<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2000
--------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
FOR THE QUARTER ENDED COMMISSION FILE NUMBER
MARCH 31, 2000 1-10269
ALLERGAN, INC.
A DELAWARE CORPORATION IRS EMPLOYER IDENTIFICATION
95-1622442
2525 DUPONT DRIVE, IRVINE, CALIFORNIA 92612
TELEPHONE NUMBER 714/246-4500
Indicate by a check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
(1) X yes no
------ ------
(2) X yes no
------ ------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
As of April 28, 2000 there were 129,576,601 shares of common stock outstanding.
<PAGE> 2
ALLERGAN, INC.
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2000
INDEX
Page
----
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
(A) Condensed Consolidated Statements of Earnings -
Three Months Ended March 31, 2000 and March 26, 1999 3
(B) Condensed Consolidated Balance Sheets -
March 31, 2000 and December 31, 1999 4
(C) Condensed Consolidated Statements of Cash Flows -
Three Months Ended March 31, 2000 and March 26, 1999 5
(D) Notes to Condensed Consolidated Financial Statements 6-10
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 11-13
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 14-15
CERTAIN FACTORS AND TRENDS AFFECTING ALLERGAN
AND ITS BUSINESSES 16-18
PART II - OTHER INFORMATION
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 19
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K 20
Signature 21
Exhibits
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
Allergan, Inc.
Condensed Consolidated Statements of Earnings
(In millions, except per share amounts)
Three months Ended
-------------------------
March 31, March 26,
2000 1999
--------- ---------
Product Sales
Net sales $ 376.2 $ 311.3
Cost of sales 103.4 89.7
------- -------
Product gross margin 272.8 221.6
Research Services
Research service revenues, primarily
from a related party 15.6 9.8
Cost of research services 14.8 9.1
------- -------
Research services margin 0.8 0.7
Operating costs and expenses
Selling, general and administrative 165.5 143.9
Technology fees from related party (0.8) (1.7)
Research and development 45.7 31.7
------- -------
Operating income 63.2 48.4
Nonoperating income (expense)
Interest income 3.9 3.3
Interest expense (4.9) (3.3)
Gain on investment, net -- 1.5
Other, net (0.1) 0.8
------- -------
(1.1) 2.3
------- -------
Earnings before income taxes
and minority interest 62.1 50.7
Provision for income taxes 18.6 15.7
------- -------
Net earnings $ 43.5 $ 35.0
======= =======
Basic earnings per share $ 0.33 $ 0.26
======= =======
Diluted earnings per share $ 0.33 $ 0.26
======= =======
See accompanying notes to condensed consolidated financial statements.
3
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Allergan, Inc.
Condensed Consolidated Balance Sheets
(In millions, except share data)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
--------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 291.6 $ 162.9
Trade receivables, net 238.1 253.2
Inventories 132.2 130.7
Other current assets 127.1 150.7
-------- --------
Total current assets 789.0 697.5
Investments and other assets 160.4 160.8
Property, plant and equipment, net 328.6 330.3
Goodwill and intangibles, net 147.9 150.5
-------- --------
Total assets $1,425.9 $1,339.1
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 87.0 $ 85.3
Accounts payable 68.4 80.5
Accrued expenses 160.1 170.7
Income taxes 76.8 83.4
-------- --------
Total current liabilities 392.3 419.9
Long-term debt 307.7 208.8
Other liabilities 78.0 75.8
Commitments and contingencies -- --
Minority interest 0.1 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 shares 1.3 1.3
Additional paid-in capital 251.9 245.5
Accumulated other comprehensive loss (51.6) (49.3)
Retained earnings 669.6 651.1
-------- --------
871.2 848.6
Less - treasury stock, at cost
(4,581,000 and 4,436,000 shares) (223.4) (214.1)
-------- --------
Total stockholders' equity 647.8 634.5
-------- --------
Total liabilities and
stockholders' equity $1,425.9 $1,339.1
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
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Allergan, Inc.
Condensed Consolidated Statements of Cash Flows
(In millions)
<TABLE>
<CAPTION>
Three months Ended
------------------------
March 31, March 26,
2000 1999
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 43.5 $ 35.0
Non-cash items included in net earnings:
Depreciation and amortization 18.6 20.5
Amortization of prepaid royalties 1.8 0.1
Gain on investments -- (1.5)
Deferred income taxes 7.6 (0.5)
Loss (gain) on sale of assets 0.9 (0.2)
Expense of compensation plans 1.9 3.9
Adjustment in reporting of foreign subsidiaries (3.2) (1.6)
Changes in assets and liabilities:
Trade receivables 11.7 15.9
Inventories (1.5) (5.2)
Accounts payable (11.7) 14.0
Accrued liabilities (8.6) (20.5)
Income taxes (1.7) 14.8
Other 10.5 7.5
------ ------
Net cash provided by operating activities 69.8 82.2
------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (10.0) (11.2)
Disposals of property, plant and equipment 0.8 0.8
Proceeds from sale of investments -- 5.3
Other, net (2.3) (15.3)
------ ------
Net cash used in investing activities (11.5) (20.4)
------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends to stockholders (10.4) (9.3)
Net borrowings (repayments) under commercial paper obligations 101.7 (20.4)
Net borrowings of notes payable 0.6 1.6
Sale of stock to employees 8.2 15.5
Increase in long term debt -- 3.0
Decrease in long term debt (0.6) (0.6)
Payments to acquire treasury stock (29.6) (18.3)
------ ------
Net cash provided by (used in) financing activities 69.9 (28.5)
------ ------
Effect of exchange rate changes on cash and equivalents 0.5 (5.4)
------ ------
Net increase in cash and equivalents 128.7 27.9
Cash and equivalents at beginning of period 162.9 181.6
------ ------
Cash and equivalents at end of period $291.6 $209.5
====== ======
Supplemental disclosure of cash flow information
Cash paid during the three months ended for
Interest (net of capitalization) $ 3.5 $ 1.9
====== ======
Income taxes $ 14.2 $ 2.7
====== ======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
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Allergan, Inc.
Notes to Condensed Consolidated Financial Statements
1. In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments necessary (consisting only of
normal recurring accruals) to present fairly the financial information contained
therein. These statements do not include all disclosures required by generally
accepted accounting principles and should be read in conjunction with the
audited financial statements of the Company for the year ended December 31,
1999. The results of operations for the three months ended March 31, 2000 are
not necessarily indicative of the results to be expected for the year ending
December 31, 2000.
2. 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. All share and per share data
is stated to reflect the split.
3. Components of inventories were:
March 31, December 31,
2000 1999
--------- ------------
(in millions)
Finished goods $ 91.5 $ 87.5
Work in process 18.4 13.3
Raw materials 22.3 29.9
------ ------
Total $132.2 $130.7
====== ======
4. Income taxes are determined using an estimated annual effective tax rate,
which is less than the U.S. Federal statutory rate, primarily because of lower
tax rates in Puerto Rico and in certain non U.S. jurisdictions. Withholding and
U.S. taxes have not been provided for unremitted earnings of certain non-U.S.
subsidiaries because such earnings are or will be reinvested in operations
outside the United States, or will be offset by appropriate credits for foreign
income taxes paid.
5. The Company is involved in various litigation and claims arising in the
normal course of business. The Company's management believes that the ultimate
disposition of these matters would not have a material adverse effect on the
consolidated financial position and results of operations of the Company.
6. On April 26, 2000 the Board of Directors declared a quarterly cash dividend
of $0.08 per share, payable June 16, 2000 to stockholders of record on May 26,
2000. Additionally, at the Annual Meeting on April 26, 2000, the stockholders
approved an amendment to the Company's Certificate of Incorporation to increase
the aggregate number of Common Stock shares authorized from 150,000,000 to
300,000,000.
6
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Allergan, Inc.
Notes to Condensed Consolidated Financial Statements (continued)
7. The following table presents the computation of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
First Quarter
---------------------------------------------------------------------------------------
ended March 31,2000 ended March 26, 1999
------------------------------------------ -----------------------------------------
Income Shares Per-Share Income Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- --------- ----------- ------------- ---------
(In millions, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Computation of basic EPS:
Income available to
common stockholders $ 43.5 129.9 $0.33 $ 35.0 132.9 $0.26
===== =====
Effect of dilutive options 2.7 3.3
----- -----
Computation of diluted EPS:
Income available to common
stockholders assuming
conversions $ 43.5 132.6 $0.33 $ 35.0 136.2 $0.26
===== ===== ===== =====
</TABLE>
Options to purchase 4,344,850 shares of common stock at exercise prices ranging
from $55.00 to $60.13 were outstanding at March 31, 2000. Additionally, options
to purchase 1,600,000 shares of common stock at an exercise price of $55.00 per
share were outstanding as of March 26, 1999. These options were not included in
the computation of diluted earnings per share at March 31, 2000 or March 26,
1999, as appropriate, because the effect would be antidilutive.
7
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Allergan, Inc.
Notes to Condensed Consolidated Financial Statements (continued)
8. The following table summarizes components of comprehensive income for the
quarters ended:
<TABLE>
<CAPTION>
March 31, 2000 March 26, 1999
-------------------------------------- ----------------------------------------
Tax Tax
Before-tax (expense) Net-of-tax Before-tax (expense) Net-of-tax
amount or benefit amount amount or benefit amount
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Foreign currency
translation adjustments $(2.4) -- $(2.4) $(30.5) -- $(30.5)
Unrealized holding
gains/(losses) arising
during period 0.1 -- 0.1 (3.1) $1.1 (2.0)
Reclassification adjustment
for net gains realized in
net earnings -- -- -- (1.5) 0.5 (1.0)
----- ---- ---- ------ ---- ------
Other comprehensive loss $(2.3) -- (2.3) $(35.1) $1.6 (33.5)
===== ==== ====== ====
Net earnings 43.5 35.0
---- ------
Total comprehensive income $41.2 $ 1.5
===== ======
</TABLE>
9. Business Segment Information
The Company operates in Regions or geographic operating segments. In accordance
with SFAS No. 131, the United States information is presented separately as it
is the Company's headquarters country, and U.S. sales represented 55.3% and
49.6% of total product net sales in the quarters ended March 31, 2000 and March
26, 1999, respectively. No other country, or single customer, generates over 10%
of total product net sales. Operations for the Europe Region also include sales
to customers in Africa and the Middle East, and operations in the Asia Pacific
Region include sales to customers in Australia and New Zealand.
Operating income attributable to each operating segment is based upon the
management assignment of costs to such regions. Operating income was determined
for each operating segment using a cost of sales amount which included the
manufacturing standard cost of goods produced by the Company's manufacturing
operations (or the cost to acquire goods from third parties),
8
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Allergan, Inc.
Notes to Condensed Consolidated Financial Statements (continued)
freight, duty and local distribution costs, royalties and charges for corporate
services and asset utilization.
Income from manufacturing operations is not assigned to geographic regions
because most manufacturing operations produce products for more than one region.
Research and Development costs are general corporate costs.
Identifiable assets are assigned by region based upon management responsibility
for such items. Corporate assets are primarily cash and equivalents, goodwill
and intangibles, and long-term investments. Assets assigned to segments have not
changed materially since December 31, 1999.
GEOGRAPHIC OPERATING SEGMENTS
<TABLE>
<CAPTION>
Net Sales Operating Income (Loss)
--------------------- ------------------------
1st Qtr. 1st Qtr. 1st Qtr. 1st Qtr.
(in millions) 2000 1999 2000 1999
- -------------------------------------------------------------- ------------------------
<S> <C> <C> <C> <C>
United States $206.9 $152.6 $ 91.4 $ 54.3
Europe 83.7 86.5 17.1 23.0
Asia Pacific 46.6 40.1 (0.6) 0.8
Other 37.7 30.5 3.5 3.4
------ ------ ------ ------
Segments total 374.9 309.7 111.4 81.5
Manufacturing operations 1.3 1.6 34.6 27.4
Research and development (45.7) (31.7)
Research services margin 0.8 0.7
Elimination of inter- company profit (48.0) (42.8)
General corporate -- -- 10.1 13.3
------ ------ ------ ------
Total $376.2 $311.3 $ 63.2 $ 48.4
====== ====== ====== ======
</TABLE>
10. Special Charges
The Company maintains specific current and non-current liabilities at March 31,
2000 for restructuring charges recognized in 1998 and 1996. For the three month
period ended March 31, 2000, the Company utilized approximately $2.6 million of
accrued liabilities specific to both the 1998 and 1996 restructuring. This
spending is primarily associated with payments made to involuntarily terminated
employees related to continued workforce reductions in identified manufacturing
facilities. At March 31, 2000, the Company maintained approximately $9.8 million
of accrued liabilities related to the 1998 and 1996 restructuring.
9
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Allergan, Inc.
Notes to Condensed Consolidated Financial Statements (continued)
11. New and Proposed Accounting Standards
In June 1998, Statement of Financial Accounting Standards No. 133 - "Accounting
for Derivative Instruments and Hedging Activities" (SFAS No. 133) was issued, as
amended, and is effective for all periods of fiscal years beginning after June
15, 2000. SFAS No. 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. SFAS No. 133 requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. The
Company believes that implementation of SFAS No. 133 will have no material
impact on its financial statements.
In December 1999, the United States Securities and Exchange Commission issued
Staff Accounting Bulletin (SAB) No. 101 - "Revenue Recognition in Financial
Statements," as amended, which for the Company is effective April 1, 2000. SAB
No. 101 summarizes certain of the staff's views in applying generally accepted
accounting principles to revenue recognition in financial statements. The
Company believes that implementation of SAB No. 101 will have no material impact
on its financial statements.
10
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ALLERGAN, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE QUARTER ENDED MARCH 31, 2000
RESULTS OF OPERATIONS
The following table compares 2000 and 1999 net sales by Product Line for the
first quarter periods:
Three Months Ended
---------------------------
March 31, March 26,
Net Sales by Product Line ($ millions) 2000 1999
-------- --------
Specialty pharmaceuticals
Eye Care Pharmaceuticals $179.1 $129.4
Skin Care 15.7 18.9
BOTOX(R)/Neuromuscular 52.0 36.1
------ ------
246.8 184.4
Medical devices and OTC products
Ophthalmic Surgical 56.5 47.4
Contact Lens Care 72.9 79.5
------ ------
Total Net Sales $376.2 $311.3
====== ======
For the quarter ended March 31, 2000 total net sales increased by $64.9 million
or 20.8% to $376.2 million as compared to the first quarter of 1999. The impact
of foreign currency changes for the three month period ended March 31,2000
decreased net sales by $5.3 million from the prior comparable period. At
constant currency rates, sales increased $70.2 million or 22.6%. Sales in the
U.S. were 55.3% of total product net sales for the quarter ended March 31, 2000,
which represents a 5.7 percentage point increase over the 49.6% rate for the
first quarter of 1999. The increase in the mix of U.S. sales as a percentage of
total product net sales was primarily attributable to the increase in U.S. Eye
Care Pharmaceutical sales.
Eye Care Pharmaceutical sales were reduced from the amounts that would have been
reported at constant currency rates by $2.6 million in the first quarter
primarily as a result of the weakness in the Euro denominated currencies in
2000. Ophthalmic Surgical sales were reduced by $1.1 million and the Contact
Lens Care sales were reduced by $1.0 million from the amounts that would have
been reported at constant currency rates in the first quarter primarily as a
result of weakness in Euro denominated currencies partially offset by the
strengthening of the Japanese Yen in 2000.
The $64.9 million increase in net sales in the first quarter was primarily the
result of increases in sales in three product lines. Eye Care Pharmaceutical
sales increased by $49.7 million, Botox(R) Purified Neurotoxin Complex increased
by $15.9 million, and Surgical sales increased by $9.1 million in the first
quarter of 2000. Eye Care Pharmaceutical sales increased primarily because of
growth in sales of Alphagan(R) ophthalmic solution. Botox(R) sales increased as
a result of strong growth in both the United States and international markets.
Allergan believes it currently
11
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Allergan, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE QUARTER ENDED MARCH 31, 2000
RESULTS OF OPERATIONS (Continued)
possesses over 80 percent of the worldwide market for neurotoxins including
Botox(R). Later this year, a competitor is expected to introduce a competing
neurotoxin. While Allergan expects this new competition to cause the market for
neurotoxins to expand, the rate of growth of Botox(R) sales may decrease in the
future as a result of this new competition. Surgical sales increased primarily
as a result of increased sales of silicone intraocular lenses (IOLs) and strong
sales in international markets of Allergan's acrylic IOL.
Allergan's gross margin percentage for the first quarter of 2000 was 72.5% of
net sales, which represents a 1.3 percentage point increase from the 71.2% rate
for the first quarter of 1999. The gross margin percentage increased in the
first quarter of 2000 compared to 1999 primarily as a result of shifts in the
mix of products sold to higher margin products. Higher margin eye care
pharmaceutical and Botox(R) Purified Neurotoxin Complex sales represented a
greater percentage of 2000 sales compared to 1999. Gross Margin in dollars
increased over the first quarter of 1999 by $51.2 million or 23% as a result of
the 20.8% increase in net sales and the 1.3 percentage point increase in gross
margin percentage.
Operating income in 2000 of $63.2 million was $14.8 million, or 31% higher than
operating income in 1999 of $48.4 million. Such increase was the result of the
$51.2 million increase in gross margin in 2000 offset by a $21.6 million
increase in selling, general and administrative expense, and a $14.0 million
dollar increase in Research and Development. Selling, general, and
administrative expenses increased primarily as a result of increases in spending
on promotion, selling and marketing activities in 2000. Research and Development
increased in 2000 as a result of increased research activity.
Net earnings were $43.5 million in the first quarter of 2000 and represent an
$8.5 million, or 24% increase over net earnings of $35.0 million in the first
quarter of 1999. The 2000 increase is primarily the result of the $14.8 million
increase in operating income partially offset by a $1.0 million increase in net
interest expense, a loss on fixed asset disposal of $0.9 million, the absence of
approximately $1.5 million in gains on sale of investments recorded in 1999 and
an increase in income taxes of $2.9 million resulting from the increase in
earnings before income tax.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2000, the Company had long-term credit facilities and a medium
term note program. The credit facilities allow for borrowings of up to $35.9
million through 2000, $65.1 million through 2001, $14.6 million through 2002,
and $277.3 million through 2003. The note program allows the Company to issue up
to an additional $60 million in notes on a non-revolving basis. Borrowings under
the credit facilities are subject to certain financial and operating covenants,
including a requirement that the
12
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Allergan, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE QUARTER ENDED MARCH 31, 2000
LIQUIDITY AND CAPITAL RESOURCES (Continued)
Company maintain certain financial ratios, and other customary covenants for
credit facilities of similar kind. As of March 31, 2000, the Company had $122.6
million in borrowings under seven of the credit facilities, $89.0 million in
borrowings under the note program, and commercial paper borrowings of $148.7
million. As of March 31, 2000, the Company has classified $148.7 million of
commercial paper borrowings as long-term debt based upon the Company's ability
to maintain such debt under terms of the credit facilities described above.
The net cash provided by operating activities for the three months ended March
31, 2000 was $69.8 million. The net cash provided by operating activities for
the three months ended March 26, 1999 was $82.2 million.
Cash used in investing activities in the first quarter of 2000 was $11.5
million. Cash used in investing activities in the first quarter of 1999 was
$20.4 million. The Company invested $10.0 million in new facilities and
equipment during the three months ended March 31, 2000 compared to $11.2 million
during the same period in 1999.
Cash provided by financing activities was $69.9 million in the first quarter of
2000 compared to cash used in financing activities of $28.5 million in the first
quarter of 1999. Borrowings, net of repayments of debt totaled $101.7 million in
the first quarter of 2000. This was primarily the result of commercial paper
borrowings during the three months ended March 31, 2000 which re-established the
debt paid down during the fourth quarter of 1999. Repayments of debt, net of
borrowings, totaled $20.4 million in the first quarter of 1999. The amounts in
both years include dividend outflows of $10.4 million in 2000 and $9.3 million
in 1999. The 2000 amount of cash used in financing activities includes $29.6
million used to repurchase treasury stock.
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.
13
<PAGE> 14
ALLERGAN, INC.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of business, operations of the Company are exposed to risks
associated with fluctuations in interest rates and foreign currency exchange
rates. The Company addresses these risks through controlled risk management that
includes the use of derivative financial instruments to hedge or reduce these
exposures. The Company does not enter into financial instruments for trading or
speculative purposes.
To ensure the adequacy and effectiveness of the Company's interest rate and
foreign exchange hedge positions, the Company continually monitors its interest
rate swap positions and foreign exchange forward and option positions both on a
stand-alone basis and in conjunction with its underlying interest rate and
foreign currency exposures, respectively, from an accounting and economic
perspective. However, given the inherent limitations of forecasting and the
anticipatory nature of the exposures intended to be hedged, there can be no
assurance that such programs will offset more than a portion of the adverse
financial impact resulting from unfavorable movements in either interest or
foreign exchange rates. In addition, the timing of the accounting for
recognition of gains and losses related to mark-to-market instruments for any
given period may not coincide with the timing of gains and losses related to the
underlying economic exposures and, therefore, may adversely affect the Company's
consolidated operating results and financial position.
Interest Rate Risk
The Company's interest income and expense is 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 results from
the Company's long-term debt obligations and related derivative financial
instruments. The Company enters into interest rate swap agreements to reduce the
impact of interest rate changes on its floating rate long-term debt. These
derivative financial instruments allow the Company to make long-term borrowings
at floating rates and then swap them into fixed rates that are anticipated to be
lower than those available to the Company if fixed-rate borrowings were made
directly.
The Company's interest rate swaps qualify as accounting hedges and generally
require the Company to pay a fixed interest rate and receive a floating rate of
interest without exchanges of the underlying notional amounts. As a result,
these swaps effectively convert the Company's floating-rate debt to fixed-rates
and generally qualify for hedge accounting treatment.
The impact of interest rate risk management activities on income during the
quarter ended March 31,2000, and the amount of deferred gains and losses from
interest rate risk management transactions at March 31,2000 were not material.
14
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Allergan, Inc.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (Continued)
Foreign Currency Risk
Overall, the Company is a net recipient of currencies other than the U.S. dollar
and, as such, benefits from a weaker dollar and is adversely affected by a
stronger dollar relative to major currencies worldwide. Accordingly, changes in
exchange rates, and in particular a strengthening of the U.S. dollar, may
negatively affect the Company's consolidated sales and gross margins as
expressed in U.S. dollars.
From time to time, the Company enters into foreign currency forward and option
contracts to reduce earnings and cash flow volatility associated with foreign
exchange rate changes to allow management to focus its attention on its core
business issues and challenges. Accordingly, the Company enters into various
contracts which change in value as foreign exchange rates change to offset the
effect of changes in the value of foreign currency assets and liabilities,
commitments and anticipated foreign currency denominated sales and operating
expenses. The Company enters into foreign currency forward and option contracts
in amounts between minimum and maximum anticipated foreign exchange exposures,
generally for periods not to exceed one year. The gains and losses on these
contracts offset changes in the value of the related exposures.
All of the Company's outstanding foreign exchange forward contracts were entered
into to protect the value of intercompany borrowings denominated in currencies
other than the lender's functional currency. These forward contracts qualify for
hedge accounting treatment. As such, gains and losses recognized upon settlement
of the forward contracts offset losses and gains, respectively, on the
underlying intercompany receivables being hedged.
Probable but not firmly committed transactions are comprised of sales of the
Company's products and purchases of raw material in currencies other than the
U.S. Dollar. A majority of these sales are made through the Company's
subsidiaries in Europe, Asia (particularly Japan), Canada and Australia. The
Company purchases foreign exchange forward and option contracts to hedge the
currency exchange risks associated with these probable but not firmly committed
transactions. The duration of foreign exchange hedging instruments, whether for
firmly committed transactions, 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, Europe, Australia
and Canada. The premium cost of purchased foreign exchange option contracts are
recorded in other current assets and amortized over the life of the option.
In January 2001, the Company is required to adopt Statement of Financial
Accounting Standards No. 133 - "Accounting for Derivative Instruments and
Hedging Activities" (SFAS 133), as amended. The Company believes that
implementation of SFAS No. 133 will not have a material impact on its financial
statements.
15
<PAGE> 16
ALLERGAN, INC.
CERTAIN FACTORS AND TRENDS AFFECTING ALLERGAN AND ITS BUSINESSES
The Company believes that certain statements made by the Company in this report
and in other reports and statements released by the Company constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995, such as comments which express the Company's
opinions about trends and factors which may impact future operating results.
Disclosures which use words such as the Company "believes," "anticipates,"
"expects" and similar expressions are intended to identify forward-looking
statements. Such statements are subject to certain risks and uncertainties 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 various disclosures made by the Company about its
businesses including, without limitation, the factors discussed below.
o The pharmaceutical industry and other health care-related industries
continue to experience consolidation, resulting in larger, more diversified
companies with greater resources than the Company. Among other things,
these larger companies can spread their research and development costs over
much broader revenue bases than Allergan and can influence customer and
distributor buying decisions.
o The Company is currently the only manufacturer of an FDA-approved
neurotoxin. The Company is aware, however, of another company seeking FDA
approval of a neurotoxin. If such approval is granted, the Company's sales
of Botox(R) Purified Neurotoxin Complex could be materially and negatively
impacted.
o The manufacturing process to create bulk toxin raw material necessary to
produce Botox(R) Purified Neurotoxin Complex is technically complicated.
Any failure of the Company to maintain an adequate supply of bulk toxin and
finished product could result in an interruption in the supply of Botox(R)
Purified Neurotoxin Complex with a resulting decrease in sales of the
product.
o The Company's Contact Lens Care business continues to be impacted by trends
in the contact lens and lens care marketplace, including technological and
medical advances in surgical techniques for the correction of vision
impairment. Cheaper one-bottle chemical disinfection systems continue to
gain popularity among soft contact lens wearers instead of peroxide-based
lens care products which historically have been Allergan's strongest family
of lens care products. Also, the growing use and acceptance of daily
contact lenses and laser-correction
16
<PAGE> 17
Allergan, Inc.
CERTAIN FACTORS AND TRENDS AFFECTING ALLERGAN AND ITS BUSINESSES (Continued)
procedures, along with the other factors above, could have the effect of
reducing demand for lens care products generally. While the Company
believes it has established appropriate marketing and sales plans to
mitigate the impact of these trends upon its Contact Lens Care business, no
assurance can be given in this regard.
o The Company has in the past been, and continues to be, subject to product
liability claims. In addition, the Company has in the past and may in the
future recall or issue field corrections related to its products due to
manufacturing deficiencies, labeling errors or other safety or regulatory
reasons. There can be no assurance that the Company will not experience
material losses due to product liability claims or product recalls or
corrections.
o Sales of the Company's surgical and pharmaceutical products have been and
are expected to continue to be impacted by continuing pricing pressures
resulting from various government initiatives as well as from the
purchasing and operational decisions made by managed care organizations.
o A current political issue of debate in the United States is the propriety
of expanding Medicare coverage to include pharmaceutical products. If
measures to accomplish that coverage become law, and if these measures
impose price controls on the Company's products, the Company's revenues and
financial condition are likely to be materially and adversely affected.
o The Company collects and pays a substantial portion of its sales and
expenditures in currencies other than the U.S. dollar. Therefore,
fluctuations in foreign currency exchange rates affect the Company's
operating results. The Company can provide no assurance that future
exchange rate movements will not have a material adverse effect on the
Company's sales, gross profit or operating expenses.
o The Company's business is also subject to other risks generally associated
with doing business abroad, such as political unrest and changing economic
conditions with countries where the Company's products are sold or
manufactured. Management cannot provide assurances that it can successfully
manage these risks or avoid their effects.
o The Company sells its pharmaceutical products primarily through
wholesalers. Wholesaler purchases may exceed customer demand, resulting in
reduced wholesaler purchases in later quarters. The Company can give no
assurances that wholesaler purchases will not decline as a result of this
potential excess buying.
17
<PAGE> 18
Allergan, Inc.
CERTAIN FACTORS AND TRENDS AFFECTING ALLERGAN AND ITS BUSINESSES (Continued)
o Future performance will be affected by the introduction of new products.
The Company has allocated significant resources to the development and
introduction of new products. The successful development, regulatory
approval and market acceptance of the products cannot be assured.
o There are intrinsic uncertainties associated with research & development
efforts and the regulatory process both of which are discussed in greater
details in the "Research and Development" and the "Government Regulation"
sections of Allergan's Annual Report on Form 10-K for the year ending
December 31, 1999, which are incorporated herein by reference.
o 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 a SFAS, the terms of this Exposure Draft could
require the Company to include the financial position and results of
operation of Allergan Specialty Therapeutics, Inc. in its consolidated
results. The Company continues to evaluate the effect of implementation of
this proposed statement. By including the results of operations of ASTI,
the Company's consolidated results of operations could be adversely
affected. In addition, in 1999 the Emerging Issues Task Force ("EITF") 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 could require the Company to account for
the activities of ASTI in the Company's Consolidated Financial Statements.
18
<PAGE> 19
Allergan, Inc.
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
The annual meeting of stockholders of the registrant was held on April
26, 2000 at which four directors, constituting all of the Class II directors,
were re-elected to serve on the Board of Directors for a three-year term until
the annual meeting of stockholders to be held in 2003. The names of the persons
elected as directors are as follows:
Herbert W. Boyer
Ronald M. Cresswell
William R. Grant
David E.I. Pyott
The terms of the following directors continued after the meeting:
Class III (term expires in 2001)
Handel E. Evans
Michael R. Gallagher
Gavin S. Herbert
Class I (term expires in 2002)
Lester J. Kaplan
Karen R. Osar
Louis T. Rosso
Leonard D. Schaeffer
Mr. Henry Wendt, a Class III director, retired from the Company's Board
of Directors effective May 1, 2000.
Two other matters were voted on, namely, approval of the amended and
restated Allergan, Inc. 1989 Nonemployee Director Stock Plan and approval of an
amendment to the Company's Certificate of Incorporation to increase the number
of authorized shares of Common Stock. Both matters were approved by the
stockholders.
A summary of the voting follows:
Broker
Directors For Withheld Non-votes
- --------- ---------- ---------- ---------
Herbert W. Boyer 97,284,299 15,762,870 0
Ronald M. Cresswell 97,285,355 15,761,814 0
William R. Grant 97,216,884 15,830,285 0
David E.I. Pyott 97,283,263 15,763,906 0
<TABLE>
<CAPTION>
Broker
Other Matters For Against Abstain Non-votes
- ------------- ----------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Approval of Amended
and Restated Nonemployee
Director Stock Plan 90,148,008 22,497,134 423,137 0
Approval of Amendment
to Certificate of
Incorporation 101,494,124 9,944,018 1,630,137 0
</TABLE>
19
<PAGE> 20
Allergan, Inc.
PART II - OTHER INFORMATION (Continued)
Item 6. Exhibits and Reports on Form 8-K
- Exhibits
(numbered in accordance with Item 601 of Regulation S-K)
27 -- Financial Data Schedule
- Reports on Form 8-K. The registrant filed a Current Report
on Form 8-K on January 28, 2000, reporting under Item 5 that
the registrant had adopted a Stockholder Rights Plan.
20
<PAGE> 21
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 12, 2000 ALLERGAN, INC.
By: /s/ ERIC K. BRANDT
--------------------------------
Eric K. Brandt
Corporate Vice President and
Chief Financial Officer
(Principal Financial Officer)
21
<PAGE> 22
EXHIBIT INDEX
Exhibit
Number Description
------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 291,600
<SECURITIES> 0
<RECEIVABLES> 245,500
<ALLOWANCES> 7,400
<INVENTORY> 132,200
<CURRENT-ASSETS> 789,000
<PP&E> 616,900
<DEPRECIATION> 288,300
<TOTAL-ASSETS> 1,425,900
<CURRENT-LIABILITIES> 392,300
<BONDS> 0
0
0
<COMMON> 1,300
<OTHER-SE> 646,500
<TOTAL-LIABILITY-AND-EQUITY> 1,425,900
<SALES> 376,200
<TOTAL-REVENUES> 391,800
<CGS> 103,400
<TOTAL-COSTS> 118,200
<OTHER-EXPENSES> 44,900
<LOSS-PROVISION> 184
<INTEREST-EXPENSE> 4,900
<INCOME-PRETAX> 62,100
<INCOME-TAX> 18,600
<INCOME-CONTINUING> 43,500
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 43,500
<EPS-BASIC> 0.33
<EPS-DILUTED> 0.33
</TABLE>
