and Chief
Financial Officer, in connection with his hiring and
7
<PAGE> 11
relocation to California. Mr. Brandt used the loan to purchase a residence in
Orange County, California. The loan is payable in full upon the earlier of five
years or 60 days after Mr. Brandt's employment terminates (unless Mr. Brandt's
employment terminates before May 2000, in which case it shall be the later of
five years or six months after the termination date). As of December 31, 1999,
the outstanding balance on the loan was $500,000.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's executive
officers, directors and persons who own more than ten percent of a registered
class of the Company's equity securities to file reports of ownership and
changes in ownership with the SEC and the New York Stock Exchange. Executive
officers, directors and greater than ten-percent stockholders are required by
SEC regulation to furnish the Company with copies of all Section 16(a) forms
they file.
Based solely on its review of the copies of such forms furnished to the
Company and written representations that no other reports were required during
the fiscal year ended December 31, 1999, its officers, directors and greater
than ten-percent beneficial owners complied with all Section 16(a) filing
requirements.
CORPORATE GOVERNANCE
GUIDELINES ON SIGNIFICANT CORPORATE GOVERNANCE ISSUES
In 1995, the Board approved "Board Guidelines on Significant Corporate
Governance Issues." The Guidelines, as amended to date, are listed below. These
guidelines are being published in this Proxy Statement to inform stockholders of
the Board's current thinking with respect to selected corporate governance
issues considered to be of significance to stockholders. The guidelines are only
guidelines, not rigid rules. Nor is it intended that publication of these
guidelines be interpreted as a representation that they will be followed in each
instance. The Board will continue to assess the appropriateness and efficacy of
the guidelines and it is likely that changes to the guidelines will be
considered from time to time.
1. SELECTION OF CHAIRMAN AND CEO
The Board should be free to make this choice any way that seems best for
the Company at a given point in time.
Therefore, the Board does not have a policy, one way or the other, on
whether or not the role of the Chief Executive Officer and Chairman should be
separate and, if it is to be separate, whether the Chairman should be selected
from the nonemployee directors or be an employee.
2. EXECUTIVE SESSIONS OF OUTSIDE DIRECTORS
The outside directors of the Board will meet in Executive Session at a
regularly scheduled meeting at least once each year. The format of these
meetings will include a discussion with the Chief Executive Officer on each
occasion. These meetings should be scheduled in conjunction with a regular Board
meeting.
It is the policy of the Board that a director be selected by the outside
directors to chair Executive Sessions or assume other responsibilities which the
outside directors as a whole might designate from time to time.
3. NUMBER OF COMMITTEES
The current committee structure of the Company seems appropriate. There
will, from time to time, be occasions in which the Board may want to form a new
committee or disband a current committee depending upon the circumstances. The
current five Committees are Audit, Finance, Organization & Compensation,
Corporate Governance and Science & Technology. The Audit, Corporate Governance
and Organization & Compensation Committees will consist entirely of outside
directors.
8
<PAGE> 12
4. ASSIGNMENT AND ROTATION OF COMMITTEE MEMBERS
The Corporate Governance Committee is responsible, after consultation with
the Chief Executive Officer and with consideration of the desires of individual
Board members, for the assignment of Board members to various committees.
It is the sense of the Board that consideration should be given to rotating
committee members periodically at about a three- to four-year interval, but the
Board does not feel that such a rotation should be mandated as policy since
there may be reasons at a given point in time to maintain an individual
director's committee membership for a longer period.
5. FREQUENCY AND LENGTH OF COMMITTEE MEETINGS
The Committee chairman, in consultation with Committee members, will
determine the frequency and length of the meetings of the Committee. Meetings
will normally be held around Board meetings.
6. COMMITTEE AGENDA
The chairman of the Committee, in consultation with the appropriate members
of management and staff, will develop the Committee's agenda.
Each Committee will issue a schedule of agenda subjects to be discussed for
the ensuing year at the beginning of each year (to the degree these can be
foreseen). This forward agenda will also be shared with the Board. Key
functional managers (i.e., CFO, CVP -- Administration) will have direct contact
with the appropriate Committee chairperson.
7. SELECTION OF AGENDA ITEMS FOR BOARD MEETINGS
The Chairman of the Board and the Chief Executive Officer (if the Chairman
is not the Chief Executive Officer) will establish the agenda for each Board
meeting.
At the beginning of the year the Chairman will establish a schedule of
agenda subjects to be discussed during the next three years.
Each Board member is free to suggest the inclusion of item(s) on the
agenda. The CEO will be proactive in encouraging Board members to submit agenda
items.
8. BOARD MATERIALS DISTRIBUTED IN ADVANCE
It is the sense of the Board that information and data that is important to
the Board's understanding of the business to be conducted at that meeting be
distributed in writing to the Board before the Board meets.
Management will make every attempt to see that this material is as brief as
possible while still providing the desired information.
9. PRESENTATIONS
As a general rule, presentations on specific subjects should be sent to the
Board members in advance so that Board meeting time may be conserved and
discussion time focused on questions that the Board has about the subject. When
there is no prior distribution of a presentation on a sensitive subject, it is
the sense of the Board that each member be advised by telephone in advance of
the meeting of the subject and the principal issues the Board will need to
consider.
10. REGULAR ATTENDANCE OF NON-DIRECTORS AT BOARD MEETINGS
The Board supports the regular attendance at each Board Meeting of
non-Board members who are members of senior management.
9
<PAGE> 13
Should the Chief Executive Officer want to add additional people as
attendees on a regular basis, it is expected that this suggestion would be made
to the Board for its concurrence.
11. BOARD ACCESS TO SENIOR MANAGEMENT
Board members have complete access to Allergan's management.
It is assumed that Board members will use judgment to be sure that this
contact is not distracting to the business operation of the Company and that
such contact, if in writing, be copied to the Chief Executive Officer and/or the
Chairman.
Furthermore, the Board encourages the senior management to, from time to
time, bring other managers into Board meetings who: (a) can provide additional
insight into the items being discussed because of personal involvement in these
areas, and/or (b) represent managers with future potential that the senior
management believes should be given exposure to the Board.
12. BOARD COMPENSATION REVIEW
It is appropriate for the staff of the Company once every other year to
report to the Corporate Governance Committee the status of Allergan Board
compensation in relation to other U.S. companies.
Changes in Board compensation, if any, should come at the suggestion of the
Corporate Governance Committee, but with full discussion and approval by the
Board. The Corporate Governance Committee will make Board compensation change
recommendations after it has reviewed the information it considers appropriate
from the Chief Executive Officer, the Human Resources department and outside
consultants.
13. SIZE OF THE BOARD
The Board presently has 12 members. It is the sense of the Board that a
size of 10 to 12 is about right. However, the Board would be willing to go to a
somewhat larger size in order to accommodate the availability of an outstanding
candidate(s).
14. MIX OF INSIDE AND OUTSIDE DIRECTORS
The Board believes that as a matter of policy there should be a majority of
Independent Directors on the Allergan Board. A maximum ratio should be 1/4
management directors to 3/4 Independent Directors.
But the Board believes that management should encourage senior managers to
understand that Board membership is not necessary or a prerequisite to any
higher management position in the Company. Managers other than the Chief
Executive Officer currently attend Board meetings on a regular basis even though
they are not members of the Board.
15. BOARD DEFINITION OF WHAT CONSTITUTES INDEPENDENCE FOR OUTSIDE DIRECTORS
Allergan's Bylaw defining independent directors was approved by the Board
in July 1995. The Board believes there is no current relationship between any
outside director and Allergan that would be construed in any way to compromise
any Board member being designated independent. Compliance with the Bylaw is
reviewed annually by the Corporate Governance Committee.
16. FORMER CHIEF EXECUTIVE OFFICER'S BOARD MEMBERSHIP
The Board believes this is a matter to be decided in each individual
instance. It is assumed that when the Chief Executive Officer resigns from that
position, he/she should offer his/her resignation from the Board at the same
time. Whether the individual continues to serve on the Board is a matter for
discussion at that time with the new Chief Executive Officer and the Board.
A former Chief Executive Officer serving on the Board will be considered an
inside director for purposes of corporate governance.
10
<PAGE> 14
17. BOARD MEMBERSHIP CRITERIA
The Corporate Governance Committee is responsible for reviewing with the
Board on an annual basis the appropriate skills and characteristics required of
Board members in the context of the current make-up of the Board. This
assessment should include issues of diversity, age, skills such as understanding
of manufacturing technologies, international background, etc. -- all in the
context of an assessment of the perceived needs of the Board at that point in
time.
18. SELECTION OF NEW DIRECTOR CANDIDATES
The Board itself should be responsible, in fact as well as procedure, for
selecting its own members. The Board delegates the screening process involved to
the Corporate Governance Committee with the direct input from the Chairman of
the Board as well as the Chief Executive Officer and the other members of the
Board. There should be a full discussion at a Board meeting before the decision
to invite someone to join the Board is made.
19. EXTENDING THE INVITATION TO A NEW POTENTIAL DIRECTOR TO JOIN THE BOARD
The invitation to join the Board should generally be extended by the
Chairman of the Corporate Governance Committee or the Chairman of the Board (if
separate from the Chief Executive Officer) on behalf of the Board after full
Board approval. The new director will receive an orientation about the Company
and its Corporate Governance philosophy.
20. ASSESSING THE BOARD'S PERFORMANCE
The Corporate Governance Committee is responsible to undertake an annual
assessment of the Board's performance. This will be discussed with the full
Board. This should be done following the end of each fiscal year and at the same
time as the report on Board membership criteria.
This assessment should be the Board's contribution as a whole and
specifically review areas in which the Board and/or the management believes a
better contribution could be made. Its purpose is to increase the effectiveness
of the Board, not to target individual Board members.
21. DIRECTORS WHO CHANGE THEIR PRESENT JOB RESPONSIBILITY
It is the sense of the Board that individual directors who change the
responsibility they held when they were elected to the Board should volunteer to
resign from the Board.
It is not the sense of the Board that the directors who retire or change
from the position they held when they came on the Board should necessarily leave
the Board. There should, however, be an opportunity for the Board, via the
Corporate Governance Committee, to review the continued appropriateness of Board
membership under these circumstances.
22. TERM LIMITS
The Board does not believe it should establish term limits. While term
limits could help ensure that there are fresh ideas and viewpoints available to
the Board, they hold the disadvantage of losing the contribution of directors
who have been able to develop, over a period of time, increasing insight into
the Company and its operations and, therefore, provide an increasing
contribution to the Board as a whole.
As an alternative to term limits, the Corporate Governance Committee, in
consultation with the Chief Executive Officer and the Chairman of the Board,
will review each director's continuation on the Board every year. This will also
allow each director the opportunity to conveniently confirm his/her desire to
continue as a member of the Board.
11
<PAGE> 15
23. RETIREMENT AGE
It is the sense of the Board that the current retirement age of 70 is
appropriate. In the unusual case when the mandated retirement age is not in the
best interest of the Company, the Board, acting through the Corporate Governance
Committee, should be guided by factors such as whether the director has retired
from other business pursuits, the past and anticipated contributions to the
Board as well as the factors typically considered for ongoing service on the
Board.
24. FORMAL EVALUATION OF THE CHIEF EXECUTIVE OFFICER
The Organization and Compensation Committee should make this evaluation
annually, and it should be communicated to the Chief Executive Officer by the
Chairman of the Organization and Compensation Committee.
The evaluation should be based on objective criteria including performance
of the business, accomplishment of long-term strategic objectives, development
of management, etc.
The evaluation will be used by the Organization and Compensation Committee
in the course of its deliberations when considering the compensation of the
Chief Executive Officer.
25. SUCCESSION PLANNING
There should be an annual report by the Chief Executive Officer to the
Board on succession planning.
There should also be available, on a continuing basis, the Chief Executive
Officer's recommendation as to a successor should he/she be unexpectedly
disabled.
26. MANAGEMENT DEVELOPMENT
There will be an annual report to the Board by the Chief Executive Officer
on the Company's program for management development, described in detail.
This report should be given to the Board at the same time as the succession
planning report noted above.
27. BOARD INTERACTION WITH THE INVESTORS, THE MEDIA, CUSTOMERS, ETC.
The Board believes that only senior management speaks for Allergan.
Individual Board members may, with the knowledge of the management and, in most
instances, at the request of management, agree to receive input from various
constituencies that are involved with Allergan.
12
<PAGE> 16
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
BY MANAGEMENT
The following table sets forth information as of January 31, 2000 regarding
the beneficial ownership of the Common Stock of the Company by each nominee,
present directors of the Company, each of the executive officers named in the
Summary Compensation Table and all of the directors and executive officers of
the Company as a group. No officer or director of the Company owns beneficially
1% or more of the Common Stock outstanding.
<TABLE>
<CAPTION>
SHARES OF RIGHTS TO
COMMON STOCK ACQUIRE
BENEFICIALLY BENEFICIAL
BENEFICIAL OWNER OWNED(1) OWNERSHIP(2) TOTAL
---------------- ------------ ------------ ---------
<S> <C> <C> <C>
CLASS II DIRECTORS NOMINEES:
Herbert W. Boyer, Ph.D....................... 16,600 3,570 20,170
Ronald M. Cresswell.......................... 7,600 1,091 8,691
William R. Grant............................. 29,822 24,613 54,435
David E. I. Pyott............................ 49,227 582,500 631,727
CLASS III DIRECTORS:
Handel E. Evans.............................. 17,704 22,392 40,096
Michael R. Gallagher......................... 7,400 1,209 8,609
Gavin S. Herbert............................. 715,596(3) 715,596
Henry Wendt.................................. 83,730 22,107 105,837
CLASS I DIRECTORS:
Lester J. Kaplan, Ph.D....................... 42,911 461,300 504,211
Karen R. Osar................................ 7,200 691 7,891
Louis T. Rosso............................... 100,603 17,519 118,122
Leonard D. Schaeffer......................... 12,000 7,259 19,259
OTHER NAMED EXECUTIVE OFFICERS:
Francis R. Tunney, Jr........................ 26,388 416,900 443,288
F. Michael Ball.............................. 4,709 259,700 264,409
Eric K. Brandt............................... 10,336 200,000 210,336
All current directors and executive officers
(21 persons, including those named
above)..................................... 1,217,383 3,495,597 4,712,980(4)
</TABLE>
- ---------------
(1) In addition to shares held in the individual's sole name, this column
includes shares held by the spouse of the named person and shares held in
various trusts. This column also includes, for employees, shares held in
trust for the benefit of the named party or group in the Company's Savings
and Investment Plan and the Employee Stock Ownership Plan as of December 31,
1999.
(2) Shares which the party or group has the right to acquire within 60 days
after January 31, 2000. For Allergan employees (Dr. Kaplan and Messrs.
Pyott, Tunney, Ball and Brandt) these shares may be acquired upon the
exercise of stock options. For the non-employee directors, this number
represents the economic equivalent number of shares held by non-employee
directors who elected to participate in the Deferred Directors' Fee Program,
as of January 31, 2000. Under this program, participants elect to defer all
or a portion of their annual retainer and meeting fees, with such deferred
amounts treated as having been invested in Common Stock of the Company. Upon
termination of their status as a director, these economic equivalents are
settled in Common Stock.
(3) Includes 3,600 shares held directly, 512,056 shares beneficially owned by a
trust for which Mr. Herbert serves as trustee and beneficiary, and 199,940
shares held in two trusts for which Mr. Herbert serves as co-trustee and in
which he or his sister has a beneficial interest.
13
<PAGE> 17
(4) Represents 3.5% of the shares outstanding as of January 28, 2000 on a
fully-diluted basis (excluding treasury shares).
BY OTHERS
Management of the Company knows of no person, except as set forth below,
who is the beneficial owner of more than 5% of the Company's issued and
outstanding Common Stock.
<TABLE>
<CAPTION>
SHARES PERCENT
NAME AND ADDRESS OF BENEFICIAL OWNERS BENEFICIALLY OWNED OF CLASS(1)
------------------------------------- ------------------ -----------
<S> <C> <C>
FMR Corp. ................................................. 15,462,741(2) 11.93
82 Devonshire Street
Boston, MA 02109-3614
Barclays Global Investors, N.A. ........................... 7,784,174(3) 6.00
45 Fremont Street
San Francisco, CA 94105
Putnam Investments, Inc. .................................. 7,513,706(4) 5.80
One Post Office Square
Boston, MA 02109
Janus Capital Corporation.................................. 7,468,600(5) 5.76
100 Fillmore Street
Denver Colorado 80206-4923
UBS AG..................................................... 7,107,309(6) 5.48
Bahnhofstrasse 45
8021, Zurich, Switzerland
</TABLE>
- ---------------
(1) Based on 129,648,217 shares outstanding on January 28, 2000 (excluding
shares held in treasury).
(2) Based on a Schedule 13G, dated February 11, 2000, filed with the Securities
and Exchange Commission by FMR Corp. on behalf of itself and related
entities.
(3) Based on a Schedule 13G, dated February 14, 2000, filed with the Securities
and Exchange Commission by Barclays Global Investors, N.A. on behalf of
itself and related entities.
(4) Based on a Schedule 13G, dated February 17, 2000, filed with the Securities
and Exchange Commission by Putnam Investments, Inc., on behalf of itself and
related entities.
(5) Based on a Schedule 13G, dated February 15, 2000, filed with the Securities
and Exchange Commission by Janus Capital Corporation.
(6) Based on a Schedule 13G, dated February 11, 2000, filed with the Securities
and Exchange Commission by UBS AG and Brinson Partners, Inc., 209 South
LaSalle, Chicago, Illinois 60604-1295.
14
<PAGE> 18
EXECUTIVE COMPENSATION
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table shows the compensation for the Company's Chief
Executive Officer and the four most highly paid executive officers other than
the CEO for services rendered in all capacities to the Company and its
subsidiaries for the years ended December 31, 1997, 1998 and 1999.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM
----------------------------- COMPENSATION AWARDS
OTHER -----------------------
ANNUAL RESTRICTED SECURITIES ALL OTHER
COMPEN- STOCK UNDERLYING COMPEN-
SALARY BONUS SATION AWARD(S) OPTIONS SATION
NAME AND PRINCIPAL POSITION YEAR ($)(1) ($)(2) ($) ($)(4) (#) ($)(5)
--------------------------- ---- ------- ------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
David E. I. Pyott,............................ 1999 701,538 676,000 -- -- 642,000 7,814
President & CEO 1998 604,615 700,000 -- -- 122,000 1,807,595
1997 -- -- -- 335,625 122,000 --
Lester J. Kaplan, Ph.D.,...................... 1999 339,154 229,100 -- -- 259,600 48,149
Corporate Vice President 1998 304,506 244,000 -- 175,625 60,000 929,189
and President, Research & 1997 283,433 135,000 -- -- 48,000 13,318
Development and Global
BOTOX(R)
Francis R. Tunney, Jr.,....................... 1999 333,500 223,400 -- -- 259,600 8,761
Corporate Vice President -- 1998 289,949 232,000 -- -- 40,000 878,398
Administration, General 1997 274,650 70,000 -- -- 32,000 7,911
Counsel and Secretary
F. Michael Ball,.............................. 1999 290,308 204,100 -- -- 246,800 8,114
Corporate Vice President 1998 276,145 239,000 -- -- 28,800 835,983
and President, North America 1997 255,500 60,000 -- -- 32,000 37,677
Region and Global Eye Rx
Business
Eric K. Brandt,............................... 1999 193,846 211,100 108,643(3) 455,938 293,600 8,291
Corporate Vice President 1998 -- -- -- -- -- --
and Chief Financial Officer 1997 -- -- -- -- -- --
(Principal Financial Officer)
</TABLE>
- ---------------
(1) The amounts shown include cash compensation earned and received by executive
officers as well as amounts earned but deferred at the election of those
officers.
(2) The amounts shown represent bonus performance awards which were paid in
February of the following year under the Company's Management Bonus Plan or
Executive Bonus Plan for services rendered during the fiscal year indicated.
(3) Includes $58,180 for relocation services and $43,909 reimbursed for the
payment of taxes. The Company does not expect to incur similar expenses with
regard to Mr. Brandt in the future.
(4) Based on the closing price of the stock on the New York Stock Exchange on
the date of grant. All shares of restricted stock granted to named executive
officers other than the CEO vest, in whole, in four years and receive
non-preferential dividends. Shares granted to the CEO in 1997 receive
non-preferential dividends and vest as follows: 4,000 shares after three
years, 6,000 shares after four years and 10,000 shares after five years. The
amounts shown in the table represent the value of the restricted stock
awards on the date of grant. The following number of restricted shares (and
the value based on the closing price of the stock on the New York Stock
Exchange on December 31, 1999) were held by each of the named executives as
of December 31, 1999: Mr. Pyott, 20,000 ($995,000); Dr. Kaplan, 10,000
($497,500); and Mr. Brandt, 10,000 ($497,500).
15
<PAGE> 19
(5) The total amounts shown in this column for the 1999 fiscal year consist of
Company contributions to the Allergan, Inc. Savings and Investment Plan
("SIP") and the Allergan, Inc. Employee Stock Ownership Plan ("ESOP"), the
cost of term life insurance and term executive post-retirement life
insurance premiums ("Ins"), and payment in lieu of vacation ("Vac").
<TABLE>
<CAPTION>
SIP ESOP INS VAC
------ ------ ------ -------
<S> <C> <C> <C> <C>
Mr. Pyott............................ $2,414 $3,780 $1,620 $ --
Dr. Kaplan........................... 4,000 3,780 907 39,462
Mr. Tunney........................... 4,000 3,780 981 --
Mr. Ball............................. 3,336 3,780 998 --
Mr. Brandt........................... 3,150 3,780 1,361 --
</TABLE>
STOCK OPTIONS
The following table shows information regarding stock options granted to
the named executive officers during 1999.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
% OF TOTAL
NUMBER OF OPTIONS
SECURITIES GRANTED TO
UNDERLYING EMPLOYEES EXERCISE OR GRANT DATE
OPTIONS IN FISCAL BASE PRICE EXPIRATION PRESENT
NAME GRANTED(#)(1) 1999 PER SHARE DATE VALUE($)(4)
---- ------------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
David E.I. Pyott........................ 242,000 4.88% 34.65625 1/25/09 4,117,340(5)
400,000(2) 8.07% 55.00000 2/28/01 2,614,840(6)
Lester J. Kaplan, Ph.D.................. 59,600 1.20% 34.65625 1/25/09 1,014,022(5)
200,000(2) 4.04% 55.00000 2/28/01 1,041,280(7)
Francis R. Tunney, Jr. ................. 59,600 1.20% 34.65625 1/25/09 1,014,022(5)
200,000(2) 4.04% 55.00000 2/28/01 1,041,280(7)
F. Michael Ball......................... 46,800 0.94% 34.65625 1/25/09 796,246(5)
200,000(2) 4.04% 55.00000 2/28/01 1,041,280(7)
Eric K. Brandt.......................... 93,600(3) 1.89% 45.59375 5/24/09 2,190,165(8)
200,000(2) 4.04% 55.00000 2/28/01 1,219,260(9)
</TABLE>
- ---------------
(1) All options disclosed above were granted pursuant to the 1989 Incentive
Compensation Plan (the "Incentive Plan"). Unless otherwise noted, options
become exercisable 25% per year beginning January 25, 2000. The exercise
price and the tax withholding obligations related to exercise may be paid by
delivery of already-owned shares. The Incentive Plan grants broad discretion
to change material terms, including the acceleration of vesting upon a
"Change in Control." See "Change in Control and Severance Arrangements" on
page 18.
(2) These Options become exercisable in their entirety upon the earlier to occur
of (a) October 1, 2000 or (b) the date that the closing price of the
Company's common stock on the New York Stock Exchange reaches $60 or more.
These options became fully vested on February 7, 2000.
(3) Mr. Brandt's options become exercisable at the rate of 25% per year
beginning May 24, 2000.
(4) Based on the Black-Scholes model of option valuation to determine grant date
fair value, as prescribed under Statement of Financial Accounting Standards
No. 123, Accounting for Stock-Based Compensation. The actual value, if any,
an executive may realize will depend on the excess of the stock price over
the exercise price on the date the option is exercised, so that there is no
assurance the value realized by an executive will be at or near the value
estimated by the Black-Scholes model.
(5) With respect to the January 1999 option grants, the following assumptions
were used in the Black-Scholes model: market price of stock, $34.65625
exercise price of option, $34.65625; expected stock
16
<PAGE> 20
volatility, 34%; risk-free interest rate, 4.81% (based on the 10-year
treasury bond rate); expected life, ten years; dividend yield, .75%.
(6) With respect to Mr. Pyott's April 1999 grant in the amount of 400,000
options, the following assumptions were used in the Black-Scholes model:
market price of stock, $46.15625; exercise price of option, $55.00; expected
stock volatility, 34%; risk-free interest rate, 4.85% (based on the two-year
treasury bond rate); expected life, 1.84 years; dividend yield, .75%.
(7) With respect to the March 1999 option grants, the following assumptions were
used in the Black-Scholes model: market price of stock, $42.46875; exercise
price of option, $55.00; expected stock volatility, 34%; risk-free interest
rate, 4.81% (based on the two-year treasury bond rate); expected life, 1.99
years; dividend yield, .75%.
(8) With respect to Mr. Brandt's May 1999 grant in the amount of 93,600 options,
the following assumptions were used in the Black-Scholes model: market price
of stock, $45.59375; exercise price of option, $45.59375; expected stock
volatility, 34%; risk-free interest rate, 5.64% (based on the ten-year
treasury bond rate); expected life, ten years; dividend yield, .75%.
(9) With respect to Mr. Brandt's May 1999 grant in the amount of 200,000
options, the following assumptions were used in the Black-Scholes model:
market price of stock, $45.59375; exercise price of option, $55.00; expected
stock volatility, 34%; risk-free interest rate, 5.04% (based on the two-year
treasury bond rate); expected life, 1.76 years; dividend yield, .75%.
OPTION EXERCISES AND HOLDINGS
The following table shows stock option exercises by the named executive
officers during 1999, including the aggregate value of gains on the date of
exercise. In addition, this table includes the number of shares covered by both
exercisable and non-exercisable stock options as of December 31, 1999. Also
reported are the values for "in-the-money" options which represent the positive
spread between the exercise price of any such existing stock options and the
year-end price of the Company's Common Stock.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT 12/31/99(#) AT 12/31/99($)(1)
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ------------ ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
David E.I. Pyott........... -- -- 91,500 794,500 3,010,922 8,640,391
Lester J. Kaplan, Ph.D. ... 40,000 $1,759,713 231,400 344,200 8,366,394 3,729,994
Francis R. Tunney, Jr. .... 60,000 $2,376,725 192,000 315,600 7,037,758 2,773,650
F. Michael Ball............ 30,000 $1,177.813 40,800 293,600 1,339,200 2,282,488
Eric K. Brandt............. -- -- -- 293,600 -- 389,025
</TABLE>
- ---------------
(1) Based on the closing price of $49.75 on the New York Stock Exchange of the
Company's Common Stock on December 31, 1999.
DEFINED BENEFIT PENSION PLANS
The Company has a defined benefit retirement plan (the "Pension Plan")
which provides pension benefits to U.S. employees, including officers, based
upon the average of the highest 60 consecutive months of eligible earnings
("Final Average Pay") and years of service integrated with covered compensation
as defined by the Social Security Administration.
Allergan also has two supplemental retirement plans ("SRP") for certain
employees, including officers. These plans pay benefits directly to a
participant to the extent benefits under the Pension Plan are limited by certain
Internal Revenue Code provisions.
17
<PAGE> 21
The following table illustrates the annual combined retirement benefits
payable under the retirement plans based on an age 62 retirement. If an employee
elects a benefit for his or her surviving spouse, the retirement benefit for the
employee is reduced to reflect this additional coverage.
PENSION PLAN TABLE
<TABLE>
<CAPTION>
YEARS OF SERVICE
FINAL --------------------------------------------------------------------------
AVERAGE
PAY 15 20 25 30 35 40 45
- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
$200,000 $ 48,700 $ 64,900 $ 81,100 $ 97,400 $113,600 $118,600 $123,600
250,000 61,700 82,200 102,800 123,300 143,900 150,100 156,400
300,000 74,600 99,500 124,400 149,300 174,100 181,600 189,100
350,000 87,600 116,800 146,000 175,200 204,400 213,200 221,900
400,000 100,600 134,100 167,600 201,200 234,700 244,700 254,700
500,000 126,500 168,700 210,900 253,100 295,200 307,700 320,200
600,000 152,500 203,300 254,100 305,000 355,800 370,800 385,800
700,000 178,400 237,900 297,400 356,900 416,300 433,800 451,800
800,000 204,400 272,500 340,600 408,800 476,900 496,900 516,900
900,000 230,300 307,100 383,900 460,700 537,400 559,900 582,400
</TABLE>
The benefits shown are computed as a single life annuity beginning at age
62 with no deduction for Social Security or other offset amounts. Eligible
earnings include basic salary and bonuses earned during the year. Unreduced
benefits are payable at age 62, but employees may continue employment beyond
then and earn additional retirement benefits. Credited years of service at
normal retirement for the individuals named in the compensation table would be
as follows: Mr. Pyott, 18 years; Dr. Kaplan, 29 years; Mr. Tunney, 30 years; Mr.
Ball, 22 years; and Mr. Brandt, 25 years.
CHANGE IN CONTROL AND SEVERANCE ARRANGEMENTS
The Company has entered into agreements with each of its executive officers
and certain other executives which provide certain benefits in the event of a
change in control of the Company. For purposes of these agreements, "change in
control" of the Company is generally defined as the acquisition by any person of
beneficial ownership of 20% or more of the voting stock of the Company (unless
the Board approves the acquisition) or 33% or more of the voting stock (with or
without Board approval), certain business combinations involving the Company and
dispositions of Company assets, or a change in a majority of the incumbent
members of the Board of Directors, except for changes in the majority of such
members approved by such members. If, within two years after a change in
control, the Company or, in certain circumstances, the executive, terminates his
or her employment, the executive is entitled to a severance payment equal to
one, two or three (depending on the executive in question) times (i) such
executive's highest annual salary rate within the five-year period preceding
termination, plus (ii) a bonus increment equal to the average of the two highest
of the last five bonuses paid to such executive under the Company's Management
Bonus Plan or Executive Bonus Plan. In addition, the executive is entitled to
the continuation of all employment benefits for a one-, two- or three-year
period (depending on the executive in question), the vesting of all stock
options and certain other benefits, including payment of an amount sufficient to
offset the impact of any "excess parachute payment" excise tax payable by the
executive pursuant to the provisions of the Internal Revenue Code or any
comparable provision of state law. The multiple of salary and bonus (as
calculated above) and the number of years of continued coverage of other
benefits are as follows: David E.I. Pyott, Dr. Kaplan and Messrs. Tunney, Ball,
Brandt and five other corporate vice presidents -- three years; nine senior vice
presidents -- two years; and 24 other covered executives -- one year.
In addition, the Company's SRP, Incentive Plan, Savings and Investment
Plan, Employee Stock Ownership Plan, Management Bonus Plan, Executive Bonus
Plan, Pension Plan and Nonemployee Director Stock Plan each contain provisions
for the accelerated vesting of benefits under such plans upon a change in
18
<PAGE> 22
control of the Company (using the same definition of change in control as used
in the change in control agreements).
The Organization and Compensation Committee has approved a severance pay
policy for Corporate Officers whose employment is terminated as a result of a
reduction in force, mutual resignation or sale of a business unit where the
Corporate Officer is not offered similar employment with the acquiring company.
The amount of severance pay depends upon the Corporate Officer's years of
service with the Company. For Corporate Officers having 15 or more years of
service, the payment and benefits are substantially consistent with those
provided pursuant to their Change in Control Agreements described above. For
Corporate Officers having between eight and 14 years of service, the severance
pay is between 22 and 26 months of base salary, depending upon the actual full
years of service, with no additional benefits other than health care coverage
during the severance pay period. For Corporate Officers having between zero and
seven years of service, the severance pay is between 14 and 15 1/2 months of
base salary, depending upon the actual full years of service, with no additional
benefits other than health care coverage during the severance pay period.
William C. Shepherd retired from the Company on January 1, 1998. Pursuant
to the terms of a letter agreement between Mr. Shepherd and Allergan regarding
Mr. Shepherd's retirement, Allergan has agreed to pay Mr. Shepherd severance
payments totaling $3,210,000, on a semi-monthly basis, during the period
commencing January 1, 1998 and ending 36 months following such date (the
"Severance Pay Period"). In partial consideration of such severance payments,
Mr. Shepherd has agreed to provide consulting services to Allergan as requested
by Allergan's Chief Executive Officer for up to a maximum of 50 days per year
during the Severance Pay Period. In addition, pursuant to the terms of the
letter agreement, the vesting of all of Mr. Shepherd's outstanding unvested
options was accelerated as of January 1, 1998. Under the terms of the letter
agreement, Allergan has also agreed to provide Mr. Shepherd with continued
medical, dental, group term life, disability and flexible spending account
benefits, continued pension benefit accruals and other miscellaneous perquisites
and benefits during the Severance Pay Period.
REPORT OF THE ORGANIZATION AND COMPENSATION COMMITTEE
As members of the Organization and Compensation Committee, it is our duty,
pursuant to our charter to: administer the Company's Management Bonus Plan,
Executive Bonus Plan and the 1989 Incentive Compensation Plan; review and adjust
base compensation levels; evaluate performance; and consider and approve
management succession for corporate officers.
Allergan's executive compensation programs are designed to attract,
motivate, and retain the executive talent needed to optimize stockholder value
in a competitive environment. The programs support the goal of increasing
stockholder value of the Company by achieving specific financial and strategic
objectives.
Allergan's executive compensation programs are designed to provide:
- levels of base compensation that are competitive with comparable
pharmaceutical and diversified health care companies;
- annual incentive compensation that varies in a consistent manner with
achievement of individual objectives and financial performance
objectives of the Company; and
- long-term incentive compensation that focuses executive efforts on
building stockholder value through meeting longer-term financial and
strategic goals.
In designing and administering its executive compensation program, the
Company attempts to strike an appropriate balance among these various elements,
each of which is discussed in greater detail below.
BASE SALARY
Base salary, as well as bonus, is targeted at the 50th percentile level,
consistent with comparable pharmaceutical and diversified health care companies.
The Company's Compensation Department, in an effort to obtain a broad base of
data, participates in a number of salary surveys and obtains commercially
19
<PAGE> 23
available surveys. In conducting its analysis, the Company attempts, when data
is available, to include data from companies included in the S&P Health Care
(Diversified) Index and other S&P Health Care indices, as well as from companies
subjectively considered comparable based on such factors as size, product lines,
employment levels and market capitalization.
Allergan's salary increase program is designed to reward individual
performance consistent with the Company's overall financial performance in the
context of competitive practice. Annual performance reviews and formal merit
increase guidelines determine individual salary increases. For 1999 and 2000,
the executive salary structure adjustment and merit increase guidelines were
based on commercially available surveys from the pharmaceutical and health care
industries. The named executive officers received an average salary increase of
11.5% effective January 2000 to reflect competitive market conditions,
promotions, performance and contributions.
THE MANAGEMENT BONUS PLAN
The Management Bonus Plan is designed to reward management-level employees
for their contributions to individual and corporate objectives. Each eligible
employee's award is expressed as a percentage of the participant's year end base
salary. Bonus targets begin at 10% for managers and in 1999 ranged from 40% to
50% for executive officers (excluding the CEO), it being the Committee's
compensation philosophy that increasing portions of compensation should be "at
risk" for those employees with greater influence on corporate results.
Individual performance is measured against objectives that reflect what
executives must do in order for Allergan to meet its short- and long-term
business goals. A participant's individual bonus target award may be modified
from 0% to 150%. In general, each eligible employee sets for himself or herself
(subject to his or her supervisor's review and approval or modification) a
number of objectives for the coming year and then receives an evaluation of
performance against these objectives as a part of the year-end compensation
review process. The individual objectives vary considerably in detail and
subject matter. Examples of objectives identified by executive officers for 1999
included year 2000 compliance efforts, identifying and pursuing new business
opportunities, obtaining regulatory approvals for new products as well as new
indications for existing products, introducing new products into designated
markets and identifying and implementing cost reduction measures. This
information (or summaries thereof) is generally considered by the Committee in
an evaluation of overall performance of the executive officers for purposes of
determining the actual bonus.
The Management Bonus Plan for 2000 will be funded according to the
achievement of a pre-established 2000 Earnings Per Share ("EPS") Target, as
approved by the Committee in January 2000. The EPS Target was based on corporate
objectives established as part of the annual operating plan process. The bonus
pool will be funded at 100% if the EPS Target is achieved, and the bonus pool
will automatically adjust if 2000 EPS surpasses or falls below the EPS Target,
up to a maximum funding level of 160%. Once funded, the bonus pool will be
allocated to the Company's business units based on the units' respective
operating income results compared to the 2000 budget. That is, if a business
unit is above budgeted operating income, it will receive a greater share of the
bonus pool than a business unit that is below the operating income budget. The
Committee will use the business unit allocations in its consideration of bonuses
to the executive officers, based on the performance of each executive officer's
business unit.
The Management Bonus Plan for 1999 followed the same design as the 2000
plan, with an EPS Target as its one funding component. For 1999, the EPS result
was above the 1999 EPS Target. As a result, the Committee approved a total bonus
fund of approximately $12.8 million for approximately 450 participating
employees. The Committee then allocated this bonus pool to the business
functions (and their respective executive officers) based on the functions'
respective operating income results compared to budgeted amounts for 1999.
THE EXECUTIVE BONUS PLAN
Through 1998, the CEO's bonus was granted under the Management Bonus Plan,
discussed above. The Company and its stockholders approved a new Executive Bonus
Plan in 1999 to cover bonus compensation to
20
<PAGE> 24
the CEO in the years 1999 and beyond. The CEO is the only employee eligible for
awards under the Executive Bonus Plan. The primary purpose of the Executive
Bonus Plan is to reward, retain and motivate the Company's CEO. Incentive
compensation under the plan is based on the achievement of performance
objectives established by the Committee for each plan year.
For 2000, the CEO's award will be based on the Company's attainment of a
pre-established EPS target -- the same target approved for other managers of the
Company under the Management Bonus Plan discussed above. The CEO's award is
expressed as a percentage of year end annualized base salary but may not exceed
$5,000,000 in any calendar year. For 2000, the CEO will receive a bonus of up to
112% of base salary, depending on EPS performance.
For 1999, Mr. Pyott's award was based on the attainment of a corporate EPS
target that the Company surpassed. Therefore, the Committee approved a bonus of
$676,000 for Mr. Pyott, based on the Committee's assessment of Mr. Pyott's
achievements of his objectives for 1999. The Committee noted particularly the
Company's profitable growth during 1999, Mr. Pyott's effective implementation of
strategic plans and organizational restructuring, his successful recruiting
efforts to fill key positions, and his efforts to reduce operating expense
ratios on a global basis.
INCENTIVE COMPENSATION PLAN
The 1989 Incentive Compensation Plan (the "Incentive Plan") authorizes the
granting of various stock-based incentive awards to officers and key employees
of the Company and its subsidiaries. The plan has been designed to:
- focus attention on building stockholder value through meeting
longer-term financial and strategic goals;
- link management's financial success to that of the stockholders via
broad-based participation of Allergan management employees
(approximately 375 employees received grants in January 2000);
- balance long-term with short-term decision making; and
- encourage and create ownership and retention of the Company's stock.
Each January, the Committee considers long-term incentive grants for each
of the executive officers of the Company. The guidelines for each grade level
are set periodically based upon a comparison of Allergan to survey data for
approximately 50 pharmaceutical and diversified health care companies prepared
and analyzed by the national consulting firm Towers Perrin in order to
approximate the 75th percentile level compensation if the Company is successful
and that success results in increased stock prices.
In January 1999, the Committee approved a grant to Mr. Pyott of 242,000
nonqualified stock options under the Incentive Plan. The Committee was
influenced by, among other things, competitive compensation requirements
necessary to retain Mr. Pyott, Mr. Pyott's successful management of growth at
Allergan, and his effective organizational and communications skills. In the
case of each of the other named executives, the stock award was within the
Company's guideline and reflects the assessment of individual performance as
well as the performance of the Company as discussed above. In determining the
specific award to the CEO and each of the other named executives, the Committee
considers a mix of individual and corporate performance achievements, without
attributing relative weights to the various factors considered.
In March 1999, the Committee initiated a program under the Incentive Plan
for the Company's CEO and corporate vice presidents. The purpose of this program
was to solidify the Company's management behind a common and clearly stated goal
(stock performance) and to provide aggressive incentives to achieve substantial
gains. The program is not a new plan but rather is a grant of premium-priced
stock options under the Incentive Plan, using shares that were available for
grant. Rather than awarding cash and/or stock upon the attainment of stock price
goals, the Committee awarded the recipients options with an exercise price of
$55 (the "Premium Options"), which was more than $20 higher than the exercise
price of options granted in January 1999 as part of the Company's annual grant
and $13 higher than the closing price of the Company's
21
<PAGE> 25
Common Stock on the New York Stock Exchange on the date of the grant. The
Premium Options were to vest on the earlier of October 1, 2000 or the date that
the closing price of the Company's Common Stock on the New York Stock Exchange
reached $60 or more which occurred on February 7, 2000. The Premium Options,
which are now fully vested, expire on February 28, 2001. The Committee granted
400,000 Premium Options to the CEO and 200,000 to each of the Company's nine
corporate vice presidents.
POLICY ON DEDUCTIBILITY OF COMPENSATION
Section 162(m) of the Internal Revenue Code of 1986, as amended, limits the
tax deductibility by a company of annual compensation in excess of $1,000,000
paid to the CEO and any of its four other most highly compensated executive
officers. However, performance-based compensation that has been approved by
stockholders is excluded from the $1,000,000 limit if, among other requirements,
the compensation is payable only upon attainment of pre-established, objective
performance goals and the Board committee that establishes such goals consists
only of "outside directors." Additionally, stock options will qualify for the
performance-based exception where, among other requirements, the exercise price
of the option is not less than the fair market value of the stock on the date of
grant, and the plan includes a per-executive limitation on the number of shares
for which options may be granted during a specified period.
All members of the Committee qualify as outside directors. While the tax
impact of any compensation arrangement is one factor to be considered, such
impact is evaluated in light of the Committee's overall compensation philosophy.
The Committee will consider ways to maximize the deductibility of executive
compensation, while retaining the discretion the Committee deems necessary to
compensate officers in a manner commensurate with performance and the
competitive environment for executive talent. However, from time to time the
Committee may award compensation which is not fully deductible if the Committee
determines that such award is consistent with its philosophy and is in the best
interests of Allergan and its stockholders.
The 1989 Incentive Compensation Plan, as amended, and the Executive Bonus
Plan, both approved most recently by the stockholders in April 1999, were
designed to meet the performance-based criteria of Section 162(m) of the
Internal Revenue Code of 1986, as amended.
COMMITTEE ACTIVITIES
The Committee held five formal meetings in 1999 as well as many interim
discussions. The following summarizes the Committee's major activities in 1999:
- Evaluated CEO performance.
- Reviewed and determined 1999 salary increases for each corporate
officer based on the officer's performance.
- Determined 1998 management bonus awards for corporate officers based
on assessment of their performance against objectives. Approved the
1999 Management Bonus Plan's corporate financial objective.
- Designed and approved the Executive Bonus Plan. Approved the 1999
Executive Bonus Plan performance criteria.
- Reviewed and recommended 1999 stock awards for executive officers as
well as for other participants, totaling approximately 375. Initiated
premium-priced stock option program for executive officers.
- Reviewed management development and succession plans.
- Engaged in a competitive review of change in control policies and
standards and approved amendments to the Company's form of change in
control severance agreement and employee benefit and compensation
plans.
- Recruited the new Corporate Vice President and Chief Financial
Officer.
22
<PAGE> 26
- Recommended the election of 1999 corporate officers and the designation
of executive officers covered under Section 16 of the Securities Exchange
Act of 1934.
- Reviewed executive stock ownership compared to the executive stock
ownership requirements established by the Committee. The President and
Chief Executive Officer is expected to hold five times his salary in
Company stock; and the guideline for Corporate Vice Presidents is two
times salary.
- Reviewed Pension Plan, Employee Stock Ownership Plan and Savings and
Investment Plan funding levels.
The Company, with the approval of the Committee, has retained the services
of Towers Perrin, a Human Resources consulting firm, since 1989 to provide
advice and review the reasonableness of compensation paid to executive officers
of the Company. The Committee has independent access to Towers Perrin. As part
of its services, Towers Perrin reviewed and, as appropriate, provided
recommendations with respect to the Incentive Plan, Management Bonus Plan and
Executive Bonus Plan.
Organization and Compensation
Committee,
Mr. William R. Grant, Chairman
Dr. Herbert W. Boyer
Mr. Michael R. Gallagher
Ms. Karen R. Osar
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No member of the Company's Organization and Compensation Committee is a
current or former officer or employee of the Company or any of its subsidiaries.
There are no compensation committee interlocks between the Company and other
entities involving Allergan executive officers and Allergan Board members who
serve as executive officers of such other entities.
23
<PAGE> 27
STOCK PERFORMANCE GRAPH
Set forth below is a line graph comparing the yearly percentage change in
the cumulative total stockholder return on the Company's Common Stock with the
cumulative total return of the S&P 500 Stock Index and the S&P Health Care
(Diversified) Index for the period beginning December 31, 1994 and ending
December 31, 1999. The graph assumes that all dividends have been reinvested.
<TABLE>
<CAPTION>
S&P HEALTH CARE
ALLERGAN S&P 500 DIVERSIFIED
-------- ------- ---------------
<S> <C> <C> <C>
12/94 100 100 100
12/95 117 137 147
12/96 130 168 185
12/97 124 224 270
12/98 245 287 393
12/99 378 347 376
</TABLE>
APPROVAL OF THE AMENDED AND RESTATED
1989 NONEMPLOYEE DIRECTOR STOCK PLAN
PROPOSAL 2
GENERAL
The Company's Board of Directors has approved an amendment to the Company's
1989 Nonemployee Director Stock Plan ("Director Plan"), subject to approval by
the Company's stockholders. The Director Plan was adopted in 1989 and was
amended with stockholder approval in 1994, 1996 and 1998. In 1999, the Board
amended the Director Plan to modify the definition of "change in control."
The amended and restated Director Plan accounts for the Company's
two-for-one stock split which was effective in December 1999 and contains two
amendments:
- An amendment to extend the term of the plan through December 31, 2009;
and
- An amendment to authorize an additional 50,000 shares of Allergan
Common Stock for issuance under the plan.
The Director Plan's terms provided that the plan was to expire as of
December 31, 1999. This amendment extends the term of the plan an additional ten
years and authorizes additional shares for issuance under the plan to cover the
extended term. The primary purpose of the proposed amendment to the Director
Plan is to enable the Company to continue to provide a total package of
nonemployee director compensation competitive with comparable publicly-traded
companies. A description of the principal features of the Director Plan, as
proposed to be amended, is set forth below. This summary description is
qualified by and
24
<PAGE> 28
subject to the actual provisions of the form of amended and restated Director
Plan attached to this Proxy Statement as Exhibit B.
PURPOSE AND ELIGIBILITY
The purpose of the Director Plan is to enable the Company to attract and
retain the services of experienced and knowledgeable nonemployee directors and
to align further their interests with those of the stockholders of the Company
by providing for or increasing the proprietary interests of the nonemployee
directors in the Company.
Only members of the Board of Directors of the Company who are not employees
of the Company or of a parent or subsidiary corporation of the Company are
eligible to receive awards under the Director Plan. The Company currently has
ten nonemployee directors.
ADMINISTRATION, AMENDMENT AND TERMINATION
The Director Plan is administered by the Board of Directors ("Board"). The
Board, in its absolute discretion, may at any time and from time to time
delegate to a committee of three or more persons appointed by the Board, all or
any part of the authority, powers and discretion of the Board under the Director
Plan.
The Board may at any time amend, suspend, or terminate the Director Plan,
with the following restrictions:
- no Board action can deprive a holder of a restricted stock award under
the Director Plan of the award without the consent of the holder;
- the Board cannot modify the nondiscretionary manner in which
restricted stock awards are made to nonemployee directors under the
Director Plan (but the number of shares to be included in each
automatic grant may be changed with approval of the stockholders); and
- stockholder approval is required for certain modifications including
modifications to increase the maximum number of shares authorized
under the Director Plan, to accelerate certain vesting schedules, to
extend the duration of the Director Plan, to materially modify the
eligibility requirements, or to materially increase the benefits
accruing to recipients of awards under the Director Plan.
RESTRICTED STOCK AWARDS
Under the Director Plan, upon election, re-election or appointment of a
nonemployee director to the Board, the nonemployee director is automatically
granted an award consisting of 1,800 shares of restricted stock multiplied by
the number of years, including any partial year as a full year, which remain in
the term of the person so elected, re-elected or appointed.
Participants under the Director Plan are not required to pay any purchase
price for the shares of Common Stock to be acquired pursuant to a restricted
stock award, unless otherwise required under applicable law or regulations.
Recipients of restricted stock are entitled to vote and to receive dividends on
the shares subject to the award from the original date through the vesting date
(at which time the recipient receives unrestricted ownership of the shares).
The shares awarded under the Director Plan are subject to:
- restrictions on transferability;
- a vesting schedule; and
- a requirement that the certificates representing the shares must
contain a restrictive legend.
The Director Plan provides that as of the date of each annual meeting of
stockholders following the date of a restricted stock award, the vesting
restrictions lapse and are removed with respect to 1,800 of the shares covered
by the restricted stock award. In the event that a recipient of a restricted
stock award under the
25
<PAGE> 29
Director Plan ceases to be a director for any reason other than death or total
disability, all unvested shares acquired under the Director Plan by such
recipient must be returned to the Company. If a recipient of a restricted stock
award under the Director Plan ceases to be a director because of death or total
disability, the vesting restrictions lapse and are removed with respect to all
shares acquired by that recipient under restricted stock awards pursuant to the
Director Plan.
In the event of a "change in control" the vesting restrictions lapse and
are removed with respect to all shares acquired under restricted stock awards
pursuant to the Director Plan. A "change in control" for this purpose occurs if:
- any person or group becomes the beneficial owner of 20% or more of the
Company's outstanding voting securities (unless the Board approves the
acquisition) or more than 33% with or without Board approval;
- a change occurs in the majority of the incumbent directors (except for
changes approved by such members);
- a merger or other business combination involving the Company is
completed (other than a merger or other transaction in which (A) the
Company's stock continues to represent at least 55% of the combined
voting power of the surviving corporation and (B) no person or group
becomes a 20% or more beneficial owner of Company voting securities);
or
- a plan of complete liquidation or the sale of all or substantially all
of the Company's assets is approved by stockholders.
SECURITIES SUBJECT TO DIRECTOR PLAN
The shares of Common Stock to be delivered under the Director Plan are made
available, at the discretion of the Board, either from authorized but unissued
shares of Common Stock or from shares of Common Stock held by the Company as
treasury shares, including shares purchased in the open market. Under the
Director Plan, as proposed to be amended, the total number of shares of Common
Stock which may be issued or transferred pursuant to an award of restricted
stock under the Director Plan may not exceed 250,000 shares. In addition, if, on
or before termination of the Director Plan, any shares of Common Stock subject
to an award of restricted stock have not been issued or transferred and cease to
be issuable or transferable for any reason, or if the shares have been
reacquired by the Company pursuant to the restrictions imposed on such shares,
those shares are no longer be charged against the 250,000 share limit.
The maximum number of shares issuable under the Director Plan, the number
of shares to be included in each grant of restricted stock under the Director
Plan, the number and kind of shares then subject to restrictions, and the
repurchase price, if any, for each share of Common Stock subject to
restrictions, will be appropriately and proportionately adjusted to reflect
mergers, consolidations, sales or exchanges of all or substantially all of the
properties of the Company, reorganizations, recapitalizations,
reclassifications, stock dividends, stock splits, reverse stock splits,
spin-offs or other distributions with respect to such shares of Common Stock (or
any stock or securities received with respect to such Common Stock).
On January 31, 2000, the closing market price of the Company's Common Stock
was $57 per share.
FEDERAL INCOME TAX CONSEQUENCES
The following is a brief description of the federal income tax treatment
which will generally apply to awards of restricted stock made under the Director
Plan, based on federal income tax laws in effect on the date of this proxy
statement. Directors who participate in the plan are advised to consult with
their own tax advisors for particular federal, as well as state and local,
income and any other tax advice.
Unless a recipient makes an election under Section 83(b) of the Internal
Revenue Code of 1986, as amended, within 30 days after receiving the restricted
stock, the recipient generally will not be taxed on the receipt of the stock
until the restrictions on the stock expire or are removed. When the restrictions
expire or are removed, the recipient recognizes ordinary income (and the Company
is entitled to a deduction) in an
26
<PAGE> 30
amount equal to the fair market value of the stock at that time. If, however,
the recipient makes a timely 83(b) election, he or she will recognize ordinary
income (and the Company will be entitled to a deduction) equal to the fair
market value of the stock on the date of receipt (determined without regard to
vesting restrictions). A director who makes an 83(b) election will ordinarily
not be entitled to recognize any loss thereafter attributable to the shares as a
result of forfeiture. In addition, unless an insider makes a valid election
under Section 83(b) of the Code, special rules may apply to insiders under
Section 16(b) of the Securities Exchange Act of 1934.
NEW PLAN BENEFITS
ALLERGAN 1989 NONEMPLOYEE DIRECTOR STOCK PLAN
<TABLE>
<CAPTION>
NAME DOLLAR VALUE AT 12/31/99 NUMBER OF SHARES
---- ------------------------ ----------------
<S> <C> <C>
Nonemployee Directors Scheduled to Receive Grants in
2000 $805,950(1) 16,200(2)
</TABLE>
- ---------------
(1) Based on the closing price of $49.75 on the New York Stock Exchange of the
Company's Common Stock on December 31, 1999.
(2) Represents only the aggregate number of restricted shares which will
automatically be awarded under the Director Plan to the three nonemployee
directors who are Class II nominees for election at the 2000 Annual Meeting
of Stockholders.
VOTE REQUIRED AND BOARD OF DIRECTORS' RECOMMENDATION
The affirmative vote of a majority of the shares of Common Stock
represented in person or by proxy at the Annual Meeting of Stockholders and
entitled to vote is required for approval of the amended and restated Director
Plan.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE FOR APPROVAL OF
THE PROPOSED AMENDED AND RESTATED 1989 NONEMPLOYEE DIRECTOR STOCK PLAN.
APPROVAL OF AMENDMENT TO THE COMPANY'S
RESTATED CERTIFICATE OF INCORPORATION
PROPOSAL 3
Under the Company's present capital structure, the Company is authorized to
issue 150,000,000 shares of Common Stock, par value $.01 per share, and
5,000,000 shares of Preferred Stock, par value $.01 per share. The Board
believes the number of authorized shares of Common Stock is inadequate for the
present and future needs of the Company and, in particular, limits the Company's
ability to effect future stock splits in the form of a stock dividend.
Therefore, the Board has unanimously approved the amendment of Article 4 of the
Company's Restated Certificate of Incorporation to increase the aggregate number
of shares of Common Stock authorized for issuance by 150,000,000 shares, to an
aggregate of 300,000,000 shares authorized. The Board believes this capital
structure more appropriately reflects the present and future needs of the
Company.
The Preferred Stock may be issued from time to time in one or more series
with such voting powers and such designations, preferences and relative,
participating, optional or other special rights as designated by the Board of
Directors in the resolution providing for the issuance of such shares.
On January 31, 2000, 134,254,772 shares of Common Stock (exclusive of
treasury stock) were outstanding and no shares of Preferred Stock were
outstanding. On January 31, 2000, assuming the exercise of all outstanding stock
options, approximately 143,816,638 shares of Common Stock (exclusive of treasury
stock) would be outstanding.
PURPOSE AND EFFECT OF AUTHORIZING ADDITIONAL COMMON STOCK
The Company's reserve of authorized but unissued shares of Common Stock was
substantially depleted in December 1999 following the Company's two-for-one
stock split effected as a stock dividend. The authoriza-
27
<PAGE> 31
tion of an additional 150,000,000 shares of Common Stock would give the Board
the ability to issue such shares of Common Stock from time to time as the Board
deems necessary. The Board believes it needs to have the ability to issue such
additional shares of Common Stock for any proper corporate purpose, such as
stock splits and stock dividends, acquisitions and convertible debt and equity
financings.
The Company has no specific plans, understandings or agreements at present
for the issuance of the proposed additional shares of Common Stock. The Company
believes, however, that if an increase in the authorized number of shares of
Common Stock were to be postponed until a specific need arose, the delay and
expense incident to obtaining the approval of the Company's stockholders at that
time could significantly impair the Company's ability to meet its objectives and
could delay the effectiveness of a stock dividend.
The additional Common Stock would be available for issuance by the Board
without any further action by the stockholders, unless such action was
specifically required by the Company's Restated Certificate of Incorporation,
applicable law or the rules of any stock exchange or quotation system on which
the Company's securities may then be listed.
The proposed increase in the authorized number of shares of Common Stock
could have a number of effects on the Company's stockholders, depending on the
exact nature and circumstances of any actual issuance of the authorized shares.
An issuance of additional shares by the Company could have an effect on the
potential realizable value of a stockholder's investment. In the absence of a
proportionate increase in the Company's earnings and book value, an increase in
the aggregate number of the Company's outstanding shares of Common Stock caused
by the issuance of the additional shares would dilute the earnings per share and
book value per share of all outstanding shares of the Company's capital stock.
If such factors were reflected in the price per share of Common Stock, the
potential realizable value of a stockholder's investment could be adversely
affected.
In addition, the increase could have an anti-takeover effect, in that
additional shares could be issued (within the limits imposed by applicable law)
in one or more transactions that could make a change in control or takeover of
the Company more difficult. For example, additional shares could be issued by
the Company to dilute the stock ownership or voting rights of persons seeking to
obtain control of the Company. Similarly, the issuance of additional shares to
certain persons allied with the Company's management could have the effect of
making it more difficult to remove the Company's current management by diluting
the stock ownership or voting rights of persons seeking to cause such removal.
While it may be deemed to have potential anti-takeover effects, the proposed
amendment to increase the authorized Common Stock is not prompted by any
specific effort or takeover threat currently perceived by the Board. Moreover,
the Board does not currently intend to propose additional anti-takeover measures
in the foreseeable future.
VOTE REQUIRED AND BOARD OF DIRECTORS' RECOMMENDATION
The affirmative vote of a majority of the outstanding shares of Common
Stock entitled to vote is required for adoption of the proposed amendment.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE FOR APPROVAL OF
THE PROPOSAL TO AMEND THE RESTATED CERTIFICATE OF INCORPORATION TO INCREASE THE
AUTHORIZED NUMBER OF SHARES OF COMMON STOCK.
INDEPENDENT AUDITORS
KPMG LLP, independent auditors, audited the consolidated financial
statements of the Company for the fiscal year ended December 31, 1999.
Representatives of KPMG LLP are expected to be present at the stockholders'
meeting, will have the opportunity to make a statement if they desire to do so,
and will be available to respond to appropriate questions. The Board of
Directors selects the independent public accountants, typically during the third
or fourth quarter of the fiscal year.
28
<PAGE> 32
ANNUAL REPORT
The Annual Report to Stockholders for the year ended December 31, 1999
accompanies the proxy material being mailed to all stockholders. The Annual
Report is not a part of the proxy solicitation material. The Company will
provide, without charge, a copy of its most recent Annual Report on Form 10-K
upon the receipt of a written request by any stockholder.
DEADLINE FOR STOCKHOLDER PROPOSALS
Any stockholder of the Company wishing to have a proposal considered for
inclusion in the Company's 2001 proxy solicitation materials must, in addition
to other applicable requirements, set forth such proposal in writing and send
the proposal to the Secretary of the Company so that it is received on or before
November 16, 2000.
OTHER BUSINESS
PRESENTED BY MANAGEMENT
As of the date of this Proxy Statement, management knows of no other
matters to be brought before the stockholders at the annual meeting. Should any
other matters properly come before the meeting, action may be taken thereon
pursuant to the proxies in the form enclosed, which confer discretionary
authority on the persons named therein or their substitutes with respect to such
matters.
PRESENTED BY STOCKHOLDERS
Pursuant to the Company's Restated Certificate of Incorporation only such
business shall be conducted at an annual meeting of stockholders as is properly
brought before the meeting. For business to be properly brought before an annual
meeting by a stockholder, in addition to any other applicable requirements,
timely notice of the matter must be first given to the Secretary of the Company.
To be timely, written notice must be received by the Secretary no less than 30
days nor more than 60 days prior to the meeting. If less than 40 days' notice or
prior public disclosure of the meeting has been given to stockholders, then
notice of the proposed business matter must be received by the Secretary not
later than ten days after the mailing of notice of the meeting or such public
disclosure. Any notice to the Secretary must include as to each matter the
stockholder proposes to bring before the meeting: (a) a brief description of the
proposal desired to be brought before the meeting and the reason for conducting
such business at the annual meeting; (b) the name and record address of the
stockholder proposing such business and any other stockholders known by such
stockholder to be supporting such proposal; (c) the class and number of shares
of the Company which are beneficially owned by the stockholder on the date of
such stockholder notice and by other stockholders known by such stockholder to
be supporting such proposal on the date of such stockholder notice; and (d) any
material interest of the stockholder in such business.
By Order of the Board of Directors
/s/ FRANCIS R. TUNNEY, JR.
--------------------------------------
Francis R. Tunney, Jr.
Secretary
March 16, 2000
Irvine, California
29
<PAGE> 33
EXHIBIT A
Allergan, Inc.
FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
MANAGEMENT'S DISCUSSION AND ANALYSIS........................ A-2
CONSOLIDATED BALANCE SHEETS................................. A-18
CONSOLIDATED STATEMENTS OF OPERATIONS....................... A-19
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY............. A-20
CONSOLIDATED STATEMENTS OF CASH FLOWS....................... A-21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.................. A-22
REPORT OF MANAGEMENT........................................ A-44
INDEPENDENT AUDITORS' REPORT................................ A-45
QUARTERLY RESULTS........................................... A-46
SELECTED FINANCIAL DATA..................................... A-47
</TABLE>
A-1
<PAGE> 34
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR
THE THREE-YEAR PERIOD ENDED DECEMBER 31, 1999
This financial review presents the operating results for Allergan, Inc. for
each of the three years in the period ended December 31, 1999, and its financial
condition at December 31, 1999. This review should be read in connection with
the information presented in the Consolidated Financial Statements and the
related Notes to the Consolidated Financial Statements.
Allergan, Inc. (the Company), headquartered in Irvine, California, is a
technology driven, global health care company providing specialty pharmaceutical
products worldwide. The Company develops and commercializes products in the eye
care, dermatological and movement disorder pharmaceutical, ophthalmic surgical
device, and over-the-counter contact lens care markets that deliver value to our
customers, satisfy unmet medical needs, and improve patients' lives.
Incorporated in 1948, the Company employs approximately 6,000 professionals
around the world. The Company is a pioneer in specialty pharmaceutical research,
targeting products and technologies related to specific disease areas such as
glaucoma, retinal disease, cataracts, dry eye, psoriasis, acne, photodamage,
movement disorders, metabolic disease, and various types of cancer. With 1999
sales in excess of $1.4 billion, the Company is an innovative leader in
therapeutic and over-the-counter products that are sold in more than 100
countries around the world.
The Company operates in four regions: North America, Latin America, Europe
and Asia Pacific. Operations for the Europe Region also include sales to
customers in Africa and the Middle East, and operations in the Asia Pacific
Region include sales to customers in Australia and New Zealand.
In each region, the Company markets products in three product segments:
Specialty Pharmaceuticals, Ophthalmic Surgical and Contact Lens Care. The
Specialty Pharmaceutical segment produces a broad range of ophthalmic products
for glaucoma therapy, ocular inflammation, infection, allergy and dry eye; skin
care products for acne, psoriasis and other prescription and over the counter
dermatological products; and Botox(R) Purified Neurotoxin Complex for movement
disorders. The Ophthalmic Surgical segment produces intraocular lenses,
phacoemulsification equipment, viscoelastics, and other products related to
cataract surgery. The Contact Lens Care segment produces cleaning, storage and
disinfection products for the consumer contact lens market. The Company provides
global marketing strategy teams to ensure development and execution of a
consistent marketing strategy for products in all geographic operating segments.
In 1999, 1998 and 1997, the Company participated in the following research
and development and marketing collaboration activities:
In December 1999, the Company acquired an exclusive license to a patented
use of neurotoxins like Botox(R) in specific medical applications.
In December 1999, the Company entered into a license agreement with
Boehringer Ingelheim granting the Company the right to develop and commercialize
epinastine for the treatment of ocular allergies.
In November 1999, the Company entered into a multi-year agreement with 3M
Pharmaceuticals, a division of Minnesota Mining and Manufacturing Company, to
co-promote Allergan's proprietary acne product, Tazorac(R)(Tazarotene Gel) 0.1%,
in the U.S. dermatology market.
In October 1999, the Company entered into a three year agreement with AXYS
Advanced Technologies, Inc. to provide the Company with a diverse compound
screening library.
In September 1999, the Company entered into a multi-year agreement with
McNeil Consumer Healthcare, a subsidiary of Johnson & Johnson, to commercialize
Allergan's proprietary anti-infective, Ocuflox(R) (ofloxacin ophthalmic
solution) 0.3%, in the U.S. pediatric and selected general practitioner markets.
A-2
<PAGE> 35
In July 1999, the Company entered into a license and research collaboration
agreement with ACADIA Pharmaceuticals to discover, develop and commercialize
compounds for glaucoma, based on ACADIA's proprietary and highly receptor
subtype-selective muscarinic lead compounds.
In June 1999, the Company obtained an exclusive license from XOMA Ltd. to
use recombinant BPI in combination with other anti-infectives to treat
ophthalmic infections.
In April 1999, the Company entered into a long-term marketing, sales and
development partnership with Bioglan Pharma Plc to commercialize tazarotene
(ZORAC(R)) in the United Kingdom, Ireland, Denmark, Sweden, Finland, and other
international markets, including certain countries in the Middle East and
Africa.
In February 1999, the Company entered into a long-term marketing, sales and
development partnership with Pierre Fabre Dermatologie to commercialize
tazarotene (ZORAC(R)), in continental Europe and nearby territories.
In July 1998, the Company entered into a multi-year research and
development collaboration with the Parke-Davis Pharmaceutical Research Division
of Warner-Lambert Company to identify, develop and commercialize up to two
retinoid compounds. The Company received a payment at the time of the agreement,
and could receive a total of up to $104 million in payments relating to
development of the two compounds. In addition, the Company will receive
royalties on sales of developed products.
In July 1998, the Company entered into an agreement with Santen
Pharmaceutical Co., Ltd. (Santen) granting Santen distribution rights in Japan
for brimonidine, a compound marketed by Allergan under the brand name
Alphagan(R). The Company will manufacture brimonidine for Santen. Santen is
responsible for development, registration and approval of brimonidine in Japan.
The Company received a payment on signing the agreement, and is entitled to
receive development milestone payments and a percentage of future product sales.
In March 1998, the Company formed Allergan Specialty Therapeutics, Inc.
(ASTI) to conduct research and development of potential pharmaceutical products
based primarily upon the Company's retinoid and neuroprotective technologies.
The Company contributed $200 million and certain related technologies to ASTI.
The Company then distributed the stock of ASTI in a dividend to the Company's
stockholders.
In November 1997, the Company and Ligand Pharmaceuticals, Incorporated
(Ligand) divided the technologies within Allergan Ligand Retinoid Therapeutics,
Inc. (ALRT) after Ligand purchased ALRT from its shareholders. ALRT was formed
in 1995 to conduct research related to small molecule retinoid products. The
Company and Ligand provided contract research services to ALRT during its
operation.
In September 1997, the Company and ACADIA Pharmaceuticals Inc. entered into
a collaboration of discovery efforts on five potential drug targets including
the prostanoid and alpha adrenergic receptors. The Company invested $6 million
in ACADIA Pharmaceuticals, and will pay ACADIA up to $12.5 million for the first
product developed for each receptor target. Upon commercialization of products,
the Company will pay ACADIA royalties on product sales.
A-3
<PAGE> 36
RESULTS OF OPERATIONS
Net Sales
The following table sets forth, for the periods indicated, net sales by
major product line.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
-------- -------- --------
IN MILLIONS
<S> <C> <C> <C>
Specialty Pharmaceuticals:
Eye Care Pharmaceuticals................... $ 571.2 $ 505.3 $ 408.5
Skin Care.................................. 76.6 80.6 80.6
Botox(R)/Neuromuscular..................... 175.8 125.3 90.1
-------- -------- --------
Total.............................. 823.6 711.2 579.2
Medical Devices and OTC Product Lines:
Ophthalmic Surgical........................ 222.9 193.6 182.2
Contact Lens Care.......................... 359.7 356.9 376.6
-------- -------- --------
Total.............................. 582.6 550.5 558.8
-------- -------- --------
Total Product Net Sales................. $1,406.2 $1,261.7 $1,138.0
======== ======== ========
Domestic..................................... 48.1% 46.2% 42.8%
International................................ 51.9% 53.8% 57.2%
</TABLE>
Net sales for 1999 were $1.406 billion, which was an increase of $144.5
million or 11% over 1998. Foreign currency fluctuations in 1999 decreased sales
by $34.6 million or 3% as compared to average rates in effect in 1998. At
constant currency rates, sales increased by $179.1 million or 14% over 1998.
Net sales increased in 1999 primarily as a result of increases in sales in
three product lines. Eye Care Pharmaceutical sales increased by $65.9 million,
or 13%; sales of Botox(R) Purified Neurotoxin Complex increased by $50.5
million, or 40%; and Surgical sales increased by $29.3 million, or 15%, in 1999.
Eye Care Pharmaceutical sales increased primarily as a result of growth in sales
of Alphagan(R) ophthalmic solution. Sales growth in international markets were
decreased by $35.4 million, or 15%, as a result of a decrease in the value of
the Brazilian real compared to the dollar. Sales increased by 19% in the United
States and 21% at constant currency rates in international markets in 1999
compared to 1998. Botox(R) sales increased as a result of strong growth in both
the United States and international markets. Allergan believes its worldwide
market share is over 85% for medical neurotoxins including Botox(R). In 2000, 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 foldable intraocular lenses (IOLs) and strong sales in
international markets of an acrylic lens introduced in 1998. Such increases were
partially offset by a decrease in sales of PMMA IOLs.
Net sales for 1998 were $1.262 billion, which was an increase of $123.7
million or 11% from 1997. Foreign currency fluctuations in 1998 decreased sales
by $27.8 million or 2% as compared to average rates in effect in 1997. At
constant currency rates, sales increased by $151.5 million or 13% over 1997.
Net sales increased in 1998 primarily as a result of increases in sales in
three product lines, partially offset by a decrease in sales of Contact Lens
Care products. Eye Care Pharmaceutical sales increased by $96.8 million, or 24%;
sales of Botox(R) Purified Neurotoxin Complex increased by $35.2 million, or
39%; and Surgical sales increased by $11.4 million, or 6%, in 1998. Eye Care
Pharmaceutical sales in the United States increased by 41% while international
sales increased by 9%. United States sales increased in 1998 primarily as a
result of increases in sales of Alphagan(R), Ocuflox(R) and Acular(R) ophthalmic
solutions. Sales of Alphagan(R) ophthalmic solution in the United States were
$87.2 million in 1998 compared to $46.3 million in 1997. Botox(R) sales in both
the U.S. and international markets increased as a result of broader therapeutic
usage of Botox(R) and increased market penetration. Surgical sales increased by
11% in the United States in 1998, while sales in international markets increased
by 2%. At constant currency rates, sales in international markets
A-4
<PAGE> 37
increased by 8% in 1998. Worldwide sales increased primarily as a result of
increased sales of IOLs. IOL sales increased as the product mix has shifted from
PMMA IOLs to foldable IOLs implanted using less invasive small incision surgery.
Contact Lens Care sales decreased by 5% from 1997 to 1998. Domestic sales
decreased by 13% in 1998 as a result of decreases in sales of ancillary contact
lens care products. This decrease was the result of increasing use of disposable
and frequent replacement contact lenses. International lens care product sales
decreased by 3% in 1998 compared to 1997. Currency fluctuations had a negative
impact on 1998 international sales growth. At constant currency rates,
international sales increased by 1% from 1997 to 1998. Sales of Consept F(R)
Cleaning and Disinfecting System increased international sales in 1998. This
increase was offset by decreases in sales of peroxide based disinfection
products as consumers increased their use of lower priced one bottle cold
chemical disinfection systems.
The following table sets forth, for periods indicated, net sales by
geographic segment.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
-------- -------- --------
IN MILLIONS
<S> <C> <C> <C>
United States................................ $ 669.2 $ 577.2 $ 479.9
Europe....................................... 377.1 363.2 338.6
Asia Pacific................................. 211.3 168.2 170.1
Other........................................ 141.7 147.0 142.6
-------- -------- --------
Segments total............................... 1,399.3 1,255.6 1,131.2
Manufacturing operations..................... 6.9 6.1 6.8
-------- -------- --------
Total Product Net Sales............ $1,406.2 $1,261.7 $1,138.0
======== ======== ========
</TABLE>
Net sales increased in 1999 by $179.1 million on a constant currency basis,
offset by a decrease in net sales of $34.6 million caused by changes in exchange
rates. United States net sales increased $92.0 million. Net sales in Europe
increased $28.9 million at constant currency rates, offset by a $15.0 million
decrease resulting from a weakening of the euro vs. the dollar. Asia Pacific net
sales increased $24.0 million at constant currency rates. Currency changes in
1999 added $19.1 million to sales growth in the Asia Pacific segment, primarily
as a result of strengthening of the Japanese yen vs. the dollar. Net sales in
the Other geographic segment increased by $33.4 million at constant currency
rates, offset by a $38.7 million decrease resulting from changes in currency
rates. The currency weakness in 1999 impacted primarily the Eye Care
Pharmaceutical business, and resulted primarily from the devaluation of the
Brazilian real in early 1999.
Net sales increased in 1998 by $151.5 million on a constant currency basis,
offset by a decrease in net sales of $27.8 million caused by changes in exchange
rates. United States net sales increased $97.3 million. Net sales in Europe
increased $34.0 million at constant currency rates, offset by a $9.4 million
decrease resulting from a weakening of the European currencies vs. the dollar.
Asia Pacific net sales increased $12.6 million at constant currency rates.
Currency changes in 1998 reduced sales growth by $14.5 million in the Asia
Pacific segment, primarily as a result of weakening of the Japanese yen vs. the
dollar. Net sales in the Other geographic segment increased by $8.3 million at
constant currency rates, offset by a $3.9 million decrease resulting from
changes in currency rates.
A-5
<PAGE> 38
Income and Expenses
The following table sets forth the relationship to sales of various income
statement items:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Product net sales................................... 100.0% 100.0% 100.0%
Cost of sales....................................... 28.9 32.3 35.1
----- ----- -----
Product gross margin................................ 71.1 67.7 64.9
Research services margin............................ 0.2 0.2 0.1
Other operating costs and expenses:
Selling, general and administrative............... 41.8 41.6 40.3
Technology fees from related party................ (0.4) (0.9) --
Research & development............................ 12.0 9.9 11.5
Restructuring charges (credit).................... (0.7) 5.9 --
Asset write-offs (credit)......................... (0.1) 4.6 --
Contribution to ASTI.............................. -- 13.6 --
----- ----- -----
Operating income (loss)............................. 18.7 (6.9) 13.1
Gains on investments, net........................... 1.0 4.3 1.1
Contribution to Allergan Foundation................. (0.5) (0.9) --
Other non-operating expense, net.................... (0.1) (1.1) (0.4)
----- ----- -----
Earnings (loss) before income taxes and minority
interest.......................................... 19.1 (4.6) 13.8
===== ===== =====
Net earnings (loss)................................. 13.4% (7.1)% 11.3%
===== ===== =====
</TABLE>
Gross Margin
The Company's gross margin percentage increased by 3.4 percentage points
from 67.7% in 1998 to 71.1% in 1999 and by 2.8 percentage points from 64.9% in
1997 to 67.7% in 1998. The increases in gross margin percentage in both years
were primarily the result of shifts in the product mix of sales. Higher margin
eye care pharmaceutical and Botox(R) Purified Neurotoxin Complex sales
represented a greater percentage of 1999 sales compared to 1998, and 1998 sales
compared to 1997.
Selling, General and Administrative
Selling, general and administrative expenses as a percentage of net sales
increased in 1999 to 41.8% from 41.6% in 1998 and 40.3% in 1997. The percentage
increase in 1999 was the result of an increase in promotion, selling and
marketing expenses partially offset by a decrease in general and administrative
expenses. The percentage increase in 1998 was primarily the result of increased
product marketing and selling costs. The increased costs were partially offset
by $12.9 million from product development licensing agreements.
Research and Development
Research and development expenses increased by 34% in 1999 to $168.4
million compared to $125.4 million in 1998 and $131.2 million in 1997. Research
and development spending does not include research and development spending
performed under contracts with ASTI in 1999 and 1998 or ALRT in 1997. Research
and development spending increased in 1999 as a result of the Company's expanded
research efforts, particularly in Eye Care Pharmaceutical and Botox(R) research
and development. Research and development costs in 1998 were decreased by $3.8
million as a result of recovery from ASTI of costs incurred and expensed in the
fourth quarter of 1997, primarily relating to retinoid research, after the
dissolution of ALRT. Research and development spending in 1997 includes $3.4
million in net cost to acquire a portion of the assets of ALRT at its
dissolution, and $3.8 million in costs of research reimbursed by ASTI in 1998,
which would have been reimbursed by ALRT had it not been dissolved. Research and
development expenditures are allocated to each product line, with higher rates
of investments allocated to Eye Care Pharmaceuticals, Botox(R) and Skin Care.
A-6
<PAGE> 39
Special Charges
Results for 1998 include three special charges disclosed on specific lines
in the Consolidated Statements of Operations.
The Company recorded a charge of $171.4 million in March 1998 relating to
the dividend distribution of ASTI stock to the Company's stockholders. Such
amount represents the excess of the $200 million contributed to ASTI by the
Company over the aggregate market value of ASTI stock at the commencement of
trading as an independent company.
During 1998, the Company recorded a $74.8 million restructuring charge,
$50.9 million after taxes. The restructuring charge represented the costs of a
comprehensive plan to streamline operations and reduce costs through reductions
in global general and administrative (G&A) staff and the closure of five of ten
manufacturing facilities in connection with the outsourcing and consolidation of
manufacturing operations. In addition, operations in many countries were
transferred to distributors, and business activities were concentrated into
regional shared service centers. The changes in operations were expected to
result in a net workforce reduction of 695 positions over a three-year period.
The reductions in G&A staff and manufacturing facilities are primarily the
result of a strategic assessment of the Company's product lines and businesses
during the first quarter of 1998, and a review of the G&A cost structure and
manufacturing capabilities during the second and third quarters.
The restructuring charge was recorded primarily in the third quarter as
most restructuring activities were announced on September 14, 1998. Certain
restructuring activities in the first and second quarters totaling $7.8 million
were previously reported as operating expenses in prior quarters. Severance
payments were made to 323 terminated employees in 1999 and 141 terminated
employees in 1998 resulting in restructuring charge spending of $8.5 million and
$3.6 million, respectively.
In 1999, the Company determined that various restructuring activities were
completed for less cost than estimated in 1998, primarily as a result of lower
than anticipated severance costs. A total of 95 positions included in the 695
position reduction will not require severance payments as certain employees
terminated their employment prior to the date they would have qualified for
severance, and other employees transferred to unfilled positions in other areas.
As a result, the Company recorded a $3.8 million reduction in the restructuring
charge in 1999.
The following table presents the restructuring activities through December
31, 1999 resulting from the 1998 restructuring charge (in millions):
<TABLE>
<CAPTION>
FACILITY ABANDONMENT
PAYMENTS CLOSURE OF
TO EMPLOYEES AND COMPUTER
INVOLUNTARILY CONSOLIDATION SOFTWARE OTHER TOTAL
TERMINATED COSTS COSTS COSTS RESTRUCTURING
------------- ------------- ----------- ----- -------------
<S> <C> <C> <C> <C> <C>
Net charge during 1998........... $22.7 $ 28.9 $10.6 $12.6 $ 74.8
Assets written off during 1998... -- (25.3) (10.6) (4.8) (40.7)
Spending during 1998............. (3.6) -- -- (7.4) (11.0)
----- ------ ----- ----- ------
Balances as of December 31,
1998........................... 19.1 3.6 -- 0.4 23.1
Adjustments during 1999.......... -- (0.3) -- 0.3 --
Net credit during 1999........... (2.6) (0.7) -- (0.5) (3.8)
Assets written off during 1999... -- (0.3) -- -- (0.3)
Spending during 1999............. (8.5) (0.4) -- -- (8.9)
----- ------ ----- ----- ------
Balances as of December 31,
1999........................... $ 8.0 $ 1.9 $ -- $ 0.2 $ 10.1
===== ====== ===== ===== ======
</TABLE>
During 1998, the Company offered an early retirement program to certain
employees. The increase in pension liability resulting from this program is
included in the table above as 1998 spending of other costs.
In 1998, management also completed a critical review of its asset bases in
light of the strategic decisions made in the restructuring activities discussed
above. Management made business decisions relating to the
A-7
<PAGE> 40
future use of certain assets resulting in a reassessment of the carrying value
of such assets. As a result, the Company recorded a $58.5 million charge, $41.1
million after taxes. Such charge reduced the value of a manufacturing facility,
office facilities in Germany and Spain, assets related to Herald products and
certain other assets. The Company determined that the value of the assets, other
than office facilities, were impaired by comparing the carrying value of each
asset with an undiscounted cash flow analysis for each asset. The value of each
asset was written-down to the higher of its net realizable sales value less
costs to sell or the value determined by a discounted cash flow analysis. The
$58.5 million charge related to the following business segments: $18.0 million
in the United States, $4.5 million in Europe, $18.5 million in Asia Pacific,
$0.4 million in the Other geographic segment, and $17.1 million related to
corporate, research and product related assets.
In 1999, the Company realized $1.4 million in proceeds in excess of
estimates from disposal of certain real property included in the 1998 asset
write-off. As a result, the Company recorded a $1.4 million reduction in the
asset write-off charge in 1999.
Approximately $2.2 million of the restructuring accrual at December 31,
1999 relates to the Company's 1996 restructuring charge. In 1996, the Company
recorded a $70.1 million restructuring charge to streamline operations and
reduce costs through management restructuring and facilities consolidation
affecting 22 locations worldwide. The Company began restructuring activities in
Europe in 1996 and completed them in 1999. Over the three year period, such
activities restructured European operations from separate administrative
services in various countries to a single shared service center organization for
the region. In 1999, the Company determined that severance costs of positions
eliminated would be $5.8 million less than accrued in 1996. As a result, the
Company recorded a $5.8 million reduction in the restructuring charge in 1999.
The following table presents the restructuring activities through December
31, 1999 resulting from the 1996 restructuring charge (in millions):
<TABLE>
<CAPTION>
FACILITY
PAYMENTS CLOSURE
TO EMPLOYEES AND
INVOLUNTARILY CONSOLIDATION OTHER TOTAL
TERMINATED COSTS COSTS RESTRUCTURING
------------- ------------- ----- -------------
<S> <C> <C> <C> <C>
Net charge during 1996....................... $34.0 $ 29.6 $ 6.5 $ 70.1
Assets written off during 1996............... -- (25.9) (6.2) (32.1)
Spending during 1996......................... (9.9) (0.7) (0.2) (10.8)
----- ------ ----- ------
Balances as of December 31, 1996............. 24.1 3.0 0.1 27.2
Adjustments during 1997...................... (0.5) -- 0.5 --
Spending during 1997......................... (7.6) (3.0) (0.6) (11.2)
----- ------ ----- ------
Balances as of December 31, 1997............. 16.0 -- -- 16.0
Adjustments during 1998...................... (0.4) -- 0.4 --
Assets written off during 1998............... -- -- (0.4) (0.4)
Spending during 1998......................... (5.0) -- -- (5.0)
----- ------ ----- ------
Balances as of December 31, 1998............. 10.6 -- -- 10.6
Adjustments during 1999...................... (2.0) -- 2.0 --
Net credit during 1999....................... (5.8) -- -- (5.8)
Spending during 1999......................... (2.6) -- -- (2.6)
----- ------ ----- ------
Balances as of December 31, 1999............. $ 0.2 $ -- $ 2.0 $ 2.2
===== ====== ===== ======
</TABLE>
Operating Income
Operating income was $263.5 million, or 18.7% of product net sales in 1999.
Operating income was a loss of $87.1 million, or 6.9% of product net sales in
1998. The 1998 amount includes special charges for restructuring of $74.8
million and asset write-offs of $58.5 million. In addition, the 1998 amount
includes the $171.4 million charge relating to the dividend distribution of ASTI
stock to the Company's stockholders. Excluding the special charges in 1998,
operating income was $217.6 million or 17.2% of product net sales. Operating
income was $149.0 million or 13.1% of product net sales in 1997.
A-8
<PAGE> 41
Operating income and the operating income percentage, excluding special
charges in 1998, increased by $45.9 million from $217.6 million or 17.2% of
product net sales in 1998 to $263.5 million or 18.7% of product net sales in
1999. Such increases were the result of the $144.5 million or 11% increase in
product net sales, combined with the 3.4 percentage point increase in gross
margin percentage from 1998 to 1999. Such increases were partially offset by the
increase in selling, general and administrative expenses of $67.8 million or
0.7% of product net sales in 1999 compared to 1998, and by the increase in
research and development expenses of $43.0 million or 2.1% of product net sales
in 1999 compared to 1998.
Operating income and the operating income percentage, excluding special
charges in 1998, increased by $68.6 million from $149.0 million or 13.1% of
product net sales in 1997 to $217.6 million or 17.2% of product net sales in
1998. Such increases were the result of the $123.7 million or 11% increase in
product net sales, combined with the 2.8 percentage point increase in gross
margin percentage from 1997 to 1998. Such increases were partially offset by the
increase in selling, general and administrative expenses of $54.9 million or
0.4% of product net sales in 1998 compared to 1997.
The following table presents operating income by geographic operating
segment:
<TABLE>
<CAPTION>
OPERATING INCOME (LOSS)
-----------------------------
1999 1998 1997
------- ------- -------
(IN MILLIONS)
<S> <C> <C> <C>
United States......................................... $ 264.3 $ 301.8 $ 244.7
Europe................................................ 113.4 34.1 52.5
Asia Pacific.......................................... 24.1 10.6 20.7
Other................................................. 29.2 17.8 22.2
------- ------- -------
Segments total........................................ 431.0 364.3 340.1
Manufacturing operations.............................. 124.8 46.6 17.6
Research and development.............................. (168.4) (125.4) (131.2)
Research services margin.............................. 3.0 2.3 0.6
Restructuring (charge) credit......................... 9.6 (74.8) --
Asset (write-offs) credit............................. 1.4 (58.5) --
Elimination of inter-company profit................... (180.5) -- --
Contribution to ASTI.................................. -- (171.4) --
General corporate..................................... 42.6 (70.2) (78.1)
------- ------- -------
Operating income (loss)............................... $ 263.5 $ (87.1) $ 149.0
======= ======= =======
</TABLE>
The Company operates in Regions or geographic operating segments. United
States information is presented separately as it is the Company's headquarters
country, and U.S. sales represented 48.1%, 46.2% and 42.8% of total product net
sales in 1999, 1998 and 1997, 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.
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 and 1997,
corporate costs include significant administrative costs applicable to United
States operations that are not charged to the U.S. region. Special charges in
1998 for restructuring and asset write-offs, the reduction of such costs in
1999, and the contribution to ASTI in 1998 are also considered corporate costs.
Operating income attributable to each operating segment is based upon the
management assignment of costs to such regions. Beginning in October 1996, the
Company has been converting its various local accounting systems to a single
worldwide system. By early 1999, the Company had converted a majority of its
businesses to the new system. The new worldwide accounting system allows the
Company to determine operating income for each operating segment using a cost of
sales amount which includes the manufacturing standard cost of goods produced by
the Company's manufacturing operations (or the cost to acquire goods
A-9
<PAGE> 42
from third parties), freight, duty and local distribution costs, and royalties.
As this basis for assignment of costs is a significantly more effective method
for measuring segment performance, the Company adopted this cost assignment
method in 1999. In addition, in 1999, operating income for all operating
segments and manufacturing operations also included a charge for corporate
services and asset utilization. Such change permits management to better measure
segment performance by including a cost of capital in the determination of
operating income for each segment. In 1998 and 1997, cost of sales in most
segments outside the United States includes the cost of goods produced by the
Company's manufacturing operations at the transfer price charged to the
distribution operation by the manufacturing location. It is impracticable to
restate operating income amounts for 1998 and 1997 using the 1999 methodology.
Operating income by geographic segment in 1999 differs from 1998 results
primarily as a result of the changes in methods of measurement of results in
1999 discussed above. As it is impracticable to restate operating income amounts
for 1998 and 1997 using the 1999 methodology, the Company is unable to provide
an analysis of the changes in operating income from 1998 to 1999 as such amounts
were determined under two different methods of measurement.
Operating income in the United States increased by $57.1 million, or 23%,
from $244.7 million in 1997 to $301.8 million in 1998. Such increase was
primarily the result of the 20% increase in United States net sales in 1998.
Operating income in the Europe segment decreased by $18.4 million, or 35%, in
1998 compared to 1997. Such decrease was primarily the result of a decrease in
gross margin based on changes in intercompany transfer prices and an increase in
marketing and selling expenses. Operating income in the Asia Pacific segment
decreased by $10.1 million, or 49%, in 1998 compared to 1997. Such decrease was
primarily the result of a decrease in gross margin based on changes in
intercompany transfer prices from 1997 to 1998. Operating income in the Other
geographic segment decreased by $4.4 million, or 20%, in 1998 compared to 1997
primarily as a result of an increase in marketing and selling expenses.
Operating income from Manufacturing Operations increased by $29.0 million, or
165%, in 1998 compared to 1997, primarily as a result of an increase in gross
margins from intercompany sales to other geographic segments at intercompany
transfer prices.
Net Earnings
Net earnings were $188.2 million in 1999 compared to a net loss of $90.2
million in 1998. The 1998 results include the charge related to the dividend of
ASTI stock of $171.4 million, the restructuring charge of $50.9 million net of
income taxes, and asset write-offs of $41.1 million net of income taxes.
Excluding the charge related to the dividend of ASTI stock and the after tax
effect of special charges, net earnings were $173.2 million in 1998. The
increase in 1999 of $15.0 million from the adjusted net earnings amount of
$173.2 million in 1998 to $188.2 million in net earnings in 1999 was the result
of the increase in operating income offset by a decrease in gain on investments.
The Company recorded a net loss of $90.2 million in 1998 compared to net
earnings of $128.3 million in 1997. The 1998 results include the charge related
to the dividend of ASTI stock of $171.4 million, the restructuring charge of
$50.9 million net of income taxes, and asset write-offs of $41.1 million net of
income taxes. Excluding the charge related to the dividend of ASTI stock and the
after tax effect of the restructuring charge and asset write-offs, net earnings
were $173.2 million compared to $128.3 million in 1997. The $44.9 million
increase in net earnings in 1998, excluding the effect of the items noted, is
the result of the $68.6 million increase in operating income excluding such
items, and an increase in non-operating income of $21.3 million, offset by an
increase in income taxes of $45.1 million. The increase in non-operating income
includes gains on sales of investments in Ocular Sciences, Inc. (OSI) of $51.8
million in 1998 compared to gains of $12.4 million in 1997, and a gain on sale
of Ligand stock of $6.1 million. Such increases were offset by a charge of $11.0
million for the contribution of OSI stock to The Allergan Foundation, and a
charge of $3.8 million to recognize the permanent impairment in value of certain
other investments. Interest expense increased by $7.5 million in 1998 primarily
as a result of an increase in debt resulting from the $200 million contribution
to ASTI. Income taxes increased in 1998 as a result of the increase in income
before income taxes excluding the effects of the special charges discussed
above. In addition, income taxes in 1997 were reduced by a $16.5 million tax
benefit resulting from the termination of ALRT.
A-10
<PAGE> 43
LIQUIDITY AND CAPITAL RESOURCES
Management assesses the Company's liquidity by its ability to generate cash
to fund its operations. Significant factors in the management of liquidity are:
funds generated by operations; levels of accounts receivable, inventories,
accounts payable and capital expenditures; the extent of the Company's stock
repurchase program; adequate lines of credit; and financial flexibility to
attract long-term capital on satisfactory terms.
Historically, the Company has generated cash from operations in excess of
working capital requirements. The net cash provided by operating activities was
$254.3 in 1999, compared to $52.7 million in 1998 and $209.8 million in 1997.
Operating cash flow in 1998 was reduced by the contribution to ASTI of $171.4
million. Excluding such contribution, operating cash flow was $224.1 million.
Operating cash flow increased in 1999 compared to 1998 primarily as a result of
the increase in net earnings from 1998 to 1999, excluding the effect of the
contribution to ASTI in 1998. Operating cash flow in 1998 was also reduced by an
increase in accounts receivable balances, and increased by a decrease in
inventory and an increase in accrued liabilities.
Net cash used in investing activities was $53.0 million in 1999 including
$63.3 million in expenditures for plant and equipment more fully described under
"Capital Expenditures" below, and $21.0 million to acquire software. Such
expenditures in 1999 were offset by $33.8 million in proceeds from sale of
investments. Net cash used in investing activities was $11.8 million in 1998
including $50.6 million in expenditures for plant and equipment, and $24.9
million to acquire software. Such expenditures in 1998 were offset by $57.0
million in proceeds from sale of investments. Net cash used in investing
activities was $83.9 million in 1997 including $64.4 million in expenditures for
property, plant and equipment, and $17.4 million to acquire software.
Expenditures in 1997 were partially offset by proceeds from sales of investments
and other assets.
Net cash used in financing activities was $213.4 million in 1999, composed
primarily of $37.0 million for payment of dividends, $225.3 million for
purchases of treasury stock, and $2.7 million in repayments of long-term debt.
Cash was provided by $22.8 million in long-term debt borrowings and $28.8
million from sale of stock to employees. Net cash used in financing activities
was $35.9 million in 1998, composed primarily of $33.8 million for payment of
dividends, $32.9 million for purchases of treasury stock, $37.0 million in net
repayments of debt including notes payable, commercial paper, and long-term
debt, and $28.6 million representing the portion of the $200 million
contribution to ASTI not charged to operations in 1998. Cash was provided by
$60.4 million in long-term debt borrowings and $36.0 million from sale of stock
to employees. Net cash used in financing activities was $54.5 million in 1997,
composed primarily of $33.4 million for payment of dividends, $34.0 million for
purchases of treasury stock and $37.6 million in net repayments of debt
including notes payable and long-term debt. Cash was provided by $31.9 million
in net borrowings under commercial paper obligations and long-term debt, and
$18.6 million in proceeds from sales of stock to employees.
As of December 31, 1999, the Company had long-term credit facilities and a
medium term note program. The credit facilities allow for borrowings of up to
$36.2 million through 2000, $65.6 million through 2001, $14.7 million through
2002, and $277.5 million through 2003. The note program allows the Company to
issue up to an additional $60 million in notes on a non-revolving basis.
Borrowings under the credit facilities are subject to certain financial and
operating covenants, including a requirement that the Company maintain certain
financial ratios and other customary covenants for credit facilities of similar
kind. As of December 31, 1999, the Company had $123.5 million in borrowings
under certain of the credit facilities, $89.0 million under the note program,
and commercial paper borrowings of $47.1 million. As of December 31, 1999, the
Company classified $48.5 million of its commercial paper borrowings and other
debt as long-term debt based upon the Company's ability to refinance such debt
on a long-term basis under terms of the credit facilities described above.
A substantial portion of the Company's existing cash and equivalents are
held by non-U.S. subsidiaries. These funds are planned to be utilized in the
Company's operations outside the United States. The Company has approximately
$451.5 million in unremitted earnings outside the United States for which
withholding and U.S. taxes have not been provided. Tax costs could be incurred
if these funds were remitted to the United States.
A-11
<PAGE> 44
The Company believes that the net cash provided by operating activities,
supplemented as necessary with borrowings available under the Company's existing
credit facilities, will provide it with sufficient resources to meet working
capital requirements, debt service and other cash needs over the next year. The
Company believes it will spend approximately $12.3 million on accrued
restructuring costs during 2000 and 2001.
The Company has the right to acquire all of the outstanding Class A Common
Stock of ASTI at any time from ASTI's inception until the 90th day after which
the Company has received notice that the amount of cash and marketable
securities held by ASTI is less than $15 million. ASTI announced in January 2000
that it expects to have expended all available funds by the middle of calendar
year 2001. Assuming that ASTI's forecast is reasonably accurate and Allergan
chooses to exercise its right to purchase the shares of ASTI, the purchase price
would be the greater of (i) $60 million, (ii) the fair market value of 1,000,000
shares of Allergan Common Stock on the date Allergan exercises its option to
purchase ASTI, or (iii) $250 million less the amount of fees previously paid to
Allergan by ASTI and research and development costs paid or incurred by ASTI.
Capital Expenditures
Expenditures for property, plant and equipment totaled $63.3 million for
1999, $50.6 million for 1998 and $64.4 million for 1997. Expenditures in 1999
include expansion of manufacturing facilities and a variety of other projects
designed to improve productivity. The Company expects to invest $65.0 million to
$75.0 million in property, plant and equipment in 2000.
Inflation
Although at reduced levels in recent years, inflation continues to apply
upward pressure on the cost of goods and services used by the Company. The
competitive and regulatory environments in many markets substantially limit the
Company's ability to fully recover these higher costs through increased selling
prices. The Company continually seeks to mitigate the adverse effects of
inflation through cost containment and improved productivity and manufacturing
processes.
Foreign Currency Fluctuations
Approximately 52% of the Company's revenues in 1999 were derived from
operations outside the U.S., and a portion of the Company's international cost
structure is denominated in currencies other than the U.S. dollar. As a result,
the Company is subject to fluctuations in sales and earnings reported in U.S.
dollars as a result of changing currency exchange rates. The Company routinely
monitors its transaction exposure to currency rates and implements certain
hedging strategies to limit such exposure, as appropriate. The impact of foreign
currency fluctuations on the Company's sales was as follows: a $34.6 million
decrease in 1999, a $27.8 million decrease in 1998 and a $46.0 million decrease
in 1997. The 1999 sales decrease included decreases of $37.4 million related to
the Brazilian Real and $15.0 million related to European currencies, offset by
an $18.6 million increase related to the Japanese Yen. The 1998 sales decrease
included decreases of $8.4 million related to European currencies and $8.5
million related to the Japanese Yen. The 1997 sales decrease included decreases
of $31.3 million related to European currencies and $9.7 million related to the
Japanese Yen. See Note 1 to the Consolidated Financial Statements relative to
the Company's accounting policy on foreign currency translation.
In the normal course of business, operations of the Company are exposed to
risks associated with fluctuations in currency exchange rates and interest
rates. The Company addresses these risks through controlled risk management that
includes the use of derivative financial instruments to hedge or reduce these
exposures. The Company does not enter into financial instruments for trading or
speculative purposes. See Note 11 to the Consolidated Financial Statements for
activities relating to foreign currency and interest rate risk management.
A-12
<PAGE> 45
QUANTITATIVE AND QUALITATIVE MARKET RISK FACTORS
In the normal course of business, operations of the Company are exposed to
risks associated with fluctuations in interest rates and foreign currency
exchange rates. The Company addresses these risks through controlled risk
management that includes the use of derivative financial instruments to hedge or
reduce these exposures. The Company does not enter into financial instruments
for trading or speculative purposes.
To ensure the adequacy and effectiveness of the Company's interest rate and
foreign exchange hedge positions, the Company continually monitors its interest
rate swap positions and foreign exchange forward and option positions both on a
stand-alone basis and in conjunction with its underlying interest rate and
foreign currency exposures, respectively, from an accounting and economic
perspective. However, given the inherent limitations of forecasting and the
anticipatory nature of the exposures intended to be hedged, there can be no
assurance that such programs will offset more than a portion of the adverse
financial impact resulting from unfavorable movements in either interest or
foreign exchange rates. In addition, the timing of the accounting for
recognition of gains and losses related to mark-to-market instruments for any
given period may not coincide with the timing of gains and losses related to the
underlying economic exposures and, therefore, may adversely affect the Company's
consolidated operating results and financial position.
Interest Rate Risk
The Company's interest income and expense is more sensitive to fluctuations
in the general level of U.S. and Japan interest rates than to changes in rates
in other markets. 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 result
from the Company's long-term debt obligations and related derivative financial
instruments. The Company enters into interest rate swap agreements to reduce the
impact of interest rate changes on its floating rate long-term debt. These
derivative financial instruments allow the Company to make long-term borrowings
at floating rates and then swap them into fixed rates that are anticipated to be
lower than those available to the Company if fixed-rate borrowings were made
directly.
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.
A-13
<PAGE> 46
The table below presents information about certain of the Company's
investment portfolio and its debt obligations for the years ended December 31,
1999 and 1998:
<TABLE>
<CAPTION>
DECEMBER 31, 1999
------------------------------------------------------------------------------------
MATURING IN
------------------------------------------------------------ FAIR MARKET
2000 2001 2002 2003 2004 THEREAFTER TOTAL VALUE
------- ------- ------ ------ ----- ---------- ------- -----------
(IN MILLIONS, EXCEPT INTEREST RATES)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Cash equivalents:
Repurchase Agreements............ $ 55.8 -- -- -- -- -- $ 55.8 $ 55.8
Weighted Average Interest Rate... 5.86% -- -- -- -- -- 5.86%
Foreign Time Deposits............ 36.7 -- -- -- -- -- 36.7 36.7
Weighted Average Interest Rate... 7.61% -- -- -- -- -- 7.61%
Commercial Paper................. 8.4 -- -- -- -- -- 8.4 8.4
Weighted Average Interest Rate... 5.10% -- -- -- -- -- 5.10%
Corporate Bonds.................. 2.0 -- -- -- -- -- 2.0 2.0
Weighted Average Interest Rate... 6.75% -- -- -- -- -- 6.75%
Total cash equivalents........... $ 102.9 -- -- -- -- -- $ 102.9 $102.9
Weighted Average Interest Rate... 6.44% -- -- -- -- -- 6.44%
LIABILITIES
Debt Obligations:
Fixed Rate ($US)................. $ 25.0 $ 14.0 $ 20.0 $ 30.0 -- -- $ 89.0 $ 88.8
Weighted Average Interest Rate... 6.01% 6.83% 6.92% 6.22% -- -- 6.41%
Fixed Rate (JPY)................. -- -- -- 24.5 -- -- 24.5 24.5
Weighted Average Interest Rate... -- -- -- 3.55% -- -- 3.55%
Other Fixed Rate (non-US$)....... -- 1.7 1.0 0.3 -- -- 3.0 3.0
Weighted Average Interest Rate... -- 13.50% 13.50% 13.50% -- -- 13.50%
Variable Rate ($US).............. 2.6 50.9 3.0 1.9 -- -- 58.4 58.4
Weighted Average Interest Rate... 5.29% 6.58% 5.29% 5.29% -- -- 6.42%
Variable Rate (JPY).............. 43.1 44.1 14.7 -- -- -- 101.9 101.9
Weighted Average Interest Rate... 1.05% 0.85% 1.02% -- -- -- 0.96%
Other Variable Rate (non-US$).... 14.6 0.7 0.7 0.7 0.6 -- 17.3 17.3
Weighted Average Interest Rate... 7.50% 5.10% 5.10% 5.10% 5.10% 7.12%
Total Debt Obligations........... $ 85.3 $ 111.4 $ 39.4 $ 57.4 $ 0.6 $ 294.1 $293.9
Weighted Average Interest Rate... 3.74% 4.45% 4.73% 5.07% 5.10% 4.40%
INTEREST RATE DERIVATIVES
Interest Rate Swaps:
Variable to fixed ($US).......... $ 10.0 -- -- -- -- -- $ 10.0 --
Average Pay Rate................. 7.00% -- -- -- -- -- 7.00%
Average Receive Rate............. 6.19% -- -- -- -- -- 6.19%
Variable to fixed (JPY).......... -- $ 44.1 -- -- -- -- $ 44.1 $ (0.4)
Average Pay Rate................. -- 0.86% -- -- -- -- 0.86%
Average Receive Rate............. -- 0.29% -- -- -- -- 0.29%
</TABLE>
A-14
<PAGE> 47
<TABLE>
<CAPTION>
DECEMBER 31, 1998
------------------------------------------------------------------------------------
MATURING IN
------------------------------------------------------------ FAIR MARKET
1999 2000 2001 2002 2003 THEREAFTER TOTAL VALUE
------- ------ ------ ------ ------ ---------- ------- -----------
(IN MILLIONS, EXCEPT INTEREST RATES)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Cash equivalents:
Repurchase Agreements............ $ 120.0 -- -- -- -- -- $ 120.0 $120.0
Weighted Average Interest Rate... 5.43% -- -- -- -- -- 5.43%
Foreign Time Deposits............ 31.7 -- -- -- -- -- 31.7 31.7
Weighted Average Interest Rate... 11.55% -- -- -- -- -- 11.55%
Total cash equivalents........... $ 151.7 -- -- -- -- -- $ 151.7 $151.7
Weighted Average Interest Rate... 6.71% -- -- -- -- -- 6.71%
LIABILITIES
Debt Obligations:
Fixed Rate ($US)................. -- $ 25.0 $ 14.0 $ 20.0 $ 30.0 -- $ 89.0 $ 90.9
Weighted Average Interest Rate... -- 6.01% 6.83% 6.92% 6.22% -- 6.41%
Fixed Rate (JPY)................. -- -- -- -- 20.3 -- 20.3 20.3
Weighted Average Interest Rate... -- -- -- -- 3.55% -- 3.55%
Variable Rate ($US).............. 32.4 12.7 3.1 3.0 2.1 -- 53.3 53.3
Weighted Average Interest Rate... 6.76% 6.38% 4.59% 4.44% 4.44% -- 6.32%
Variable Rate (JPY).............. 5.8 30.1 36.5 -- -- -- 72.4 72.4
Weighted Average Interest Rate... 0.88% 0.63% 1.28% -- -- -- 0.98%
Other Variable Rate (non-US$).... 10.3 0.9 0.9 0.9 0.9 0.7 14.6 14.6
Weighted Average Interest Rate... 8.43% 5.10% 5.10% 5.10% 5.10% 5.10% 7.50%
Total Debt Obligations........... $ 48.5 $ 68.7 $ 54.5 $ 23.9 $ 53.3 $0.7 $ 249.6 $251.5
Weighted Average Interest Rate... 6.42% 3.71% 2.95% 6.54% 5.11% 5.10% 4.65%
INTEREST RATE DERIVATIVES
Interest Rate Swaps:
Variable to fixed ($US).......... $ 30.0 $ 10.0 -- -- -- -- $ 40.0 $ (0.4)
Average Pay Rate................. 6.22% 7.00% -- -- -- -- 6.42%
Average Receive Rate............. 4.98% 5.22% -- -- -- -- 5.04%
</TABLE>
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 are
entered into to protect the value of intercompany borrowings denominated in
currencies other than the lender's functional currency. These forward contracts
qualify for hedge accounting treatment. As such, gains and losses recognized
upon settlement of the forward contracts offset losses and gains, respectively,
on the underlying intercompany receivables being hedged.
Probable but not firmly committed transactions comprise sales of the
Company's products and purchases of raw material in currencies other than the
U.S. Dollar. A majority of these sales are made through the Company's
subsidiaries in Europe, Asia (particularly Japan), Canada and Australia. The
Company purchases
A-15
<PAGE> 48
foreign exchange forward and option contracts to hedge the currency exchange
risks associated with these probable but not firmly committed transactions.
During 1999 and 1998, the Company also sold foreign exchange option contracts,
in order to partially finance the purchase of foreign exchange option contracts.
At December 31, 1999, all sold foreign exchange option contracts used to
partially finance the purchase option contracts had expired. 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.
All of the Company's purchased options are 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 contracts are recorded in
other current assets and amortized over the life of the option.
The following table provides information about the Company's foreign
currency derivative financial instruments outstanding as of December 31. The
information is provided in U.S. dollar amounts, as presented in the Company's
consolidated financial statements.
<TABLE>
<CAPTION>
1999 1998
------------------------------- -------------------------------
NOTIONAL AVERAGE CONTRACT NOTIONAL AVERAGE CONTRACT
AMOUNT RATE OR STRIKE AMOUNT RATE OR STRIKE
IN MILLIONS AMOUNT IN MILLIONS AMOUNT
----------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C>
Foreign currency forward
contracts:
(Receive $US/Pay Foreign
Currency)
Spanish Pesetas.............. $ 9.7 164.05 $ 8.7 141.05
Australian Dollars........... 8.7 0.64 7.7 0.65
German Marks................. 4.1 1.93 -- --
Italian Lira................. 4.9 1,907.40 2.4 1,640.40
Singapore Dollars............ -- -- 5.7 1.62
French Francs................ 2.4 6.46 5.0 5.57
Miscellaneous other
currencies................ 5.1 n/a 2.8 n/a
----- -----
Total currency
forward
contracts.......... $34.9 $32.3
Estimated fair value........... $(0.2) $ 0.5
</TABLE>
<TABLE>
<CAPTION>
1999 1998
------------------------------- -------------------------------
NOTIONAL AVERAGE CONTRACT NOTIONAL AVERAGE CONTRACT
AMOUNT RATE OR STRIKE AMOUNT RATE OR STRIKE
IN MILLIONS AMOUNT IN MILLIONS AMOUNT
----------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C>
Foreign currency purchased put
options:
Japanese Yen................. $38.6 100.98 $43.6 130.84
Estimated fair value........... $ 1.2 $ 0.6
Foreign currency sold call
options:
Japanese Yen................. $ -- -- $44.7 127.65
Estimated fair value........... $ -- -- $(7.4)
</TABLE>
YEAR 2000
The Company has experienced no material disruption in the operation of its
business as a result of the transition from 1999 to 2000. 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 spent less than
$1 million in non-SAP out of pocket expenses through December 31, 1999 to
address the year 2000 issue. The Company continues to monitor the year 2000
issue. It is possible that year 2000 problems (or leap year issues) may become
evident as the year progresses. Such issues 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.
A-16
<PAGE> 49
FORWARD LOOKING STATEMENTS
Safe Harbor Statement Under the Private Securities Litigation Reform Act of
1995
Certain disclosures made by the Company in this report and in other reports
and statements released by the Company are and will be forward-looking in
nature, such as comments which express the Company's opinions about trends and
factors which may impact future operating results. Disclosures that use words
such as the Company "believes," "anticipates," "expects" and similar expressions
are intended to identify forward looking statements. Such statements are subject
to certain risks and uncertainties which could cause actual results to differ
materially from expectations. Any such forward-looking statements, whether made
in this report or elsewhere, should be considered in context with the Company's
disclosures about its businesses made in the Company's press releases and in the
Company's Annual Report on Form 10-K and other reports filed with the Securities
and Exchange Commission.
A-17
<PAGE> 50
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1999 1998
-------- --------
IN MILLIONS,
EXCEPT SHARE DATA
<S> <C> <C>
Current assets
Cash and equivalents...................................... $ 162.9 $ 181.6
Trade receivables, net.................................... 253.2 226.1
Inventories............................................... 130.7 123.3
Other current assets...................................... 150.7 130.2
-------- --------
Total current assets.............................. 697.5 661.2
Investments and other assets................................ 160.8 179.2
Property, plant and equipment, net.......................... 330.3 324.9
Goodwill and intangibles, net............................... 150.5 169.1
-------- --------
Total assets...................................... $1,339.1 $1,334.4
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes payable............................................. $ 85.3 $ 48.5
Accounts payable.......................................... 80.5 67.0
Accrued compensation...................................... 52.3 64.8
Other accrued expenses.................................... 118.4 148.8
Income taxes.............................................. 83.4 39.4
-------- --------
Total current liabilities......................... 419.9 368.5
Long-term debt.............................................. 208.8 201.1
Other liabilities........................................... 75.8 68.8
Commitments and contingencies
Minority interest........................................... 0.1 --
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 134,255,000 and 67,133,000 shares....... 1.3 0.7
Additional paid-in capital................................ 245.5 223.0
Accumulated other comprehensive loss...................... (49.3) (4.3)
Retained earnings......................................... 651.1 516.3
-------- --------
848.6 735.7
Less treasury stock, at cost (4,436,000 and 1,016,000
shares)................................................ (214.1) (39.7)
-------- --------
Total stockholders' equity........................ 634.5 696.0
-------- --------
Total liabilities and stockholders' equity........ $1,339.1 $1,334.4
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
A-18
<PAGE> 51
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1999 1998 1997
--------- --------- ---------
IN MILLIONS, EXCEPT PER SHARE DATA
<S> <C> <C> <C>
Product sales
Net sales................................................... $1,406.2 $1,261.7 $1,138.0
Cost of sales............................................... 406.4 407.0 399.3
-------- -------- --------
Product gross margin...................................... 999.8 854.7 738.7
-------- -------- --------
Research services
Research service revenues, primarily from related parties... 46.2 34.4 11.0
Cost of research services................................... 43.3 32.1 10.4
-------- -------- --------
Research services margin.................................. 2.9 2.3 0.6
-------- -------- --------
Selling, general and administrative......................... 587.9 525.2 459.1
Technology fees from related party.......................... (6.1) (11.2) --
Research & development...................................... 168.4 125.4 131.2
Restructuring charges (credit).............................. (9.6) 74.8 --
Asset write-offs (credit)................................... (1.4) 58.5 --
Contribution to ASTI........................................ -- 171.4 --
-------- -------- --------
Operating income (loss)..................................... 263.5 (87.1) 149.0
Interest income............................................. 14.3 11.7 8.9
Interest expense............................................ (15.1) (16.4) (8.9)
Gain on investments, net.................................... 14.0 54.1 12.4
Contribution to Allergan Foundation......................... (6.9) (11.0) --
Other, net.................................................. (0.8) (9.0) (4.3)
-------- -------- --------
Earnings (loss) before income taxes and minority interest... 269.0 (57.7) 157.1
Provision for income taxes.................................. 80.7 32.8 29.0
Minority interest........................................... 0.1 (0.3) (0.2)
-------- -------- --------
Net earnings (loss)......................................... $ 188.2 $ (90.2) $ 128.3
======== ======== ========
Basic earnings (loss) per common share...................... $ 1.42 $ (0.69) $ 0.98
======== ======== ========
Diluted earnings (loss) per common share.................... $ 1.39 $ (0.69) $ 0.97
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
A-19
<PAGE> 52
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL UNEARNED OTHER TREASURY STOCK
------------------ PAID-IN COMPEN- COMPREHENSIVE RETAINED ----------------
SHARES PAR VALUE CAPITAL SATION INCOME (LOSS) EARNINGS SHARES AMOUNT TOTAL
------ --------- ---------- -------- ------------- -------- ------ ------- -------
IN MILLIONS
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance December 31, 1996...... 67.2 $0.7 $227.7 $(22.1) $ 7.1 $574.8 (1.7) $ (38.4) $ 749.8
Comprehensive income
Net earnings................. 128.3 128.3
Other comprehensive income,
net of tax.................
Foreign currency translation
adjustments................
Unrealized gains on
investments................
Other comprehensive income... 4.6 4.6
Comprehensive income...
Dividends ($0.52 per share).... (33.8) (33.8)
Stock options exercised........ 1.0 0.1 0.8 18.3 19.4
Activity under other stock
plans........................ (1.0) (1.3) 1.5 0.2 4.2 3.4
Adjustment in reporting of
subsidiaries................. (0.1) (0.1)
Purchases of treasury stock.... (1.2) (34.0) (34.0)
Expense of compensation
plans........................ 3.8 3.8
----- ---- ------ ------ ------ ------ ---- ------- -------
Balance December 31, 1997...... 67.2 0.7 227.7 (19.6) 11.7 670.8 (1.9) (49.9) 841.4
Comprehensive loss
Net loss..................... (90.2) (90.2)
Other comprehensive income,
net of tax.................
Foreign currency translation
adjustments................
Unrealized losses on
investments................
Other comprehensive loss..... (16.0) (16.0)
Comprehensive loss.....
Dividends ($0.52 per share).... (34.1) (34.1)
Dividend of ASTI stock......... (28.6) (28.6)
Stock options exercised........ 12.7 (2.9) 1.5 39.2 49.0
Activity under other stock
plans........................ (0.1) (1.1) (1.1) 2.2 0.2 3.9 3.9
Adjustment in reporting of
subsidiaries................. (0.9) (0.9)
Purchases of treasury stock.... (0.8) (32.9) (32.9)
Expense of compensation
plans........................ 4.4 4.4
----- ---- ------ ------ ------ ------ ---- ------- -------
Balance December 31, 1998...... 67.1 0.7 239.3 (16.3) (4.3) 516.3 (1.0) (39.7) 696.0
----- ---- ------ ------ ------ ------ ---- ------- -------
Comprehensive income
Net earnings................. 188.2 188.2
Other comprehensive loss, net
of tax.....................
Foreign currency translation
adjustments................
Unrealized loss on
investments................
Other comprehensive loss..... (45.0) (45.0)
Comprehensive income...
Two for one stock split
effected as a dividend (Note
2)........................... 67.2 0.6 (0.6) (1.0)
Dividends ($0.28 per share).... (37.0) (37.0)
Stock options exercised........ 22.2 (17.8) 1.0 46.6 51.0
Activity under other stock
plans........................ (0.1) (5.4) 4.5 1.3 4.3 3.3
Adjustment in reporting of
subsidiaries................. (2.5) (2.5)
Purchase of treasury stock..... (4.7) (225.3) (225.3)
Expense of compensation
plans........................ 5.8 5.8
----- ---- ------ ------ ------ ------ ---- ------- -------
Balance December 31, 1999...... 134.3 $1.3 $261.4 $(15.9) $(49.3) $651.1 (4.4) $(214.1) $ 634.5
===== ==== ====== ====== ====== ====== ==== ======= =======
<CAPTION>
COMPREHENSIVE
INCOME (LOSS)
-------------
IN MILLIONS
<S> <C>
Balance December 31, 1996......
Comprehensive income
Net earnings................. 128.3
Other comprehensive income,
net of tax.................
Foreign currency translation
adjustments................ (9.0)
Unrealized gains on
investments................ 13.6
-------
Other comprehensive income... 4.6
-------
Comprehensive income... $ 132.9
=======
Dividends ($0.52 per share)....
Stock options exercised........
Activity under other stock
plans........................
Adjustment in reporting of
subsidiaries.................
Purchases of treasury stock....
Expense of compensation
plans........................
Balance December 31, 1997......
Comprehensive loss
Net loss..................... (90.2)
Other comprehensive income,
net of tax.................
Foreign currency translation
adjustments................ (2.1)
Unrealized losses on
investments................ (13.9)
-------
Other comprehensive loss..... (16.0)
-------
Comprehensive loss..... $(106.2)
=======
Dividends ($0.52 per share)....
Dividend of ASTI stock.........
Stock options exercised........
Activity under other stock
plans........................
Adjustment in reporting of
subsidiaries.................
Purchases of treasury stock....
Expense of compensation
plans........................
Balance December 31, 1998......
Comprehensive income
Net earnings................. 188.2
Other comprehensive loss, net
of tax.....................
Foreign currency translation
adjustments................ (42.1)
Unrealized loss on
investments................ (2.9)
-------
Other comprehensive loss..... (45.0)
-------
Comprehensive income... $ 143.2
=======
Two for one stock split
effected as a dividend (Note
2)...........................
Dividends ($0.28 per share)....
Stock options exercised........
Activity under other stock
plans........................
Adjustment in reporting of
subsidiaries.................
Purchase of treasury stock.....
Expense of compensation
plans........................
Balance December 31, 1999......
</TABLE>
See accompanying notes to consolidated financial statements.
A-20
<PAGE> 53
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1999 1998 1997
------- ------ ------
IN MILLIONS
<S> <C> <C> <C>
Cash flows provided by operating activities
Net earnings (loss)......................................... $ 188.2 $(90.2) $128.3
Non-cash items included in net earnings (loss)
Depreciation and amortization............................. 73.8 76.5 68.8
Amortization of prepaid royalties......................... 8.6 10.3 11.0
Deferred income taxes..................................... (7.1) (40.4) (7.1)
Gain on sale of investments, net.......................... (14.0) (54.1) (12.4)
Contribution to Allergan Foundation....................... 6.9 11.0 --
Loss (gain) on sale of assets............................. (0.2) 4.3 2.2
Expense of compensation plans............................. 10.0 8.1 7.2
Minority interest......................................... 0.1 (0.3) (0.2)
Restructuring charge (credit)............................. (9.6) 74.8 --
Asset write-offs (credit)................................. (1.4) 58.5 --
Adjustment in reporting of foreign subsidiaries........... (2.5) (0.9) (0.1)
Changes in assets and liabilities
Trade receivables......................................... (31.8) (40.1) 44.4
Inventories............................................... (6.9) 18.8 (18.7)
Accounts payable.......................................... 11.2 (15.8) 9.0
Income taxes.............................................. 66.3 9.7 (12.8)
Accrued liabilities....................................... (27.9) 37.3 (3.6)
Other..................................................... (9.4) (14.8) (6.2)
------- ------ ------
Net cash provided by operating activities............. 254.3 52.7 209.8
------- ------ ------
Cash flows from investing activities
Additions to property, plant and equipment.................. (63.3) (50.6) (64.4)
Proceeds from sale of property, plant and equipment......... 13.7 8.8 10.4
Proceeds from sale of investments........................... 33.8 57.0 12.4
Other, net.................................................. (37.2) (27.0) (42.3)
------- ------ ------
Net cash used in investing activities................. (53.0) (11.8) (83.9)
------- ------ ------
Cash flows from financing activities
Dividends to stockholders................................... (37.0) (33.8) (33.4)
ASTI dividend............................................... -- (28.6) --
Increase (decrease) in notes payable........................ 0.6 (32.9) (35.0)
Sale of stock to employees.................................. 28.8 36.0 18.6
Net borrowings (repayments) under commercial paper
obligations............................................... 4.5 (1.1) 25.6
Long-term debt borrowings................................... 17.7 60.4 6.3
Repayments of long-term debt................................ (2.7) (3.0) (2.6)
Payments to acquire treasury stock.......................... (225.3) (32.9) (34.0)
------- ------ ------
Net cash used in financing activities................. (213.4) (35.9) (54.5)
Effect of exchange rates on cash and equivalents............ (6.6) (4.3) (2.5)
------- ------ ------
Net increase (decrease) in cash and equivalents............. (18.7) 0.7 68.9
Cash and equivalents at beginning of year................... 181.6 180.9 112.0
------- ------ ------
Cash and equivalents at end of year......................... $ 162.9 $181.6 $180.9
======= ====== ======
Supplemental disclosure of cash flow information
Cash paid during the year for
Interest (net of amount capitalized)...................... $ 13.4 $ 14.3 $ 13.5
======= ====== ======
Income taxes.............................................. $ 33.2 $ 65.8 $ 46.1
======= ====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
A-21
<PAGE> 54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements include the accounts of Allergan,
Inc. and all of its subsidiaries. All significant transactions among the
consolidated entities have been eliminated from the financial statements.
Beginning in fiscal 1997, the Company began converting the financial
systems in its significant non-U.S. subsidiaries. At the time of conversion, the
results of such operations were converted to be accounted for on a calendar year
basis. Prior to December 31, 1999, a majority of non-U.S. subsidiaries were
included on the basis of their fiscal years ended November 30. Subsidiaries
which underwent conversion in 1999, 1998 and 1997 had revenues of $19.2 million,
$1.3 million, and $4.8 million, respectively, and net losses of $2.5 million,
$0.9 million, and $0.1 million, respectively, for the month of activity not
included. Activities not included in operating results were recorded as
adjustments to retained earnings.
Two foreign subsidiaries remain which account for results on the basis of
their fiscal years ended November 30. The aggregate sales and earnings of these
two subsidiaries represent less than 1% of total consolidated sales and earnings
for the year ended December 31, 1999.
Use of Estimates
The financial statements have been prepared in conformity with generally
accepted accounting principles and, as such, include amounts based on informed
estimates and judgments of management. Actual results could differ from those
estimates.
Foreign Currency Translation
The financial position and results of operations of the Company's foreign
subsidiaries are generally determined using local currency as the functional
currency. Assets and liabilities of these subsidiaries are translated at the
exchange rate in effect at each year-end. Income statement accounts are
translated at the average rate of exchange prevailing during the year.
Translation adjustments arising from the use of differing exchange rates from
period to period are included in accumulated other comprehensive income (loss)
in stockholders' equity. Gains and losses resulting from foreign currency
transactions and translation adjustments relating to foreign entities deemed to
be operating in U.S. dollar functional currency in highly inflationary economies
are included in earnings. Foreign currency transaction and translation losses
totaled $1.4 million in 1999, $9.7 million in 1998 and $5.6 million in 1997.
Cash and Equivalents
The Company considers cash and equivalents to include cash in banks and
deposits with financial institutions which can be liquidated without prior
notice or penalty.
Inventories
Inventories are valued at the lower of cost or market (net realizable
value). Cost is determined by the first-in, first-out method.
Long-Lived Assets
Property, plant and equipment are stated at cost. Additions, major renewals
and improvements are capitalized, while maintenance and repairs are expensed.
Upon disposition, the net book value of assets is relieved and resulting gains
or losses are reflected in earnings. For financial reporting purposes,
depreciation is generally provided on the straight-line method over the useful
life of the related asset. Accelerated depreciation methods are generally used
for income tax purposes.
Goodwill represents the excess of acquisition costs over the fair value of
net assets of purchased businesses and is being amortized on a straight-line
basis over periods from 7 to 30 years. Intangibles include
A-22
<PAGE> 55
patents, licensing agreements and marketing rights which are being amortized
over their estimated useful lives. Amortization expense was $17.6 million in
1999, $19.5 million in 1998 and $20.0 million in 1997.
Long-lived assets and certain identifiable intangibles are reviewed for
impairment in value based upon undiscounted future operating cash flows, and
appropriate losses are recognized and reflected in current earnings, whenever
the carrying amount of an asset exceeds its estimated fair value determined by
the use of appraisals, discounted cash flow analyses or comparable fair values
of similar assets.
Revenue Recognition
The Company recognizes revenue from product sales when the goods are
shipped to the customer. The Company generally permits returns of product from
any product line by any class of customer if such product is returned in a
timely manner, in good condition, from the normal channels of distribution.
Returns policies in certain international markets provide for more stringent
guidelines for returns in accordance with the terms of contractual agreements
with customers. Allowances for returns are provided for based upon an analysis
of the Company's historical patterns of returns matched against the sales from
which they originated. Historical product returns have been within the amounts
reserved. Intraocular lenses are the only product that is an exception to the
statements above. Intraocular lenses are generally sold on a consignment basis
and are, therefore, generally not subject to return. Revenue is recognized on
the ultimate sales of intraocular lenses.
Research service revenue is recognized and related costs are recorded as
services are performed under research service agreements. At such time, the
research service customers are obligated to pay, and such obligation is not
refundable.
The Company recognizes income from license fees based upon the facts and
circumstances of each licensing agreement. In general, the Company recognizes
income on signing of a license agreement that grants rights to products or
technology to a third party. Generally, the Company has no further obligation to
provide products or services to the third party after granting the license.
License fees are reported in selling, general and administrative expense in the
Consolidated Statements of Operations.
Stock-Based Compensation
The Company measures stock based compensation for option grants to
employees and members of the board of directors using a method which assumes
that options granted at market price at the date of grant have no intrinsic
value. Pro forma net income and earnings per share are presented in Note 10 as
if the fair value method had been applied.
New and Proposed Accounting Standards
In June 1998, Statement of Financial Accounting Standards No.
133 -- "Accounting for Derivative Instruments and Hedging Activities" (SFAS No.
133) was issued, 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 believes that implementation of SFAS No. 133 will have no material
impact on its financial statements.
In February 1999, the Financial Accounting Standards Board (FASB) released
a revised Exposure Draft of a Proposed Statement of Financial Accounting
Standards -- Consolidated Financial Statements: Purpose and Policy. If adopted
as an SFAS, the terms of this Exposure Draft could require the Company to
include the financial position and results of operations of Allergan Specialty
Therapeutics, Inc. (ASTI) in its consolidated results on a retrospective basis.
See Note 5 for a description of ASTI. The Company is currently evaluating the
effect of implementation of this proposed statement. In addition, in 1999 the
Emerging Issues Task Force of the FASB began deliberating Issue No. 99-16
relating to the appropriate methods of accounting for entities similar to ASTI.
Certain alternatives under consideration by the EITF would require the Company
to account for the activities of ASTI in the Company's Consolidated Financial
Statements.
A-23
<PAGE> 56
Income Taxes
The Company recognizes deferred tax assets and liabilities for temporary
differences between the financial reporting basis and the tax basis of the
Company's assets and liabilities and expected benefits of utilizing net
operating loss and credit carryforwards. The impact on deferred taxes of changes
in tax rates and laws, if any, are applied to the years during which temporary
differences are expected to be settled and reflected in the financial statements
in the period of enactment. No provision is made for taxes on unremitted
earnings of certain non-U.S. subsidiaries which are or will be reinvested
indefinitely in such operations.
NOTE 2: COMMON STOCK SPLIT
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 to stockholders of record
on November 18, 1999 and payable December 9, 1999. At December 31, 1999, this
stock split has been recorded by a transfer of $671,000 from retained earnings
to Common Stock, representing a $0.01 par value for each additional share
issued.
The number of common shares issued at December 9, 1999 after giving effect
to the split was 134,254,772 (67,127,386 before the split).
All share and per share data, including the Employee Stock Ownership Plan
and Incentive Compensation Plan information, is stated to reflect the split for
all periods presented except for the Consolidated Balance Sheet as of December
31, 1998 and the Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1997 and 1998.
NOTE 3: SPECIAL CHARGES
Results for 1998 include three special charges disclosed on specific lines
in the Consolidated Statements of Operations.
The Company recorded a charge of $171.4 million in March 1998 relating to
the dividend distribution of ASTI stock to the Company's stockholders. Such
amount represents the excess of the $200 million contributed to ASTI by the
Company over the aggregate market value of ASTI stock at the commencement of
trading as an independent company.
During 1998, the Company recorded a $74.8 million restructuring charge,
$50.9 million after taxes. The restructuring charge represented the costs of a
comprehensive plan to streamline operations and reduce costs through reductions
in global general and administrative (G&A) staff and the closure of five of ten
manufacturing facilities in connection with the outsourcing and consolidation of
manufacturing operations. In addition, operations in many countries were
transferred to distributors, and business activities were concentrated into
regional shared service centers. The changes in operations were expected to
result in a net workforce reduction of 695 positions over a three-year period.
The reductions in G&A staff and manufacturing facilities are primarily the
result of a strategic assessment of the Company's product lines and businesses
during the first quarter of 1998, and a review of the G&A cost structure and
manufacturing capabilities during the second and third quarters.
The restructuring charge was recorded primarily in the third quarter as
most restructuring activities were announced on September 14, 1998. Certain
restructuring activities in the first and second quarters totaling $7.8 million
were previously reported as operating expenses in prior quarters. Severance
payments were made to 323 terminated employees in 1999 and 141 terminated
employees in 1998 resulting in restructuring charge spending of $8.5 million and
$3.6 million, respectively.
In 1999, the Company determined that various restructuring activities were
completed for less cost than estimated in 1998, primarily as a result of lower
than anticipated severance costs. A total of 95 positions included in the 695
position reduction will not require severance payments as certain employees
terminated their employment prior to the date they would have qualified for
severance, and other employees transferred to unfilled positions in other areas.
As a result, the Company recorded a $3.8 million reduction in the restructuring
charge in 1999.
A-24
<PAGE> 57
The following table presents the restructuring activities through December
31, 1999 resulting from the 1998 restructuring charge (in millions):
<TABLE>
<CAPTION>
PAYMENTS FACILITY ABANDONMENT
TO EMPLOYEES CLOSURE AND OF COMPUTER
INVOLUNTARILY CONSOLIDATION SOFTWARE OTHER TOTAL
TERMINATED COSTS COSTS COSTS RESTRUCTURING
------------- ------------- ----------- ----- -------------
<S> <C> <C> <C> <C> <C>
Net charge during 1998.............. $22.7 $ 28.9 $ 10.6 $12.6 $ 74.8
Assets written off during 1998...... -- (25.3) (10.6) (4.8) (40.7)
Spending during 1998................ (3.6) -- -- (7.4) (11.0)
----- ------ ------ ----- ------
Balances as of December 31, 1998.... 19.1 3.6 -- 0.4 23.1
Adjustments during 1999............. -- (0.3) -- 0.3 --
Net credit during 1999.............. (2.6) (0.7) -- (0.5) (3.8)
Assets written off during 1999...... -- (0.3) -- -- (0.3)
Spending during 1999................ (8.5) (0.4) -- -- (8.9)
----- ------ ------ ----- ------
Balances as of December 31, 1999.... $ 8.0 $ 1.9 $ -- $ 0.2 $ 10.1
===== ====== ====== ===== ======
</TABLE>
During 1998, the Company offered an early retirement program to certain
employees. The increase in pension liability resulting from this program is
included in the table above as 1998 spending of other costs.
In 1998, management also completed a critical review of its asset bases in
light of the strategic decisions made in the restructuring activities discussed
above. Management made business decisions relating to the future use of certain
assets resulting in a reassessment of the carrying value of such assets. As a
result, the Company recorded a $58.5 million charge, $41.1 million after taxes.
Such charge reduced the value of a manufacturing facility, office facilities in
Germany and Spain, assets related to Herald products and certain other assets.
The Company determined that the value of the assets, other than office
facilities, were impaired by comparing the carrying value of each asset with an
undiscounted cash flow analysis for each asset. The value of each asset was
written-down to the higher of its net realizable sales value less costs to sell
or the value determined by a discounted cash flow analysis. The $58.5 million
charge related to the following business segments: $18.0 million in the United
States, $4.5 million in Europe, $18.5 million in Asia Pacific, $0.4 million in
the Other geographic segment, and $17.1 million related to corporate, research
and product related assets.
In 1999, the Company realized $1.4 million in proceeds in excess of
estimates from disposal of certain real property included in the 1998 asset
write-off. As a result, the Company recorded a $1.4 million reduction in the
asset write-off charge in 1999.
Approximately $2.2 million of the restructuring accrual at December 31,
1999 relates to the Company's 1996 restructuring charge. In 1996, the Company
recorded a $70.1 million restructuring charge to streamline operations and
reduce costs through management restructuring and facilities consolidation
affecting 22 locations worldwide. The Company began restructuring activities in
Europe in 1996 and completed them in 1999. Over the three year period, such
activities restructured European operations from separate administrative
services in various countries to a single shared service center organization for
the region. In 1999, the Company determined that severance costs of positions
eliminated would be $5.8 million less than accrued in 1996. As a result, the
Company recorded a $5.8 million reduction in the restructuring charge in 1999.
A-25
<PAGE> 58
The following table presents the restructuring activities through December
31, 1999 resulting from the 1996 restructuring charge (in millions):
<TABLE>
<CAPTION>
PAYMENTS FACILITY
TO EMPLOYEES CLOSURE AND
INVOLUNTARILY CONSOLIDATION OTHER TOTAL
TERMINATED COSTS COSTS RESTRUCTURING
------------- ------------- ----- -------------
<S> <C> <C> <C> <C>
Net charge during 1996....................... $34.0 $ 29.6 $ 6.5 $ 70.1
Assets written off during 1996............... -- (25.9) (6.2) (32.1)
Spending during 1996......................... (9.9) (0.7) (0.2) (10.8)
----- ------ ----- ------
Balances as of December 31, 1996............. 24.1 3.0 0.1 27.2
Adjustments during 1997...................... (0.5) -- 0.5 --
Spending during 1997......................... (7.6) (3.0) (0.6) (11.2)
----- ------ ----- ------
Balances as of December 31, 1997............. 16.0 -- -- 16.0
Adjustments during 1998...................... (0.4) -- 0.4 --
Assets written off during 1998............... -- -- (0.4) (0.4)
Spending during 1998......................... (5.0) -- -- (5.0)
----- ------ ----- ------
Balances as of December 31, 1998............. 10.6 -- -- 10.6
Adjustments during 1999...................... (2.0) -- 2.0 --
Net credit during 1999....................... (5.8) -- -- (5.8)
Spending during 1999......................... (2.6) -- -- (2.6)
----- ------ ----- ------
Balances as of December 31, 1999............. $ 0.2 $ -- $ 2.0 $ 2.2
===== ====== ===== ======
</TABLE>
NOTE 4: CONTRIBUTION TO ALLERGAN FOUNDATION
In 1998, the Company founded the Allergan Foundation, an independent
charitable foundation. In 1998, the Company disposed of the remainder of its
investment in Ocular Sciences, Inc. (OSI) for a gain of $51.8 million. Prior to
sale of the investment, the Company contributed $11.0 million in OSI stock to
the Allergan Foundation. In 1999, the Company disposed of its investment in
Pharmacia & Upjohn, Inc. for a gain of $6.9 million. Such investment was the
result of an investment in SUGEN, Inc. that was acquired by Pharmacia & Upjohn,
Inc. in 1999. Prior to the sale of the investment, the Company contributed $6.9
million of Pharmacia & Upjohn, Inc. stock to the Allergan Foundation. The
Company has no obligation to provide additional contributions to the Allergan
Foundation on an annual or other basis.
NOTE 5: ALLERGAN SPECIALTY THERAPEUTICS, INC. AND ALLERGAN LIGAND RETINOID
THERAPEUTICS, INC.
In 1997 the Company formed a new subsidiary, Allergan Specialty
Therapeutics, Inc., to conduct research and development of potential
pharmaceutical products based on the Company's retinoid and neuroprotective
technologies. On March 10, 1998, the Company made a special distribution of ASTI
Class A Common Stock to the Company's stockholders.
Prior to the distribution, the Company contributed $200 million to ASTI.
The market value of ASTI stock on March 10, 1998 was $28.6 million. The Company
recorded a dividend for the amount of the market value of ASTI stock at the
distribution. The remainder of the $200 million, $171.4 million, was recorded as
a charge against operating income. The Company's stockholders received one share
of ASTI Class A Common Stock for each 20 shares of Common Stock held as of a
record date. As a result, 3,272,690 shares of ASTI Class A Common Stock were
issued in the distribution. The Company's stockholders were not required to pay
any cash or other consideration for the ASTI Class A Common Stock received in
the distribution.
As the sole holder of ASTI's outstanding Class B Common Stock following the
distribution, the Company has the right to vote separately as a class with
respect to any merger or liquidation of ASTI, the sale, lease, exchange,
transfer or other disposition of any substantial asset of ASTI and any
amendments to the Restated Certificate of Incorporation of ASTI that would alter
the Company's purchase option, ASTI's authorized capitalization or the
provisions governing ASTI's Board of Directors. As the holder of all of the
A-26
<PAGE> 59
Class B Common Stock, the Company is entitled to elect one ASTI director. On all
other matters, the Class A and Class B Common Stockholders vote together as a
single class, with each Class A and Class B Common Share having one vote.
Ownership of the Class B Common Stock conveys to Allergan rights to acquire the
Class A Common Stock of ASTI or selected assets of ASTI. Allergan has an
irrevocable option to purchase all of the issued and outstanding shares of ASTI
Class A Common Stock until the option terminates. This purchase option will
terminate on the 90th day after the date on which Allergan receives notice that
the amount of cash and marketable securities held by ASTI is less than $15
million. If the purchase option is exercised, the exercise price will be set by
a pre-established formula. The Company has also granted certain technology
licenses and agreed to make specified payments on sales of certain products in
exchange for the payment by ASTI of a technology fee and the option to
independently develop certain compounds funded by ASTI prior to the filing of an
Investigational New Drug application with the U.S. Food and Drug Administration
with respect thereto and to license any products and technology developed by
ASTI. The Company will recognize the technology fee as revenue as it is earned
and received. For the years ended December 31, 1999 and 1998, technology fees of
$6.1 million and $11.2 million, respectively, were earned and reported in
technology fees from related party in the accompanying Consolidated Statements
of Operations. If ASTI were to operate for a full five years, the future fees
earned would be $3.1 million in 2000 and $1.6 million in 2001.
ASTI's technology and product research and development activities take
place under a research and development agreement with the Company. The Company
recognizes revenues and related costs as services are performed under such
contracts. It is expected that substantially all of ASTI's funds will be
directed toward continuing the research and development of products based on
retinoid and neuroprotective technologies. In addition, ASTI may fund the
research and development of pharmaceutical products in therapeutic categories of
interest to the Company, other than those based on retinoid and neuroprotective
technologies, that complement the Company's product pipeline or otherwise are
believed to provide a potential commercialization opportunity for the Company.
For the years ended December 31, 1999 and 1998, the Company earned $46.2 million
and $34.4 million, respectively, in research service revenues under the research
and development agreement with ASTI.
The following is a summary of operations for ASTI for the years ended
December 31, 1999 and 1998, Period from Inception (November 12, 1997) to
December 31, 1997, and for the cumulative period from Inception (November 12,
1997) to December 31, 1999 and Financial Position at December 31, 1999 and 1998:
<TABLE>
<CAPTION>
PERIOD FROM CUMULATIVE PERIOD FROM
NOVEMBER 12, NOVEMBER 12,
1997 1997
YEAR ENDED YEAR ENDED (INCEPTION) TO (INCEPTION) TO
DECEMBER 31, DECEMBER 21, DECEMBER 31, DECEMBER 31,
1999 1998 1997 1999
------------ ------------ ----------------- ----------------------
(IN THOUSANDS, EXCEPT SHARE, AND PER SHARE DATA)
<S> <C> <C> <C> <C>
Results of Operations:
Revenues....................... $ 7,110 $ 9,043 $ -- $ 16,153
Costs and expenses
Research and development..... 49,200 35,886 -- 85,086
Technology fees.............. 5,500 6,520 -- 12,020
General and administrative... 1,198 933 -- 2,131
---------- ---------- ---- ----------
Total costs and
expenses........... 55,898 43,339 -- 99,237
---------- ---------- ---- ----------
Net loss....................... $ (52,806) $ (36,808) $ -- $ (89,614)
========== ========== ==== ==========
Basic & dilutive loss per
share........................ $ (16.13) $ (11.24) $ -- $ (27.37)
========== ========== ==== ==========
Basic & dilutive shares
outstanding.................. 3,273,690 3,273,690 100 3,273,690
</TABLE>
A-27
<PAGE> 60
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
Balance Sheet Data:
Cash and investments........................................ $105,299 $158,667
Total assets................................................ 112,022 165,137
Payable to Allergan, Inc.................................... 6,047 4,509
Total liabilities........................................... 6,047 4,804
Total stockholders' equity.................................. 105,975 160,333
</TABLE>
In 1992, the Company and Ligand Pharmaceuticals Incorporated (Ligand) began
operating a joint venture for the purpose of performing certain research and
development activities. In December 1994, Allergan and Ligand formed a new
research and development company, Allergan Ligand Retinoid Therapeutics, Inc.
(ALRT) to function as the successor to the joint venture. In June 1995, Ligand
contributed $17.5 million to ALRT for a right to acquire all of the stock of
ALRT at specified future dates and amounts. At the same time, the Company
contributed $50.0 million to ALRT in exchange for rights to acquire one half of
all technologies and other assets, or a similar right to acquire all of the
stock of ALRT if Ligand did not exercise its right. The Company also purchased
$6.0 million of Ligand Common Stock at the time of its contribution to ALRT. The
Company accounted for its $50.0 million contribution as a charge to operating
expense at the time of the contribution.
In November 1997 Ligand acquired all of the stock of ALRT. At the same
time, Allergan paid $8.9 million to Ligand to acquire one-half of all
technologies and cash of approximately $5.5 million. The net cost of assets
acquired was charged to research and development. At that time, Allergan and
Ligand changed their agreements so that, among other things, ALRT compounds and
development programs were divided between Allergan and Ligand, and each party
received exclusive rights to ALRT technology for use with their respective
compounds and programs.
The Company performed contract research services for ALRT from 1995 to
1997. Revenues from such services represent a recovery of the research and
development costs incurred with an amount added to compensate the Company for
general corporate overhead costs. The Company recognized revenues and related
costs as services were performed under such contracts. The Company recognized
research service revenues under its agreement with ALRT of $11.0 million in
1997.
A-28
<PAGE> 61
NOTE 6: COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1999 1998
------ ------
IN MILLIONS
<S> <C> <C>
Trade receivables, net
Trade receivables......................................... $258.6 $232.8
Less allowance for doubtful accounts...................... 5.4 6.7
------ ------
$253.2 $226.1
====== ======
Inventories
Finished products......................................... $ 87.5 $ 75.4
Work in process........................................... 13.3 18.1
Raw materials............................................. 29.9 29.8
------ ------
$130.7 $123.3
====== ======
Other current assets
Prepaid expenses.......................................... $ 48.1 $ 53.7
Deferred taxes............................................ 55.8 46.8
Other..................................................... 46.8 29.7
------ ------
$150.7 $130.2
====== ======
Property, plant and equipment, net
Land...................................................... $ 13.0 $ 12.6
Buildings................................................. 296.3 294.1
Machinery and equipment................................... 301.5 290.8
------ ------
610.8 597.5
Less accumulated depreciation............................. 280.5 272.6
------ ------
$330.3 $324.9
====== ======
Goodwill and intangibles, net
Goodwill.................................................. $250.5 $284.5
Intangibles............................................... 25.5 27.1
------ ------
276.0 311.6
Less accumulated amortization............................. 125.5 142.5
------ ------
$150.5 $169.1
====== ======
</TABLE>
A-29
<PAGE> 62
NOTE 7: NOTES PAYABLE AND LONG-TERM DEBT
<TABLE>
<CAPTION>
1999 1998
AVERAGE AVERAGE
EFFECTIVE EFFECTIVE
INTEREST DECEMBER 31, INTEREST DECEMBER 31,
RATE 1999 RATE 1998
--------- ------------ --------- ------------
IN MILLIONS
<S> <C> <C> <C> <C>
Bank loans............................. 5.32% $ 20.6 5.59% $ 15.9
Commercial paper....................... 6.62% 47.1 6.95% 39.5
ESOP loan due 2003..................... 5.29% 10.3 4.68% 12.9
Medium term notes 4.93% -- 6.92% due
from 2000-2003....................... 5.94% 89.0 5.94% 89.0
Yen denominated notes due from
2000 - 2003.......................... 1.70% 119.5 1.59% 86.9
Capitalized leases..................... 3.6 4.9
Other.................................. 4.0 0.5
------ ------
$294.1 $249.6
Less current maturities........... 85.3 48.5
------ ------
Total long-term debt.............. $208.8 $201.1
====== ======
</TABLE>
At December 31, 1999 and 1998, the Company had a domestic unused committed
line of credit of $250 million which supports general corporate purposes and
domestic commercial paper borrowing arrangements. The commitment fees under the
agreement are nominal. In addition, the Company had foreign unused committed
lines of credit of approximately $20.5 million in 1999 and $1.0 million in 1998.
At December 31, 1999, $48.5 million of commercial paper and other debt was
classified as long-term debt because the Company had the ability to refinance
these debts on a long term basis under terms of its unused committed lines of
credit.
The credit facilities and medium term note program entered into by the
Company provide that the Company will maintain certain financial and operating
covenants which include, among other provisions, maintaining minimum debt to
capitalization ratios and minimum consolidated net worth. Certain covenants also
limit subsidiary debt and restrict dividend payments. The Company was in
compliance with these covenants as of December 31, 1999.
The aggregate maturities of debt for each of the next five years and
thereafter are as follows: $85.3 million in 2000; $111.4 million 2001; $39.4
million in 2002; $57.4 million in 2003; $0.6 million in 2004. Interest incurred
of $0.9 million in 1999, $0.7 million in 1998 and $1.1 million in 1997 has been
capitalized and included in property, plant and equipment. Noncash additions to
capitalized leases and capital lease obligations of $1.7 million in 1997 were
excluded from the Consolidated Statements of Cash Flows.
NOTE 8: INCOME TAXES
The components of earnings (loss) before income taxes and minority interest
were:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1999 1998 1997
------ ------- ------
IN MILLIONS
<S> <C> <C> <C>
Earnings (loss) before income taxes and minority
interest
U.S................................................... $ 91.4 $(144.1) $ 44.3
Non-U.S............................................... 177.6 86.4 112.8
------ ------- ------
Earnings (loss) before income taxes and minority
interest.............................................. $269.0 $ (57.7) $157.1
====== ======= ======
</TABLE>
A-30
<PAGE> 63
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1999 1998 1997
----- ------ -----
IN MILLIONS
<S> <C> <C> <C>
Income tax expense (benefit)
Current
U.S. federal.......................................... $49.6 $ 48.4 $(4.2)
Non-U.S............................................... 26.4 18.4 28.3
U.S. state and Puerto Rico............................ 13.4 13.9 3.8
----- ------ -----
Total current......................................... 89.4 80.7 27.9
----- ------ -----
Deferred
U.S. federal.......................................... (6.7) (31.4) (3.5)
Non-U.S............................................... 3.8 (13.3) 4.9
U.S. state and Puerto Rico............................ (5.8) (3.2) (0.3)
----- ------ -----
Total deferred........................................ (8.7) (47.9) 1.1
----- ------ -----
Total............................................ $80.7 $ 32.8 $29.0
===== ====== =====
</TABLE>
The reconciliations of the U.S. federal statutory tax rate to the combined
effective tax rate follow:
<TABLE>
<CAPTION>
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Statutory rate of tax (benefit) expense..................... 35% (35.0)% 35.0%
State taxes, net of U.S. tax benefit...................... 1.1 (3.1) 0.7
Ireland and Puerto Rico income............................ (12.0) (43.9) (10.7)
U.S. tax effect of foreign earnings and dividends, net of
foreign tax credits.................................... 7.8 1.2 1.3
Other credits (R&D)....................................... (0.9) (4.0) (1.7)
Taxes on unremitted earnings of subsidiaries.............. (0.7) 37.7 9.7
Valuation allowance, federal & state, on ALRT
contribution........................................... -- (3.9) (10.9)
ASTI contribution......................................... -- 103.9 --
Other..................................................... (0.3) 3.9 (4.9)
----- ----- -----
Effective tax rate..................................... 30.0% 56.8% 18.5%
===== ===== =====
</TABLE>
Withholding and U.S. taxes have not been provided on approximately $451.5
million of unremitted earnings of certain non-U.S. subsidiaries because such
earnings are or will be reinvested in operations or will be offset by
appropriate credits for foreign income taxes paid. Such earnings would become
taxable upon the sale or liquidation of these non-U.S. subsidiaries or upon the
remittance of dividends. It is not practicable to estimate the amount of the
deferred tax liability on such unremitted earnings. Upon remittance, certain
foreign countries impose withholding taxes that are then available, subject to
certain limitations, for use as credits against the Company's U.S. tax
liability, if any.
The Company and its domestic subsidiaries file a consolidated U.S. federal
income tax return. Such returns have either been audited and/or settled through
statute expiration through the year 1995. The Company and its consolidated
subsidiaries are not currently under examination.
At December 31, 1999, the Company has net operating loss carryforwards in
certain non-U.S. subsidiaries, with various expiration dates, of approximately
$44.5 million.
A-31
<PAGE> 64
Temporary differences and carryforwards which give rise to a significant
portion of deferred tax assets and liabilities at December 31, 1999, 1998 and
1997 are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
IN MILLIONS
<S> <C> <C> <C>
Deferred tax assets
Net operating loss carryforwards (foreign)............. $ 13.0 $ 15.3 $ 10.5
Accrued expenses....................................... 14.2 14.1 20.6
Capitalized expenses................................... 8.6 6.8 7.9
Deferred compensation.................................. 6.3 4.1 2.8
Pension expense........................................ 12.5 11.9 7.1
Medicaid rebates....................................... 4.0 4.3 4.2
Postretirement medical benefits........................ 7.6 7.1 6.7
Intercompany profit in inventory....................... 5.3 10.3 8.2
Purchase of ALRT assets................................ 11.5 12.4 15.5
Asset write-off -- manufacturing facility.............. 7.0 7.0 --
Plant consolidation.................................... 6.3 7.1 --
Asset write-off........................................ -- 6.7 --
Research credit carryforwards.......................... 14.4 -- --
All other.............................................. 21.5 8.3 15.6
------ ------ ------
132.2 115.4 99.1
Less: valuation allowance................................ (14.4) (14.6) (16.9)
------ ------ ------
Total deferred tax asset....................... 117.8 100.8 82.2
------ ------ ------
Deferred tax liabilities
Depreciation........................................... 12.5 9.2 13.0
All other.............................................. 2.8 (2.2) 23.3
------ ------ ------
Total deferred tax liabilities................. 15.3 7.0 36.3
------ ------ ------
Net deferred tax asset................................... $102.5 $ 93.8 $ 45.9
====== ====== ======
</TABLE>
The balances of net current deferred tax assets and net non-current
deferred tax assets at December 31, 1999 were $55.8 million and $46.7 million,
respectively. The balances of net current deferred tax assets and net
non-current deferred tax assets at December 31, 1998 were $46.8 million and
$47.0 million, respectively. Such amounts are included in other current assets
and investments and other assets in the Consolidated Balance Sheets.
Based on the Company's historical pre-tax earnings, management believes it
is more likely than not that the Company will realize the benefit of the
existing net deferred tax asset at December 31, 1999. Management believes the
existing net deductible temporary differences will reverse during periods in
which the Company generates net taxable income, however, there can be no
assurance that the Company will generate any earnings or any specific level of
continuing earnings in future years. Certain tax planning or other strategies
could be implemented, if necessary, to supplement income from operations to
fully realize recorded tax benefits.
NOTE 9: EMPLOYEE RETIREMENT AND OTHER BENEFIT PLANS
Pension and Postretirement Benefit Plans
The Company sponsors qualified defined benefit pension plans covering
substantially all of its employees. In addition, the Company sponsors two
supplemental nonqualified plans, covering certain management employees and
officers. U.S. pension benefits are based on years of service and compensation
during the five highest consecutive earnings years. The Company's funding policy
for its U.S. qualified plan is to provide currently for accumulated benefits,
subject to federal regulations. Plan assets of the qualified plan consist
primarily of fixed income and equity securities. Benefits for the nonqualified
plans are paid as they come due.
A-32
<PAGE> 65
The Company has one retiree health plan that covers United States retirees
and dependents. Retiree contributions are required depending on the year of
retirement and the number of years of service at the time of retirement.
Disbursements exceed retiree contributions and the plan currently has no assets.
The accounting for the health care plan anticipates future cost-sharing changes
to the written plan that are consistent with the Company's past practice and
management's intent to manage plan costs. The Company's history of retiree
medical plan modifications indicates a consistent approach to increasing the
cost sharing provisions of the plan.
Components of net periodic benefit cost under the Company's U.S. and major
non-U.S. pension plans and retiree health plan for 1999, 1998 and 1997 were:
<TABLE>
<CAPTION>
OTHER
PENSION BENEFITS POSTRETIREMENT BENEFITS
-------------------------- -----------------------
1999 1998 1997 1999 1998 1997
------ ------ ------ ----- ----- -----
IN MILLIONS
<S> <C> <C> <C> <C> <C> <C>
Service cost............................ $ 10.7 $ 9.8 $ 9.0 $ 0.9 $ 0.9 $ 0.8
Interest cost........................... 13.0 11.8 10.8 0.7 0.8 0.7
Expected return on plan assets.......... (14.0) (11.6) (11.5) -- -- --
Amortization of transition amount....... (0.5) (0.4) (0.2) -- -- --
Amortization of prior service cost...... 0.2 0.2 -- (0.1) (0.1) (0.1)
Recognized net actuarial (gain) loss.... 3.4 1.1 2.4 (0.3) (0.1) (0.2)
Settlement loss......................... -- 8.6 -- -- 0.2 --
Curtailment gain (loss)................. 0.1 -- -- (0.1) (0.1) --
------ ------ ------ ----- ----- -----
Net periodic benefit cost............... $ 12.9 $ 19.5 $ 10.5 $ 1.1 $ 1.6 $ 1.2
====== ====== ====== ===== ===== =====
</TABLE>
Included in 1998 settlement loss is $7.4 million and $0.2 million for
pension benefits and other postretirement benefits, respectively, representing
the cost of enhanced termination benefits to participants of a voluntary early
retirement program. Such costs were included in the restructuring charge as more
fully described in Note 3.
A-33
<PAGE> 66
Components of the change in benefit obligation, change in plan assets and
funded status for the Company's U.S. and major non-U.S. pension plans and
retiree health plan for December 31, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
OTHER
POSTRETIREMENT
PENSION BENEFITS BENEFITS
---------------- --------------
1999 1998 1999 1998
------ ------ ----- -----
IN MILLIONS
<S> <C> <C> <C> <C>
Change in benefit obligation
Benefit obligation, beginning of period........... $195.4 $149.9 $13.2 $12.1
Service cost...................................... 10.7 9.8 0.9 0.9
Interest cost..................................... 13.0 11.8 0.7 0.8
Participant contributions......................... 0.8 0.9 -- 0.1
Plan amendments................................... -- 0.1 -- --
Curtailment gain.................................. (0.2) --
Actuarial (gain) loss............................. (12.8) 18.9 (4.5) (0.6)
Settlement (gain) loss............................ (2.5) 8.6 -- 0.2
Benefits paid..................................... (5.5) (3.4) (0.3) (0.3)
Impact of foreign currency translation............ (2.0) (1.2) -- --
------ ------ ----- -----
Benefit obligation, end of period................. $197.1 $195.4 $ 9.8 $13.2
------ ------ ----- -----
Change in plan assets
Fair value of plan assets, beginning of period.... $140.7 $124.3 $ -- $ --
Actual return on plan assets...................... 16.6 11.7 -- --
Company contribution.............................. 8.3 8.5 0.3 0.2
Participant contributions......................... 0.8 0.9 -- 0.1
Benefits paid..................................... (5.5) (3.4) (0.3) (0.3)
Settlement gain (loss)............................ (2.5) -- -- --
Impact of foreign currency translation............ (2.4) (1.3) -- --
------ ------ ----- -----
Fair value of plan assets, end of period.......... $156.0 $140.7 $ -- $ --
------ ------ ----- -----
Funded status of plan............................. $ 41.1 $ 54.7 $ 9.8 $13.2
Unrecognized net actuarial loss (gain)............ (2.5) (20.5) 7.8 3.5
Unrecognized prior service cost................... (1.6) (1.9) 1.3 1.4
Unrecognized net transition obligation............ 1.5 1.9 -- --
Fourth quarter contributions...................... (0.2) (1.4) -- --
------ ------ ----- -----
Accrued benefit cost.............................. $ 38.3 $ 32.8 $18.9 $18.1
------ ------ ----- -----
</TABLE>
The funded status of the pension and other postretirement benefits
presented as of December 31, 1999 and 1998 were measured as of September 30,
1999 and 1998, respectively. The Company adopted this measurement date to
conform to its internal cost management systems.
Weighted average assumptions as of December 31 are:
<TABLE>
<CAPTION>
OTHER
PENSION POSTRETIREMENT
BENEFITS BENEFITS
------------ --------------
1999 1998 1999 1998
---- ---- ----- -----
<S> <C> <C> <C> <C>
Discount rate used...................................... 7.75% 6.46% 7.75% 6.75%
Expected return on plan assets.......................... 9.00% 8.52% n/a n/a
Rate of compensation increase........................... 5.14% 3.95% n/a n/a
</TABLE>
A-34
<PAGE> 67
Assumed health care cost trend rates have a significant effect on the
amounts reported as other postretirement benefits. A one-percentage-point change
in assumed health care cost trend rates would have the following effects:
<TABLE>
<CAPTION>
1-PERCENTAGE-POINT 1-PERCENTAGE-POINT
INCREASE DECREASE
------------------ ------------------
IN MILLIONS
<S> <C> <C>
Effect on total service and interest cost
components............................... $0.4 $(0.3)
Effect on postretirement benefit
obligation............................... 2.3 (1.9)
</TABLE>
Cost increases of 4% were assumed for the indemnity medical plan and 6.5%
for the HMO medical plan in 1999. Annual cost increases were assumed to increase
gradually to 5% for the medical plans by 2000 and remain level thereafter.
Savings and Investment Plan
The Company has a Savings and Investment Plan, which provides for all U.S.
and Puerto Rico employees to become participants upon employment. In general,
participants' contributions, up to 5% of compensation, qualify for a 50% Company
match. Company contributions are generally used to purchase Allergan Common
Stock. The Company's cost of the plan was $2.8 million in 1999, $3.3 million in
1998, and $3.2 million in 1997.
NOTE 10: EMPLOYEE STOCK OWNERSHIP PLAN AND INCENTIVE COMPENSATION PLANS
Employee Stock Ownership Plan
The Company has an Employee Stock Ownership Plan (ESOP) for U.S. employees.
A related loan is guaranteed by the Company as to payment of principal and
interest and, accordingly, the unpaid balance of the loan is included in the
Company's consolidated financial statements as debt, offset by unearned
compensation included in stockholders' equity. The ESOP trust purchased
2,670,000 shares from the Company using the proceeds of the loan, all of which
are considered outstanding for purposes of calculating earnings per share.
Participants receive an allocation of shares held in the plan based on the
amortization schedule of the loan borrowed by the ESOP to purchase the shares,
and generally become vested over five years of Company service. Allocated shares
are divided among participants based on relative compensation. Allocated and
unallocated shares in the ESOP as of December 31, 1999 and 1998, summarized
below, have been presented giving effect to the two for one stock split (Note
2).
<TABLE>
<CAPTION>
NUMBER OF SHARES
----------------
1999 1998
------ ------
IN THOUSANDS
<S> <C> <C>
Allocated shares............................................ 1,780 1,560
Shares committed to be allocated............................ 196 220
Unallocated shares.......................................... 694 890
----- -----
Total ESOP shares........................................... 2,670 2,670
===== =====
</TABLE>
The loan has a fifteen year maturity, with quarterly principal and interest
payments. Under the current repayment plan, the loan will be repaid in July
2003. Interest rates are determined at the Company's option based upon a percent
of prime or the LIBOR and the Company's consolidated debt to capitalization
ratio.
Dividends accrued on unallocated shares held by the ESOP are used to repay
the loan and totaled $0.3 million in 1999, $0.6 million in 1998 and $0.4 million
in 1997. Dividends received on allocated shares held by the ESOP are allocated
directly to participants' accounts. Interest incurred on ESOP debt in 1999, 1998
and 1997 was $0.5 million, $0.7 million and $0.8 million, respectively.
Compensation expense is recognized based on the amortization of the related
loan. Compensation expense for 1999, 1998 and 1997 was $2.5 million, $2.2
million and $2.0 million, respectively.
A-35
<PAGE> 68
Incentive Compensation Plans
The Company has an incentive compensation plan and a nonemployee director
stock plan. The incentive compensation plan provides for the granting of
non-qualified stock options, restricted stock and other stock-based incentive
awards for officers and key employees. As of December 31, 1999, an aggregate of
approximately 15,699,000 shares of stock have been authorized for issuance under
the incentive compensation plan and 200,000 shares have been authorized for
issuance under the nonemployee director stock plan.
Generally, grants have historically provided that options become
exercisable 25% per year beginning twelve months after the date of grant.
Options generally expire ten years after their original date of grant. Options
granted under the Company's incentive compensation plan provide that an employee
holding a stock option may exchange stock which the employee has owned for at
least six months as payment against the exercise of their option. This provision
applies to all options outstanding at December 31, 1999.
Stock option activity under the Company's incentive compensation plan was
as follows and reflects the two for one stock split (Note 2):
<TABLE>
<CAPTION>
1999 1998 1997
------------------ ------------------ ------------------
WEIGHTED WEIGHTED WEIGHTED
NUMBER AVERAGE NUMBER AVERAGE NUMBER AVERAGE
OF EXERCISE OF EXERCISE OF EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------- -------- ------- -------- ------- --------
IN THOUSANDS, EXCEPT OPTION PRICE DATA
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year........... 6,835 $14.45 8,942 $13.15 7,955 $12.59
Options granted.......................... 4,955 44.77 1,702 17.56 2,971 13.63
Options exercised........................ (2,075) 13.99 (3,005) 12.11 (1,678) 10.99
Options cancelled........................ (70) 23.95 (804) 15.33 (306) 14.98
------- ------- -------
Outstanding, end of year................. 9,645 30.06 6,835 14.45 8,942 13.15
======= ======= =======
Exercisable, end of year................. 2,575 14.27 3,154 13.08 4,298 11.82
======= ======= =======
Weighted average fair value of options
granted during the year................ $9.79 $5.85 $5.31
</TABLE>
The fair value of each option granted during 1999, 1998 and 1997 is
estimated on the date of grant using the Black-Scholes option-pricing model with
the following assumptions: dividend yield of 0.75% in 1999, 1.5% in 1998 and
1.9% in 1997, expected volatility of 34% for 1999, 32% for 1998 and 39% for
1997, risk-free interest rate of 4.9% in 1999, 5.5% in 1998 and 6.7% in 1997,
and expected life of 4 years for 1999 and 7 years for 1998 and 1997 grants.
The following table summarizes stock options outstanding at December 31,
1999 (shares in thousands) and reflects the two for one stock split (Note 2):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------- -------------------------------
AVERAGE NUMBER
NUMBER REMAINING WEIGHTED AVERAGE EXERCISABLE WEIGHTED AVERAGE
RANGE OF OUTSTANDING CONTRACTUAL EXERCISE AT EXERCISE
EXERCISE PRICES AT 12/31/99 LIFE PRICE 12/31/99 PRICE
--------------- ----------- ----------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$ 6.75 - $ 8.19.......... 24 0.6 $ 8.12 24 $ 8.12
$10.53 - $13.81.......... 2,718 5.7 $12.93 1,720 $12.60
$16.59 - $17.56.......... 1,998 7.1 $17.37 808 $17.41
$26.44 - $34.66.......... 2,072 8.8 $34.54 23 $34.66
$42.69 - $55.00.......... 2,833 3.1 $52.34 -- --
----- -----
9,645 2,575
===== =====
</TABLE>
No compensation expense has been recognized for stock-based incentive
compensation plans other than for the restricted stock award plan and the
nonemployee director stock plan. Had compensation expense for the Company's
incentive stock option plan been recognized based upon the fair value for awards
granted, the Company's net earnings would have been decreased by $15.0 million
or $0.11 for both basic and diluted earnings per share in 1999, net loss would
have increased by $6.1 million or $0.05 for both basic and diluted
A-36
<PAGE> 69
earnings per share in 1998, and net earnings would have been reduced by $6.6
million or $0.05 for both basic and diluted earnings per share in 1997. These
proforma effects are not indicative of future amounts. The Company expects to
grant additional awards in future years.
Under the terms of the incentive compensation plan, the restricted stock
awards are subject to restrictions as to sale or other disposition of the shares
and to restrictions which require continuous employment with the Company. The
restrictions generally expire, and the awards become fully vested, four years
from the date of grant. The Company granted approximately 180,000, 124,000 and
128,000 shares of stock under the plan in 1999, 1998 and 1997, respectively. The
weighted average grant date price of the restricted stock grants was $35.26 in
1999, $17.35 in 1998 and $13.99 in 1997. Grants of restricted stock are charged
to unearned compensation in stockholders' equity at their intrinsic value and
recognized in expense over the vesting period. Compensation expense recognized
under the restricted stock award plan was $2.4 million in 1999 and $1.3 million
in both 1998 and 1997.
Under the terms of the nonemployee director stock plan, each eligible
director received an initial grant of restricted stock and will receive
additional grants upon re-election to the Board. As of December 31, 1999, there
were 41,466 shares issued and outstanding under the plan. Compensation expense
recognized under the plan was $780,000 in 1999, $185,000 in 1998, and $112,000
in 1997.
NOTE 11: FINANCIAL INSTRUMENTS
In the normal course of business, operations of the Company are exposed to
risks associated with fluctuations in interest rates and currency exchange
rates. The Company addresses these risks through controlled risk management that
includes the use of derivative financial instruments to hedge these exposures.
The Company does not enter into financial instruments for trading or speculative
purposes.
The Company enters into derivative financial instruments with major
financial institutions that have at least an "A" or equivalent credit rating.
The Company has not experienced any losses on its derivative financial
instruments to date due to credit risk and management believes that such risk is
remote and in any event would be immaterial.
Interest Rate Risk Management
The Company enters into interest rate swap agreements to reduce the impact
of interest rate changes on its floating rate long-term debt. These derivative
financial instruments allow the Company to make long-term borrowings at floating
rates and then swap them into fixed rates that are anticipated to be lower than
rates available to the Company if fixed-rate borrowings were made directly.
Under interest rate swaps, the Company will pay a fixed interest rate and
receive a floating rate of interest based on LIBOR, without exchanges of the
underlying notional amounts.
The following table presents the notional amounts, maturity dates, and
effective floating and fixed interest rates related to the Company's interest
rate swaps as of December 31 (in millions):
<TABLE>
<CAPTION>
INTEREST RATE
---------------------
NOTIONAL AMOUNT MATURITY DATE FLOATING PAY-FIXED
--------------- ------------- -------- ---------
<S> <C> <C> <C> <C>
1999................. $ 10.0 2000 6.19% 7.00%
2,500Y 2001 0.30% 0.87%
2,000Y 2001 0.28% 0.84%
1998................. $ 10.0 1999 4.44% 4.75%
10.0 2000 5.22% 7.00%
20.0 1999 5.25% 6.95%
</TABLE>
The impact of interest rate risk management activities on income in 1999,
1998 and 1997 were not material.
A-37
<PAGE> 70
Foreign Exchange Risk Management
The Company enters into foreign currency forward and option contracts to
reduce earnings and cash flow volatility associated with foreign exchange rate
changes to allow management to focus its attention on its core business issues
and challenges. Accordingly, the Company enters into various contracts which
change in value as foreign exchange rates change to offset the effect of changes
in the value of foreign currency assets and liabilities, commitments and
anticipated foreign currency denominated sales and operating expenses. The
Company enters into foreign currency forward and option contracts in amounts
between minimum and maximum anticipated foreign exchange exposures, generally
for periods not to exceed one year. The gains and losses on these contracts
offset changes in the value of the related exposures.
The Company uses a combination of option and forward contracts, which
provide for the sale of foreign currencies to offset foreign currency exposures
expected to arise in the normal course of the Company's business. While these
instruments are subject to fluctuations in value, such fluctuations are
anticipated to offset changes in the value of the underlying exposures. The
principal currencies subject to this process are the Japanese yen, British
pound, Australian dollar, Canadian dollar and the Euro. Derivative instruments
that are used to offset these probable, but not firmly committed foreign
currency exposures are carried at fair value with gains and losses recorded
currently in income as a component of other non-operating expense, net.
The Company uses a combination of option and forward contracts to hedge
foreign currency assets and intercompany borrowings. These instruments are
designated and effective as hedges. While these hedging instruments are subject
to fluctuations in value, they do not subject the Company to market risk from
exchange rate movements because such gains and losses offset losses and gains,
respectively, on the assets and intercompany borrowings being hedged.
During 1999 and 1998, the Company also sold option contracts to reduce the
net cost of its derivative financial instruments. At the time of sale, options
were recorded at fair value with corresponding gains and losses recorded in
income as a component of other, net. At December 31, 1999, there were no
outstanding foreign currency options sold.
At December 31, the notional principal and fair value of the Company's
outstanding foreign currency derivative financial instruments were as follows
(in millions):
<TABLE>
<CAPTION>
1999 1998
------------------ ------------------
NOTIONAL FAIR NOTIONAL FAIR
PRINCIPAL VALUE PRINCIPAL VALUE
--------- ----- --------- -----
<S> <C> <C> <C> <C>
Forward exchange contracts............... $34.9 $(0.2) $32.3 $0.5
Foreign currency options purchased....... 38.6 1.2 43.6 0.6
Foreign currency options sold............ -- -- 44.7 (7.4)
</TABLE>
The notional principal amounts provide one measure of the transaction
volume outstanding as of year end, and do not represent the amount of the
Company's exposure to market loss. The estimates of fair value are based on
applicable and commonly used pricing models using prevailing financial market
information as of December 31, 1999 and 1998. The amounts ultimately realized
upon settlement of these financial instruments, together with the gains and
losses on the underlying exposures, will depend on actual market conditions
during the remaining life of the instruments. The impact of foreign exchange
risk management transactions on income was a net gain of $1.6 million in 1999, a
net loss of $5.9 million in 1998 and $0.5 million in 1997.
Fair Value of Financial Instruments
At December 31, 1999 and 1998, the Company's financial instruments included
cash and equivalents, trade receivables, investments, accounts payable,
borrowings and foreign exchange risk management instruments. The carrying amount
of cash and equivalents, trade receivables and accounts payable approximates
fair value due to the short-term maturities of these instruments. The fair value
of marketable investments, notes payable, long-term debt and foreign currency
contracts were estimated based on quoted market prices at year-end. The fair
values of non-marketable equity investments, which represent either equity
investments in
A-38
<PAGE> 71
start-up technology companies or partnerships that invest in start-up technology
companies, are estimated based on the fair value information provided by these
ventures.
The carrying amount and estimated fair value of the Company's financial
instruments at December 31 were as follows (in millions):
<TABLE>
<CAPTION>
1999 1998
---------------------- ----------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Cash and equivalents............... $162.9 $162.9 $181.6 $181.6
Non-current investments:
Marketable equity................ 0.2 0.2 31.4 31.4
Non-marketable equity............ 7.1 7.1 7.3 7.3
Notes payable...................... 85.3 85.3 48.5 48.5
Long-term debt..................... 208.8 208.6 201.1 203.0
</TABLE>
Marketable equity amounts include unrealized holding losses of $0.2 million
at December 31, 1999 and $0.7 million at December 31, 1998 ; and unrealized
holding gains of $5.0 million at December 31, 1998. There were no unrealized
holding gains on marketable equity amounts at December 31, 1999.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to credit risk
principally consist of trade receivables. Wholesale distributors, major retail
chains, and managed care organizations account for a substantial portion of
trade receivables. This risk is limited due to the number of customers
comprising the Company's customer base, and their geographic dispersion. Ongoing
credit evaluations of customers' financial condition are performed and,
generally, no collateral is required. The Company maintains reserves for
potential credit losses and such losses, in the aggregate, have not exceeded
management's expectations.
NOTE 12: COMMITMENTS AND CONTINGENCIES
The Company leases certain facilities, office equipment and automobiles and
provides for payment of taxes, insurance and other charges on certain of these
leases. Rental expense was $21.6 million in 1999, $25.2 million in 1998 and
$23.0 million in 1997.
Future minimum rental payments under non-cancelable operating lease
commitments with a term of more than one year as of December 31, 1999, are as
follows: $26.5 million in 2000; $18.8 million in 2001; $9.1 million in 2002;
$4.9 million in 2003; $3.4 million in 2004 and $7.9 million thereafter.
The Company is involved in various litigation and claims arising in the
normal course of business. Management believes that recovery or liability with
respect to these matters will not have a material adverse effect on the
Company's consolidated financial position or results of operations.
NOTE 13: BUSINESS SEGMENT INFORMATION
The Company operates in Regions or geographic operating segments. The
United States information is presented separately as it is the Company's
headquarters country, and U.S. sales represented 48.1%, 46.2% and 42.8% of total
product net sales in 1999, 1998 and 1997, 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. Beginning in October 1996, the
Company has been converting its various local accounting systems to a single
worldwide system. By early 1999, the Company had converted a majority of its
businesses to the new system. The new worldwide accounting system allows the
Company to determine operating income for each operating segment using a cost of
sales amount which includes the manufacturing
A-39
<PAGE> 72
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. As this basis for assignment of costs is a
significantly more effective method for measuring segment performance, the
Company adopted this cost assignment method in 1999. In addition, in 1999,
operating income for all operating segments and manufacturing operations also
included a charge for corporate services and asset utilization. Such change
permits management to better measure segment performance by including a cost of
capital in the determination of operating income for each segment. In 1998 and
1997, cost of sales in most segments outside the United States includes the cost
of goods produced by the Company's manufacturing operations at the transfer
price charged to the distribution operation by the manufacturing location. It is
impracticable to restate operating income amounts for 1998 and 1997 using the
1999 methodology.
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 and 1997,
corporate costs include significant administrative costs applicable to United
States operations that are not charged to the U.S. region. Special charges in
1998 for restructuring and asset write-offs, the reduction of such costs in
1999, and the contribution to ASTI in 1998 are also considered corporate costs.
Identifiable assets, depreciation and amortization and capital expenditures
are assigned by region based upon management responsibility for such items.
Corporate assets are primarily cash and equivalents, goodwill and intangibles,
and long-term investments.
GEOGRAPHIC OPERATING SEGMENTS
<TABLE>
<CAPTION>
NET SALES OPERATING INCOME (LOSS)
-------------------------------- -----------------------------
1999 1998 1997 1999 1998 1997
-------- -------- -------- ------- ------- -------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
United States................ $ 669.2 $ 577.2 $ 479.9 $ 264.3 $ 301.8 $ 244.7
Europe....................... 377.1 363.2 338.6 113.4 34.1 52.5
Asia Pacific................. 211.3 168.2 170.1 24.1 10.6 20.7
Other........................ 141.7 147.0 142.6 29.2 17.8 22.2
-------- -------- -------- ------- ------- -------
Segments total............... 1,399.3 1,255.6 1,131.2 431.0 364.3 340.1
Manufacturing operations..... 6.9 6.1 6.8 124.8 46.6 17.6
Research and development..... (168.4) (125.4) (131.2)
Research services margin..... 3.0 2.3 0.6
Restructuring (charge)
credit..................... 9.6 (74.8) --
Asset (write-offs) credit.... 1.4 (58.5) --
Elimination of inter-company
profit..................... (180.5) -- --
Contribution to ASTI......... -- (171.4) --
General corporate............ 42.6 (70.2) (78.1)
-------- -------- -------- ------- ------- -------
Net sales and operating
income (loss).............. $1,406.2 $1,261.7 $1,138.0 $ 263.5 $ (87.1) $ 149.0
======== ======== ======== ======= ======= =======
</TABLE>
A-40
<PAGE> 73
<TABLE>
<CAPTION>
DEPRECIATION AND
IDENTIFIABLE ASSETS AMORTIZATION CAPITAL EXPENDITURES
------------------------------ ----------------------- -----------------------
1999 1998 1997 1999 1998 1997 1999 1998 1997
-------- -------- -------- ----- ----- ----- ----- ----- -----
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
United States........................ $ 195.1 $ 82.5 $ 59.7 $22.0 $ 3.0 $ 3.0 $25.4 $ 0.8 $ 0.3
Europe............................... 142.5 164.2 153.9 6.5 6.9 5.9 1.2 1.5 4.3
Asia Pacific......................... 106.3 88.9 86.3 6.5 6.1 4.6 1.6 2.4 1.4
Other................................ 67.8 67.3 65.7 4.0 8.1 3.9 2.0 1.1 3.6
-------- -------- -------- ----- ----- ----- ----- ----- -----
Segments total....................... 511.7 402.9 365.6 39.0 24.1 17.4 30.2 5.8 9.6
Manufacturing operations............. 316.1 362.9 405.3 29.7 42.5 38.6 27.7 40.4 40.6
Adjustments and eliminations......... (24.5) (38.0) (32.3) -- -- -- -- -- --
General Corporate.................... 535.8 606.6 660.3 5.1 9.9 12.8 5.4 4.4 14.2
-------- -------- -------- ----- ----- ----- ----- ----- -----
Total........................ $1,339.1 $1,334.4 $1,398.9 $73.8 $76.5 $68.8 $63.3 $50.6 $64.4
======== ======== ======== ===== ===== ===== ===== ===== =====
</TABLE>
In 1999, the Company assigned responsibility to the United States segment
for certain assets previously included in manufacturing operations and general
corporate assets. Such assets were primarily finished goods inventory,
capitalized software and prepaid expenses.
In each geographic segment the Company markets products in three product
segments: Specialty Pharmaceuticals, Ophthalmic Surgical and Contact Lens Care.
The Specialty Pharmaceutical segment produces a broad range of ophthalmic
products for glaucoma therapy, ocular inflammation, infection, allergy and dry
eye; skin care products for acne, psoriasis and other prescription and over the
counter dermatological products; and Botox(R) Purified Neurotoxin Complex for
movement disorders. The Ophthalmic Surgical segment produces intraocular lenses,
phacoemulsification equipment, viscoelastics, and other products related to
cataract surgery. The Contact Lens Care segment produces cleaning, storage and
disinfection products for the consumer contact lens market. The Company provides
global marketing strategy teams to ensure the marketing strategy has consistent
execution for products in all geographic operating segments. There are no
transfers of products between product lines.
PRODUCT NET SALES BY PRODUCT LINE
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C>
Specialty Pharmaceuticals
Eye Care Pharmaceuticals........................... $ 571.2 $ 505.3 $ 408.5
Skin Care.......................................... 76.6 80.6 80.6
Botox/Neuromuscular................................ 175.8 125.3 90.1
-------- -------- --------
Total Specialty Pharmaceuticals............ 823.6 711.2 579.2
Ophthalmic Surgical.................................. 222.9 193.6 182.2
Contact Lens Care.................................... 359.7 356.9 376.6
-------- -------- --------
Net sales............................................ $1,406.2 $1,261.7 $1,138.0
======== ======== ========
</TABLE>
A-41
<PAGE> 74
NOTE 14: EARNINGS PER SHARE
The following table presents the computation of basic and diluted earnings
(loss) per share and reflects the two for one stock split (Note 2):
<TABLE>
<CAPTION>
FOR THE YEAR ENDED 1999 FOR THE YEAR ENDED 1998
--------------------------------------- ----------------------------------------
INCOME SHARES PER-SHARE INCOME(LOSS) SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- --------- ------------ ------------- ---------
(IN MILLIONS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Computation of basic
EPS:
Income (loss)
available to common
stockholders........ $188.2 132.2 $1.42 $(90.2) 131.1 $(0.69)
===== ======
Effect of dilutive
options............. 3.0 --
----- -----
Computation of diluted
EPS:
Income (loss)
available to common
stockholders
assuming
conversions......... $188.2 135.2 $1.39 $(90.2) 131.1 $(0.69)
===== ===== ===== ======
<CAPTION>
FOR THE YEAR ENDED 1997
---------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
(IN MILLIONS EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Computation of basic
EPS:
Income (loss)
available to common
stockholders........ $128.3 130.4 $0.98
=====
Effect of dilutive
options............. 1.2
-----
Computation of diluted
EPS:
Income (loss)
available to common
stockholders
assuming
conversions......... $128.3 131.6 $0.97
===== =====
</TABLE>
Options to purchase 2,200,000 of Common Stock at an exercise price of
$55.00 per share were outstanding at December 31, 1999. At December 31, 1997,
options of 1,465,000 and 122,000 with exercise prices of $17.56 and $16.59,
respectively, were outstanding. These outstanding options at December 31, 1999
and 1997 were not included in the computation of diluted EPS because the
options' exercise price was greater than the average market price of common
shares and, therefore, the effect would be antidilutive.
Stock options outstanding at December 31, 1998 were not included in the
computation of diluted EPS because the Company incurred a loss and hence, the
impact would be antidilutive.
NOTE 15: COMPREHENSIVE INCOME
The following table summarizes the components of comprehensive income at
December 31:
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------------------- --------------------------------------- ----------
BEFORE TAX TAX (EXPENSE) NET-OF-TAX BEFORE TAX TAX (EXPENSE) NET-OF-TAX BEFORE TAX
AMOUNT OR BENEFIT AMOUNT AMOUNT OR BENEFIT AMOUNT AMOUNT
---------- ------------- ---------- ---------- ------------- ---------- ----------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
Foreign currency
translation adjustments:
Unrealized foreign
currency translation
adjustments............ $(42.1) $ -- $(42.1) $ (0.9) $ -- $ (0.9) $(9.0)
Less: reclassification
adjustment for gains
(losses) realized in
net income (loss)...... -- -- -- (1.2) -- (1.2) --
------ ----- ------ ------ ------ ------- -----
Net unrealized foreign
translation
adjustments............ (42.1) -- (42.1) (2.1) -- (2.1) (9.0)
Unrealized gains on
investments:
Unrealized holding gains
arising during
period................. 1.6 (0.6) 1.0 33.4 (11.7) 21.7 7.4
Less: reclassification
adjustment for gains
realized in net income
(loss)................. (6.1) 2.2 (3.9) (54.1) 18.5 (35.6) 12.4
------ ----- ------ ------ ------ ------- -----
Net unrealized gains
(losses) on
investments............ (4.5) 1.6 (2.9) (20.7) 6.8 (13.9) 19.8
------ ----- ------ ------ ------ ------- -----
Other comprehensive income
(loss)................... $(46.6) $ 1.6 (45.0) $(22.8) $ 6.8 (16.0) $10.8
====== ===== ====== ====== =====
Net earnings (loss)........ 188.2 (90.2)
------ -------
Total comprehensive
income (loss).... $143.2 $(106.2)
====== =======
<CAPTION>
1997
--------------------------
TAX (EXPENSE) NET-OF-TAX
OR BENEFIT AMOUNT
------------- ----------
(IN MILLIONS)
<S> <C> <C>
Foreign currency
translation adjustments:
Unrealized foreign
currency translation
adjustments............ $ -- $ (9.0)
Less: reclassification
adjustment for gains
(losses) realized in
net income (loss)...... -- --
----- ------
Net unrealized foreign
translation
adjustments............ -- (9.0)
Unrealized gains on
investments:
Unrealized holding gains
arising during
period................. (2.6) 4.8
Less: reclassification
adjustment for gains
realized in net income
(loss)................. (3.6) 8.8
----- ------
Net unrealized gains
(losses) on
investments............ (6.2) 13.6
----- ------
Other comprehensive income
(loss)................... $(6.2) 4.6
=====
Net earnings (loss)........ 128.3
------
Total comprehensive
income (loss).... $132.9
======
</TABLE>
A-42
<PAGE> 75
NOTE 16: SUBSEQUENT EVENTS
On January 25, 2000, the Board of Directors declared a cash dividend of
$.08 per share payable on March 10, 2000, to stockholders of record on February
18, 2000. Additionally, the Board of Directors has declared a dividend
distribution of one Preferred Share Purchase Right on each outstanding share of
Allergan Common Stock. Subject to limited exceptions, the Rights will be
exercisable if a person or group acquires 15% or more of the Common Stock. Under
certain circumstances, each Right will entitle stockholders to buy one
one-hundredth of a share of newly created Series A Junior Participating
Preferred Stock of the Company at an exercise price of $300.00. The Allergan
Board will be entitled to redeem the Rights at $.01 per Right at any time before
a person has acquired 15% or more of the outstanding Common Stock. The Rights
Plan will expire in 2010.
A-43
<PAGE> 76
REPORT OF MANAGEMENT
Management is responsible for the preparation and integrity of the
consolidated financial statements appearing in this Proxy Statement. The
consolidated financial statements are presented in Exhibit A to the Company's
Proxy Statement. The consolidated financial statements were prepared in
conformity with generally accepted accounting principles appropriate in the
circumstances and, accordingly, include some amounts based on management's best
judgments and estimates.
Management is responsible for maintaining a system of internal control and
procedures to provide reasonable assurance, at an appropriate cost/benefit
relationship, that assets are safeguarded and that transactions are authorized,
recorded and reported properly. The internal control system is augmented by a
program of internal audits and appropriate reviews by management, written
policies and guidelines, careful selection and training of qualified personnel
and a written Code of Ethics adopted by the Board of Directors, applicable to
all employees of the Company and its subsidiaries. Management believes that the
Company's system of internal control provides reasonable assurance that assets
are safeguarded against material loss from unauthorized use or disposition and
that the financial records are reliable for preparing financial statements and
other data and for maintaining accountability for assets.
The Audit Committee of the Board of Directors, composed solely of Directors
who are not officers or employees of the Company, meets with the independent
auditors, management and internal auditors periodically to discuss internal
accounting controls, auditing and financial reporting matters. The Committee
reviews with the independent auditors the scope and results of the audit effort.
The Committee also meets with the independent auditors without management
present to ensure that the independent auditors have free access to the
Committee.
The independent auditors, KPMG LLP, were recommended by the Audit Committee
of the Board of Directors and selected by the Board of Directors. KPMG LLP was
engaged to audit the 1999, 1998 and 1997 consolidated financial statements of
Allergan, Inc. and its subsidiaries and conducted such tests and related
procedures as deemed necessary in conformity with generally accepted auditing
standards. The opinion of the independent auditors, based upon their audits of
the consolidated financial statements, is presented on Page A-45 of this Proxy
Statement.
January 24, 2000
David E. I. Pyott
President and Chief Executive Officer
Eric K. Brandt
Corporate Vice President and
Chief Financial Officer
Dwight J. Yoder
Senior Vice President, Controller and
Principal Accounting Officer
A-44
<PAGE> 77
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors of Allergan, Inc.:
We have audited the accompanying consolidated balance sheets of Allergan,
Inc. and subsidiaries as of December 31, 1999 and 1998 and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the years in the three-year period ended December 31, 1999. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Allergan,
Inc. and subsidiaries as of December 31, 1999 and 1998 and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1999, in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
Costa Mesa, California
January 24, 2000
A-45
<PAGE> 78
QUARTERLY RESULTS (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH TOTAL
QUARTER QUARTER QUARTER QUARTER YEAR
------- ------- ------- ------- --------
IN MILLIONS, EXCEPT PER SHARE DATA
<S> <C> <C> <C> <C> <C>
1999(a)
Product net sales........................... $ 311.3 $367.8 $346.8 $380.3 $1,406.2
Product gross margin........................ 221.6 254.3 244.9 279.0 999.8
Research service revenues................... 9.8 11.1 11.9 13.4 46.2
Research services margin.................... 0.7 0.6 0.9 0.7 2.9
Operating income............................ 48.4 65.9 67.2 82.0 263.5
Net earnings................................ 35.0 46.9 47.0 59.3 188.2
Basic earnings per share.................... 0.26 0.35 0.36 0.45 1.42
Diluted earnings per share.................. 0.26 0.34 0.35 0.44 1.39
1998(b)
Product net sales........................... $ 269.3 $325.0 $321.2 $346.2 $1,261.7
Product gross margin........................ 175.6 218.7 223.1 237.3 854.7
Research service revenues................... 9.6 6.3 8.2 10.3 34.4
Research services margin.................... 0.7 0.4 0.6 0.6 2.3
Operating income (loss)..................... (137.6) 44.0 (32.4) 38.9 (87.1)
Net earnings (loss)......................... (122.2) 34.8 (31.4) 28.6 (90.2)
Basic earnings (loss) per share............. (0.93) 0.27 (0.24) 0.22 (0.69)
Diluted earnings (loss) per share........... (0.93) 0.26 (0.24) 0.21 (0.69)
</TABLE>
The earnings per share data in periods prior to the fourth quarter of 1999
has been restated to reflect the two for one stock split in December 1999 (see
Note 2 to the Consolidated Financial Statements).
- ---------------
(a) Fiscal quarters in 1999 ended on March 26, June 25, September 24 and
December 31.
(b) Fiscal quarters in 1998 ended on March 27, June 26, September 25 and
December 31 (see Note 3 to the Consolidated Financial Statements).
A-46
<PAGE> 79
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
IN MILLIONS, EXCEPT PER SHARE DATA
<S> <C> <C> <C> <C> <C>
Summary of Operations
Product net sales...................... $1,406.2 $1,261.7 $1,138.0 $1,147.0 $1,067.2
Research service revenues.............. 46.2 34.4 11.0 9.9 6.4
Operating costs and expenses:
Cost of product sales................ 406.4 407.0 399.3 384.7 328.0
Cost of research services............ 43.3 32.1 10.4 9.2 5.9
Selling, general and
administrative.................... 587.9 525.2 459.1 456.6 443.4
Technology fees from related party... (6.1) (11.2) -- -- --
Research & development............... 168.4 125.4 131.2 118.3 116.7
Restructuring charges (credit)....... (9.6) 74.8 -- 70.1 --
Asset write-offs (credit)............ (1.4) 58.5 -- 7.4 --
Contribution to ASTI................. -- 171.4 -- -- --
Contribution to ALRT................. -- -- -- -- 50.0
-------- -------- -------- -------- --------
Operating income (loss)................ 263.5 (87.1) 149.0 110.6 129.6
Non-operating income (expense)......... 5.5 29.4 8.1 (2.6) (4.4)
Earnings (loss) before income taxes and
minority interest.................... 269.0 (57.7) 157.1 108.0 125.2
Net earnings (loss).................... 188.2 (90.2) 128.3 77.1 72.5
Basic earnings (loss) per common
share................................ 1.42 (0.69) 0.98 0.59 0.57
Diluted earnings (loss) per common
share................................ 1.39 (0.69) 0.97 0.58 0.56
Cash dividends per share............... 0.28 0.26 0.26 0.245 0.235
Financial Position
Current assets......................... $ 697.5 $ 661.2 $ 636.4 $ 599.7 $ 522.3
Working capital........................ 277.6 292.7 273.1 224.4 190.7
Total assets........................... 1,339.1 1,334.4 1,398.9 1,349.8 1,316.3
Long-term debt......................... 208.8 201.1 142.5 170.0 266.7
Total stockholders' equity............. 634.5 696.0 841.4 749.8 668.9
</TABLE>
The earnings per shared data in years prior to 1999 has been restated to
reflect the two for one stock split in December 1999 (see Note 2 to the
Consolidated Financial Statements).
MARKET PRICES OF COMMON STOCK AND DIVIDENDS
The following table shows the quarterly price range of the Common Stock and
the cash dividends declared per share during the period listed. Stock prices and
cash dividends per share prior to December 10, 1999 have been restated to
reflect the two for one stock split (see Note 2 to the Consolidated Financial
Statements).
<TABLE>
<CAPTION>
1999 1998
----------------------- ------------------------
CALENDAR QUARTER LOW HIGH DIV. LOW HIGH DIV.
---------------- --- ---- ---- --- ---- -----
<S> <C> <C> <C> <C> <C> <C>
First.................................. 31 11/16 48 41/64 0.07 15 7/8 19 1/2 0.065
Second................................. 41 5/16 55 1/2 0.07 18 5/8 23 25/32 0.065
Third.................................. 42 1/32 57 3/8 0.07 22 5/8 31 7/16 0.065
Fourth................................. 41 57 13/16 0.07 26 23/32 33 1/4 0.065
</TABLE>
Allergan Common Stock is listed on the New York Stock Exchange and is
traded under the symbol "AGN." In newspapers, stock information is frequently
listed as "Alergn."
The approximate number of stockholders of record was 8,300 as of January
31, 2000.
On January 25, 2000, the Board declared a cash dividend of $0.08 per share,
payable March 10, 2000 to stockholders of record on February 18, 2000. See Note
7 to the Consolidated Financial Statements relative to restrictions on dividend
payments.
A-47
<PAGE> 80
EXHIBIT B
ALLERGAN, INC.
1989 NONEMPLOYEE DIRECTOR STOCK PLAN
(AS AMENDED AND RESTATED APRIL 2000,
REFLECTING THE 1999 STOCK SPLIT IN SECTIONS 1.3(A), 2.4(C) AND 2.4(E))
I. GENERAL PROVISIONS
1.1 PURPOSES OF PLAN. Allergan, Inc. (the "Company") has adopted this 1989
Nonemployee Director Stock Plan (the "Plan") to enable the Company to attract
and retain the services of experienced and knowledgeable Nonemployee Directors
and to align further their interests with those of the stockholders of the
Company by providing for or increasing the proprietary interests of the
Nonemployee Directors in the Company.
1.2 DEFINITIONS. The following terms, when used in this Plan, shall have
the meanings set forth in this Section 1.2:
(a) "Award" means an award of Restricted Stock under the Plan.
(b) "Board" or "Board of Directors" means the Board of Directors of the
Company.
(c) "Change in Control" means the following and shall be deemed to occur if
any of the following events occur:
(i) Any "person," as such term is used in Sections 13(d) and 14(d) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act") (a
"Person"), is or becomes the "beneficial owner," as defined in Rule 13d-3
under the Exchange Act (a "Beneficial Owner"), directly or indirectly, of
securities of the Company representing (i) 20% or more of the combined
voting power of the Company's then outstanding voting securities, which
acquisition is not approved in advance of the acquisition or within 30 days
after the acquisition by a majority of the Incumbent Board (as hereinafter
defined) or (ii) 33% or more of the combined voting power of the Company's
then outstanding voting securities, without regard to whether such
acquisition is approved by the Incumbent Board;
(ii) Individuals who, as of the date hereof, constitute the Board of
Directors (the "Incumbent Board"), cease for any reason to constitute at
least a majority of the Board of Directors, provided that any person
becoming a director subsequent to the date hereof whose election, or
nomination for election by the Company's stockholders, is approved by a
vote of at least a majority of the directors then comprising the Incumbent
Board (other than an election or nomination of an individual whose initial
assumption of office is in connection with an actual or threatened election
contest relating to the election of the directors of the Company, as such
terms are used in Rule 14a-11 of Regulation 14A promulgated under the
Exchange Act) shall, for the purposes of this Plan, be considered as though
such person were a member of the Incumbent Board of the Company;
(iii) The consummation of a merger, consolidation or reorganization
involving the Company, other than one which satisfies both of the following
conditions:
(A) a merger, consolidation or reorganization which would result in
the voting securities of the Company outstanding immediately prior
thereto continuing to represent (either by remaining outstanding or by
being converted into voting securities of another entity) at least 55%
of the combined voting power of the voting securities of the Company or
such other entity resulting from the merger, consolidation or
reorganization (the "Surviving Corporation") outstanding immediately
after such merger, consolidation or reorganization and being held in
substantially the same proportion as the ownership in the Company's
voting securities immediately before such merger, consolidation or
reorganization, and
B-1
<PAGE> 81
(B) a merger, consolidation or reorganization in which no Person is
or becomes the Beneficial Owner, directly or indirectly, of securities
of the Company representing 20% or more of the combined voting power of
the Company's then outstanding voting securities; or
(iv) The stockholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or other
disposition by the Company of all or substantially all of the Company's
assets.
Notwithstanding the preceding provisions of this Paragraph (c), a Change in
Control shall not be deemed to have occurred if the Person described in the
preceding provisions of this Paragraph (c) is (1) an underwriter or underwriting
syndicate that has acquired any of the Company's then outstanding voting
securities solely in connection with a public offering of the Company's
securities, (2) the Company or any subsidiary of the Company or (3) an employee
stock ownership plan or other employee benefit plan maintained by the Company
that is qualified under the provisions of the Code. In addition, notwithstanding
the preceding provisions of this Paragraph (c), a Change in Control shall not be
deemed to have occurred if the Person described in the preceding provisions of
this Paragraph (c) becomes a Beneficial Owner of more than the permitted amount
of outstanding securities as a result of the acquisition of voting securities by
the Company which, by reducing the number of voting securities outstanding,
increases the proportional number of shares beneficially owned by such Person,
provided, that if a Change in Control would occur but for the operation of this
sentence and such Person becomes the Beneficial Owner of any additional voting
securities (other than through the exercise of options granted under any stock
option plan of the Company or through a stock dividend or stock split), then a
Change in Control shall occur.
(d) "Common Stock" means the common stock, par value $.01 per share, of the
Company.
(e) "Company" means Allergan, Inc., a Delaware corporation, or any
successor thereto.
(f) "Nonemployee Director" means any member of the Board of Directors who
is not an employee of the Company or of a parent or subsidiary corporation (as
defined in Section 425 of the Internal Revenue Code) with respect to the
Company.
(g) "Participant" means any Nonemployee Director who receives an Award
pursuant to the terms of the Plan.
(h) "Plan" means the Allergan, Inc. 1989 Nonemployee Director Stock Plan as
set forth herein, as amended from time to time.
(i) "Restricted Stock" means Common Stock which is the subject of an Award
under this Plan and which is nontransferable and subject to a substantial risk
of forfeiture until specific conditions are met as set forth in this Plan.
1.3 COMMON SHARES SUBJECT TO PLAN.
(a) Subject to the provisions of Article IV and of this Section 1.3, the
maximum number of shares of Common Stock which may be issued or transferred
pursuant to Awards under this Plan shall not exceed 250,000 shares.
(b) The shares of Common Stock to be delivered under the Plan shall be made
available, at the discretion of the Board of Directors, either from authorized
but unissued shares of Common Stock or from shares of Common Stock held by the
Company as treasury shares, including shares purchased in the open market.
(c) If, on or before termination of the Plan, any shares of Common Stock
subject to an Award shall not be issued or transferred and shall cease to be
issuable or transferable for any reason, or if such shares shall have been
reacquired by the Company pursuant to restrictions imposed on such shares under
the Plan, the shares not so issued or transferred and the shares so reacquired
shall not longer be charged against the limitation provided for in Paragraph (a)
of this Section 1.3 and may be again made the subject of Awards under this Plan.
B-2
<PAGE> 82
1.4 ADMINISTRATION OF PLAN.
(a) Subject to the provisions of Paragraph (b) below, this Plan shall be
administered by the Board of Directors. Awards under the Plan shall be automatic
as described elsewhere in this Plan. Subject to the provisions of this Plan, the
Board shall be authorized and empowered to do all things necessary or desirable
in connection with the administration.
(b) The Board, in its absolute discretion, may at any time and from time to
time delegate to a committee of three or more persons appointed by the Board
(the "Committee") all or any part of the authority, powers and discretion of the
Board under this Plan. Any determinations, decisions, interpretations, rules,
regulations or other actions of the Committee shall have the same effect as if
made or taken by the Board. Members of the Committee shall be subject to removal
at any time as determined by the Board, and the Board may at any time abolish
the entire Committee, in which case all authority, powers and discretion
delegated to the Committee shall immediately become revested in the Board. The
Board also may limit the Committee's authority and power at any time, in which
case any specified authority or power removed from the Committee shall
immediately become revested in the Board. No Nonemployee Director shall be
eligible to be a member of the Committee.
1.5 PARTICIPATION. All Nonemployee Directors shall receive Awards under
this Plan, which Awards shall be granted automatically as provided in Section
2.1 below.
II. GRANTS OF RESTRICTED STOCK
2.1 RESTRICTED STOCK AWARDS -- PRE-1994.
(a) Immediately following the effective date of this Plan (as determined
pursuant to Section 5.2 hereof), each Nonemployee Director who is then serving
as a member of the Board of Directors shall automatically be granted an Award
consisting of a number of shares of Restricted Stock (rounded to the nearest
whole number of shares) equal to 1,000 multiplied by the Applicable Service
Fraction (as defined in Paragraph (c) below) with respect to such Nonemployee
Director determined as of the effective date of this Plan.
(b) Thereafter, each Nonemployee Director who is newly appointed or elected
to the Board for a full term of three years shall automatically be granted an
award consisting of 1,000 shares of Restricted Stock at the time such
Nonemployee Director first joins the Board. Such Award shall be made on the
first business day following the date of the regular annual meeting of
stockholders of the Company, or any adjournment thereof, at which directors are
elected.
(c) Each Nonemployee Director who is appointed or elected to fulfill a term
of less than three years (whether by replacing a director who retires, resigns
or otherwise terminates his service as a director prior to the expiration of
this term or otherwise) shall automatically be granted an Award consisting of a
number of shares of Restricted Stock (rounded to the nearest whole number of
shares) equal to 1,000 multiplied by the Applicable Service Fraction with
respect to such Nonemployee Director determined as of the date of such
Nonemployee Director's appointment or election to the Board. Such Award shall be
made as of the first business day following the date of such Nonemployee
Director's appointment or election to the Board.
(d) Each Nonemployee Director who is re-elected (or, in the case of a
Nonemployee Director who was appointed to the Board and received an Award
pursuant to any of the preceding provisions of this Section 2.1 (an "Appointed
Director"), elected) to the Board for a full term of three years shall
automatically be granted an Award consisting of 700 shares of Restricted Stock
at the time of such Nonemployee Director's re-election (or, in the case of an
Appointed Director, election) to the Board. Such Award shall be made on the
first business day following the date of the annual meeting of stockholders of
the Company, or any adjournment thereof, at which directors of the Company are
elected.
(e) As used herein, "Applicable Service Fraction" means, with respect to
any Nonemployee Director, a fraction the numerator of which is the number of
months remaining in such Nonemployee Director's term at the time the Applicable
Service Fraction is to be determined pursuant hereto and the denominator of
which is 36.
B-3
<PAGE> 83
2.2 PURCHASE PRICE. Participants under the Plan shall not be required to
pay any purchase price for the shares of Common Stock to be acquired pursuant to
an Award, unless otherwise required under applicable law or regulations for the
issuance of shares of Common Stock which are nontransferable and subject to a
substantial risk of forfeiture until specific conditions are met. If so
required, the price at which shares of Common Stock shall be sold to
Participants under this Plan pursuant to an Award shall be the minimum purchase
price required in such law or regulations, as determined by the Board in the
exercise of its sole discretion.
2.3 TERMS OF PAYMENT. The purchase price, if any, of shares of Common
Stock sold by the Company hereunder shall be payable by the Participant in cash
at the time such award is granted.
2.4 RESTRICTED STOCK AWARDS -- 1994 AND AFTER. Effective as of immediately
prior to the 1994 Annual Meeting of Stockholders of the Company:
(a) No new Awards shall be made pursuant to the provisions of Section 2.1.
(b) Upon election, re-election or appointment of a Nonemployee Director to
the Board occurring at or after the 1994 Annual Meeting of Stockholders, such
Nonemployee Director shall automatically be granted an Award consisting of the
following number of shares of Restricted Stock: 600 multiplied by the number of
years which remain in the term of the person so elected, re-elected or
appointed. For purposes of such calculation, a year shall be the period between
annual meetings of stockholders of the Company or any part of such period
(exclusive of the 60 days immediately preceding the first annual meeting to be
held following such election, re-election or appointment giving rise to such
Award). For example, if a Nonemployee Director is appointed to the Board in
January of 1995 to serve a term which will expire at the 1997 Annual Meeting of
Stockholders (and the 1995 Annual Meeting of Stockholders is held more than 60
days after such appointment), the term of such person would be considered to be
three years for purposes of calculating the Award.
(c) Effective at the 1998 Annual Meeting of Stockholders, Sections 2.4(b)
and 3.1(d)(v) are amended by changing all references to "600 shares" to become
"1,800 shares."
(d) Awards automatically granted pursuant to this Section 2.4 shall be made
on the first business day following the date of such election, re-election or
appointment, as applicable.
(e) At the 1998 Annual Meeting of Stockholders, a one-time grant of 10,000
shares of Restricted Stock shall be made to Dr. Herbert W. Boyer, Chairman of
the Board. Notwithstanding the reference in Section 3.1 (d)(v) to 1,800 shares,
for purposes of the one-time grant to Dr. Boyer, references to the 1800 shares
will refer to 3,334, 3,334 and 3,332 shares at the Annual Meeting of
Stockholders in 1999, 2000 and 2001, respectively.
III. RESTRICTIONS ON GRANTED STOCK
3.1 RESTRICTIONS ON SHARES ISSUED. All shares of Common Stock granted
pursuant to an Award under this Plan shall be subject to the following
restrictions:
(a) The shares may not be sold, assigned, transferred, pledged,
hypothecated or otherwise disposed of, alienated or encumbered until the
restrictions set forth in Paragraph (b) below lapse and are removed as provided
in Paragraph (d) below, and any additional requirements or restrictions set
forth in or imposed pursuant to this Plan have been satisfied, terminated or
expressly waived by the Company in writing.
(b) In the event a Participant's service as a director of the Company
terminates for any reason other than death or total disability, all shares of
Common Stock acquired under this Plan by such Participant with respect to which,
at the date of such termination of service, the vesting restrictions imposed
under this Plan have not lapsed and been removed as provided in Paragraph (d)
below shall be returned to the Company forthwith, and all rights of the
Participant to such shares shall immediately terminate upon payment by the
Company to such Participant of the amount, if any, that the Participant paid to
the Company for such shares.
(c) In the event a Participant's service as a director of the Company
terminates because of death or total disability, the Participant shall not be
obligated to return any shares as described in Paragraph (b) above and, except
for any continuing and additional restrictions which may exist as set forth in
or imposed pursuant to
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this Plan, the vesting restrictions imposed upon the shares of Common Stock
acquired by such Participant under this Plan shall lapse and be removed (and the
shares of Common Stock acquired by such Participant under Awards pursuant to the
Plan shall vest) upon such termination of service.
(d) The restrictions imposed under Paragraph (b) above shall lapse and be
removed (and the shares of Common Stock acquired by a Participant pursuant to an
Award shall vest) in accordance with the following rules:
(i) Subject to the provisions of Subparagraphs (iii) and (iv) below,
in the case of an Award granted pursuant to Paragraph (a) or (c) of Section
2.1, as of the date of each regular annual meeting of stockholders of the
Company at which directors are to be elected following the date of such
Award, the vesting restrictions imposed under this Plan shall lapse and be
removed from such number of shares of Restricted Stock acquired pursuant to
the Award as is required to cause the aggregate number of shares of Common
Stock acquired pursuant to such Award with respect to which the vesting
restrictions imposed pursuant to this Plan have lapsed and been removed
(and in which the Participant shall be fully vested) to equal the number
(rounded to the nearest whole number of shares) computed by multiplying the
total number of shares of Restricted Stock that were initially the subject
of such Award by the lesser of (A) one or (b) a fraction the numerator of
which is the number of months the Participant has served as a member of the
Board of Directors subsequent to the date upon which the Award was granted
and the denominator of which is the total number of months in the term of
such Nonemployee Director determined as of the date upon which the Award
was granted.
(ii) Subject to the provisions of Subparagraph (iii) and (iv) below,
in the case of an Award pursuant to Paragraph (b) or (d) of Section 2.1, as
of the date of each regular annual meeting of stockholders of the Company
at which directors are to be elected following the date of such Award, the
vesting restrictions imposed pursuant to this Plan shall lapse and be
removed (and the Participant shall be fully vested) with respect to
one-third (rounded to the nearest whole number) of the number of shares
acquired by the Participant pursuant to the Award, such that the
restrictions shall lapse and be removed (and the Participant shall be fully
vested) with respect to all of the shares acquired by the Participant
pursuant to such Award as of the date of the third such annual meeting of
stockholders following the date upon which the Award is granted.
(iii) Notwithstanding the provisions of Subparagraphs (i), (ii) and
(v) of this Section 3.1, in the event that a Participant's service as a
director of the Company terminates because of death or total disability, as
of the date of such termination of service the vesting restrictions imposed
pursuant to this Plan shall lapse and be removed (and the Participant shall
be fully vested) with respect to all shares of Common Stock acquired by
such Participant under Awards pursuant to this Plan.
(iv) Notwithstanding the provisions of Subparagraphs (i), (ii) and (v)
of this Section 3.1, in the event of a Change in Control, as of the date of
such Change in Control the vesting restrictions imposed pursuant to this
Plan shall lapse and be removed (and Participants shall be fully vested)
with respect to all shares of Common Stock acquired under Awards pursuant
to this Plan.
(v) Subject to the provisions of Subparagraphs (iii) and (iv) of this
Section 3.1, Awards made pursuant to Section 2.4, as of the date of each
annual meeting of stockholders following the date of such Award, the
vesting restrictions imposed pursuant to this Plan shall lapse and be
removed (and the Participant shall be fully vested) with respect to 600 of
the shares covered by such Award.
3.2 RIGHTS WITH RESPECT TO SHARES OF RESTRICTED STOCK. A Nonemployee
Director to whom an Award has been made shall be notified of the Award, and upon
payment in full of the purchase price (if any) required for the shares of the
Restricted Stock, the Company shall promptly cause to be issued or transferred
to the name of the Nonemployee Director a certificate or certificates for the
number of shares of Restricted Stock granted, subject to the provisions of
Sections 3.3, 3.4 and 3.5 below. From and after the date of the Award, the
Nonemployee Director shall be a Participant and shall have all rights of
ownership with respect to such shares of Restricted Stock, including the right
to vote and to receive dividends and other distributions with respect thereto,
subject to the terms, conditions and restrictions described in this Plan.
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3.3 CUSTODY OF STOCK CERTIFICATES. In order to enforce the restrictions
imposed upon shares of Restricted Stock pursuant to this Plan, the Board may
require that the certificates representing such shares of Restricted Stock
remain in the physical custody of the Company until any or all of the
restrictions imposed pursuant to the Plan expire or shall have been removed.
3.4 LEGENDS ON STOCK CERTIFICATES. The Board shall cause such legend or
legends making reference to the restrictions imposed hereunder to be placed on
certificates representing shares of Common Stock which are subject to
restrictions hereunder as the Board deems necessary or appropriate in order to
enforce the restrictions imposed upon shares of Restricted Stock issued pursuant
to Awards granted hereunder.
3.5 SECURITIES LAW REQUIREMENTS. Shares of Common Stock shall not be
offered or issued under this Plan unless the offer, issuance and delivery of
such shares shall comply with all applicable provisions of law, domestic or
foreign, including, without limitation, the Securities Act of 1933, as amended,
the California Corporate Securities Law of 1968, as amended, and the
requirements of any stock exchange upon which the Common Stock may then be
listed. As a condition precedent to the issuance of shares of Common Stock
pursuant to an Award, the Company may require the Participant to take any
reasonable action to comply with such requirements.
IV. ADJUSTMENT PROVISIONS
4.1 ADJUSTMENTS. If the outstanding shares of the Common Stock of the
Company are increased, decreased or exchanged for a different number or kind of
shares or other securities, or if additional shares or new or different shares
or other securities are distributed in respect of such shares of Common Stock
(or any stock or securities received with respect to such Common Stock), through
merger, consolidation, sale or exchange of all or substantially all of the
properties of the Company, reorganization, recapitalization, reclassification,
stock dividend, stock split, reverse stock split, spin-off or other distribution
in respect of such shares of Common Stock (or any stock or securities received
with respect to such Common Stock), and appropriate and proportionate adjustment
shall be made in (i) the maximum number of securities provided in Section 1.3 of
the Plan, (ii) the number of shares to be included in each grant of Restricted
Stock of the Plan; (iii) the number and kind of shares then subject to
restrictions pursuant to Section 3.1 of the Plan, and (iv) the repurchase price,
if any, for each share of Common Stock subject to such restrictions. The Board's
determination of the adjustments required under this Section 4.1 shall be final,
binding and conclusive. No fractional interests shall be issued under the Plan
on account of any such adjustment.
V. MISCELLANEOUS PROVISIONS
5.1 AMENDMENT, SUSPENSION AND TERMINATION OF PLAN. The Board of Directors
may at any time amend, suspend, or terminate the Plan; provided, however, that
no such action shall deprive the holder of an Award of such Award without the
consent of such holder, and further provided that the nondiscretionary manner in
which Awards are made to Nonemployee Directors under Section 2.1 and Section 2.4
shall not be modified or amended (provided that the number of shares to be
included in each automatic grant thereunder may be changed with the approval of
the stockholders). Furthermore, no such amendment shall, without approval of the
stockholders of the Company, except as provided in Article IV hereof:
(a) increase the maximum number of shares specified in paragraph (a) of
Section 1.3;
(b) change the price of Common Stock specified in Section 2.2;
(c) change the terms of payment specified in Section 2.3;
(d) accelerate the restriction-removal schedule specified in Paragraph (d)
of Section 3.1;
(e) extend the duration of the Plan;
(f) materially modify the requirements as to eligibility for participation
in the Plan; or
(g) materially increase in any other way the benefits accruing to the
holder of an Award already granted or that subsequently may be granted under
this Plan.
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<PAGE> 86
Except as provided in Article IV, no termination, suspension or amendment
of this Plan may, without the consent of the holder thereof, affect Common Stock
previously acquired by a Participant pursuant to this Plan.
5.2 EFFECTIVE DATE AND DURATION OF PLAN. This Plan shall become effective
on the later of (a) the date of its approval by the Board of Directors of the
Company, (b) the date of its approval by the holders of the outstanding shares
of Common Stock (either by a vote of a majority of such outstanding shares
present in person or by proxy and entitled to vote at a meeting of the
stockholders of the Company or by written consent), or (c) the date of the
distribution by SmithKline Beckman Corporation ("SKB") of the stock of the
Company pursuant to the terms of that certain Distribution Agreement, dated as
of April 11, 1989, among SKB, the Company and Beckman Instruments, Inc. Unless
previously terminated by the Board of Directors, this Plan shall terminate at
the close of business on December 31, 2009, and no Award may be granted under
the Plan thereafter, but such termination shall not affect any Award theretofore
granted and any shares of Common Stock granted pursuant thereto.
5.3 ADDITIONAL LIMITATIONS ON COMMON STOCK. With respect to any shares of
Common Stock issued or transferred under any provisions of the Plan, such shares
may be issued or transferred subject to such conditions, in addition to those
specifically provided in the Plan as the Board may direct.
5.4 DIRECTOR STATUS. Nothing in this Plan or in any instrument executed
pursuant hereto shall confer upon any Nonemployee Director any right to continue
as a member of the Board of Directors of the Company or any subsidiary thereof
or shall interfere with or restrict the right of the Company or its stockholders
(or of a subsidiary or its stockholders, as the case may be) to terminate the
service of any Nonemployee Director at any time and for any reason whatsoever,
with or without good cause.
5.5 SECURITIES LAW LEGENDS. In addition to any legend or legends pursuant
to Section 3.4 above, each certificate representing shares of Common Stock
issued under the Plan shall be endorsed with such legends as the Company may, in
its discretion, deem reasonably necessary or appropriate to comply with or give
notice of applicable federal and state securities laws.
5.6 NO ENTITLEMENT TO SHARES. No Nonemployee Director (individually or as
a member of a group), and no beneficiary or other person claiming under or
through such Nonemployee Director, shall have any right, title, or interest in
or to any shares of Common Stock allocated or reserved for the purpose of the
Plan or subject to any Award except as to such shares of Common Stock, if any,
as shall have been issued or transferred to such Nonemployee Director. A
Nonemployee Director's rights to any shares of Common Stock issued or
transferred to the name of such Nonemployee Director pursuant to an Award under
this Plan shall be subject to such limitations and restrictions as are set forth
in or imposed pursuant to this Plan.
5.7 WITHHOLDING OF TAXES. The Company may make such provisions as it deems
appropriate for the withholding by the Company of such amounts as the Company
determines it is required to withhold in connection with any Award. The Company
may require a Participant to satisfy any relevant tax requirements before
authorizing any issuance of Common Stock to such Participant. Any such
settlement shall be made in the form of cash, a certified or bank cashier's
check or such other form of consideration as is satisfactory to the Board.
5.8 TRANSFERABILITY. No award or right under this Plan, contingent or
otherwise, shall be assignable or otherwise transferable other than by will or
the laws of descent and distribution, or shall be subject to any encumbrance,
pledge or change or any nature. Any Award shall be accepted during a
Participant's lifetime only by the Participant or the Participant's guardian or
other legal representative.
5.9 OTHER PLANS. Nothing in this Plan is intended to be a substitute for,
or shall preclude or limit the establishment or continuation of, any other plan,
practice or arrangement for the payment of compensation or benefits to directors
generally, which the Company now has or may hereafter lawfully put into effect,
including, without limitation, any retirement, pension, insurance, stock
purchase, incentive compensation or bonus plan.
5.10 INVALID PROVISIONS. In the event that any provision of this Plan
document is found to be invalid or otherwise unenforceable under any applicable
law, such invalidity or unenforceability shall not be construed as
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<PAGE> 87
rendering any other provisions contained herein invalid or unenforceable, and
all such other provisions shall be given full force and effect to the same
extent as though the invalid or unenforceable provision were not contained
herein.
5.11 SINGULAR, PLURAL; GENDER. Whenever used herein, nouns in the singular
shall include the plural, and the masculine pronoun shall include the feminine
gender, as the context may require.
5.12 APPLICABLE LAW. This Plan shall be governed by, interpreted under,
and construed and enforced in accordance with the internal laws, and not the
laws relating to conflicts or choice of laws, of the State of California
applicable to agreements made and to be performed wholly within the State of
California.
5.13 SUCCESSORS AND ASSIGNS OF THE COMPANY. The Plan shall be binding upon
the successors and assignees of the Company.
5.14 SUCCESSORS AND ASSIGNS OF PARTICIPANTS. The provisions of this Plan
and any agreement executed upon the acquisition of shares hereunder shall be
binding upon each Participant in the Plan, and such Participant's heirs,
executors, administrators, personal representatives, transferees, assignees and
successors in interest.
5.15 HEADINGS, ETC. NOT PART OF PLAN. Heading of Articles and Sections
hereof are inserted for convenience and reference only, and they shall not
constitute a part of the Plan.
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[ALLERGAN LOGO]
CONFIDENTIAL PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF
THE COMPANY FOR THE ANNUAL MEETING APRIL 26, 2000
The undersigned hereby constitutes and appoints Francis R. Tunney, Jr. and
Douglas S. Ingram, and each of them, his or her true and lawful agents and
proxies with full power of substitution in each to represent the undersigned at
the Annual Meeting of Stockholders of ALLERGAN, INC. to be held at the Irvine
Marriot Hotel, 18000 Von Karman Avenue, Irvine, California on Wednesday, April
26, 2000, and at any adjournments thereof, on all matters coming before the
meeting.
THE PROXIES WILL VOTE ON THE PROPOSALS SET FORTH IN THE NOTICE OF ANNUAL MEETING
AND PROXY STATEMENT AS SPECIFIED ON THIS CARD (SEE REVERSE SIDE) AND ARE
AUTHORIZED TO VOTE IN THEIR DISCRETION AS TO ANY OTHER BUSINESS THAT MAY COME
PROPERLY BEFORE THE MEETING. IF A VOTE IS NOT SPECIFIED, THE PROXIES WILL VOTE
IN FAVOR OF THE ELECTION OF HERBERT W. BOYER, RONALD M. CRESSWELL, WILLIAM R.
GRANT AND DAVID E.I. PYOTT AS DIRECTORS AND IN FAVOR OF PROPOSALS 2 AND 3.
If this Proxy relates to shares held for the undersigned in the Allergan, Inc.
Employee Stock Ownership Plan or the Allergan, Inc. Savings and Investment Plan,
then, when properly executed, it shall constitute instructions to the plan
trustees to vote in the manner directed herein.
THE PROXIES CANNOT VOTE YOUR SHARES UNLESS YOU CAST YOUR VOTE ON THE INTERNET OR
BY TELEPHONE OR UNLESS YOU SIGN AND RETURN THIS CARD.
---------------------
SEE
REVERSE SIDE
---------------------
Fold and detach here
ADMISSION TICKET
RETAIN FOR ADMITTANCE
You are cordially invited to attend the
2000 ANNUAL MEETING OF STOCKHOLDERS
of ALLERGAN, INC.
Wednesday, April 26, 2000
10:00 a.m.
(Registration begins at 9:30 a.m.)
Irvine Marriot Hotel
18000 Von Karman Avenue
Irvine, California
If you plan to attend, please check the box on the proxy card.
This card is your admission ticket to the meeting and must be
presented at the meeting registration area.
[ALLERGAN LOGO]
<PAGE> 89
[X] Please mark your votes as -----------
in this example 5893
-----------
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED
HEREIN. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR ELECTION
OF DIRECTORS AND FOR PROPOSALS 2 AND 3.
The Board of Directors recommends a vote FOR election of Directors
FOR WITHHELD
1. Election of Directors.
(see reverse)
For, except vote withheld from the following nominee(s):
_____________________________________________________________
The Board of Directors recommends a vote FOR proposals 2 and 3.
FOR AGAINST ABSTAIN
2. Approval of the Amended and
Restated Allergan, Inc. 1989
Nonemployee Director Stock Plan.
3. Approval of an Amendment to the
Allergan, Inc. Restated Certificate
of Incorporation to Increase
Authorized Capital.
Please check the box if you plan to attend the Annual Meeting [ ]
Please check the box if you wish to have your vote disclosed
to the Company. The Company's Confidential Voting Policy
is described in the Proxy Statement accompanying this Proxy. [ ]
NOTE: Please sign exactly as name appears
hereon. Joint owners should each sign. When
signing as attorney, executor,
administrator, trustee or guardian, please
give full title as such.
-------------------------------------------
-------------------------------------------
SIGNATURE(S) DATE
Fold and detach here
[ALLERGAN LOGO]
PROXY VOTING INSTRUCTIONS
YOUR VOTE IS IMPORTANT. CASTING YOUR VOTE IN ONE OF THREE WAYS DESCRIBED ON THIS
INSTRUCTION CARD VOTES ALL COMMON SHARES OF ALLERGAN, INC. THAT YOU ARE ENTITLED
TO VOTE. WE URGE YOU TO PROMPTLY CAST YOUR VOTE BY:
[COMPUTER GRAPHIC] o Accessing the World Wide Web site
http://www.eproxyvote.com/agn to vote via the
Internet.
[PHONE GRAPHIC] o Using a touch-tone telephone to vote by
telephone toll free from the U.S. or Canada.
Simply dial 1-877-779-8683 and follow the
instructions. When you are finished voting, your
vote will be confirmed and the call will end.
[ENVELOPE GRAPHIC] o Completing, dating, signing and mailing the
proxy card in the postage-paid envelope included
with the proxy statement or sending it to
Allergan, Inc., c/o First Chicago Trust Company
of New York, P.O. Box 8648, Edison, New Jersey
08818-9147.
